SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the quarterly period ended September 30, 2004
------------------
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
------------------------------------------------------
(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
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5600
--------------
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 November 4, 2004: 15,919,560
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, the potential
for adjustment of the Company's deferred income tax asset valuation allowance
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 - September 30, 2004 (unaudited) and
December 31, 2003 2
Consolidated Statements of Operations - Three and nine months
ended September 30, 2004 and 2003 (unaudited) 4
Consolidated Statements of Comprehensive Income (Loss) - Three
and nine months ended September 30, 2004 and 2003
(unaudited) 6
Consolidated Statements of Cash Flows - Nine months ended
September 30, 2004 and 2003 (unaudited) 7
Consolidated Statement of Changes in Stockholders' Equity - Nine
months ended September 30, 2004 (unaudited) 9
Notes to Consolidated Financial Statements (unaudited) 10
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
Item 4. Controls and Procedures 36
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 38
Item 6. Exhibits and Reports on Form 8-K 38
- 1 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2004 2003
-------------------- ------------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 7,973 $ 35,040
Restricted cash and cash equivalents 2,248 2,248
Accounts and other receivables, less allowance
of $1,469 and $2,347 86,371 67,432
Refundable income taxes - 2,155
Inventories 213,575 165,721
Prepaid expenses and other 3,522 2,604
Deferred income taxes 826 778
-------------------- ------------------
Total current assets 314,515 275,978
Marketable securities 40,770 -
Investment in joint ventures 21,223 22,469
Investment in common securities of TIMET Capital Trust I 6,259 6,794
Property and equipment, net 227,438 239,182
Intangible assets, net 5,165 6,294
Deferred income taxes 697 -
Other 10,730 16,692
-------------------- ------------------
Total assets $ 626,797 $ 567,409
==================== ==================
See accompanying Notes to Consolidated Financial Statements
- 2 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands, except per share data)
September 30, December 31,
LIABILITIES, MINORITY INTEREST AND 2004 2003
STOCKHOLDERS' EQUITY --------------------- -------------------
(unaudited)
Current liabilities:
Notes payable $ 33,759 $ -
Current maturities of capital lease obligations 170 524
Accounts payable 41,695 29,200
Accrued liabilities 45,029 45,163
Customer advances 17,554 3,356
Income taxes payable 1,260 11
Other 375 251
--------------------- -------------------
Total current liabilities 139,842 78,505
Capital lease obligations 9,740 9,766
Accrued OPEB cost 14,300 13,661
Accrued pension cost 65,335 62,366
Accrued environmental cost 2,751 3,930
Deferred income taxes 124 637
Accrued interest on debt payable to TIMET Capital Trust I - 19,003
Debt payable to TIMET Capital Trust I 12,010 207,465
Other 1,527 2,188
--------------------- -------------------
Total liabilities 245,629 397,521
--------------------- -------------------
Minority interest 11,128 11,131
--------------------- -------------------
Stockholders' equity:
Preferred Stock, $.01 par value, $195,455 liquidation
preference; 10,000 shares authorized, 3,909 and 0
shares issued 173,650 -
Common stock, $.01 par value; 90,000 shares
authorized, 15,960 and 15,950 shares issued 160 160
Additional paid-in capital 350,812 350,515
Accumulated deficit (114,975) (140,428)
Accumulated other comprehensive loss (38,384) (50,226)
Treasury stock, at cost (45 shares) (1,208) (1,208)
Deferred compensation (15) (56)
--------------------- -------------------
Total stockholders' equity 370,040 158,757
--------------------- -------------------
Total liabilities, minority interest and
stockholders' equity $ 626,797 $ 567,409
===================== ===================
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 Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Net sales $ 120,246 $ 83,635 $ 364,859 $ 284,741
Cost of sales 106,585 83,677 323,356 279,407
--------------- --------------- --------------- ---------------
Gross margin 13,661 (42) 41,503 5,334
Selling, general, administrative and
development expense 11,710 8,538 32,378 28,016
Equity in earnings (losses) of joint ventures 393 (93) 161 321
Other income (expense), net 10,088 9,940 12,941 13,476
--------------- --------------- --------------- ---------------
Operating income (loss) 12,432 1,267 22,227 (8,885)
Interest expense 3,099 3,958 11,497 12,216
Other non-operating income (expense), net 15,399 (7) 16,296 (583)
--------------- --------------- --------------- ---------------
Income (loss) before income taxes,
minority interest and cumulative effect
of change in accounting principle 24,732 (2,698) 27,026 (21,684)
Income tax (benefit) expense (629) 326 692 807
Minority interest, net of tax 120 (38) 881 246
--------------- --------------- --------------- ---------------
Income (loss) before cumulative effect of
change in accounting principle 25,241 (2,986) 25,453 (22,737)
Cumulative effect of change in
accounting principle - - - (191)
--------------- --------------- --------------- ---------------
Net income (loss) 25,241 (2,986) 25,453 (22,928)
Dividends on Series A Preferred Stock 1,099 - 1,099 -
--------------- --------------- --------------- ---------------
Net income (loss) attributable to
common stockholders $ 24,142 $ (2,986) $ 24,354 $ (22,928)
=============== =============== =============== ===============
See accompanying Notes to Consolidated Financial Statements
- 4 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (continued)
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Basic earnings (loss) per share attributable
to common stockholders:
Before cumulative effect of change in
accounting principle $ 1.52 $ (0.19) $ 1.53 $ (1.44)
Cumulative effect of change in
accounting principle - - - (0.01)
--------------- --------------- --------------- ---------------
Basic earnings (loss) per share attributable
to common stockholders $ 1.52 $ (0.19) $ 1.53 $ (1.45)
=============== =============== =============== ===============
Diluted earnings (loss) per share attributable
to common stockholders:
Before cumulative effect of change in
accounting principle $ 1.37 $ (0.19) $ 1.53 $ (1.44)
Cumulative effect of change in
accounting principle - - - (0.01)
--------------- --------------- --------------- ---------------
Diluted earnings (loss) per share attributable
to common stockholders $ 1.37 $ (0.19) $ 1.53 $ (1.45)
=============== =============== =============== ===============
Weighted average shares outstanding:
Basic 15,887 15,858 15,876 15,838
=============== =============== =============== ===============
Diluted 20,039 15,858 16,687 15,838
=============== =============== =============== ===============
See accompanying Notes to Consolidated Financial Statements
- 5 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
(In thousands)
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Net income (loss) $ 25,241 $ (2,986) $ 25,453 $ (22,928)
--------------- --------------- --------------- ---------------
Other comprehensive income (loss):
Currency translation adjustment 445 741 428 5,480
Unrealized gains on marketable
securities 4,950 - 11,536 -
TIMET's share of VALTIMET's
unrealized net losses on
derivative financial instruments
qualifying as cash flow hedges (67) - (122) -
--------------- --------------- --------------- ---------------
Total other comprehensive income 5,328 741 11,842 5,480
--------------- --------------- --------------- ---------------
Comprehensive income (loss) $ 30,569 $ (2,245) $ 37,295 $ (17,448)
=============== =============== =============== ===============
See accompanying Notes to Consolidated Financial Statements
- 6 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
Nine months ended
September 30,
----------------------------------------
2004 2003
------------------- ------------------
Cash flows from operating activities:
Net income (loss) $ 25,453 $ (22,928)
Depreciation and amortization 24,303 28,344
Cumulative effect of change in accounting principle - 191
Gain on exchange of BUCS (15,465) -
Equity in earnings of joint ventures, net of distributions 1,518 926
Equity in earnings of common securities of TIMET
Capital Trust I, net of distributions 536 (321)
Deferred income taxes (1,270) (203)
Minority interest, net of tax 881 246
Other, net 49 683
Change in assets and liabilities:
Receivables (18,854) 1,094
