SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
Commission file number 0-28538
Titanium Metals Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-5630895
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1999 Broadway, Suite 4300, Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5600
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Number of shares of common stock outstanding on August 12, 2002: 31,864,538 .
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Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in the Notes to Consolidated Financial Statements and under the
captions "Results of Operations" and "Liquidity and Capital Resources" (both
contained in 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 Quarterly Report, including in those portions
referenced above and those described from time to time in the Company's other
filings with the Securities and Exchange Commission which include, but are not
limited to, the cyclicality of the commercial aerospace industry, the
performance of aerospace manufacturers and the Company under their long-term
agreements, the renewal of certain 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.
TITANIUM METALS CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 2002 (unaudited) and
December 31, 2001 2
Consolidated Statements of Operations - Three months and
six months ended June 30, 2002 and 2001 (unaudited) 4
Consolidated Statements of Comprehensive Income (Loss) -
Three months and six months ended June 30, 2002
and 2001 (unaudited) 5
Consolidated Statements of Cash Flows - Six months
ended June 30, 2002 and 2001 (unaudited) 6
Consolidated Statement of Changes in Stockholders' Equity -
Six months ended June 30, 2002 (unaudited) 8
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 36
Item 6. Exhibits and Reports on Form 8-K 36
-1-
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
ASSETS 2002 2001
------------------ ------------------
(unaudited)
Current assets:
Cash and cash equivalents $ 7,372 $ 24,500
Accounts and other receivables, less
allowance of $3,157 and $2,739 76,819 83,347
Receivables from related parties 1,687 5,907
Refundable income taxes 1,009 470
Inventories 197,716 185,052
Prepaid expenses and other 2,948 9,026
Deferred income taxes 493 385
------------------ ------------------
Total current assets 288,044 308,687
Investment in joint ventures 21,776 20,585
Preferred securities of Special Metals Corporation ("SMC") - 27,500
Property and equipment, net 265,369 275,308
Goodwill, net 45,077 44,310
Other intangible assets, net 8,925 9,836
Deferred income taxes 18 56
Other 13,458 13,101
------------------ ------------------
Total assets $ 642,667 $ 699,383
================== ==================
-2-
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
June 30, December 31,
LIABILITIES, MINORITY INTEREST AND 2002 2001
------------------ -------------------
STOCKHOLDERS' EQUITY (unaudited)
Current liabilities:
Notes payable $ 10,732 $ 1,522
Current maturities of long-term debt and
capital lease obligations 703 512
Accounts payable 25,297 42,821
Accrued liabilities 42,940 41,799
Customer advance payments 27,660 33,242
Payable to related parties 350 1,612
Income taxes 710 746
Deferred income taxes 156 106
------------------- ------------------
Total current liabilities 108,548 122,360
Long-term debt 9,571 10,712
Capital lease obligations 9,161 8,598
Payable to related parties 644 953
Accrued OPEB cost 13,983 15,980
Accrued pension cost 25,063 23,690
Accrued environmental cost 3,262 3,262
Deferred income taxes 4,098 5,509
Other 153 237
------------------ -------------------
Total liabilities 174,483 191,301
------------------ -------------------
Minority interest - Company-obligated mandatorily
redeemable preferred securities of subsidiary trust
holding solely subordinated debt securities ("Convertible
Preferred Securities") 201,241 201,241
Other minority interest 9,514 8,727
Stockholders' equity:
Preferred stock, $.01 par value; 1,000 share authorized, - -
none outstanding
Common stock, $.01 par value; 99,000 shares authorized;
31,951 and 31,946 shares issued, respectively 319 319
Additional paid-in capital 350,661 350,514
Accumulated deficit (64,268) (15,841)
Accumulated other comprehensive loss (27,708) (35,274)
Treasury stock, at cost (90 shares) (1,208) (1,208)
Deferred compensation (367) (396)
------------------ -------------------
Total stockholders' equity 257,429 298,114
------------------ -------------------
Total liabilities and stockholders' equity $ 642,667 $ 699,383
================== ===================
Commitments and contingencies (Note 14)
See accompanying notes to consolidated financial statements.
-3-
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- ------------- -------------- -------------
Revenues and other income:
Net sales $ 94,295 $ 120,035 $ 198,735 $ 244,043
Equity in earnings of joint ventures 823 248 1,328 1,114
Other 2,051 75,379 2,121 77,835
-------------- ------------- -------------- -------------
97,169 195,662 202,184 322,992
-------------- ------------- -------------- -------------
Costs and expenses:
Cost of sales 92,871 123,514 192,203 240,260
Selling, general, administrative
and development 11,414 21,211 21,793 31,911
Interest 735 1,083 1,473 2,594
Other 121 - 28,269 -
-------------- ------------- -------------- -------------
105,141 145,808 243,738 274,765
-------------- ------------- -------------- -------------
(Loss) income before income taxes
and minority interest (7,972) 49,854 (41,554) 48,227
Income tax expense (benefit) 615 17,532 (839) 16,963
Minority interest - Convertible
Preferred Securities, net of tax in 2001 3,333 2,493 6,666 4,679
Other minority interest, net of tax 425 277 1,046 649
-------------- ------------- -------------- -------------
Net (loss) income $ (12,345) $ 29,552 $ (48,427) $ 25,936
============== ============= ============== =============
(Loss) earnings per share:
Basic $ (.39) $ .94 $ (1.53) $ .82
============== ============= ============== =============
Diluted $ (.39) $ .86 $ (1.53) $ .82
============== ============= ============== =============
Weighted average shares outstanding:
Basic 31,603 31,504 31,582 31,460
Diluted 31,603 37,193 31,582 31,755
See accompanying notes to consolidated financial statements.
-4-
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
(In thousands)
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- ------------- -------------- -------------
Net (loss) income $ (12,345) $ 29,552 $ (48,427) $ 25,936
Other comprehensive income (loss) -
currency translation adjustment 8,842 (3,404) 7,566 (7,713)
-------------- ------------- -------------- -------------
Comprehensive (loss) income $ (3,503) $ 26,148 $ (40,861) $ 18,223
============== ============= ============== =============
See accompanying notes to consolidated financial statements.
-5-
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
Six months ended June 30,
-------------------------------------
2002 2001
----------------- ----------------
Cash flows from operating activities:
Net (loss) income $ (48,427) $ 25,936
Depreciation and amortization 18,248 20,161
Noncash equipment impairment charge - 10,840
Noncash impairment of SMC securities 27,500 -
Equity in (earnings) losses of joint ventures,
net of distributions (1,058) (714)
Deferred income taxes (1,672) 14,998
Other minority interest 1,046 649
Other, net 827 561
Change in assets and liabilities:
Receivables 10,529 (6,362)
Inventories (8,662) (2,923)
Prepaid expenses and other 6,165 (4,725)
Accounts payable and accrued liabilities (17,740) 7,513
Customer advance payments (6,884) 1,755
Accrued restructuring charges (117) (395)
Income taxes (1,421) 90
Accounts with related parties, net 2,648 1,457
Accrued OPEB and pension costs (1,418) (286)
Accrued dividends on SMC securities - (529)
Accrued dividends on Convertible Preferred Securities - (10,043)
Other, net 1,079 (2,793)
----------------- ----------------
Net cash (used) provided by operating activities (19,357) 55,190
----------------- ----------------
Cash flows from investing activities:
Capital expenditures (3,337) (4,200)
----------------- ----------------
Net cash used by investing activities (3,337) (4,200)
----------------- ----------------
Cash flows from financing activities:
Indebtedness:
Borrowings 206,196 272,015
Repayments (198,640) (308,557)
Dividends paid on minority interest (1,115) -
Issuance of common stock - 513
Other, net (322) (79)
----------------- ----------------
Net cash provided (used) by financing activities 6,119 (36,108)
----------------- ----------------
Net cash (used) provided by operating,
investing and financing activities $ (16,575) $ 14,882
================= ================
See accompanying notes to consolidated financial statements.
