SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
Commission file number 0-28538
Titanium Metals Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-5630895
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5600
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Number of shares of common stock outstanding on October 29, 2001: 31,892,338
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Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in the Notes to Consolidated Financial Statements and under the
captions "Financial Condition and Results of Operations" and "Liquidity and
Capital Resources" (both contained in Management's Discussion and Analysis of
Financial Condition, Results of Operations and Liquidity and Capital Resources),
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"will," "looks," "should," "could," "anticipates," "expects" or comparable
terminology or by discussions of strategies or trends. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it cannot give any assurances that these expectations will prove to
be correct. Such statements by their nature involve substantial risks and
uncertainties that could significantly affect expected results. Actual future
results could differ materially from those described in such forward-looking
statements, and the Company disclaims any intention or obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Among the factors that could cause actual results to
differ materially are the risks and uncertainties discussed in this Quarterly
Report, including in those portions referenced above and those described from
time to time in the Company's other filings with the Securities and Exchange
Commission which include, but are not limited to, the cyclicality of the
commercial aerospace industry, the performance of aerospace manufacturers under
their long-term purchase agreements with the Company, the difficulty in
forecasting demand for titanium products, global economic and political
conditions, global productive capacity for titanium, changes in product pricing
and costs, the impact of long-term contracts with vendors on the ability of the
Company to reduce or increase supply or achieve lower costs, the possibility of
labor disruptions, fluctuations in currency exchange rates, control by certain
stockholders and possible conflicts of interest, uncertainties associated with
new product development, the supply of raw materials and services, changes in
raw material and other operating costs (including energy costs), possible
increases in the cost of doing business resulting from war or terrorist
activities, and other risks and uncertainties. Should one or more of these risks
materialize (or the consequences of such a development worsen), or should the
underlying assumptions prove incorrect, actual results could differ materially
from those forecasted or expected.
TITANIUM METALS CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2001 (unaudited)
and December 31, 2000 2-3
Consolidated Statements of Operations - Three months and nine
months ended September 30, 2001 and 2000 (unaudited) 4
Consolidated Statements of Comprehensive Income
(Loss) - Three months and nine months ended
September 30, 2001
and 2000 (unaudited) 5
Consolidated Statements of Cash Flows - Nine months
ended September 30, 2001 and 2000 (unaudited) 6-7
Consolidated Statement of Changes in Stockholders' Equity -
Nine months ended September 30, 2001 (unaudited) 8
Notes to Consolidated Financial Statements (unaudited) 9-18
Item 2. Management's Discussion and Analysis of Financial Condition,
Results of Operations and Liquidity and Capital Resources 19-26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 6. Exhibits and Reports on Form 8-K 28
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30,
2001 December 31,
ASSETS (unaudited) 2000
--------------------- --------------------
Current assets:
Cash and cash equivalents $ 15,364 $ 9,796
Accounts and other receivables, less allowance
for doubtful accounts of $2,961 and $2,927 89,732 75,913
Receivable from related parties 5,249 5,029
Refundable income taxes 346 637
Inventories 165,954 148,384
Prepaid expenses and other 14,159 8,049
Deferred income taxes 1,296 397
--------------------- --------------------
Total current assets 292,100 248,205
--------------------- --------------------
Other assets:
Investments in joint ventures 20,008 18,136
Preferred securities 80,000 80,000
Accrued dividends on preferred securities 8,849 8,136
Goodwill 45,745 49,305
Other intangible assets 10,907 13,258
Deferred income taxes 12,163 27,820
Other 12,770 12,156
--------------------- --------------------
Total other assets 190,442 208,811
--------------------- --------------------
Property and equipment:
Land 6,150 6,158
Buildings 36,675 37,593
Information technology systems 55,130 54,426
Manufacturing and other 293,741 305,856
Construction in progress 9,029 8,811
--------------------- --------------------
400,725 412,844
Less accumulated depreciation 126,740 110,714
--------------------- --------------------
Net property and equipment 273,985 302,130
--------------------- --------------------
$ 756,527 $ 759,146
===================== ====================
- 2 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
September 30,
LIABILITIES, MINORITY INTEREST AND 2001 December 31,
STOCKHOLDERS' EQUITY (unaudited) 2000
-------------------- ---------------------
Current liabilities:
Notes payable $ 1,879 $ 24,112
Current maturities of long-term debt and
capital lease obligations 277 2,011
Accounts payable 54,154 50,456
Accrued liabilities 46,657 36,180
Payable to related parties 1,452 1,099
Income taxes 1,539 852
Deferred income taxes 211 1,132
-------------------- ---------------------
Total current liabilities 106,169 115,842
-------------------- ---------------------
Noncurrent liabilities:
Long-term debt 8,022 18,953
Capital lease obligations 8,646 8,642
Payable to related parties 953 1,332
Accrued OPEB cost 17,215 18,219
Accrued pension cost 3,816 5,361
Accrued environmental cost 3,262 3,262
Deferred income taxes 10,141 9,655
Accrued dividends on Convertible Preferred Securities - 11,154
Other 116 117
-------------------- ---------------------
Total noncurrent liabilities 52,171 76,695
-------------------- ---------------------
Minority interest - Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely
subordinated debt securities
("Convertible Preferred Securities") 201,241 201,250
Other minority interest 8,751 7,844
Stockholders' equity:
Preferred stock - -
Common stock 319 319
Additional paid-in capital 350,631 350,078
Retained earnings 56,201 25,925
Accumulated other comprehensive loss (17,125) (16,408)
Treasury stock, at cost (90 shares) (1,208) (1,208)
Deferred compensation (623) (1,191)
-------------------- ---------------------
Total stockholders' equity 388,195 357,515
-------------------- ---------------------
$ 756,527 $ 759,146
==================== =====================
Commitments and contingencies (Note 12)
See accompanying notes to consolidated financial statements.
- 3 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
-------------- ------------- -------------- -------------
Revenues and other income:
Net sales $ 126,437 $ 106,730 $ 370,479 $ 320,279
Equity in earnings (losses)
of joint ventures 749 (232) 1,863 (957)
Other, net 1,262 1,432 78,877 5,191
-------------- ------------- -------------- -------------
128,448 107,930 451,219 324,513
-------------- ------------- -------------- -------------
Costs and expenses:
Cost of sales 105,601 103,072 345,861 318,626
Selling, general, administrative
and development 11,562 11,202 43,473 33,833
Restructuring charge (credit) - - (220) 2,805
Interest 722 1,898 3,316 6,022
-------------- ------------- -------------- -------------
117,885 116,172 392,430 361,286
-------------- ------------- -------------- -------------
Income (loss) before income taxes,
minority interest and
extraordinary item 10,563 (8,242) 58,789 (36,773)
Income tax expense (benefit) 3,731 (2,834) 20,693 (12,871)
Minority interest - Convertible
Preferred Securities, net of tax 2,166 2,166 6,845 6,524
Other minority interest, net of tax 326 335 975 1,249
-------------- ------------- -------------- -------------
Income (loss) before
extraordinary item 4,340 (7,909) 30,276 (31,675)
Extraordinary item, net of tax - - - (873)
-------------- ------------- -------------- -------------
Net income (loss) $ 4,340 $ (7,909) $ 30,276 $ (32,548)
============== ============= ============== =============
Earnings (loss) per share:
Basic:
Before extraordinary item $ .14 $ (.25) $ .96 $ (1.01)
Extraordinary item - - - (.03)
-------------- ------------- -------------- -------------
$ .14 $ (.25) $ .96 $ (1.04)
============== ============= ============== =============
Diluted:
Before extraordinary item $ .14 $ (.25) $ .95 $ (1.01)
Extraordinary item - - - (.03)
-------------- ------------- -------------- -------------
$ .14 $ (.25) $ .95 $ (1.04)
============== ============= ============== =============
Weighted average shares outstanding:
Common shares 31,539 31,374 31,486 31,373
Diluted shares 31,764 31,374 31,760 31,373
See accompanying notes to consolidated financial statements.
