ITEM 1 -- BUSINESS
Howmet International Inc. is a Delaware corporation organized in 1995 (referred
to hereinafter together with its subsidiaries as the "Company" or "Howmet").
Through its principal operating subsidiary, Howmet Corporation, founded in 1926,
the Company is the largest manufacturer in the world of investment cast turbine
engine components for jet aircraft and industrial gas turbines ("IGT") as
original equipment and spare parts. The Company uses investment casting
techniques to produce high-performance, highly reliable superalloy and titanium
components to the exacting specifications of the major aerospace and IGT engine
manufacturers. Through Howmet Corporation's Aluminum Casting (formerly Cercast)
subsidiaries, the Company is also the world's largest producer of aluminum
investment castings, which it produces principally for the commercial aerospace
and defense electronics industries.
Howmet Corporation operates in one business segment, investment castings.
Financial information with respect to geographic regions is included in Note 15
of "Notes to Consolidated Financial Statements" on page F-21 - F-22 hereof.
The Company was formed in 1995 under the name Blade Acquisition Corp. ("Blade")
as a joint venture between Cordant Technologies Inc., then known as Thiokol
Corporation ("Cordant"), which at that time owned 49% of the Company's Common
Stock, and Carlyle-Blade Acquisition Partners, L.P. ("Carlyle-Blade Partners"),
which owned 51% of the Company's Common Stock. The Company was formed to
purchase Howmet Corporation and the Cercast companies ("Cercast") from a
subsidiary of Pechiney, S.A. The acquisition of Howmet Corporation and Cercast
was accomplished on December 13, 1995 through the purchase of the capital stock
of Pechiney Corporation, Howmet Corporation's parent holding company, and the
capital stock of Cercast (the "Acquisition"). The Cercast companies then became
subsidiaries of Howmet Corporation, and Pechiney Corporation's name was changed
to Howmet Holdings Corporation ("Holdings").
On December 2, 1997, Cordant acquired 13 million shares of the Company's Common
Stock from Carlyle-Blade Partners, increasing its ownership interest in the
Company to 62%. This was done concurrently with a public offering of stock of
the Company by Carlyle-Blade Partners, pursuant to which public stockholders
acquired a 15.35% interest in the Company and Carlyle-Blade Partners' interest
was reduced to 22.65%. On February 8, 1999, Cordant acquired all of Carlyle-
Blade Partners' remaining shares of the Company's Common Stock and now holds
84.6% of the currently outstanding Common Stock.
POSSIBLE OWNERSHIP CHANGES
On November 12, 1999, Cordant made a proposal to acquire all of the outstanding
shares of Common Stock of the Company not currently owned by Cordant for a price
of $17.00 per share in cash, and the proposal was referred to the Independent
Directors Committee of the Company's Board of Directors (the "Committee"). On
March 10, 2000, Cordant informed the Committee that it was willing to increase
its offer to $18.75 per share, but following further discussions no agreement
was reached. On March 14, 2000, Alcoa Inc. ("Alcoa") and Cordant announced an
agreement under which Alcoa agreed to acquire Cordant. Alcoa has advised the
Company that it intends to enter into discussions with the Committee to pursue
the acquisition of the outstanding publicly held shares of the Company's stock.
See "Control by and Relationship with Cordant" in "Cautionary Statement," page
The Company uses the investment casting process to manufacture superalloy,
titanium and aluminum components for aerospace engine and airframe applications
and IGT applications for customers worldwide. Sales to the aerospace market were
$733.7 million, $802.5 million, and
$739.9 million in 1999, 1998, and 1997 respectively. Sales to the IGT market
were $677.4 million, $476.1 million, and $402.5 million respectively in those
years. These products are manufactured to precise specifications provided by
PRODUCTS SUMMARY DESCRIPTION AND APPLICATION
Blades High temperature superalloy rotating turbine engine
components. Blades act as airfoils, which are driven by the
hot gas flow.
Vanes High temperature superalloy non-rotating turbine engine
components. Vanes are the fixed airfoils which direct the
IGT shroud blocks Vane holders that provide a seal to fix each vane in
Turbine rotors Integrated cast rotating wheels of blades primarily for use
in smaller engines. Rotors incorporate numerous blades in a
Nozzle rings Integrated cast non-rotating rings of vanes primarily for
use in smaller engines. Nozzle rings are like vanes but are
manufactured as a single integral component.