-6-
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (CONTINUED)
(In thousands)
Six months ended June 30,
-------------------------------------
2002 2001
----------------- ----------------
Cash and cash equivalents:
Net (decrease) increase from:
Operating, investing and financing activities $ (16,575) $ 14,882
Currency translation (553) 124
----------------- ----------------
(17,128) 15,006
Cash at beginning of period 24,500 9,796
----------------- ----------------
Cash at end of period $ 7,372 $ 24,802
================= ================
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 876 $ 2,127
Convertible Preferred Securities dividends $ 6,666 $ 17,227
Income taxes, net $ 2,253 $ 1,926
See accompanying notes to consolidated financial statements.
-7-
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
Six months ended June 30, 2002
(In thousands)
Accumulated Other
Additional Comprehensive Loss
------------------------ Total
Common Common Paid-In Accumulated Currency Pension Treasury Deferred Stockholders'
Shares Stock Capital Deficit Translation Liabilities Stock Compensation Equity
-------- ------- ----------- ----------- ----------- ----------- --------- ------------- -------------
Balance at December 31, 2001 31,856 $ 319 $ 350,514 $ (15,841) $ (14,395) $ (20,879) $ (1,208) $ (396) $ 298,114
Components of comprehensive
income (loss):
Net loss - - - (48,427) - - - - (48,427)
Change in cumulative
currency translation
adjustment - - - - 7,566 - - - 7,566
Issuance of common stock 5 - 20 - - - - - 20
Stock award cancellations - - (6) - - - - 6 -
Amortization of deferred
compensation - - - - - - - 156 156
Other - - 133 - - - - (133) -
-------- ------- ----------- ----------- ----------- ----------- --------- ------------- ------------
Balance at June 30, 2002 31,861 $ 319 $ 350,661 $ (64,268) $ (6,829) $ (20,879) $ (1,208) $ (367) $ 257,429
======== ======= =========== =========== =========== =========== ========= ============= ============
See accompanying notes to consolidated financial statements.
-8-
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1 - Organization and basis of presentation
Titanium Metals Corporation ("TIMET") is a vertically integrated producer
of titanium sponge, melted products and a variety of mill products for
aerospace, industrial and other applications. At June 30, 2002, Tremont
Corporation ("Tremont") held approximately 39% of TIMET's outstanding common
stock. At June 30, 2002, 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, held approximately an additional 6% of TIMET's common stock.
At June 30, 2002, 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 93% of Valhi's outstanding
common stock. Substantially all of Contran's outstanding voting stock is held by
trusts established for the benefit of certain children and grandchildren of
Harold C. Simmons, of which Mr. Simmons is sole trustee. 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.
The accompanying consolidated financial statements include the accounts of
TIMET and its majority-owned subsidiaries (collectively, the "Company"). All
material intercompany transactions and balances have been eliminated. The
consolidated balance sheet at June 30, 2002 and the consolidated statements of
operations, comprehensive income (loss), changes in stockholders' equity and
cash flows for the interim periods ended June 30, 2002 and 2001 have been
prepared by the Company without audit. In the opinion of management, all
adjustments necessary to present fairly the consolidated financial position,
results of operations and cash flows have been made. The results of operations
for interim periods are not necessarily indicative of the operating results of a
full year or of future operations. Certain prior year amounts have been
reclassified to conform to the current year presentation. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001 (the "2001
Annual Report").
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, effective April 1, 2002. SFAS No.
145, among other things, eliminated the prior requirement that all gains and
losses from the early extinguishment of debt were to be classified as an
extraordinary item. Upon adoption of SFAS No. 145, gains and losses from the
early extinguishment of debt will be classified as an extraordinary item only if
they meet the "unusual and infrequent" criteria contained in Accounting
Principles Board ("APB") Opinion No. 30. In addition, upon adoption of SFAS No.
145, all gains and losses from the early extinguishment of debt that had
previously been classified as an extraordinary item are to be reassessed to
determine if they would have met the "unusual and infrequent" criteria of APB
Opinion No. 30. Any such gain or loss that would not have met the APB Opinion
No. 30 criteria are retroactively reclassified and reported as a component of
income before extraordinary items. The Company has concluded that its
previously-recognized loss from the early extinguishment of debt that occurred
during 2000 would not have met the APB Opinion No. 30 criteria for
classification as an extraordinary item and, accordingly, such
previously-reported loss will be retroactively reclassified and reported as a
component of income before extraordinary items in the applicable reporting
periods.
-9-
Note 2 - Business segment information
The Company's worldwide operations are conducted through one business
segment - the production and sale of titanium melted and mill products. The
following provides supplemental segment information to the consolidated
statements of operations:
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- -------------- -------------- --------------
($ in thousands except selling price data)
Net sales $ 94,295 $ 120,035 $ 198,735 $ 244,043
Cost of sales 92,871 123,514 192,203 240,260
------------- -------------- -------------- --------------
Gross margin 1,424 (3,479) 6,532 3,783
Selling, general, administrative
and development expense 11,414 21,211 21,793 31,911
Equity in earnings of joint ventures 823 248 1,328 1,114
Other income (expense), net 2,158 73,052 2,209 73,808
------------- -------------- -------------- --------------
Operating (loss) income (7,009) 48,610 (11,724) 46,794
General corporate income (expense):
Dividends and interest income 24 2,039 93 3,571
Currency transactions and other, net (252) 288 (950) 456
Impairment of investment in SMC - - (27,500) -
Interest expense 735 1,083 1,473 2,594
------------- -------------- -------------- --------------
(Loss) income before income taxes
and minority interest $ (7,972) $ 49,854 $ (41,554) $ 48,227
============= ============== ============== ==============
Titanium melted and mill products:
Mill product net sales $ 70,290 $ 89,980 $ 149,987 $ 183,785
Melted product net sales 9,269 14,456 19,228 29,084
Other 14,736 15,599 29,520 31,174
------------- -------------- -------------- --------------
$ 94,295 $ 120,035 $ 198,735 $ 244,043
============= ============== ============== ==============
Mill product shipments:
Volume (metric tons) 2,130 3,045 4,815 6,230
Average price ($ per kilogram) $ 33.00 $ 29.55 $ 31.15 $ 29.50
Melted product shipments:
Volume (metric tons) 620 1,040 1,265 2,070
Average price ($ per kilogram) $ 14.95 $ 13.90 $ 15.20 $ 14.05
-10-
Note 3 - Preferred securities of SMC
On March 27, 2002, SMC and its U.S. subsidiaries filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result,
the Company undertook an assessment of its investment in SMC with the assistance
of an external valuation specialist and recorded a $27.5 million impairment
charge during the first quarter of 2002 for an other than temporary decline in
the estimated fair value of its investment in SMC. This charge reduced the
Company's carrying amount of its investment in SMC to zero.
Note 4 - Inventories
June 30, December 31,
2002 2001
------------------ ------------------
(In thousands)
Raw materials $ 53,790 $ 43,863
Work-in-process 88,566 94,709
Finished products 65,711 54,074
Supplies 14,239 13,476
------------------ ------------------
222,306 206,122
Less adjustment of certain inventories to LIFO basis 24,590 21,070
------------------ ------------------
$ 197,716 $ 185,052
================== ==================
Note 5 - Goodwill and intangible assets
The Company's goodwill, arising from business combinations accounted for
under the purchase method, is stated net of accumulated amortization recorded
through December 31, 2001. On January 1, 2002, the Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill is no longer
amortized on a periodic basis, but instead is subject to a two-step impairment
test to be performed on at least an annual basis. The change in net goodwill
during the first half of 2002 is due to currency translation effects.