Inventories (47,692) 22,915
Prepaid expenses and other (898) (1,318)
Accounts payable and accrued liabilities 12,273 2,072
Customer advances 14,194 11,095
Income taxes 3,316 550
Accrued OPEB and pension costs 2,820 (2,962)
Accrued interest on debt payable to TIMET Capital Trust I (18,936) 10,712
Other, net (1,642) (491)
------------------- ------------------
Net cash (used) provided by operating activities (19,414) 50,605
------------------- ------------------
Cash flows from investing activities:
Capital expenditures (10,868) (5,984)
Purchase of marketable securities (29,135) -
Other - 36
------------------- ------------------
Net cash used by investing activities (40,003) (5,948)
------------------- ------------------
Cash flows from financing activities:
Indebtedness:
Borrowings 101,114 108,628
Repayments (67,359) (126,920)
Dividends paid to minority interest (691) (1,892)
Other, net (488) (937)
------------------- ------------------
Net cash provided (used) by financing activities 32,576 (21,121)
------------------- ------------------
Net cash (used) provided by operating,
investing and financing activities $ (26,841) $ 23,536
=================== ==================
See accompanying Notes to Consolidated Financial Statements
- 7 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (continued)
(In thousands)
Nine months ended
September 30,
----------------------------------------
2004 2003
------------------ ------------------
Cash and cash equivalents:
Net (decrease) increase from:
Operating, investing and financing activities $ (26,841) $ 23,536
Currency translation (226) 164
------------------ ------------------
(27,067) 23,700
Cash and cash equivalents at beginning of period 35,040 6,214
------------------ ------------------
Cash and cash equivalents at end of period $ 7,973 $ 29,914
=================== ==================
Supplemental disclosures:
Cash paid for:
Interest $ 29,863 $ 954
Income taxes, net $ - $ 463
See accompanying Notes to Consolidated Financial Statements
- 8 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
Nine months ended September 30, 2004
(In thousands)
Accumulated
Series A Additional Other
Common Common Preferred Paid-in Accumulated Comprehensive Treasury Deferred
Shares Stock Stock Capital Deficit Income (Loss) Stock Compensation Total
-------- ------- ---------- ---------- ----------- ---------- -------- ------- ----------
Balance at December 31, 2003 15,905 $ 160 $ - $ 350,515 $(140,428) $(50,226) $(1,208) $ (56) $ 158,757
Comprehensive income - - - 25,453 11,842 - - 37,295
Issuance of common stock 20 - 366 - - - - 366
Issuance of Series A
Preferred Stock - - 173,650 - - - - - 173,650
Stock award cancellations (10) - - (69) - - - 69 -
Amortization of deferred
compensation, net of effects of
stock award cancellations - - - - - - - (28) (28)
-------- ------- ---------- ---------- ----------- ---------- -------- ------- ----------
Balance at September 30, 2004 15,915 $ 160 $ 173,650 $ 350,812 $(114,975) $(38,384) (1,208) $ (15) $ 370,040
======== ======= ========== ========== =========== ========== ======== ======= ==========
See accompanying Notes to Consolidated Financial Statements
- 9 -
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 income (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 September 30, 2004, and the
Consolidated Statements of Operations, Comprehensive Income (Loss), Changes in
Stockholders' Equity and Cash Flows for the interim periods ended September 30,
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 Company's first three fiscal quarters reported are the approximate
13-week periods ending on the Saturday generally nearest to March 31, June 30
and September 30. The Company's fourth fiscal quarter and fiscal year always end
on December 31. For presentation purposes, the Company's Consolidated Financial
Statements and notes thereto have been presented as ending on March 31, June 30,
September 30 and December 31, as applicable. 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, as amended (the "2003 Annual Report").
At September 30, 2004, Valhi, Inc. and subsidiaries ("Valhi") held
approximately 40.8% of the Company's outstanding common stock and approximately
0.4% of the Company's 6.75% Series A Convertible Preferred Stock (the "Series A
Preferred Stock"). At September 30, 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 11.8% of the Company's common
stock. TIMET's U.S. pension plans invest in a portion of the CMRT that does not
hold TIMET common stock. At September 30, 2004, Contran Corporation ("Contran")
held, directly or through subsidiaries, approximately 90% 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, 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. At September 30, 2004, Mr. Simmons' spouse owned 40.9%
of the outstanding Series A Preferred Stock. Mr. Simmons may be deemed to
control each of Contran, Valhi and TIMET.
- 10 -
The Company completed a five-for-one stock split of its common stock, which
was effected in the form of a stock dividend (whereby an additional four shares
of post-split stock were distributed for each one share of pre-split stock)
effective after the close of trading on August 27, 2004. All share and per share
disclosures for all periods presented have been adjusted to give effect to the
stock split.
During the third quarter of 2004, the Company adopted Financial Accounting
Standards Board Emerging Issues Task Force ("EITF") Issue 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF
Issue 03-1 provides guidance for determining when an investment is considered
impaired, whether that impairment is other than temporary and the measurement
date of an impairment loss. EITF 03-1 had no impact on the Company as of
September 30, 2004.
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 and nine months ended September 30, 2004 and 2003. The following table
illustrates the effect on net income (loss) and earnings (loss) per share
attributable to common stockholders 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 Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- ------------- -------------- -------------
(In thousands, except per share data)
Net income (loss) attributable to
common stockholders, as reported $ 24,142 $ (2,986) $ 24,354 $ (22,928)
Less stock option related stock-based
employee compensation expense
determined under SFAS No. 123 11 47 54 213
-------------- ------------- -------------- -------------
Pro forma net income (loss) attributable
to common stockholders $ 24,131 $ (3,033) $ 24,300 $ (23,141)
============== ============= ============== =============
Basic earnings (loss) per share
attributable to common stockholders:
As reported $ 1.52 $ (0.19) $ 1.53 $ (1.45)
============== ============= ============== =============
Pro forma $ 1.52 $ (0.19) $ 1.53 $ (1.46)
============== ============= ============== =============
Diluted earnings (loss) per share
attributable to common stockholders:
As reported $ 1.37 $ (0.19) $ 1.53 $ (1.45)
============== ============= ============== =============
Pro forma $ 1.37 $ (0.19) $ 1.52 $ (1.46)
============== ============= ============== =============
- 11 -
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 (losses) on such derivative financial instruments is
included as a component of other comprehensive income.
Note 2 - Inventories
September 30, December 31,
2004 2003
--------------------- -------------------
(In thousands)
Raw materials $ 65,956 $ 33,198
Work-in-process 90,757 76,573
Finished products 66,448 62,687
Supplies 12,398 12,248
--------------------- -------------------
235,559 184,706
Less adjustment of certain inventories to LIFO basis 21,984 18,985
--------------------- -------------------
$ 213,575 $ 165,721
===================== ===================
Note 3 - Marketable securities
The following table summarizes the Company's marketable securities as of
September 30, 2004, which were acquired during the nine months then ended:
Market Unrealized
Marketable security Shares value (1) Cost basis gains (1)
-------------------------------------------- ------------ ------------- -------------- --------------
($ in thousands)
CompX International, Inc. ("CompX") 2,212,820 $ 36,489 $ 26,673 $ 9,816
NL Industries, Inc. ("NL") 222,100 4,171 2,462 1,709
Kronos Worldwide, Inc. ("Kronos") 2,850 110 99 11
------------- -------------- --------------
$ 40,770 $ 29,234 $ 11,536
============= ============== ==============
-----------------------------------------------------------------------------------------------------------------------
(1) The Company's securities are classified as noncurrent available-for-sale
marketable securities carried at market value, with all unrealized gains
(losses) reported as a component of other comprehensive income.
