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 March 31, 2004
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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
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Titanium Metals Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-5630895
------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5600
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Number of shares of common stock outstanding on May 2, 2004: 3,179,942
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 in
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), are forward-looking statements that represent management's
beliefs and assumptions based on currently available information.
Forward-looking statements can generally 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
assurance 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 risks and uncertainties in those portions referenced above and those
described from time to time in the Company's other filings with the Securities
and Exchange Commission ("SEC") 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, fluctuations in the market price of
marketable securities, 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 terrorist activities or global conflicts,
the Company's ability to achieve reductions in its cost structure 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
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2004 (unaudited)
and December 31, 2003 2
Consolidated Statements of Operations - Three months
ended March 31, 2004 and 2003 (unaudited) 4
Consolidated Statements of Comprehensive Income (Loss) -
Three months ended March 31, 2004 and 2003 (unaudited) 5
Consolidated Statements of Cash Flows - Three months ended
March 31, 2004 and 2003 (unaudited) 6
Consolidated Statement of Changes in Stockholders' Equity -
Three months ended March 31, 2004 (unaudited) 8
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 6. Exhibits and Reports on Form 8-K 31
- 1 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
2004 2003
-------------------- ------------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 32,779 $ 35,040
Restricted cash and cash equivalents 2,248 2,248
Accounts and other receivables, less allowance
of $1,859 and $2,347 80,332 67,432
Refundable income taxes 1,538 2,155
Inventories 175,976 165,721
Prepaid expenses and other 2,536 2,604
Deferred income taxes 604 778
-------------------- ------------------
Total current assets 296,013 275,978
Marketable securities 17,224 -
Investment in joint ventures 23,384 22,469
Investment in common securities of TIMET Capital Trust I 6,907 6,794
Property and equipment, net 236,537 239,182
Intangible assets, net 5,938 6,294
Other 17,287 16,692
-------------------- ------------------
Total assets $ 603,290 $ 567,409
==================== ==================
See accompanying Notes to Consolidated Financial Statements
- 2 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
March 31, December 31,
LIABILITIES, MINORITY INTEREST AND 2004 2003
STOCKHOLDERS' EQUITY --------------------- -------------------
(unaudited)
Current liabilities:
Current maturities of capital lease obligations $ 176 $ 524
Accounts payable 30,366 29,200
Accrued liabilities 62,522 45,163
Customer advances 31,494 3,356
Other 418 262
--------------------- -------------------
Total current liabilities 124,976 78,505
Capital lease obligations 10,084 9,766
Accrued OPEB cost 13,856 13,661
Accrued pension cost 66,615 62,366
Accrued environmental cost 3,230 3,930
Deferred income taxes 491 637
Accrued interest on debt payable to TIMET Capital Trust I - 19,003
Debt payable to TIMET Capital Trust I 207,465 207,465
Other 1,844 2,188
--------------------- -------------------
Total liabilities 428,561 397,521
--------------------- -------------------
Minority interest 11,301 11,131
--------------------- -------------------
Stockholders' equity:
Preferred stock, $.01 par value; 100 shares authorized,
none issued - -
Common stock, $.01 par value; 9,900 shares authorized,
3,189 and 3,190 shares issued 32 32
Additional paid-in capital 350,632 350,643
Accumulated deficit (142,082) (140,428)
Accumulated other comprehensive loss (43,910) (50,226)
Treasury stock, at cost (9 shares) (1,208) (1,208)
Deferred compensation (36) (56)
--------------------- -------------------
Total stockholders' equity 163,428 158,757
--------------------- -------------------
Total liabilities and stockholders' equity $ 603,290 $ 567,409
===================== ===================
Commitments and contingencies (Note 13)
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 March 31,
------------------------------------------
2004 2003
------------------- -------------------
Net sales $ 120,488 $ 99,294
Cost of sales 108,132 98,276
------------------- -------------------
Gross margin 12,356 1,018
Selling, general, administrative and development expense 9,517 9,895
Equity in (losses) earnings of joint ventures (83) 185
Other income (expense), net 74 628
------------------- -------------------
Operating income (loss) 2,830 (8,064)
Interest expense 4,309 4,200
Other non-operating income (expense), net 738 (415)
------------------- -------------------
Loss before income taxes, minority interest and
cumulative effect of change in accounting principle (741) (12,679)
Income tax expense 523 457
Minority interest, net of tax 390 263
------------------- -------------------
Loss before cumulative effect of change in
accounting principle (1,654) (13,399)
Cumulative effect of change in accounting principle - (191)
------------------- -------------------
Net loss $ (1,654) $ (13,590)
=================== ===================
Basic and diluted loss per share:
Before cumulative effect of change in
accounting principle $ (0.52) $ (4.23)
Cumulative effect of change in accounting principle - (0.06)
------------------- -------------------
Basic and diluted loss per share $ (0.52) $ (4.29)
=================== ===================
Weighted average shares outstanding 3,173 3,165
See accompanying Notes to Consolidated Financial Statements
- 4 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
(In thousands)
Three months ended March 31,
------------------------------------------
2004 2003
------------------- -------------------
Net loss $ (1,654) $ (13,590)
------------------- -------------------
Other comprehensive income (loss):
Currency translation adjustment 1,616 (91)
Unrealized gains on marketable securities 4,450 -
TIMET's share of VALTIMET's unrealized net gains on
derivative financial instruments qualifying as cash flow
hedges 250 -
------------------- -------------------
Total other comprehensive income (loss) 6,316 (91)
------------------- -------------------
Comprehensive income (loss) $ 4,662 $ (13,681)
=================== ===================
See accompanying Notes to Consolidated Financial Statements
- 5 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
Three months ended March 31,
----------------------------------------
2004 2003
------------------- ------------------
Cash flows from operating activities:
Net loss $ (1,654) $ (13,590)
Depreciation and amortization 8,483 9,547
Cumulative effect of change in accounting principle - 191
Equity in earnings of joint ventures, net of distributions 83 (135)
Equity in earnings of common securities of TIMET
Capital Trust I, net of distributions (113) (105)
Deferred income taxes 13 113
Minority interest, net of tax 390 263
Other, net (525) 486
Change in assets and liabilities:
Receivables (12,275) (16,286)
Inventories (9,252) 13,906
Prepaid expenses and other 94 30
Accounts payable and accrued liabilities (4,427) 2,980
Customer advances 28,157 26,656
Income taxes 581 (321)
Accrued OPEB and pension costs 2,180 (120)
Accrued interest on debt payable to TIMET Capital Trust I 3,751 3,512
Other, net (1,309) (304)
------------------- ------------------
Net cash provided by operating activities 14,177 26,823
------------------- ------------------
Cash flows from investing activities:
Capital expenditures (3,280) (1,487)
Purchase of marketable securities (12,774) -
------------------- ------------------
Net cash used by investing activities (16,054) (1,487)
------------------- ------------------
Cash flows from financing activities:
Indebtedness:
Borrowings 9,575 58,060
Repayments (9,575) (62,683)
Other, net (403) (493)
------------------- ------------------
