SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 296-5600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on Which Registered
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Common Stock New York Stock Exchange
($.01 par value per share)
Securities registered pursuant to Section 12(g) of the Act: None.
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K ___
As of March 18, 2002, 31,861,338 shares of common stock were outstanding. The
aggregate market value of the 18.7 million shares of voting stock held by
nonaffiliates of Titanium Metals Corporation as of such date approximated $94.6
million.
Documents incorporated by reference:
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
Forward-Looking Information
The statements contained in this Annual Report on Form 10-K ("Annual
Report") that are not historical facts, including, but not limited to,
statements found in the Notes to Consolidated Financial Statements and in Item 1
- Business, Item 2 - Properties, Item 3 - Legal Proceedings and Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations, 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 Annual 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 and the Company under their long-term agreements, 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
disruption of business or 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.
PART I
ITEM 1: BUSINESS
General. Titanium Metals Corporation ("TIMET" or the "Company") was
originally formed in 1950 and was incorporated in Delaware in 1955. TIMET is one
of the world's leading integrated producers of titanium sponge, melted and mill
products. The Company is the only integrated producer with major titanium
production facilities in both the United States and Europe, the world's
principal markets for titanium. The Company estimates that in 2001 it accounted
for approximately 24% of worldwide industry shipments of mill products and
approximately 13% of worldwide sponge production.
Titanium was first manufactured for commercial use in the 1950s. Titanium's
unique combination of corrosion resistance, elevated-temperature performance and
high strength-to-weight ratio makes it particularly desirable for use in
commercial and military aerospace applications in which these qualities are
essential design requirements for certain critical parts such as wing supports
and jet engine components. While aerospace applications have historically
accounted for a substantial portion of the worldwide demand for titanium and
were approximately 40% of aggregate mill product shipments in 2001, the number
of non-aerospace end-use markets for titanium has expanded substantially. Today,
numerous industrial uses for titanium exist, including chemical and industrial
power plants, desalination plants and pollution control equipment. Demand for
titanium is also increasing in emerging markets with such diverse uses as
offshore oil and gas production installations, geothermal facilities, military
armor, automotive and architectural applications.
TIMET's products include (i) titanium sponge, the basic form of titanium
metal used in processed titanium products, (ii) melted products, comprised of
titanium ingot and slab, the result of melting sponge and titanium scrap, either
alone or with various other alloying elements and (iii) mill products that are
forged and rolled from ingot or slab, including long products (billet and bar),
flat products (plate, sheet and strip), pipe and pipe fittings. The Company
believes it is among the lower-cost producers of titanium sponge and melted
products due in part to its manufacturing expertise and technology. The titanium
industry is comprised of several manufacturers that, like TIMET, produce a
relatively complete range of titanium products and a significant number of
producers worldwide that manufacture a limited range of titanium mill products.
The Company is presently the only active titanium sponge producer in the U.S.
The Company's long-term strategy is to maximize the value of its core
aerospace business and develop new markets, applications and products to help
reduce its traditional dependence on the aerospace industry. In the near-term,
the Company is focused on reducing its cost structure, improving the quality of
its products and processes and taking other actions to return to profitability
and generate positive cash flow.
1
Industry. The titanium industry historically has derived a substantial
portion of its business from the aerospace industry. Mill product shipments to
the aerospace industry in 2001 represented about 40% of total titanium demand
and slightly over 80% of the Company's annual mill product shipments. Aerospace
demand for titanium products, which includes both jet engine components (i.e.
blades, discs, rings and engine cases) and air frame components (i.e. bulkheads,
tail sections, landing gears, wing supports and fasteners) can be broken down
into commercial and military sectors. The commercial aerospace sector has a
significant influence on titanium companies, particularly mill product producers
such as TIMET. Industry shipments of mill products to the commercial aerospace
sector in 2001 accounted for approximately 90% of aerospace demand and 35% of
aggregate mill product demand.
The cyclical nature of the aerospace industry has been the principal driver
of the historical fluctuations in the performance of titanium companies. Over
the past 20 years, the titanium industry had cyclical peaks in mill product
shipments in 1980, 1989, 1997 and 2001 and cyclical lows in 1983, 1991 and 1999.
Demand for titanium reached its highest peak in 1997 when industry mill product
shipments reached an estimated 60,000 metric tons. Industry mill product
shipments subsequently declined approximately 5% to an estimated 57,000 metric
tons in 1998. After falling 16% from 1998 levels to 48,000 metric tons in 1999
and 2000, industry shipments climbed to an estimated 51,000 metric tons in 2001.
The Company expects total industry mill product shipments will decrease in 2002
by approximately 16% to approximately 43,000 metric tons.
During the latter part of 2001, an economic slowdown in the U.S. and other
regions of the world 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
the 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. The major U.S.
airlines reported significant financial losses in the fourth quarter of 2001 and
profits for European and Asian airlines declined. In response, airlines have
announced a number of actions to reduce both costs and capacity including, but
not limited to, the early retirement of airplanes, the deferral of scheduled
deliveries of new aircraft and allowing purchase options to expire. These events
have resulted in the major commercial airframe and jet engine manufacturers
substantially reducing both their forecast of jet engine and large commercial
aircraft deliveries over the next few years and their production levels in 2002.
Although certain recently reported economic data may indicate some modest level
of recovery, the Company expects the current slowdown in the commercial
aerospace sector to last for about two years.
The Company believes that mill product demand for the commercial aerospace
sector could decline by up to 40% in 2002, primarily due to a combination of
reduced aircraft production rates and excess inventory accumulated throughout
the aerospace supply chain since September 11, 2001. The aerospace supply chain
is fragmented and decentralized, making it difficult to quantify excess
inventories. However, the Company roughly estimates that excess inventory
throughout the supply chain might be in the range of 3,200 to 5,500 metric tons
at the end of 2001, and believes it may take up to two years for such excess
inventory to be substantially absorbed.
2
According to The Airline Monitor, a leading aerospace publication, the
worldwide commercial airline industry reported an estimated operating loss of
approximately $13 billion in 2001, compared with operating income of $11 billion
in 2000 and $12 billion in 1999. According to The Airline Monitor, large
commercial aircraft deliveries for the 1996 to 2001 period peaked in 1999 with
889 aircraft, including 254 wide body aircraft. Wide body aircraft use
substantially more titanium than their narrow body counterparts. Large
commercial aircraft deliveries totaled 834 (including 202 wide bodies) in 2001,
and the most recent forecast of aircraft deliveries by The Airline Monitor calls
for 660 deliveries in 2002, 505 deliveries in 2003 and 515 deliveries in 2004.
After 2004, The Airline Monitor calls for a continued increase each year in
large commercial aircraft deliveries, with forecasted deliveries of 920 aircraft
in 2008 exceeding 2001 levels. Relative to 2001, these forecasted delivery rates
represent anticipated declines of about 20% in 2002 and just under 40% in 2003
and 2004. Additionally, the Company's discussions with jet engine manufacturers
and related suppliers suggest that they are expecting production declines in
2002 relative to 2001 in the range of 25% to 30%. The demand for titanium
generally precedes aircraft deliveries by about one year, although this varies
considerably by titanium product. Accordingly, the Company's cycle historically
precedes the cycle of the aircraft industry and related deliveries. The Company
can give no assurance as to the extent or duration of the current commercial
aerospace cycle or the extent to which it will affect demand for the Company's
products.
Since titanium's initial applications in the aerospace sector, the number
of end-use markets for titanium has significantly expanded. Established
industrial uses for titanium include chemical plants, industrial power plants,
desalination plants and pollution control equipment. Titanium continues to gain
acceptance in many emerging market applications, including automotive, military
armor, energy, architecture and consumer products. Although titanium is
generally higher cost than other competing metals, in many cases customers find
the physical properties of titanium to be attractive from the standpoint of
performance, design alternatives, life cycle value and other factors. Although
emerging market demand presently represents only about 10% of the total industry
demand for titanium mill products, the Company believes emerging market demand,
in the aggregate, could grow at healthy double-digit rates over the next few
years. The Company is actively pursuing these markets.
Although difficult to predict, the most attractive emerging segment appears
to be automotive, due to its potential for sustainable long-term growth.
Titanium is now used in several consumer car applications including the Toyota
Alteeza, Infiniti Q45, Corvette Z06, Volkswagen Lupo FSI, Honda S2000 and
Mercedes S Class. At the present time, titanium is primarily used for exhaust
systems and suspension springs in consumer vehicles. In exhaust systems,
titanium provides for significant weight savings, while its corrosion resistance
provides life-of-vehicle durability. In suspension spring applications, titanium
saves weight and its combination of low mass and low modulus of elasticity
allows the spring's height to be reduced by 20% to 50% compared to a steel
spring.
3
Titanium is also making inroads into other automotive applications,
including turbo charger wheels, brake parts, pistons, valves and internal engine
components. Titanium engine components provide mass-reduction benefits, allowing
a corresponding weight and size reduction in crankshaft counterbalance weights
and resultant improvements in noise, vibration and harshness. The additional
cost associated with titanium's use for internal engine parts can be offset by
the elimination of balance shafts and the ability to replace sophisticated
engine mounts with low cost, compact, simple designs. All of this can translate
into greater styling and structural design freedom for automotive designers and
engineers. Titanium is also advantageous compared to alternative materials in
that it often can be formed and fabricated on the same tooling used for the
steel component it is typically replacing.
The decision to select titanium components for consumer car, truck and
motorcycle components remains highly cost sensitive; however, the Company
believes titanium's acceptance in consumer vehicles will expand as the
automotive industry continues to better understand the benefits it offers.
Customer agreements. The Company has long-term agreements ("LTAs") with
certain major aerospace customers, including, but not limited to, The Boeing
Company ("Boeing"), Rolls-Royce plc ("Rolls-Royce"), United Technologies
Corporation (Pratt & Whitney and related companies) and Wyman-Gordon Company
("Wyman-Gordon") (a unit of Precision Castparts Corporation ("PCC")). These
agreements initially became effective in 1998 and 1999 and expire in 2007
through 2008, subject to certain conditions. The LTAs generally provide for (i)
minimum market shares of the customers' titanium requirements or firm annual
volume commitments and (ii) fixed or formula-determined prices generally for at
least the first five years. Generally, the LTAs require the Company's service
and product performance to meet specified criteria and contain a number of other
terms and conditions customary in transactions of these types. In certain events
of nonperformance by the Company, the LTAs may be terminated early.
Additionally, if the parties are unable to reach agreement on pricing after the
initial pricing period or in certain other circumstances, the LTAs may be
terminated early. These agreements were designed to limit selling price
volatility to the customer, while providing TIMET with a committed base of
volume throughout the aerospace business cycles. They also, to varying degrees,
effectively obligate TIMET to bear part of the risks of increases in raw
material and other costs, but allow TIMET to benefit in part from decreases in
such costs. These contracts and others represent the core of the Company's
long-term aerospace strategy.
In April 2001, the Company reached a settlement of the litigation between
TIMET and Boeing related to the parties' 1997 LTA. Pursuant to the settlement,
the Company received a cash payment of $82 million from Boeing. In addition,
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 from
2002 through 2007. The LTA is structured as a take-or-pay agreement such that,
beginning in calendar year 2002, Boeing will forfeit a proportionate part of the
$28.5 million annual advance, or effectively $3.80 per pound, 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 product is
produced. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations for additional information regarding the
Boeing LTA.
4
The Company also has an LTA with VALTIMET SAS ("VALTIMET"), a manufacturer
of stainless steel, copper, nickel and welded titanium tubing that is
principally sold into the industrial markets. VALTIMET is a 44% owned affiliate
of TIMET. The LTA was entered into in 1997 and expires in 2007. Under the LTA,
VALTIMET has agreed to purchase a certain percentage of its titanium
requirements from TIMET at formula-determined selling prices, subject to certain
conditions. Certain provisions of this contract have been renegotiated in the
past and may be renegotiated in the future to meet changing business conditions.
Acquisitions and capital transactions during the past five years. In 1998,
TIMET (i) acquired Loterios S.p.A. to increase its market share in industrial
markets, and provide increased geographic sales coverage in Europe, (ii)
purchased for cash $80 million of non-voting and non-marketable convertible
preferred securities of Special Metals Corporation ("SMC"), a U.S. manufacturer
of wrought nickel-based superalloys and special alloy long products and (iii)
entered into a castings joint venture with Wyman-Gordon. In January 2000, the
Company sold its interest in the castings joint venture for $7 million and
realized a gain of $1.2 million on the sale. In December 2001, the Company
determined that there had been an other than temporary decline in the fair value
of its investment in SMC and reduced the carrying amount of these securities and
related dividends and interest to an estimated fair value of $27.5 million. See
Notes 1, 3 and 4 to the Consolidated Financial Statements.
In 1998, Tremont Corporation ("Tremont") purchased TIMET common stock in
market transactions. In 1999, Tremont exercised an option to purchase
approximately two million shares of the Company's common stock. At December 31,
2001, Tremont held approximately 39% of TIMET's outstanding common stock. See
Note 16 to the Consolidated Financial Statements.
Products and operations. The Company is a vertically integrated titanium
manufacturer whose products include (i) titanium sponge, the basic form of
titanium metal used in processed titanium products, (ii) melted products,
comprised of titanium ingot and slab, the result of melting sponge and titanium
scrap, either alone or with various other alloying elements and (iii) mill
products that are forged and rolled from ingot or slab, including long products
(billet and bar), flat products (plate, sheet and strip), pipe and pipe
fittings. During the past three years, all of TIMET's sales revenue was
generated by the Company's integrated titanium operations (its "Titanium melted
and mill products" segment), its principal business segment. Business and
geographic segment financial information is included in Note 2 to the
Consolidated Financial Statements.
Titanium sponge (so called because of its appearance) is the commercially
pure, elemental form of titanium metal. The first step in sponge production
involves the chlorination of titanium-containing rutile ores (derived from beach
sand) with chlorine and coke to produce titanium tetrachloride. Titanium
tetrachloride is purified and then reacted with magnesium in a closed system,
producing titanium sponge and magnesium chloride as co-products. The Company's
titanium sponge production facility in Henderson, Nevada, incorporates vacuum
distillation process ("VDP") technology, which removes the magnesium and
magnesium chloride residues by applying heat to the sponge mass while
maintaining vacuum in the chamber. The combination of heat and vacuum boils the
residues from the reactor mass into the condensing vessel. The titanium mass is
then mechanically pushed out of the original reactor, sheared and crushed, while
the residual magnesium chloride is electrolytically separated and recycled.
5
Titanium ingots and slabs are solid shapes (cylindrical and rectangular,
respectively) that weigh up to 8 metric tons in the case of ingots and up to 16
metric tons in the case of slabs. Each is formed by melting titanium sponge or
scrap or both, usually with various other alloying elements such as vanadium,
aluminum, molybdenum, tin and zirconium. Titanium scrap is a by-product of the
forging, rolling, milling and machining operations, and significant quantities
of scrap are generated in the production process for finished titanium products.
The melting process for ingots and slabs is closely controlled and monitored
utilizing computer control systems to maintain product quality and consistency
and to meet customer specifications. Ingots and slabs are both sold to customers
and further processed into mill products.
Titanium mill products result from the forging, rolling, drawing, welding
and/or extrusion of titanium ingots or slabs into products of various sizes and
grades. These mill products include titanium billet, bar, rod, plate, sheet,
strip, pipe and pipe fittings. The Company sends certain products to outside
vendors for further processing before being shipped to customers or to the
Company's service centers. Many of the Company's customers process the Company's
products for their ultimate end-use or for sale to third parties.
During the production process and following the completion of
manufacturing, the Company performs extensive testing on its products, including
sponge, melted and mill products. Testing may involve chemical analysis,
mechanical testing, ultrasonic and x-ray testing. The inspection process is
critical to ensuring that the Company's products meet the high quality
requirements of customers, particularly in aerospace components production. The
Company certifies its products meet customer specification at the time of
shipment for substantially all customer orders.
The Company is reliant on several outside processors to perform certain
rolling, finishing and other processing steps in the U.S., and certain melting,
forging and finishing steps in France. In the U.S., one of the processors that
performs these steps in relation to strip production and another as relates to
plate finishing are owned by a competitor. One of the processors as relates to
extrusion is operated by a customer. These processors are currently the sole
source for these services. Other processors used in the U.S. are not
competitors. In France, the processor is also a joint venture partner in the
Company's 70%-owned subsidiary, TIMET Savoie, SA ("TIMET Savoie"). Although the
Company believes that there are other metal producers with the capability to
perform these same processing functions, arranging for alternative processors,
or possibly acquiring or installing comparable capabilities, could take several
months or longer, and any interruption in these functions could have a material
and adverse effect on the Company's business, results of operations, financial
postion and liquidity in the near term.
Raw materials. The principal raw materials used in the production of
titanium mill products are titanium sponge, titanium scrap and alloying
elements. The Company processes rutile ore into titanium tetrachloride and
further processes the titanium tetrachloride into titanium sponge. During 2001,
approximately 32% of the Company's melted and mill product was made from
internally produced sponge, 40% from purchased sponge, 21% from titanium scrap
and 7% from alloying elements.
6
The primary raw materials used in the production of titanium sponge are
titanium-containing rutile ore, chlorine, magnesium and petroleum coke.
Titanium-containing rutile ore is currently available from a limited number of
suppliers around the world, principally located in Australia, South Africa,
India and the United States. A majority of the Company's supply of rutile ore is
currently purchased from Australian suppliers. The Company believes the
availability of rutile ore will be adequate for the foreseeable future and does
not anticipate any interruptions of its rutile supplies, although political or
economic instability in the countries from which the Company purchases its
rutile could materially and adversely affect availability. Although the Company
believes that the availability of rutile ore is adequate in the near-term, there
can be no assurance that the Company will not experience interruptions.
Chlorine is currently obtained from a single supplier near the Company's
sponge plant. That supplier is currently reorganizing under Chapter 11
bankruptcy. While the Company does not presently anticipate any chlorine supply
problems, there can be no assurances the chlorine supply will not be
interrupted. The Company has taken steps to mitigate this risk, including
establishing the feasibility of certain equipment modifications to enable it to
utilize alternative chlorine suppliers or to purchase and successfully utilize
an intermediate product which will allow the Company to bypass the purchase of
chlorine if needed. Magnesium and petroleum coke are also generally available
from a number of suppliers. Various alloying elements used in the production of
titanium ingot are available from a number of suppliers.
Should the Company be unable to obtain the necessary raw materials, the
Company may incur higher costs to purchase sponge which could have a material
adverse effect on the Company's business, results of operations, financial
position and liquidity.
While the Company was one of six major worldwide producers of titanium
sponge in 2001, it cannot supply all of its needs for all grades of titanium
sponge internally and is dependent, therefore, on third parties for a
substantial portion of its sponge requirements. Titanium mill and melted
products require varying grades of sponge and/or scrap depending on the
customers' specifications and expected end use. In 2001, Allegheny Technologies,
Inc. idled its titanium sponge production facility, making TIMET the only active
U.S. producer of titanium sponge and reducing the number of active worldwide
producers to five. Presently, TIMET and certain suppliers in Japan are the only
producers of premium quality sponge required for more demanding aerospace
applications. However, one additional sponge supplier is presently undergoing
qualification tests of its product for premium quality applications and is
expected to be qualified for such during 2002.
Historically, the Company has purchased sponge predominantly from producers
in Japan and Kazakhstan. During 2000 and throughout 2001, the Company also
purchased sponge from the U.S. Defense Logistics Agency ("DLA") stockpile. In
2002, the Company expects to continue to purchase sponge from Japan, Kazakhstan
and the DLA.
7
TIMET has a ten-year LTA for the purchase of titanium sponge produced in
Kazakhstan. The LTA runs through 2007, with firm pricing through 2002, subject
to certain possible adjustments and possible early termination in 2004. The
Company is currently in the process of renegotiating certain components of this
LTA with the supplier. Although the LTA provides for minimum annual purchases by
the Company of 6,000 metric tons, the supplier has agreed to reduced purchases
by TIMET since 1999. The Company is currently operating under an agreement in
principle that provides for significantly reduced minimum purchases in 2002 and
certain other modified terms. The Company has no other long-term sponge supply
agreements.
Markets and customer base. Approximately 50% of the Company's 2001 sales
revenue was generated by sales to customers within North America, about 40% to
European customers and the balance to other regions. Over 70% of the Company's
sales revenue was generated by sales to the aerospace industry. Sales under the
Company's LTAs accounted for over 40% of its sales revenue in 2001. Sales to PCC
and its related entities approximated 11% of the Company's sales revenue in
2001. Sales to Rolls-Royce and other Rolls-Royce suppliers under the Rolls-Royce
LTA (including sales to certain of the PCC related entities) represented
approximately 15% of the Company's sales revenue in 2001. The Company expects
that while a majority of its 2002 sales revenue will be to the aerospace
industry, other markets will continue to represent a significant portion of
sales.
The primary market for titanium products in the commercial aerospace
industry consists of two major manufacturers of large (over 100 seats)
commercial airframes: Boeing Commercial Airplanes Group of the United States and
Airbus Integrated Company (80% owned by European Aeronautic Defence and Space
Company and 20% owned by BAE Systems) of Europe ("Airbus"). In addition to the
airframe manufacturers, the following four manufacturers of large civil aircraft
engines are also significant titanium users - Rolls-Royce, Pratt & Whitney (a
unit of United Technologies Corporation), General Electric Aircraft Engines and
Societe Nationale d'Etude et de Construction de Moteurs d'Aviation ("Snecma").
The Company's sales are made both directly to these major manufacturers and to
companies (including forgers such as Wyman-Gordon) that use the Company's
titanium to produce parts and other materials for such manufacturers. If any of
the major aerospace manufacturers were to significantly reduce aircraft and/or
jet engine build rates from those currently expected, there could be a material
adverse effect, both directly and indirectly, on the Company.