At September 30, 2004, the Company owned approximately 14.6%, and NL, a
subsidiary of Valhi, owned an additional 68.4%, of the total number of shares of
all classes of CompX common stock outstanding. Effective October 1, 2004, the
Company and NL contributed 100% of their respective holdings on that date of all
classes of CompX common stock to CompX Group Inc. ("CGI") in return for a 17.6%
and 82.4% ownership interest in CGI, respectively, and CGI became the owner of
the 83.0% of CompX that the Company and NL had previously owned in the
aggregate. The CompX shares are the sole assets of CGI. The Company's shares of
CGI are redeemable at the option of the Company based upon the market value of
the underlying CompX stock held by CGI. The fair value of the Company's
investment in CGI is based on the market value of the underlying CompX shares.
On October 19, 2004, the Company purchased an additional 3,500 shares of
CompX Class A common stock for an aggregate of $0.1 million. None of the shares
purchased subsequent to October 1, 2004 have been, or are expected to be,
contributed to CGI.
- 12 -
At September 30, 2004, the Company owned approximately 0.5%, and Valhi and
a wholly owned subsidiary of Valhi owned an additional 83.3%, of the total
number of shares of NL common stock outstanding.
During the nine months ended September 30, 2004, NL paid dividends on its
common stock in the form of shares of Kronos common stock. At September 30,
2004, the Company owned less than 0.1% and Valhi, a wholly owned subsidiary of
Valhi and NL own an additional 93.9%, of the total number of shares of Kronos
common stock outstanding.
Note 4 - Property and equipment
September 30, December 31,
2004 2003
-------------------- ------------------
(In thousands)
Land and improvements $ 6,369 $ 6,358
Buildings and improvements 41,872 41,700
Information technology systems 61,140 59,782
Manufacturing equipment and other 324,969 318,364
Construction in progress 8,071 6,754
-------------------- ------------------
442,421 432,958
Less accumulated depreciation 214,983 193,776
-------------------- ------------------
$ 227,438 $ 239,182
==================== ==================
Note 5 - Other noncurrent assets
September 30, December 31,
2004 2003
-------------------- ------------------
(In thousands)
Deferred financing costs $ 918 $ 7,563
Prepaid pension cost 9,710 8,981
Notes receivable from officers 102 145
Other - 3
-------------------- ------------------
$ 10,730 $ 16,692
==================== ==================
See Note 9 with respect to deferred financing costs.
- 13 -
Note 6 - Accrued liabilities
September 30, December 31,
2004 2003
--------------------- ------------------
(In thousands)
OPEB cost $ 3,065 $ 3,135
Pension cost 4,749 8,466
Payroll and vacation 4,704 6,891
Incentive compensation 10,226 579
Other employee benefits 8,519 9,731
Deferred income 1,669 1,664
Environmental costs 1,761 301
Taxes, other than income 4,100 4,408
Accrued interest on debt payable to the Capital Trust 66 -
Wyman-Gordon installment - 2,800
Other 6,170 7,188
--------------------- ------------------
$ 45,029 $ 45,163
===================== ==================
See Note 9 with respect to accrued interest on debt payable to the Capital
Trust. See Note 14 with respect to environmental costs.
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
reduced its vacation accrual for these employees from $1.9 million to zero
during the first quarter of 2004, resulting in a one-time reduction in cost of
sales of $1.6 million and selling, general, administrative and development
expense of $0.3 million.
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 of
$2.0 million each to Wyman-Gordon during the third and fourth quarters of 2003
and paid the remaining $2.8 million during the first quarter of 2004.
- 14 -
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 September 30, 2004, approximately $11.8 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 in order to avoid the costs of an appraisal. The Company took
advantage of this flexibility during the first quarter of 2004, effectively
reducing the Company's borrowing availability in the U.S. by $10 million as of
September 30, 2004. However, the Company can regain this availability by
completing an updated equipment appraisal. As of September 30, 2004, the Company
had outstanding borrowings of $33.7 million under its U.S. credit agreement and
$0.1 million under one of its European credit facilities. Aggregate unused
borrowing availability under the Company's U.S. and European credit facilities
was approximately $117 million as of September 30, 2004.
Note 9 - Capital Trust
In November 1996, the Capital Trust issued $201.3 million 6.625%
mandatorily redeemable convertible preferred securities, beneficial unsecured
convertible securities ("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
September 30, 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 beginning with the June 1, 2004 payment.
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.
- 15 -
In August 2004, the Company completed an exchange offer, pursuant to which
the Company had offered to exchange any and all of the 4,024,820 outstanding
BUCS issued by the Capital Trust for shares of the Company's Series A Preferred
Stock at the exchange rate of one share of Series A Preferred Stock for each
BUCS. Based upon the 3,909,103 BUCS tendered and accepted for exchange as of the
close of the offer on August 31, 2004, the Company issued 3,909,103 shares of
Series A Preferred Stock in exchange for such BUCS. During the third quarter of
2004, the Company recognized a $15.5 million non-cash non-operating gain related
to the BUCS exchange, reflecting the difference between the carrying value of
the related Subordinated Debentures ($195.5 million) and the fair value of the
Series A Preferred Stock issued ($173.7 million, based on the closing price of
the BUCS on August 31, 2004 according to NASDAQ's website of $45.25 per share,
less $3.2 million attributable to accrued and unpaid dividends), less $6.3
million of unamortized deferred financing costs related to the exchanged BUCS.
See Note 10.
Note 10 - Series A Preferred Stock
Upon completion of the BUCS exchange offer discussed in Note 9, the Company
issued 3,909,103 shares of Series A Preferred Stock. Each share of the Series A
Preferred Stock is convertible, at any time, at the option of the holder
thereof, into one and two-thirds shares of the Company's common stock, subject
to adjustment in certain events. The Series A Preferred Stock is not mandatorily
redeemable, but is redeemable at the option of the Company under certain
circumstances. Holders of the Series A Preferred Stock are entitled to receive
cumulative cash dividends at the rate of 6.75% of the $50 per share 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. Whether or not declared,
cumulative dividends on Series A Preferred Stock are deducted from net income to
arrive at net income attributable to common stockholders. Subsequent to
September 30, 2004, the Company's board of directors declared a dividend of
$0.84375 per share, payable on December 15, 2004 to holders of record of Series
A Preferred Stock as of the close of trading on December 1, 2004.
Note 11 - Other income (expense)
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
2004 2003 2004 2003
-------------- ------------ -------------- ------------
(In thousands)
Other operating income (expense):
Litigation settlement $ - $ - $ - $ 475
Boeing take-or-pay 10,058 10,123 12,565 12,943
Other, net 30 (183) 376 58
-------------- ------------ -------------- ------------
$ 10,088 $ 9,940 $ 12,941 $ 13,476
============== ============ ============== ============
Other non-operating income (expense):
Dividend and interest income $ 68 $ 74 $ 304 $ 255
Equity in earnings of common
securities of the Capital Trust 103 109 320 321
Foreign exchange (losses) gains (471) 240 100 (647)
Gain on BUCS exchange, net (Note 9) 15,465 - 15,465 -
Other, net 234 (430) 107 (512)
-------------- ------------ -------------- ------------
$ 15,399 $ (7) $ 16,296 $ (583)
============== ============ ============== ============
- 16 -
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 12 - Income taxes
Nine months ended
September 30,
-----------------------------------------
2004 2003
------------------ -------------------
(In thousands)
Expected income tax expense (benefit), at 35% $ 9,459 $ (7,589)
Non-U.S. tax rates (217) 400
Incremental tax on earnings of non-U.S. tax group affiliates 94 27
U.S. state income taxes, net (103) (790)
Dividends received deduction (25) (312)
Nontaxable income (70) (123)
Revision of estimated tax liability (551) (241)
Adjustment of deferred income tax asset
valuation allowance (7,750) 9,121
Other, net (145) 314
------------------ -------------------
$ 692 $ 807
================== ===================
The Company periodically reviews its deferred income tax assets to
determine if future realization is more likely than not. During the third
quarter of 2004, due to a change in estimate of the Company's ability to utilize
the benefits of its net operating loss ("NOL") carryforwards in Germany, the
Company determined that its deferred income tax asset in Germany now meets the
"more-likely-than-not" recognition criteria. Accordingly, the Company reversed
the $0.7 million valuation allowance attributable to such deferred income tax
asset. In addition, the Company's deferred income tax asset valuation allowance
related to income from continuing operations decreased by $7.0 million during
the first nine months of 2004, primarily due to the utilization of the U.S. and
U.K. NOL carryforwards, the benefit of which had previously not met the
"more-likely-than-not" recognition criteria.
