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, 2006
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
Commission file number 1-14368
Titanium Metals Corporation
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-5630895
-------------------------------------------------- -----------------------------
(State or other jurisdiction of incorporation or (IRS Employer Identification
organization) No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
--------------
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 large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large accelerated filer__ Accelerated filer X Non-accelerated filer__.
Indicate by check mark whether the registrant is a shell company (as defined by
rule 12b-2 of the Exchange Act).
Yes No X
-------- --------
Number of shares of common stock outstanding on November 1, 2006: 161,157,557
TITANIUM METALS CORPORATION
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2006
(unaudited) and December 31, 2005 ................................................... 2
Condensed Consolidated Statements of Income for the three and
nine months ended September 30, 2006 and 2005 (unaudited)............................ 4
Condensed Consolidated Statements of Comprehensive Income for
the three and nine months ended September 30, 2006 and 2005
(unaudited).......................................................................... 5
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2006 and 2005 (unaudited)........................................ 6
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the nine months ended September 30, 2006 (unaudited)...................... 8
Notes to Condensed Consolidated Financial Statements..................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 32
Item 4. Controls and Procedures.................................................................. 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 33
Item 1A. Risk Factors............................................................................. 33
Item 6. Exhibits................................................................................. 33
- 1 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
September 30, December 31,
ASSETS 2006 2005
-------------------- --------------------
(unaudited)
Current assets:
Cash and cash equivalents $ 26,660 $ 17,605
Restricted cash and cash equivalents 146 146
Accounts and other receivables, less allowance
of $1,653 and $1,983, respectively 178,110 142,902
Inventories 489,155 365,696
Income tax receivable 4,733 953
Prepaid expenses and other 6,265 3,532
Deferred income taxes 12,555 19,436
-------------------- --------------------
Total current assets 717,624 550,270
Marketable securities 44,395 46,477
Investment in joint ventures 34,001 25,978
Property and equipment, net 295,865 252,990
Prepaid pension cost 27,375 22,337
Deferred income taxes 7,477 8,009
Other 889 1,203
-------------------- --------------------
Total assets $ 1,127,626 $ 907,264
==================== ====================
See accompanying Notes to Condensed Consolidated Financial Statements.
- 2 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
September 30, December 31,
LIABILITIES, MINORITY INTEREST AND 2006 2005
-------------------- --------------------
STOCKHOLDERS' EQUITY (unaudited)
Current liabilities:
Accounts payable $ 70,566 $ 61,457
Accrued liabilities 74,935 75,698
Customer advances 15,316 15,577
Income taxes payable 18,163 13,151
Deferred income taxes 567 30
Other 749 937
-------------------- --------------------
Total current liabilities 180,296 166,850
Long-term debt 55,283 51,359
Accrued OPEB cost 17,059 15,580
Accrued pension cost 63,453 58,450
Accrued environmental cost 1,948 1,948
Deferred income taxes 28,186 27,445
Debt payable to TIMET Capital Trust I - 5,852
Other 4,865 4,089
-------------------- --------------------
Total liabilities 351,090 331,573
-------------------- --------------------
Minority interest 18,010 13,523
-------------------- --------------------
Stockholders' equity:
Series A Preferred Stock, $.01 par value; $85,688
liquidation preference; 4,025 shares authorized; 1,714
and 2,983 shares issued and outstanding, respectively 76,131 132,493
Common stock, $.01 par value; 200,000 shares
authorized; 161,134 and 141,930 shares
issued, respectively 1,611 1,419
Additional paid-in capital 482,770 400,348
Retained earnings 229,636 66,179
Accumulated other comprehensive loss (31,622) (38,271)
-------------------- --------------------
Total stockholders' equity 758,526 562,168
-------------------- --------------------
Total liabilities, minority interest and
stockholders' equity $ 1,127,626 $ 907,264
==================== ====================
Commitments and contingencies (Note 11)
See accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
(unaudited)
Net sales $ 271,808 $ 190,032 $ 859,644 $ 529,013
Cost of sales 174,031 134,284 547,246 396,430
--------------- --------------- --------------- ---------------
Gross margin 97,777 55,748 312,398 132,583
Selling, general, administrative and
development expense 17,163 13,287 49,781 38,625
Equity in earnings of joint ventures 4,789 1,235 11,113 3,381
Other income (expense), net (846) 8,048 (480) 10,723
--------------- --------------- --------------- ---------------
Operating income 84,557 51,744 273,250 108,062
Interest expense 765 1,080 2,392 2,697
Other non-operating income (expense), net 620 1,350 (762) 17,518
--------------- --------------- --------------- ---------------
Income before income taxes and minority
interest 84,412 52,014 270,096 122,883
Income tax expense 28,592 14,426 94,695 4,886
Minority interest in after tax earnings 1,651 1,325 6,213 3,430
--------------- --------------- --------------- ---------------
Net income 54,169 36,263 169,188 114,567
Dividends on Series A Preferred Stock 1,445 2,830 5,374 9,426
--------------- --------------- --------------- ---------------
Net income attributable to
common stockholders $ 52,724 $ 33,433 $ 163,814 $ 105,141
=============== =============== =============== ===============
Earnings per share attributable to common
stockholders:
Basic $ 0.33 $ 0.26 $ 1.07 $ 0.82
Diluted $ 0.29 $ 0.20 $ 0.92 $ 0.63
Weighted average shares outstanding:
Basic 161,117 131,104 152,917 128,923
Diluted 184,184 182,063 183,750 181,461
See accompanying Notes to Condensed Consolidated Financial Statements.