As of December 31, 2001, the estimated firm order backlog for Boeing and
Airbus, as reported by The Airline Monitor, was 2,919 planes, versus 3,224
planes at the end of 2000 and 2,943 planes at the end of 1999. The backlogs for
Boeing and Airbus reflect orders for aircraft to be delivered over several
years. For example, the first deliveries of the Airbus A380 are anticipated to
begin in 2006. Additionally, changes in the economic environment and the
financial condition of airlines can result in rescheduling or cancellation of
contractual orders. Accordingly, aircraft manufacturer backlogs are not
necessarily a reliable indicator of near-term business activity, but may be
indicative of potential business levels over a longer-term horizon.
8
The newer wide body planes, such as the Boeing 777 and the Airbus A330,
A340 and A380, tend to use a higher percentage of titanium in their frames,
engines and parts (as measured by total fly weight) than narrow body planes.
"Fly weight" is the empty weight of a finished aircraft with engines but without
fuel or passengers. Titanium represents approximately 9% of the total fly weight
of a Boeing 777 for example, compared to between 2% to 3% on the older 737, 747
and 767 models. The estimated firm order backlog for wide body planes at
year-end 2001 was 801 (27% of total backlog) compared to 751 (23% of total
backlog) at the end of 2000. At year-end 2001, a total of 85 firm orders had
been placed for the Airbus A380 superjumbo jet, which was officially launched in
December 2000. The Company estimates that approximately 65 metric tons of
titanium will be purchased for each A380 manufactured, the most of any
commercial aircraft.
Outside of aerospace markets, the Company manufactures a wide range of
industrial products including sheet, plate, tube, bar, billet and skelp for
customers in the chemical process, oil and gas, consumer, sporting goods,
automotive, power generation and armor/armament industries. Approximately 15% of
the Company's sales revenue in 2001 was generated by sales into the industrial
and emerging markets, including sales to VALTIMET for the production of
condenser tubing. For the oil and gas industries, the Company provides seamless
pipe for downhole casing, risers, tapered stress joints and other offshore oil
production equipment, including fabrication of subsea manifolds. In armor and
armament, the Company sells plate products for fabrication into door hatches on
fighting vehicles, as well as tank/turret protection.
In addition to mill and melted products, the Company sells certain products
it collectively refers to as "Other", such as sponge which is not suitable for
internal consumption, titanium tetrachloride and fabricated titanium assemblies.
Sales of these other products represented 12% of the Company's sales revenue in
each of 2001 and 2000, and 14% of sales revenue in 1999.
The Company's backlog of unfilled orders was approximately $225 million at
December 31, 2001, compared to $245 million at December 31, 2000 and $195
million at December 31, 1999. Substantially all of the 2001 year-end backlog is
scheduled to be shipped during 2002. However, the Company's order backlog may
not be a reliable indicator of future business activity. Since September 11,
2001, the Company has received a number of deferrals and cancellations of
previously scheduled orders and believes such requests will continue into 2002.
Through various strategic relationships, the Company seeks to gain access
to unique process technologies for the manufacture of its products and to expand
existing markets and create and develop new markets for titanium. The Company
has explored and will continue to explore strategic arrangements in the areas of
product development, production and distribution. The Company also will continue
to work with existing and potential customers to identify and develop new or
improved applications for titanium that take advantage of its unique qualities.
Competition. The titanium metals industry is highly competitive on a
worldwide basis. Producers of mill products are located primarily in the United
States, Japan, France, Italy, Russia, China and the United Kingdom. With the
idling of Allegheny Technologies' sponge manufacturing facility discussed
previously, the Company is one of four "integrated producers" in the world, with
integrated producers being considered as those that produce at least both sponge
and ingot. There are also a number of non-integrated producers that produce mill
products from purchased sponge, scrap or ingot.
9
The Company's principal competitors in aerospace markets are Allegheny
Technologies Inc. and RTI International Metals, Inc., both based in the United
States, and Verkhnaya Salda Metallurgical Production Organization ("VSMPO"),
based in Russia. These companies, along with the Japanese producers and other
companies, are also principal competitors in industrial markets. The Company
competes primarily on the basis of price, quality of products, technical support
and the availability of products to meet customers' delivery schedules.
In the U.S. market, the increasing presence of non-U.S. participants has
become a significant competitive factor. Until 1993, imports of foreign titanium
products into the U.S. had not been significant. This was primarily attributable
to relative currency exchange rates and, with respect to Japan, Russia,
Kazakhstan and Ukraine, duties (including antidumping duties). However, since
1993, imports of titanium sponge, ingot and mill products, principally from
Russia and Kazakhstan, have increased and have had a significant competitive
impact on the U.S. titanium industry. To the extent the Company has been able to
take advantage of this situation by purchasing sponge, ingot or intermediate and
finished mill products from such countries for use in its own operations, the
negative effect of these imports on the Company has been somewhat mitigated.
Generally, imports into the U.S. of titanium products from countries
designated by the U.S. government as "most favored nations" are subject to a 15%
tariff (45% for other countries). Titanium products for tariff purposes are
broadly classified as either wrought or unwrought. Wrought products include bar,
sheet, strip, plate and tubing. Unwrought products include sponge, ingot, slab
and billet. For most periods since 1993, imports of titanium wrought products
from Russia were exempted from this duty under the "generalized system of
preferences" or "GSP" program designed to aid developing economies. TIMET has
successfully resisted efforts to date to expand the scope of the GSP program to
eliminate duties on sponge and other unwrought titanium products from Russia and
Kazakhstan. Antidumping duties on imports of titanium sponge from Japan and the
former Soviet Union were revoked in 1998. TIMET's appeal of that revocation was
not successful.
Further reductions in, or the complete elimination of, all or any of these
tariffs, including expansion of the GSP program to unwrought titanium products,
could lead to increased imports of foreign sponge, ingot and mill products into
the U.S. and an increase in the amount of such products on the market generally,
which could adversely affect pricing for titanium sponge and mill products and
thus the business, results of operations, financial position and liquidity of
the Company. However, since 1993, the Company has been a large importer of
foreign titanium sponge and mill products, particularly sponge from Kazakhstan,
into the U.S. To the extent the Company remains a substantial purchaser of these
products, any adverse effects on product pricing as a result of any reduction
in, or elimination of, any of these tariffs would be partially ameliorated by
the decreased cost to the Company for these products to the extent it currently
bears the cost of the import duties.
Producers of other metal products, such as steel and aluminum, maintain
forging, rolling and finishing facilities that could be modified without
substantial expenditures to process titanium products. The Company believes,
however, that entry as a producer of titanium sponge would require a significant
capital investment and substantial technical expertise. Titanium mill products
also compete with stainless steels, nickel alloys, steel, plastics, aluminum and
composites in many applications.
10
Research and development. The Company's research and development activities
are directed toward expanding the use of titanium and titanium alloys in all
market sectors, and key research activities center around the design of new
alloys and the associated applications development focused by specific
commercial strategies in the automotive and aerospace markets. In addition, the
Company continues a focus on enhancing the performance of the Company's existing
products, as applications for TIMET's proprietary alloys, such as TIMETAL(R)834,
TIMETAL 5111 and TIMETAL LCB, continue to develop. The Company conducts the
majority of its research and development activities at its Henderson Technical
Laboratory in Henderson, Nevada, which is supported by additional activities at
its Witton facility in Birmingham, England.
Patents and trademarks. The Company holds U.S. and non-U.S. patents
applicable to certain of its titanium alloys and manufacturing technology. The
Company continually seeks patent protection with respect to its technical base
and has occasionally entered into cross-licensing arrangements with third
parties. However, most of the titanium alloys and manufacturing technology used
by the Company do not benefit from patent or other intellectual property
protection. The Company believes that the trademarks TIMET(R) and TIMETAL(R),
which are protected by registration in the U.S. and other countries, are
important to its business.
Employees. The cyclical nature of the aerospace industry and its impact on
the Company's business is the principal reason that the Company periodically
implements cost reduction, restructurings, reorganizations and other changes
that impact the Company's employment levels. The following table shows the
fluctuation in the number of employees over the past 3 years. The 9% increase in
employees from 2000 to 2001, and the 6% reduction in employees from 1999 to
2000, were principally in response to changes in market demand for the Company's
products. During 2002, the Company expects to decrease employment, principally
in its manufacturing operations, due to the previously discussed decline in
demand for titanium products.
Employees at December 31,
-----------------------------------------------------------
2001 2000 1999
------------------ ---------------- -----------------
U.S. 1,462 1,333 1,490
Europe 948 887 860
------------------ ---------------- -----------------
Total 2,410 2,220 2,350
================== ================ =================
The Company's production, maintenance, clerical and technical workers in
Toronto, Ohio, and its production and maintenance workers in Henderson, Nevada
are represented by the United Steelworkers of America ("USWA") under contracts
expiring in June 2002 and October 2004, respectively. Employees at the Company's
other U.S. facilities are not covered by collective bargaining agreements.
Approximately 62% of the salaried and hourly employees at the Company's European
facilities are represented by various European labor unions, generally under
annual agreements.
While the Company currently considers its employee relations to be
satisfactory, it is possible that there could be future work stoppages, or other
labor disruptions, upon the expiration of the Toronto, Ohio labor contract, or
other labor contracts, that could materially and adversely affect the Company's
business, results of operations, financial position, and liquidity.
11
Regulatory and environmental matters. The Company's operations are governed
by various Federal, state, local and foreign environmental and worker safety
laws and regulations. In the U.S., such laws include the Occupational, Safety
and Health Act, the Clean Air Act, the Clean Water Act and the Resource
Conservation and Recovery Act. The Company uses and manufactures substantial
quantities of substances that are considered hazardous or toxic under
environmental and worker safety and health laws and regulations. In addition, at
the Company's Henderson, Nevada facility, the Company produces and uses
substantial quantities of titanium tetrachloride, a material classified as
extremely hazardous under Federal environmental laws. The Company has used such
substances throughout the history of its operations. As a result, risk of
environmental damage is inherent in the Company's operations. The Company's
operations pose a continuing risk of accidental releases of, and worker exposure
to, hazardous or toxic substances. There is also a risk that government
environmental requirements, or enforcement thereof, may become more stringent in
the future. There can be no assurances that some, or all, of the risks discussed
under this heading will not result in liabilities that would be material to the
Company's business, results of operations, financial position or liquidity.
The Company's operations in Europe are similarly subject to foreign laws
and regulations respecting environmental and worker safety matters, which laws
have not had, and are not presently expected to have, a material adverse effect
on the Company's business, results of operations, financial position, or
liquidity.
The Company believes that its operations are in compliance in all material
respects with applicable requirements of environmental and worker health and
safety laws. The Company's policy is to continually strive to improve
environmental, health and safety performance. From time to time, the Company may
be subject to environmental regulatory enforcement under various statutes,
resolution of which typically involves the establishment of compliance programs.
Occasionally, resolution of these matters may result in the payment of
penalties. The Company incurred capital expenditures for health, safety and
environmental compliance matters of approximately $2.4 million in 2001, $2.6
million in 2000 and $4.0 million in 1999. The Company's capital budget provides
for approximately $2.0 million of such expenditures in 2002. However, the
imposition of more strict standards or requirements under environmental, health
or safety laws and regulations could result in expenditures in excess of amounts
estimated to be required for such matters. See Note 17 to the Consolidated
Financial Statements - Commitments and contingencies - Environmental matters.
ITEM 2: PROPERTIES
Set forth below is a listing of the Company's major production facilities.
In addition to its U.S. sponge capacity discussed below, the Company's worldwide
melting capacity presently aggregates approximately 45,000 metric tons
(estimated 30% of world capacity), and its mill capacity aggregates
approximately 20,000 metric tons (estimated 16% of world capacity).
Approximately 35% of TIMET's worldwide melting capacity is represented by
electron beam cold hearth melting ("EB") furnaces, 63% by vacuum arc remelting
("VAR") furnaces and 2% by a vacuum induction melting ("VIM") furnace.
12
Annual Practical
Capacities (3) (4)
---------------------------------
Melted Mill
Manufacturing Location Products Manufactured Products Products
------------------------------------------ ----------------------------------- -------------- ---------------
(metric tons)
Henderson, Nevada(1) Sponge, Ingot 12,250 -
Morgantown, Pennsylvania(1) Slab, Ingot, Raw materials
processing 20,000 -
Toronto, Ohio(1) Billet, Bar, Plate, Sheet, Strip - 9,900
Vallejo, California(2) Ingot (including non-titanium
superalloys) 1,600 -
Ugine, France(2) Ingot, Billet, Bar, Wire,
Extrusions 2,450 2,000
Waunarlwydd (Swansea), Wales(1) Bar, Plate, Sheet - 3,900
Witton, England(2) Ingot, Billet, Bar 8,700 8,000
--------------------------------------------------------------------------------
(1) Owned facilities.
(2) Leased facilities.
(3) Practical capacities are variable based on production mix.
(4) Practical capacities are not additive.
The Company has operated its major production facilities at varying levels
of practical capacity during the past three years. In 2001, the plants operated
at approximately 75% of practical capacity, an increase from 60% in 2000 and
from 55% in 1999. In 2002, the Company's plants are expected to operate at 60%
of practical capacity. However, practical capacity and utilization measures can
vary significantly based upon the mix of products produced. In 1999, the Company
idled its Kroll-leach process sponge facility in Henderson, Nevada due to
changing market conditions for certain grades of titanium sponge.
The Company conducts its operations in Europe primarily through its wholly
owned subsidiaries TIMET UK, Ltd. ("TIMET UK"), 70% owned TIMET Savoie and
wholly owned Loterios S.p.A. ("Loterios"). TIMET UK's Witton, England facilities
are leased pursuant to long-term capital leases expiring in 2026. TIMET Savoie
has the right to utilize portions of the Ugine, France plant of Compagnie
Europeene du Zirconium-CEZUS, S.A. ("CEZUS"), the 30% minority partner in TIMET
Savoie, pursuant to an agreement expiring in 2006.
United States production. The Company's VDP sponge facility is expected to
operate at approximately 95% of its annual practical capacity of 8,600 metric
tons during 2002, up slightly from approximately 94% in 2001. VDP sponge is used
principally as a raw material for the Company's melting facilities in the U.S.
and Europe. Approximately 1,200 metric tons of VDP production from the Company's
Henderson, Nevada facility was used in Europe during 2001, which represented
approximately 20% of the sponge consumed in the Company's European operations.
The Company expects the consumption of VDP sponge in its European operations to
be 40% of their sponge requirements in 2002. The raw materials processing
facilities in Morgantown, Pennsylvania primarily process scrap used as melting
feedstock, either in combination with sponge or separately.
13
The Company's U.S. melting facilities in Henderson, Nevada and Morgantown,
Pennsylvania, produce ingots and slabs both sold to customers and used as
feedstock for its mill products operations. These melting facilities are
expected to operate at approximately 50% of aggregate capacity in 2002.
Titanium mill products are produced by TIMET in the U.S. at its forging and
rolling facility in Toronto, Ohio, which receives intermediate titanium products
(ingots or slabs) principally from the Company's U.S. melting facilities. The
Company's U.S. forging and rolling facility is expected to operate at
approximately 60% of practical capacity in 2002. Capacity utilization across the
Company's product lines varies.
Sponge for melting requirements in the U.S. that is not supplied by the
Company's Henderson, Nevada plant is purchased principally from suppliers in
Japan and Kazakhstan, and from the DLA.
European production. TIMET UK's melting facility in Witton, England
produces VAR ingots used primarily as feedstock for its forging operations, also
in Witton. The forging operations process the ingots principally into billet
product for sale to customers or into an intermediate product for further
processing into bar and plate at its facility in Waunarlwydd, Wales. U.K.
melting and mill products production in 2002 is expected to operate at
approximately 60% and 45%, respectively, of practical capacity.
The capacity of 70%-owned TIMET Savoie in Ugine, France is to a certain
extent dependent upon the level of activity in CEZUS' zirconium business, which
may from time to time provide TIMET Savoie with capacity in excess of that
contractually required to be provided by CEZUS. During 2002, TIMET Savoie
expects to operate at approximately 60% of the maximum capacity required to be
provided by CEZUS.
Sponge for melting requirements in both the U.K. and France that is not
supplied by the Company's U.S. Henderson, Nevada plant is purchased principally
from suppliers in Japan and Kazakhstan.
Distribution. The Company sells its products through its own sales force
based in the U.S. and Europe, and through independent agents worldwide. The
Company's marketing and distribution system also includes eight Company-owned
service centers (five in the U.S. and three in Europe), which sell the Company's
products on a just-in-time basis. The service centers primarily sell value-added
and customized mill products including bar and flat-rolled sheet and strip. The
Company believes its service centers provide a competitive advantage because of
their ability to foster customer relationships, customize products to suit
specific customer requirements and respond quickly to customer needs.
The Company believes that it has a competitive sales advantage arising from
the location of certain of its production plants and service centers, which are
in close proximity to major customers.
14
ITEM 3: LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. See Note 17 of
the Consolidated Financial Statements.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2001.
15
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
TIMET's common stock is traded on the New York Stock Exchange (symbol:
"TIE"). On March 18, 2002, the closing price of TIMET common stock was $5.05 per
share. The high and low sales prices for the Company's common stock are set
forth below.
Year ended December 31, 2001: High Low
----------------- -----------------
First quarter $ 10.62 $ 6.69
Second quarter 14.40 6.75
Third quarter 11.90 2.35
Fourth quarter 4.70 2.75
Year ended December 31, 2000:
First quarter $ 5.50 $ 4.19
Second quarter 5.00 3.13
Third quarter 8.94 4.50
Fourth quarter 8.19 6.00
As of March 18, 2002, there were 313 common shareholders of record, which
the Company estimates represents approximately 8,300 shareholders.
In the third quarter of 1999, the Company suspended payment of quarterly
common stock dividends. The Company's U.S. credit agreement, entered into in
early 2000, prohibits the payment of dividends on the Company's common stock and
the repurchase of common shares, except under specified conditions. The Company
presently has no plans to resume payment of common stock dividends. See Note 9
to the Consolidated Financial Statements.
16
ITEM 6: SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with the Company's Consolidated Financial Statements and Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A").
Year Ended December 31,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------- ----------- ----------- ------------ -----------
($ in millions, except per share and selling price data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 486.9 $ 426.8 $ 480.0 $ 707.7 $ 733.6
Gross margin 39.9 3.9 25.5 165.4 179.0
Operating income (loss) (1) 64.5 (41.7) (31.4) 82.7 133.0
Interest expense 4.1 7.7 7.1 2.9 2.0
Net income (loss) (1) $ (41.8) $ (38.9) $ (31.4) $ 45.8 $ 83.0
Earnings (loss) per share (1):
Basic $ (1.33) $ (1.24) $ (1.00) $ 1.46 $ 2.64
Diluted (2) $ (1.33) $ (1.24) $ (1.00) $ 1.46 $ 2.49
Cash dividends per share $ - $ - $ .12 $ .12 $ -
BALANCE SHEET DATA:
Cash and cash equivalents $ 24.5 $ 9.8 $ 20.7 $ 15.5 $ 69.0
Total assets (1) 699.4 759.1 883.1 953.2 793.1
Indebtedness (3) 12.4 44.9 117.4 105.6 5.0
Net cash (debt) (4) 12.1 (35.1) (96.7) (90.1) 64.0
Capital lease obligations 8.9 8.8 10.1 10.3 11.2
Minority interest - Convertible
Preferred Securities 201.2 201.2 201.2 201.2 201.2
Stockholders' equity $ 298.1 $ 357.5 $ 408.1 $ 448.4 $ 408.9
OTHER OPERATING DATA:
Cash flows provided (used):
Operating activities $ 62.6 $ 63.3 $ 19.5 $ 76.1 $ 72.6
Investing activities (16.1) (4.2) (21.7) (223.2) (79.8)
Financing activities (31.4) (70.7) 8.6 92.2 (9.8)
------------- ----------- ----------- ------------ -----------
Net provided (used) $ 15.1 $ (11.6) $ 6.4 $ (54.9) $ (17.0)
Mill product shipments (5) 12.2 11.4 11.4 14.8 15.1
Average mill product prices (5) $ 29.80 $ 28.70 $ 33.00 $ 35.25 $ 35.00
Melted product shipments (5) 4.4 3.5 2.5 3.6 7.1
Average melted product prices (5) $ 14.50 $ 13.65 $ 14.20 $ 18.50 $ 15.55
Active employees at December 31 2,410 2,220 2,350 2,740 3,025
Order backlog at December 31(6) $ 225.0 $ 245.0 $ 195.0 $ 350.0 $ 530.0
Capital expenditures $ 16.1 $ 11.2 $ 24.8 $ 115.2 $ 66.3
--------------------------------------------------------------------------------
(1) See the notes to the Consolidated Financial Statements and MD&A for special
items which materially affect the 2001, 2000 and 1999 periods. In 1998, the
Company recorded a $24.0 million pre-tax restructuring charge.
(2) Antidilutive in 2001, 2000, 1999, and 1998.
(3) Indebtedness represents notes payable and current and noncurrent debt, and
excludes capital lease obligations and Minority interest - Convertible
Preferred Securities.
(4) Net cash (debt) represents cash and cash equivalents less indebtedness.
(5) Shipments in thousands of metric tons; average selling prices stated per
kilogram.
(6) Order backlog is defined as unfilled purchase orders, which are generally
subject to deferral or cancellation by the customer under certain
conditions.
17
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview. The titanium industry derives a substantial portion of its demand
from the highly cyclical commercial aerospace industry. The Company estimates
that aggregate industry demand for titanium mill products in 2001 was derived
from the following markets: 40% from aerospace; 50% from industrial; and 10%
from emerging markets. The commercial aerospace sector is the principal driver
of titanium consumed in the aerospace markets, representing about 90% of
aggregate aerospace demand, or 35% of aggregate industry demand. The Company's
business is more dependent on the commercial aerospace demand than the overall
titanium industry, as approximately two-thirds of its sales volume in 2001 was
to this sector.
During the latter part of 2001, an economic slowdown in the U.S. and other
regions of the world 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. The major U.S. airlines reported
significant financial losses in the fourth quarter of 2001 and profits for
European and Asian airlines declined. In response, airlines have announced a
number of actions to reduce both costs and capacity including, but not limited
to, the early retirement of airplanes, the deferral of scheduled deliveries of
new aircraft, and allowing purchase options to expire.