At September 30, 2004, the Company had, for U.S. federal income tax
purposes, (i) NOL carryforwards of $110 million that expire in 2020 through
2023, (ii) a capital loss carryforward of $86 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 September 30, 2004, the Company had the equivalent of
(i) a $24 million NOL carryforward in the United Kingdom and a $2 million NOL
carryforward in Germany, both of which have indefinite carryforward periods, and
(ii) $0.1 million of NOL carryforwards in Italy that expire in 2008 and 2009.
- 17 -
Note 13 - Employee benefits
Defined benefit pension plans. The components of the net periodic pension
expense are set forth below:
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- ------------- -------------- -------------
(In thousands)
Service cost $ 789 $ 667 $ 2,466 $ 2,094
Interest cost 3,135 2,769 9,429 8,228
Expected return on plan assets (3,257) (2,594) (9,791) (7,074)
Amortization of unrecognized
prior service cost 122 144 366 432
Amortization of net losses 1,088 780 3,272 2,901
-------------- ------------- -------------- -------------
Net periodic pension expense $ 1,877 $ 1,766 $ 5,742 $ 6,581
============== ============= ============== =============
Through September 30, 2004, the Company has made $7.9 million of cash
contributions to its defined benefit pension plans in 2004 ($1.8 million to the
U.S. plan and $6.1 million to the U.K. plan), and the Company currently expects
to make additional cash contributions of approximately $1.9 million to its
defined benefit pension plans during 2004 (all to the U.K. plan). The current
aggregate estimate for full-year 2004 cash contributions represents a $1.7
million decrease from estimates as of December 31, 2003, primarily based upon
the effects on the U.S. 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 Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- ------------- -------------- -------------
(In thousands)
Service cost $ 152 $ 14 $ 405 $ 366
Interest cost 529 521 1,335 1,291
Amortization of unrecognized
prior service cost (116) (160) (348) (348)
Amortization of net losses 386 319 840 717
-------------- ------------- -------------- -------------
Net periodic OPEB expense $ 951 $ 694 $ 2,232 $ 2,026
============== ============= ============== =============
- 18 -
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the "Medicare Act of 2003"), enacted in December 2003, introduced a
prescription drug benefit under Medicare (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 actuarially equivalent to Medicare Part D. Detailed regulations
necessary to implement the Medicare Act of 2003 were not issued upon enactment,
including those that would specify the manner in which actuarial equivalency
would be determined, the evidence required to demonstrate actuarial equivalence
and the documentation requirements necessary to receive the subsidy. In
accordance with FASB Staff Position ("FSP") No. 106-1, the Company elected to
defer accounting for the effects of the Medicare Act of 2003 until authoritative
guidance on how to account for such effects was issued.
In May 2004, the FASB issued FSP No. 106-2, which superceded FSP No. 106-1
and is applicable to the Company beginning in the quarter ended September 30,
2004. FSP No. 106-2 provides guidance on (i) accounting for the effects of the
Medicare Act of 2003 once the Company is able to determine actuarial equivalency
and (ii) various required disclosures. Actuarial equivalence will be determined
under regulations issued by the Centers for Medicare and Medicaid Services
("CMMS"). Based on proposed CMMS guidance issued to date and the Company's
understanding of the Medicare Act of 2003, the Company is currently unable to
determine whether the benefits provided by its plans are actuarially equivalent.
Accordingly, the Company's accumulated postretirement benefit obligation and net
periodic OPEB cost, as reflected in the accompanying consolidated financial
statements, do not reflect any effect of the federal subsidy. The Company
expects to be able to determine actuarial equivalency when additional
clarification and final regulations are issued, at which time the Company will
account for the effect of the federal subsidy, if any, prospectively from that
date, as permitted by and in accordance with FSP No. 106-2.
Note 14 - Commitments and contingencies
Environmental matters. TIMET and Basic Management, Inc. ("BMI") entered
into an agreement in 1999 providing that upon BMI's payment to TIMET 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 and BMI have agreed in principle to a new agreement, which
would supercede the 1999 agreement, pursuant to which TIMET would transfer to
BMI the TIMET Pond Property and BMI would pay TIMET cash and would assume
substantially all of the environmental obligations associated with such
property. TIMET currently expects to finalize this agreement during the fourth
quarter 2004. TIMET expects to use any funds received to pay substantially all
of the expected cost to complete a new wastewater neutralization facility
currently under construction.
- 19 -
In the event the agreement is not completed, 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 investigation with respect to
other environmental issues associated with the TIMET Pond Property, including
possible groundwater issues, in the event the agreement is not finalized for any
reason.
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
$4.3 million accrued based on the undiscounted cost estimates of the probable
costs for remediation of these sites, which includes an increase in the accrual
of $0.8 million in the third quarter of 2004 related to specific future
remediation costs which the Company now considers probable. The Company expects
these accrued expenses to be paid over a period of up to thirty years.
As of September 30, 2004, the Company had accrued an aggregate of
approximately $4.5 million for environmental matters, including those discussed
above. The upper end of the range of reasonably possible costs to remediate
these matters is approximately $9.1 million. 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 workers' compensation bonds (having
a maximum aggregate exposure of $3.0 million) issued on behalf of a divested
subsidiary that is currently under Chapter 11 bankruptcy protection. The issuers
of the bonds have been required to make payments on the bonds for claims and
have requested reimbursement from TIMET. Since the third quarter of 2002, TIMET
has reimbursed the issuers approximately $1.3 million for claims under these
bonds, and $0.7 million remains accrued for future payments as of September 30,
2004, based on the Company's current best estimates of its probable future
obligation. TIMET may revise its estimated liability under these bonds in the
future as additional facts become known or claims develop.
- 20 -
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.
See the 2003 Annual Report and the March 31, 2004 Quarterly Report for
additional information concerning certain legal and environmental matters,
commitments and contingencies.
Note 15 - 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 attributable to common stockholders reflects the dilutive
effect of common stock options, restricted stock and the assumed conversion of
the BUCS and the Series A Preferred Stock, if applicable. A reconciliation of
the numerator and denominator used in the calculation of basic and diluted
earnings (loss) per share is presented below.
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- ------------- -------------- -------------
(In thousands)
Numerator:
Net income attributable to common
stockholders $ 24,142 $ (2,986) $ 24,354 $ (22,928)
Dividends on Series A Preferred
Stock 1,099 - 1,099 -
Interest expense on BUCS 2,254 - - -
-------------- ------------- -------------- -------------
Diluted net income (loss) attributable
to common stockholders $ 27,495 $ (2,986) $ 25,453 $ (22,928)
============== ============= ============== =============
Denominator:
Average common shares outstanding 15,887 15,858 15,876 15,838
Average dilutive stock options and
restricted stock 87 - 56 -
Series A Preferred Stock 2,291 - 755 -
BUCS 1,774 - - -
-------------- ------------- -------------- -------------
Diluted shares 20,039 15,858 16,687 15,838
============== ============= ============== =============
- 21 -
For the nine months ended September 30, 2004, and for the three and nine
months ended September 30, 2003, the conversion of the BUCS was antidilutive.