- 4 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Nine months ended
September 30,
----------------------------------------
2006 2005
------------------ ------------------
(unaudited)
Net income $ 169,188 $ 114,567
------------------ ------------------
Other comprehensive income (loss), net of tax:
Currency translation adjustment 9,225 (10,378)
Unrealized losses on marketable securities (2,082) (935)
TIMET's share of VALTIMET SAS's unrealized net losses on
derivative financial instruments qualifying as cash flow hedges (494) (288)
------------------ ------------------
Total other comprehensive income (loss) 6,649 (11,601)
------------------ ------------------
Comprehensive income $ 175,837 $ 102,966
================== ==================
See accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine months ended September 30,
----------------------------------------
2006 2005
------------------- ------------------
(unaudited)
Cash flows from operating activities:
Net income $ 169,188 $ 114,567
Depreciation and amortization 25,466 23,357
Loss (gain) on disposal of property and equipment 601 (12,281)
Equity in earnings of joint ventures, net
of distributions (7,703) (3,381)
Deferred income taxes 9,761 (10,549)
Excess tax benefit of stock option exercises (9,953) -
Minority interest, net of tax 6,212 3,429
Other, net (329) (50)
Change in assets and liabilities:
Receivables (29,891) (48,861)
Inventories (114,767) (86,925)
Prepaid expenses and other (2,642) (3,298)
Accounts payable and accrued liabilities 9,448 17,343
Customer advances (945) 12,298
Income taxes 9,385 10,201
Deferred revenue (6,735) 326
Accrued OPEB and pension costs 1,479 384
Other, net (1,067) 492
------------------- ------------------
Net cash provided by operating activities 57,508 17,052
------------------- ------------------
Cash flows from investing activities:
Capital expenditures (62,460) (43,292)
Purchase of marketable securities - (2,223)
Proceeds from sale of property - 1,289
Other, net (660) 576
------------------- ------------------
Net cash used in investing activities (63,120) (43,650)
------------------- ------------------
Cash flows from financing activities:
Indebtedness:
Borrowings 505,219 255,248
Repayments (502,563) (222,701)
Dividends paid on Series A Preferred Stock (5,731) (9,687)
Dividend paid to minority shareholder (2,994) (2,216)
Issuance of common stock 10,689 5,256
Excess tax benefit of stock option exercises 9,953 -
Other, net (776) (16)
------------------- ------------------
Net cash provided by financing activities 13,797 25,884
------------------- ------------------
Net cash provided by (used in) operating, investing and
financing activities $ 8,185 $ (714)
=================== ==================
See accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Nine months ended September 30,
----------------------------------------
2006 2005
------------------ ------------------
(unaudited)
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $ 8,185 $ (714)
Effect of exchange rate changes on cash 870 (940)
------------------ ------------------
9,055 (1,654)
Cash and cash equivalents at beginning of period 17,605 7,194
------------------ ------------------
Cash and cash equivalents at end of period $ 26,660 $ 5,540
================== ==================
Supplemental disclosures:
Cash paid for:
Interest $ 1,839 $ 2,297
Income taxes, net $ 74,976 $ 5,214
Noncash investing and financing activities:
Capital lease obligations incurred on certain leases
entered into for new equipment $ 561 $ -
See accompanying Notes to Condensed Consolidated Financial Statements.
- 7 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
(In thousands)
Accumulated
Series A Additional Other
Common Common Preferred Paid-in Retained Comprehensive
Shares Stock Stock Capital Earnings Loss Total
--------- --------- ----------- ------------ ------------ --------------- ------------
(unaudited)
Balance at December 31, 2005 141,930 $ 1,419 $ 132,493 $ 400,348 $ 66,179 $ (38,271) $ 562,168
Net income - - - - 169,188 - 169,188
Other comprehensive
income - - - - - 6,649 6,649
Issuance of common stock 2,286 23 - 10,605 - 10,628
Conversion of Series A
Preferred Stock 16,918 169 (56,362) 61,864 - - 5,671
Tax benefit of stock
options exercised - - - 9,953 - - 9,953
Dividends declared on
Series A Preferred Stock - - - - (5,731) - (5,731)
--------- --------- ----------- ------------ ---------- --------------- ------------
Balance at September 30, 2006 161,134 $ 1,611 $ 76,131 $ 482,770 $ 229,636 $ (31,622) $ 758,526
========= ========= =========== ============ ========== =============== ============
See accompanying Notes to Condensed Consolidated Financial Statements.