- 4 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
(In thousands)
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
-------------- ------------- -------------- -------------
Net income (loss) $ 4,340 $ (7,909) $ 30,276 $ (32,548)
Other comprehensive income (loss) -
currency translation adjustment 6,996 (4,447) (717) (12,224)
-------------- ------------- -------------- -------------
Comprehensive income (loss) $ 11,336 $ (12,356) $ 29,559 $ (44,772)
============== ============= ============== =============
See accompanying notes to consolidated financial statements.
- 5 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
Nine months ended
September 30,
-------------------------------------
2001 2000
----------------- ----------------
Cash flows from operating activities:
Net income (loss) $ 30,276 $ (32,548)
Depreciation and amortization 30,145 31,765
Noncash restructuring (credit) charge (220) 2,405
Noncash special charges 14,412 6,729
Gain on sale of castings joint venture - (1,205)
Extraordinary loss on early extinguishment of debt, net - 873
Equity in (earnings) losses of joint ventures,
net of distributions (1,463) 1,357
Deferred income taxes 17,283 (15,461)
Other minority interest 975 1,249
Other, net 897 293
Change in assets and liabilities:
Receivables (13,265) 21,323
Accrued dividends receivable on preferred securities (714) (1,553)
Inventories (18,230) 37,840
Prepaid expenses and other (5,383) (382)
Accounts payable and accrued liabilities 9,506 (17,802)
Accrued restructuring charges (470) (2,580)
Income taxes 811 9,005
Accounts with related parties, net (273) 33
Accrued OPEB and pension costs (2,548) (3,466)
Accrued dividends on Convertible Preferred Securities (10,043) 6,691
Other, net (4,103) (3,288)
----------------- ----------------
Net cash provided by operating activities 47,593 41,278
----------------- ----------------
Cash flows from investing activities:
Capital expenditures (7,922) (6,652)
Proceeds from sale of castings joint venture - 7,000
Other, net 30 (36)
----------------- ----------------
Net cash (used) provided by investing activities (7,892) 312
----------------- ----------------
Cash flows from financing activities:
Indebtedness:
Borrowings 389,029 273,830
Repayments (423,210) (330,677)
Issuance of common stock 513 -
Other, net (125) (171)
----------------- ----------------
Net cash used by financing activities (33,793) (57,018)
----------------- ----------------
Net cash provided (used) by operating,
investing and financing activities $ 5,908 $ (15,428)
================= ================
See accompanying notes to consolidated financial statements.
- 6 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (CONTINUED)
(In thousands)
Nine months ended
September 30,
-------------------------------------
2001 2000
----------------- ----------------
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $ 5,908 $ (15,428)
Currency translation (340) 270
----------------- ----------------
5,568 (15,158)
Balance at beginning of period 9,796 20,671
----------------- ----------------
Balance at end of period $ 15,364 $ 5,513
================= ================
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 2,613 $ 5,319
Convertible Preferred Securities dividends $ 20,560 $ 3,333
Income taxes, net $ 2,598 $ -
Noncash investing and financing activities:
Capital lease obligations of $481 were incurred during the
nine months ended September 30, 2001 when the Company
entered into certain leases for new equipment
See accompanying notes to consolidated financial statements.
- 7 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
Nine months ended September 30, 2001
(In thousands)
Accumulated Other
Comprehensive Loss
Additional -------------------------------
Common Common Paid-In Retained Currency Pension
Shares Stock Capital Earnings Translation Liabilities
----------- ----------- ------------- ---------- ------------- --------------
Balance at December 31, 2000 31,817 $ 319 $ 350,078 $ 25,925 $ (10,920) $ (5,488)
Components of comprehensive
income (loss):
Net income - - - 30,276 - -
Change in cumulative
currency translation
adjustment - - - - (717) -
Issuance of common stock 80 1 577 - - -
Stock award cancellations (37) (1) (201) - - -
Amortization of deferred
compensation - - - - - -
Other, net - - 177 - - -
----------- ----------- ------------- ---------- ------------- --------------
Balance at September 30, 2001 31,860 $ 319 $ 350,631 $ 56,201 $ (11,637) $ (5,488)
=========== =========== ============= ========== ============= ==============
Total
Treasury Deferred Stockholders'
Stock Compensation Equity
------------- ---------------- ----------------
Balance at December 31, 2000 $ (1,208) $ (1,191) $ 357,515
Components of comprehensive
income (loss):
Net income - - 30,276
Change in cumulative
currency translation
adjustment - - (717)
Issuance of common stock - - 578
Stock award cancellations - 202 -
Amortization of deferred
compensation - 366 366
Other, net - - 177
------------- ---------------- ----------------
Balance at September 30, 2001 $ (1,208) $ (623) $ 388,195
============= ================ ================
See accompanying notes to consolidated financial statements.
- 8 -
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1 - Organization and basis of presentation:
Titanium Metals Corporation ("TIMET") is a vertically integrated producer
of titanium sponge, melted products and a variety of mill products for
aerospace, industrial and other applications. At September 30, 2001, Tremont
Corporation ("Tremont") held approximately 39% of TIMET's outstanding common
stock. At September 30, 2001, subsidiaries of Valhi, Inc. ("Valhi") held an
aggregate of approximately 80% of Tremont's outstanding common stock, and
Contran Corporation ("Contran") held, directly or through subsidiaries,
approximately 94% of Valhi's outstanding common stock. Substantially all of
Contran's outstanding voting stock is held by trusts established for the benefit
of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons
is sole trustee. Mr. Simmons may be deemed to control each of Contran, Valhi,
Tremont and TIMET.
The consolidated balance sheet of TIMET and subsidiaries (collectively, the
"Company") at December 31, 2000 has been condensed from the Company's audited
consolidated financial statements at that date. The consolidated balance sheet
at September 30, 2001 and the consolidated statements of operations,
comprehensive income (loss), changes in stockholders' equity and cash flows for
the interim periods ended September 30, 2001 and 2000 have been prepared by the
Company without audit. In the opinion of management, all adjustments necessary
to present fairly the consolidated financial position, results of operations and
cash flows have been made. The results of operations for interim periods are not
necessarily indicative of the operating results of a full year or of future
operations. Certain prior year amounts have been reclassified to conform to the
current year presentation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The accompanying consolidated financial
statements should be read in conjunction with the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 (the "2000 Annual Report").
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended, effective January 1, 2001. SFAS No. 133 establishes accounting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Under SFAS No. 133, all
derivatives are recognized as either assets or liabilities and measured at fair
value. The accounting for changes in fair value of derivatives is dependent upon
the intended use of the derivative. As permitted by the transition requirements
of SFAS No. 133, as amended, the Company has exempted from the scope of SFAS No.
133 all host contracts containing embedded derivatives that were issued or
acquired prior to January 1, 1999. The Company is not a party to any significant
derivative or hedging instrument covered by SFAS No. 133, and the adoption of
SFAS No. 133 had no material effect on the Company's consolidated financial
position, liquidity or results of operations.