Net cash used by financing activities (403) (5,116)
------------------- ------------------
Net cash (used) provided by operating,
investing and financing activities $ (2,280) $ 20,220
=================== ==================
See accompanying Notes to Consolidated Financial Statements
- 6 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (CONTINUED)
(In thousands)
Three months ended March 31,
----------------------------------------
2004 2003
------------------ ------------------
Cash and cash equivalents:
Net (decrease) increase from:
Operating, investing and financing activities $ (2,280) $ 20,220
Currency translation 19 122
------------------ ------------------
(2,261) 20,342
Cash and cash equivalents at beginning of period 35,040 6,214
------------------ ------------------
Cash and cash equivalents at end of period $ 32,779 $ 26,556
================== ==================
Supplemental disclosures:
Cash paid for:
Interest $ 366 $ 455
Income taxes, net $ 39 $ 677
See accompanying Notes to Consolidated Financial Statements
- 7 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
Three months ended March 31, 2004
(In thousands)
Accumulated
Additional Other Total
Common Common Paid-In Accumulated Comprehensive Treasury Deferred Stockholders'
Shares Stock Capital Deficit Income (Loss) Stock Compensation Equity
-------- -------- --------- ----------- ----------- -------- --------- -----------
Balance at December 31, 2003 3,181 $ 32 $350,643 $ (140,428) $ (50,226) $(1,208) $ (56) $ 158,757
Components of comprehensive
income (loss):
Net loss - - - (1,654) - - - (1,654)
Change in cumulative currency
translation adjustment - - - - 1,616 - - 1,616
Unrealized gains on marketable
securities - - - - 4,450 - - 4,450
TIMET's share of VALTIMET's
unrealized net gains on
derivative financial instruments
qualifying as cash flow hedges - - - - 250 - - 250
Issuance of common stock - - 40 - - - - 40
Stock award cancellations (1) - (51) - - - 51 -
Amortization of deferred
compensation, net of effects of
stock award cancellations - - - - - - (31) (31)
-------- -------- --------- ----------- ----------- ------- --------- -----------
Balance at March 31, 2004 3,180 $ 32 $350,632 $ (142,082) $ (43,910) $(1,208) $ (36) $ 163,428
======== ======== ========= =========== =========== ======== ========= ===========
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. The accompanying Consolidated
Financial Statements include the accounts of TIMET and its majority-owned
subsidiaries (collectively, the "Company") except the TIMET Capital Trust I (the
"Capital Trust"), a wholly-owned subsidiary which was deconsolidated at December
31, 2003, and for which all prior periods were retroactively restated. Such
retroactive restatement did not impact net loss, stockholders' equity or cash
flow from operations for any prior period. All material intercompany
transactions and balances with consolidated subsidiaries have been eliminated,
and certain prior year amounts have been reclassified to conform to the current
year presentation. The Consolidated Balance Sheet at March 31, 2004, and the
Consolidated Statements of Operations, Comprehensive Income (Loss), Changes in
Stockholders' Equity and Cash Flows for the interim periods ended March 31, 2004
and 2003, as applicable, have been prepared by the Company without audit in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). 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 information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP 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, 2003 (the "2003
Annual Report").
At March 31, 2004, Valhi, Inc. and subsidiaries ("Valhi") held
approximately 40.8% of TIMET's outstanding common stock and approximately 0.4%
of the Capital Trust's outstanding 6.625% mandatorily redeemable convertible
preferred securities, beneficial unsecured convertible securities ("BUCS"). At
March 31, 2004, the Combined Master Retirement Trust ("CMRT"), a trust formed by
Valhi to permit the collective investment by trusts that maintain the assets of
certain employee benefit plans adopted by Valhi and certain related companies,
held approximately 8% of TIMET's common stock. TIMET's U.S. pension plans began
investing in the CMRT in the second quarter of 2003; however, these plans invest
only in a portion of the CMRT that does not hold TIMET common stock. At March
31, 2004, Contran Corporation ("Contran") held, directly or through
subsidiaries, approximately 90% of Valhi's outstanding common stock, and Harold
C. Simmons' spouse owned 39.8% of the outstanding BUCS. 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, or is held by Mr. Simmons or persons or other entities related
to Mr. Simmons. 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 and TIMET.
- 9 -
The Company has elected the disclosure alternative prescribed by Statement
of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, and has chosen to account for its
stock-based employee compensation related to stock options in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and its various interpretations. Under APB Opinion No. 25,
compensation cost is generally recognized for fixed stock options for which the
exercise price is less than the market price of the underlying stock on the
grant date. All of the Company's stock options have been granted with exercise
prices equal to or in excess of the market price on the date of grant, and the
Company recognized no compensation expense for fixed stock options during the
three months ended March 31, 2004 and 2003. The following table illustrates the
effect on net loss and loss per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to all options granted since January 1,
1995:
Three months ended March 31,
-----------------------------------------
2004 2003
------------------- ------------------
(In thousands, except per share data)
Net loss, as reported $ (1,654) $ (13,590)
Less stock option related stock-based employee
compensation expense determined under SFAS No. 123 (30) (110)
------------------- ------------------
Pro forma net loss $ (1,684) $ (13,700)
=================== ==================
Basic and diluted loss per share:
As reported $ (0.52) $ (4.29)
=================== ==================
Pro forma $ (0.53) $ (4.33)
=================== ==================
VALTIMET, the Company's 43.7% owned affiliate accounted for by the equity
method, has entered into certain derivative financial instruments that qualify
as cash flow hedges under GAAP. The Company's pro-rata share of VALTIMET's
unrealized net gains on such derivative financial instruments is included as a
component of other comprehensive income.
In March 2004, the Company's Board of Directors approved, subject to
stockholder approval, a split of its common stock at a ratio of five shares of
post-split common stock for each outstanding one share of pre-split common
stock, to be effected in the form of a stock dividend. When completed, the
Company will retroactively adjust all earnings per share data for the effect of
the stock split.
- 10 -
Note 2 - Inventories
March 31, December 31,
2004 2003
------------------- -------------------
(In thousands)
Raw materials $ 40,285 $ 33,198
Work-in-process 81,477 76,573
Finished products 60,415 62,687
Supplies 13,211 12,248
------------------- -------------------
195,388 184,706
Less adjustment of certain inventories to LIFO basis 19,412 18,985
------------------- -------------------
$ 175,976 $ 165,721
=================== ===================
Note 3 - Marketable securities
During the first quarter of 2004, the Company purchased 1,277,710 shares of
CompX International, Inc. ("CompX") Class A common stock for an aggregate of
$12.8 million in open market or privately negotiated transactions with
unaffiliated parties, representing approximately 8.5% of the total number of
shares of all classes of CompX common stock outstanding. Valhi and a wholly
owned subsidiary of Valhi own an additional 68.6% of CompX's outstanding common
stock. At March 31, 2004, the quoted market price for CompX's Class A common
stock was $13.37 per share. The Company's shares of CompX Class A common stock
are classified as noncurrent available-for-sale marketable securities carried at
fair value on the Company's Consolidated Balance Sheet as of March 31, 2004,
with all unrealized gains reported as a component of other comprehensive income.