Compressor stators Integrated cast non-rotating rings of compressor vanes for
use in small and large engines. Compressor stators
incorporate numerous vanes in a single part.
Frames Large diameter thin-wall cases used to support their
respective sections of turbine engines such as fans,
compressors and turbines.
Bearing housings Large diameter, heavy structural supports for bearings.
Airframe components Titanium and aluminum structures for commercial and
military aircraft, including door frames, flap tracks,
nacelles, longerons, wing tips, and nose and tail cones.
packaging Aluminum boxes with card slots and cooling fins for
electronic avionics packages.
system housings Heads-up display, gimbal and other housings.
Engine parts Gear boxes, front frames, and blocker doors for small
parts Aircraft fuel pump, a/c blower, oil tank and surge tank
Howmet Corporation currently is participating in two joint ventures, one in
Japan with Komatsu Ltd. and the other in the United States with a subsidiary of
United Technologies Corporation. The Japanese joint venture, Komatsu-Howmet Ltd.
("KHL"), was established in 1972 and manufactures investment cast components for
IGT and aerospace customers, primarily in Japan. Howmet Corporation currently
holds an 81% interest in KHL and has an option to purchase Komatsu's remaining
interest in this venture. On December 20, 1999 the Company announced that it
intends to acquire Komatsu's remaining interest, with the acquisition expected
to be completed in the second quarter of 2000. The joint venture with United
Technologies Corporation, Sprayform Technologies International, L.L.C.
("Sprayform"), was organized in 1997 to develop and commercialize the
Spraycast-X(R) technology. Through this technology atomized metal is sprayed
onto a rotating mandrel to form products such as cases and rings. Howmet
Corporation currently holds a 51% interest in Sprayform.
The Company's raw materials include a number of metals and minerals, including
titanium, hafnium, aluminum, nickel, cobalt, molybdenum and chromium, among
others. The Company has multiple sources of supply for most of these materials
and has not experienced any significant supply interruption in the past twenty
years. Prices of these materials, however, can be volatile, and the Company
engages in advance purchases of some of these materials under certain market
conditions, and passes certain price fluctuations through to customers pursuant
to its long-term agreements. The Company ordinarily does not otherwise attempt
to hedge the price risk of its raw materials. See "Availability and Cost of Raw
Materials" in "Cautionary Statement", page 8.
The Company has 75 outstanding United States patents, 8 of which will expire
within five years and 12 more of which will expire within ten years. The Company
has also obtained certain technical licenses and developed other proprietary
information. The Company believes that these proprietary rights, including
modifications and applications of the directional solidification and single
crystal casting processes, provide it with a competitive advantage. To protect
its proprietary information, the Company requires its employees to sign
confidentiality agreements, reminds employees of this confidentiality obligation
upon their departure from the Company, and builds much of its own specialized
equipment, such as casting furnaces, to prevent competitors from learning about
Howmet's newly developed processes.
Competitors in the Company's business also hold patents and other forms of
proprietary information, and there is active technical competition in that
business. No assurance can be given that one company or another will not obtain
a significant advantage from time to time in one aspect of the industry's
technology or another.
The Company is the leading supplier of precision investment cast components to
the producers of aircraft and industrial gas turbine engines. Most of the
turbine engine market is characterized by a limited number of large
manufacturers of engines. The Company's top ten customers represented
approximately 76% of the Company's net sales in 1999. The Company's principal
customers are The General Electric Company, principally through its aircraft
engine (GEAE) and power systems (GEPS) groups, ABB Power Generation Ltd., and
United Technologies Corporation, principally through its Pratt & Whitney
aircraft operations (Pratt & Whitney Division and Pratt & Whitney Canada). Sales
to these customers represented 24%, 13% and 10%, respectively, of the Company's
1999 net sales. The Company's other principal aerospace engine customers (none
of which represented more than 10% of 1999 net sales) include Honeywell
International Inc. (through its acquisition of AlliedSignal Inc.), FiatAvio,
S.p.A., Rolls-Royce PLC (and its Rolls-Royce Allison subsidiary), Walbar (a
division of Coltec Industries Inc.), and The Boeing Company. The Company's other
principal IGT customers (none of which represented more than 10% of 1998 net
sales) include Siemens Westinghouse Power Corporation, Mitsubishi Heavy
Industries Ltd., and Solar Turbines Incorporated.