In order to test for impairment, SFAS No. 142 requires the Company to
identify its reporting units and determine the carrying amount of each reporting
unit by assigning its assets and liabilities, including existing goodwill and
intangible assets, to those reporting units as of January 1, 2002. The Company
has determined that it operates one reporting unit, as that term is defined by
SFAS No. 142, consisting of the Company in total. The first step of the
impairment test requires the Company to determine the fair value of its
reporting unit and compare it to that reporting unit's carrying amount. To the
extent that the carrying amount of the Company's reporting unit exceeds its fair
value, an indication exists that the reporting unit's goodwill may be impaired
and the Company must perform the second step of the impairment test. The Company
has completed the first step of its transitional impairment test, which
indicates that an impairment of its recorded goodwill may exist. The Company is
currently performing the second step of its transitional impairment test, which
requires the Company to compare the implied fair value of its reporting unit's
goodwill with the carrying amount of that goodwill. If the goodwill's carrying
amount exceeds its implied fair value, an impairment loss will be recognized in
an amount equal to that excess. The Company currently estimates it is likely
that the entire amount of the Company's goodwill balance (approximately $45
million at June 30, 2002) may be deemed impaired. Any such transitional
impairment will 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.
-11-
As shown in the following table, the Company would have reported a net
income of $30.4 million and $27.6 million or $.88 and $.87 per diluted share for
the three and six months ended June 30, 2001, respectively, if the goodwill
amortization included in the Company's reported net income had not been
recognized.
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- -------------- -------------- --------------
(In thousands except per share data)
Net (loss) income as reported $ (12,345) $ 29,552 $ (48,427) $ 25,936
Adjustments for:
Goodwill amortization - 1,148 - 2,305
Tax provision on amortization - (307) - (615)
------------- -------------- -------------- --------------
Adjusted net (loss) income $ (12,345) $ 30,393 $ (48,427) $ 27,626
============= ============== ============== ==============
Net (loss) income per basic share as reported $ (.39) $ .94 $ (1.53) $ .82
Adjustments for:
Goodwill amortization - .04 - .07
Tax provision on amortization - (.01) - (.02)
------------- -------------- -------------- --------------
Adjusted net (loss) income per basic share $ (.39) $ .97 $ (1.53) $ .87
============= ============== ============== ==============
Net (loss) income per diluted share as reported $ (.39) $ .86 $ (1.53) $ .82
Adjustments for:
Goodwill amortization - .03 - .07
Tax provision on amortization - (.01) - (.02)
------------- -------------- -------------- --------------
Adjusted net (loss) income per diluted share $ (.39) $ .88 $ (1.53) $ .87
============= ============== ============== ==============
As required by SFAS No. 142, the Company has evaluated the remaining useful
lives of its intangible assets with definite lives, comprised of patents and
covenants not to compete. Based on this evaluation, the Company's patents and
covenants not to compete will continue to be amortized over their weighted
average remaining amortization periods of 3.75 and .75 years, respectively. The
carrying amount and accumulated amortization of the Company's intangible assets
are as follows:
June 30, 2002 December 31, 2001
---------------------------------- -------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------- ----------------- ------------ --------------
(In thousands)
Intangible assets:
Definite lives, subject to amortization:
Patents $ 13,625 $ 8,456 $ 13,405 $ 7,606
Covenants not to compete 8,720 8,162 8,353 7,514
Other intangible asset - pension asset(1) 3,198 - 3,198 -
------------- ----------------- ------------ --------------
$ 25,543 $ 16,618 $ 24,956 $ 15,120
============= ================= ============ ==============
(1) Not covered by the scope of SFAS No. 142.
-12-
For the three and six months ended June 30, 2002, the Company's
amortization expense relating to its intangible assets was $.5 million and $1.0
million, respectively. The estimated aggregate annual amortization expense for
the Company's patents and covenants not to compete for the next five fiscal
years is summarized in the table below.
Estimated annual
amortization expense
----------------------------------
(In thousands)
Year ending December 31,
2002 $ 2,062
2003 $ 1,560
2004 $ 1,392
2005 $ 947
2006 $ 677
Note 6 - Property and equipment
June 30, December 31,
2002 2001
------------------ ------------------
(In thousands)
Land $ 6,176 $ 6,138
Buildings 37,296 36,574
Information technology systems 56,948 55,112
Manufacturing and other 310,620 300,315
Construction in progress 7,755 11,631
------------------ ------------------
418,795 409,770
Less accumulated depreciation 153,426 134,462
------------------ ------------------
$ 265,369 $ 275,308
================== ==================
Note 7 - Other noncurrent assets
June 30, December 31,
2002 2001
------------------ ------------------
(In thousands)
Deferred financing costs $ 7,164 $ 8,212
Notes receivable from officers 163 163
Prepaid pension cost 4,513 4,006
Refundable income taxes 1,009 -
Other 609 720
------------------ ------------------
$ 13,458 $ 13,101
================== ==================
-13-
Note 8 - Accrued liabilities
June 30, December 31,
2002 2001
------------------ ------------------
(In thousands)
OPEB cost $ 4,485 $ 2,969
Pension cost 1,056 555
Incentive compensation 3,111 6,077
Other employee benefits 13,702 14,616
Deferred income 854 325
Environmental costs 537 654
Restructuring costs 80 198
Tungsten costs 2,701 2,743
Taxes, other than income 4,559 4,867
Dividends on Convertible Preferred Securities 1,111 1,111
Other 10,744 7,684
------------------ ------------------
$ 42,940 $ 41,799
================== ==================
Accrued restructuring costs of $.1 million at June 30, 2002 consist of
unpaid personnel severance and benefits for terminated employees relating to the
Company's restructuring plans implemented during 1999 and 2000. During the six
months ended June 30, 2002, the Company applied payments of $.1 million against
the accrued costs related to the restructuring plans. During the six months
ended June 30, 2001, the Company applied payments of $.4 million against the
accrued costs related to the restructuring plans and recorded income of $.2
million related to revisions to estimates of previously established
restructuring accruals.
Note 9 - Customer advance payments
As of June 30, 2002, approximately $23.5 million of the customer advance
liability was related to the Company's long-term-agreement ("LTA") with The
Boeing Company ("Boeing"). In April 2001, the Company reached a settlement of
the litigation between TIMET and Boeing related to the parties' LTA entered into
in 1997. Under the terms of the LTA, in years 2002 through 2007, Boeing advances
TIMET $28.5 million annually less $3.80 per pound of titanium product purchased
by Boeing subcontractors during the preceding year.
Effectively, the Company collects $3.80 less from Boeing than the LTA
selling price for each pound of titanium product sold directly to Boeing and
reduces the related customer advance liability recorded by the Company. For
titanium products sold to Boeing subcontractors, the Company collects the full
LTA selling price, but gives Boeing credit by reducing the next year's annual
advance by $3.80 per pound of titanium product sold to Boeing subcontractors.
The Boeing customer advance liability is also reduced as take-or-pay benefits
are earned, as described in Note 12.
-14-
Note 10 - Notes payable, long-term debt and capital lease obligations
June 30, December 31,
2002 2001
------------------ ------------------
(In thousands)
Notes payable:
U.S. credit agreement $ 9,056 $ 30
European credit agreements 1,676 1,492
------------------ ------------------
$ 10,732 $ 1,522
================== ==================
Long-term debt:
Bank credit agreement - U.K. $ 9,571 $ 10,712
Other 95 172
------------------ ------------------
9,666 10,884
Less current maturities 95 172
------------------ ------------------
$ 9,571 $ 10,712
================== ==================
Capital lease obligations $ 9,769 $ 8,938
Less current maturities 608 340
------------------ ------------------
$ 9,161 $ 8,598
================== ==================
Borrowings under the Company's U.S. asset-based revolving credit agreement
are limited to the lesser of $125 million or 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", as defined, 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 June 30, 2002, excess availability was approximately $90 million.
The Company's U.S. credit agreement allows the lender to modify the
borrowing base formulas at its discretion, subject to certain conditions. During
the second quarter of 2002, the Company's lender elected to exercise such
discretion and modified the Company's borrowing base formulas, which reduced the
amount that the Company can borrow against its inventory and equipment by
approximately $7 million. In the event the lender exercises such discretion in
the future, such event could have a material adverse impact on the Company's
liquidity. Borrowings outstanding under this U.S. facility are classified as a
current liability. Unused borrowing availability under this agreement at June
30, 2002 was approximately $93 million. The credit agreement expires in February
2003. The Company is currently negotiating with its lender to extend the
maturity date of this agreement on substantially similar terms; however, no
assurance can be given that an agreement to extend this facility will be
achieved.