A number of the Company's customers cancelled or deferred delivery of
previously scheduled orders in late 2001, and the rate of new orders slowed
significantly. The Company's order backlog at the end of December 2001 decreased
to approximately $225 million, compared to $315 million at the end of September
2001 and $245 million at the end of December 2000.
As a result of recent events, the Company's financial results and trends
during most of 2001 are not indicative of future trends or the Company's
expectations for 2002. The Company anticipates a substantial near term decline
in its business as described in Outlook.
The following table summarizes certain components of the Company's results
for the past three years. The discussion that follows regarding the Company's
results frequently refers to segment information that is presented in Note 2 to
the Consolidated Financial Statements, and should be read in conjunction with
that information. Restructuring and other special items are more fully described
in Note 13 to the Consolidated Financial Statements. Average selling prices per
kilogram, as reported by the Company, reflect the net effects of changes in
selling prices, currency exchange rates, customer and product mix. Accordingly,
average selling prices are not necessarily indicative of any one factor. In the
following discussion, the Company has attempted to adjust for the effect of
currency fluctuations and changes in mix when referring to the percentage change
in selling prices from period to period.
18
Year ended December 31,
------------------------------------------------------
2001 2000 1999
--------------- ---------------- ---------------
($ in thousands)
Net sales $ 486,935 $ 426,798 $ 480,029
Gross margin 39,892 3,881 25,523
Gross margin, excluding special items 54,002 10,610 25,523
Operating income (loss) 64,480 (41,650) (31,433)
Operating income (loss), excluding restructuring
and other special items 11,555 (34,116) (24,599)
Percent of net sales:
Gross margin 8% 1% 5%
Gross margin, excluding special items 11% 2% 5%
Percent change in:
Mill product sales volume +7 -1 -23
Mill product selling prices (1) - -9 -8
Melted product sales volume +27 +39 -31
Melted product selling prices (1) +8 -10 -17
--------------------------------------------------------------------------------
(1) Change expressed in U.S. dollars.
2001 operations. Demand for titanium products for the commercial aerospace
industry increased substantially in 2001. This was principally driven by
increased aircraft production rates and a substantial reduction of excess
inventory throughout the aerospace supply chain that accumulated following the
previous cyclical peak. Generally, the Company's recurring operations prior to
September 11 were characterized by rising selling prices on new non-LTA orders
for aerospace quality titanium products, strong order demand, increasing
production levels and capacity utilization, and the Company's return to
profitability in the third quarter of 2001.
Sales of mill products in 2001 increased 11% from $326.3 million in 2000 to
$363.3 million in 2001. This increase was principally due to a 7% increase in
mill product sales volume and changes in customer and product mix. Mill product
selling prices (expressed in U.S. dollars using actual foreign currency exchange
rates prevailing during the respective periods) during 2001 approximated 2000
selling prices. In billing currencies (which exclude the effects of foreign
currency translation), mill product selling prices increased 2% over 2000
levels. Melted product sales increased 35% from $47.4 million in 2000 to $64.1
million in 2001 due to the net effects of a 27% increase in melted product sales
volume, an 8% increase in melted product selling prices and changes in customer
and product mix.
19
Gross margin (net sales less cost of sales) was 8% of sales in 2001,
compared to 1% in the prior year, primarily reflecting the net effects of higher
selling prices, higher operating rates at certain plants, lower sponge costs,
higher scrap costs, higher energy costs, changes in customer and product mix and
special items. Gross margin, excluding special items, was 11% of sales in 2001,
compared to 2% for the prior year. Gross margin for 2001 was adversely impacted
by $10.8 million of equipment impairment charges and $3.3 million of estimated
costs related to the tungsten inclusion matter. In comparison, gross margin in
2000 was adversely impacted by a $3.5 million equipment impairment charge and a
$3.3 million charge for anticipated environmental remediation costs.
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 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 the present 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
currently believes 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 continuing
assessments of possible losses completed by the Company, the Company recorded an
aggregate charge to cost of sales of $3.3 million during 2001 ($1.0 million
expense in the first quarter of 2001, $2.8 million expense in the second quarter
of 2001 and $.5 million reduction in expense in the fourth 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 December 31, 2001, $2.7
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 December 31, 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, as the assets' undiscounted
future cash flows could no longer support their carrying amount. 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. As a result, the Company recorded a $10.8 million pre-tax
impairment charge to cost of sales in 2001, representing the difference between
the assets' previous carrying amounts and their estimated fair values, based on
a third-party appraisal.
20
In April 2001, the Company reached a settlement of the litigation between
TIMET and Boeing related to the parties' 1997 LTA. Pursuant to the settlement,
the Company received a cash payment of $82 million. In the 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 employee incentive compensation and other costs
reported as a component of selling, general, administrative and development
expense, resulting in a net pre-tax income effect of $62.7 million in the second
quarter of 2001. In the fourth quarter of 2001, the Company reduced its estimate
of employee incentive compensation by $4.1 million as a result of its fourth
quarter and full year financial results, and recorded such reduction as a
component of selling, general, administrative and development expense.
Accordingly, the net pre-tax income effect of the Boeing settlement for 2001 was
$66.8 million.
Selling, general, administrative and development expenses increased 18% in
2001 compared to 2000 principally due to approximately $6.2 million of employee
incentive compensation discussed above.
Equity in earnings (losses) of joint ventures in 2001 increased by $3.4
million from 2000 principally due to the increase in earnings of VALTIMET, the
Company's 44%-owned welded tube joint venture.
2000 operations. Sales of mill products in 2000 declined 13%, from $376.2
million in 1999 to $326.3 million in 2000. This decrease was due to a 9% decline
in mill product selling prices (expressed in U.S. dollars using actual foreign
currency exchange rates prevailing during the respective periods), a less than
1% decrease in sales volume, and changes in customer and product mix. In billing
currencies, mill product selling prices declined 7% from 1999. Melted product
sales increased 33% from $35.5 million in 1999 to $47.4 million in 2000 due to
the net effects of a 39% increase in melted product sales volume, a 10% decline
in melted product selling prices and changes in product mix. The decrease in the
selling prices was principally due to greater price competition in the Company's
non-LTA business.
Early in 2000, the Company implemented a plan to address market and
operating conditions, which resulted in the recognition of a net $2.8 million
restructuring charge in 2000. The restructuring charge is principally related to
personnel severance and benefits for the approximately 170 employees terminated
as part of the restructuring. Additionally, the Company recorded net special
charges of $4.7 million to operating income, consisting of $3.5 million of
equipment related impairment charges, $3.3 million of environmental remediation
charges, a special income item of $2.0 million related to the termination of the
Company's 1990 agreement to sell titanium sponge to Union Titanium Sponge
Corporation.
Gross margin was 1% of sales for 2000 compared to 5% in the prior year,
primarily reflecting the net effects of lower selling prices, higher energy
costs, lower raw material costs, changes in customer and product mix and special
items. Gross margin in 2000 was adversely impacted by $3.5 million of equipment
impairment charges and a $3.3 million charge for anticipated environmental
remediation costs. Gross margin, excluding special items, was 2% in 2000, as
compared to 5% for the year ended December 31, 1999.
21
Selling, general, administrative and development expenses decreased 9% in
2000 compared to 1999 principally due to the impact of the restructuring plan
implemented in early 2000, as well as reduced expenses related to the
business-enterprise information system project that was completed in early 1999
and "Year 2000" computer systems expenses which were incurred in 1999 but not
2000.
Equity in earnings (losses) of joint ventures of the "Titanium melted and
mill products" segment in 2000 decreased by $1.4 million from 1999 principally
due to the decline in earnings of VALTIMET.
Non-operating income and expense.
Year ended December 31,
------------------------------------------------------
2001 2000 1999
--------------- ---------------- ---------------
(In thousands)
Dividends and interest income $ 5,460 $ 6,154 $ 6,034
General corporate income (expense), net:
SMC impairment charge (61,519) - -
Other 112 67 (1,246)
Interest expense (4,060) (7,704) (7,093)
--------------- ---------------- ---------------
$ (60,007) $ (1,483) $ (2,305)
=============== ================ ===============
Dividends and interest income consisted principally of dividends on $80
million principal amount of non-voting convertible preferred securities of
Special Metals Corporation. During the fourth quarter of 2001, the Company
recognized a $61.5 million pre-tax impairment charge to general corporate
expense for an other than temporary decline in the fair value of these
securities. See Note 4 to the Consolidated Financial Statements.
The remaining general corporate income (expense) consists principally of
currency transaction gains/losses. In 2000, net currency losses of $1.1 million
were offset by a $1.2 million gain on the sale of the Company's castings joint
venture.
Interest expense for 2001 decreased 47% compared to 2000, primarily due to
the paydown of the Company's revolving U.S. debt following settlement of the
Boeing related litigation. Interest expense for 2000 increased over 1999
primarily due to the net effects of increased interest rates related to U.S.
credit facilities entered into in early 2000, lower average borrowings
outstanding during the year and a lower level of capitalized interest.
European operations. The Company has substantial operations and assets
located in Europe, principally the United Kingdom, with less significant
operations in France and Italy. Titanium is a worldwide market, and many factors
influencing the Company's U.S. and European operations are similar.
22
Approximately 40% of the Company's sales revenue originated in Europe in
2001, of which approximately 60% was 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 exchange rate fluctuations which 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. Net currency transaction gains/losses included in earnings were a
gain of $.1 million in 2001 and losses of $1.1 million and $1.2 million in 2000
and 1999, respectively. At December 31, 2001, consolidated assets and
liabilities denominated in currencies other than functional currencies were
approximately $31.7 million and $41.2 million, respectively, consisting
primarily of U. S. dollar cash, accounts receivable, accounts payable and
borrowings. Exchange rates among eleven European currencies (including the
French franc and Italian lira, but excluding the British pound) became fixed
relative to each other as a result of the implementation of the euro effective
in 1999.
Income taxes. Based on its recent history of losses, its near term outlook,
and management's evaluation of available tax planning strategies, the Company
concluded that realization of its previously recorded U.S. deferred tax assets
did not continue to meet the "more-likely-than-not" recognition criteria.
Accordingly, during 2001, the Company increased its deferred tax valuation
allowance by $35.5 million to offset deferred tax benefits related to net U.S.
deferred tax assets, primarily net operating loss and minimum tax credit
carryforwards and certain capital losses that did not meet the
"more-likely-than-not" recognition criteria. This included a fourth quarter 2001
charge of $12.3 million to increase the deferred tax asset valuation allowance
related to U.S. net deferred tax assets recorded as of September 30, 2001. This
charge included $8.6 million as a component of income tax expense and $3.7
million as a component of Minority interest - Convertible Preferred Securities.
Additionally, the Company determined that it would not recognize a deferred tax
benefit related to U.S. losses commencing in the fourth quarter of 2001, and
continuing for an uncertain period of time. Accordingly, the Company provided a
deferred tax valuation allowance of $23.2 million related to U.S. net deferred
tax assets arising from its fourth quarter 2001 operating results. See Note 14
to the Consolidated Financial Statements.
Minority interest. Annual dividend expense related to the Company's 6.625%
Convertible Preferred Securities approximates $13 million and is reported as
minority interest. In 2000 and 1999, this expense was reported net of allocable
income taxes; however, as a result of the Company's decision to increase its
deferred tax valuation allowance as described above, this expense was reported
pre-tax in 2001. Other minority interest relates primarily to the 30% interest
in TIMET Savoie held by CEZUS. See Note 10 to the Consolidated Financial
Statements.
23
Extraordinary item. During 2000, the deferred financing costs associated
with the Company's prior U.S. credit facility were written off and reflected as
an extraordinary item of $.9 million after taxes in the Consolidated Statements
of Operations.
Related party transactions The Company is a party to certain transactions
with related parties. See Note 16 to the Consolidated Financial Statements.
Outlook. The Outlook section contains a number of forward-looking
statements, all of which are based on current expectations, and exclude the
potential effect of special and other charges related to restructurings, asset
impairments, valuation allowances and similar items, unless otherwise noted.
Undue reliance should not be placed on forward-looking statements. Actual
results may differ materially. See Note 1 to the Consolidated Financial
Statements - Summary of significant accounting policies and Note 17 to the
Consolidated Financial Statements - Commitments and contingencies regarding
commitments, contingencies, legal, environmental and other matters, which may
materially affect the Company's future business, results of operations,
financial position and liquidity.
During the latter part of 2001, an economic slowdown in the U.S. and other
regions of the world 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. The major U.S. airlines reported
significant financial losses in the fourth quarter of 2001 and profits of
European and Asian airlines declined. In response, airlines have announced a
number of actions to reduce both costs and capacity including, but not limited
to, the early retirement of airplanes, the deferral of scheduled deliveries of
new aircraft, and allowing purchase options to expire.
These events have resulted in the major commercial airframe and jet engine
manufacturers substantially reducing their forecast of engine and aircraft
deliveries over the next few years and their production levels in 2002. The
Company expects that aggregate industry mill product shipments will decrease in
2002 by approximately 16% to about 43,000 metric tons. The Company believes that
demand for mill products for the commercial aerospace sector could decline by up
to 40% in 2002, primarily due to a combination of reduced aircraft production
rates and excess inventory accumulated throughout the aerospace supply chain
since September 11, 2001. Excess inventory accumulation typically leads to order
demand for titanium products falling below actual consumption.
According to The Airline Monitor, a leading aerospace publication, large
commercial aircraft deliveries totaled 834 (including 202 wide bodies) in 2001,
and the most recent forecast of aircraft deliveries by The Airline Monitor calls
for 660 deliveries in 2002, 505 deliveries in 2003 and 515 deliveries in 2004.
After 2004, The Airline Monitor calls for a continued increase each year in
large commercial aircraft deliveries, with forecasted deliveries of 920 aircraft
in 2008 exceeding 2001 levels. Compared to 2001, these forecasted delivery rates
represent anticipated declines of about 20% in 2002 and just under 40% in 2003
and 2004. Additionally, the Company's discussions with jet engine manufacturers
and related suppliers suggest that they are expecting production declines in
2002 relative to 2001 in the range of 25% to 30%. Although certain recently
reported economic data may indicate some modest level of recovery, the Company
expects the current slowdown in the commercial aerospace sector to last for
about two years.
24
Although the current business environment makes it particularly difficult
to predict the Company's future performance, the Company believes sales revenue
in 2002 may decline to approximately $375 million, reflecting the combined
effects of decreases in sales volume, softening of market selling prices, and
changes in customer and product mix. Mill product sales volume is expected to
decline approximately 20% from 2001 levels to about 10,000 metric tons. Melted
products volume is expected to decline by almost one-third relative to 2001, to
approximately 3,000 metric tons. The Company expects approximately 60% of its
2002 sales volume will be derived from the commercial aerospace sector (compared
to approximately two-thirds in 2001), with the balance from military aerospace,
industrial and emerging markets. The sales volume decline in 2002 is principally
driven by an anticipated reduction in the Company's commercial aerospace sales
volume of approximately 30% compared to 2001, partly offset by sales volume
growth to other markets.
Market selling prices on new orders for titanium products, while difficult
to forecast, are expected to soften throughout 2002. However, about one-half of
the Company's anticipated commercial aerospace volume in 2002 is under LTAs that
provide the Company with selling price stability on that portion of its
business. The Company may sell substantially similar titanium products to
different customers at varying selling prices due to the effect of LTAs, timing
of purchase orders and market fluctuations. There are also wide differences in
selling prices across different titanium products that the Company offers.
Accordingly, the mix of customers and products sold affects the average selling
price realized and has an important impact on sales revenue and gross margin.
Average selling prices per kilogram, as reported by the Company, reflect the net
effects of changes in selling prices, currency exchange rates, customer and
product mix. Accordingly, average selling prices are not necessarily indicative
of any one factor.
Under the amended Boeing LTA, Boeing will advance TIMET $28.5 million
annually from 2002 through 2007. The Company received the $28.5 million advance
for contract year 2002 in December of 2001. The LTA is structured as a
take-or-pay agreement such that, beginning in calendar year 2002, Boeing will
forfeit a proportionate part of the $28.5 million annual advance, or effectively
$3.80 per pound, in the event that its orders for delivery for such calendar
year are less than 7.5 million pounds. The Company presently intends to
recognize as income any forfeitable portion of the advance when it becomes
virtually assured that Boeing's annual orders for delivery will be less than 7.5
million pounds and no other significant uncertainties exist. This will generally
result in any take-or-pay forfeiture being recognized as operating income in the
last half of each year. The Company anticipates that Boeing will purchase about
3 million pounds of product in 2002. At this projected order level, the Company
expects to recognize about $17 million of income under the Boeing LTA's
take-or-pay provisions in 2002. Any such earnings will be reported as operating
income, but will not be included in sales revenue, sales volume or gross margin.
25
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 and energy costs. Raw material costs represent the
largest portion of the Company's manufacturing cost structure. The Company
expects to manufacture a significant portion of its titanium sponge requirements
in 2002 and purchase the balance. While the cost of titanium sponge manufactured
at the Company's Henderson, Nevada facility is expected to be relatively stable
compared to 2001, the Company expects the aggregate cost of purchased sponge and
scrap to trend downward in 2002. The Company expects its overall capacity
utilization to average about 60% in 2002 compared to about 75% in 2001, however,
the Company's practical capacity utilization measures can vary significantly
based on product mix. As production volume decreases, certain manufacturing and
other costs will decrease at a slower rate and to a lesser extent than volume,
effectively resulting in higher costs per metric ton. In combination with a
softening of market selling prices, this is expected to result in a significant
reduction of gross margin and gross margin percent in 2002 compared to 2001. The
Company currently anticipates that its gross margin as a percent of sales will
decrease over the year and that gross margin will be near breakeven or less for
the full year.
In response to the current business climate, the Company is taking a number
of actions in the near term to reduce costs. These actions include reducing
plant operating rates and employment levels as business declines, negotiating
improved pricing at lower volume commitments for certain raw materials, reducing
discretionary spending and negotiating various concessions from both suppliers
and service providers. The Company has reduced operating rates and employment
levels at its melting facilities since September 11 and expects similar actions
will occur in the future. For the longer term, the Company is continuing to
evaluate product line and facilities consolidations that may permit it to
meaningfully reduce its cost structure in the future while maintaining and even
increasing its market share. Accordingly, the Company's results in 2002 could
include one or more special or other charges for restructurings, asset
impairments and similar charges that might be material.
The Company's agreement with its labor union at its Toronto, Ohio plant
expires at the end of June 2002. The Company does not presently anticipate any
work stoppage or other labor disruption at any facility, and its outlook for
2002 does not contemplate any such event. However, should the Company's efforts
to negotiate a mutually satisfactory agreement be unsuccessful, any work
stoppage or other labor disruption at any facility could materially and
adversely affect the Company's business, results of operation, financial
position and liquidity.
On October 11, 2001, the Company was notified by Special Metals Corporation
of its intention to again defer the payment of dividends on the SMC convertible
preferred securities held by the Company, effective with the dividend due on
October 28, 2001. The Company believes such dividends are likely to be deferred
indefinitely and does not expect to recognize any dividend income on its SMC
preferred securities in 2002.
Selling, general, administrative and development expenses for 2002 should
be approximately $42 million. Interest expense in 2002 should approximate $3
million. Minority interest on the Company's Convertible Preferred Securities in
2002 should approximate $13 million.
26
The Company`s effective consolidated income tax rate is expected to be
significantly below the U.S. statutory rate, as no income tax benefit is
expected to be recorded on U.S. losses during 2002. However, the Company
operates in several tax jurisdictions and is subject to varying income tax
rates. As a result, the geographic mix of pretax income (loss) can significantly
impact the Company's overall effective tax rate.
The Company presently expects an operating loss in 2002 of approximately
$25 million and a net loss of approximately $40 million. Although the Company
expects its gross margin to decrease over the year, the Company presently
anticipates its results in the last half of 2002 will be improved compared to
the first half because the estimated $17 million expected to be earned under the
take-or-pay provision of the Boeing LTA will be recognized in the last half of
the year.
The Company expects cash flow from operations to be negative in 2002. This
is principally driven by the expected net loss and the effect in 2002 of the
$28.5 million cash advance payment that was received from Boeing in December
2001. This customer advance was reflected as a current liability on the
Company's consolidated balance sheet at year-end 2001 and will be reduced during
2002 as product shipments are made or the Boeing take-or-pay benefits are
earned. Subsequent advances will occur early each calendar year beginning in
2003. Capital expenditures in 2002 are expected to be approximately $12 million,
principally covering capital maintenance, safety and environmental programs.
Depreciation and amortization should approximate $40 million. Effective January
1, 2002, the Company will adopt Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets. Under SFAS 142, goodwill
will not be amortized on a periodic basis. For the year ended December 31, 2001,
the Company recorded amortization expense of approximately $4.5 million relating
to its goodwill.
Debt is expected to increase in 2002 as compared to year-end 2001 levels.
At December 31, 2001, the Company had over $150 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 in 2002.
27
Future results of operations and other forward-looking statements contained
in this Outlook involve a number of substantial risks and uncertainties that
could significantly affect expected results. Actual 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. Among the factors that could cause actual results to
differ materially are the risks and uncertainties discussed in this Annual
Report 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 and the Company under their LTAs, 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
disruption of business or 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.
28
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows provided by operating, investing and
financing activities for each of the past three years are presented below. The
following should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto.
Year ended December 31,
------------------------------------------------------
2001 2000 1999
--------------- ---------------- ---------------
(In thousands)
Cash provided (used) by:
Operating activities:
Excluding changes in assets and liabilities $ 97,908 $ (4,119) $ 23,958
Changes in assets and liabilities (35,334) 67,447 (4,415)
--------------- ---------------- ---------------
62,574 63,328 19,543
Investing activities (16,093) (4,218) (21,663)
Financing activities (31,358) (70,678) 8,563
--------------- ---------------- ---------------
Net cash provided (used) by operating,
investing and financing activities $ 15,123 $ (11,568) $ 6,443
=============== ================ ===============
Operating activities. Cash provided by operating activities was
approximately $63 million in 2001 and 2000 and $20 million in 1999.