Orders for components are primarily awarded through a competitive bidding
process. Contractual relationships with the Company's principal customers vary.
More than one-half of the Company's casting business is derived from multi-year
contracts, typically three years in length. Under these contracts, the Company's
customers agree to order from the Company, and the Company agrees to supply,
specified percentages of customer requirements for certain parts at specific
pricing over the life of the contracts. The customers are not required to order
fixed numbers of parts, although pricing may be subject to certain threshold
quantities. Some of these contracts include provisions requiring specified price
reductions over the term of the contract, based on lower production costs as
programs mature, shared benefits from other cost reductions resulting from joint
production decisions, and negotiated reductions. The Company typically
renegotiates these contracts during the
last year of the contract period, and during the process, customers frequently
solicit bids from the Company's competitors. See "Customer Base", "Competition"
and "Pricing Pressures" in "Cautionary Statement", pages 6-8.
The Company's backlog of orders as of December 31, 1999 and December 31, 1998
was $765 million and $877 million, respectively. Because of the short lead and
delivery times often involved, backlog may not be a significant indicator of the
Company's future performance.
RESEARCH AND DEVELOPMENT
The Company has made a substantial investment in research and development to
establish technology leadership in the investment casting industry. The Company
believes it has significant opportunities for growth by developing new products
and new applications, which offer its customers improved quality, greater
performance and significant cost savings. These products include turbogenerator
components, airframe structural components manufactured using metal mold
processes, new thermal barrier coatings and titanium aluminide airframe
A portion of the Company's total research and development budget comes from the
Company's customers, which regularly retain the Company for specific projects.
The Company also provides research and development services by contract to
governmental agencies. Its research center staff includes 75 degreed engineers
and scientists. The Company's research and development expenses for the years
ended December 31, 1999, 1998 and 1997 were $19.9 million, $20.2 million and
$17.6 million, respectively. The amount spent during the same periods for
customer-sponsored research and development (including U.S. government funded)
was $12.9 million, $15.3 million and $15.8 million, respectively.
The Company believes it has a majority market share in the overall worldwide
aerospace and IGT turbine engine airfoil investment casting market. Precision
Castparts Corp. ("PCC"), a publicly held company based in Portland, Oregon, is
the Company's primary competitor. The Company believes that the Company and PCC
account for most of the total aerospace turbine engine and IGT investment
casting production, except for captive foundries owned by three customers. The
Company competes with PCC and other smaller participants primarily on the basis
of technological sophistication, quality, price, service and delivery time for
orders from large, well-capitalized customers with significant market power.
Certain of the Company's customers, principally in Europe, have their own
investment casting foundries, which produce parts similar to those manufactured
by the Company. The Company knows of no plans by its major customers to
establish new captive facilities, nor any significant expansion plans by those
customers that have such foundries now. See "Competition" in "Cautionary
Statement," page 7.
The Company's aluminum casting operations compete with a large number of smaller
competitors, also on the basis of price, quality and service.
See "Major Customers", page 3, for discussion of competition in the contract
The Company is subject to comprehensive and changing environmental laws, which
are discussed more fully in "Environmental Laws" in "Cautionary Statement", page
In connection with the Acquisition, Pechiney, S.A. indemnified the Company for
environmental liabilities relating to Howmet Corporation stemming from events
occurring or conditions existing on or prior to the Acquisition, to the extent
that such liabilities exceed a cumulative $6 million. This
threshold has not yet been reached. This indemnification applies to all of the
environmental matters discussed in the next two paragraphs. It is probable that
changes in any of the accrued liabilities discussed in the next two paragraphs
will result in an equal change in the amount of the receivable from Pechiney,
S.A. pursuant to this indemnification.
The Company has received test results indicating levels of polychlorinated
biphenyls ("PCBs") at its Dover, New Jersey facility which will require
remediation. These levels have been reported to the New Jersey Department of
Environmental Protection (the "NJDEP"), and the Company is preparing a work plan
to define the risk and to test possible clean-up options. The statement of work
must be approved by the NJDEP pursuant to an Administrative Consent Order
entered into between the Company and the NJDEP on May 20, 1991 regarding clean-
up of the site. Various remedies are possible and could involve expenditures
ranging from $3 million to $22 million or more. The Company has recorded a $3
million long-term liability as of December 31, 1999 and $2 million as of
December 31, 1998 for this matter. The indemnification discussed above applies
to the costs associated with this matter.