Note 4 - Property and equipment
March 31, December 31,
2004 2003
--------------------- ------------------
(In thousands)
Land and improvements $ 6,395 $ 6,358
Buildings and improvements 42,153 41,700
Information technology systems 61,050 59,782
Manufacturing equipment and other 325,677 318,364
Construction in progress 4,402 6,754
--------------------- ------------------
439,677 432,958
Less accumulated depreciation 203,140 193,776
--------------------- ------------------
$ 236,537 $ 239,182
===================== ==================
- 11 -
Note 5 - Other noncurrent assets
March 31, December 31,
2004 2003
-------------------- ------------------
(In thousands)
Deferred financing costs $ 7,641 $ 7,563
Prepaid pension cost 9,521 8,981
Notes receivable from officers 119 145
Other 5 3
-------------------- ------------------
$ 17,286 $ 16,692
==================== ==================
Note 6 - Accrued liabilities
March 31, December 31,
2004 2003
--------------------- ------------------
(In thousands)
OPEB cost $ 3,143 $ 3,135
Pension cost 6,713 8,466
Payroll and vacation 4,795 6,891
Incentive compensation 1,555 579
Other employee benefits 8,909 9,731
Deferred income 1,497 1,664
Environmental costs 1,001 301
Taxes, other than income 4,948 4,408
Accrued interest on debt payable to the Capital Trust 22,754 -
Wyman-Gordon installment - 2,800
Other 7,207 7,188
--------------------- ------------------
$ 62,522 $ 45,163
===================== ==================
During the third quarter of 2003, the Company and Wyman-Gordon Company
("Wyman-Gordon") agreed to terminate the 1998 purchase and sale agreement
associated with the formation of the titanium castings joint venture previously
owned by the two parties. The Company agreed to pay Wyman-Gordon a total of $6.8
million in three quarterly installments in connection with this termination,
which included the termination of certain favorable purchase terms. The Company
recorded a one-time charge for the entire $6.8 million as a reduction to sales
in the third quarter of 2003. The Company paid the first two installments
aggregating $4.0 million to Wyman-Gordon during 2003 and paid the remaining $2.8
million in the first quarter of 2004.
Effective January 1, 2004, the Company modified the vacation policy for its
U.S. salaried employees. Such employees no longer accrue their entire year's
vacation entitlement on January 1, but rather will accrue the current year's
vacation entitlement over the course of the year. As a result, the Company's
reduced its vacation accrual for these employees from $1.9 million to zero
during the first quarter of 2004, resulting in one-time reductions in cost of
sales of $1.6 million and selling, general, administrative and development
expense of $0.3 million.
See Note 9 with respect to accrued interest on debt payable to the Capital
Trust.
- 12 -
Note 7 - Boeing advance
Under the terms of the amended long-term agreement ("LTA") between TIMET
and The Boeing Company ("Boeing"), in years 2002 through 2007, Boeing is
required to advance TIMET $28.5 million annually less $3.80 per pound of
titanium product purchased by Boeing subcontractors from TIMET during the
preceding year. The advance relates to Boeing's take-or-pay obligations under
the LTA. 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 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 is also reduced as take-or-pay benefits are earned.
As of March 31, 2004, approximately $27.3 million of customer advances related
to the Company's LTA with Boeing.
Note 8 - Bank debt
During the first quarter of 2004, the Company amended its U.S. credit
facility to, among other things, allow the Company the flexibility to remove the
equipment component from the determination of the Company's borrowing
availability. The Company took advantage of this flexibility during the first
quarter of 2004, effectively reducing the Company's current borrowing
availability in the U.S. by $12 million. However, the Company can regain this
availability by completing an updated equipment appraisal. As of March 31, 2004,
the Company had no outstanding borrowings and had aggregate unused borrowing
availability of approximately $134 million under its U.S. and European credit
facilities.
Note 9 - Capital Trust
In November 1996, the Capital Trust issued $201.3 million BUCS and $6.2
million 6.625% common securities. TIMET owns all of the outstanding common
securities of the Capital Trust, and the Capital Trust is a wholly-owned finance
subsidiary of TIMET. The Capital Trust used the proceeds from such issuance to
purchase from the Company $207.5 million principal amount of TIMET's 6.625%
convertible junior subordinated debentures due 2026 (the "Subordinated
Debentures"). Interest on the Subordinated Debentures is recorded as interest
expense. The Subordinated Debentures and accrued interest receivable were the
sole assets of the Capital Trust at March 31, 2004.
In October 2002, the Company exercised its right to defer future interest
payments on the Subordinated Debentures, effective beginning with the Company's
December 1, 2002 scheduled interest payment. Based on the deferral, accrued
interest on the Subordinated Debentures was reflected as a long-term liability
in the Consolidated Balance Sheet at December 31, 2003. On March 24, 2004, the
Company's Board of Directors approved resumption of scheduled quarterly interest
payments on the Subordinated Debentures with the next scheduled payment on June
1, 2004. The Company's Board also approved payment of all previously deferred
interest on the Subordinated Debentures. On April 15, 2004, the Company paid the
deferred interest in the amount of $21.7 million. Based on the Board's approval
and subsequent payment, the Company reclassified the accrued interest on the
Subordinated Debentures to current liabilities at March 31, 2004. See also Notes
6 and 16.
- 13 -
Note 10 - Other income (expense)
Three months ended March 31,
------------------ ------------------
2004 2003
------------------ ------------------
(In thousands)
Other operating income (expense):
Litigation settlement $ - $ 475
Other, net 74 153
------------------ ------------------
$ 74 $ 628
================== ==================
Other non-operating income (expense):
Interest income $ 100 $ 112
Equity in earnings of common securities of the
Capital Trust 113 105
Foreign exchange gains (losses) 472 (630)
Other, net 53 (2)
------------------ ------------------
$ 738 $ (415)
================== ==================
During the first quarter of 2003, the Company received $0.5 million related
to its settlement of certain litigation relating to power outages suffered at
its Henderson, Nevada facility in 1997 and 1998 as a result of contractor
activity.
Note 11 - Income taxes
Three months ended
March 31,
--------------------------------------------
2004 2003
--------------------- -------------------
(In thousands)
Expected income tax benefit, at 35% $ (259) $ (4,438)
Non-U.S. tax rates (51) 117
U.S. state income taxes, net (192) (482)
Nontaxable income - (93)
Change in valuation allowance:
Adjustment of deferred tax valuation allowance 985 5,259
Other, net 40 94
--------------------- -------------------
$ 523 $ 457
===================== ===================
At March 31, 2004, the Company had, for U.S. federal income tax purposes,
(i) net operating loss ("NOL") carryforwards of $119 million that expire in 2020
through 2024, (ii) a capital loss carryforward of $89 million that expires in
2008 and (iii) AMT credit carryforwards of $4 million, which can be utilized to
offset regular income taxes payable in future years, with an indefinite
carryforward period. In addition, at March 31, 2004, the Company had the
equivalent of (i) a $30 million NOL carryforward in the United Kingdom and a $2
million NOL carryforward in Germany, both of which have indefinite carryforward
periods, and (ii) $0.6 million of NOL carryforwards in Italy that expire in 2008
and 2009.