Stock options to purchase approximately 288,000 shares of common stock during
the three months ended September 30, 2004 and 363,000 shares of common stock
during the nine months ended September 30, 2004 were excluded from the
calculation because the exercise price for such options was greater than the
average market price of the common shares and such options were therefore
antidilutive during the respective period. Stock options and restricted shares
excluded from the calculation because they were antidilutive were approximately
645,000 for the three and nine months ended September 30, 2003.
Note 16 - 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 Chief Executive Officer is the Company's chief operating
decision maker ("CODM") as that term is defined in SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. The CODM receives
financial information about TIMET from which he makes decisions concerning
resource utilization and performance analysis only on a global, consolidated
basis. Based upon this level of decision-making, the Company currently has one
segment, its worldwide "Titanium melted and mill products" 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 Nine months ended
September 30, September 30,
--------------------------------- ------------------------------
2004 2003 2004 2003
--------------- -------------- ------------- -------------
($ in thousands, except product shipment data)
Titanium melted and mill products:
Melted product net sales $ 16,461 $ 12,261 $ 51,942 $ 41,300
Mill product net sales 87,183 65,185 268,111 208,646
Other product sales 16,602 12,989 44,806 41,595
Other (1) - (6,800) - (6,800)
--------------- -------------- ------------- -------------
$ 120,246 $ 83,635 $ 364,859 $ 284,741
=============== ============== ============= =============
Melted product shipments:
Volume (metric tons) 1,180 1,220 3,935 3,500
Average selling price ($ per kilogram) $ 13.95 $ 10.05 $ 13.20 $ 11.80
Mill product shipments:
Volume (metric tons) 2,695 2,015 8,525 6,510
Average selling price ($ per kilogram) $ 32.35 $ 32.35 $ 31.45 $ 32.05
---------------------------------------------------------------------------------------------------------------------
(1) Represents the effect of a $6.8 million reduction to sales during 2003
related to the termination of a purchase and sale agreement with
Wyman-Gordon. See further discussion in Note 6.
- 22 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Summarized financial information. The following table summarizes certain
information regarding the Company's results of operations for the three and nine
months ended September 30, 2004 and 2003. Average selling prices, as reported by
the Company, are a reflection of not just actual selling prices received by the
Company, but also include other related factors such as currency exchange rates
and customer and product mix during a given period. Consequently, changes in
average selling prices from period to period will be impacted by changes
occurring not just in actual prices, but by these other factors as well. The
percentage change information presented below represents changes from the
respective prior year. See "Results of Operations - Outlook" for further
discussion of the Company's business expectations for the remainder of 2004.
Three months ended Nine months ended
September 30, September 30,
--------------------------------- -------------------------------
2004 2003 2004 2003
-------------- --------------- ------------- --------------
($ in thousands)
Net sales $ 120,246 $ 83,635 $ 364,859 $ 284,741
Gross margin $ 13,661 $ (42) $ 41,503 $ 5,334
Operating income (loss) $ 12,432 $ 1,267 $ 22,227 $ (8,885)
Gross margin percent of net sales 11% 0% 11% 2%
Percentage change in:
Sales volume:
Melted product sales volume -3 +95 +12 +85
Mill product sales volume +34 - +31 -5
Average selling prices - includes
changes in product mix:
Melted products +39 -27 +12 -20
Mill products - +4 -2 +3
Selling prices - excludes changes
in product mix:
Melted products +15 -20 +6 -15
Mill products in U.S. dollars +6 -2 +4 -2
Mill products in
billing currencies (1) +2 -5 -1 -7
-------------------------------------------------------------------------------------------------------------------
(1) Excludes the effect of changes in foreign currencies.
- 23 -
Third quarter of 2004 compared to third quarter of 2003. The Company's
melted product sales increased 34% from $12.3 million during the third quarter
of 2003 to $16.5 million during the third quarter of 2004, primarily due to an
39% increase in melted product average selling prices and changes in customer
and product mix, partially offset by a 3% decrease in melted product sales
volume. Melted products consist of ingot and slab and are generally sold only in
U.S. dollars. The increase in melted product average selling prices was
partially due to the impact in the third quarter of 2003 of a significant sale
of slab, for which selling prices are lower than ingot. Excluding the effects of
changes in customer and product mix, melted product selling prices during the
third quarter of 2004 increased 15% compared to the third quarter of 2003.
The Company's mill product sales increased 34% from $65.2 million during
the third quarter of 2003 to $87.2 million during the third quarter of 2004.
This increase was principally due to a 34% increase in mill product sales volume
primarily due to increased sales to the aerospace (commercial and military
sectors) and industrial markets. Average selling prices during the third quarter
of 2004 were unfavorably impacted by customer and product mix and favorably
impacted by changes in foreign currencies, resulting in relatively unchanged
third quarter 2004 average selling prices compared to the year-ago period.
Selling prices in billing currencies and excluding changes in customer and
product mix increased 2% during the third quarter of 2004 as compared to the
year-ago period.
Gross margin (net sales less cost of sales) was 11% of net sales during the
third quarter of 2004, compared to 0% during the year-ago period. The
improvement in gross margin was primarily a result of improved plant operating
rates (from 55% in the third quarter of 2003 to 72% in the third quarter of
2004) and the Company's continued cost management efforts. These positive
effects were offset by charges to cost of sales for (i) a $4.1 million accrual
related to certain employee incentive compensation payments expected to be made
for 2004, (ii) a $0.8 million increase in the Company's accrual for
environmental costs and (iii) a net increase in the Company's LIFO inventory
reserve. Due to higher raw material costs (including scrap and alloys), higher
energy costs and increasing book inventories, the Company currently expects its
LIFO inventory reserve to increase at the end of 2004 as compared to the end of
2003. As a result, the Company increased cost of sales by $1.1 million in the
third quarter of 2004. This compared to a decrease in the Company's LIFO
inventory reserve during the third quarter of 2003, which decreased cost of
sales by $3.9 million in the third quarter 2003. Gross margin for the 2003
period was negatively affected by a $6.8 million one-time charge related to the
termination of a purchase and sales agreement between the Company and Wyman
Gordon, recorded as a reduction in sales.
Selling, general, administrative and development expenses increased 37%
from $8.5 million during the third quarter of 2003 to $11.7 million during the
third quarter of 2004, principally as a result of (i) a $1.0 million accrual
related to certain employee incentive compensation payments expected to be made
for 2004, (ii) $0.6 million of additional auditing and consulting costs relative
to the Company's compliance with the Sarbanes-Oxley Act's internal control
requirements and (iii) $0.3 million of increased costs related to the Company's
intercompany services agreement with Contran.
Equity in (losses) earnings of joint ventures increased from a loss of $0.1
million during the third quarter of 2003 to earnings of $0.4 million during the
third quarter of 2004, principally due to an increase in the operating results
of VALTIMET, the Company's minority-owned welded tube joint venture.
Net other income (expense) is primarily related to Boeing take-or-pay
income, which was $10.1 million during the third quarter of both 2004 and 2003.
- 24 -
First nine months of 2004 compared to first nine months of 2003. The
Company's melted product sales increased 26% from $41.3 million during the first
nine months of 2003 to $51.9 million during the first nine months of 2004,
primarily due to a 12% increase in melted product sales volume and a 12%
increase in melted product average selling prices. Melted product sales volume
increased principally as a result of increased market demand and share gains.
Excluding the effects of changes in product mix, melted product selling prices
during the first nine months of 2004 increased 6% compared to the comparable
period during 2003.