-15-
The Company's subsidiary, TIMET UK, has a credit agreement that provides
for borrowings limited to the lesser of (pound)30 million or a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and equipment ("borrowing availability"). The credit agreement
includes a revolving and term loan facility and an overdraft facility (the "U.K.
facilities"). 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 for one year
in February 2002. The U.K. facilities expire in February 2005. As of June 30,
2002, the outstanding balance of the U.K. facilities was approximately $10
million with unused borrowing availability of approximately $32 million.
The Company also has overdraft and other credit facilities at certain of
its other European subsidiaries. These facilities accrue interest at various
rates and are payable on demand. Unused borrowing availability as of June 30,
2002 under these facilities was approximately $14 million.
The weighted average interest rate on borrowings outstanding under the
U.S., U.K. and other European credit agreements for the six months ended June
30, 2002 was 5.25%, 5.56% and 4.29%, respectively.
Note 11 - Minority interest
During the second quarter of 2002, TIMET Savoie, S.A. ("TIMET Savoie"), the
Company's 70% owned consolidated French subsidiary, paid a dividend, of which
$1.1 million was paid to Compagnie Europeene du Zirconium-CEZUS, the 30%
minority owner in TIMET Savoie.
Note 12 - Other income and other expense
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- -------------
(In thousands)
Other income:
Dividends and interest income $ 24 $ 2,017 $ 93 $ 3,530
Boeing settlement, net of legal fees - 73,000 - 73,000
Boeing take-or-pay 2,156 - 2,156 -
Foreign exchange (loss) gain (226) 305 (342) 438
Restructuring credit - - - 220
Other 97 57 214 647
-------------- -------------- -------------- -------------
$ 2,051 $ 75,379 $ 2,121 $ 77,835
============== ============== ============== =============
Other expense:
Impairment of investment in SMC (Note 3) $ - $ - $ 27,500 $ -
Other 121 - 769 -
-------------- -------------- -------------- -------------
$ 121 $ - $ 28,269 $ -
============== ============== ============== =============
-16-
Pursuant to the Boeing 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.
The terms of the amended Boeing LTA allow Boeing to purchase up to 7.5
million pounds of titanium product annually from TIMET through 2007, but limit
TIMET's maximum quarterly volume obligation to 3.0 million pounds. The LTA is
structured as a take-or-pay agreement such that, beginning in calendar year
2002, Boeing forfeits $3.80 per pound of its advance payment in the event that
its orders for delivery are less than 7.5 million pounds in any given calendar
year. The Company recognizes income to the extent Boeing's year-to-date orders
for delivery plus TIMET's maximum quarterly volume obligations for the remainder
of the year total less than 7.5 million pounds. This income is recognized as
other operating income and is not included in net sales or gross margin. Based
on actual purchases of approximately .9 million pounds through June 30, 2002 and
the Company's contractual maximum volume obligation of 6.0 million pounds for
the remainder of the year, the Company recognized $2.2 million of income in the
second quarter of 2002 related to the take-or-pay provisions for the .6 million
pounds of material that the Company is no longer obligated to provide under the
LTA in 2002. Recognition of the take-or-pay income reduces the Boeing customer
advance liability as described in Note 9.
Note 13 - Income taxes
Six months ended June 30,
----------------------------------------
2002 2001
------------------ ------------------
(In thousands)
Expected income tax (benefit) expense, at 35% $ (14,544) $ 16,879
Non-U.S. tax rates 658 277
U.S. state income taxes, net 162 662
Dividends received deduction - (632)
Effect of change in tax law (1,797) -
Adjustment of deferred tax valuation allowance 14,767 (39)
Other, net (85) (184)
------------------ ------------------
$ (839) $ 16,963
================== ==================
During the first quarter of 2002, the Job Creation and Worker Assistance
Act of 2002 (the "Act") was signed into law. The Company benefits from certain
provisions of the Act, which liberalized certain net operating loss ("NOL") and
alternative minimum tax ("AMT") restrictions. Prior to the law change, NOLs
could be carried back two years and forward 20 years. The Act increases the
carryback period for losses generated in 2001 and 2002 to five years with no
change to the carryforward period. In addition, losses generated in 2001 and
2002 can be carried back and offset against 100% of a taxpayer's alternative
minimum taxable income ("AMTI"). Prior to the law change, an NOL could offset no
more than 90% of a taxpayer's AMTI. The suspension of the 90% limitation is also
applicable to NOLs carried forward into 2001 and 2002. Based on these changes,
the Company recognized $1.8 million of refundable U.S. income taxes during the
first quarter of 2002.
-17-
At June 30, 2002, the Company had, for U.S. federal income tax purposes,
NOL carryforwards of approximately $90 million that expire between 2020 and
2022. At June 30, 2002, the Company had AMT credit carryforwards of
approximately $4 million, which can be utilized to offset regular income taxes
payable in future years. The AMT credit carryforward has an indefinite
carryforward period. At June 30, 2002, the Company had the equivalent of an $11
million NOL carryforward in the United Kingdom and a $2 million NOL carryforward
in Germany, both of which have indefinite carryforward periods.
Note 14 - Commitments and contingencies
For additional information concerning certain legal proceedings and
contingencies related to the Company, see (i) Part I, Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations, (ii)
Part II, Item 1 - Legal Proceedings and (iii) the 2001 Annual Report on Form
10K.
Long-term agreements. The Company has LTAs with certain major aerospace
customers, including, but not limited to, Boeing, Rolls-Royce plc, United
Technologies Corporation (Pratt & Whitney and related companies) and
Wyman-Gordon Company (a unit of Precision Castparts Corporation). 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, under a group of related LTAs (which group represents
approximately 15% of the Company's 2001 sales revenue), which currently have
fixed prices that convert to formula-derived prices in 2004, the customer may
terminate the agreement as of the end of 2003 if the effect of the initiation of
formula-derived pricing would cause such customer "material harm." If any of
such agreements were to be terminated by the customer on this basis, it is
possible that some portion of the business represented by that LTA would
continue on a non-LTA basis. However, the termination of one or more of such
agreements by the customer in such circumstances could result in a material and
adverse effect on the Company's business, results of operations, consolidated
financial condition or liquidity.
Environmental matters. 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.
-18-
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.
At June 30, 2002, the Company had accrued an aggregate of $3.8 million 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, and no estimate of a possible loss is
determinable at this time, but in any event the Company does not presently
anticipate that any adverse outcome in this case would be material to its
results of operations, consolidated financial position or liquidity.
-19-
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. At the
present time, the Company is aware of six standard grade ingots that have been
demonstrated to contain tungsten inclusions. Based upon the Company's assessment
of possible losses, TIMET recorded an aggregate charge to cost of sales for this
matter of $3.3 million during 2001 (of which $2.8 million was recorded in the
second quarter of 2001). During 2001, the Company charged $.3 million against
this accrual to write down its remaining on-hand inventory and made $.3 million
in settlement payments, resulting in a $2.7 million accrual as of December 31,
2001 for potential future claims. During 2002, the Company has made settlement
payments aggregating $.2 million. Additionally, the Company has revised its
estimate of the most likely amount of loss to be incurred, resulting in a charge
of $.2 million to cost of sales in the second quarter of 2002. As of June 30,
2002, $2.7 million is accrued for pending and potential future claims. This
amount represents the Company's best estimate of the most likely amount of loss
to be incurred. This amount 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 June 30,
2002, the Company has received claims aggregating approximately $5 million and
has made settlement payments aggregating $.5 million. Pending claims are being
investigated and negotiated. The Company believes that certain claims are
without merit or can be settled for less than the amount of the original claim.