- 8 -
TITANIUM METALS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of presentation and organization
Basis of presentation. The unaudited Condensed Consolidated Financial
Statements contained in this Quarterly Report have been prepared on the same
basis as the audited Consolidated Financial Statements in our Annual Report on
Form 10-K for the year ended December 31, 2005 that we filed with the Securities
and Exchange Commission ("SEC") on March 24, 2006 (our "2005 Annual Report").
They include the accounts of Titanium Metals Corporation and its majority owned
subsidiaries (collectively referred to as "TIMET") except the TIMET Capital
Trust I ("Capital Trust"). Unless otherwise indicated, references in this report
to "we", "us" or "our" refer to TIMET and its subsidiaries, taken as a whole.
All material intercompany transactions and balances with consolidated
subsidiaries have been eliminated. In our opinion, we have made all necessary
adjustments (which include only normal recurring adjustments) in order to state
fairly, in all material respects, our consolidated financial position, results
of operations and cash flows as of the dates and for the periods presented. We
have condensed the Consolidated Balance Sheet at December 31, 2005 contained in
this Quarterly Report as compared to our audited Consolidated Financial
Statements at that date, and we have condensed or omitted certain information
and footnote disclosures (including those related to the Consolidated Balance
Sheet at December 31, 2005) normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States
of America ("GAAP"). Our results of operations for the interim periods ended
September 30, 2006 may not be indicative of our operating results for the full
year. The Condensed Consolidated Financial Statements contained in this
Quarterly Report should be read in conjunction with the 2005 Consolidated
Financial Statements contained in our 2005 Annual Report. Our 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. Our fourth fiscal
quarter and fiscal year always end on December 31. For presentation purposes,
our financial statements and accompanying notes have been presented as ended on
March 31, June 30, September 30 and December 31, as applicable.
Organization. At September 30, 2006, Valhi, Inc. and subsidiaries held
35.1% of our outstanding common stock and 0.9% of our 6.75% Series A Convertible
Preferred Stock. At September 30, 2006, Contran Corporation held, directly or
through its subsidiaries, approximately 92% of Valhi's outstanding common stock.
At September 30, 2006, the Combined Master Retirement Trust ("CMRT"), a trust
sponsored by Contran to permit the collective investment by trusts that maintain
the assets of certain employee benefit plans adopted by Contran and certain
related companies, held 9.5% of our 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, 2006,
Mr. Simmons directly owned 3.0% of our outstanding common stock and Mr. Simmons'
spouse owned 93.4% of our outstanding Series A Preferred Stock and a nominal
number of shares of our common stock. Consequently, Mr. Simmons may be deemed to
control each of Contran, Valhi and us.
Stock splits. We effected two-for-one splits of our common stock on
February 16, 2006 and May 15, 2006. All share and per share disclosures
contained in this report have been adjusted for all periods to give effect to
these stock splits.
- 9 -
Recent Accounting Pronouncements
Share-based payments. On January 1, 2006, we adopted Statement of Financial
Accounting Standards ("SFAS") No. 123 (revised 2004), Share-Based Payment, which
requires all share-based payments to employees, including grants of employee
stock options, to be accounted for under the fair value method and eliminates
the ability to account for these instruments under the intrinsic value method
prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for
Stock Issued to Employees, which was allowed under the original provisions of
SFAS 123, Accounting for Stock-Based Compensation. Prior to the adoption of SFAS
123R and as permitted by SFAS 123 and SFAS 148, Accounting for Stock-Based
Compensation Transition and Disclosure, we elected to follow APB 25 and related
interpretations in accounting for our employee stock options and implemented the
disclosure-only provisions of SFAS 123 and SFAS 148.
We adopted SFAS 123R using the modified prospective method. Under this
transition method, stock compensation expense would include the cost for all
share-based payments granted prior to, but not yet vested, as of January 1,
2006, as well as those share-based payments granted subsequent to December 31,
2005. All of our outstanding options were fully vested as of our adoption date,
and all compensation costs previously measured under SFAS 123 have been
previously reported in our pro forma disclosures. Our adoption of SFAS 123R did
not have a material effect on our consolidated financial position or results of
operations. If we were to grant a significant number of options or modify,
repurchase or cancel existing options in the future, we could recognize material
amounts of compensation cost related to such options in our consolidated
financial statements. If we had accounted for our stock-based employee
compensation in accordance with the fair value-based recognition provisions of
SFAS 123 for all awards granted subsequent to January 1, 1995, there would have
been no material effect on our reported net income and related per share
amounts, for the three and nine months ended September 30, 2005. Also upon
adoption of SFAS 123R, we began reflecting the excess tax benefits from the
exercise of stock-based compensation awards in cash flows from financing
activities. SFAS 123R also requires certain expanded disclosures regarding
share-based compensation, and we provided these expanded disclosures in our 2005
Annual Report.
Inventory costs. On January 1, 2006, we adopted SFAS No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4. SFAS 151 clarifies the types of
costs that should be expensed rather than capitalized as inventory. This
statement also clarifies the circumstances under which fixed overhead costs
associated with operating facilities involved in inventory processing should be
capitalized. Our adoption of SFAS 151 did not have a material impact on our
consolidated financial position or results of operations as our existing
production cost accounting already conforms to the requirements of SFAS 151.