On July 1, 2001, the Company adopted SFAS No. 141, Business Combinations.
Under SFAS 141, all business combinations are accounted for by the purchase
method, and the pooling-of-interests method is prohibited.
- 9 -
On September 11, 2001, the United States was the target of terrorist
attacks that have had a significant adverse effect on the global economy and
commercial aerospace industry. The Company estimates that approximately 80% of
its sales in 2001 are derived from the commercial aerospace sector and,
accordingly, the Company expects to see a substantial near- term decline in its
business.
The Company has undertaken an assessment of the longer-term impact of these
events and any potential charges that may be appropriate for asset impairments,
increases in valuation allowances and other similar items. Such potential
charges, if any, are not yet reasonably estimable due to the period of time
necessary for external information to become available and then be analyzed and
assessed. The Company expects these items to become estimable over the next few
months and, accordingly, the Company's results for the three months ended
December 31, 2001 and future periods could include material charges for these
matters. These charges could relate to goodwill, the Company's investment in
preferred securities of Special Metals Corporation ("SMC"), deferred tax assets
and other long-lived assets.
- 10 -
Note 2 - Business segment information:
The Company's worldwide operations are conducted through one business
segment - the production and sale of titanium melted and mill products.
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------- -------------- -------------- --------------
(In thousands) (In thousands)
Net sales $ 126,437 $ 106,730 $ 370,479 $ 320,279
Cost of sales 105,601 103,072 345,861 318,626
------------- -------------- -------------- --------------
Gross margin 20,836 3,658 24,618 1,653
Selling, general, administrative
and development 11,562 11,202 43,473 33,833
Equity in (earnings) losses of
joint ventures (749) 232 (1,863) 957
Restructuring (income) charge - - (220) 2,805
Other expense (income) 59 (107) (73,529) (429)
------------- -------------- -------------- --------------
Operating income (loss) 9,964 (7,669) 56,757 (35,513)
General corporate income:
Dividends and interest income 1,687 1,542 5,140 4,592
Gain on sale of castings joint venture - - - 1,205
Currency transactions and other, net (366) (217) 208 (1,035)
Interest expense 722 1,898 3,316 6,022
------------- -------------- -------------- --------------
Income (loss) before income taxes,
minority interest, and
extraordinary item $ 10,563 $ (8,242) $ 58,789 $ (36,773)
============= ============== ============== ==============
Titanium melted and mill products:
Mill product net sales $ 91,053 $ 80,088 $ 274,577 $ 246,156
Melted product net sales 19,906 13,158 49,005 33,863
Other 15,478 13,484 46,897 40,260
------------- -------------- -------------- --------------
$ 126,437 $ 106,730 $ 370,479 $ 320,279
============= ============== ============== ==============
Mill product shipments:
Volume (metric tons) 3,015 2,840 9,245 8,430
Average price ($ per kilogram) $ 30.20 $ 28.20 $ 29.70 $ 29.20
Melted product shipments:
Volume (metric tons) 1,345 950 3,415 2,445
Average price ($ per kilogram) $ 14.80 $ 13.85 $ 14.35 $ 13.85
- 11 -
Note 3 - Inventories:
September 30, December 31,
2001 2000
--------------------- --------------------
(In thousands)
Raw materials $ 32,156 $ 31,127
Work-in-process 94,178 74,631
Finished products 49,944 53,685
Supplies 13,425 14,991
--------------------- --------------------
189,703 174,434
Less adjustment of certain inventories to LIFO basis 23,749 26,050
--------------------- --------------------
$ 165,954 $ 148,384
===================== ====================
Note 4 - Joint ventures:
VALTIMET is a manufacturer of stainless steel, copper, nickel and welded
titanium tubing with operations in the United States, France and China. At
December 31, 2000, VALTIMET was owned 46% by TIMET and 54% by Valinox Welded, a
French manufacturer of welded tubing. During the second quarter of 2001,
VALTIMET sold 50,220 newly-issued shares of VALTIMET common stock to Sumitomo
Metal Industries, Ltd. ("Sumitomo") for $58.73 per share (as translated from
euros). The Company reported a $.3 million gain on this transaction which was
recorded as a component of equity. As a result, VALTIMET is presently owned 5%
by Sumitomo, 43.7% by TIMET and 51.3% by Valinox Welded.
Note 5 - Preferred securities:
In October 1998, the Company purchased for cash $80 million of non-voting
preferred securities of SMC, a U.S. manufacturer of wrought nickel-based
superalloys and special alloy long products. The preferred securities accrue
dividends at the annual rate of 6.625%, are mandatorily redeemable in April 2006
and are convertible into SMC common stock at $16.50 per share. SMC's common
stock is traded on the NASDAQ under the symbol "SMCX" and had a quoted market
price on September 30, 2001 of $2.65 per share. From October 1998 through
December 1999, dividends on the preferred securities had been deferred by SMC.
In April 2000, SMC resumed current dividend payments of $1.3 million each
quarter; however, dividends and interest in arrears due the Company were not
paid. At September 30, 2001, aggregate accrued dividends and interest
approximate $8.8 million.
The SMC preferred securities are not marketable and, accordingly, quoted
market prices are unavailable. The Company understands that approximately 30% of
SMC's sales are to the commercial aerospace industry and, therefore, SMC's
business may be adversely impacted by the terrorist attacks of September 11,
2001. See Note 1 for further information. Additionally, on October 11, 2001, the
Company was notified by SMC of their intention to again defer the payment of
dividends effective with the dividend due on October 28, 2001. As a result of
these and other factors, the Company has undertaken an assessment of its
investment in SMC to determine if a writedown of this investment is appropriate.
The Company anticipates that such assessment will be completed over the next few
months and, accordingly, the Company's results for the three months ended
December 31, 2001 could include a material charge for this matter.
- 12 -
Note 6 - Intangible and other noncurrent assets:
September 30, December 31,
2001 2000
--------------------- --------------------
(In thousands)
Intangible assets:
Patents $ 13,476 $ 13,521
Covenants not to compete 8,480 8,500
--------------------- --------------------
21,956 22,021
Less accumulated amortization 14,738 12,452
--------------------- --------------------
7,218 9,569
Intangible pension assets 3,689 3,689
--------------------- --------------------
$ 10,907 $ 13,258
===================== ====================
Other noncurrent assets:
Deferred financing costs $ 8,479 $ 9,194
Notes receivable from officers 163 544
Prepaid pension cost 3,386 1,359
Other 742 1,059
--------------------- --------------------
$ 12,770 $ 12,156
===================== ====================
Note 7 - Accrued liabilities:
September 30, December 31,
2001 2000
--------------------- --------------------
(In thousands)
OPEB cost $ 3,345 $ 3,129
Pension cost 353 1,251
Accrued profit sharing 7,615 -
Other employee benefits 17,632 15,120
Accrued dividends on Convertible Preferred Securities 1,111 -
Deferred income 901 2,558
Accrued tungsten costs 2,984 -
Environmental costs 654 818
Restructuring costs 320 1,012
Taxes, other than income 3,836 3,593
Other 7,906 8,699
--------------------- --------------------
$ 46,657 $ 36,180
===================== ====================
- 13 -
Note 8 - Notes payable, long-term debt and capital lease obligations:
September 30, December 31,
2001 2000
--------------------- --------------------
(In thousands)
Notes payable:
U.S. credit agreement $ 6 $ 19,893
European credit agreements 1,873 4,219
--------------------- --------------------
$ 1,879 $ 24,112
===================== ====================
Long-term debt:
Bank credit agreement - U.K. $ 7,933 $ 20,263
Other 178 514
--------------------- --------------------
8,111 20,777
Less current maturities 89 1,824
--------------------- --------------------
$ 8,022 $ 18,953
===================== ====================
Capital lease obligations $ 8,834 $ 8,829
Less current maturities 188 187
--------------------- --------------------
$ 8,646 $ 8,642
===================== ====================
Upon entering into its current U.S. and U.K. credit facilities in February
2000, the Company's previous U.S. credit facility was repaid and terminated. The
deferred financing costs associated with the previous U.S. facility were written
off and reflected as an extraordinary item in 2000 of $.9 million, net of tax.