There is no assurance that all potential claims have yet been submitted to the
Company. The Company has filed suit seeking full recovery from its 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 June 30, 2002.
As a consequence of uncertainties surrounding both the titanium and
commercial aerospace industries and broader economic conditions, the Company
believes assessments of long-lived asset recoverability, as required under SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that
may result in charges for asset impairments could occur in the balance of 2002.
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 and charges for asset
impairments, if any, are recorded when reasonably estimable. Such potential
future charges, if any, could be material.
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 condition
or liquidity.
-20-
Note 15 - Earnings (loss) per share
Basic earnings (loss) per share is based on the weighted average number of
unrestricted common shares outstanding during each period. Diluted earnings
(loss) per share reflect the dilutive effect of common stock options, restricted
stock and the assumed conversion of the Convertible Preferred Securities, if
applicable. The assumed conversion of the Convertible Preferred Securities was
omitted from the diluted earnings (loss) per share calculation for the three and
six months ended June 30, 2002 and for the six months ended June 30, 2001
because the effect was antidilutive. Had the Convertible Preferred Securities
not been antidilutive, diluted losses would have been decreased by $3.3 million
and $6.7 million for the three and six months ended June 30, 2002, respectively
and by $4.7 million for the six months ended June 30, 2001. Diluted average
shares outstanding would have been increased by 5.4 million shares for each of
these three periods. Stock options and restricted shares omitted from the
calculation because they were antidilutive approximated 1.8 million for the
three and six months ended June 30, 2002. A reconciliation of the numerator and
denominator used in the calculation of basic and diluted earnings per share is
presented below.
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- ------------- -------------- -------------
(In thousands) (In thousands)
Numerator:
Net (loss) income $ (12,345) $ 29,552 $ (48,427) $ 25,936
Minority interest - Convertible
Preferred Securities - 2,493 - -
-------------- ------------- -------------- -------------
Diluted net (loss) income $ (12,345) $ 32,045 $ (48,427) $ 25,936
============== ============= ============== =============
Denominator:
Average common shares outstanding 31,603 31,504 31,582 31,460
Average dilutive stock options and
restricted shares - 299 - 295
Convertible Preferred Securities - 5,390 - -
-------------- ------------- -------------- -------------
Diluted shares 31,603 37,193 31,582 31,755
============== ============= ============== =============
Note 16 - Accounting principles not yet adopted
In 2001, the Financial Accounting Standards Board 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.
-21-
The Company will adopt SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, no later than January 1, 2003 for exit or disposal
activities initiated on or after the date of adoption. Under SFAS No. 146, costs
associated with exit activities, as defined, that are covered by the scope of
SFAS No. 146 are recognized and measured initially at fair value, generally in
the period in which the liability is incurred. SFAS No. 146 eliminates the
definition and requirement for recognition of exit costs in Emerging Issues Task
Force Issue No. 94-3 where a liability for an exit cost was recognized at the
date of an entity's commitment to an exit plan. Costs covered by the scope of
SFAS No. 146 include termination benefits provided to employees, costs to
consolidate facilities or relocate employees, and costs to terminate contracts
(other than a capital lease). The Company is currently unable to determine the
effect, if any, of adopting this standard.
-22-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes certain components of the Company's results
for the three and six month periods ended June 30, 2002 and 2001. 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. 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.
Three months ended Six months ended
June 30, June 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- - --------------
($ in thousands) ($ in thousands)
Net sales $ 94,295 $ 120,035 $ 198,735 $ 244,043
Gross margin 1,424 (3,479) 6,532 3,783
Gross margin, excluding special items 1,424 10,120 6,532 18,382
Operating (loss) income (7,009) 48,610 (11,724) 46,794
Operating (loss) income, excluding
restructuring and special items (7,009) (452) (11,724) (1,488)
Percent of net sales:
Gross margin 2% -3% 3% 2%
Gross margin, excluding special items 2% 8% 3% 8%
Percent change in:
Mill product sales volume -30 -23
Mill product selling prices (1) +4 +4
Melted product sales volume -40 -39
Melted product selling prices (1) +3 +5
--------------------------------------------------------------------------------
(1) Change expressed in U.S. dollars and mix adjusted.
Second quarter of 2002 compared to second quarter of 2001. Sales of $94.3
million in the second quarter of 2002 were 21% lower than the year-ago period
due principally to the net effects of a 30% decrease in mill product volume and
a 40% decrease in melted product volume, partially offset by 4% and 3% increases
in mill and melted product selling prices, respectively (mill product selling
prices expressed in U.S. dollars using actual foreign currency exchange rates
prevailing during the respective periods) and changes in customer and product
mix. In billing currencies (which exclude the effects of foreign currency
translation), mill product selling prices also increased 4%.
-23-
Gross margin (net sales less cost of sales) was 2% of sales for the second
quarter of 2002 compared to negative 3% in the year-ago period, reflecting the
net effect of a decrease in sales volumes, slightly higher selling prices, lower
operating rates at certain facilities (estimated capacity utilization declined
from approximately 75% to 55%), changes in customer and product mix and the
effect of special items. Gross margin for the second quarter of 2001 was
adversely impacted by $10.8 million of equipment impairment charges and $2.8
million of estimated costs related to the tungsten matter discussed below. Gross
margin excluding special items was 8% of sales for the second quarter of 2001.
The 2001 period was also adversely impacted by goodwill amortization of $1.1
million. As required by SFAS No. 142, and effective January 1, 2002, the Company
no longer amortizes its goodwill on a periodic basis. See Note 5 to the
Consolidated Financial Statements.
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. At the
present time, the Company is aware of six standard grade ingots that have been
demonstrated to contain tungsten inclusions. Based upon the Company's assessment
of possible losses, TIMET recorded an aggregate charge to cost of sales for this
matter of $3.3 million during 2001 (of which $2.8 million was recorded in the
second quarter of 2001). During 2001, the Company charged $.3 million against
this accrual to write down its remaining on-hand inventory and made $.3 million
in settlement payments, resulting in a $2.7 million accrual as of December 31,
2001 for potential future claims. During 2002, the Company has made settlement
payments aggregating $.2 million. Additionally, the Company has revised its
estimate of the most likely amount of loss to be incurred, resulting in a charge
of $.2 million to cost of sales in the second quarter of 2002. As of June 30,
2002, $2.7 million is accrued for pending and potential future claims. This
amount represents the Company's best estimate of the most likely amount of loss
to be incurred. This amount 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 June 30,
2002 the Company has received claims aggregating approximately $5 million and
has made settlement payments aggregating $.5 million. Pending claims are being
investigated and negotiated. The Company believes that certain claims are
without merit or can be settled for less than the amount of the original claim.
There is no assurance that all potential claims have yet been submitted to the
Company. The Company has filed suit seeking full recovery from its 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 June 30, 2002.
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. Accordingly, the Company recorded
a $10.8 million pretax impairment charge to cost of sales in the second quarter
of 2001, representing the difference between the assets' previous carrying
amount and their estimated fair values, based on a third-party appraisal.
Selling, general, administrative and development expenses during the second
quarter of 2002 increased by approximately 5% from year-ago levels (excluding
$10.3 million of incentive compensation related to the Boeing settlement in the
2001 period), principally as a result of increases to the Company's allowance
for doubtful accounts and higher selling and marketing costs relating to the
Company's automotive division.
Equity in earnings of joint ventures during the second quarter of 2002 was
$.6 million higher than the year-ago period principally due to an increase in
earnings of VALTIMET, the Company's minority-owned welded tube joint venture.