The Company's mill product sales increased 29% from $208.6 million during
the first nine months of 2003 to $268.1 million during the first nine months of
2004. This increase was principally due to a 31% increase in mill product sales
volume primarily due to increased sales to the aerospace (commercial and
military sectors) and industrial markets, partially offset by a 2% decrease in
mill product average selling prices. As compared to the first nine months of
2003, mill product average selling prices during the first nine months of 2004
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 was 11% of net sales during the first nine months of 2004,
compared to 2% during the year-ago period. The improvement in gross margin was
primarily a result of improved plant operating rates (from 55% during the first
nine months of 2003 to 72% during the first nine months of 2004) and the
Company's continued cost management efforts. Gross margin during the first nine
months 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. These positive
effects were offset by charges to cost of sales for (i) a $7.6 million accrual
related to certain employee incentive compensation payments expected to be made
for 2004, (ii) a $0.8 million increase in the Company's accrual for
environmental costs and (iii) a net increase in the Company's LIFO inventory
reserve. Due to higher raw material costs (including scrap and alloys), higher
energy costs and increasing book inventories, the Company currently expects its
LIFO inventory reserve to increase at the end of 2004 as compared to the end of
2003. As a result, the Company increased cost of sales by $3.0 million in the
first nine months of 2004. This compared to a decrease in the Company's LIFO
inventory reserve during the first nine months of 2003, which decreased cost of
sales by $4.5 million in the first nine months of 2003. Gross margin for the
2003 period was negatively affected by a $6.8 million one-time charge related to
the termination of a purchase and sales agreement between the Company and Wyman
Gordon, recorded as a reduction in sales.
Selling, general, administrative and development expenses increased 16%
from $28.0 million during the first nine months of 2003 to $32.4 million during
the first nine months of 2004, principally as a result of (i) a $2.1 million
accrual related to certain employee incentive compensation payments expected to
be made for 2004, (ii) $1.0 million of additional auditing and consulting costs
relative to the Company's compliance with the Sarbanes-Oxley Act's internal
control requirements and (iii) $0.8 million of increased costs related to the
Company's intercompany services agreement with Contran.
- 25 -
Net other income (expense) is primarily related to Boeing take-or-pay
income, which decreased from $12.9 million during the first nine months of 2003
to $12.6 million during the first nine months of 2004 due to an increase in the
amount of product shipped to Boeing during the 2004 period. In addition, net
other income (expense) decreased related to the one-time settlement of certain
litigation during the first nine months of 2003.
Non-operating income (expense).
Three months ended Nine months ended
September 30, September 30,
--------------------------------- -------------------------------
2004 2003 2004 2003
-------------- --------------- ------------- --------------
(In thousands)
Interest expense on debt payable
to the Capital Trust $ 2,357 $ 3,630 $ 9,604 $ 10,712
Other interest expense 742 328 1,893 1,504
-------------- --------------- ------------- --------------
$ 3,099 $ 3,958 $ 11,497 $ 12,216
============== =============== ============= ==============
Dividend and interest income $ 68 $ 74 $ 304 $ 255
Equity in earnings of common
securities of the Capital Trust 103 109 320 321
Foreign exchange (losses) gains (471) 240 100 (647)
Gain on BUCS exchange, net 15,465 - 15,465 -
Other, net 234 (430) 107 (512)
-------------- --------------- ------------- --------------
$ 15,399 $ (7) $ 16,296 $ (583)
============== =============== ============= ==============
Prior to September 1, 2004, quarterly interest expense on the Company's
debt payable to the Capital Trust approximated $3.4 million, exclusive of any
accrued interest on deferred interest payments. On September 1, 2004, the
Company exchanged 97.1% of its outstanding BUCS for its Series A Preferred
Stock, resulting in a $15.5 million non-cash non-operating gain (see "Liquidity
and Capital Resources - Other" and Note 9 to the Consolidated Financial
Statements). Interest expense related to the remaining debt payable to the
Capital Trust is approximately $0.1 million per quarter.
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 continued 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 beginning with the 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.
- 26 -
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 and nine months ended September 30, 2004 and 2003, the Company's income
tax rate varied from the U.S. statutory rate primarily due to changes in the
deferred income tax valuation allowance related to the Company's tax attributes
with respect to the "more-likely-than-not" recognition criteria during those
periods. See Note 12 to the Consolidated Financial Statements. The Company's
current income tax expense during the nine months ended September 30, 2004 and
for the three and nine months ended September 30, 2003 relates primarily to its
operations in France.
The Company periodically reviews its deferred income tax assets to
determine if future realization is more likely than not. During the third
quarter of 2004, due to a change in estimate of the Company's ability to utilize
the benefits of its net operating loss ("NOL") carryforwards in Germany, the
Company determined that its deferred income tax asset in Germany now meets the
"more-likely-than-not" recognition criteria. Accordingly, the Company reversed
the $0.7 million valuation allowance attributable to such deferred income tax
asset.
In addition, the Company's deferred income tax asset valuation allowance
related to income from continuing operations decreased by $7.0 million during
the first nine months of 2004, primarily due to the utilization of the U.S. and
U.K. NOL carryforwards, the benefit of which had previously not met the
"more-likely-than-not" recognition criteria. As of September 30, 2004, the
Company had cumulative valuation allowances in the U.S. and U.K. of
approximately $85 million offsetting its deferred income tax assets, primarily
related to net operating loss carryforwards, capital loss carryforwards, minimum
pension liability and other temporary differences. The Company has concluded
that the benefit from these items does not currently meet the
"more-likely-than-not" recognition criteria, in part because the Company has not
demonstrated a recent pattern of taxable income for a time period sufficient to
overcome the negative evidence generated by prior operating losses. The Company
will continue to monitor and evaluate these deferred income tax asset valuation
allowances in light of all available evidence, and it is possible that at some
point in the future the Company will conclude that the weight of positive
evidence is sufficient to support reversal of the applicable portion of its
valuation allowances.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law contains several provisions that could impact the Company.
These provisions provide for, among other things, a special deduction from U.S.
taxable income equal to a stipulated percentage of qualified income from
domestic manufacturing activities (as defined) beginning in 2005, and a special
85% dividends received deduction for certain dividends received from controlled
foreign corporations, subject to certain limitations. The Company is still
studying the new law, including the technical provisions related to the two
complex provisions noted above that are also subject to numerous limitations.
The effect on the Company of the new law, if any, has not yet been determined,
in part because the Company has not yet determined whether its operations
qualify for the special deduction or whether it would benefit from the special
dividends received deduction.
- 27 -
Dividends on Series A Preferred Stock. Shares of the Company's Series A
Preferred Stock are convertible, at any time, at the option of the holder
thereof, into one and two-thirds shares of the Company's common stock, subject
to adjustment in certain events. The Series A Preferred Stock is not mandatorily
redeemable, but is redeemable at the option of the Company under certain
circumstances. When, as and if declared by the Company's board of directors,
holders of the Series A Preferred Stock are entitled to receive cumulative cash
dividends at the rate of 6.75% of the $50 per share liquidation preference per
annum per share (equivalent to $3.375 per annum per share). Subsequent to
September 30, 2004, the Company's board of directors declared a dividend of
$0.84375 per share, payable on December 15, 2004 to holders of record of Series
A Preferred Stock as of the close of trading on December 1, 2004.
European operations. The Company has substantial operations located in
Europe, principally the United Kingdom, France and Italy. Approximately 43% of
the Company's sales originated in Europe for the nine months ended September 30,
2004, of which approximately 60% 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 loss of $0.5 million during the three months ended
September 30, 2004 and a gain of $0.2 million during the three months ended
September 30, 2003. Net currency transaction gains/losses were a gain of $0.1
million during the nine months ended September 30, 2004 and a loss of $0.6
million during the nine months ended September 30, 2003. At September 30, 2004,
consolidated assets and liabilities denominated in currencies other than
functional currencies were approximately $37.8 million and $39.7 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.