- 14 -
Note 12 - Employee benefits
Defined benefit pension plans. The components of the net periodic pension
expense are set forth below:
Three months ended March 31,
------------------------------------------
2004 2003
------------------- ------------------
(In thousands)
Service cost $ 885 $ 715
Interest cost 3,151 2,735
Expected return on plan assets (3,269) (2,244)
Amortization of unrecognized prior service cost 122 144
Amortization of net losses 1,093 1,062
------------------- ------------------
Net periodic pension expense $ 1,982 $ 2,412
=================== ==================
The Company has made $2.1 million of cash contributions to its defined
benefit pension plans in 2004 through March 31, 2004 (all of which relate to the
UK plan), and the Company currently expects to make additional cash
contributions of approximately $7.3 million to its defined benefit pension plans
during 2004 ($1.8 million to the US plan and $5.5 million to the UK plan). The
current aggregate estimate for full-year 2004 cash contributions represents a
$2.1 million decrease from estimates as of December 31, 2003, based upon the
effects on the US plan of the Company's application of the Pension Funding
Equity Act of 2004, which was enacted on April 9, 2004.
Postretirement benefits other than pensions. The components of net periodic
OPEB expense are set forth below:
Three months ended March 31,
------------------------------------------
2004 2003
------------------- ------------------
(In thousands)
Service cost $ 127 $ 176
Interest cost 403 385
Amortization of unrecognized prior service cost (116) (94)
Amortization of net losses 227 199
------------------- ------------------
Net periodic OPEB expense $ 641 $ 666
=================== ==================
- 15 -
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Medicare Act of 2003") was enacted. The Medicare
Act of 2003 introduced a prescription drug benefit under Medicare Part D as well
as a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least equivalent to Medicare Part D. Detailed
regulations necessary to implement the Medicare Act of 2003 have not been
issued, including those that would specify the manner in which plan sponsors
could demonstrate their eligibility to receive the subsidy. Additionally,
certain accounting issues raised by the Medicare Act of 2003, including how to
account for the federal subsidy, are not explicitly addressed by current
existing authoritative guidance. In accordance with FASB Staff Position FAS No.
106-1, the Company has elected to defer accounting for the effects of the
Medicare Act of 2003 until authoritative guidance on how to account for the
federal subsidiary has been issued. Consequently, the Company's accumulated
postretirement benefit obligation and net periodic postretirement benefit cost,
as reflected in the accompanying Consolidated Financial Statements, do not
reflect any effect of the Medicare Act of 2003. Specific authoritative guidance
on the accounting for the federal subsidy is pending, and that guidance, when
issued, could require the Company to change previously reported financial
information, depending on the transition provisions of such guidance.
Note 13 - Commitments and contingencies
Environmental matters. As previously disclosed in the 2003 Annual Report,
TIMET and Basic Management, Inc. ("BMI") entered into an agreement in 1999
providing that 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 into settling ponds located on
certain lands owned by the Company adjacent to its Henderson, Nevada plant site
(the "TIMET Pond Property"), the Company would convey the TIMET Pond Property to
BMI, at no additional cost. Under this agreement, BMI will pay 100% of the first
$15.9 million of the cost for this project, and TIMET will pay 50% of the cost
in excess of $15.9 million, up to a maximum payment by TIMET of $2 million. The
Company presently expects that the total cost of this project will not exceed
$15.9 million. The Company and BMI are continuing discussions about possible
modifications to the original project scope and also the 1999 agreement, and are
also continuing investigation with respect to certain environmental issues
associated with the TIMET Pond Property, including possible groundwater issues.
Under certain circumstances (not presently in effect), TIMET may be
required to restore some portion of the TIMET Pond Property to the condition it
was in prior to TIMET's use of the property, before returning title of the
affected property to BMI. The Company currently believes any liability it may
have under this obligation to be remote. The Company is continuing to
investigate this potential liability, and is presently unable to estimate the
magnitude of such potential liability.
The Company is also continuing assessment work with respect to its own
active plant site in Henderson, Nevada. In 2000 through 2002, the Company
commissioned studies of certain remediation issues at the Company's plant site
and other Company-owned sites within the BMI Complex. The Company currently has
$3.9 million accrued based on the undiscounted cost estimates of the probable
costs for remediation of these sites. The upper end of the range of reasonably
possible costs to remediate these sites is approximately $8.6 million. The
Company expects these accrued expenses to be paid over a period of up to thirty
years.
- 16 -
As of March 31, 2004, the Company had accrued an aggregate of approximately
$4.2 million for environmental matters, including those discussed above. The
Company records liabilities related to environmental remediation obligations
when estimated future costs are probable and reasonably estimable. Such accruals
are adjusted as further information becomes available or circumstances change.
Estimated future costs 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 costs 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. The Company records liabilities related to legal
proceedings when estimated costs are probable and reasonably estimable. Such
accruals are adjusted as further information becomes available or circumstances
change. Estimated future costs are not discounted to their present value. It is
not possible to estimate the range of costs for certain matters. No assurance
can be given that actual costs will not exceed accrued amounts or that costs
will not be incurred with respect to matters as to which no problem is currently
known or where no estimate can presently be made. Further, there can be no
assurance that additional legal proceedings will not arise in the future.
Other. TIMET is the primary obligor on two workers' compensation bonds,
each having a maximum obligation of $1.5 million, issued on behalf of a former
subsidiary, Freedom Forge Corporation ("Freedom Forge"), which TIMET sold in
1989. Freedom Forge filed for Chapter 11 bankruptcy protection in July 2001 and
discontinued payment on the underlying workers' compensation claims in November
2001. During 2002 and 2003, TIMET received notices that the issuers of the bonds
were required to make payments on the bonds for applicable claims and were
requesting reimbursement from TIMET. Through March 31, 2004, TIMET has
reimbursed the issuers approximately $0.9 million for claims under these bonds
and $1.1 million remains accrued for future payments. TIMET may revise its
estimated liability under these bonds in the future as additional facts become
known or claims develop.
In March 2001, certain standard grade material produced by the Company was
found to contain tungsten inclusions as a result of tungsten contaminated
silicon sold to the Company by a third-party supplier. The Company has paid $1.2
million for claims related to this matter since initial identification, and as
of March 31, 2004, all pending claims have been investigated and resolved.
However, there is no assurance that all potential claims have been submitted to
the Company. The Company has filed suit seeking full recovery from its silicon
supplier for any liability the Company has incurred or might incur, although no
assurance 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 March 31, 2004.
The Company is involved in various employment, environmental, contractual,
product liability and other claims, disputes and litigation incidental to its
business including those discussed above. While management currently believes
that the outcome of these matters, individually and in the aggregate, will not
have a material adverse effect on the Company's financial position, liquidity or
overall trends in results of operations, all such matters are subject to
inherent uncertainties. Were an unfavorable outcome to occur in any given
period, it is possible that it could have a material adverse impact on the
results of operations or cash flows in that particular period.
- 17 -
See the 2003 Annual Report for additional information concerning certain
legal and environmental matters, commitments and contingencies.
Note 14 - Earnings 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 reflects the dilutive effect of common stock options,
restricted stock and the assumed conversion of the BUCS. The assumed conversion
of the BUCS was omitted from the diluted loss per share calculation for the
three months ended March 31, 2004 and 2003 because the effect was antidilutive.
Had the BUCS not been antidilutive, diluted losses would have decreased by $3.8
million and $3.6 million, respectively, for the three months ended March 31,
2004 and 2003. Diluted average shares outstanding would have increased by
approximately 540,000 shares for each of these periods from the assumed
conversion of the BUCS. Stock options and restricted shares excluded from the
calculation because they were antidilutive were approximately 114,000 and
approximately 133,000, respectively, for the three months ended March 31, 2004
and 2003.