-24-
Other income (expense), net during the second quarter of 2002 was $70.9
million lower than the year-ago period principally due to the recognition of
$73.0 million of income in the 2001 period related to a settlement of the
litigation between TIMET and Boeing related to the parties' LTA entered into in
1997. The terms of the amended Boeing LTA allow Boeing to purchase up to 7.5
million pounds of titanium product annually from TIMET through 2007 but limit
TIMET's maximum quarterly volume obligation to 3.0 million pounds. The Company
recognizes income to the extent Boeing's year-to-date orders for delivery plus
TIMET's maximum quarterly volume obligations for the remainder of the year total
less than 7.5 million pounds. This income is recognized as other operating
income and is not included in net sales or gross margin. Based on actual
purchases of approximately .9 million pounds through June 30, 2002 and the
Company's contractual maximum volume obligation of 6.0 million pounds for the
remainder of the year, the Company recognized $2.2 million of other income in
the second quarter of 2002 related to the take-or-pay provisions for the .6
million pounds of material that the Company is no longer obligated to provide
under the LTA in 2002.
First six months of 2002 compared to first six months of 2001. Sales of
$198.7 million for the six months ended June 30, 2002 were 19% lower than the
year-ago period due principally to the net effects of a 23% decrease in mill
product volume and a 39% decrease in melted product volume, partially offset by
4% and 5% increases in mill and melted product selling prices, respectively
(mill product selling prices expressed in U.S. dollars using actual foreign
currency exchange rates prevailing during the respective periods) and changes in
customer and product mix. In billing currencies (which exclude the effects of
foreign currency translation), mill product prices also increased 4%.
Gross margin was 3% of sales for the six months ended June 30, 2002
compared to 2% in the year-ago period, principally reflecting the net effect of
a decrease in sales volume, slightly higher selling prices, lower operating
rates at certain facilities (estimated capacity utilization declined from
approximately 70% to 60%), changes in customer and product mix and the effect of
special items. Gross margin for the six months ended June 30, 2001 was adversely
impacted by $10.8 million of equipment impairment charges and $3.8 million of
estimated costs related to the tungsten matter described above. Gross margin
excluding special items was 8% of sales for the six months ended June 30, 2001.
The 2001 period was also adversely impacted by goodwill amortization of $2.3
million. As required by SFAS No. 142, effective January 1, 2002, the Company no
longer amortizes its goodwill on a periodic basis. See Note 5 to the
Consolidated Financial Statements.
Selling, general, administrative and development expenses for the six
months ended June 30, 2002 increased by approximately 1% from year-ago levels
(excluding $10.3 million of incentive compensation related to the Boeing
settlement in the 2001 period), principally as a result of higher selling and
marketing costs relating to the Company's automotive division, partially offset
by lower personnel-related costs.
Equity in earnings of joint ventures during the six months ended June 30,
2002 was $.2 million higher than the year ago period principally due to an
increase in earnings of VALTIMET.
Other income (expense), net during the six months ended June 30, 2002 was
$71.6 million lower than the year-ago period principally due to the recognition
of $73.0 million of income in the 2001 period related to a settlement of the
previously discussed litigation between TIMET and Boeing and the $2.2 million of
other operating income recognized in the second quarter of 2002 related to the
Boeing take-or-pay agreement.
-25-
General corporate income (expense). General corporate income (expense) for
the three and six months ended June 30, 2001 includes interest income and
dividend income on $80 million of non-voting preferred securities of Special
Metals Corporation ("SMC"), which accrued at an annual rate of 6.625%. No
interest income or dividend income relating to these securities was recognized
during the three and six months ended June 30, 2002. On March 27, 2002, SMC and
its U.S. subsidiaries filed voluntary petitions for reorganization under Chapter
11 of the U.S. Bankruptcy Code. As a result, the Company undertook an assessment
of its investment in SMC with the assistance of an external valuation specialist
and recorded a $27.5 million impairment charge during the first quarter of 2002
for an other than temporary decline in the estimated fair value of its
investment in SMC. This charge reduced the Company's carrying amount of its
investment in SMC to zero. See Note 3 to the Consolidated Financial Statements.
Interest expense. Interest expense during the three and six months ended
June 30, 2002 was lower than in the comparable periods in 2001, primarily due to
lower average debt levels and lower interest rates during the 2002 period.
Income taxes. During the first quarter of 2002, the Job Creation and Worker
Assistance Act of 2002 (the "Act") was signed into law. The Company benefits
from certain provisions of the Act, which liberalized certain net operating loss
("NOL") and alternative minimum tax restrictions. Prior to the law change, NOLs
could be carried back two years and forward 20 years. The Act increases the
carryback period for losses generated in 2001 and 2002 to five years with no
change to the carryforward period. In addition, losses generated in 2001 and
2002 can be carried back and offset against 100% of a taxpayer's alternative
minimum taxable income ("AMTI"). Prior to the law change, an NOL could offset no
more than 90% of a taxpayer's AMTI. The suspension of the 90% limitation is also
applicable to NOLs carried forward into 2001 and 2002. Based on these changes,
the Company recognized $1.8 million of refundable U.S. income taxes during the
first quarter of 2002.
The Company operates in several tax jurisdictions and is subject to varying
income tax rates. As a result, the geographic mix of pretax income can impact
the Company's overall effective tax rate. The Company's income tax rate
approximated the U.S. statutory rate during the second quarter 2001. For the
three and six months ended June 30, 2002, the Company's income tax rate varied
from the U.S. statutory rate primarily due to an increase in the deferred tax
valuation allowance related to the Company's tax attributes that did not meet
the "more-likely-than-not" recognition criteria during that period. See Note 13
to the Consolidated Financial Statements.
Minority interest. Dividend expense related to the Company's 6.625%
Convertible Preferred Securities approximates $3.3 million per quarter and is
reported as minority interest. For the three and six months ended June 30, 2001,
this expense was recorded net of allocable income taxes; however, as a result of
the Company's decision to increase its deferred tax valuation allowance, this
expense was reported pre-tax for the three and six months ended June 30, 2002.
In addition, in the second quarter of 2001 the Company recorded an additional
$.5 million of pretax dividend expense related to dividends in arrears. Other
minority interest relates primarily to the 30% interest in TIMET Savoie, SA held
by Compagnie Europeene du Zirconium-CEZUS, S.A. ("CEZUS").
-26-
Supplemental information. Approximately 43% of the Company's sales
originated in Europe for the six months ended June 30, 2002, of which
approximately 60% were denominated in currencies other than the U.S. dollar,
principally the British pound and 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 that may
impact reported earnings and may affect the comparability of period-to-period
operating results. Borrowings of the Company's European operations may be in
U.S. dollars or in functional currencies. The Company's export sales from the
U.S. are denominated in U.S. dollars and as such are not subject to currency
exchange rate fluctuations.
The Company does not use currency contracts to hedge its currency
exposures. At June 30, 2002, consolidated assets and liabilities denominated in
currencies other than functional currencies were approximately $40 million and
$38 million, respectively, consisting primarily of U.S. dollar cash, accounts
receivable, accounts payable and borrowings.
In July 2002, the Company successfully negotiated a new three-year labor
agreement with its labor unions at its Toronto, Ohio facility.
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, changes in accounting principles and similar
items, unless otherwise noted. Undue reliance should not be placed on
forward-looking statements. Actual results may differ materially. See Notes 1,
5, 12, 14 and 16 to the Consolidated Financial Statements regarding commitments,
contingencies, legal, environmental and other matters, which may materially
affect the Company's future business, results of operations, consolidated
financial position and liquidity.
The economic slowdown that began during 2001 in the economies of the U.S.
and other regions of the world combined with the events of September 11, 2001
have resulted in the major commercial airframe and jet engine manufacturers
substantially reducing their forecast of future engine and aircraft deliveries
and their production levels in 2002. The Company expects that aggregate industry
mill product shipments will decrease in 2002 by approximately 18%, from its
revised estimate of 55,000 metric tons in 2001 to an estimated 45,000 metric
tons, and 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. Excess inventory accumulation typically leads to order
demand for titanium products falling below actual consumption.