Uncertain tax positions. In the second quarter of 2006 the FASB issued FASB
Interpretation ("FIN") No. 48, Accounting for Uncertain Tax Positions, which
will become effective for us on January 1, 2007. FIN 48 clarifies when and how
much of a benefit we can recognize in our consolidated financial statements for
certain positions taken in our income tax returns under SFAS 109, Accounting for
Income Taxes, and enhances the disclosure requirements for our income tax
policies and reserves. Among other things, FIN 48 will prohibit us from
recognizing the benefits of a tax position unless we believe it is
more-likely-than-not our position will prevail with the applicable tax
authorities and limits the amount of the benefit to the largest amount for which
we believe the likelihood of realization is greater than 50%. FIN 48 also
requires companies to accrue penalties and interest on the difference between
tax positions taken on their tax returns and the amount of benefit recognized
for financial reporting purposes under the new standard. We will also be
- 10 -
required to classify any future reserves for uncertain tax positions in a
separate current or noncurrent liability, depending on the nature of the tax
position. We are currently evaluating the impact of FIN 48 on our consolidated
financial position and results of operations.
Quantifying financial statement misstatements. In the third quarter of 2006
the SEC issued Staff Accounting Bulletin ("SAB") No. 108 expressing their views
regarding the process of quantifying financial statement misstatements. The SAB
is effective for us no later than the fourth quarter of 2006. According to SAB
108 both the "rollover" and "iron curtain" approaches must be considered when
evaluating a misstatement for materiality. This is referred to as the "dual
approach." For companies that have previously evaluated misstatements under one,
but not both, of these methods, SAB 108 provides companies with a one-time
option to record the cumulative effect of their prior unadjusted misstatements
in a manner similar to a change in accounting principle in their 2006 annual
financial statements if (i) the cumulative amount of the unadjusted
misstatements as of January 1, 2006 would have been material under the dual
approach to their annual financial statements for 2005 or (ii) the effect of
correcting the unadjusted misstatements during 2006 would cause those annual
financial statements to be materially misstated under the dual approach. We are
still evaluating the impact, if any, that SAB 108 will have on our consolidated
financial statements.
Fair value measurements. In the third quarter of 2006 the FASB issued SFAS
No. 157, Fair Value Measurements, which will become effective for us on January
1, 2008. SFAS 157 generally provides a consistent, single fair value definition
and measurement techniques for GAAP pronouncements. SFAS 157 also establishes a
fair value hierarchy for different measurement techniques based on the objective
nature of the inputs in various valuation methods. We will be required to ensure
all of our fair value measurements are in compliance with SFAS 157 on a
prospective basis beginning in the first quarter of 2008. In addition, we will
be required to expand our disclosures regarding the valuation methods and level
of inputs we utilize in the first quarter of 2008. The adoption of this standard
is not expected to have a material effect on our consolidated financial position
or results of operations.
Pension and other postretirement plans. In the third quarter of 2006 the
FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans. SFAS 158 requires us to recognize an asset or
liability for the over or under funded status of each of our individual defined
benefit pension and postretirement benefit plans on our Consolidated Balance
Sheets. We will recognize, through other comprehensive income, prior
unrecognized gains and losses and prior service costs or credits, net of tax, as
of December 31, 2006 that we currently amortize through net periodic benefit
cost. All future changes in the funded status of these plans will be recognized
through comprehensive income (either net income or other comprehensive income),
net of tax. We will also provide certain new disclosures related to these plans.
This standard does not change the existing recognition and measurement
requirements that determine the amount of periodic benefit cost recognized in
net income.
The asset and liability recognition and disclosure requirements of this
standard will become effective for us as of December 31, 2006 and are adopted
prospectively. We will not complete the 2006 assessment of the funded status of
our pension and postretirement benefit plans until after December 31, 2006. At
December 31, 2005, our U.S. pension plan was over funded by $5.3 million, our
European pension plans were under funded by $55.2 million and our other
postretirement benefit plan was under funded by $17.8 million. At that date, we
had an $11.3 million asset related to our U.S. pension plan, an $11.0 million
asset and a $63.8 million liability related to our European pension plans and a
$17.8 million liability related to our other postretirement benefit plan
recognized on our consolidated balance sheet. Our 2006 funded status will be
- 11 -
based in part on certain actuarial assumptions that we cannot yet determine and
differences between the actual and expected return on plan assets during the
year. Therefore, we are not yet able to determine the impact this standard will
have on our Consolidated Financial Statements. However, upon adoption of SFAS
158, we believe our U.S. pension plan will continue to be over funded and our
European pension plans and our OPEB plan will continue to be under funded at
December 31, 2006, which is expected to result in a net reduction of our
stockholders' equity at December 31, 2006. The full disclosure of the funded
status of our defined benefit pension and postretirement benefit plans at
December 31, 2005 can be found in Note 16 to our 2005 Annual Report.