Besides the above-mentioned remediation work required at the Company's Dover,
New Jersey plant, liabilities exist for clean-up costs associated with hazardous
materials at seven other on-site and off-site locations. The Company 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, 1999, $4 million of accrued environmental
liabilities are included in the consolidated balance sheet for these seven
sites. The December 31, 1998 consolidated balance sheet includes $4.2 million of
accrued liabilities for nine such sites. The indemnification discussed above
applies to these costs.
In addition to the above environmental matters, and unrelated to Howmet
Corporation, Howmet Holdings Corporation ("Holdings") 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 1960's. These liabilities include
approximately $7 million in remaining 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 the Company for such liabilities in full.
In connection with these environmental matters, the Company recorded a $17
million liability and an equal $17 million receivable from Pechiney, S.A. as of
December 31, 1999 and $26 million for both the liability and receivable as of
December 31, 1998. Pechiney, S.A. is currently funding all amounts related to
Estimated environmental costs are not expected to impact materially the
financial position or the results of the Company's operations in future periods.
However, environmental clean-ups are protracted in length and environmental
costs in future periods are subject to changes in environmental remediation
regulations. Any costs which are not covered by the Pechiney, S.A.
indemnifications and which are in excess of amounts currently accrued will be
charged to operations in the periods in which they occur.
The Company believes that Pechiney, S.A. will honor its indemnification
obligations described in the preceding paragraphs. In the event that Pechiney,
S.A. does not honor its obligations, the Company would likely be responsible for
the foregoing environmental matters and the cost of addressing those matters
could be material.
As of December 31, 1999, the Company had approximately 11,500 employees.
FOR PURPOSES OF THE SAFE HARBOR
PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
The Company wishes to inform its investors of the following important factors
that in some cases have affected, and in the future could affect, the Company's
results of operations, and that could cause the Company's future results of
operations, financial condition or liquidity to differ materially from those
expressed in any forward-looking statements made by or on behalf of the Company.
Such statements include those relating to pricing, competition effects, market
structure, contracting practices, developmental projects, and environmental
conditions, among others. The words "expect," "project," "estimate," "predict,"
"anticipate," "believes," "plans," "intends," and similar expressions are also
intended to identify forward-looking statements.
Disclosure of these factors is intended to permit the Company to take advantage
of the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995. Many of these factors have been discussed in prior SEC filings by the
Company or by Howmet Corporation.
Although the Company has attempted to list comprehensively these important
cautionary factors, the Company wishes to caution investors that other factors
may prove to be important in affecting the Company's results of operations,
financial condition and liquidity. The Company undertakes no obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
INDUSTRY ECONOMIC CONDITIONS AND CYCLICALITY
The Company currently derives approximately forty per cent of its revenue from
the commercial aerospace industry. This is a cyclical business. Although 1999
was a record year for aircraft deliveries, orders that year were substantially
below those in each of the prior three years. The Company's sales to commercial
original equipment manufacturers ("OEMs") lead the market by approximately nine
months. Hence, the Company's component sales have been adversely affected due to
decreased aircraft production rates for 2000. Any developments in the commercial
aerospace market resulting in a reduction in air travel, the rate of aircraft
engine deliveries, or customer or airline part inventory adjustments in the
future could materially adversely affect the Company's financial condition and
results of operations. Such developments could include cancellations or
deferrals of scheduled deliveries, substantial increases in aircraft fuel costs
or international political factors.