Cash provided by operating activities, excluding changes in assets and
liabilities, during the past three years generally follows the trend in gross
margin. Changes in assets and liabilities reflect the timing of purchases,
production and sales, and can vary significantly from period to period. Accounts
receivable increased in 2001, principally as a result of increased sales.
Accounts receivable provided cash in 2000 and 1999, reflecting the decrease in
sales levels as well as an improvement, particularly in 2000, in collections as
reflected by a decrease in the average number of days that receivables were
outstanding. The significant reduction in receivables in 2000 was also
attributable to $16 million of customer payments received in the first quarter
of 2000 related to a bill-and-hold arrangement entered into near the end of
1999. See Note 8 to the Consolidated Financial Statements.
In April 2001, the Company reached a settlement of the litigation between
TIMET and Boeing. Pursuant to the settlement, the Company received a cash
payment of $82 million ($73 million net of legal fees) and in December 2001
received a $28.5 million customer advance from Boeing. See Note 17 to the
Consolidated Financial Statements.
Inventories increased in 2001, reflecting material purchases and production
rates that were based on expected sales levels higher than actual sales levels
achieved. Due to the impact of the September 11, 2001 terrorist attacks, the
Company received a number of customer order deferrals and cancellations late in
2001, contributing to the inventory increase. The Company reduced inventories
during 2000 and 1999 as excess raw materials and other inventory items were
consumed and inventory reduction and control efforts were put in place.
29
Changes in deferred income taxes in 2001 were primarily due to an increase
in the Company's deferred tax asset valuation allowance, as further described in
Note 14 to the Consolidated Financial Statements. Changes in income taxes in
2000 primarily reflect net tax refunds of $8 million. In 1999, income taxes
payable decreased as the 1999 losses were carried back to recover a portion of
prior years' taxes paid. Changes in accounts with related parties resulted
primarily from relative changes in receivable levels with joint ventures in
2001, 2000 and 1999.
Changes in restructuring charges represent payments made, primarily related
to personnel severance and benefits, in connection with the Company's 2000 and
1999 restructuring plans, which are described in more detail in Note 13 to the
Consolidated Financial Statements.
Dividends for the period October 1998 through December 1999 on the
Company's investment in SMC 6.625% convertible preferred stock were 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 SMC's intention to again defer the
payment of dividends effective with the dividend due on October 28, 2001. The
Company believes that such dividends are likely to be deferred indefinitely.
The SMC convertible preferred securities held by TIMET are not marketable
and, accordingly, quoted market prices are unavailable. The Company recorded a
pre-tax impairment charge of $61.5 million related to these securities in 2001
that reduced the carrying amount of these securities to an estimated fair value
of $27.5 million. See Note 4 to the Consolidated Financial Statements. The
Company believes SMC has a significant amount of debt relative to its near term
potential earnings and cash flow and that a refinancing and/or restructuring of
its capital, or some portion thereof, is necessary. SMC has indicated that it
may violate certain bank covenants early in 2002 and that it is considering
strategic and financial options, including efforts to restructure and/or modify
the terms of certain debt agreements. Such efforts may include negotiations with
the Company to modify the terms of its preferred securities in SMC and/or
exchange, in whole or in part, such preferred securities for common stock, other
securities or other assets.
In April 2000, the Company exercised its right to defer future dividend
payments on its outstanding 6.625% Convertible Preferred Securities for a period
of up to 10 quarters (subject to possible further extension for up to an
additional 10 quarters), although interest continued to accrue at the coupon
rate on the principal and unpaid dividends. A portion of the Boeing settlement,
described above, was used to pay the previously deferred aggregate dividends of
$13.9 million and resume the payment of the regularly scheduled dividends.
Changes in accrued dividends on Convertible Preferred Securities reflect this
activity.
Investing activities. The Company's capital expenditures were $16.1 million
in 2001, up from $11.2 million in 2000. Capital expenditures were $24.8 million
in 1999. Capital spending for 2001 was principally for safety and maintaining
capacity. Capital spending for 2000 was principally for capacity enhancements,
capital maintenance, and safety and environmental projects. Capital expenditures
in 1999 were primarily related to the expansion of forging capacity at the
Toronto, Ohio facility, the installation of the business-enterprise system in
Europe and various environmental and other projects.
30
Proceeds from sale of joint venture in 2000 represents the proceeds from
the Company's sale to Wyman-Gordon of the Company's 20% interest in Wyman-Gordon
Titanium Castings, LLC. This transaction is more fully described in Note 3 to
the Consolidated Financial Statements.
Financing activities. Net repayments of $32 million in 2001 are principally
the result of the Company's litigation settlement with Boeing. Net repayments of
$70 million in 2000 reflect reductions of outstanding borrowings principally in
the U.S. resulting from collection of receivables, reduction in inventories, tax
refunds, the sale of the Company's casting joint venture and deferral of
dividend payments on the Company's Convertible Preferred Securities. Net
borrowings of $13 million in 1999 were primarily to fund capital expenditures.
In November 1999, the Company's Board of Directors voted to suspend the
regular quarterly dividend on its common stock in view of, among other things,
the continuing weakness in overall market demand for titanium metal products.
The Company's U.S. credit agreement prohibits the payment of dividends on the
Company's common stock and the repurchase of common shares except under
specified conditions. The Company presently has no plans to resume payment of
common stock dividends.
Borrowing arrangements. At December 31, 2001, the Company's net cash was
approximately $12.1 million ($24.5 million of cash and equivalents, less $12.4
million of notes payable and debt, principally borrowings under the Company's
U.S. and U.K. credit agreements). At December 31, 2001, the Company had over
$150 million of borrowing availability under its various worldwide credit
agreements.
In 2000, the Company completed a new $125 million, U.S. asset-based
revolving credit agreement replacing its previous U.S. bank credit facility.
Borrowings under this facility are limited to a formula-determined borrowing
base derived from the value of accounts receivable, inventory and equipment
("borrowing availability"). This facility requires the Company's U.S. daily cash
receipts to be used to reduce outstanding borrowings, which may then be
reborrowed, subject to the terms of the agreement. Interest generally accrues at
rates that vary from LIBOR plus 2% to LIBOR plus 2.5%. Borrowings are
collateralized by substantially all of the Company's U.S. assets. The credit
agreement prohibits the payment of dividends on TIMET's Convertible Preferred
Securities if excess availability is less than $25 million, limits additional
indebtedness, prohibits the payment of dividends on the Company's common stock
if excess availability is less than $40 million, requires compliance with
certain financial covenants and contains other covenants customary in lending
transactions of this type. Excess availability is defined as borrowing
availability less certain contractual commitments such as letters of credit. At
December 31, 2001, excess availability was $115 million. The Company's U.S.
credit agreement allows the lender to modify the borrowing base formulas at its
discretion, subject to certain conditions. In the event the lender exercised
this discretion, such event could have a significant adverse effect on the
Company's borrowing availability. Unused borrowing availability under this
agreement at December 31, 2001 was approximately $117 million. The credit
agreement expires in February 2003; however, the Company is currently
negotiating with its lender to extend the maturity date of this agreement on
substantially similar terms.
31
The Company's subsidiary, TIMET UK, has a credit agreement that includes a
revolving and term loan facility and an overdraft facility (the "U.K.
facilities"). During 2000, aggregate borrowing capacity under the U.K.
facilities was increased from (pound)18 million to (pound)30 million. Borrowings
under the U.K. facilities can be in various currencies, including U.S. dollars,
British pounds and euros, accrue interest at rates that vary from LIBOR plus 1%
to LIBOR plus 1.25% and are collateralized by substantially all of TIMET UK's
assets. The U.K. facilities require the maintenance of certain financial ratios
and amounts and other covenants customary in lending transactions of this type.
The U.K. overdraft facility is subject to annual review in February of each year
and was extended in February 2002. The U.K. facilities expire in February 2005.
As of December 31, 2001, the outstanding balance of the U.K. facilities was
approximately $11 million with unused borrowing availability of approximately
$31 million.
Environmental matters. See Item 1 - Business - Regulatory and environmental
matters and Note 17 to the Consolidated Financial Statements for a discussion of
environmental 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, its debt service requirements, the cost of debt and
equity capital and estimated future operating cash flows. As a result of this
process, the Company has in the past and, in light of its current outlook, may
in the future 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
related 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.
32
Contractual commitments. As more fully described in Notes 9, 10, 16 and 17
to the Consolidated Financial Statements, the Company is a party to various
debt, lease and other agreements at December 31, 2001 that contractually and
unconditionally commit the Company to pay certain amounts in the future. The
following table summarizes such contractual commitments that are unconditional
both in terms of timing and amount by the type and date of payment.
Unconditional Payment Due Date
----------------------------------------------------------------------------
2003/ 2005/ 2007 &
2002 2004 2006 After Total
----------- ------------ ------------ ------------ ------------
(In thousands)
Contractual Commitment
-----------------------------------
Indebtedness $ 1,694 $ 10,712 $ - $ - $ 12,406
Capital leases 340 679 397 7,522 8,938
Operating leases 4,253 4,079 967 348 9,647
Obligations to Basic Management, Inc. 1,324 2,648 1,129 1,638 6,739
Minimum sponge purchase commitments 9,975 19,950 19,950 9,975 59,850
Company-obligated manditorily
redeemable preferred securities of
subsidiary trust holding solely
subordinated debt securities - - - 201,241 201,241
----------- ------------ ------------ ------------ ------------
$ 17,586 $ 38,068 $ 22,443 $ 220,724 $ 298,821
=========== ============ ============ ============ ============
33
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the Company to
make estimates and judgments, and select from a range of possible estimates and
assumptions, that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period. On an on-going basis, the Company evaluates its estimates, including
those related to allowances for uncollectible accounts receivable, inventory
allowances, impairments of investments in preferred securities and investments
accounted for by the equity method, the recoverability of other long-lived
assets, including property and equipment, goodwill and other intangible assets,
pension and other post-retirement benefit obligations and the underlying
actuarial assumptions related thereto, the realization of deferred income tax
assets, and accruals for environmental remediation, litigation, income tax and
other contingencies. The Company bases its estimates and judgments, to varying
degrees, on historical experience, advice of outside experts, and various other
factors that it believes to be prudent under the circumstances. Actual results
may differ from previously estimated amounts and such estimates, assumptions and
judgments are regularly subject to revision. The policies discussed below are
considered by management to be critical to an understanding of the Company's
financial statements because their application requires the most significant
judgments from management in estimating matters for financial reporting that are
inherently uncertain.
o Impairments of long-lived assets. Generally, when events or changes in
circumstances indicate that the carrying amount of long-lived assets,
including property and equipment, goodwill and other intangible assets, may
not be recoverable, the Company prepares an evaluation comparing the
carrying amount of the assets to the undiscounted expected future cash
flows of the assets or asset group. If this comparison indicates that the
carrying amount is not recoverable, the amount of the impairment would
typically be calculated using discounted expected future cash flows or
appraised values. All relevant factors are considered in determining
whether an impairment exists.
The Company completed an impairment assessment under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, and
Accounting Principles Board ("APB") Opinion No. 17, Intangible Assets,
during the fourth quarter of 2001 in response to certain events described
in Note 1 to the Consolidated Financial Statements. Future cash flows are
inherently uncertain. Although management utilizes certain external
information sources such as The Airline Monitor as the basis for sales
volume projections, significant management judgment is required in
estimating other factors that are significant to future cash flows
including, but not limited to, customer demand, the Company's market
position, selling prices, competitive forces and manufacturing costs. The
result of this assessment led the Company to conclude that there was no
impairment related to the long-lived assets in the asset groups tested.
34
o Valuation and impairment of securities. In accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the
Company evaluates its investments in debt and equity securities whenever
events or conditions occur to indicate that the fair value of such
investments has declined below their carrying amounts. If the decline in
fair value is judged to be other than temporary, the carrying amount of the
security is written down to fair value. In response to certain events
described in Notes 1 and 4 to the Consolidated Financial Statements, the
Company undertook an assessment in the fourth quarter of 2001, with the
assistance of an outside expert, of its investment in SMC. That assessment
indicated that it was unlikely that the Company would recover its then
existing carrying amount of the SMC securities in accordance with the
securities' contractual terms and that an other than temporary decline in
the fair value of its investment had occurred. Accordingly, the Company
recorded an impairment charge of $61.5 million in the fourth quarter of
2001.
The SMC convertible preferred securities held by the Company are not
marketable and, accordingly, quoted market prices are unavailable. The
estimate of fair value requires significant judgment and considered a
number of factors including, but not limited to, the financial health and
prospects of the issuer and market yields of comparable securities. The
amount the Company ultimately recovers from its investment in SMC, if any,
could vary significantly from estimated fair value. See Notes 1 and 4 to
the Consolidated Financial Statements.
o Deferred income tax valuation allowances. Under SFAS 109, Accounting for
Income Taxes, and related guidance, the Company is required to record a
valuation allowance if realization of deferred tax assets is not
"more-likely-than-not." Substantial weight must be given to recent
historical results and near-term projections and management must assess the
availability of tax planning strategies that might impact either the need
for, or amount of, any valuation allowance.
Based on its recent history of losses, its near term outlook and
management's evaluation of available tax planning strategies, the Company
concluded that an increase in its valuation allowance against its U.S. net
deferred tax assets was required. Accordingly, the Company recorded a
charge of $12.3 million in the fourth quarter of 2001 to increase its
deferred tax asset valuation allowance related to previously recorded
deferred tax assets. Additionally, the Company determined that it would not
recognize a deferred tax benefit related to U.S. losses commencing in the
fourth quarter of 2001, and continuing for an uncertain period of time.
Regular reviews of the "more-likely-than-not" criteria and availability of
tax planning strategies will continue to require significant management
judgment. See Notes 1 and 14 to the Consolidated Financial Statements.
o Other loss contingencies. Accruals for estimated loss contingencies,
including, but not limited to, product-related liabilities, environmental
remediation, and litigation, are recorded when it is probable that a
liability has been incurred and the amount of the loss can be reasonably
estimated. Disclosure is made when there is a reasonable possibility that a
loss may have been incurred. Contingent liabilities are often resolved over
long time periods. Estimating probable losses often requires analysis of
various projections that are dependent upon the future outcome of multiple
factors, including costs, the findings of investigations, and actions by
the Company and third parties. See Note 17 to the Consolidated Financial
Statements.
35
o Inventory allowances. The Company values approximately one-half of its
inventory using the last-in, first-out ("LIFO") method with the remainder
primarily stated using an average cost method. The Company periodically
reviews its inventory for estimated obsolescence or unmarketable inventory
and records any write-down equal to the difference between the cost of
inventory and its estimated net realizable value based upon assumptions
about alternative uses, market conditions and other factors.
Other significant accounting policies and the use of estimates are
described in the Notes to the Consolidated Financial Statements.
36
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The Company is exposed to market risk from changes in foreign
currency exchange rates, interest rates and commodity prices. 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. The Company is exposed to market risk from changes in
interest rates related to indebtedness. At December 31, 2001 substantially all
of the Company's indebtedness was denominated in U.S. dollars, the British pound
sterling or the euro and bore interest at variable rates, primarily related to
spreads over LIBOR, as summarized below.
Contractual maturity date (1) Interest
---------------------------------------------------------------------
2002 2003 2004 2005 2006 rate (2)
----------- ---------- ----------- ---------- ----------- -----------
(In millions)
Variable rate debt:
U. S. dollars $ - $ - $ 8.1 $ - $ - 4.6%
British pounds - - 2.6 - - 5.9%
Euro 1.7 - - - - 4.9%
--------------------------------------------------------------------------------
(1) Non - U.S. dollar denominated amounts are translated at year-end rates of
exchange.
(2) Weighted average.
At December 31, 2000, substantially all of the Company's $44.9 million in
outstanding indebtedness consisted of U.S. dollar-denominated variable rate debt
at a weighted average interest rate of 8.2%.
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 7 -Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results of Operations - European
operations.
Commodity prices. The Company is exposed to market risk arising from
changes in commodity prices as a result of its long-term purchase and supply
agreements with certain suppliers and customers. These agreements, which offer
various fixed pricing arrangements, effectively obligate the Company to bear (i)
part of the risks of increased raw material and other costs which cannot be
passed on to the Company's customers through increased titanium product prices
(in whole or in part) or (ii) the risk of decreasing raw material costs which
are not passed on to the Company by its suppliers in the form of lower raw
material prices.
Other. The Company holds convertible preferred securities of Special Metals
Corporation (NASDAQ: SMCX) with a principal amount of $80 million and an
estimated fair value of $27.5 million that are not publicly traded, and,
accordingly, quoted market prices are unavailable. These securities are
accounted for at estimated fair value and are considered "available-for-sale"
securities. See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources -
Investing activities and Note 4 to the Consolidated Financial Statements.
37
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in a separate section of
this Annual Report. See Index of Financial Statements and Schedules on page F.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
38
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
TIMET's definitive proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of the
fiscal year covered by this Annual Report (the "TIMET Proxy Statement").
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement. See also Note 16 to the Consolidated Financial
Statements.
39
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
The consolidated financial statements and schedules listed by the
Registrant on the accompanying Index of Financial Statements and Schedules (see
page F) are filed as part of this Annual Report.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended December 31, 2001 and the months
of January and February 2002:
Date of Report Items Reported
--------------------------------- -----------------------------
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
December 18, 2001 5 and 7
January 4, 2002 5 and 7
February 8, 2002 5 and 7
(c) Exhibits
Included as exhibits are the items listed in the Exhibit Index. TIMET will
furnish a copy of any of the exhibits listed below upon payment of $4.00 per
exhibit to cover the costs to TIMET of furnishing the exhibits. Instruments
defining the rights of holders of long-term debt issues which do not exceed 10%
of consolidated total assets will be furnished to the Commission upon request.
40
Item No. Exhibit Index
-------------- ------------------------------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of Titanium Metals Corporation, incorporated by
reference to Exhibit 3.1 to Titanium Metals Corporation's Registration Statement on Form S-1 (No.
333-2940).
3.2 Bylaws of Titanium Metals Corporation as Amended and Restated, dated February 23, 1999, incorporated
by reference to Exhibit 3.2 to Titanium Metals Corporation's Annual Report on Form 10-K (No. 1-14368)
for the year ended December 31, 1998.
4.1 Certificate of Trust of TIMET Capital Trust I, dated November 13, 1996, incorporated by reference to
Exhibit 4.1 to Titanium Metals Corporation's Current Report on Form 8-K filed with the Commission on
December 5, 1996.
4.2 Amended and Restated Declaration of Trust of TIMET Capital Trust I, dated as of November 20, 1996,
among Titanium Metals Corporation, as Sponsor, the Chase Manhattan Bank, as Property Trustee, Chase
Manhattan Bank (Delaware), as Delaware Trustee and Joseph S. Compofelice, Robert E. Musgraves and Mark
A. Wallace, as Regular Trustees, incorporated by reference to Exhibit 4.2 to the Registrant's Current
Report on Form 8-K filed with the Commission on December 5, 1996.
4.3 Indenture for the 6 5/8% Convertible Junior Subordinated Debentures, dated as of November 20, 1996,
among Titanium Metals Corporation and The Chase Manhattan Bank, as Trustee, incorporated by reference
to Exhibit 4.3 to the Registrant's Current Report on Form 8-K filed with the Commission on December 5,
1996.
4.4 Form of 6 5/8% Convertible Preferred Securities (included in Exhibit 4.2 above), incorporated by
reference to Exhibit 4.4 to the Registrant's Current Report on Form 8-K filed with the Commission on
December 5, 1996.
4.5 Form of 6 5/8% Convertible Junior Subordinated Debentures (included in Exhibit 4.3 above),
incorporated by reference to Exhibit 4.6 to the Registrant's Current Report on Form 8-K filed with the
Commission on December 5, 1996.
4.6 Form of 6 5/8% Trust Common Securities (included in Exhibit 4.2 above), incorporated by reference to
Exhibit 4.5 to the Registrant's Current Report on Form 8-K filed with the Commission on December 5,
1996.
4.7 Convertible Preferred Securities Guarantee, dated as of November 20, 1996, between Titanium Metals
Corporation, as Guarantor, and The Chase Manhattan Bank, as Guarantee Trustee, incorporated by
Reference to Exhibit 4.7 to the Registrant's Current Report on Form 8-K filed with the Commission on
December 5, 1996.
41
Item No. Exhibit Index
-------------- ------------------------------------------------------------------------------------------------------
4.8 Purchase Agreement, dated November 20, 1996, between Titanium Metals Corporation, TIMET Capital Trust
I, Salomon Brothers Inc, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co.
Incorporated, as Initial Purchasers, incorporated by reference to Exhibit 99.1 to the Registrant's
Current Report on Form 8-K filed with the Commission on December 5, 1996.
4.9 Registration Agreement, dated November 20, 1996, between TIMET Capital Trust I and Salomon Brothers
Inc, as Representative of the Initial Purchasers, incorporated by reference to Exhibit 99.2 to the
Registrant's Current Report on Form 8-K filed with the Commission on December 5, 1996.
9.1 Shareholders' Agreement, dated February 15, 1996, among Titanium Metals Corporation, Tremont
Corporation, IMI plc, IMI Kynoch Ltd., and IMI Americas, Inc., incorporated by reference to Exhibit
2.2 to Tremont Corporation's Current Report on Form 8-K (No. 1-10126) filed with the Commission on
March 1, 1996.
9.2 Amendment to the Shareholders' Agreement, dated March 29, 1996, among Titanium Metals Corporation,
Tremont Corporation, IMI plc, IMI Kynoch Ltd., and IMI Americas,, Inc., incorporated by reference to
Exhibit 10.30 to Tremont Corporation's Annual Report on Form 10-K (No. 1-10126) for the year ended
December 31, 1995.
10.1 Lease Agreement, dated January 1, 1996, between Holford Estates Ltd. and IMI Titanium Ltd. related to
the building known as Titanium Number 2 Plant at Witton, England, incorporated by reference to Exhibit
10.23 to Tremont Corporation's Annual Report on Form 10-K (No. 1-10126) for the year ended December
31, 1995.