Note 2 - Inventories
September 30, December 31,
2006 2005
--------------------- -------------------
(In thousands)
Raw materials $ 141,552 $ 89,956
Work-in-process 225,980 169,856
Finished products 82,582 73,395
Inventory consigned to customers 21,020 20,000
Supplies 18,021 12,489
--------------------- -------------------
Total inventories $ 489,155 $ 365,696
===================== ===================
Note 3 - Marketable securities
The following table summarizes our marketable securities as of September
30, 2006 and December 31, 2005:
September 30, 2006 December 31, 2005
------------------------------ ------------------------------
Marketable security Shares Market Value Shares Market Value
------------------------------------------------ -------------- ------------ -------------- -------------
(Dollars in thousands)
CompX International, Inc. ("CompX") (1) 2,696,420 $ 42,037 2,696,420 $ 43,197
NL Industries, Inc. ("NL") 222,100 2,208 222,100 3,129
Kronos Worldwide, Inc. ("Kronos") 5,203 150 5,203 151
------------ -------------
Total marketable securities $ 44,395 $ 46,477
============ =============
-------------------------------------------------------------------------------
(1) We directly held 483,600 shares of CompX as of September 30, 2006 and
December 31, 2005. The remaining 2,212,820 shares are held through CompX
Group Inc.
As of September 30, 2006 and December 31, 2005, the aggregate cost basis of
our marketable securities was $36.9 million. We recognized an unrealized loss of
$2.1 million (net of tax benefits) for the nine months ended September 30, 2006
and an unrealized loss of $0.9 million (net of tax benefits) for the nine months
ended September 30, 2005 in stockholders' equity as a component of other
comprehensive income (loss).
- 12 -
Note 4 - Property and equipment
September 30, December 31,
2006 2005
-------------------- ------------------
(In thousands)
Land and improvements $ 8,821 $ 8,922
Buildings and improvements 37,797 37,259
Information technology systems 64,390 61,175
Manufacturing equipment and other 366,504 348,080
Construction in progress 75,464 31,488
-------------------- ------------------
Total property and equipment 552,976 486,924
Less accumulated depreciation 257,111 233,934
-------------------- ------------------
Total property and equipment, net $ 295,865 $ 252,990
==================== ==================
Note 5 - Accrued liabilities
September 30, December 31,
2006 2005
--------------------- ------------------
(In thousands)
OPEB cost $ 2,682 $ 2,181
Pension cost 5,813 5,353
Payroll and vacation 4,697 6,227
Incentive compensation 16,808 20,091
Other employee benefits 13,596 9,938
Deferred revenue 7,804 14,525
Environmental costs 1,001 1,718
Taxes, other than income 6,765 5,318
Other 15,769 10,347
--------------------- ------------------
Total accrued liabilities $ 74,935 $ 75,698
===================== ==================
Note 6 - Bank debt and capital lease obligations
September 30, December 31,
2006 2005
--------------------- ------------------
(In thousands)
Long-term debt:
U.S. credit facility $ 55,283 $ 40,255
U.K. credit facility - 11,104
--------------------- ------------------
Total long-term debt $ 55,283 $ 51,359
===================== ==================
Capital lease obligations:
Current $ 241 $ 19
Non-current 485 138
--------------------- ------------------
Total capital lease obligations $ 726 $ 157
===================== ==================
- 13 -
Credit agreements. On February 17, 2006, we entered into a new $175 million
long-term U.S. credit agreement, replacing the previous U.S. credit agreement
terminated on that date. We incurred $0.7 million of financing costs related to
this new credit agreement that were deferred and are being amortized over the
five-year term of the credit agreement. The amount we show as outstanding under
our U.S. credit facility at September 30, 2006 includes $12.4 million of
outstanding checks. We are required to classify these outstanding checks as
borrowings under this facility. As of September 30, 2006, the weighted average
interest rate on borrowings outstanding under our U.S. credit agreement was
6.3%. At September 30, 2006 we had no outstanding borrowings under our European
credit facilities. Our borrowing availability under our U.S. and European credit
facilities, including the effect of our outstanding checks, was $172.7 million
as of September 30, 2006.
Letters of credit. As of September 30, 2006, we had $4.1 million of letters
of credit outstanding under our U.S. credit facility required by various
utilities and government entities for performance and insurance guarantees, and
we had $3.6 million of letters of credit outstanding under our European credit
facilities as collateral under certain inventory purchase contracts. These
letters of credit reduce our borrowing availability under our credit facilities.
Note 7 - Capital trust
Prior to March 3, 2006, the Capital Trust was our wholly-owned finance
subsidiary that issued our 6.625% mandatorily redeemable convertible preferred
securities, beneficial unsecured convertible securities ("BUCS"). On March 3,
2006, we called all of the outstanding BUCS for redemption. The redemption price
equaled 100.6625% of the $50.00 liquidation amount per BUCS, or $50.3313, plus
accrued distributions to the March 24, 2006 redemption date of the BUCS of
$0.2116 per BUCS. Subsequent to March 3, 2006 and through March 20, 2006,
substantially all of the 113,400 outstanding BUCS were converted into 607,356
shares of our common stock, and a nominal number of BUCS were redeemed for cash
on March 24, 2006. Subsequently, the Capital Trust was dissolved and,
accordingly, our investment in the common securities of the Capital Trust was
reduced to zero.