Note 15 - Business segment information
The Company's production facilities are located in the United States,
United Kingdom, France and Italy, and its products are sold throughout the
world. The Company's worldwide integrated activities are conducted through its
"Titanium melted and mill products" segment, currently the Company's only
segment. Sales, gross margin, operating income (loss), inventory and receivables
are the key management measures used to evaluate segment performance. The
following table provides segment information supplemental to the Company's
Consolidated Financial Statements:
Three months ended March 31,
2004 2003
--------------------- ---------------------
($ in thousands, except selling price data)
Titanium melted and mill products:
Melted product net sales $ 17,395 $ 12,854
Mill product net sales 90,675 73,617
Other product sales 12,418 12,823
--------------------- ---------------------
$ 120,488 $ 99,294
===================== =====================
Melted product shipments:
Volume (metric tons) 1,420 985
Average selling price ($ per kilogram) $ 12.25 $ 13.05
Mill product shipments:
Volume (metric tons) 2,925 2,315
Average selling price ($ per kilogram) $ 31.00 $ 31.80
- 18 -
Note 16 - Subsequent event
The Company's Board of Directors has approved an exchange offer pursuant to
which the Company would offer to exchange any and all of the outstanding
4,024,820 BUCS issued by the Capital Trust for shares of a newly created 6.75%
Series A Convertible Preferred Stock to be issued by the Company (the "Series A
Preferred Stock") at the exchange rate of one share of Series A Preferred Stock
for each BUCS. Each share of Series A Preferred Stock would be convertible, in
whole or in part, at any time, at the option of the holder thereof, into 0.2
shares of TIMET common stock (or at a rate of one share of TIMET common stock
per one share of Series A Preferred Stock, assuming completion of the
five-for-one stock split discussed in Note 1), subject to adjustment in certain
events.
The holders of shares of the Series A Preferred Stock will be entitled to
receive cumulative cash dividends at the rate of 6.75% of the liquidation
preference per annum per share (equivalent to $3.375 per annum per share), when,
as and if declared by the Company's Board of Directors out of funds of TIMET
legally available for the payment of dividends. The Series A Preferred Stock
would not be mandatorily redeemable, but it would be redeemable at the option of
the Company under certain circumstances.
The exchange offer is subject to the satisfaction of several conditions,
including approval by the Company's stockholders of the exchange offer and of an
amendment to the Company's certificate of incorporation to increase the number
of shares that TIMET is authorized to issue. The exchange offer is also
conditioned on the declaration and continued effectiveness of a registration
statement and prospectus on Form S-4.
- 19 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Summarized financial information. The following table summarizes certain
information regarding the Company's results of operations for the three months
ended March 31, 2004 and 2003. Average selling prices, as reported by the
Company, are a reflection of not just actual selling prices received by the
Company, but also include other related factors such as currency exchange rates
and customer and product mix during a given period. Consequently, changes in
average selling prices from period to period will be impacted by changes
occurring not just in actual prices, but by these other factors as well. The
percentage change information presented below represents changes from the
respective prior year. See "Results of Operations - Outlook" for further
discussion of the Company's business expectations for the remainder of 2004.
Three months ended March 31,
---------------------------------------
2004 2003
------------------ ------------------
($ in thousands)
Net sales $ 120,488 $ 99,294
Gross margin $ 12,356 $ 1,018
Operating income (loss) $ 2,830 $ (8,064)
Gross margin percent of net sales 10% 1%
Percentage change in:
Sales volume:
Melted product sales volume +44 +53
Mill product sales volume +26 -14
Average selling prices - includes changes in product mix:
Melted products -6 -16
Mill products -3 +7
Selling prices - excludes changes in product mix:
Melted products -4 -12
Mill products in U.S. dollars +2 -1
Mill products in billing currencies (1) -3 -6
-------------------------------------------------------------------------------------------------------------------
(1) Excludes the effect of changes in foreign currencies.
First quarter of 2004 compared to first quarter of 2003. The Company's
melted product sales increased 35% from $12.9 million during the first quarter
of 2003 to $17.4 million during the first quarter of 2004 primarily due to a 44%
increase in melted product sales volume, partially offset by a 6% decrease in
melted product average selling prices. Melted products consist of ingot and slab
and are generally sold only in U.S. dollars. Melted product sales volume
increased principally as a result of new customer relationships and share gains.
Excluding the effects of changes in product mix, melted product selling prices
during the first quarter of 2004 decreased 4% compared to the first quarter of
2003.
- 20 -
The Company's mill product sales increased 23% from $73.6 million during
the first quarter of 2003 to $90.7 million during the first quarter of 2004.
This increase was principally due to a 26% increase in mill product sales
volume, partially offset by a 3% decrease in mill product average selling
prices. As compared to the first quarter of 2003, mill product average selling
prices were positively affected by the weakening of the U.S. dollar compared to
the British pound sterling and the euro and negatively affected by changes in
product mix.
Gross margin (net sales less cost of sales) was 10% of net sales during the
first quarter of 2004, compared to 1% during the year-ago period. The
improvement in gross margin was primarily a result of improved plant operating
rates (from 52% in the first quarter of 2003 to 72% in the first quarter of
2004) and the Company's continued cost management efforts. Gross margin during
the first quarter of 2004 was also positively affected by a $1.6 million
reduction in cost of sales related to the Company's elimination of its vacation
accrual for U.S. salaried employees. On January 1, 2004, the Company modified
its vacation policy for its U.S. salaried employees, whereby such employees no
longer accrue their entire year's vacation entitlement on January 1, but rather
will accrue the current year's vacation entitlement over the course of the year.
Additionally, gross margin was positively affected by the elimination of $1.0
million of previously recorded rebate accruals that are no longer required and
negatively affected by a $0.8 million accrual for potential employee profit
sharing payments.
Selling, general, administrative and development expenses decreased by 2%
from $9.9 million during the first quarter of 2003 to $9.7 million during the
first quarter of 2004, principally as a result of a $0.3 million reduction
related to the Company's elimination of its vacation accrual for U.S. salaried
employees.
Equity in (losses) earnings of joint ventures decreased from earnings of
$0.2 million during the first quarter of 2003 to a loss of $0.1 million during
the first quarter of 2004, principally due to a decrease in the operating
results of VALTIMET, the Company's minority-owned welded tube joint venture.
Net other income (expense) decreased from $0.6 million during the first
quarter of 2003 to $0.1 million during the first quarter of 2004, principally
due to a gain of $0.5 million related to the settlement of certain litigation
during the first quarter of 2003.
Non-operating income (expense).