10.2 Loan and Security Agreement by and among Congress Financial Corporation (Southwest) as Lender and
Titanium Metals Corporation and Titanium Hearth Technologies, Inc. as borrowers, dated February 25,
2000, incorporated by reference to Exhibit 10.12 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1999.
10.3 Investment Agreement dated July 9, 1998, between Titanium Metals Corporation, TIMET Finance Management
Company and Special Metals Corporation, incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K dated July 9, 1998.
10.4 Amendment to Investment Agreement, dated October 28, 1998, among Titanium Metals Corporation, TIMET
Finance Management Company and Special Metals Corporation, incorporated by reference to Exhibit 10.4
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.
10.5 Registration Rights Agreement, dated October 28, 1998, between TIMET Finance Management Company and
Special Metals Corporation, incorporated by reference to Exhibit 10.5 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.
42
Item No. Exhibit Index
-------------- ------------------------------------------------------------------------------------------------------
10.6 Certificate of Designations for the Special Metals Corporation Series A Preferred Stock, filed on
October 28, 1998, with the Secretary of State of Delaware, incorporated by reference to Exhibit 4.5 of
a Current Report on Form 8-K dated October 28, 1998, filed by Special Metals Corporation (No.
000-22029).
10.7* 1996 Long Term Performance Incentive Plan of Titanium Metals Corporation, incorporated by reference to
Exhibit 10.19 to Titanium Metals Corporation's Amendment No. 1 to Registration Statement on Form S-1
(No.333-18829).
10.8* Senior Executive Cash Incentive Plan, incorporated by reference to Appendix B to Titanium Metals
Corporation's proxy statement included as part of a statement on Schedule 14A dated April 17, 1997.
10.9* Executive Severance Policy, as amended and restated effective May 17, 2000, incorporated by reference
to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
10.10* Executive Agreement dated as of September 27, 1996, between Titanium Hearth Technologies, Inc. and
Charles H. Entrekin, Jr., incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1999.
10.11* Titanium Metals Corporation Executive Stock Ownership Loan Plan, as amended and restated effective
February 28, 2001, incorporated by reference to Exhibit 10.17 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2000.
10.12* Form of Loan and Pledge Agreement by and between Titanium Metals Corporation and individual TIMET
executives under the Corporation's Executive Stock Ownership Loan Program, incorporated by reference
to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000.
10.13 Settlement Agreement and Release of Claims dated April 19, 2001 between Titanium Metals Corporation
and The Boeing Company, incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended March 31, 2001.
10.14 Intercorporate Services Agreement between Titanium Metals Corporation and Tremont Corporation,
effective as of January 1, 2001, incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
10.15 Intercorporate Services Agreement between Titanium Metals Corporation and NL Industries, Inc.,
effective as of January 1, 2001, incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
43
Item No. Exhibit Index
-------------- ------------------------------------------------------------------------------------------------------
10.16* Titanium Metals Corporation Amended and Restated 1996 Non-Employee Director Compensation Plan, as
amended and restated effective June 8, 2001, incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
10.17* Trust Agreement, effective as of May 22, 2001, by and between Titanium Metals Corporation and Robert
E. Musgraves, incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2001.
10.18* Agreement to Defer Bonus Payment, effective as of May 22, 2001, by and between Titanium Metals
Corporation and J. Landis Martin, incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
10.19 Amendment No. 1 to Loan and Security Agreement by and among Congress Financial Corporation (Southwest)
as Lender and Titanium Metals Corporation and Titanium Hearth Technologies, Inc. as borrowers, dated
September 7, 2001, incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
* Management contract, compensatory plan or arrangement.
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By /s/ J. Landis Martin
-----------------------------------
J. Landis Martin, March 20, 2002
(Chairman of the Board, President
and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ J. Landis Martin /s/ Steven L. Watson
------------------------------------------ ----------------------------------
J. Landis Martin, March 20, 2002 Steven L. Watson, March 20, 2002
(Chairman of the Board, President (Director)
and Chief Executive Officer)
/s/ Edward C. Hutcheson, Jr. /s/ Thomas P. Stafford
------------------------------------------ ----------------------------------
Edward C. Hutcheson, Jr., March 20, 2002 Thomas P. Stafford, March 20, 2002
(Director) (Director)
/s/ Glenn R. Simmons /s/ Patrick M. Murray
------------------------------------------ ----------------------------------
Glenn R. Simmons, March 20, 2002 Patrick M. Murray, March 20, 2002
(Director) (Director)
/s/ Albert W. Niemi, Jr. /s/ Mark A. Wallace
------------------------------------------ ----------------------------------
Albert W. Niemi, Jr., March 20, 2002 Mark A. Wallace, March 20, 2002
(Director) (Executive Vice President and
Chief Financial Officer)
/s/ JoAnne A. Nadalin
------------------------------------------
JoAnne A. Nadalin, March 20, 2002
(Vice President, Corporate Controller and
Principal Accounting Officer)
45
TITANIUM METALS CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(a) and 14(d)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
Page
Financial Statements
Report of Independent Accountants F-1
Consolidated Balance Sheets - December 31, 2001 and 2000 F-2
Consolidated Statements of Operations - Years ended
December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Comprehensive Income (Loss) - Years ended
December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows - Years ended
December 31, 2001, 2000 and 1999 F-6
Consolidated Statements of Changes in Stockholders' Equity - Years ended
December 31, 2001, 2000 and 1999 F-8
Notes to Consolidated Financial Statements F-9
Financial Statement Schedules
Report of Independent Accountants S-1
Schedule II - Valuation and qualifying accounts S-2
F
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Titanium Metals Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of comprehensive income (loss),
of changes in stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Titanium Metals Corporation and
Subsidiaries as of December 31, 2001 and 2000 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
Denver, Colorado
February 4, 2002
F-1
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(In thousands, except per share data)
ASSETS 2001 2000
---------------- ----------------
Current assets:
Cash and cash equivalents $ 24,500 $ 9,796
Accounts and other receivables, less
allowance of $2,739 and $2,927 83,347 75,913
Receivable from related parties 5,907 5,029
Refundable income taxes 470 637
Inventories 185,052 148,384
Prepaid expenses and other 9,026 8,049
Deferred income taxes 385 397
---------------- ----------------
Total current assets 308,687 248,205
---------------- ----------------
Investment in joint ventures 20,585 18,136
Preferred securities of Special Metals Corporation ("SMC") 27,500 88,136
Property and equipment, net 275,308 302,130
Goodwill, net 44,310 49,305
Other intangible assets, net 9,836 13,258
Deferred income taxes 56 27,820
Other 13,101 12,156
---------------- ----------------
$ 699,383 $ 759,146
================ ================
F-2
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2001 and 2000
(In thousands, except per share data)
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
2001 2000
---------------- ----------------
Current liabilities:
Notes payable $ 1,522 $ 24,112
Current maturities of long-term debt and capital lease obligations 512 2,011
Accounts payable 42,821 48,680
Accrued liabilities 41,799 34,005
Customer advance payments 33,242 3,951
Payable to related parties 1,612 1,099
Income taxes 746 852
Deferred income taxes 106 1,132
---------------- ----------------
Total current liabilities 122,360 115,842
---------------- ----------------
Long-term debt 10,712 18,953
Capital lease obligations 8,598 8,642
Payable to related parties 953 1,332
Accrued OPEB cost 15,980 18,219
Accrued pension cost 23,690 5,361
Accrued environmental cost 3,262 3,262
Deferred income taxes 5,509 9,655
Accrued dividends on Convertible Preferred Securities - 11,154
Other 237 117
---------------- ----------------
Total liabilities 191,301 192,537
---------------- ----------------
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 8,727 7,844
Stockholders' equity:
Preferred stock $.01 par value; 1,000 shares authorized,
none outstanding - -
Common stock, $.01 par value; 99,000 shares authorized,
31,946 and 31,907 shares issued, respectively 319 319
Additional paid-in capital 350,514 350,078
Retained (deficit) earnings (15,841) 25,925
Accumulated other comprehensive income (loss) (35,274) (16,408)
Treasury stock, at cost (90 shares) (1,208) (1,208)
Deferred compensation (396) (1,191)
---------------- ----------------
Total stockholders' equity 298,114 357,515
---------------- ----------------
$ 699,383 $ 759,146
================ ================
Commitments and contingencies (Note 17)
See accompanying notes to consolidated financial statements.
F-3
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2001, 2000 and 1999
(In thousands, except per share data)
2001 2000 1999
-------------- -------------- -------------
Revenues and other income:
Net sales $ 486,935 $ 426,798 $ 480,029
Equity in earnings (losses) of joint ventures 2,515 (865) (1,709)
Other 79,210 8,377 4,952
-------------- -------------- -------------
568,660 434,310 483,272
-------------- -------------- -------------
Costs and expenses:
Cost of sales 447,042 422,917 454,506
Selling, general, administrative and development 51,788 44,017 48,577
Restructuring (income) charge (220) 2,805 4,506
Interest 4,060 7,704 7,093
Other 61,519 - 2,328
-------------- -------------- -------------
564,189 477,443 517,010
-------------- -------------- -------------
Income (loss) before income taxes, minority
interest and extraordinary item 4,471 (43,133) (33,738)
Income tax expense (benefit) 31,112 (15,097) (12,021)
Minority interest - Convertible Preferred Securities,
net of tax in 2000 and 1999 13,850 8,710 8,667
Other minority interest, net of tax 1,275 1,283 1,006
-------------- -------------- -------------
Loss before extraordinary item (41,766) (38,029) (31,390)
Extraordinary item, net of tax - (873) -
-------------- -------------- -------------
Net loss $ (41,766) $ (38,902) $ (31,390)
============== ============== =============
Basic and diluted loss per share:
Before extraordinary item $ (1.33) $ (1.21) $ (1.00)
Extraordinary item - (.03) -
-------------- -------------- -------------
$ (1.33) $ (1.24) $ (1.00)
============== ============== =============
Weighted average shares outstanding 31,496 31,373 31,371
============== ============== =============
See accompanying notes to consolidated financial statements.
F-4
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
-------------- -------------- --------------
Net loss $ (41,766) $ (38,902) $ (31,390)
Other comprehensive (loss) income:
Currency translation adjustment (3,475) (10,883) (5,637)
Pension liabilities adjustment, net of tax benefit
(expense) of $4,834, $909, and $(260) in 2001,
2000 and 1999, respectively (15,391) (1,688) 483
-------------- -------------- --------------
(18,866) (12,571) (5,154)
-------------- -------------- --------------
Comprehensive loss $ (60,632) $ (51,473) $ (36,544)
============== ============== ==============
See accompanying notes to consolidated financial statements.
F-5
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
-------------- -------------- --------------
Cash flows from operating activities:
Net loss $ (41,766) $ (38,902) $ (31,390)
Depreciation and amortization 40,134 41,942 42,693
Noncash impairment charges:
Equipment and joint ventures 10,840 3,467 2,328
SMC convertible preferred securities 61,519 - -
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 (2,040) 1,710 3,730
Deferred income taxes 26,822 (17,245) (464)
Other minority interest 1,275 1,283 1,006
Other, net 1,124 696 6,055
Change in assets and liabilities:
Receivables (7,953) 25,273 17,406
Inventories (38,631) 37,026 23,598
Prepaid expenses and other (3,112) (452) 3,137
Accounts payable and accrued liabilities 3,895 (1,751) (24,919)
Accrued restructuring charges (592) (974) (5,042)
Customer advance payments 29,291 (86) 768
Income taxes 98 10,386 (16,220)
Accounts with related parties, net (743) (1,247) 2,409
Accrued OPEB and pension costs (4,288) (4,256) (411)
Accrued dividends on SMC securities - (1,606) (5,640)
Accrued dividends on Convertible
Preferred Securities (10,043) 10,043 -
Other, net (3,256) (1,647) 499
-------------- -------------- --------------
Net cash provided by operating activities 62,574 63,328 19,543
-------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures (16,124) (11,182) (24,772)
Proceeds from sale of castings joint venture - 7,000 -
Proceeds from sale of fixed assets 31 38 2,900
Other, net - (74) 209
-------------- -------------- --------------
Net cash used by investing activities (16,093) (4,218) (21,663)
-------------- -------------- --------------
Cash flows from financing activities:
Indebtedness:
Borrowings 537,884 364,214 111,900
Repayments (569,569) (434,257) (99,284)
Dividends paid - - (3,764)
Other, net 327 (635) (289)
-------------- -------------- --------------
Net cash (used) provided by financing activities (31,358) (70,678) 8,563
-------------- -------------- --------------
Net cash provided (used) $ 15,123 $ (11,568) $ 6,443
============== ============== ==============
F-6
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
-------------- -------------- --------------
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $ 15,123 $ (11,568) $ 6,443
Currency translation (419) 693 (1,236)
-------------- -------------- --------------
14,704 (10,875) 5,207
Cash at beginning of year 9,796 20,671 15,464
-------------- -------------- --------------
Cash at end of year $ 24,500 $ 9,796 $ 20,671
============== ============== ==============
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 3,065 $ 7,642 $ 6,669
Convertible Preferred Securities dividends $ 23,893 $ 3,333 $ 13,332
Income taxes, net $ 4,192 $ - $ 148
Noncash investing and financing activities:
Capital lease obligations of $517 were incurred
during 2001 related to equipment
See accompanying notes to consolidated financial statements.
F-7
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2001, 2000 and 1999
(In thousands)
Accumulated Other
Comprehensive
Income (Loss)
Additional Retained -------------------------
Common Common Paid-in Earnings Currency Pension Treasury Deferred
Shares Stock Capital (Deficit) Translation Liabilities Stock Compensation Total
------- ------- ---------- --------- ----------- ------------- -------- ------------ ----------
Balance at December 31, 1998 31,369 $ 315 $ 347,972 $ 99,981 $ 5,600 $ (4,283) $(1,208) $ - $ 448,377
Comprehensive income (loss) - - - (31,390) (5,637) 483 - - (36,544)
Dividends paid ($.12 per share) - - - (3,764) - - - - (3,764)
Other, net 2 - 12 - - - - - 12
------- ------- ---------- --------- ----------- ------------- -------- ------------ ----------
Balance at December 31, 1999 31,371 315 347,984 64,827 (37) (3,800) (1,208) - 408,081
Comprehensive income (loss) - - - (38,902) (10,883) (1,688) - - (51,473)
Long-term incentive plan stock
awards, net of cancellations 444 4 1,936 - - - - (1,940) -
Amortization of deferred
compensation - - - - - - - 749 749
Other 2 - 158 - - - - - 158
------- ------- ---------- --------- ----------- ------------- -------- ------------ ----------
Balance at December 31, 2000 31,817 319 350,078 25,925 (10,920) (5,488) (1,208) (1,191) 357,515
Comprehensive income (loss) - - - (41,766) (3,475) (15,391) - - (60,632)
Issuance of common stock 80 1 580 - - - - - 581
Stock award cancellations (41) (1) (321) - - - - 322 -
Amortization of deferred
compensation - - - - - - - 473 473
Other - - 177 - - - - - 177
------- ------- ---------- --------- ----------- ------------- -------- ------------ ----------
Balance at December 31, 2001 31,856 $ 319 $ 350,514 $(15,841) $ (14,395) $ (20,879) $(1,208) $ (396) $ 298,114
======= ======= ========== ========= =========== ============= ======== ============ ==========
See accompanying notes to consolidated financial statements.
F-8
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies
Principles of consolidation. The accompanying consolidated financial
statements include the accounts of Titanium Metals Corporation ("TIMET") and its
majority-owned subsidiaries (collectively, the "Company"). All material
intercompany transactions and balances have been eliminated.
Cash and cash equivalents. Cash equivalents include highly liquid
investments with original maturities of three months or less.
Inventories and cost of sales. Inventories include material, labor and
overhead and are stated at the lower of cost or market. Approximately one-half
of inventories are costed using the last-in, first-out ("LIFO") method with the
balance primarily stated using an average cost method.
Investments. The Special Metals Corporation, ("SMC") convertible preferred
securities held by the Company are carried at estimated fair value. These
securities are not marketable and, accordingly, quoted market prices are
unavailable. The amount the Company ultimately recovers from its investment in
SMC, if any, could vary significantly from estimated fair value. The SMC
securities are presently classified as "available-for-sale" securities with
unrealized gains and losses included in stockholders' equity, unless an
unrealized loss is deemed to be other than temporary, in which case it will be
charged to earnings. Investment securities are periodically reviewed for
impairment considering the extent to which fair value is below the carrying
amount, the duration of the decline and the financial health and prospects of
the issuer. Prior to December 31, 2001, the securities were classified as
"held-to-maturity" and reported at cost. See Note 4.
Investments in 20% to 50%-owned joint ventures are accounted for by the
equity method. Differences between the Company's investment in joint ventures
and its proportionate share of the joint ventures' reported equity are amortized
based upon the respective useful lives of the assets to which the differences
relate, which is generally over not more than 15 years.
Intangible assets and amortization. Goodwill, representing the excess of
cost over the fair value of individual net assets acquired in business
combinations accounted for by the purchase method, is amortized using the
straight-line method over 15 years and is stated net of accumulated amortization
of $24.2 million and $19.7 million at December 31, 2001 and 2000, respectively.
Patents and other intangible assets, except intangible pension assets, are
amortized using the straight-line method over the periods expected to be
benefited, generally seven to nine years. The Company periodically assesses the
amortization period and recoverability of the carrying amount of goodwill and
other intangible assets and the effects of revisions are reflected in the period
they are determined to be necessary.
F-9
Property, equipment and depreciation. Property and equipment are recorded
at cost and depreciated principally on the straight-line method over the
estimated useful lives of 15 to 40 years for buildings and three to 25 years for
machinery and equipment. Capitalized software costs are amortized over the
software's estimated useful life, generally three to five years. Maintenance,
repairs and minor renewals are expensed as incurred and included in cost of
sales. Major improvements are capitalized and depreciated over the estimated
period to be benefited. Interest costs related to major, long-term capital
projects are capitalized as a component of construction costs and were $1.0
million in 2000 and $1.3 million in 1999. No interest was capitalized during
2001.
Generally, when events or changes in circumstances indicate that the
carrying amount of long-lived assets, including property and equipment, may not
be recoverable, the Company prepares an evaluation comparing the carrying amount
of the assets to the undiscounted expected future cash flows of the assets or
asset group. If this comparison indicates that the carrying amount is not
recoverable, the amount of the impairment would typically be calculated using
discounted expected future cash flows or appraised values. All relevant factors
are considered in determining whether an impairment exists.
During 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for Impairment or Disposal of Long-Lived
Assets, which standard is effective retroactive to January 1, 2001. SFAS No.
144, which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, retains the fundamental
provisions with respect to the recognition and measurement of long-lived asset
impairment but does not apply to goodwill and other intangible assets. However,
SFAS No. 144 provides 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 adoption of SFAS No. 144 had no material effect on the Company's
results of operations, consolidated financial position or liquidity.
Stock-based compensation. The Company has elected the disclosure
alternative prescribed by SFAS No. 123, Accounting for Stock-Based Compensation,
and to account for the Company's stock-based employee compensation in accordance
with Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock
Issued to Employees and its various interpretations. Under APB No. 25, no
compensation cost is generally recognized for fixed stock options for which the
exercise price is not less than the market price of the Company's common stock
on the grant date.
Employee benefit plans. Accounting and funding policies for retirement
plans and postretirement benefits other than pensions ("OPEB") are described in
Note 15.
Research and development. Research and development expense, which includes
activities directed toward expanding the use of titanium and titanium alloys in
all market sectors, is recorded as selling, general, administrative and
development expense and totaled $2.6 million in each of 2001 and 2000 and $2.5
million in 1999. Related engineering and experimentation costs associated with
ongoing commercial production are recorded as cost of sales.
F-10
Advertising costs. Advertising costs, which are not significant, are
expensed as incurred.
Shipping and handling costs. Shipping and handling costs are included in
cost of sales.
Self Insurance. The Company is self insured for certain losses relating to
workers' compensation claims, employee medical benefits, environmental, product
and other liabilities. The Company maintains certain stop loss and other
insurance to reduce its exposure and provides accruals for estimates of known
liabilities and incurred but not reported claims. See Note 17.
Income taxes. Deferred income tax assets and liabilities are recognized for
the expected future tax consequences of temporary differences between the income
tax and financial reporting carrying amounts of assets and liabilities,
including investments in subsidiaries not included in TIMET's consolidated U.S.
tax group. The Company periodically reviews its deferred tax assets to determine
if future realization is more likely than not and a change in the valuation
allowance is recorded in the period it is determined to be necessary. See Note
14.
Translation of foreign currencies. Assets and liabilities of subsidiaries
whose functional currency is deemed to be other than the U.S. dollar are
translated at year-end rates of exchange, and revenues and expenses are
translated at average exchange rates prevailing during the year. Resulting
translation adjustments are accumulated in the currency translation adjustments
component of other comprehensive income (loss). Currency transaction gains and
losses are recognized in income currently and were a net gain of $.1 million in
2001 and net losses of $1.1 million in 2000 and $1.2 million in 1999.
Revenue recognition. Sales revenue is generally recognized when the Company
has certified that its product meets the related customer specifications,
products have been shipped, and title and substantially all the risks and
rewards of ownership pass to the customer. The Company believes that its revenue
recognition policies are in compliance with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements.
Derivatives and hedging activities. The Company adopted 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 are measured at fair value.
The accounting for changes in fair value of derivatives depends upon the
intended use of the derivative, and such changes are recognized either in net
income or other comprehensive income. 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 was not a party to
any significant derivative or hedging instrument covered by SFAS No. 133 during
2001 or at December 31, 2001, and the adoption of SFAS No. 133 had no material
effect on the Company's results of operations, consolidated financial position
or liquidity.
F-11
Fair value of financial instruments. Carrying amounts of certain of the
Company's financial instruments including, among others, cash and cash
equivalents, accounts receivable, accrued compensation, and other accrued
liabilities approximate fair value because of their short maturities. The
Company's bank debt reprices with changes in market interest rates and,
accordingly, the carrying amount of such debt is believed to approximate market
value.