In the third quarter of 2001, the Company amended its U.S. revolving credit
agreement to permit, under specified conditions, payment of dividends on the
Company's common stock and the making of up to $20 million of intercompany loans
to certain subsidiaries.
The weighted average interest rate on borrowings outstanding under the U.S.
and U.K. credit agreements at September 30, 2001 was 7.0% and 4.4%,
respectively. As of September 30, 2001, the Company had approximately $152
million of unused borrowing availability under its U.S. and European credit
agreements.
Note 9 - Restructuring and other special charges:
Accrued restructuring costs of $.3 million at September 30, 2001 consist of
unpaid personnel severance and benefits and other exit costs (primarily carrying
costs on closed leased facilities) relating to the Company's restructuring plans
implemented during 1999 and 2000. During the nine months ended September 30,
2001, payments of $.5 million were applied against the accruals related to the
2000 plan, while payments related to the 1999 plan were insignificant. During
the first quarter of 2001, the Company also recorded income of $.2 million
related to revisions to estimates of previously established restructuring
accruals.
During the second quarter of 2001, the Company recorded $10.8 million in
special charges to cost of sales for the impairment of certain equipment located
in Millbury, Massachusetts. The Company completed studies of the potential uses
of this equipment in the foreseeable future as well as the economic viability of
those alternatives, resulting in the determination that the equipment's
undiscounted future cash flows could no longer support its carrying value. The
loss on impairment represents the difference between the equipment's
- 14 -
estimated fair value, as determined through a third-party appraisal, and its
previous carrying amount.
The Company also recorded special charges to cost of sales aggregating $3.8
million for the nine months ended September 30, 2001 ($1.0 million in the first
quarter of 2001 and $2.8 million in the second quarter of 2001) for potential
losses related to products that may contain tungsten inclusions. See Note 12 for
additional information.
During the first quarter of 2000, the Company recorded special charges to
cost of sales aggregating $6.7 million, consisting of $3.4 million in
equipment-related impairment charges and $3.3 million of environmental charges.
Certain accrued environmental costs are reflected as noncurrent liabilities in
the consolidated balance sheet at September 30, 2001 and December 31, 2000 as
they are expected to be paid over a period of up to thirty years.
Note 10 - Income taxes:
The difference between the Company's income tax expense (benefit)
attributable to pre-tax income (loss) and the amounts that would be expected
using the U.S. federal statutory income tax rate of 35% is summarized below.
Nine months ended September 30,
---------------------------------------------
2001 2000
-------------------- --------------------
(In thousands)
Expected income tax expense (benefit), at 35% $ 20,577 $ (12,871)
Non-U.S. tax rates 407 873
U.S. state income taxes, net 1,092 127
Extraterritorial income exclusion (346) -
Dividends received deduction (974) (963)
Adjustment of deferred tax valuation allowance (103) 59
Other, net 40 (96)
-------------------- --------------------
$ 20,693 $ (12,871)
==================== ====================
Note 11 - Other, net:
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
-------------- ------------- -------------- -------------
(In thousands) (In thousands)
Dividends and interest income $ 1,687 $ 1,542 $ 5,140 $ 4,592
Boeing settlement, net - - 73,000 -
Gain on sale of castings joint venture - - - 1,205
Other (expense) income (425) (110) 737 (606)
-------------- ------------- -------------- -------------
$ 1,262 $ 1,432 $ 78,877 $ 5,191
============== ============= ============== =============
- 15 -
Note 12 - Commitments and contingencies:
For additional information concerning certain legal proceedings and
contingencies related to the Company, see (i) Part I, Item 2 - "Management's
Discussion and Analysis of Financial Condition, Results of Operations and
Liquidity and Capital Resources," (ii) Part II, Item 1 - "Legal Proceedings,"
(iii) the 2000 Annual Report on Form 10K and (iv) Note 1 to the Consolidated
Financial Statements.
In April 2001, the Company reached a settlement of previously reported
litigation between TIMET and The Boeing Company ("Boeing") relating to the
parties' 1997 long-term titanium purchase and supply agreement. Pursuant to the
settlement, TIMET received a cash payment of $82.0 million and recorded $73.0
million (cash settlement less legal fees of $9.0 million) as other operating
income and approximately $10.3 million for profit sharing and other costs as
selling, general, administrative and development expense during the second
quarter of 2001. The parties also entered into an amended long-term agreement
that, among other things, allows Boeing to purchase up to 7.5 million pounds of
titanium product annually from TIMET through 2007, subject to certain maximum
quarterly volume levels. Under a separate agreement, TIMET will establish and
hold titanium buffer stock for Boeing at TIMET's facilities. See Part I, Item
2.A. - "Financial Condition and Results of Operations" for additional
information regarding the settlement with Boeing.
In March 2001, the Company was notified by one of its customers that a
product the customer manufactured from standard grade titanium produced by the
Company contained what has been confirmed to be a tungsten inclusion. The
Company believes that the source of this tungsten was contaminated silicon,
which is used as an alloying addition to the titanium at the melting stage,
purchased from an outside vendor in 1998. The Company continues to investigate
the scope of this problem, including identification of customers who received
material manufactured using this silicon and the applications into which such
material has been placed by such customers.
At this time, the Company is aware of six standard grade ingots that have
been demonstrated to contain tungsten inclusions; however, further investigation
may identify other material that has been similarly affected. Until this
investigation is completed, TIMET is unable to determine the ultimate liability
the Company may incur with respect to this matter. The Company currently
believes that it is unlikely that its insurance policies will provide coverage
for any costs that may be associated with this matter. The Company is continuing
to work with its affected customers to determine the appropriate remedial steps
required to satisfy their claims. Based upon an assessment of possible losses
completed by the Company, TIMET recorded an aggregate charge to cost of sales
for this matter of $3.8 million through September 30, 2001 ($1.0 million in the
first quarter of 2001 and $2.8 million in the second quarter of 2001). This
amount represents the Company's best estimate of the most likely amount of loss
to be incurred. It does not represent the maximum possible loss, which is not
possible for the Company to estimate at this time, and may be periodically
revised in the future as more facts become known. As of September 30, 2001, $3.0
million remains accrued for potential future claims. The Company has filed suit
seeking full recovery from the silicon supplier for any liability the Company
might incur, although no assurances can be given that the Company will
ultimately be able to recover all or any portion of such amounts. The Company
has not recorded any recoveries related to this matter as of September 30, 2001.
See also Part I, Item 2.A. - "Financial Condition and Results of Operations" for
additional information.
- 16 -
The Company is involved in various other environmental, contractual,
product liability and other claims, disputes and litigation incidental to its
business.
The Company currently believes the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
the Company's financial condition, results of operations or liquidity.