The Company's revenues from its industrial gas turbine ("IGT") castings are
subject to changes in global electric power demand and the availability and cost
of natural gas used to fuel these machines. Changing economic and political
conditions in the United States and in other countries could also delay delivery
of IGT engines, which could have a material adverse effect on the Company's
A substantial portion of the Company's business is conducted with a small number
of large aerospace and industrial gas turbine customers, including The General
Electric Company through its aircraft engine and power systems groups, ABB Power
Generation Ltd., and United Technologies Corporation's Pratt & Whitney aircraft
operations. The Company's top ten customers in the aggregate accounted for
approximately 76% of 1999 net sales. More than one-half of the Company's
business is derived from multi-year contracts with its customers, which
typically last three years and generally give the Company the right and
obligation to fill a specified percentage of the customer's requirements but
generally do not provide the Company with any minimum order commitments. The
Company usually renegotiates these contracts during the last year of the
contract period, and, during
the renegotiation process, customers frequently solicit bids from the Company's
competitors. Some of the contracts require specified price reductions over the
term of the contract based on lower production costs as programs mature, shared
benefits from other cost reductions resulting from joint production decisions,
and negotiated reductions.
Military and defense contractor sales comprised approximately 14% of the
Company's 1999 sales. United States defense spending in markets served by the
Company has declined since the 1980's. If reductions in defense budgets or
military aircraft procurement continue, these reductions could adversely affect
the Company's results of operations. Furthermore, in the event of failure to
comply with the federal statutes and regulations relating to these sales, a
proceeding, including one relating to the matters described below, could result
in fines, penalties, compensatory and treble damages, the cancellation or
suspension of payments under one or more U.S. government contracts, debarment,
or ineligibility for future contracts or subcontracts funded in whole or in part
with federal funds.
Starting in late 1998, the Company discovered certain product testing and
specification non-compliance issues at the Montreal (Canada) and Bethlehem
(Pennsylvania) operations of its Howmet Aluminum Casting subsidiaries. In 1999,
the Company discovered several additional instances of other testing and
specification non-compliance at its Hillsboro (Texas) aluminum casting facility
and at the Montreal and Bethlehem operations. The Company has notified customers
and the appropriate government agencies and has substantially completed
correction of these issues. The Company knows of no in-service problems
associated with any of these issues. In addition, Howmet Aluminum Casting has
been, and expects to continue for some time to be, late in delivery of products
to certain customers, resulting in lower sales. However, delivery performance in
2000 is expected to improve significantly.
The Defense Criminal Investigative Service (the "DCIS"), in conjunction with
other agents from the Defense Department and NASA, has undertaken an
investigation with respect to certain of the foregoing matters at the Montreal
and Bethlehem facilities. The DCIS has informed the Company that the
investigation concerns possible violations of the False Claims Act and the False
Statements Act, as well as possible criminal penalties. The Company is unable to
determine definitively what, if any, civil or criminal penalties might be
imposed as a result of the investigation.
All customer claims relating to the foregoing matters either have been resolved
or, in the Company's judgment, will be resolved within existing reserves.
The Company believes that additional cost for the foregoing matters beyond
amounts accrued, if any, would not have a material adverse effect on the
Company'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.
On August 6, 1999, the Company entered into an Administrative Agreement with the
U.S. Air Force terminating Notices of Proposed Debarment issued on March 1, 1999
relating to certain of the foregoing matters. The Administrative Agreement
permitted the affected facilities to resume accepting new U.S. government
contracts and subcontracts.
The Company competes against Precision Castparts Corp. ("PCC"), its principal
competitor, and other investment casting manufacturers. Competition in
investment casting is based primarily on technological sophistication, quality,
price, service and delivery for orders from large, well-capitalized customers
with significant market power. The Company believes that it and PCC account for
most of the total aerospace turbine engine and IGT component casting production,
except for captive foundries owned by three customers. Because competition is
based to a significant extent on technological capabilities and innovations,
there can be no assurance that PCC or any of the
Company's other competitors will not develop products and/or processes that
would give them a competitive advantage in the Company's markets.
The Company has experienced pressure from all of its major customers for price
reductions. This pressure is the result of the competitive environment in which
the Company's OEM customers are operating in the selling of their engines in
the worldwide market. Because winning an initial order by an OEM generally
provides it with a long-term profitable market for sales of spare parts, fierce
competition exists for these orders and has resulted in reduced prices which
OEMs receive in the market. Pressure for reduced prices is then exerted by OEMs
on their suppliers. The future profitability of the Company will depend upon,
among other things, its ability to continue to reduce its per unit costs and
maintain a cost structure that will enable it to remain cost-competitive.