The convertible preferred securities of SMC held by the Company are not
marketable and, accordingly, quoted market prices are unavailable. The Company
has estimated the fair value of these securities to be approximately $27.5
million at December 31, 2001. However, the amount the Company ultimately
realizes from this investment could vary significantly from estimated fair
value. See Note 4.
Use of estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amount of
revenues and expenses during the reporting period. Estimates are used in
accounting for, among other things, allowances for uncollectible accounts,
inventory allowances, environmental accruals, self-insurance accruals, deferred
tax valuation allowances, loss contingencies, fair values of financial
instruments, the determination of discount and other rate assumptions for
pension and postretirement employee benefit costs, asset impairments,
restructuring accruals and other special items. Actual results may, in some
instances, differ from previously estimated amounts. Estimates and assumptions
are reviewed periodically, and the effects of revisions are reflected in the
period they are determined to be necessary.
Reclassification. Certain prior year amounts have been reclassified to
conform to the current year presentation.
Accounting principles not yet adopted. In July 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 142, Goodwill and Other
Intangible Assets. The Company will adopt SFAS 142 effective January 1, 2002.
Under SFAS 142, goodwill will not be amortized on a periodic basis, but instead
will be subject to a two-step impairment test to be performed on at least 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, with
the completion of the first step by June 30, 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 principle no later
than December 31, 2002, as provided by the transition requirements of SFAS No.
142. For the year ended December 31, 2001, the Company recorded amortization
expense of approximately $4.5 million relating to its goodwill. The Company, at
this time, cannot reasonably estimate the impact of SFAS 142 on its financial
statements. However, it is possible that SFAS 142 could result in the
determination that goodwill or other intangible assets are impaired and result
in a material charge in 2002.
F-12
In 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. 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
standard to determine, among other things, whether it has any asset retirement
obligations that 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 implement SFAS No. 143 no later than January 1, 2003.
Impact of recent events including September 11, 2001. On September 11,
2001, the United States was the target of terrorist attacks that had a
significant adverse effect on the global economy and commercial aerospace
industry. The Company estimates that approximately two-thirds of its sales
revenue in 2001 was derived from this sector and, accordingly, the Company
expects to see a substantial near-term decline in its business.
The Company also understands that a significant portion of SMC's sales are
to the commercial aerospace industry and, therefore, SMC's business may be
adversely impacted by the terrorist attacks. SMC notified the Company in October
2001 of its intention to again defer payment of dividends on the SMC convertible
preferred securities held by the Company effective with the dividend due on
October 28, 2001. The Company believes such dividends are likely to be deferred
indefinitely. The Company believes SMC has a significant amount of debt relative
to its near term potential earnings and cash flow and that a refinancing and/or
restructuring of its capital, or some portion thereof, is necessary. SMC has
indicated that it may violate certain bank covenants early in 2002 and that it
is considering strategic and financial options, including efforts to restructure
and/or modify the terms of its debt agreements. Such efforts include
negotiations with the Company to modify the terms of the SMC convertible
preferred securities held by the Company and/or exchange, in whole or in part,
such preferred securities for common stock, other securities or other assets.
Accordingly, during the fourth quarter of 2001, the Company undertook an
assessment of the impact of these events and any potential charges that might be
appropriate for asset impairments, increases in valuation allowances and other
similar items. As a result of such assessment, the Company recorded a pre-tax
impairment charge related to its investment in SMC of $61.5 million (see Note 4)
and increased its deferred tax valuation allowance related to previously
recorded U.S. net deferred tax assets resulting in a charge of $12.3 million
(see Note 14). The Company's assessment identified no other impairments at
December 31, 2001, however, see discussion of SFAS No. 142 under Accounting
principles not yet adopted.
F-13
Note 2 - Segment information
The Company is a vertically integrated producer of titanium sponge, melted
products and a variety of mill products for aerospace, industrial and other
applications. In addition to mill and melted products, the Company sells certain
products it collectively refers to as "Other", such as sponge which is not
suitable for internal consumption, titanium tetrachloride and fabricated
titanium assemblies. The Company's production facilities are located principally
in the United States, United Kingdom and France, and its products are sold
throughout the world. These worldwide integrated activities comprise the
"Titanium melted and mill products" segment, the Company's only segment in 2001
and 2000, and its principal segment in 1999. In 1999, the "Other" segment
consisted of the Company's investment in nonintegrated joint ventures, which
have been either sold or charged off due to an asset impairment.
Sales, gross margin, operating income (loss), inventory and receivables are
the key management measures used to evaluate segment performance, both including
and excluding the effect of special items. Segment operating income (loss) is
defined as income (loss) before income taxes and minority interest, exclusive of
interest expense and certain general corporate income and expense items.
F-14
Years Ended December 31,
-------------------------------------------------------
2001 2000 1999
---------------- --------------- ----------------
($ in thousands, except selling price data)
Operating Segments:
Net sales:
Titanium melted and mill products:
Mill product net sales $ 363,257 $ 326,319 $ 376,200
Melted product net sales 64,063 47,366 35,500
Other 59,615 53,113 68,329
---------------- --------------- ----------------
$ 486,935 $ 426,798 $ 480,029
================ =============== ================
Gross margin:
Titanium melted and mill products $ 39,892 $ 3,881 $ 25,523
Other - - -
---------------- --------------- ----------------
$ 39,892 $ 3,881 $ 25,523
================ =============== ================
Operating income (loss):
Titanium melted and mill products $ 64,480 $ (41,715) $ (27,746)
Other - 65 (3,687)
---------------- --------------- ----------------
64,480 (41,650) (31,433)
Dividends and interest income 5,460 6,154 6,034
General corporate income (expense), net (61,409) 67 (1,246)
Interest expense (4,060) (7,704) (7,093)
---------------- --------------- ----------------
Income (loss) before income taxes, minority
Interest and extraordinary item $ 4,471 $ (43,133) $ (33,738)
================ =============== ================
Mill product shipments:
Volume (metric tons) 12,180 11,370 11,400
Average price ($ per Kilogram) $ 29.80 $ 28.70 $ 33.00
Melted product shipments:
Volume (metric tons) 4,415 3,470 2,500
Average price ($ per Kilogram) $ 14.50 $ 13.65 $ 14.20
F-15
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999
---------------- --------------- ----------------
(In thousands)
Depreciation and amortization:
Titanium melted and mill products $ 40,134 $ 41,942 $ 42,693
================ =============== ================
Capital expenditures:
Titanium melted and mill products $ 16,124 $ 11,182 $ 24,771
Other - - 1
---------------- --------------- ----------------
$ 16,124 $ 11,182 $ 24,772
================ =============== ================
Equity in earnings (losses) of joint ventures:
Titanium melted and mill products $ 2,515 $ (865) $ 549
Other - - (2,258)
---------------- --------------- ----------------
$ 2,515 $ (865) $ (1,709)
================ =============== ================
Accounts receivable:
Titanium melted and mill products $ 83,347 $ 75,913 $ 105,654
Other - - 550
---------------- --------------- ----------------
$ 83,347 $ 75,913 $ 106,204
================ =============== ================
Inventories:
Titanium melted and mill products $ 185,052 $ 148,384 $ 191,599
Eliminations - - (64)
---------------- --------------- ----------------
$ 185,052 $ 148,384 $ 191,535
================ =============== ================
Investment in joint ventures:
Titanium melted and mill products $ 20,585 $ 18,136 $ 21,143
Other - - 5,795
---------------- --------------- ----------------
$ 20,585 $ 18,136 $ 26,938
================ =============== ================
Total assets:
Titanium melted and mill products $ 699,383 $ 759,146 $ 876,760
Other - - 6,345
---------------- --------------- ----------------
$ 699,383 $ 759,146 $ 883,105
================ =============== ================
F-16
Year Ended December 31,
-------------------------------------------------------
2001 2000 1999
---------------- --------------- ----------------
(In thousands)
Geographic segments:
Net sales - point of origin:
United States $ 399,708 $ 345,370 $ 365,652
United Kingdom 139,210 139,599 160,765
Other Europe 70,079 74,432 89,433
Eliminations (122,062) (132,603) (135,821)
---------------- --------------- ----------------
$ 486,935 $ 426,798 $ 480,029
================ =============== ================
Net sales - point of destination:
United States $ 247,410 $ 234,350 $ 239,797
Europe 188,729 163,661 203,858
Other 50,796 28,787 36,374
---------------- --------------- ----------------
$ 486,935 $ 426,798 $ 480,029
================ =============== ================
Long-lived assets - property and equipment, net:
United States $ 208,069 $ 227,994 $ 246,744
United Kingdom 62,463 69,212 81,607
Other Europe 4,776 4,924 5,414
---------------- --------------- ----------------
$ 275,308 $ 302,130 $ 333,765
================ =============== ================
Export sales from U.S. based operations approximated $37 million in 2001,
$24 million in 2000 and $35 million in 1999.
During the past three years, the Company recorded pre-tax restructuring and
other special charges (income) to segment operating income (loss). See Note 13.
F-17
Note 3 - Investment in joint ventures
December 31,
--------------------------------------
2001 2000
----------------- -----------------
(In thousands)
Joint ventures:
VALTIMET $ 20,214 $ 17,719
Other 371 417
----------------- -----------------
$ 20,585 $ 18,136
================= =================
VALTIMET SAS ("VALTIMET") is a manufacturer of welded stainless steel,
copper, nickel and titanium tubing with operations in the United States, France
and China. At December 31, 2001, VALTIMET was owned 43.7% by TIMET, 51.3% by
Valinox Welded, a French manufacturer of welded tubing, and 5% by Sumitomo
Metals Industries, Ltd., a Japanese manufacturer of steel products. For the
years ended December 31, 2001, 2000 and 1999, VALTIMET reported sales of
approximately $80 million, $67 million and $71 million, respectively, and net
income of $4.3 million, a net loss of $.2 million and net income of $.5 million,
respectively. As of year-end 2001 and 2000, VALTIMET reported total assets of
$62.0 million and $66.9 million, respectively, and equity of $35.5 million and
$28.8 million, respectively. At December 31, 2001 the unamortized net difference
between the Company's carrying amount of its investment in VALTIMET and its
proportionate share of VALTIMET's net assets was approximately $5.3 million, and
is principally attributable to the difference between the carrying amount and
fair value of fixed assets initially contributed by TIMET. This difference is
being amortized over 15 years and reduces (increases) the amount of equity in
earnings (losses) that the Company reports related to its investment in
VALTIMET.
In 1998, the Company completed a series of strategic transactions with
Wyman-Gordon Company ("Wyman-Gordon"). The principal components were (i) the
Company exchanged certain of its titanium castings assets and $5 million in cash
for Wyman-Gordon's Millbury, Massachusetts vacuum arc re-melting facility, which
produced titanium ingot, (ii) Wyman-Gordon and the Company combined their
respective titanium castings businesses into a new joint venture, Wyman-Gordon
Titanium Castings LLC, 80% owned by Wyman-Gordon and 20% by the Company and
(iii) the Company and Wyman-Gordon entered into a contract pursuant to which the
Company expects to be the principal supplier of titanium material to
Wyman-Gordon through 2007. The Company accounted for the castings
business/melting facility transaction at fair value, which approximated the $18
million net carrying value of the assets exchanged, and, accordingly, recognized
no gain on the transaction. The Company accounted for its interest in the
castings joint venture by the equity method. Early in 2000, the Company sold its
interest in the castings joint venture to Wyman-Gordon for approximately $7
million and recorded a pretax gain of approximately $1.2 million.
TIMET's strategy for developing new markets and uses for titanium has
included providing funds to third parties to potentially prove out new uses for
titanium. Other joint ventures in 2001 and 2000 consist primarily of investments
in outside providers of certain testing services. In 1999, the Company recorded
a $2.3 million special charge to earnings associated with the write-downs of the
Company's investment in certain of these start-up joint ventures.
F-18
Note 4 - Preferred securities of Special Metals Corporation
The Company has invested $80 million in non-voting convertible preferred
securities of Special Metals Corporation, a U.S. manufacturer of wrought
nickel-based superalloys and special alloy long products. The convertible
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 NASDAQ under the symbol
"SMCX" and had a quoted market price on December 31, 2001 of $2.58 per share.
From October 1998 through December 1999, dividends on the preferred securities
were 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. As of December 31, 2000, accrued dividends and interest
due the Company were approximately $8.1 million. On October 11, 2001, the
Company was notified by SMC of its intention to again defer the payment of
dividends effective with the dividend due on October 28, 2001.
The SMC convertible preferred securities are not marketable and,
accordingly, quoted market prices are unavailable. The Company understands that
a significant portion 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. The Company believes SMC's dividends on its
convertible preferred securities are likely to be deferred indefinitely. The
Company believes SMC has a significant amount of debt relative to its near term
potential earnings and cash flow and that a refinancing and/or restructuring of
its capital, or some portion thereof, is necessary. SMC has indicated that it
may violate certain bank covenants early in 2002 and that it is considering
strategic and financial options, including efforts to restructure and/or modify
the terms of certain debt agreements. Such efforts include negotiations with the
Company to modify the terms of the SMC convertible preferred securities held by
the Company and/or exchange, in whole or in part, such convertible preferred
securities for common stock, other securities or other assets.
Because of these and other factors, the Company undertook an assessment in
the fourth quarter of 2001, with the assistance of an outside expert, of its
investment in SMC. That assessment indicated that it was unlikely that the
Company would recover its then existing carrying amount, including accrued
dividends and interest, of the SMC preferred securities in accordance with the
securities' contractual terms and that an other than temporary decline in the
fair value of its investment had occurred. The estimate of fair value of these
securities requires significant judgment and considered a number of factors,
including, but not limited to, the financial health and prospects of the issuer
and market yields of comparable securities. The Company recorded a $61.5 million
pre-tax impairment charge in the fourth quarter of 2001 to reduce the carrying
amount of this investment, including accrued dividends and interest, to an
estimated fair value of $27.5 million. The amount the Company ultimately
recovers from its investment in SMC, if any, could vary significantly from
estimated fair value.
F-19
Note 5 - Inventories
December 31,
--------------------------------------
2001 2000
----------------- -----------------
(In thousands)
Raw materials $ 43,863 $ 31,127
Work-in-process 94,709 74,631
Finished products 54,074 53,685
Supplies 13,476 14,991
----------------- -----------------
206,122 174,434
Less adjustment of certain
inventories to LIFO basis 21,070 26,050
----------------- -----------------
$ 185,052 $ 148,384
================= =================
Note 6 - Intangible and other noncurrent assets
December 31,
---------------------------------------
2001 2000
------------------ -----------------
(In thousands)
Intangible assets:
Patents $ 13,405 $ 13,521
Covenants not to compete 8,353 8,500
------------------ -----------------
21,758 22,021
Less accumulated amortization 15,120 12,452
------------------ -----------------
6,638 9,569
Intangible pension assets 3,198 3,689
------------------ -----------------
$ 9,836 $ 13,258
================== =================
Other noncurrent assets:
Deferred financing costs $ 8,212 $ 9,194
Notes receivable from officers 163 544
Prepaid pension cost 4,006 1,359
Other 720 1,059
------------------ -----------------
$ 13,101 $ 12,156
================== =================
F-20
Note 7 - Property and equipment, net
December 31,
---------------------------------------
2001 2000
------------------ -----------------
(In thousands)
Land $ 6,138 $ 6,158
Buildings 36,574 37,593
Information technology systems 55,112 54,426
Manufacturing and other 300,315 305,856
Construction in progress 11,631 8,811
------------------ -----------------
409,770 412,844
Accumulated depreciation (134,462) (110,714)
------------------ -- -----------------
$ 275,308 $ 302,130
================== =================
In 2001, the Company recorded $10.8 million in special charges to cost of
sales for the impairment of certain equipment located in Millbury,
Massachusetts, which was acquired from Wyman-Gordon in 1998. 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 estimated fair value, as determined through a
third-party appraisal, and its previous carrying amount.
In 2000, the Company recorded $3.5 million in special charges to cost of
sales for the impairment of certain equipment.
Note 8 - Accrued liabilities
December 31,
--------------------------------------
2001 2000
----------------- -----------------
(In thousands)
OPEB cost $ 2,969 $ 3,129
Pension cost 555 1,251
Accrued profit sharing 6,077 980
Other employee benefits 14,616 14,140
Deferred income 325 2,558
Environmental costs 654 818
Restructuring costs 198 1,012
Accrued tungsten costs 2,743 -
Taxes, other than income 4,867 3,593
Accrued dividends on Convertible Preferred Securities 1,111 -
Other 7,684 6,524
----------------- -----------------
$ 41,799 $ 34,005
================= =================
F-21
In 1999, the Company had customer orders for approximately $16 million of
titanium ingot for which the customer had not yet determined the final mill
product specifications. At the customer's request, the Company manufactured the
ingots and stored the material at the Company's facilities. As agreed with the
customer, the customer was billed for and took title to the ingots in 1999;
however, the Company retained an obligation to convert the ingots into mill
products in the future. Accordingly, the revenue and cost of sales on this
product were not recognized in 1999. Approximately $2.5 million and $13.4
million of this deferred income was recognized during 2001 and 2000,
respectively. As of December 31, 2001, pretax income of approximately $.1
million from the remaining material stored at the Company's facilities has been
deferred until the related sale is recorded.
Note 9 - Notes payable, long-term debt and capital lease obligations
December 31,
---------------------------------------
2001 2000
------------------ -----------------
(In thousands)
Notes payable:
U.S. credit agreement $ 30 $ 19,893
European credit agreements 1,492 4,219
------------------ -----------------
$ 1,522 $ 24,112
================== =================
Long-term debt:
Bank credit agreement - U.K. $ 10,712 $ 20,263
Other 172 514
------------------ -----------------
10,884 20,777
Less current maturities 172 1,824
------------------ -----------------
$ 10,712 $ 18,953
================== =================
Capital lease obligations $ 8,938 $ 8,829
Less current maturities 340 187
------------------ -----------------
$ 8,598 $ 8,642
================== =================
F-22
Long-term bank credit agreements. In 2000, the Company completed a new $125
million, U.S. asset-based revolving credit agreement replacing its previous U.S.
bank credit facility. Borrowings under this facility are limited to a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and equipment ("borrowing availability"). This facility requires the
Company's U.S. daily cash receipts to be used to reduce outstanding borrowings,
which may then be reborrowed, subject to the terms of the agreement. Interest
generally accrues at rates that vary from LIBOR plus 2% to LIBOR plus 2.5%.
Borrowings are collateralized by substantially all of the Company's U.S. assets.
The credit agreement prohibits the payment of dividends on TIMET's Convertible
Preferred Securities if excess availability is less than $25 million, limits
additional indebtedness, prohibits the payment of dividends on the Company's
common stock if excess availability is less than $40 million, requires
compliance with certain financial covenants and contains other covenants
customary in lending transactions of this type. Excess availability is defined
as borrowing availability less certain contractual commitments such as letters
of credit. At December 31, 2001, excess availability was $115 million. The
Company's U.S. credit agreement allows the lender to modify the borrowing base
formulas at its discretion, subject to certain conditions. In the event the
lender exercised this discretion, such event could have a significant adverse
effect on the Company's borrowing availability. Borrowings outstanding under
this U.S. facility are classified as a current liability. Unused borrowing
availability under this agreement at December 31, 2001 was approximately $117
million. The credit agreement expires in February 2003; however, the Company is
currently negotiating with its lender to extend the maturity date of this
agreement on substantially similar terms.
The Company's subsidiary, TIMET UK, has a credit agreement that includes a
revolving and term loan facility and an overdraft facility (the "U.K.
facilities"). During 2000, aggregate borrowing capacity under the U.K.
facilities was increased from (pound)18 million to (pound)30 million. Borrowings
under the U.K. facilities can be in various currencies including U.S. dollars,
British pounds and euros, accrue interest at rates that vary from LIBOR plus 1%
to LIBOR plus 1.25% and are collateralized by substantially all of TIMET UK's
assets. The U.K. facilities require the maintenance of certain financial ratios
and amounts and other covenants customary in lending transactions of this type.
The U.K. overdraft facility is subject to annual review in February of each year
and was extended in February 2002. The U.K. facilities expire in February 2005.
As of December 31, 2001, the outstanding balance of the U.K. facilities was
approximately $11 million with unused borrowing availability of approximately
$31 million.
The Company also has overdraft and other credit facilities at certain of
its other European subsidiaries. These facilities accrue interest at various
rates, are payable on demand and have a combined outstanding balance of $1.5
million as of December 31, 2001. Unused borrowing availability as of December
31, 2001 under these facilities was approximately $14 million.
Borrowings under the above U.S. and U.K. credit agreements in 2000 were
used to repay the $58 million in then-outstanding borrowings under the Company's
prior U.S. credit agreement, which was terminated. In 2000, the deferred
financing costs associated with the previous U.S. facility were written off and
reflected as an extraordinary item of $.9 million after taxes, or $.03 per
share.
The weighted average interest rate on borrowings outstanding under U.S.,
U.K. and other European credit agreements at December 31, 2001 was 5.25%, 3.56%
and 3.54%, respectively.
F-23
Capital lease obligations. Certain of the Company's U.K. production
facilities are under thirty year leases expiring in 2026. The U.K. rentals are
subject to adjustment every five years based on changes in certain published
price indices. TIMET has guaranteed TIMET UK's obligations under its leases. The
Company's French subsidiary, TIMET Savoie, leases certain machinery and
equipment from Compagnie Europeenne du Zirconium-CEZUS, S.A. ("CEZUS") (the 30%
minority shareholder) under a ten year agreement expiring in 2006. Assets held
under capital leases included in buildings were $8.5 million and $8.7 million,
and assets included in equipment were $1.5 million and $1.0 million at December
31, 2001 and 2000, respectively. The related aggregate accumulated depreciation
was $2.4 million and $1.9 million at December 31, 2001 and 2000, respectively.