Note 8 - 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,
--------------------------------- -------------------------------
2006 2005 2006 2005
---------------- ------------- -------------- -------------
(In thousands)
Service cost $ 1,159 $ 901 $ 3,381 $ 2,798
Interest cost 3,518 3,346 10,322 10,298
Expected return on plan assets (4,642) (3,651) (13,682) (11,198)
Amortization of net losses 839 1,186 2,438 3,640
Amortization of unrecognized prior
service cost 139 139 417 417
---------------- ------------- -------------- -------------
Total pension expense $ 1,013 $ 1,921 $ 2,876 $ 5,955
================ ============= ============== =============
- 14 -
Postretirement benefits other than pensions ("OPEB"). The components of net
OPEB expense are set forth below:
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2006 2005 2006 2005
-------------- ------------- -------------- -------------
(In thousands)
Service cost $ 213 $ 165 $ 639 $ 496
Interest cost 450 413 1,349 1,239
Amortization of unrecognized prior
service cost (116) (116) (348) (348)
Amortization of net losses 354 245 1,061 735
-------------- ------------- -- -------------- -------------
Total OPEB expense $ 901 $ 707 $ 2,701 $ 2,122
============== ============= ============== =============
Note 9 - Other income and expense
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2006 2005 2006 2005
------------- -------------- ------------- --------------
(In thousands)
Other operating income (expense):
Settlement of customer claim $ - $ - $ - $ 1,800
Boeing take-or-pay - 8,285 - 8,729
Other, net (846) (237) (480) 194
------------- -------------- ------------- --------------
Total other operating income, net $ (846) $ 8,048 $ (480) $ 10,723
============= ============== ============= ==============
Other non-operating income (expense):
Dividends and interest $ 922 $ 491 $ 2,378 $ 1,440
Gain on sale of property - - - 13,881
Foreign exchange gain (loss), net (238) 498 (1,733) 2,030
Other, net (64) 361 (1,407) 167
------------- -------------- ------------- --------------
Total other non-operating income
(expense), net $ 620 $ 1,350 $ (762) $ 17,518
============= ============== ============= ==============
During the second quarter of 2006, we accrued an additional $1.3 million
for a change in estimate of the aggregate liability for worker's compensation
bonds issued on behalf of a former subsidiary, Freedom Forge Corporation.
- 15 -
Note 10 - Income taxes
Nine months ended
September 30,
--------------------
2006 2005
--------- --------
(In thousands)
Expected income tax expense, at 35% $ 94,534 $ 43,009
Non-U.S. tax rates (1,645) (863)
U.S. state income taxes, net 4,580 1,706
Dividends received deduction (249) (227)
Change in state income tax law - 550
Tax on repatriation of foreign earnings - 998
Adjustment of deferred income tax asset valuation allowance - (41,345)
Nontaxable income (995) (165)
Domestic manufacturing credit (1,445) -
Other, net (85) 1,223
-------- --------
Total income tax expense $ 94,695 $ 4,886
======== ========
At September 30, 2006, we had a capital loss carryforward of $73.0 million
for U.S. federal income tax purposes that expires in 2008. We have recognized a
deferred income tax asset valuation allowance for the majority of this capital
loss carryforward.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law provides for a special deduction from U.S. taxable income equal
to a specified percentage of a U.S. company's qualified income from domestic
manufacturing activities (as defined). Our provision for income taxes includes a
tax benefit of $1.4 million for the first nine months of 2006 related to such
special deduction and no tax benefit on our income tax provision during the
first nine months of 2005.
Note 11 - Commitments and contingencies
Environmental matters. We are continuing assessment work with respect to
our active plant site in Henderson, Nevada. As of September 30, 2006, we have
accrued $2.0 million representing our estimate of the probable costs for
remediation of this site. We expect these accrued expenses to be paid over the
remediation period of up to thirty years. We estimate the upper end of the range
of reasonably possible costs related to this matter, including the current
accrual, to be approximately $4.2 million. In addition to the remaining
estimated costs for our remediation efforts at our Henderson site, during the
third quarter of 2006 we accrued for a $1.1 million asset retirement obligation
related to asbestos removal at our Henderson site.
We accrue liabilities related to environmental remediation obligations when
estimated future costs are probable and estimable. We evaluate and adjust our
estimates as additional information becomes available or as circumstances
change. Estimated future costs are not discounted to their present value. In the
future, if the standards or requirements under environmental laws or regulations
become more stringent, if our testing and analysis at our operating facilities
identify additional environmental remediation, or if we determine that we are
responsible for the remediation of hazardous substance contamination at other
sites, then we may incur additional costs in excess of our current estimates. We
do not know if actual costs will exceed our current estimates, if additional
sites or matters will be identified which require remediation or if the
estimated costs associated with previously identified sites requiring
environmental remediation will become estimable in the future.