-27-
The Company believes that demand for titanium is likely to recover more
gradually than it previously anticipated based on recent projections of large
commercial aircraft deliveries by The Airline Monitor. The Airline Monitor's
latest forecast for deliveries of large commercial aircraft is for 675 in 2002,
595 in 2003, 525 in 2004, 495 in 2005, 565 in 2006 and 685 in 2007. Although
these projections are somewhat higher in 2002 through 2004, they are down 13% to
17% from The Airline Monitor's previous forecast for 2005 through 2007. The
demand for titanium generally precedes aircraft deliveries by about one year and
can be significantly affected by both excess inventory accumulation and its
subsequent absorption. Based on The Airline Monitor's current forecast and the
Company's projected changes in supply chain inventory levels, the Company
anticipates a cyclical trough in titanium demand may occur in 2003 with a
gradual recovery beginning thereafter. Adverse world events, including terrorist
activities and conflicts in the Middle East, the financial health of airlines
and economic growth in the U.S. and other regions of the world, could
significantly and adversely affect the timing of the commercial aerospace
recovery.
The Company's backlog of unfilled orders was approximately $145 million at
June 2002, compared to $175 million at March 2002 and $300 million at June 2001.
Substantially all of the June 2002 backlog is scheduled to be shipped within the
next 12 months. However, the Company's order backlog may not be a reliable
indicator of future business activity. Since September 11, 2001, the Company has
continued to receive a number of deferrals and cancellations of previously
scheduled orders and believes such requests will continue throughout 2002.
Although the current business environment makes it difficult to predict the
Company's future financial performance, the Company expects its sales revenue
for the full year of 2002 to decline to about $375 million, reflecting the
combined effects of decreases in sales volume, softening of market selling
prices and changes in customer and product mix. Compared to 2001, mill product
sales volume is expected to decline approximately 25% to about 9,100 metric
tons. Melted product sales volume is expected to decline approximately 40% to
about 2,600 metric tons. The reduction of overall sales volume in 2002 is
principally driven by an anticipated decline of 35% in the Company's commercial
aerospace sales volume compared to 2001, partly offset by sales volume growth in
other markets. The Company expects market selling prices on new orders to
continue to soften throughout the balance of 2002. However, about one-half of
the Company's commercial aerospace volume is under LTAs that provide price
stability on that portion of its business. The Company's forecast anticipates
that Boeing will purchase about 1.5 million pounds of product under its LTA with
the Company in 2002. At that level, the Company expects to recognize about $23
million of income under the Boeing agreement's take-or-pay provisions for the
full year 2002. Those earnings will be reported as operating income, but will
not be included in net sales or gross margin.
The Company currently anticipates gross margin as a percent of sales will
decrease over the year and that gross margin for the full year 2002 will be
between negative 1% and negative 4%. Selling, general, administrative and
development expense should be approximately $43 million. Interest expense should
approximate $4 million. The Company's consolidated effective book tax rate is
expected to be about 5%, but could vary significantly with the geographic mix of
income. Minority interest on the Company's Convertible Preferred Securities
should approximate $13 million. The Company presently expects an operating loss
before special items of $25 million to $35 million and a net loss before changes
in accounting principles and other special items of between $40 million and $50
million in 2002.
-28-
The Company expects cash flow from operations in 2002 to be approximately
negative $30 million. This is mainly due to the effect in 2002 of the $28.5
million cash advance payment that the Company received from Boeing in December
2001. That advance created a liability for the same amount at year end 2001. The
liability is being reduced during 2002 as product shipments are made and as the
take-or-pay benefits are earned. The advance for calendar year 2003 will not be
received until early in 2003. Excluding the effect of the Boeing advance, the
Company expects cash flow from operations to be slightly negative in 2002. Cash
flow from operations is also expected to be affected by increased payments to
fund employee retirement plan benefits due to decreases in the value of the
underlying plan assets and certain early employee retirements. Capital
expenditures are expected to be approximately $12 million. Depreciation and
amortization should approximate $37 million.
For the third quarter of 2002, the Company expects sales revenue to range
between $75 million and $85 million. Mill product sales volume is expected to be
about 2,000 metric tons and melted product sales volume should be about 600
metric tons. Certain third quarter production was pulled forward into the second
quarter of 2002. As a result of this and the current reduced demand for
titanium, the Company's forecast anticipates temporary shutdowns of certain U.S.
facilities in the second half of this year. These shutdowns are currently
expected to be only a few weeks each in duration, but that will ultimately be
dependent on the level of production needed to meet demand. Gross margin as a
percent of sales in the third quarter is expected to range between negative 4%
and negative 8%. Selling, general, administrative and development expense in the
third quarter of 2002 should be about $11 million. The Company expects to
recognize an additional $10 million of operating income related to the
take-or-pay provisions of the Boeing contract during the third quarter. Interest
expense should approximate $1 million while minority interest on the Company's
Convertible Preferred Securities should approximate $3.3 million. With these
estimates, the Company expects an operating loss before special items in the
third quarter of 2002 of between $4 million and $7 million, and a net loss
before changes in accounting principles and other special items of between $8
million and $12 million.
The Company expects to take actions to reduce its costs and working capital
over the balance of 2002. The Company plans to reduce the operating rate of its
sponge production facility to about 70% of capacity for the last half of this
year, and it recently targeted an additional reduction in its Company-wide
employment levels of 10% to 15% by year end. At June 30, 2002, the Company
employed approximately 2,250 personnel worldwide. The timing and effect of these
recent decisions is somewhat uncertain and, accordingly, the effect of such
items has not been included in the 2002 forecasts outlined above. These actions
could result in restructuring or other charges in 2002 that might be material.
-29-
The Company adopted SFAS No. 142 effective as of January 1, 2002. Under
SFAS No. 142, goodwill is no longer amortized on a periodic basis, but instead
is subject to a two-step impairment test to be performed at least on an annual
basis. In order to test for impairment, SFAS No. 142 requires the Company to
identify its reporting units and determine the carrying amount of each reporting
unit by assigning its assets and liabilities, including existing goodwill and
intangible assets, to those reporting units as of January 1, 2002. The Company
has determined that it operates one reporting unit, as defined by SFAS No. 142.
The first step of the impairment test requires the Company to determine the fair
value of its reporting unit and compare it to that reporting unit's carrying
amount. To the extent that the carrying amount of the Company's reporting unit
exceeds its fair value, an indication exists that the reporting unit's goodwill
may be impaired and the Company must perform the second step of the impairment
test. The Company has completed the first step of its transitional impairment
test, which indicates that an impairment of its recorded goodwill may exist. The
Company is currently performing the second step of its transitional impairment
test, which requires the Company to compare the implied fair value of its
reporting unit's goodwill with the carrying amount of that goodwill. If the
goodwill's carrying amount exceeds its implied fair value, an impairment loss
will be recognized in an amount equal to that excess. The Company currently
believes it is likely that the entire amount of the Company's goodwill balance
(approximately $45 million at June 30, 2002) may be deemed impaired. Any such
transitional impairment will 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.
As a consequence of uncertainties surrounding both the titanium and
commercial aerospace industries and broader economic conditions, the Company
believes assessments of long-lived asset recoverability, as required under SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that
may result in charges for asset impairments could occur in the balance of 2002.
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 and charges for asset
impairments, if any, are recorded when reasonably estimable. Such potential
future charges, if any, could be material.
-30-
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 Quarterly
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 renewal of certain
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows provided by operating, investing and
financing activities are presented below:
Six months ended
June 30,
------------------------------------------
2002 2001
------------------- -------------------
(In thousands)
Cash provided (used) by:
Operating activities:
Excluding changes in assets and liabilities $ (3,536) $ 72,431
Changes in assets and liabilities (15,821) (17,241)
------------------- -------------------
(19,357) 55,190
Investing activities (3,337) (4,200)
Financing activities 6,119 (36,108)
------------------- -------------------
Net cash provided (used) by operating,
investing and financing activities $ (16,575) $ 14,882
=================== ===================
-31-
Operating activities. Cash used by operating activities, excluding changes
in assets and liabilities, generally followed the trend in operating results.