Three months ended March 31,
2004 2003
-------------------- -------------------
(In thousands)
Interest expense on debt payable to the Capital Trust $ (3,751) $ (3,512)
Other interest expense (558) (688)
-------------------- -------------------
$ (4,309) $ (4,200)
==================== ===================
Interest income $ 100 $ 112
Equity in earnings of common securities of the
Capital Trust 113 105
Foreign exchange gains (losses) 472 (630)
Other, net 53 (2)
-------------------- -------------------
$ 738 $ (415)
==================== ===================
- 21 -
Quarterly interest expense on the Company's Subordinated Debentures payable
to the Capital Trust approximates $3.4 million, exclusive of any accrued
interest on deferred interest payments. In October 2002, the Company exercised
its right to defer future interest payments on this debt effective with the
Company's December 1, 2002 scheduled interest payment. Interest continues to
accrue at the 6.625% coupon rate on the principal and unpaid interest. On March
24, 2004, the Company's Board of Directors approved resumption of scheduled
quarterly interest payments on the Subordinated Debentures with the next
scheduled payment on June 1, 2004. The Company's Board also approved payment of
all previously deferred interest on the Subordinated Debentures. On April 15,
2004, the Company paid the deferred interest in the amount of $21.7 million,
$21.0 million of which related to the BUCS.
Income taxes. The Company operates in several tax jurisdictions and is
subject to varying income tax rates. As a result, the geographic mix of pretax
income or loss can impact the Company's overall effective tax rate. For the
three months ended March 31, 2004 and 2003, 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 those periods. See Note
11 to the Consolidated Financial Statements. The Company's current tax expense
during the three months ended March 31, 2004 and 2003 relates primarily to its
operations in France and Italy.
European operations. The Company has substantial operations and assets
located in Europe, principally the United Kingdom, France and Italy. Titanium is
sold worldwide, and many similar factors influence the Company's U.S. and
European operations. Approximately 42% of the Company's sales originated in
Europe for the three months ended March 31, 2004, of which approximately 62%
were denominated in the British pound sterling or 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, and the European subsidiaries 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 are not subject
to currency exchange rate fluctuations.
The Company does not use currency contracts to hedge its currency
exposures. Net currency transaction gains/losses included in the Company's
results of operations were a gain of $0.5 million during the three months ended
March 31, 2004 and a loss of $0.6 million during the three months ended March
31, 2003. At March 31, 2004, consolidated assets and liabilities denominated in
currencies other than functional currencies were approximately $31.5 million and
$41.2 million, respectively, consisting primarily of U.S. dollar cash, accounts
receivable and accounts payable.
VALTIMET has entered into certain derivative financial instruments that
qualify as cash flow hedges under GAAP. The Company's pro-rata share of
VALTIMET's unrealized net gains on such derivative financial instruments is
included as a component of other comprehensive income.
- 22 -
Outlook. The "Outlook" section contains a number of forward-looking
statements, all of which are based on current expectations and exclude the
effect of potential future charges related to restructurings, asset impairments,
valuation allowances, changes in accounting principles and similar items, unless
otherwise noted. Additionally, unless otherwise noted, the "Outlook" section
excludes any potential effects from the BUCS exchange offer discussed further in
the "Liquidity and Capital Resources - Other" section of this MD&A. Undue
reliance should not be placed on these statements, as more fully discussed in
the "Forward-Looking Information" statement of this Quarterly Report. Actual
results may differ materially. See also Notes to the Consolidated Financial
Statements regarding commitments, contingencies, legal matters, environmental
matters and other matters, including new accounting principles, which could
materially affect the Company's future business, results of operations,
financial position and liquidity.
The Company currently expects sales revenue for the full year 2004 to range
from $460 million to $480 million. This range reflects an increase of $35
million from our previous guidance, primarily related to significant increases
in sales volume and somewhat higher average selling prices. Melted product sales
volume for the full year 2004 is expected to approximate 4,950 metric tons,
reflecting a 5% increase over 2003 levels, and mill product sales volume for the
full year 2004 is expected to approximate 11,350 metric tons, reflecting a 28%
increase compared to 2003 levels. These increases reflect expected volume
improvements in all key markets - commercial and military aerospace, industrial
and emerging.
The Company currently expects production volume to remain relatively stable
throughout the remainder of 2004, resulting in overall full-year 2004 capacity
utilization of approximately 70% to 75%. Capacity utilization was 72% in the
first quarter of 2004. The Company's backlog of unfilled orders was
approximately $220 million at March 31, 2004, up from $180 million at December
31, 2003 and $165 million at March 31, 2003. Substantially all the March 31,
2004 backlog is scheduled to ship within the next 12 months. The Company's order
backlog may not be a reliable indicator of future business activity.
The Company's cost of sales is affected by a number of factors, including
customer and product mix, material yields, plant operating rates, raw material
costs, labor costs and energy costs. Raw material costs represent the largest
portion of the Company's manufacturing cost structure. The Company expects to
manufacture about one-third of its titanium sponge requirements during 2004. The
unit cost of titanium sponge manufactured at TIMET's Henderson, Nevada facility
is expected to decrease relative to 2003, due primarily to higher sponge plant
operating rates as the plant reaches full capacity. The Company expects the
aggregate cost of purchased sponge to increase through the remainder of 2004.
The Company is experiencing higher prices for certain types of scrap and for
energy, and the Company expects those costs to continue to increase throughout
2004. The Company recently announced an increase in prices on all non-contract
titanium melted and mill products in an effort to offset the effects of such
increased raw material and energy costs.
Based on anticipated sales volumes, production levels and continued focus
on cost management opportunities, somewhat offset by the anticipated continued
increases in scrap and energy costs, the Company expects full year 2004 gross
margin to range from 8% to 10% of net sales.
- 23 -
Selling, general, administrative and development expenses for 2004 should
approximate $42 million, an increase of $6 million from 2003. This increase
relates primarily to (i) potential employee profit sharing payouts based upon
the Company's currently projected full year return on equity, (ii) increases in
costs related to the Company's intercompany services agreement with Contran and
(iii) additional auditing and consulting costs expected to be incurred relative
to the Company's compliance with the Sarbanes-Oxley Act's internal control
requirements.
The Company currently anticipates that it will receive orders from Boeing
for about 1.5 million pounds of product during 2004. At this projected order
level, the Company expects to recognize about $23 million of income in 2004
under the Boeing LTA's take-or-pay provisions.
The current outlook is for 2004 operating income to range between $16
million and $26 million, which is a $2 million increase from previous guidance.
Excluding the Boeing take-or-pay income, the Company currently expects operating
results in 2004 to range between operating loss of $7 million and operating
income of $3 million.
Interest expense should approximate $16 million in 2004, including interest
on the Company's Subordinated Debentures held by the Capital Trust.
The Company currently expects 2004 full year net income to range between
breakeven and $10 million, which is a $3 million increase from previous
guidance. Excluding the Boeing take-or-pay income, the Company currently expects
a net loss in 2004 of between $13 million and $23 million.
The Company expects to use $1 million to $11 million in cash flows from
operating activities during 2004, reflecting in part the 2004 resumption of
interest payments on the Subordinated Debentures (including the $19 million
accrued interest at December 31, 2003). Capital expenditures during 2004 are
expected to approximate $18 million. Depreciation and amortization should
approximate $32 million in 2004. The Company currently expects its full-year
2004 cash contributions to its defined benefit pension plans to be $9.4 million
and expects its pension expense to approximate $8 million in 2004.