- 16 -
Legal proceedings. We are also involved in various other environmental,
contractual, product liability, patent (or intellectual property), employment
and other claims and disputes incidental to our present and former businesses.
In certain cases, we have insurance coverage for these items, although we do not
expect any additional material insurance coverage for our environmental claims.
We currently believe the disposition of all claims and disputes, individually or
in the aggregate, should not have a material adverse effect on our consolidated
financial position, results of operations and liquidity beyond the accruals
already provided for.
See our 2005 Annual Report for additional information concerning certain
legal and environmental matters, commitments and contingencies.
Note 12 - Earnings per share
Basic earnings per share is based on the weighted average number of
unrestricted common shares outstanding during each period. Diluted earnings per
share attributable to common stockholders reflects the dilutive effect of common
stock options, restricted stock and the assumed conversion of our 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 per share is
presented below:
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2006 2005 2006 2005
-------------- ------------- -------------- -------------
(In thousands)
Numerator:
Net income attributable to common
stockholders (1) $ 52,724 $ 33,433 $ 163,814 $ 105,141
Dividends on Series A
Preferred Stock 1,445 2,830 5,374 9,426
Interest expense on BUCS, net of tax - 73 43 235
-------------- ------------- -------------- -------------
Diluted net income attributable
to common stockholders $ 54,169 $ 36,336 $ 169,231 $ 114,802
============== ============= ============== =============
Denominator:
Average common shares outstanding 161,117 131,104 152,917 128,923
Average dilutive stock options
and restricted stock (2) 210 701 403 649
Series A Preferred Stock 22,857 49,638 30,340 51,269
BUCS - 620 90 620
-------------- ------------- -------------- -------------
Diluted shares 184,184 182,063 183,750 181,461
============== ============= ============== =============
-------------------------------------------------------------------------------
(1) Net income attributable to common stockholders for the three and nine
months ended September 30, 2006 and 2005 included $0.5 million and $0.9
million, respectively, of undeclared dividends on our Series A Preferred
Stock.
(2) Stock option conversion excludes anti-dilutive shares of 2,306 and 2,905
during the three and nine months ended September 30, 2005, respectively.
- 17 -
Note 13 - Business segment information
Our production facilities are located in the U.S., U.K., France and Italy,
and our products are sold throughout the world. Our Chief Executive Officer
functions as our chief operating decision maker ("CODM"), and the CODM receives
consolidated financial information about us. He makes decisions concerning
resource utilization and performance analysis on a consolidated and global
basis. We have one reportable segment, our worldwide "Titanium melted and mill
products" segment. Sales, gross margin, operating income, inventory and
receivables are the key management measures used to evaluate segment
performance. The following table provides segment information supplemental to
our Condensed Consolidated Financial Statements:
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2006 2005 2006 2005
-------------- ------------- -------------- -------------
(Dollars in thousands, except selling price data)
Titanium melted and mill products:
Melted product net sales $ 49,661 $ 31,137 $ 156,006 $ 77,044
Mill product net sales 188,213 128,184 600,660 373,793
Other product sales 33,934 30,711 102,978 78,176
-------------- ------------- -------------- -------------
Total net sales $ 271,808 $ 190,032 $ 859,644 $ 529,013
============== ============= ============== =============
Melted product shipments:
Volume (metric tons) 1,275 1,345 4,280 4,120
Average selling price (per kilogram) $ 38.95 $ 23.15 $ 36.45 $ 18.70
Mill product shipments:
Volume (metric tons) 3,150 2,940 10,575 9,380
Average selling price (per kilogram) $ 59.75 $ 43.60 $ 56.80 $ 39.85
- 18 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 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 we believe that the expectations reflected in
such forward-looking statements are reasonable, we do not know if 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 we disclaim 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 our other filings with
the SEC which include, but are not limited to, the cyclicality of the commercial
aerospace industry, the performance of aerospace manufacturers and us under our
long-term agreements, the renewal of certain long-term agreements, the
difficulty in forecasting demand for titanium products, global economic and
political conditions, global production capacity for titanium, changes in
product pricing and costs, the impact of long-term contracts with vendors on our
ability to reduce or increase supply, the possibility of labor disruptions,
fluctuations in currency exchange rates, fluctuations in the market price of
marketable securities, uncertainties associated with new product or new market
development, the availability of raw materials and services, changes in raw
material prices 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, competitive products and strategies
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.
Overview. Titanium Metals Corporation is a vertically integrated producer
of titanium sponge, melted products and a variety of mill products for
commercial aerospace, military, industrial and other applications. We are the
only titanium producer with major production facilities in both the U.S. and
Europe, the world's principal titanium markets.
The following discussion and analysis should be read in conjunction with
our Condensed Consolidated Financial Statements and related notes included
elsewhere in this Quarterly Report and with our Consolidated Financial
Statements and the information under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations," which are included
in our 2005 Annual Report.