Note 13 - Earnings per share:
A reconciliation of the numerator and denominator used in the calculation
of basic and diluted earnings per share is presented below. Convertible
Preferred Securities omitted from the diluted earnings per share calculation
because they were antidilutive approximated 5.4 million shares for the three and
nine month periods ended September 30, 2001 and 2000. Stock options and
restricted shares omitted from the calculation because they were antidilutive
approximated 2.2 million and 2.0 million for the three and nine month periods
ended September 30, 2000, respectively.
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2001 2000 2001 2000
-------------- ------------- -------------- -------------
(In thousands) (In thousands)
Numerator:
Diluted net income (loss) $ 4,340 $ (7,909) $ 30,276 $ (32,548)
============== ============= ============== =============
Denominator:
Average common shares outstanding 31,539 31,374 31,486 31,373
Average dilutive stock options and
restricted shares 225 - 274 -
-------------- ------------- -------------- -------------
Diluted shares 31,764 31,374 31,760 31,373
============== ============= ============== =============
Note 14 - Accounting principles not yet adopted:
The Company will adopt SFAS No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002. Under SFAS 142, goodwill will not be amortized on a
periodic basis, but instead will be subject to an impairment test to be
performed at least on an annual basis. The Company anticipates adoption of this
standard will reduce its amortization expense commencing on January 1, 2002;
however, impairment reviews may also result in future periodic write-downs. The
Company will complete its initial goodwill impairment analysis under the new
standard during 2002. If any goodwill impairment under the new standard is
determined to exist, such impairment would be recognized as a cumulative effect
of a change in accounting policy no later than December 31, 2002, as provided by
the transition requirements of SFAS No. 142. For the nine months ended September
30, 2001, the Company recorded amortization expense of approximately $3.5
million relating to its goodwill.
The Company will adopt SFAS No. 143, Accounting for Asset Retirement
Obligations, no later than January 1, 2003. Under SFAS No. 143, the fair value
of a liability for an asset retirement obligation covered under the scope of
SFAS No. 143 would be recognized in the period in which the liability is
incurred, with an offsetting increase in the carrying amount of the related
long-lived asset. Over time, the liability would be accreted to its present
value, and the capitalized cost would be depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity would either settle
the obligation for its recorded amount or incur a gain or loss upon settlement.
The Company is still studying this newly-issued standard to determine,
- 17 -
among other things, whether it has any asset retirement obligations which are
covered under the scope of SFAS No. 143, and the effect, if any, to the Company
of adopting this standard has not yet been determined.
The Company will adopt SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, no later than January 1, 2002. SFAS No. 144
retains the fundamental provisions of existing generally accepted accounting
principles with respect to the recognition and measurement of long-lived asset
impairment contained in SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. However, SFAS No.
144 provides new guidance intended to address certain significant implementation
issues associated with SFAS No. 121, including expanded guidance with respect to
appropriate cash flows to be used to determine whether recognition of any
long-lived asset impairment is required, and if required how to measure the
amount of the impairment. SFAS No. 144 also requires that any net assets to be
disposed of by sale be reported at the lower of carrying value or fair value
less cost to sell, and expands the reporting of discontinued operations to
include any component of an entity with operations and cash flows that can be
clearly distinguished from the rest of the entity. The Company is still studying
this newly-issued standard, and the effect, if any, to the Company of adopting
SFAS No. 144 has not yet been determined.
- 18 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND LIQUIDITY AND CAPITAL RESOURCES
A. Financial Condition and Results of Operations
Sales and operations.
Three months ended Nine months ended
September 30, September 30,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
($ in thousands) ($ in thousands)
Net sales $ 126,437 $ 106,730 $ 370,479 $ 320,279
Gross margin 20,836 3,658 24,618 1,653
Gross margin, excluding special items 20,836 3,658 39,217 8,382
Operating income (loss) 9,964 (7,669) 56,757 (35,513)
Operating income (loss), excluding
restructuring and special items 9,964 (7,669) 8,695 (25,979)
Percent change in:
Mill product sales volume +6.3 +9.7
Mill product selling prices (1) +3.2 -1.3
Melted product sales volume +42.0 +39.7
Melted product selling prices (1) +13.1 +5.5
(1) Change expressed in U.S. dollars and mix adjusted.
Third quarter of 2001 compared to third quarter of 2000. Sales of $126.4
million in the third quarter of 2001 were 18% higher than the year-ago period
due principally to the net effects of a 6% increase in mill product volume, a 3%
increase in mill product selling prices (expressed in U.S. dollars using actual
foreign currency exchange rates prevailing during the respective periods) and
changes in customer and product mix. In billing currencies (which exclude the
effects of foreign currency translation), mill product selling prices increased
5%. Melted product (ingot and slab) sales volume increased 42% while melted
product selling prices increased 13% from year-ago levels.
Gross margin (net sales less cost of sales) was 16.5% of sales for the
third quarter of 2001 compared to 3.4% in the year-ago period, primarily
reflecting the effect of increased selling prices, higher plant operating rates,
lower energy costs, and changes in customer and product mix. See "Outlook" for a
discussion of sales and gross margin expectations.
Selling, general, administrative and development expenses during the third
quarter of 2001 increased by approximately 3% from year-ago levels principally
due to an increase in personnel and related costs.
Equity in earnings of joint ventures during the third quarter of 2001 was
approximately $1 million higher than the year-ago period principally due to an
increase in earnings of VALTIMET, the Company's minority-owned welded tube joint
venture.
Nine months of 2001 compared to nine months of 2000. Sales of $370.5
million for the nine months ended September 30, 2001 were 16% higher than the
year-ago period due principally to the net effects of a 10% increase in mill
product volume, a 1% decrease in mill product selling prices (expressed in U.S.
dollars using actual foreign currency exchange rates
- 19 -
prevailing during the respective periods) and changes in customer and product
mix. In billing currencies (which exclude the effects of foreign currency
translation), mill product prices increased 1%. Melted product sales volume
increased 40% from year-ago levels while selling prices increased 6%.
Gross margin was 6.6% of sales for the nine months ended September 30, 2001
compared to .5% in the year-ago period, principally reflecting the net effects
of higher selling prices, lower energy costs, higher operating rates at certain
plants, changes in customer and product mix and special items. As discussed
below, gross margin for the nine months ended September 30, 2001 was adversely
impacted by $10.8 million of equipment impairment charges and $3.8 million of
estimated costs related to the tungsten inclusion matter. Gross margin for the
nine months ended September 30, 2000 was adversely impacted by $3.4 million of
equipment impairment charges and a $3.3 million charge for anticipated
environmental remediation costs. Gross margin excluding special items was 10.6%
of sales for the nine months ended September 30, 2001 compared to 2.6% in the
year-ago period. See "Outlook" for a discussion of sales and gross margin
expectations.
The Company was notified by one of its customers in March 2001 that a
product the customer manufactured from standard grade titanium produced by the
Company contained what has been confirmed to be a tungsten inclusion. The
Company believes that the source of this tungsten was contaminated silicon,
which is used as an alloying addition to titanium at the melting stage,
purchased from an outside vendor in 1998. The Company continues to investigate
the scope of this problem, including identification of customers who received
material manufactured using this silicon and the applications into which such
material has been placed by such customers.