Upon completion of the BUCS exchange offer, the Company's results of
operations and cash flows from operating and financing activities would be
affected. If 100% of the BUCS were exchanged, the Company's interest expense
would be reduced by $3.3 million per quarter. However, net income available for
common stockholders would reflect the impact of preferred stock dividends of
$3.4 million per quarter. Additionally, the Company would recognize either a
non-operating gain or loss on the exchange, which would result from the
difference, if any, between the carrying value of the Subordinated Debentures
eliminated from the Consolidated Balance Sheet and the shares of Series A
Preferred Stock issued in the exchange (which will be recorded at fair value on
the date the exchange is completed), reduced by the carrying value of any
unamortized deferred financing costs related to the BUCS that will be written of
upon exchange. If 100% of the BUCS had been exchanged as of March 31, 2004, such
gain would have been $29.4 million, reflecting the $201.2 million book value of
related Subordinated Debentures, less the $165.1 million estimated fair value of
Series A Preferred Stock (at $46.50 per share, based on the last reported trade
of the BUCS on March 31, 2004 according to NASDAQ's website, less $22.1 million
attributable to accrued and unpaid dividends) and the $6.7 million carrying
value of unamortized deferred financing costs.
- 24 -
Non-GAAP financial measures. In an effort to provide investors with
information in addition to the Company's results as determined by accounting
principles generally accepted in the United States of America ("GAAP"), the
Company has provided the following non-GAAP financial disclosures that it
believes may provide useful information to investors:
o The Company discloses percentage changes in its melted and mill
product selling prices in U.S. dollars, which have been adjusted to
exclude the effects of changes in product mix. The Company believes
such disclosure provides useful information to investors by allowing
them to analyze such changes without the impact of changes in product
mix, thereby facilitating period-to-period comparisons of the relative
changes in average selling prices. Depending on the composition of
changes in product mix, the percentage change in selling prices
excluding the effect of changes in product mix can be higher or lower
than such percentage change would be using the actual product mix
prevailing during the respective periods;
o In addition to disclosing percentage changes in its mill product
selling prices adjusted to exclude the effects of changes in product
mix, the Company also discloses such percentage changes in billing
currencies, which have been further adjusted to exclude the effects of
changes in foreign currency exchange rates. The Company believes such
disclosure provides useful information to investors by allowing them
to analyze such changes without the impact of changes in foreign
currency exchange rates, thereby facilitating period-to-period
comparisons of the relative changes in average selling prices in the
various actual billing currencies. Generally, when the U.S. dollar
strengthens (weakens) against other currencies, the percentage change
in selling prices in billing currencies will be higher (lower) than
such percentage changes would be using actual exchange rates
prevailing during the respective periods; and
o The Company discloses forecasted operating income and net income
excluding the impact of the Boeing take-or-pay income. The Company
believes this provides investors with useful information to better
analyze the Company's business and possible future earnings during
periods after December 31, 2007, at which time the Company will no
longer receive the positive effects of the take-or-pay income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows for the three months ended March 31,
2004 and 2003 are presented below. The following discussion should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto.
Three months ended March 31,
--------------------------------------------
2004 2003
-------------------- --------------------
(In thousands)
Cash (used) provided by:
Operating activities $ 14,177 $ 26,823
Investing activities (16,054) (1,487)
Financing activities (403) (5,116)
-------------------- --------------------
Net cash (used) provided by operating,
investing and financing activities $ (2,280) $ 20,220
==================== ====================
- 25 -
Operating activities. The titanium industry historically has derived a
substantial portion of its business from the aerospace industry. The aerospace
industry is cyclical, and changes in economic conditions within the aerospace
industry significantly impact the Company's earnings and operating cash flows.
Cash flow from operations is considered a primary source of the Company's
liquidity. Changes in titanium pricing, production volume and customer demand,
among other things, could significantly affect the Company's liquidity.
Certain items included in the determination of net income (loss) have an
impact on cash flows from operating activities, but the impact of such items on
cash may differ from their impact on net income. For example, pension expense
and OPEB expense will generally differ from the outflows of cash for payment of
such benefits. In addition, relative changes in assets and liabilities generally
result from the timing of production, sales and purchases. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period than that in which the underlying cash transaction occurs. For
example, raw materials may be purchased in one period, but the cash payment for
such raw materials may occur in a subsequent period. Similarly, inventory may be
sold in one period, but the cash collection of the receivable may occur in a
subsequent period.
Net loss decreased from $13.6 million for the three months ended March 31,
2003, to $1.7 million for the three months ended March 31, 2004.
Accounts receivable increased during the first three months of 2004
primarily as a result of increased sales. Accounts receivable increased during
the first three months of 2003 primarily as a result of increased sales and an
increase in days sales outstanding as certain customers extended their payment
terms with the Company.
Inventories increased during the first three months of 2004 as a result of
increased run rates and related inventory build in order to meet the anticipated
sales volume increases during 2004, as well as the effects of increased raw
material costs. Inventories decreased during the first three months of 2003 as a
result of reduced run rates at the Company's sponge plant, improved turnover
within the Company's inventory consignment programs and reduced cycle times.
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 material purchases. Additionally, accrued liabilities decreased in
the first three months of 2004 due to (i) the $2.8 million final installment
related to termination of the prior Wyman-Gordon agreement and (ii) a $2.1
million reclassification of the Company's defined benefit pension liability from
current to noncurrent, as the current cash contribution requirements were
reduced significantly based on the Pension Funding Equity Act of 2004.
The increase in customer advances during the first three months of 2004 and
2003 primarily reflects the Company's receipt of the $27.9 million and $27.7
million advances from Boeing in January 2004 and 2003, respectively, partially
offset by the application of customer purchases. Under the terms of the amended
Boeing LTA, in years 2002 through 2007, Boeing advances TIMET $28.5 million
annually, less $3.80 per pound of titanium product purchased from TIMET by
Boeing subcontractors during the preceding year.
- 26 -
In October 2002, the Company exercised its right to defer future interest
payments on its Subordinated Debentures held by the Capital Trust, effective
beginning with the Company's December 1, 2002 scheduled interest payment,
although interest continued to accrue at the coupon rate on the principal and
unpaid interest. Changes in accrued interest payable to the Capital Trust
reflect this activity.
On March 24, 2004, the Company's Board of Directors approved resumption of
scheduled quarterly interest payments on the Subordinated Debentures with the
next scheduled payment on June 1, 2004. The Company's Board also approved
payment of all previously deferred interest on the Subordinated Debentures. On
April 15, 2004, the Company paid all previously deferred and accrued interest to
holders of record as of April 5, 2004, in the amount of $21.7 million ($21.0
million of which related to the BUCS), which will negatively impact the
Company's cash flows for the three and six months ended June 30, 2004. See
further discussion in Note 9 to the Consolidated Financial Statements
Investing activities. The Company's capital expenditures were $3.3 million
for the three months ended March 31, 2004, compared to $1.5 million for the same
period in 2003, principally for replacement of machinery and equipment and
capacity maintenance. During the first quarter of 2004, the Company purchased
1,277,710 shares of CompX Class A common stock for $12.8 million. See further
discussion in Note 3 to the Consolidated Financial Statements.
Financing activities. The Company had zero net borrowings during the three
months ended March 31, 2004. Cash used during the three months ended March 31,
2003 was due primarily to the Company's $4.7 million of net repayments on its
outstanding borrowings upon the Company's receipt of the $27.7 million Boeing
advance in January 2003.