Changes in assets and liabilities reflect primarily the timing of purchases,
production and sales and can vary significantly from period to period. Accounts
receivable decreased in the first half of 2002 primarily as a result of reduced
sales, which was somewhat offset by an increase in days sales outstanding as
certain customers extended their payment terms to the Company. Receivables from
related parties decreased in the first half of 2002 primarily as a result of
cash received from Tremont through an intercorporate services agreement and from
a reduction in trade sales to VALTIMET during the second quarter of 2002.
Inventories increased in the first half of 2002 as a result of production begun
by the Company prior to certain customer cancellations and push-outs related to
the recent downturn in the commercial aerospace market, the timing of certain
raw material purchases and the accelerated production of certain orders as part
of its contingency planning for a possible labor disruption at its Toronto
plant. This increase was partially offset by an increase in the Company's LIFO
reserve. Prepaid expenses and other current assets decreased in the first half
of 2002 due to the receipt of raw materials for which the Company had made
advance payments during 2001 and the ongoing usage of other prepaid assets.
Changes in accounts payable and accrued liabilities reflect, among other
things, the timing of payments to suppliers of titanium sponge, titanium scrap
and other raw materials purchases. Changes in customer advance payments reflect
the application of customer purchases and the recognition of Boeing-related
take-or-pay income during the first half of 2002. Under the terms of the LTA, in
years 2002 through 2007, Boeing advances TIMET $28.5 million annually, less
$3.80 per pound of titanium product purchased by Boeing subcontractors during
the preceding year. Effectively, the Company collects $3.80 less from Boeing
than the LTA selling price for each pound of titanium product sold directly to
Boeing, which reduces the related customer advance liability recorded by the
Company. For titanium products sold to Boeing subcontractors, the Company
collects the full LTA selling price, but gives Boeing credit by reducing the
next year's annual advance by $3.80 per pound of titanium product sold to Boeing
subcontractors. The Company estimates that the reduction against the 2003
advance from Boeing will be less than $2.0 million. The LTA is structured as a
take-or-pay agreement such that, beginning in calendar year 2002, Boeing
forfeits $3.80 per pound in the event that its orders for delivery are less than
7.5 million pounds in any given calendar year. The Boeing customer advance was
reduced by $5.0 million ($2.8 million from purchases directly by Boeing and $2.2
million from recognition of take-or-pay income) to $23.5 million during the
first half of 2002.
On March 27, 2002, SMC and its U.S. subsidiaries filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result,
the Company, with the assistance of an external valuation specialist, undertook
a further assessment of its investment in SMC and recorded an additional $27.5
million impairment charge during the first quarter of 2002 to general corporate
expense for an other than temporary decline in the fair value of its investment
in SMC, reducing the Company's carrying amount of its investment in SMC to zero.
Investing activities. The Company's capital expenditures were $3.3 million
for the six months ended June 30, 2002 compared to $4.2 million for the same
period in 2001, principally for capacity enhancements, capital maintenance, and
safety and environmental projects.
Financing activities. Net borrowings of $7.6 million in the 2002 period are
primarily attributable to increases in working capital (exclusive of cash). Net
repayments in the 2001 period were primarily attributable to the Company's
litigation settlement with Boeing. The Company also made a $1.1 million dividend
payment to CEZUS in the second quarter of 2002.
-32-
Borrowing arrangements. At June 30, 2002, the Company's net debt was
approximately $13.0 million, consisting of $7.4 million of cash and equivalents
and $20.4 million of debt (principally borrowings under the Company's U.S. and
U.K. credit agreements). This compares to a net cash position of $12.1 million
as of December 31, 2001.
Borrowings under the Company's U.S. asset-based revolving credit agreement
are limited to the lesser of $125 million or 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", as defined, 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 June 30, 2002, excess availability was approximately $90 million.
The Company's U.S. credit agreement allows the lender to modify the
borrowing base formulas at its discretion, subject to certain conditions. During
the second quarter of 2002, the Company's lender elected to exercise such
discretion and modified the Company's borrowing base formulas, which reduced the
amount that the Company can borrow against its inventory and equipment by
approximately $7 million. In the event the lender exercises such discretion in
the future, such event could have a material adverse impact on the Company's
liquidity. Borrowings outstanding under this U.S. facility are classified as a
current liability. Unused borrowing availability under this agreement at June
30, 2002 was approximately $93 million. The credit agreement expires in February
2003. The Company is currently negotiating with its lender to extend the
maturity date of this agreement on substantially similar terms; however, no
assurance can be given that an agreement to extend this facility will be
achieved.
The Company's subsidiary, TIMET UK, has a credit agreement that provides
for borrowings limited to the lesser of (pound)30 million or a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and equipment ("borrowing availability"). The credit agreement
includes a revolving and term loan facility and an overdraft facility (the "U.K.
facilities"). 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 for one year
in February 2002. The U.K. facilities expire in February 2005. As of June 30,
2002, the outstanding balance of the U.K. facilities was approximately $10
million with unused borrowing availability of approximately $32 million.
The Company also has overdraft and other credit facilities at certain of
its other European subsidiaries. These facilities accrue interest at various
rates and are payable on demand. Unused borrowing availability as of June 30,
2002 under these facilities was approximately $14 million.
-33-
Although excess availability under TIMET's U.S. credit agreement remains
above $40 million, no dividends were paid by TIMET during the six-month periods
ended June 30, 2002 and 2001. Any future dividends will be at the discretion of
the Company's board of directors and will depend upon, among other things,
earnings, financial condition, cash requirements, cash availability and
contractual requirements. TIMET presently has no plans to resume payment of
common stock dividends.
Legal and environmental matters. See Note 14 to the Consolidated Financial
Statements for additional discussion of environmental and legal matters.
Other. The Company periodically evaluates its liquidity requirements,
capital needs and availability of resources in view of, among other things, its
alternative uses of capital, debt service requirements, the cost of debt and
equity capital and estimated future operating cash flows. As a result of this
process, the Company 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
other industries. In the event of any future acquisition or joint venture
opportunities, the Company may consider using then-available liquidity, issuing
equity securities or incurring additional indebtedness.
-34-
Item 3. 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. Information regarding the Company's market risk relating to
interest rate volatility was disclosed in the Company's 2001 Annual Report and
should be read in conjunction with this interim financial information. Since
December 31, 2001, there has been no significant change in the nature of the
Company's exposure to market risks.
Foreign currency exchange rates. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of its
international operations. See Item 2 - "Management's Discussion and Analysis of
Financial Condition and Results of 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 or formula-determined pricing arrangements, effectively obligate
the Company to bear (i) the risk of increased raw material and other costs to
the Company 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 to the Company's suppliers which are not passed on
to the Company in the form of lower raw material prices.
-35-
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Note 14 of the Consolidated Financial Statements which
information is incorporated herein by reference and to the Company's 2001 Annual
Report for descriptions of certain previously reported legal proceedings.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1*Amended and Restated Employment Contract between TIMET
Savoie, SA and Christian Leonhard
10.2 Purchase and Sale Agreement (for titanium products) between
The Boeing Company, acting through its division, Boeing
Commercial Airplanes, and Titanium Metals Corporation (as
amended and restated effective April 19, 2001)
10.3 Purchase and Sale Agreement between Rolls-Royce plc and
Titanium Metals Corporation
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
* Management contract, compensatory plan or arrangement.
(b) Reports on Form 8-K filed by the Registrant for the quarter ended
June 30, 2002 and the month of July 2002:
Date of Report Items Reported
----------------------------- -----------------------------
April 11, 2002 5 and 7
April 26, 2002 5 and 7
May 15, 2002 5 and 7
July 9, 2002 5 and 7
-36-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TITANIUM METALS CORPORATION
----------------------------------------------
(Registrant)
Date: August 13, 2002 By /s/ Mark A. Wallace
----------------------------------------------
Mark A. Wallace
(Executive Vice President and
Chief Financial Officer)
Date: August 13, 2002 By /s/ JoAnne A. Nadalin
----------------------------------------------
JoAnne A. Nadalin
(Vice President, Corporate Controller and
Principal Accounting Officer)