AVAILABILITY AND COST OF RAW MATERIALS
Raw materials used by the Company include a number of metals and minerals,
including titanium, hafnium, aluminum, nickel, cobalt, molybdenum and chromium,
among others. Prices of these materials can be volatile, and the Company engages
in advance purchases of some of these materials under certain market conditions,
and passes certain price fluctuations through to customers pursuant to its
long-term agreements. The Company ordinarily does not otherwise attempt to hedge
the price risk of its raw materials. For some of the supplies and raw materials
it purchases, including certain metals, the Company has no fixed price contracts
or arrangements. Commercial deposits of certain metals, such as cobalt, nickel,
titanium and molybdenum, which are required for the alloys used in the Company's
precision castings, are found in only a few parts of the world, and for certain
materials only single sources are readily available. The availability and prices
of these metals and other materials may be influenced by private or governmental
cartels, changes in world politics, unstable governments in exporting nations,
production interruptions, inflation and other factors. Although the Company has
not experienced significant shortages of its supplies and raw materials in the
past twenty years, there can be no assurance that such shortages will not occur
in the future. Any such shortages or price fluctuations could have a material
adverse effect on the Company.
CONTROL BY AND RELATIONSHIP WITH CORDANT
Cordant Technologies Inc. ("Cordant") beneficially owns 84.6% of the outstanding
Common Stock of the Company. Accordingly, subject to the Corporate Agreement
referred to below, Cordant is able to control the election of the Company's
Board of Directors and exercise a controlling influence over the business and
affairs of the Company (including any determinations with respect to mergers or
other business combinations involving the Company, the acquisition or
disposition of assets by the Company, the incurrence of indebtedness by the
Company, the issuance of any additional Common Stock or other equity securities
of the Company, the repurchase or redemption of Common Stock of the Company and
the payment of dividends with respect to the Common Stock), and will be able to
do so as long as it continues to own more than 50% of the voting power of the
Company's capital stock. Similarly, Cordant has the power to determine matters
submitted to a vote of the Company's stockholders without the consent of the
Company's other stockholders, has the power to prevent or cause a change in
control of the Company and could take other actions that might be favorable to
Cordant has entered into a Corporate Agreement with the Company relating to the
terms under which Cordant may acquire additional shares of the Company's Common
Stock. See "Arrangements Among the Company and Cordant - Corporate Agreement,"
On November 12, 1999, Cordant made a proposal to acquire all of the outstanding
shares of Common Stock of the Company not currently owned by Cordant ( the
"Publicly Held Shares") for a price of $17.00 per share in cash, and the
proposal was referred to the Independent Directors
Committee of the Company's Board of Directors (the "Committee"). On March 10,
2000, Cordant informed the Committee that it was willing to increase its offer
to $18.75 per share, but following further discussions no agreement was reached.
On March 14, 2000, Alcoa Inc. ("Alcoa") and Cordant announced an agreement under
which Alcoa agreed to acquire Cordant. Alcoa has advised the Company that it
intends to enter into discussions with the Committee to pursue the acquisition
of the Publicly Held Shares of the Company. Such an acquisition would be subject
to the Corporate Agreement referred to above.
POTENTIAL CONFLICTS OF INTEREST ARISING FROM CORDANT RELATIONSHIP
As a result of Cordant's ownership of Common Stock of the Company and its
intercompany agreements with the Company or otherwise, various conflicts of
interest between the Company and Cordant could arise. The Company and Cordant
have entered into an intercompany services agreement with respect to services to
be provided by Cordant to the Company. Under the agreement, the Company
generally pays Cordant its cost plus a fee, as determined by Cordant from time
to time on a basis consistent with past practice. This arrangement is designed
to control administrative costs and avoid duplication of administrative
functions. The Company paid Cordant $1,875,000 to cover both its costs and fees
for the year ended December 31, 1999. Under the arrangement, Cordant also bills
the Company directly, with no "mark-up," for some services provided by third
Ownership interests of directors or officers of the Company in Common Stock of
Cordant, if any, or service as a director or officer of both the Company and
Cordant could create or appear to create potential conflicts of interest when
directors and officers are faced with decisions that could have different
implications for the Company and Cordant. The Restated Certificate of
Incorporation of the Company includes certain provisions relating to the
allocation of business opportunities that may be suitable for both the Company
and Cordant. In addition, under Delaware corporate law, officers, directors and
controlling stockholders of the Company have certain fiduciary duties to the
The Company is subject to comprehensive and changing federal, state, local and
international laws, regulations and ordinances (together, "Environmental Laws")
governing activities or operations that may have adverse environmental effects,
such as discharges to air and water, as well as handling and disposal practices
for solid and hazardous wastes. Environmental Laws also impose liability for the
costs of cleaning up, and certain damages resulting from, sites of past spills,
disposals or other releases of hazardous substances and materials, including
liability under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA," the federal "Superfund" statute), and similar
state statutes for the investigation and remediation of environmental
contamination at properties owned and/or operated by the Company and at off-site
locations where it has arranged for the disposal of hazardous substances. The
Company is involved from time to time in legal proceedings involving remediation
of environmental contamination from past or present operations, as well as
compliance with environmental requirements applicable to ongoing operations.