At this time, the Company is aware of six standard grade ingots that have
been demonstrated to contain tungsten inclusions; however, further investigation
may identify additional material that has been similarly affected. Until this
investigation is completed, TIMET is unable to determine the ultimate liability
the Company may incur with respect to this matter. The Company is continuing to
work with its affected customers to determine the appropriate remedial steps
required to satisfy their claims. Based upon an assessment of possible losses
completed by the Company, TIMET recorded an aggregate charge to cost of sales of
$3.8 million through September 30, 2001 ($1.0 million in the first quarter of
2001 and $2.8 million in the second quarter of 2001). This amount represents the
Company's best estimate of the most likely amount of loss to be incurred. It
does not represent the maximum possible loss, which is not possible for the
Company to estimate at this time, and may be periodically revised in the future
as more facts become known. As of September 30, 2001, $3.0 million remains
accrued for potential future claims. The Company has filed suit seeking full
recovery from the silicon supplier for any liability the Company might incur,
although no assurances can be given that the Company will ultimately be able to
recover all or any portion of such amounts. The Company has not recorded any
recoveries related to this matter as of September 30, 2001.
During the second quarter of 2001, the Company determined that an
impairment of the carrying amount of certain long-lived assets located at its
Millbury, Massachusetts facility had occurred. This determination was made after
the Company completed studies of the potential uses of these assets in the
foreseeable future as well as the economic viability of those alternatives.
Accordingly, the Company recorded a $10.8 million pre-tax impairment charge to
cost of sales in the second quarter of 2001, representing the difference between
the assets' previous carrying amounts and their estimated fair values.
In April 2001, the Company reached a settlement of the litigation between
TIMET and Boeing related to the parties' 1997 long term purchase and supply
agreement ("LTA"). Pursuant to the settlement, the Company received a cash
payment of $82 million. In the
- 20 -
second quarter of 2001, the Company reported approximately $73 million (cash
settlement less legal fees) as other operating income, with partially offsetting
operating expenses of approximately $10.3 million for profit sharing and other
costs reported as a component of selling, general, administrative and
development expense (collectively the "Boeing Special Items"), resulting in a
net pre-tax income effect of $62.7 million in the second quarter of 2001.
In connection with the settlement, TIMET and Boeing also entered into an
amended LTA that, among other things, allows Boeing to purchase up to 7.5
million pounds of titanium product annually from TIMET through 2007, subject to
certain maximum quarterly volume levels. Under the amended LTA, Boeing will
advance TIMET $28.5 million annually for 2002 through 2007. The annual advance
will occur in December 2001 for 2002, with subsequent advances occurring early
each calendar year beginning in 2003. The LTA is structured as a take-or-pay
agreement such that Boeing will forfeit a proportionate part of the $28.5
million annual advance in the event that its orders for delivery for such
calendar year are less than 7.5 million pounds. Under a separate agreement TIMET
will establish and hold buffer stock for Boeing at TIMET's facilities, for which
Boeing will pay TIMET as such stock is produced.
Selling, general, administrative and development expenses for the nine
months ended September 30, 2001 (excluding $10.3 million of Boeing Special
Items) decreased by approximately 2% from year-ago levels, principally as a
result of reduced travel and other personnel costs.
Equity in earnings of joint ventures during the nine months ended September
30, 2001 was $2.8 million higher than the year ago period principally due to an
increase in earnings of VALTIMET.
General corporate income. General corporate income for all periods includes
interest income and dividend income on $80 million of nonvoting preferred
securities of Special Metals Corporation, which accrues at an annual rate of
6.625%. See Note 5 to the Consolidated Financial Statements and "Outlook" for a
discussion of issues related to these securities.
Interest expense. Interest expense during the three and nine months ended
September 30, 2001 was lower than in the comparable periods in 2000, primarily
due to the paydown of the Company's revolving U.S. debt during the second
quarter of 2001.
Income taxes. The Company's consolidated effective income tax rate
approximated the U.S. statutory rate in all periods. The Company operates in
several tax jurisdictions and is subject to various income tax rates. As a
result, the geographical mix of pre-tax income (loss) can impact the Company's
effective tax rate. See Note 10 to the Consolidated Financial Statements.
Minority interest. Dividend expense related to the Company's 6.625%
Convertible Preferred Securities approximates $3.3 million per quarter and is
reported as minority interest, net of allocable income taxes.
Supplemental information. Approximately 40% of the Company's sales
originated in Europe for the nine months ended September 30, 2001, of which
approximately 60% were denominated in currencies other than the U.S. dollar,
principally the British pound and European currencies tied to the euro. Certain
purchases of raw materials, principally titanium sponge and alloys, for the
Company's European operations are denominated in U.S. dollars, while labor and
other production costs are primarily denominated in local currencies. The
functional currencies of the Company's European subsidiaries are those of their
respective countries; thus, the U.S. dollar value of these subsidiaries' sales
and costs denominated in currencies other than their functional currency,
including sales and costs denominated in U.S. dollars, are subject to
- 21 -
exchange rate fluctuations that may impact reported earnings and may affect the
comparability of period-to-period operating results. Borrowings of the Company's
European operations may be in U.S. dollars or in functional currencies. The
Company's export sales from the U.S. are denominated in U.S. dollars and as such
are not subject to currency exchange rate fluctuations.
The Company does not use currency contracts to hedge its currency
exposures. At September 30, 2001, consolidated assets and liabilities
denominated in currencies other than functional currencies were approximately
$23.3 million and $35.6 million, respectively, consisting primarily of U.S.
dollar cash, accounts receivable, accounts payable and borrowings.
Outlook. The Outlook section contains a number of forward-looking
statements, all of which are based on current expectations. Actual results may
differ materially. See Note 1 to the Consolidated Financial Statements -
"Organization and basis of presentation," Note 12 to the Consolidated Financial
Statements - "Commitments and contingencies," and Note 14 to the Consolidated
Financial Statements - "Accounting principles not yet adopted," regarding
commitments, contingencies, legal, environmental, and other matters, which
information is incorporated herein by reference and may affect the Company's
future results of operations and liquidity.
The commercial aerospace industry has significant influence on titanium
companies, particularly mill product producers such as TIMET. Industry shipments
of mill products to the commercial aerospace industry in 2001 are expected to
account for approximately 40% of the estimated 54,000 metric tons of aggregate
titanium mill product demand, and this market has been the principal driver of
increased industry shipments over the last year. The Company's business is more
dependent on commercial aerospace demand as shipments to this market are
presently estimated to represent approximately 80% of the Company's sales
revenues. The Company's recently improved financial performance has been driven
principally by both increased sales volume and improved selling prices on both
mill and melted products destined for commercial aerospace.
The economic slowdown in the U.S. and other regions of the world recently
began to negatively affect the commercial aerospace industry as evidenced by,
among other things, a decline in airline passenger traffic, reported operating
losses by a number of airlines and a reduction in forecasted deliveries of large
commercial aircraft from both Boeing and Airbus. On September 11, 2001, the
United States was the target of terrorist attacks that exacerbated these trends
and had a significant adverse impact on the global economy and the commercial
aerospace industry. Since that time, airline passenger traffic has declined
substantially and airlines are reporting significant losses. In response to the
current business climate, airlines have announced a number of actions to reduce
both costs and capacity, including the early retirement of airplanes, the
deferral of scheduled deliveries of new aircraft, and allowing aircraft purchase
options to expire. Both Boeing and Airbus have indicated that deliveries of
large commercial aircraft over the next two years are now expected to be lower
than previously anticipated.
The commercial aerospace supply chain is decentralized and fragmented.