Outlook. The "Outlook" section contains a number of forward-looking
statements, all of which are based, unless otherwise noted, 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. 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.
- 28 -
The Company expects its full year 2004 sales revenue to range from $495
million to $505 million (narrowing from previous guidance of between $490
million and $510 million), with full year 2004 capacity utilization expected to
approximate 70% to 75%. Capacity utilization was 72% during the first nine
months of 2004. The Company has modified its method of calculating its backlog
to include purchase orders under consignment relationships. The Company believes
inclusion of these orders provides a more accurate reflection of the Company's
overall backlog. Using the modified methodology for all periods, the Company's
backlog at the end of September 2004 was $400 million, an $80 million (25%)
increase over the $320 million backlog at the end of June 2004 and a $220
million (122%) increase over the $180 million backlog at the end of September
2003.
The Company continues to expect full year 2004 gross margin to range from
9% to 11% of net sales. 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 in 2004 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 reached full
capacity in the second quarter of 2004. The Company expects the aggregate cost
of purchased sponge and alloys to increase through the remainder of 2004 and
into 2005. Additionally, the industry is currently experiencing higher prices
for scrap, and the Company expects those costs to continue to increase
throughout 2004 and into 2005. When the demand for titanium melted and mill
products begins to increase, the Company's requirements for scrap precede the
increase in scrap generation by downstream customers and the supply chain,
placing upward pressure on the market price of scrap. The Company is continuing
its efforts to increase prices on its products in order to offset the effects of
increased raw material and energy costs.
Selling, general, administrative and development expenses for 2004 should
approximate $44 million, an increase of $8 million from 2003. This increase
relates primarily to (i) potential employee profit sharing payouts based upon
the Company's various incentive compensation arrangements, (ii) additional
auditing and consulting costs expected to be incurred relative to the Company's
compliance with the Sarbanes-Oxley Act's internal control requirements and (iii)
increases in costs related to the Company's intercompany services agreement with
Contran.
The Company currently anticipates that it will receive orders from Boeing
for about 1.6 million pounds of product during 2004. At this projected order
level, the Company expects to recognize about $22 million of income in 2004
under the Boeing LTA's take-or-pay provisions.
The Company expects its 2004 operating income to range between $33 million
and $38 million (narrowed from previous guidance of between $28 million and $38
million). Excluding the Boeing take-or-pay income, operating income in 2004 is
expected to range from $11 million to $16 million. Interest expense should
approximate $13 million in 2004, including interest on the Company's
Subordinated Debentures held by the Capital Trust.
- 29 -
Dividends on Series A Preferred Stock should approximate $4 million in
2004, resulting in 2004 full year net income attributable to common stockholders
of between $34 million and $39 million. Excluding the Boeing take-or-pay income,
the Company would expect 2004 net income attributable to common stockholders to
range from $12 million to $17 million. The Company's current estimate of net
income attributable to common stockholders has increased from previous guidance
of between $8 million and $18 million, primarily as a result of the $15.5
million non-operating BUCS exchange gain recognized in the third quarter of 2004
and the expected reversal of the deferred income tax asset valuation allowance
related to utilization of a portion of the Company's capital loss carryforwards
in the fourth quarter of 2004. The Company currently anticipates selling certain
real property at its Henderson, Nevada facility in the fourth quarter of 2004,
and although the Company does not anticipate recognizing any gain on the sale
for book purposes until the Company ceases continuing involvement with the
property in 2005, a gain for federal income tax purposes would occur at the time
of the sale. As a result, the "more-likely-than-not" recognition criteria would
be met relative to the portion of the Company's capital loss carryforwards
utilized to offset any tax gain on the sale, which would require reversal of a
portion of the deferred income tax asset valuation allowance in the fourth
quarter of 2004.
The Company expects its cash flows from operating activities to be negative
during 2004, primarily reflecting the Company's accumulation of inventory to
meet expected customer demand over the next several months, higher raw material
prices and the 2004 resumption of quarterly interest payments on the
Subordinated Debentures and payment of the $19 million of deferred interest
payments on the Subordinated Debentures that were accrued as of December 31,
2003. Capital expenditures during 2004 are expected to approximate $24 million,
a decrease from the Company's previous guidance of $29 million due in part to
the timing of construction of a wastewater neutralization plant at the Henderson
facility (scheduled to be completed in the first half of 2005 - see also Note
14). Depreciation and amortization should approximate $33 million in 2004. The
Company currently expects its full-year cash contributions to its defined
benefit pension plans to approximate $10 million and expects its pension expense
to approximate $8 million in 2004.
Non-GAAP financial measures. In an effort to provide investors with
information in addition to the Company's results as determined by 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;
- 30 -
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 nine months ended September
30, 2004 and 2003 are presented below. The following discussion should be read
in conjunction with the Company's Consolidated Financial Statements and Notes
thereto.
Nine months ended September 30,
--------------------------------------------
2004 2003
-------------------- --------------------
(In thousands)
Cash (used) provided by:
Operating activities $ (19,414) $ 50,605
Investing activities (40,003) (5,948)
Financing activities 32,576 (21,121)
-------------------- --------------------
Net cash (used) provided by operating,
investing and financing activities $ (26,841) $ 23,536
==================== ====================
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.
- 31 -
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 income attributable to common stockholders was $24.4 million for the
nine months ended September 30, 2004, compared to a net loss attributable to
common stockholders of $22.9 million for the nine months ended September 30,
2003.
Accounts receivable increased during the first nine months of 2004
primarily as a result of increased sales. Accounts receivable was relatively
unchanged during the first nine months of 2003. Inventories increased during the
first nine months of 2004 as a result of increased run rates and related
inventory build in order to meet expected customer demand during the balance of
2004 and into 2005, as well as the effects of increased raw material costs.
Inventories decreased during the first nine months of 2003 as a result of higher
melted product sales volumes during the first half of 2003 and the Company's
focus on inventory reduction.
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. Accrued liabilities increased during the first
nine months of 2004 primarily due to (i) a $9.6 million increase in the
Company's accrual for incentive compensation for potential employee profit
sharing payments and (ii) an increase to the Company's accrual for costs
expected to be incurred for environmental remediation at the Company's
Henderson, Nevada facility. These increases were partially offset by (i) payment
of the $2.8 million final installment related to termination of the prior
Wyman-Gordon agreement, (ii) a $1.9 million reduction of the Company's vacation
accrual related to the Company's modification of its vacation policy for its U.S
salaried employees and (iii) a $3.5 million reclassification of the Company's
defined benefit pension liability from current to noncurrent, as the Company's
short-term cash contribution requirements have decreased significantly.
The increase in customer advances during the first nine 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 recognition of Boeing-related take-or-pay income and the
application of customer purchases through September 30, 2004 and 2003. 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.
- 32 -
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. On April 15, 2004, the Company paid all previously deferred and
accrued interest in the amount of $21.7 million ($21.0 million of which related
to the BUCS) and on June 1, 2004, the Company resumed its quarterly interest
payments on the Subordinated Debentures. Changes in accrued interest on debt
payable to the Capital Trust reflect this activity. See further discussion in
Note 9 to the Consolidated Financial Statements.
Investing activities. The Company's capital expenditures were $10.9 million
for the nine months ended September 30, 2004, compared to $6.0 million for the
comparable period in 2003, principally for replacement of machinery and
equipment and capacity maintenance. During the first nine months of 2004, the
Company purchased 2,212,820 shares of CompX Class A common stock for $26.7
million and 221,100 shares of NL common stock for $2.5 million. On October 19,
2004, the Company purchased an additional 3,500 shares of CompX Class A common
stock for an aggregate of $0.1 million. See further discussion in Note 3 to the
Consolidated Financial Statements.