Aggregate maturities of long-term debt and capital lease obligations:
Capital Long-term
Leases Debt
----------------- -----------------
(In thousands)
Years ending December 31,
2002 $ 1,174 $ 172
2003 1,156 -
2004 1,085 10,712
2005 953 -
2006 914 -
2007 and thereafter 16,348 -
Less amounts representing interest (12,692) -
----------------- -----------------
$ 8,938 $ 10,884
================= =================
Note 10 - Minority interest
Convertible Preferred Securities. In November 1996, TIMET Capital Trust I
(the "Trust"), a wholly-owned subsidiary of TIMET, issued $201 million of 6.625%
Company-obligated mandatorily redeemable convertible preferred securities and $6
million of common securities. TIMET holds all of the outstanding common
securities of the Trust. The Trust used the proceeds from such issuance to
purchase from the Company $207 million principal amount of TIMET's 6.625%
convertible junior subordinated debentures due 2026 (the "Subordinated
Debentures"). TIMET's guarantee of payment of the Convertible Preferred
Securities (in accordance with the terms thereof) and its obligations under the
Trust documents constitute, in the aggregate, a full and unconditional guarantee
by the Company of the Trust's obligations under the Convertible Preferred
Securities. The sole assets of the Trust are the Subordinated Debentures. The
Convertible Preferred Securities represent undivided beneficial ownership
interests in the Trust, are entitled to cumulative preferred distributions from
the Trust of 6.625% per annum, compounded quarterly, and are convertible, at the
option of the holder, into TIMET common stock at the rate of 1.339 shares of
common stock per Convertible Preferred Security (an equivalent price of $37.34
per share), for an aggregate of approximately 5.4 million common shares if fully
converted.
F-24
The Convertible Preferred Securities mature December 2026 and do not
require principal amortization. The Convertible Preferred Securities are
redeemable at the Company's option, currently at approximately 104% of the
principal amount declining to 100% subsequent to December 2006. The Company's
U.S. credit agreement prohibits the payment of dividends on these securities if
excess availability, as determined under the agreement, is less than $25
million. In April 2000, the Company exercised its right to defer future dividend
payments on the Convertible Preferred Securities for a period of up to 10
quarters (subject to possible further extension for up to an additional 10
quarters), although interest continued to accrue at the coupon rate on the
principal and unpaid dividends. During the second quarter of 2001, the Company
resumed payment of dividends on these securities and made the scheduled payment
of $3.3 million due on June 1, 2001. The Company also paid the previously
deferred aggregate dividends of $13.9 million on that date. Based on limited
trading data, the fair value of the Convertible Preferred Securities was
approximately $70 million at December 31, 2001.
Dividends on the Convertible Preferred Securities are reported in the
Consolidated Statements of Operations as minority interest, net of allocable
income tax benefits in 2000 and 1999. In 2001, such dividends also reflect
changes in related valuation allowances. Accrued dividends on the Convertible
Preferred Securities are reflected as current liabilities in the consolidated
balance sheet at December 31, 2001.
Other. Other minority interest relates principally to TIMET Savoie, a 70%
owned consolidated French subsidiary. This amount is reflected as minority
interest on the Company's Consolidated Balance Sheet. The Company has the right
to purchase from Compagnie Europeene du Zirconium-CEZUS, S.A. ("CEZUS"), the
holder of the remaining 30% interest, CEZUS' interest in TIMET Savoie for 30% of
TIMET Savoie's equity determined under French accounting principles, or
approximately $8.9 million as of December 31, 2001. CEZUS has the right to sell
its interest in TIMET Savoie to the Company for 30% of TIMET Savoie's registered
capital, or approximately $.7 million as of December 31, 2001.
Note 11 - Stockholders' equity
Preferred stock. The Company is authorized to issue one million shares of
preferred stock. The Board of Directors determines the rights of preferred stock
as to, among other things, dividends, liquidation, redemption, conversions, and
voting rights.
Common stock. The Company's U.S. credit agreement, as amended, prohibits
the payment of common stock dividends, except under specified conditions (see
Note 9).
Restricted stock and common stock options. The Company's 1996 Long-Term
Performance Incentive Plan (the "Incentive Plan") provides for the discretionary
grant of restricted common stock, stock options, stock appreciation rights and
other incentive compensation to officers and other key employees of the Company.
Options generally vest over five years and expire ten years from date of grant.
F-25
During 2000, the Company awarded 467,500 shares of TIMET restricted common
stock, under the Incentive Plan, to certain officers and employees. No shares
were awarded during 2001. The restrictions on the stock grants lapse ratably on
an annual basis over a five-year period. Since holders of restricted stock have
all of the rights of other common stockholders, subject to forfeiture unless
certain periods of employment are completed, all such shares of restricted stock
are considered to be currently issued and outstanding. During 2001, 41,000
shares of restricted stock were forfeited. The market value of the restricted
stock awards was approximately $2.0 million on the date of grant ($4.375 per
share), and this amount has been recorded as deferred compensation, a separate
component of stockholders' equity. The Company amortizes deferred compensation
to expense on a straight-line basis for each tranche of the award over the
period during which the restrictions lapse. Compensation expense recognized by
the Company related to restricted stock awards was $.5 million in 2001 and $.7
million in 2000.
Additionally, a separate plan (the "Director Plan") provides for annual
grants to eligible non-employee directors of options to purchase 5,000 shares of
the Company's common stock (1,500 prior to 1999) at a price equal to the market
price on the date of grant and to receive, as partial payment of director fees,
annual grants of 1,000 shares of common stock (500 shares prior to 2001).
Options granted to eligible directors vest in one year and expire ten years from
date of grant (five year expiration for grants prior to 1998).
The weighted average remaining life of options outstanding at December 31,
2001 was 6.1 years (2000 - 7.2 years). At December 31, 2001, 2000 and 1999,
options to purchase approximately 896,000, 662,000 and 431,000 shares,
respectively, were exercisable at average exercise prices of $23.80, $25.75 and
$25.85, respectively. Options to purchase 294,000 shares become exercisable in
2002. In February 2001, the Director Plan was amended to authorize an additional
200,000 shares for future grants under such plan. At December 31, 2001,
approximately 1.2 million shares and .2 million shares were available for future
grant under the Incentive Plan and the Director Plan, respectively.
F-26
The following table summarizes information about the Company's stock
options.
Amount
payable Weighted Weighted
Exercise upon average average fair
price per exercise exercise value at
Shares share (thousands) price grant date
------------- ------------- ------------- ------------- -------------
Outstanding at December 31, 1998 1,217,700 $23.00-35.31 $ 34,686 $ 28.48
Granted:
At market 433,000 7.38-7.97 3,445 7.96 $ 3.98
Above market 206,000 8.97-9.97 1,951 9.47 3.59
Canceled (118,500) 7.97-35.31 (3,023) 25.51
------------- ------------- ------------- -------------
Outstanding at December 31, 1999 1,738,200 $7.38-35.31 $ 37,059 $ 21.32
Granted:
At market 25,000 3.94 98 3.94 $ 1.99
Above market 250,000 7.00-11.00 2,150 8.60 1.53
Canceled (361,700) 7.97-35.31 (7,285) 20.14
------------- ------------- ------------- -------------
Outstanding at December 31, 2000 1,651,500 $3.94-$35.31 $ 32,022 $ 9.39
Granted:
At market 30,000 3.60-14.21 362 12.07 $ 8.11
Above market - - - -
Canceled (148,402) 7.97-35.31 (2,427) 16.35
------------- ------------- ------------- -------------
Outstanding at December 31, 2001 1,553,098 $3.60-35.31 $ 29,957 $ 19.54
============= ============= ============= =============
Weighted average fair values of options at grant date were estimated using
the Black-Scholes model and assumptions listed below.
2001 2000 1999
---------------- ---------------- ----------------
Assumptions at date of grant:
Expected life (years) 7 6 6
Risk-free interest rate 3.44% 4.95% 5.14%
Volatility 68% 45% 45%
Dividend yield 0% 0% 0%
Had stock-based compensation cost been determined based on the estimated
fair values of options granted and recognized as compensation expense over the
vesting period of the grants in accordance with SFAS No. 123, the Company's net
loss and loss per share would have been increased in 2001 by $1.9 million and
$.06 per share, respectively, in 2000 by $2.0 million and $.06 per share,
respectively, and in 1999 by $3.1 million and $.10 per share, respectively.
F-27
Note 12 - Other income and other expense
Years Ended December 31,
----------------------------------------------
Reference 2001 2000 1999
------------ ------------- ------------ -------------
(In thousands)
Other income:
Dividends and interest income $ 5,460 $ 6,154 $ 6,034
Boeing settlement, net Note 17 73,000 (1) - -
Gain on sale of castings joint venture Note 3 - 1,205 -
Foreign exchange gain (loss) 92 (1,085) (1,235)
Gain on termination of UTSC agreement Note 16 - 2,000 -
Other 658 103 153
------------- ------------ -------------
$ 79,210 $ 8,377 $ 4,952
============= ============ =============
Other expense:
Impairment of investment in SMC Note 4 $ 61,519 $ - $ -
Impairment of investment in joint ventures Note 3 - - 2,328
------------- ------------ -------------
$ 61,519 $ - $ 2,328
============= ============ =============
--------------------------------------------------------------------------------
(1) The Boeing settlement includes cash received from Boeing at settlement of
$82.0 million less legal fees of $9.0 million. Additionally, $6.2 million
in related employee incentive compensation was recorded as a component of
selling, general administrative and development expense.
Note 13 - Restructuring and special charges
In 2000 and 1999, the Company implemented plans designed to address
then-current market and operating conditions, which resulted in recognizing $2.8
million and $4.5 million of restructuring charges in 2000 and 1999,
respectively. During 2000, the Company terminated approximately 170 people,
primarily in its manufacturing operations, as part of its restructuring plans.
The 1999 plan included the disposition of one plant and termination of an
aggregate of 100 people, or approximately 4% of TIMET's worldwide workforce
prior to the 1999 restructuring. The components of the 2000 and 1999
restructuring charges are summarized in the following table.
2000 Plan 1999 Plan
---------------------------------- ---------------------------------
Segment Segment
---------------------------------- ---------------------------------
Titanium Titanium
Melted Melted
and Mill And Mill
Products Other Products Other
--------------- --------------- --------------- --------------
(In millions)
Property and equipment $ 0.3 $ - $ 0.3 $ -
Disposition of German subsidiary 0.1 - 2.0 -
Pension and OPEB costs, net - - (0.1) -
Personnel severance and benefits 2.6 - 2.5 -
Other exit costs, principally
related to leased facilities (0.2) - - (0.2)
--------------- --------------- --------------- --------------
$ 2.8 $ - $ 4.7 $ (0.2)
=============== =============== =============== ==============
F-28
Substantially all of the property and equipment charges relate to items
sold, scrapped or abandoned. Depreciation of equipment temporarily idled but not
impaired was not suspended. The disposition of the German subsidiary was
completed in the second quarter of 2000. The pension and OPEB costs relate to
actuarial valuations of accelerated defined benefits of employees terminated and
curtailment of pension and OPEB liabilities.
Payments applied against the accrued costs related to the 2000 plan were
$.5 million and $2.6 million during 2001 and 2000, respectively. Payments
applied against the accrued costs related to the 1999 plan were $.1 million and
$.7 million during 2001 and 2000, respectively.
At December 31, 2001, the remaining balance of accrued restructuring costs
related to the 2000 and 1999 plans was $.2 million, consisting of approximately
$.1 million under each plan related to personnel severance and benefits for
terminated employees. The Company expects to pay the remaining balance of the
accrued costs under the 2000 and 1999 restructuring plans by mid-2002.
In 2001, the Company recorded income of $.2 million related to the 2000
plan for revisions to estimates of the previously established restructuring
accruals.
The following table summarizes pre-tax restructuring and special charges
(income) recorded by the Company during the past three years:
Year ended December 31,
-----------------------------------------------
Reference 2001 2000 1999
------------ ------------- ------------- -------------
(In thousands)
Restructuring items $ (220) $ 2,805 $ 4,506
Special items:
Boeing settlement, net Note 17 (66,818) (1) - -
Impairment charges:
Property and equipment Note 7 10,840 3,467 -
Joint ventures Note 3 - - 2,328
Environmental remediation charge Note 17 - 3,262 -
Tungsten inclusion charge Note 17 3,269 - -
Termination of UTSC agreement Note 16 - (2,000) -
------------- ------------- -------------
Net total - operating income (52,929) 7,534 6,834
Impairment of investment in SMC Note 4 61,519 - -
Gain on sale of castings joint venture Note 3 - (1,205) -
------------- ------------- -------------
Net total - other expense (income) 61,519 (1,205) -
------------- ------------- -------------
Net total - pre-tax charges $ 8,590 $ 6,329 $ 6,834
============= ============= =============
--------------------------------------------------------------------------------
(1) The Boeing settlement includes cash received from Boeing at settlement of
$82.0 million less legal fees of $9.0 million and related employee
incentive compensation of $6.2 million.
F-29
Note 14 - Income taxes
Summarized in the following table are (i) the components of income (loss)
before income taxes and minority interest ("pre-tax income (loss)"), (ii) the
difference between the 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%, (iii) the components of the income tax expense
(benefit) attributable to pre-tax income (loss) and (iv) the components of the
comprehensive tax provision (benefit).
Year ended December 31,
-------------------------------------------------------
2001 2000 1999
---------------- ---------------- ----------------
(In thousands)
Pre-tax income (loss):
U.S. $ (6,719) $ (42,830) $ (30,485)
Non-U.S. 11,190 (303) (3,253)
---------------- ---------------- ----------------
$ 4,471 $ (43,133) $ (33,738)
================ ================ ================
Expected income tax expense (benefit), at 35% $ 1,565 $ (15,097) $ (11,809)
Non-U.S. tax rates 521 1,121 893
U.S. state income taxes, net 307 8 (1,705)
Dividends received deduction (1,110) (1,367) (1,382)
Export sales credit (462) - -
Adjustment of deferred tax valuation allowance 30,102 49 1,869
Other, net 189 189 113
---------------- ---------------- ----------------
$ 31,112 $ (15,097) $ (12,021)
================ ================ ================
Income tax expense (benefit):
Current income taxes (benefit):
U.S. $ 787 $ (548) $ (11,225)
Non-U.S. 3,503 2,696 (332)
---------------- ---------------- ----------------
4,290 2,148 (11,557)
---------------- ---------------- ----------------
Deferred income taxes (benefit):
U.S. 26,061 (15,612) (1,850)
Non-U.S. 761 (1,633) 1,386
---------------- ---------------- ----------------
26,822 (17,245) (464)
---------------- ---------------- ----------------
$ 31,112 $ (15,097) $ (12,021)
================ ================ ================
Comprehensive tax provision (benefit) allocable to:
Pre-tax income (loss) $ 31,112 $ (15,097) $ (12,021)
Minority interest - Convertible Preferred Securities - (4,675) (4,666)
Extraordinary item - (470) -
Stockholders' equity, including amounts allocated
to other comprehensive income (4,834) (1,057) 205
---------------- ---------------- ----------------
$ 26,278 $ (21,299) $ (16,482)
================ ================ ================
F-30
December 31,
-----------------------------------------------------------
2001 2000
---------------------------- ---------------------------
Assets Liabilities Assets Liabilities
------------ ------------ ----------- ------------
(In millions)
Temporary differences relating to net assets:
Inventories $ 0.3 $ (6.6) $ 0.4 $ (5.2)
Property and equipment, including software - (25.6) - (30.0)
Accrued OPEB cost 9.0 - 9.7 -
Accrued liabilities and other deductible differences 33.1 - 12.3 -
Other taxable differences - (9.5) - (8.2)
Tax loss and credit carryforwards 31.5 - 40.4 -
Valuation allowance (37.4) - (1.9) -
------------ ------------ ----------- ------------
Gross deferred tax assets (liabilities) 36.5 (41.7) 60.9 (43.4)
Netting (36.1) 36.1 (32.7) 32.7
------------ ------------ ----------- ------------
Total deferred taxes 0.4 (5.6) 28.2 (10.7)
Less current deferred taxes 0.4 (0.1) 0.4 (1.1)
------------ ------------ ----------- ------------
Net noncurrent deferred taxes $ - $ (5.5) $ 27.8 $ (9.6)
============ ============ =========== ============
The Company periodically reviews its deferred tax assets to determine if
future realization is more-likely-than-not. During 2001, the Company increased
its deferred tax valuation allowance by $35.5 million to offset deferred tax
benefits related to net U.S. deferred tax assets, primarily net operating loss
and minimum tax credit carryforwards and certain capital losses that did not
meet the "more-likely-than-not" recognition criteria. This included a fourth
quarter 2001 charge of $12.3 million to increase the deferred tax asset
valuation allowance related to U.S. net deferred tax assets recorded as of
September 30, 2001. This charge included $8.6 million as a component of income
tax expense and $3.7 million as a component of Minority interest - Convertible
Preferred Securities. Additionally, the Company determined that it would not
recognize a deferred tax benefit related to U.S. losses commencing in the fourth
quarter of 2001, and continuing for an uncertain period of time. Accordingly,
the Company provided a deferred tax valuation allowance of $23.2 million related
to U.S. net deferred tax assets arising from its fourth quarter 2001 operating
results. There were no material increases to the Company's valuation allowance
during 2000.
At December 31, 2001, the Company had, for U.S. federal income tax
purposes, net operating loss ("NOL") carryforwards of approximately $64.5
million that expire in 2020. At December 31, 2001, the Company had alternative
minimum tax ("AMT") credit carryforwards of approximately $5.6 million, which
can be utilized to offset regular income taxes payable in future years. The AMT
credit carryforward has an indefinite carryforward period. At December 31, 2001,
the Company had the equivalent of a $6.6 million NOL carryforward in the United
Kingdom and a $2.1 million NOL carryforward in Germany, both of which have
indefinite carryforward periods.
F-31
Note 15 - Employee benefit plans
Variable compensation plans. The majority of the Company's total worldwide
employees, including a significant portion of its domestic hourly employees,
participate in compensation programs which provide for variable compensation
based upon the financial performance of the Company and, in certain
circumstances, the individual performance of the employee. In 2002, the Company
authorized an employee incentive compensation payment for 2001. The cost of
these plans was $7.2 million, $.9 million and $1.0 million in 2001, 2000 and
1999, respectively.
Defined contribution plans. All of the Company's domestic hourly and
salaried employees (60% of worldwide employees at December 31, 2001) are
eligible to participate in contributory savings plans with partial matching
employer contributions. In addition, the Company makes matching contributions
based on the Company's annual return on equity for approximately 80% of eligible
employees. Approximately 42% of the Company's total employees at December 31,
2001 also participate in a defined contribution pension plan with employer
contributions based upon a fixed percentage of the employee's eligible earnings.
The cost of these pension and savings plans approximated $2.8 million for 2001
and $2.0 million for each of 2000 and 1999.
Defined benefit pension plans. The Company maintains contributory and
noncontributory defined benefit pension plans covering the majority of its
European employees and a minority of its domestic workforce. Defined pension
benefits are generally based on years of service and compensation, and the
related expense is based upon independent actuarial valuations. The Company's
funding policy for U.S. plans is to annually contribute amounts satisfying the
funding requirements of the Employee Retirement Income Security Act of 1974, as
amended. Non-U.S. defined benefit pension plans are funded in accordance with
applicable statutory requirements. The U.S. defined benefit pension plans were
closed to new participants prior to 1996, and benefit levels have been frozen.
The U.K. defined benefit plan was closed to new participants in 1996, and
benefit levels have been frozen.
The rates used in determining the actuarial present value of benefit
obligations at December 31, 2001 were (i) discount rates - 6.0% to 7.0% (6.0% to
7.25% at December 31, 2000), (ii) rates of increase in future compensation
levels - 2.0% to 3.0% (2.0% to 3.0% at December 31, 2000) and (iii) expected
long-term rates of return on assets - 6.0% to 9.0% (6.0% to 9.0% at December 31,
2000). The benefit obligations are sensitive to changes in these estimated
rates, and actual results may differ from the obligations noted below. At
December 31, 2001, the assets of the plans are primarily comprised of government
obligations, corporate stocks and bonds. The funded status of the Company's
defined benefit pension plans is set forth in the following table.
F-32
Year ended December 31,
---------------------------------------
2001 2000
------------------ -----------------
(In thousands)
Change in projected benefit obligations:
Balance at beginning of year $ 153,280 $ 148,688
Service cost 3,657 3,768
Interest cost 9,534 9,182
Plan amendments - 917
Curtailment gain - (38)
Actuarial loss 6,050 6,700
Benefits paid (8,743) (8,528)
Change in currency exchange rates (2,110) (7,409)
------------------ -----------------
Balance at end of year $ 161,668 $ 153,280
================== =================
Change in plan assets:
Fair value at beginning of year $ 149,687 $ 156,636
Actual return on plan assets (9,830) 3,099
Employer contribution 6,267 5,936
Plan participants' contributions 737 759
Benefits paid (8,743) (8,528)
Change in currency exchange rates (2,356) (8,215)
------------------ -----------------
Fair value at end of year $ 135,762 $ 149,687
================== =================
Funded status:
Plan assets under projected benefit obligations $ (25,906) $ (3,593)
Unrecognized:
Actuarial loss 34,407 6,777
Prior service cost 3,198 3,689
------------------ -----------------
Total prepaid pension cost $ 11,699 $ 6,873
================== =================
Amounts recognized in balance sheets:
Intangible pension asset $ 3,198 $ 3,689
Noncurrent prepaid pension cost 4,006 1,359
Current pension liability (555) (1,251)
Noncurrent pension liability (23,690) (5,361)
Accumulated other comprehensive income 28,740 8,437
------------------ -----------------
$ 11,699 $ 6,873
================== =================
Selected information related to the Company's defined benefit pension plans
that have accumulated benefit obligations in excess of fair value of plan assets
are presented below.
December 31,
---------------------------------------
2001 2000
------------------ -----------------
(In thousands)
Projected benefit obligation $ 161,668 $ 63,611
Accumulated benefit obligation $ 156,001 $ 63,361
Fair value of plan assets $ 135,762 $ 57,242
F-33
The components of the net periodic defined benefit pension cost are set
forth below.