Aircraft and jet engine manufacturers, as well as other companies in the supply
chain, are still assessing the impact these events will have on their
businesses. Although they will clearly have a negative effect on suppliers
throughout this sector, including TIMET, the magnitude and duration of that
impact is still very uncertain. While the Company is regularly speaking to its
customers, most of their views are only speculative at this time given the
limited information currently available.
The Airline Monitor, a leading aerospace publication, recently published
its revised forecast of large commercial aircraft deliveries which attempts to
take into consideration the events of September 11, 2001. The Airline Monitor's
current forecast of large commercial
- 22 -
aircraft deliveries is for 820 deliveries in 2001, 660 deliveries in 2002 and
505 deliveries in 2003. Compared to The Airline Monitor's previous forecast
(pre-September 11) for the same periods, these delivery rates represent declines
of 8%, 26% and 34%, respectively. As compared to the previous (pre-September 11)
estimated 2001 deliveries of 890 aircraft, deliveries in 2002 and 2003 are
forecasted by The Airline Monitor to decline by 26% and 43%, respectively.
The Company presently believes commercial aerospace demand for titanium
products over the next year could decline by 30% to 40% from 2001 levels,
resulting from a combination of reduced aircraft production rates and excess
inventory being created throughout the supply chain. Although quantitative
information is not readily available, the Company believes that no significant
amount of excess titanium inventory existed prior to September 11, 2001.
However, a sharp decline in demand could potentially create a significant amount
of inventory accumulation. This would likely lead to order demand for titanium
products falling below actual consumption. The demand for titanium generally
precedes aircraft deliveries by about one year, although this varies
considerably by titanium product. Since the Company will begin producing
products in 2002 destined for aircraft to be delivered in 2003, it expects to
see a decline in its 2002 business that is similar to aircraft delivery
reductions relative to 2003.
The Company's order backlog at the end of September 2001 was approximately
$315 million. Comparable backlogs approximated $300 million at June 30, 2001,
$290 million at March 31, 2001 and $245 million at December 31, 2000. However,
the Company's order backlog may not be a reliable indicator of future business
activity. The Company has recently experienced a number of customer requests to
defer or cancel scheduled orders. The Company believes such requests will
continue and may accelerate in the near-term. As aircraft and jet engine
manufacturers settle upon a production schedule for next year, information
should be communicated through the supply chain, providing the Company a better
understanding of its business outlook.
The Company is preparing for the anticipated downturn by taking a number of
actions, including, but not limited to, (i) reducing plant operating rates and
employment levels as business declines, (ii) negotiating improved pricing at
lower volume commitments for certain raw materials, (iii) reducing discretionary
spending and (iv) negotiating various other concessions from both suppliers and
service providers. For the longer term, the Company is evaluating product line
and facilities consolidations that may permit it to meaningfully reduce its cost
structure while maintaining and even increasing its market share.
In October 2001, the Company announced that operating rates are being
reduced at both its Henderson, Nevada and Morgantown, Pennsylvania facilities.
In Nevada, the Company is reducing its vacuum arc melting rates by about 40%. In
Pennsylvania, the Company intends to stop production on one of its three
electron beam ("EB") cold hearth melting operations this year and is reducing
the operating rate on another EB furnace. Production in Pennsylvania will
decline by about 20% after these decisions are fully implemented. These actions
will result in the Company's employment levels declining by approximately 50
people; however, the Company anticipates further reductions in operating rates
and employment levels in the future as demand for titanium products declines.
Current business conditions make it particularly difficult to predict the
Company's future financial results and, therefore, undue reliance should not be
placed on the following comments as actual results may differ materially from
expectations. For the fourth quarter of 2001, the Company believes sales revenue
may range between $90 million and $120 million, reflecting the net effects of
changes in sales volume, selling prices and mix. Excluding special items, gross
margin as a percent of sales in the fourth quarter is expected to range between
6% and 12% of sales, but could vary significantly from this estimate. Selling,
general, and administrative and development costs in the fourth quarter of 2001
should approximate third quarter levels.
- 23 -
Interest expense in the fourth quarter is expected to increase modestly from
third quarter levels while minority interest expense related to the Company's
Convertible Preferred Securities is expected to approximate third quarter
levels. Excluding the Boeing Special Items and other special charges, the
Company expects to be near break-even on operating income and report a net loss
for the full year of 2001.
For financial reporting purposes, the Company has recognized the tax
benefit of its net operating loss carryforwards ("NOLs"), and expects that tax
provisions and benefits to be recognized during the remainder of 2001 will
principally be deferred income tax items with cash income tax payments expected
in certain state and foreign jurisdictions. For U.S. federal income tax
purposes, the Company had NOLs of approximately $47 million and $89 million as
of September 30, 2001 and December 31, 2000, respectively. At September 30,
2001, the Company also had the equivalent of a $7.1 million NOL in the United
Kingdom and a $2.3 million NOL in Germany, both of which have indefinite
carryforward periods.
The Company expects to generate positive cash flow from operations in 2001
in the range of $80 million to $90 million principally due to the Boeing
settlement and the related $28.5 million advance that TIMET expects to receive
in December 2001. Depreciation and amortization expense should approximate $41
million in 2001. Capital spending for 2001 is currently expected to approximate
$15 million, covering principally capacity enhancements, capital maintenance,
and safety and environmental projects. At September 30, 2001, the Company had
approximately $152 million of borrowing availability under its various worldwide
credit agreements. The Company believes its cash, cash flow from operations and
borrowing availability will satisfy its expected working capital, capital
expenditures and other requirements over the next year.
For 2002, the Company believes it may experience a 30% to 40% decline in
its commercial aerospace sales volume, which presently represents about 80% of
the Company's sales revenue. A change in demand of this magnitude will likely
result in heightened competitive pricing pressures resulting in decreased
selling prices. The Company believes the net effects of changes in sales volume,
selling prices, and customer and product mix could result in sales revenue
ranging from $350 million to $400 million in fiscal 2002. The Company's cost of
sales is affected by a number of factors including, among others, customer and
product mix, material yields, plant operating rates, raw material costs, labor
costs and energy costs. The Company believes that costs for titanium sponge and
scrap will trend down over the next year while energy cost may remain volatile.
However, as the Company reduces production volume in response to reduced order
demand, certain manufacturing overhead costs are likely to decrease at a slower
rate and to a lesser extent than production volume changes, resulting in higher
costs relative to production levels. The Company's gross margin expectation for
2002 is uncertain at this time; however, the Company anticipates that the
adverse effects of decreased selling prices and lower plant operating rates to
only be partially offset by lower raw material costs and other cost control
actions the Company is presently taking. The Company believes gross margins,
excluding special items, in 2002 may decline substantially as compared to 2001.
The Company has undertaken an assessment of the longer-term impact of the
commercial aerospace downturn on its business and any potential charges that may
be appropriate for asset impairments, increases in valuation allowances and
other similar items. Such potential charges, if any, are not yet reasonably
estimable due to the period of time necessary for external information to become
available and then be analyzed and assessed. The Company expects these items to
become estimable over the next few months and, accordingly, the Company's
results for the three months ended December 31, 2001 and future periods could
include material charges for these matters. The Company currently believes such
charges could relate to goodwill, the Company's investment in preferred
securities of SMC, deferred tax assets and other long-lived assets.
Additionally, the Company may also incur
- 24 -
material charges in the fourth quarter of 2001 and future periods for
restructuring charges related to workforce reductions, product line and facility
consolidations and other items.