Financing activities. The Company had $33.8 million of net borrowings
during the nine months ended September 30, 2004, primarily to support the
Company's accumulation of inventory in order to meet expected customer demand
during the balance of 2004 and into 2005 and to fund its investing activities.
Cash used during the nine months ended September 30, 2003 was due primarily to
the Company's $18.5 million of net repayments on its outstanding borrowings upon
the Company's receipt of the $27.7 million Boeing advance in January 2003. In
addition, the Company's 70%-owned subsidiary, TIMET Savoie, S.A. made dividend
payments of $0.7 million and $1.9 million during the second quarter of 2004 and
2003, respectively, to its 30% minority partner.
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 in order to avoid the costs of an appraisal.
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 and dividends on Series A
Preferred Stock 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 and nine months ended
September 30, 2004 and for all periods during the year ended December 31, 2003.
At September 30, 2004, the Company had borrowings of $33.7 million and excess
availability (defined as borrowing availability less outstanding borrowings and
certain contractual commitments such as letters of credit) was $59.9 million,
under the U.S. credit agreement.
- 33 -
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 and nine months ended September 30, 2004 and
for all periods during the year ended December 31, 2003. At September 30, 2004,
the Company had no borrowings and unused borrowing availability was $40.7
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 September 30, 2004, the Company had
outstanding borrowings of $0.1 million, and unused borrowing availability was
$16.2 million, under these facilities.
Legal and environmental matters. See Note 14 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 or redeem
BUCS or Series A Preferred 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.
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, 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.
- 34 -
In March 2004 the Company's Board of Directors approved a five-for-one
split of the Company's common stock, which was effected after the close of
trading on August 27, 2004 in the form of a stock dividend. All share and per
share data has been adjusted for the effect of the stock split in all periods
presented.
In August 2004, the Company completed an exchange offer, pursuant to which
the Company had offered to exchange any and all of the 4,024,820 outstanding
BUCS issued by the Capital Trust for shares of the Company's Series A Preferred
Stock at the exchange rate of one share of Series A Preferred Stock for each
BUCS. Based upon the 3,909,103 BUCS tendered and accepted for exchange as of the
close of the offer on August 31, 2004, the Company issued 3,909,103 shares of
Series A Preferred Stock in exchange such BUCS. During the third quarter of
2004, the Company recognized a $15.5 million non-cash non-operating gain on the
BUCS exchange, reflecting the difference between the carrying value of the
related Subordinated Debentures ($195.5 million) and the fair value of the
Series A Preferred Stock issued ($173.7 million, based on the closing price of
the BUCS on August 31, 2004 according to NASDAQ's website of $45.25 per share,
less $3.2 million attributable to accrued and unpaid dividends), less $6.3
million of unamortized deferred financing costs related to the exchanged BUCS.
Each share of the Series A Preferred Stock is convertible, at any time, at
the option of the holder thereof, into one and two-thirds shares of the
Company's common stock, subject to adjustment in certain events. The Series A
Preferred Stock is not mandatorily redeemable, but is redeemable at the option
of the Company under certain circumstances. When, as and if declared by the
Company's board of directors, holders of the Series A Preferred Stock are
entitled to receive cumulative cash dividends at the rate of 6.75% of the $50
per share liquidation preference per annum per share (equivalent to $3.375 per
annum per share). Subsequent to September 30, 2004, the Company's board of
directors declared a dividend of $0.84375 per share, payable on December 15,
2004 to holders of record of Series A Preferred Stock as pf the close of trading
on December 1, 2004. See Note 10 to the consolidated financial statements.
During the third quarter of 2004, the President of the United States
approved a petition filed by the Company to eliminate a special tariff exemption
for titanium wrought products imported into the United States from Russia under
the Generalized System of Preferences ("GSP"). Under the GSP program, the
President has the authority to suspend normal trade tariffs on imports of
designated products from certain developing countries. Normal customs duties on
titanium wrought products from Russia had been suspended since 1998. This action
means that duties on imports of titanium wrought product from Russia, where one
of the Company's main competitors is located, will return to the normal tariff
of 15% during the fourth quarter of 2004.
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 nine months ended September 30, 2004, the Company
purchased certain publicly-traded 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 aggregate market value of these equity securities at
September 30, 2004 was $40.8 million, as compared to a cost basis of $29.2
million. The potential change in the aggregate market value of these securities,
assuming a 10% change in prices, would be $4.1 million at September 30, 2004.
See also Note 3 to the Consolidated Financial Statements.
- 35 -
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, Corporate Controller
and Treasurer, have evaluated the Company's disclosure controls and procedures
as of September 30, 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.
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 September 30, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.
- 36 -
Section 404 of the Sarbanes-Oxley Act of 2002 requires the Company's
management to annually report on internal control over financial reporting
starting with the Company's Annual Report on Form 10-K for the year ended
December 31, 2004 ("2004 Annual Report"). The Company's independent registered
public accounting firm is also required to attest annually to the Company's
internal control over financial reporting. In order to achieve compliance with
Section 404, the Company has been documenting, testing and evaluating its
internal control over financial reporting using a combination of internal and
external resources. The process of documenting, testing and evaluating the
Company's internal control over financial reporting under the applicable
guidelines is complex and time consuming. The Company currently believes it has
dedicated the appropriate resources and that it will be able to comply fully
with the requirements of Section 404 for its 2004 Annual Report, and be in a
position to conclude whether or not the Company's internal control over
financial reporting is effective as of December 31, 2004. However, because the
applicable requirements are complex and unforseen events could arise beyond the
Company's control, the Company is unable to provide assurance that it will
ultimately be able to comply fully with the requirements of Section 404 for its
2004 Annual Report.
- 37 -
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 2003
Annual Report for descriptions of certain previously reported legal proceedings.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Form of Certificate of Designations, Rights and Preferences of 6
3/4 % Series A Convertible Preferred Stock incorporated by
reference to Exhibit 4.1 to Pre-effective Amendment No. 1 to
Registration Statement on Form S-4 of Registrant filed with the
SEC on June 23, 2004 as Securities Exchange Commission file No.
333-114218
3.2 Bylaws of Titanium Metals Corporation, as Amended and Restated,
dated August 31, 2004, incorporated by reference to Exhibit 99.2
to Registrant's Current Report on Form 8-K filed with the SEC on
September 2, 2004
10.1 Amendment No. 4 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 June 2, 2004, incorporated by reference to
Exhibit 10.1 to the Pre-effective Amendment No.1 to Registration
Statement on Form S-4 Filed by Registrant with the SEC on June
23, 2004 as Securities Exchange Commission File No. 333-114218
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
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.
- 38 -
(b) Reports on Form 8-K filed by the registrant for the quarter ended
September 30, 2004 and through November 5, 2004:
Date of Report Items Reported
---------------------- -----------------------
July 2, 2004 9
August 5, 2004 9 and 12
August 11, 2004 9
August 11, 2004 9
August 27, 2004 7.01 and 9.01
September 2, 2004 5.02 and 9.01
September 10, 2004 7.01 and 9.01
September 13, 2004 7.01 and 9.01
October 4, 2004 7.01 and 9.01
October 8, 2004 8.01 and 9.01
October 21, 2004 8.01 and 9.01
November 5, 2004 2.02, 7.01 and 9.01
- 39 -
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: November 5, 2004 By /s/ J. Landis Martin
--------------------------------------
J. Landis Martin
Chairman of the Board, President and
Chief Executive Officer
Date: November 5, 2004 By /s/ Bruce P. Inglis
--------------------------------------
Bruce P. Inglis
Vice President - Finance, Corporate
Controller and Treasurer
- 40 -