Year ended December 31,
-------------------------------------------------------
2001 2000 1999
---------------- ---------------- ----------------
(In thousands)
Service cost benefits earned $ 2,919 $ 3,768 $ 4,053
Interest cost on projected benefit obligations 9,534 9,182 8,939
Expected return on plan assets (11,737) (11,907) (10,650)
Net amortization 732 342 120
---------------- ---------------- ----------------
Net pension expense $ 1,448 $ 1,385 $ 2,462
================ ================ ================
Postretirement benefits other than pensions. The Company provides certain
postretirement health care and life insurance benefits to certain of its
domestic employees upon retirement. The Company funds such benefits as they are
incurred, net of any contributions by the retirees. Under plans currently in
effect, a majority of TIMET's active domestic employees would become eligible
for these benefits if they reach normal retirement age while working for TIMET.
These plans have been revised to discontinue employer-paid health care coverage
for future retirees once they become Medicare-eligible.
The components of the periodic OPEB cost and change in the accumulated OPEB
obligations are set forth below. The plan is unfunded and contributions to the
plan during the year equal benefits paid. The rates used in determining the
actuarial present value of the accumulated OPEB obligations at December 31, 2001
were (i) discount rate - 7.00% (2000 - 7.25%), (ii) rate of increase in health
care costs for the following period - 11.15% (2000 - 8.9%) and (iii) ultimate
health care trend rate (achieved in 2010) - 5.25% (2000 - 6.0 %). If the health
care cost trend rate were increased by one percentage point for each year, OPEB
expense would have increased approximately $.2 million in 2001, and the
actuarial present value of accumulated OPEB obligations at December 31, 2001
would have increased approximately $2.5 million. A one-percentage point decrease
would have a similar, but opposite, effect. The accrued OPEB cost is sensitive
to changes in these estimated rates and actual results may differ from the
obligations noted below.
F-34
December 31,
---------------------------------------
2001 2000
------------------ -----------------
(In thousands)
Actuarial present value of accumulated OPEB obligations:
Balance at beginning of year $ 22,757 $ 24,186
Service cost 271 176
Interest cost 1,686 1,709
Amendments - 364
Actuarial loss 2,499 402
Curtailment gain - (443)
Benefits paid, net of participant contributions (3,968) (3,637)
------------------ -----------------
Balance at end of year 23,245 22,757
Unrecognized net actuarial loss (5,518) (3,056)
Unrecognized prior service credits 1,222 1,647
------------------ -----------------
Total accrued OPEB cost 18,949 21,348
Less current portion 2,969 3,129
------------------ -----------------
Noncurrent accrued OPEB cost $ 15,980 $ 18,219
================== =================
Year ended December 31,
-------------------------------------------------
2001 2000 1999
-------------- -------------- -------------
(In thousands)
Service cost benefits earned $ 271 $ 176 $ 252
Interest cost on accumulated OPEB obligations 1,686 1,709 1,577
Curtailment gain - (443) (115)
Net amortization and deferrals (203) (324) (364)
-------------- -------------- -------------
Net OPEB expense $ 1,754 $ 1,118 $ 1,350
============== ============== =============
Note 16 - Related party transactions
During 1999, Tremont Corporation ("Tremont") exercised an option to
purchase approximately two million shares of TIMET common stock, and at December
31, 2001, Tremont held approximately 39% of TIMET's outstanding common stock.
During 1999, the Combined Master Retirement Trust ("CMRT"), a trust formed by
Valhi, Inc. ("Valhi") to permit the collective investment by trusts that
maintain the assets of certain employee benefit plans adopted by Valhi and
related companies, purchased shares of TIMET common stock in market
transactions; however, as of December 31, 2001, the CMRT had fully divested of
all TIMET common stock. At December 31, 2001, subsidiaries of 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. Between February 7, 2002
and March 1, 2002, the CMRT purchased 844,600 shares of TIMET common stock in
open market transactions. 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. In
addition, Mr. Simmons is the sole trustee of the CMRT and a member of the trust
investment committee for the CMRT. Mr. Simmons may be deemed to control each of
Contran, Valhi, Tremont and TIMET.
F-35
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (i) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties, and (ii) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. The Company
continuously considers, reviews and evaluates, and understands that Contran,
Tremont and related entities consider, review and evaluate such transactions.
Depending upon the business, tax and other objectives then relevant, it is
possible that the Company might be a party to one or more such transactions in
the future.
Receivables from and payables to related parties are summarized in the
table below.
December 31,
--------------------------------------
2001 2000
----------------- -----------------
(In thousands)
Receivables from related parties:
Tremont $ 1,281 $ 1,248
VALTIMET 4,626 3,781
----------------- -----------------
$ 5,907 $ 5,029
================= =================
Payables to related parties:
Tremont $ 1,261 $ 1,640
NL Industries, Inc. 379 -
VALTIMET 925 791
----------------- -----------------
$ 2,565 $ 2,431
================= =================
Under the terms of various intercorporate services agreements ("ISAs")
entered into between the Company and various related parties, employees of one
company will provide certain management, tax planning, financial and
administrative services to the other company on a fee basis. Such charges are
based upon estimates of the time devoted by the employees of the provider of the
services to the affairs of the recipient, and the compensation of such persons.
These ISA agreements are reviewed and approved by the applicable independent
directors of the companies that are parties to the agreements.
The Company has an ISA with Tremont whereby the Company provides certain
management, financial and other services to Tremont for approximately $.4
million, $.3 million and $.2 million in 2001, 2000 and 1999, respectively. This
agreement is expected to be renewed for 2002.
The Company has an ISA with NL Industries, Inc. ("NL"), a majority-owned
subsidiary of Valhi. Under the terms of the agreement, NL provides certain
financial and other services to TIMET for approximately $.3 million in each of
2001, 2000 and 1999. This agreement is expected to be renewed for 2002.
F-36
The Company extends market-rate loans to certain officers pursuant to a
Board-approved program to facilitate the purchase of Company stock and its
Convertible Preferred Securities and to pay applicable taxes on shares of
restricted Company stock as such shares vest. The loans are generally payable in
five annual installments beginning six years from date of loan and bear interest
at a rate tied to the Company's borrowing rate, payable quarterly. At December
31, 2001, the outstanding balance of officer notes receivable was approximately
$.2 million.
EWI RE, Inc. ("EWI") arranges for and brokers certain of the Company's
insurance policies. At December 31, 2001, parties related to Contran owned all
of the outstanding common stock of EWI. On January 7, 2002, NL purchased EWI
from its previous owners and EWI became a wholly owned subsidiary of NL. Through
December 31, 2000, a son-in-law of Harold C. Simmons managed the operations of
EWI. Subsequent to December 31, 2000, such son-in-law provides advisory services
to EWI as requested by EWI. The Company generally does not compensate EWI
directly for insurance, but understands that, consistent with insurance industry
practices, EWI receives a commission from the insurance underwriters for the
policies that it arranges or brokers. The Company's aggregate premiums for such
policies were approximately $2.8 million, $2.4 million and $2.0 million in 2001,
2000 and 1999, respectively. The Company expects that these relationships with
EWI will continue in 2002.
TIMET supplies titanium strip product to VALTIMET under a long-term
contract as the preferred supplier and previously supplied casting ingot to
Wyman-Gordon Titanium Castings. Sales to VALTIMET were $22 million in 2001 and
2000. Sales to VALTIMET and Wyman-Gordon Titanium Castings were $19 million in
1999. Early in 2000, TIMET sold its interest in the castings joint venture at a
pre-tax gain of $1.2 million.
In connection with the construction and financing of TIMET's vacuum
distillation process ("VDP") titanium sponge plant, Union Titanium Sponge
Corporation ("UTSC") licensed certain technology to TIMET in exchange for the
right to acquire up to 20% of TIMET's annual production capacity of VDP sponge
at agreed-upon prices through early 1997 and higher formula-determined prices
thereafter through 2008. The agreement also obligated UTSC to pay certain
amounts in the event that UTSC purchases were below contractual volume minimums.
In the fourth quarter of 2000, UTSC paid TIMET $2.0 million, which was included
in other operating income, in connection with the termination of this agreement.
F-37
Tremont owns 32% of Basic Management, Inc ("BMI"). Among other things, BMI
provides utility services (primarily water distribution, maintenance of a common
electrical facility and sewage disposal monitoring) to the Company and other
manufacturers within an industrial complex located in Henderson, Nevada. Power
transmission and sewer services are provided on a cost reimbursement basis,
similar to a cooperative, while water delivery is currently provided at the same
rates as are charged by BMI to an unrelated third party. Amounts paid by the
Company to BMI for these utility services were $1.5 million in 2001, $1.6
million in 2000 and $1.0 million in 1999. The Company paid BMI a facilities
usage fee of $1.3 million in each of 2001 and 2000 and $.8 million in 1999. The
$1.3 million annual facilities usage fee continues through 2005. The facilities
usage fee declines to $.5 million annually for 2006 through 2010, at which time
the facilities usage fee expires.
Note 17 - Commitments and contingencies
Long-term agreements. The Company has long-term agreements ("LTAs") with
certain major aerospace customers, including, but not limited to, The Boeing
Company ("Boeing"), Rolls-Royce plc ("Rolls-Royce"), United Technologies
Corporation (Pratt & Whitney and related companies) ("UTC") and Wyman-Gordon
Company ("Wyman-Gordon") (a unit of Precision Castparts Corporation ("PCC")).
These agreements initially became effective in 1998 and 1999 and expire in 2007
through 2008, subject to certain conditions. The LTAs generally provide for (i)
minimum market shares of the customers' titanium requirements or firm annual
volume commitments and (ii) fixed or formula-determined prices generally for at
least the first five years. Generally, the LTAs require the Company's service
and product performance to meet specified criteria and contain a number of other
terms and conditions customary in transactions of these types. In certain events
of nonperformance by the Company, the LTAs may be terminated early.
Additionally, if the parties are unable to reach agreement on pricing after the
initial pricing period or in certain other circumstances, the LTAs may be
terminated early. These agreements were designed to limit selling price
volatility to the customer, while providing TIMET with a committed base of
volume throughout the aerospace business cycles. They also, to varying degrees,
effectively obligate TIMET to bear part of the risks of increases in raw
material and other costs, but allow TIMET to benefit in part from decreases in
such costs.
In April 2001, the Company reached a settlement of the litigation between
TIMET and Boeing related to the parties' LTA entered into in 1997. Pursuant to
the settlement, the Company received a cash payment of $82 million. The
Company's 2001 results reflect approximately $73 million (cash settlement less
legal fees) as other operating income, with partially offsetting operating
expenses of approximately $6.2 million for employee incentive compensation and
other costs reported as a component of selling, general, administrative and
development expense, resulting in a net pre-tax income effect of $66.8 million
in 2001.
F-38
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 advances
TIMET $28.5 million annually for 2002 through 2007. The annual advance for
contract year 2002 was made in December 2001, with subsequent advances occurring
early each calendar year beginning in 2003. The LTA is structured as a
take-or-pay agreement such that, beginning in calendar year 2002, Boeing will
forfeit a proportionate part of the $28.5 million annual advance, or effectively
$3.80 per pound, in the event that its annual 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.
The Company entered into an LTA in 1997 for the purchase of titanium
sponge. The sponge LTA runs through 2007, with firm pricing through 2002,
subject to certain possible adjustments and possible early termination in 2004.
The Company is currently in the process of renegotiating certain components of
this LTA with the supplier. Although the LTA provides for annual purchases by
the Company of a minimum of 6,000 metric tons, the supplier has agreed to
reduced purchases by TIMET since 1999. The Company is currently operating under
an agreement in principle that provides for significantly reduced minimum
purchases in 2002 and certain other modified terms. During 2001, the Company
recorded a charge of $3.0 million relating to the sponge suppliers' agreement to
renegotiate certain components of this LTA from time to time. As of December 31,
2001, $2.0 million of this amount remained accrued and unpaid. The Company has
no other long-term supply agreements.
Concentration of credit and other risks. Substantially all of the Company's
sales and operating income (loss) are derived from operations based in the U.S.,
the U.K. and France. Over 70% of the Company's sales revenue is generated by
sales to customers in the aerospace industry (including airframe and engine
construction). As described previously, the Company has LTAs with certain major
aerospace customers, including Boeing, Rolls-Royce, UTC and Wyman-Gordon. These
agreements and others accounted for approximately 43% and 35% of sales revenue
in 2001 and 2000, respectively. During 1999 and 2000, PCC acquired Wyman-Gordon
and a forging company in the U.K. Sales to PCC and related entities approximated
11% of the Company's sales revenue in 2001. Sales to Rolls-Royce and other
Rolls-Royce suppliers under the Rolls-Royce LTA (including sales to certain of
the PCC related entities) represented approximately 15% of the Company's sales
revenue in 2001. The Company's ten largest customers accounted for about
one-half of sales revenue in 2001 and 2000 and about 30% of sales revenue in
1999. Such concentration of customers may impact the Company's overall exposure
to credit and other risks, either positively or negatively, in that such
customers may be similarly affected by economic or other conditions.
Operating leases. The Company leases certain manufacturing and office
facilities and various equipment. Most of the leases contain purchase and/or
various term renewal options at fair market and fair rental values,
respectively. In most cases management expects that, in the normal course of
business, leases will be renewed or replaced by other leases. Net rent expense
was approximately $6.1 million in 2001, $6.6 million in 2000 and $5.9 million in
1999.
F-39
At December 31, 2001, future minimum payments under noncancellable
operating leases having an initial or remaining term in excess of one year were
as follows:
Amount
-------------------
(In thousands)
Years ending December 31,
2002 $ 4,253
2003 2,734
2004 1,345
2005 522
2006 445
2007 and thereafter 348
-------------------
$ 9,647
===================
Environmental matters.
BMI Complex. In 1999, TIMET and certain other companies (the "Steering
Committee Companies") that currently have or formerly had operations within a
Henderson, Nevada industrial complex (the "BMI Complex") entered into a series
of agreements with BMI and certain related companies pursuant to which, among
other things, BMI assumed responsibility for the conduct of soils remediation
activities on the properties described, including the responsibility to complete
all outstanding requirements pertaining to such activities under existing
consent agreements with the Nevada Division of Environmental Protection. The
Company contributed $2.8 million to the cost of this remediation (which payment
was charged against accrued liabilities). The Company also agreed to convey to
BMI, at no additional cost, certain lands owned by the Company adjacent to its
plant site (the "TIMET Pond Property") upon payment by BMI of the cost to
design, purchase, and install the technology and equipment necessary to allow
the Company to stop discharging liquid and solid effluents and co-products onto
the TIMET Pond Property (BMI will pay 100% of the first $15.9 million cost for
this project, and TIMET agreed to contribute 50% of the cost in excess of $15.9
million, up to a maximum payment by TIMET of $2 million). The Company, BMI and
the other Steering Committee Companies are continuing investigation with respect
to certain additional issues associated with the properties described above,
including any possible groundwater issues at the BMI Complex and the TIMET Pond
Property.
The Company is continuing assessment work with respect to its own active
plant site. During 2000, a preliminary study was completed of certain
groundwater remediation issues at the Company's Henderson operations and other
Company sites within the BMI Complex (which sites do not include the above
discussed TIMET Pond Property). The Company accrued $3.3 million in 2000 based
on the undiscounted cost estimates set forth in the study. These expenses are
expected to be paid over a period of up to thirty years.
Henderson facility. In February 2002, the Company fulfilled all of its
remaining obligations under the 2000 Settlement Agreement of the U. S.
Environmental Protection Agency's 1998 civil action against TIMET (United States
of America v. Titanium Metals Corporation; Civil Action No. CV-S-98-682-HDM
(RLH), U. S. District Court, District of Nevada).
F-40
At December 31, 2001, the Company had accrued an aggregate of approximately
$4 million primarily for environmental matters, including those discussed above.
The Company records liabilities related to environmental remediation obligations
when estimated future expenditures are probable and reasonably estimable. Such
accruals are adjusted as further information becomes available or circumstances
change. Estimated future expenditures are not discounted to their present value.
It is not possible to estimate the range of costs for certain sites. The
imposition of more stringent standards or requirements under environmental laws
or regulations, the results of future testing and analysis undertaken by the
Company at its operating facilities, or a determination that the Company is
potentially responsible for the release of hazardous substances at other sites,
could result in expenditures in excess of amounts currently estimated to be
required for such matters. No assurance can be given that actual costs will not
exceed accrued amounts or that costs will not be incurred with respect to sites
as to which no problem is currently known or where no estimate can presently be
made. Further, there can be no assurance that additional environmental matters
will not arise in the future.
Legal proceedings. In September 2000, the Company was named in an action
filed by the U.S. Equal Employment Opportunity Commission in Federal District
Court in Las Vegas, Nevada (U.S. Equal Employment Opportunity Commission v.
Titanium Metals Corporation, CV-S-00-1172DWH-RJJ). The complaint, as amended,
alleges that several female employees at the Company's Henderson, Nevada plant
were the subject of sexual harassment and retaliation. The Company intends to
vigorously defend this action, but in any event does not presently anticipate
that any adverse outcome in this case would be material to the Company's results
of operations, consolidated financial position or liquidity.
Other. 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 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 the present 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, the Company is unable to determine the
ultimate liability it 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 continuing
assessments of possible losses completed by the Company, the Company recorded an
aggregate charge to cost of sales for this matter of $3.3 million during 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 December 31, 2001, $2.7
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 December 31, 2001.
F-41
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 business, results of operations, consolidated financial position
or liquidity.
Note 18 - Quarterly results of operations (unaudited)
For the quarter ended
----------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------------- -------------- ------------- -------------
(In millions, except per share data)
Year ended December 31, 2001:
Net sales $ 124.0 $ 120.0 $ 126.4 $ 116.5
Gross margin 7.3 (3.5) 20.8 15.3
Operating (loss) income (1.8) 48.6 10.0 7.7
Net (loss) income (1) (3.6) 29.6 4.3 (72.0)
(Loss) earnings per share (2):
Basic $ (.12) $ .94 $ .14 $ (2.28)
Diluted $ (.12) $ .86 $ .14 $ (2.28)
Year ended December 31, 2000:
Net sales $ 104.7 $ 108.8 $ 106.8 $ 106.5
Gross margin (3.3) 1.2 3.7 2.3
Operating loss (1) (18.4) (9.5) (7.7) (6.2)
Net loss (15.1) (9.5) (7.9) (6.4)
Basic and diluted loss per share (2):
Before extraordinary item $ (.45) $ (.30) $ (.25) $ (.20)
Extraordinary item (.03) - - -
------------- -------------- ------------- -------------
$ (.48) $ (.30) $ (.25) $ (.20)
============= ============== ============= =============
--------------------------------------------------------------------------------
(1) The sum of quarterly amounts do not agree to the full year results due to
rounding.
(2) The sum of quarterly amounts may not agree to the full year results due to
rounding and the timing of potential conversion to common stock, which
would have an antidilutive effect on the calculation.
See also discussion of significant fourth quarter items in Notes 1, 4, 14
and 17.
Note 19 - Earnings per share
In 2001, 2000 and 1999, the effect of the assumed conversion of the
Convertible Preferred Securities was antidilutive. Had the Convertible Preferred
Securities not been antidilutive, diluted losses would have been decreased by
$13.9 million in 2001 and $8.7 million in each of 2000 and 1999, and diluted
shares would have been increased by the 5.4 million shares in each of 2001, 2000
and 1999 issuable upon conversion. Dilutive stock options of 18,000 in 2001,
88,000 in 2000 and 22,000 in 1999 were excluded from the calculation of diluted
earnings per share because their effect would have been antidilutive due to the
losses in those years. Stock options and restricted stock omitted from the
denominator because they were antidilutive approximated 1.9 million in 2001, 2.1
million in 2000 and 1.7 million in 1999.
F-42
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of Titanium Metals Corporation:
Our audits of the consolidated financial statements referred to in our
report dated February 4, 2002, appearing in this 2001 Annual Report on Form 10-K
also included an audit of the financial statement schedule listed in the Index
on page F of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Denver, Colorado
February 4, 2002
S-1
TITANIUM METALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
charged
Balance at (credited) to Balance
beginning costs and at end
Description of year expenses Deductions Other of year
------------------------------------ ------------ -------------- ------------- ----------- ----------
Year ended December 31, 2001:
Allowance for doubtful
accounts $ 2,927 $ 4 $ (170) (1) $ (22) $ 2,739
============ ============== ============= =========== ==========
Valuation allowance for
deferred income taxes $ 1,918 $ 35,504 $ (45) $ 37,377
============ ============== ============= =========== ==========
Allowance for excess and
slow moving inventories $ 14,414 $ 1,755 $ (2,762) $ 214 $ 13,621
============ ============== ============= =========== ==========
Reserve for business
restructuring $ 1,012 $ (227) $ (587) $ - $ 198
============ ============== ============= =========== ==========
Year ended December 31, 2000:
Allowance for doubtful
accounts $ 3,330 $ 185 $ (365) (1) $ (223) $ 2,927
============ ============== ============= =========== ==========
Valuation allowance for
deferred income taxes $ 1,869 $ 49 $ - $ - $ 1,918
============ ============== ============= =========== ==========
Allowance for excess and
slow moving inventories $ 14,518 $ 2,305 $ (1,635) $ - $ 14,414
============ ============== ============= =========== ==========
Reserve for business
restructuring $ 1,490 $ 3,219 $ (3,697) $ - $ 1,012
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Year ended December 31, 1999:
Allowance for doubtful
accounts $ 1,932 $ 1,628 $ (230) (1) $ - $ 3,330
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Valuation allowance for
deferred income taxes $ - $ 1,869 $ - $ - $ 1,869
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Allowance for excess and
slow moving inventories $ 6,520 $ 5,077 $ (406) $ 3,327 (2) $ 14,518
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Reserve for business
restructuring $ 6,727 $ 4,506 $ (9,743) $ - $ 1,490
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(1) Amounts written off, less recoveries.
(2) Adjustment for slow moving inventory previously carried at zero value.
S-2