B. Liquidity and Capital Resources
The Company's consolidated cash flows provided by operating,
investing and financing activities are presented below:
Nine months ended
September 30,
-------------------------------------
2001 2000
----------------- ----------------
(In thousands)
Cash provided (used) by:
Operating activities:
Excluding changes in assets and liabilities $ 92,305 $ (4,543)
Changes in assets and liabilities (44,712) 45,821
----------------- ----------------
47,593 41,278
Investing activities (7,892) 312
Financing activities (33,793) (57,018)
----------------- ----------------
Net cash provided (used) by operating,
investing and financing activities $ 5,908 $ (15,428)
================= ================
Operating activities. Cash provided by operating activities, excluding
changes in assets and liabilities, generally followed the trend in operating
results. Changes in assets and liabilities reflect primarily the timing of
purchases, production and sales and can vary significantly from period to
period. Accounts receivable increased in the third quarter of 2001 primarily as
a result of a higher proportion of sales occurring near the end of the quarter,
as well as variations in the timing of collections. Inventories increased in the
third quarter of 2001 principally as a result of higher plant operating rates
needed to meet fourth quarter shipments levels that were anticipated prior to
the downturn in the commercial aerospace market. Additionally, higher
inventories were influenced by longer than anticipated scheduled maintenance
outages both in the U.S. and Europe that resulted in final processing and
shipping of certain products being delayed. Accrued profit sharing cost
increased as a result of the Boeing settlement and accrued tungsten costs
increased related to the tungsten inclusion matter identified in March 2001.
Changes in accounts payable and accrued liabilities also reflect, among other
things, the timing of payments to suppliers of titanium sponge, titanium scrap
and other raw materials purchases.
Dividends for the period October 1998 through December 1999 on the
Company's $80 million of Special Metals Corporation ("SMC") convertible
preferred securities had been deferred by SMC. In April 2000, SMC resumed
current dividend payments of $1.3 million each quarter; however, dividends and
interest in arrears were not paid. On October 11, 2001, the Company was notified
by SMC of their intention to again defer the payment of dividends effective with
the dividend due on October 28, 2001. At September 30, 2001, aggregate dividends
and interest due the Company were approximately $8.8 million. As a result of
this and other factors, the Company has undertaken an assessment of the carrying
amount of its investment in the SMC preferred securities. See Notes 1 and 5 to
the Consolidated Financial Statements.
The Company's Convertible Preferred Securities do not require principal
amortization, and the Company has the right to defer dividend payments for one
or more periods of up to 20 consecutive quarters for each period. In April 2000,
the Company exercised its right to defer future dividend payments on these
securities for a period of 10 quarters, although interest continued to accrue at
the coupon rate on the principal and unpaid dividends. During the
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second quarter of 2001, the Company resumed payment of dividends on these
securities and made the scheduled payments of $3.3 million due on June 1, 2001
and September 1, 2001. The Company also paid the previously deferred aggregate
dividends of $13.9 million on June 1, 2001.
Restructuring and special items are described in Note 9 to the Consolidated
Financial Statements.
Investing activities. The Company's capital expenditures were $7.9 million
for the nine months ended September 30, 2001 compared to $6.7 million for the
same period in 2000, principally for capacity enhancements, capital maintenance,
and safety and environmental projects. In the first quarter of 2000, the Company
sold its interest in the castings joint venture to Wyman-Gordon for $7.0 million
and recorded a pre-tax gain of $1.2 million.
Financing activities. At September 30, 2001, the Company's net cash was
approximately $5.4 million, consisting of $15.4 million of cash and $10.0
million of debt. The Company also had approximately $152 million of borrowing
availability under its various worldwide credit agreements. Net cash in the 2001
period was primarily attributed to receipt of the Boeing settlement. Net
repayments in the 2000 period reflect reductions of outstanding borrowings
principally in the U.S.
Boeing Special Items. In April 2001, the Company received a cash payment of
$82.0 million in connection with the settlement of its litigation with Boeing.
The proceeds were used partially to (i) repay $33.3 million of the Company's
outstanding revolving bank debt, (ii) pay the current and deferred dividends of
$17.2 million on the Company's Convertible Preferred Securities and (iii) pay
legal and other costs of $9.0 million associated with the Boeing settlement.
See Note 12 to the Consolidated Financial Statements for additional
discussion of environmental and legal matters.
Other. The Company periodically evaluates its liquidity requirements,
capital needs and availability of resources in view of, among other things, its
alternative uses of capital, debt service requirements, the cost of debt and
equity capital and estimated future operating cash flows. As a result of this
process, the Company in the past has sought and in the future may seek, to raise
additional capital, modify its common and preferred dividend policies,
restructure ownership interests, incur, refinance or restructure indebtedness,
repurchase shares of capital stock, sell assets, or take a combination of such
steps or other steps to increase or manage its liquidity and capital resources.
In the normal course of business, the Company investigates, evaluates,
discusses and engages in acquisition, joint venture, strategic relationship and
other business combination opportunities in the titanium, specialty metal and
other industries. In the event of any future acquisition or joint venture
opportunities, the Company may consider using then-available liquidity, issuing
equity securities or incurring additional indebtedness.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The Company is exposed to market risk from changes in foreign
currency exchange rates and interest rates. The Company typically does not enter
into interest rate swaps or other types of contracts in order to manage its
interest rate market risk and typically does not enter into currency forward
contracts to manage its foreign exchange market risk associated with
receivables, payables and indebtedness denominated in a currency other than the
functional currency of the particular entity.
Interest rates. Information regarding the Company's market risk relating to
interest rate volatility was disclosed in its Form 10-K for the year ended
December 31, 2000 and should be read in conjunction with this interim financial
information. Since December 31, 2000, there has been no significant change in
the nature of the Company's exposure to market risks.
Foreign currency exchange rates. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of its
international operations. See Item 2 - "Management's Discussion and Analysis of
Financial Condition, Results of Operations and Liquidity and Capital Resources,"
which information is incorporated herein by reference.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Note 12 of the Consolidated Financial Statements which
information is incorporated herein by reference and to the Company's 2000 Annual
Report on Form 10K for descriptions of certain previously reported legal
proceedings.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Trust Agreement, effective as of May 22, 2001, by and between the
Registrant and Robert E. Musgraves.
10.2 Agreement to Defer Bonus Payment, effective as of May 22, 2001,
by and between the Registrant and J. Landis Martin.
10.3 Amendment No. 1 to Loan and Security Agreement dated September 7,
2001, by and among the registrant and Titanium Hearth
Technologies, Inc., TIMET Millbury Corporation, TIMET Castings
Corporation, TIMET Finance Management Company, TMCA
International, Inc., and Congress Financial Corporation
(Southwest).
(b) Reports on Form 8-K:
Reports on Form 8-K filed by the Registrant for the quarter ended
September 30, 2001 and the month of October 2001:
Date of Report Items Reported
-------------------------- --------------------
September 21, 2001 5 and 7
October 5, 2001 5 and 7
October 5, 2001 5 and 7
October 23, 2001 5 and 7
October 23, 2001 5 and 7
October 23, 2001 5 and 7
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TITANIUM METALS CORPORATION
-----------------------------------------------------
(Registrant)
Date: November 2, 2001 By /s/ Mark A. Wallace
--------------------------- ---------------------------------------
Mark A. Wallace
(Executive Vice President and
Chief Financial Officer)
Date: November 2, 2001 By /s/ JoAnne A. Nadalin
--------------------------- ---------------------------------------
JoAnne A. Nadalin
Vice President and Corporate Controller
(Principal Accounting Officer)
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