Borrowing arrangements. Under the terms of the Company's U.S. asset-based
revolving credit agreement, which matures in February 2006, borrowings are
limited to the lesser of $105 million or a formula-determined borrowing base
derived from the value of accounts receivable, inventory and equipment
("borrowing availability"). During the first quarter of 2004, the Company
amended its U.S. credit facility to, among other things, allow the Company the
flexibility to remove the equipment component from the determination of the
Company's borrowing availability. The Company took advantage of this flexibility
during the first quarter of 2004, effectively reducing the Company's current
borrowing availability in the U.S. by $12 million. However, the Company can
regain this availability by completing an updated equipment appraisal. 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 distributions in respect of the
Capital Trust's BUCS 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. The Company was in
compliance in all material respects with all covenants for the three months
ended March 31, 2004 and for all periods during the year ended December 31,
2003. At March 31, 2004, the Company had no outstanding borrowings, and excess
availability (defined as borrowing availability less outstanding borrowings and
certain contractual commitments such as letters of credit) was approximately $74
million, under the U.S. credit agreement.
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The Company's subsidiary, TIMET UK, has a credit agreement that provides
for borrowings limited to the lesser of (pound)22.5 million or a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and property, plant and equipment ("borrowing availability"). The
credit agreement includes a revolving and term loan facility and an overdraft
facility (the "U.K. Facilities") and matures in December 2005. Borrowings under
the U.K. Facilities can be in various currencies, including U.S. dollars,
British pounds sterling and euros. Borrowings 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. TIMET UK was in compliance in all material respects
with all covenants for the three months ended March 31, 2004 and for all periods
during the year ended December 31, 2003. At March 31, 2004, the Company had no
outstanding borrowings, and unused borrowing availability was approximately $42
million, under the U.K. Facilities.
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. At March 31, 2004, the Company had no
outstanding borrowing, and unused borrowing availability was approximately $18
million, under these facilities.
Legal and environmental matters. See Note 13 to the Consolidated Financial
Statements for discussion of legal and environmental matters, commitments and
contingencies.
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, or 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 common stock, purchase BUCS, 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.
Corporations that may be deemed to be controlled by or affiliated with
Harold C. Simmons sometimes engage in (i) intercorporate transactions such as
guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds on
open account, and sales, leases and exchanges of assets, including securities
issued by both related and unrelated parties, and (ii) common investment and
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly-held minority equity interest in another related party. The
Company continuously considers, reviews and evaluates such transactions, and
understands that Contran Corporation, Valhi and related entities consider,
review and evaluate such transactions. Depending upon the business, tax and
other objectives then relevant, it is possible that the Company might be a party
to one or more such transactions in the future.
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In March 2004, the Company's Board of Directors approved, subject to
stockholder approval, a split of its common stock at a ratio of five shares of
post-split common stock for each outstanding one share of pre-split common
stock, to be effected by a stock dividend. When completed, the Company will
retroactively adjust all earnings per share data for the effect of the stock
split.
The Company's Board of Directors has approved, subject to stockholder
approval, an exchange offer pursuant to which the Company would offer to
exchange any and all of the outstanding 4,024,820 BUCS issued by the Capital
Trust for shares of Series A Preferred Stock at the exchange rate of one share
of Series A Preferred Stock for each BUCS. Each share of Series A Preferred
Stock would be convertible, in whole or in part, at any time, at the option of
the holder thereof, into 0.2 share of TIMET common stock (or at a rate of one
share of TIMET common stock per one share of Series A Preferred Stock, assuming
completion of the five-for-one stock split), subject to adjustment in certain
events.
The holders of shares of the Series A Preferred Stock will be entitled to
receive, when, as and if declared by the Company's Board of Directors out of
funds of TIMET legally available for the payment of dividends, cumulative cash
dividends at the rate of 6.75% of the liquidation preference per annum per share
(equivalent to $3.375 per annum per share). The Series A Preferred Stock would
not be mandatorily redeemable, but it would be redeemable at the option of the
Company under certain circumstances. See further discussion of the exchange
offer in Note 16 to the Consolidated Financial Statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a complete discussion of the Company's market risks, refer to the Item
7A, "Quantitative and Qualitative Disclosures About Market Risk," in the 2003
Annual Report. During the three months ended March 31, 2004, the Company
purchased certain publicly-traded marketable equity securities that are exposed
to market risk due to changes in prices of the securities as reported on the New
York Stock Exchange. The fair value of these marketable equity securities at
March 31, 2004 was $17.1 million, as compared to a cost basis of $12.8 million.
The potential change in the fair value of these securities, assuming a 10%
change in prices, would be $1.7 million at March 31, 2004. See also Note 3 to
the Consolidated Financial Statements.
Item 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures of the Company that are designed to ensure
that information required to be disclosed in the reports that the Company files
or submits to the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), is recorded, processed, summarized and reported, within the
time periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits to the SEC under the Exchange Act is accumulated and
communicated to the Company's management, including its principal executive
officer and its principal financial officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure. Both J. Landis Martin, the Company's Chief Executive Officer, and
Bruce P. Inglis, the Company's Vice President - Finance and Corporate
Controller, have evaluated the Company's disclosure controls and procedures as
of March 31, 2004. Based upon their evaluation, these executive officers have
concluded that the Company's disclosure controls and procedures are effective as
of the date of such evaluation.
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The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP, and includes
those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and
directors of the Company; and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the Company's consolidated
financial statements.
There has been no change to the Company's system of internal control over
financial reporting during the quarter ended March 31, 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's system of
internal controls over financial reporting.
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PART II. - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Note 13 of the Consolidated Financial Statements,
which information is incorporated herein by reference, and to the Company's 2003
Annual Report for descriptions of certain previously reported legal proceedings.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Amendment No. 3 to Loan and Security Agreement by and among
Congress Financial Corporation (Southwest) as Lender and Titanium
Metals Corporation and Titanium Hearth Technologies, Inc. as
borrowers, dated March 18, 2004, and effective February 12, 2004,
incorporated by reference to Exhibit 6 to Amendment No. 4 to the
statement on Schedule 13D for CompX International, Inc. filed by
Valhi, Inc. (along with other reporting persons) on March 23,
2004 (File No. 005-54653)
10.2*2004 Senior Executive Cash Incentive Plan, effective January 1,
2004
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
* Management contract, compensatory plan or arrangement
Note:The Company has retained a signed original of any exhibit listed
above that contains signatures, and the Company will provide any
such exhibit to the SEC or its staff upon request. Such request
should be directed to the attention of the Company's Corporate
Secretary at the Company's corporate offices located at 1999
Broadway, Suite 4300, Denver, Colorado 80202.
(b) Reports on Form 8-K filed by the registrant for the quarter ended
March 31, 2004 and through May 3, 2004:
Date of Report Items Reported
------------------- ----------------
January 28, 2004 7 and 12
January 29, 2004 7 and 9
February 26, 2004 5 and 7
March 25, 2004 5 and 7
May 3, 2004 7 and 12
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TITANIUM METALS CORPORATION
------------------------------------------------------
Date: May 4, 2004 By /s/ J. Landis Martin
------------------------------------------------------
J. Landis Martin
Chairman of the Board, President and
Chief Executive Officer
Date: May 4, 2004 By /s/ Bruce P. Inglis
------------------------------------------------------
Bruce P. Inglis
Vice President - Finance and Corporate
Controller
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