There can be no assurance that material costs or liabilities will not be
incurred in connection with any such proceedings, claims or compliance
requirements or in connection with currently unknown environmental liabilities.
If it is determined that the Company is not in compliance with current
Environmental Laws, the Company could be subject to penalties. The amount of any
such penalties could be material. In addition, the Company uses solvents, waxes,
metals, caustics, acids, oils and other hazardous substances, and as is the case
with manufacturers in general, if a release of hazardous substances occurs on or
from the Company's properties or from an off-site disposal facility attributable
to the Company, the Company may be held liable and may be required to pay the
cost of remedying the condition. The amount of any such liability could be
The Company's facilities have made, and will continue to make, expenditures to
comply with current and future Environmental Laws. The Company anticipates that
it could incur additional capital and operating costs in the future to comply
with existing Environmental Laws and new requirements arising from new or
amended statutes and regulations. In addition, because the applicable regulatory
agencies have not yet promulgated final standards for some existing
environmental programs, the Company cannot at this time reasonably estimate the
cost for compliance with these additional requirements. The amount of any such
compliance costs could be material.
Certain potential sources of liability under the Environmental Laws, as well as
other information relating to environmental matters, including rights of the
Company to indemnification for substantial portions of these potential
liabilities, are described under "Business - Environmental Matters", pages 4-5.
FOREIGN CURRENCY HEDGING
The Company maintains a policy of hedging foreign currency transactions and
economic exposures for foreign currency denominated obligations. The Company
does not hedge against net asset values for its foreign investments attributed
to its foreign subsidiaries valued in local currencies. To the extent the
Company's foreign revenue base grows and net asset base expands as a result of
increased foreign business activity, the Company's exposure to adverse foreign
currency rate movement increases. The Company's foreign currency risk exposure
is also subject to the stability of the foreign currency of the country where
the Company maintains foreign operations or does business. The Company seeks to
minimize the impact of adverse foreign currency rate movements through its
hedging policy. The success of the hedging policy in preventing an adverse
financial result on operations in any accounting period cannot be assured.
YEAR 2000 COMPLIANCE
The Company has not experienced any disruption in operations as a result of
computer software issues associated with the Year 2000. Only a few minor
problems have been discovered so far, and all of them have been addressed. There
can be no guarantee that the systems of other companies on which Howmet's
systems rely will continue to operate successfully. This could have an adverse
effect on the Howmet systems. However, at this point, the Company has not been
made aware of material problems. The Company has not experienced any failures
within its supply chain.
The estimated cost at completion for all phases of the Company's Year 2000
project is $16.2 million. An estimated $6.7 million (41%) of this expense is for
information systems labor and miscellaneous project costs; these costs are being
expensed as routine information systems maintenance as incurred over the
three-year duration of the project. Another $6.9 million (43%) is for software
purchase and implementation costs for applications that were installed as
scheduled or, on an expedited basis, for Year 2000 purposes. An additional $2.6
million (16%) is for infrastructure upgrades or replacement.
Approximately $15.9 million (98%) had been expended as of December 31, 1999; the
Company expects to spend $0.3 million (2%) in 2000.
The Company implemented a strategy during 1999, which would allow it to operate
in a Euro environment during the transition period, January 1, 1999 through
December 31, 2001, and after full Euro conversion, effective July 1, 2002. To
date the Company has not experienced and does not anticipate any material impact
from the Euro conversion on its operations, its competitive position or its
computer software plans. Also, the Company does not expect any significant
changes to its currency hedging program and does not expect any significant
increases in its foreign exchange exposure.