We effected two-for-one splits of our common stock on February 16, 2006 and
May 15, 2006. All share and per share disclosures contained herein have been
adjusted for all periods to give effect to these stock splits.
- 19 -
RESULTS OF OPERATIONS
Quarter ended September 30, 2006 compared to quarter ended September 30, 2005
Summarized financial information. The following table summarizes certain
information regarding our results of operations for the three months ended
September 30, 2006 and 2005. Our reported average selling prices are a
reflection of actual selling prices received by us after the effects of currency
exchange rates, customer and product mix, and other related factors realized
throughout a given period. Consequently, changes in average selling prices from
period to period will be impacted by changes in actual prices and these other
factors. The percentage change information presented in the table represents
changes from the respective prior year.
Three months ended September 30,
---------------------------------------------------------------
% of Total % of Total
2006 Net Sales 2005 Net Sales
------------- ------------ -------------- ------------
(Dollars in thousands, except selling price data)
Net sales:
Melted products $ 49,661 18% $ 31,137 16%
Mill products 188,213 69% 128,184 68%
Other products 33,934 13% 30,711 16%
------------- ------------ -------------- ------------
Total net sales 271,808 100% 190,032 100%
Cost of sales (174,031) 64% (134,284) 71%
------------- ------------ -------------- ------------
Gross margin 97,777 36% 55,748 29%
Selling, general, administrative and
development expense (17,163) 6% (13,287) 7%
Other operating income and expenses, net 3,943 1% 9,283 5%
------------- ------------ -------------- ------------
Operating income $ 84,557 31% $ 51,744 27%
============= ============ ============== ============
Melted product shipments:
Volume (metric tons) 1,275 1,345
Average selling price (per kilogram) $ 38.95 $ 23.15
Mill product shipments:
Volume (metric tons) 3,150 2,940
Average selling price (per kilogram) $ 59.75 $ 43.60
Net sales. We experienced significant sales growth during the third quarter
of 2006, as net sales increased 43%, or $81.8 million, compared to the third
quarter of 2005. We, and the industry as a whole, have benefited from
significantly increased demand for titanium across all major industry market
sectors that has driven melted and mill titanium prices to record levels. As a
result of these market factors, average selling prices for melted and mill
products have increased 68% and 37%, respectively, over the same period in the
prior year. Our combined volume of melted and mill product shipments during the
third quarter of 2006 was consistent with the volumes of shipments in the prior
year period, but in response to market demands, our product mix shifted toward
an increased level of mill products. In addition, other product sales have also
increased 10% compared to the prior year period due principally to improved
demand for our fabrication products related primarily to increased construction
of chemical, power and other industrial facilities.
- 20 -
Cost of sales. Our cost of sales increased $39.7 million, or 30%, in the
third quarter of 2006 as compared to the third quarter of 2005. A substantial
portion of the increase in our cost of sales is due to higher cost of raw
materials, including purchased titanium sponge and purchased titanium scrap. The
higher cost of our purchased sponge is due principally to our utilization in
2005 of lower-cost sponge we had purchased from the U.S. Defense Logistics
Agency ("DLA") stockpile. We had purchased sponge from the DLA stockpile since
2000, but the stockpile became fully depleted in 2005. The higher cost of our
purchased titanium scrap is due to increased industry-wide demand as well as
demand in non-titanium markets that use titanium as an alloying agent. The
impact of market increases in the cost of sponge and scrap was mitigated in part
because certain of our raw material purchases are subject to long term
agreements. In addition to the impact of higher raw material costs, our cost of
sales increased as we increased our manufacturing employee headcount by
approximately 160 full time equivalents compared to the 2005 period in order to
support the continued growth of our business. Despite these increases, cost of
sales improved to 64% of sales for the third quarter of 2006 compared to 71% for
the third quarter of 2005 as increases in selling prices more than offset higher
raw material, energy and other operating costs.
Our cost of sales was favorably impacted by our increased production
levels, as our plant operating rate improved in the third quarter of 2006 to 84%
compared to the prior year period plant operating rate of 77%. We expect to
maintain production levels near 90% of practical capacity for the remainder of
2006. As a result of current production levels, current demand and future
outlook of the demand for our products, we have initiated several strategic
capital improvement projects at our existing facilities that will add capacity
to capitalize on the anticipated increase in demand.
Gross margin. During the third quarter 2006, our gross margin increased to
$97.8 million compared to $55.7 million for the same period in 2005, and our
resulting gross margin percentage increased to 36% in the third quarter of 2006
from 29% in the third quarter of 2005. The improved profitability was generally
driven by the increases in sales prices for each of our products, favorable
product mix and improved plant operating rates, which more than offset the
effect of our higher raw materials, energy and other operating costs.
Operating income. Our third quarter of 2006 operating income increased 63%
to $84.6 million compared to the same period in 2005, and our operating income
percentage increased to 31% in the third quarter of 2006 from 27% in the third
quarter of 2005. The increase in operating income is driven primarily by
increases in gross margin which is somewhat offset by an increase in selling,
general, administrative and development expense ("SGA&D") and a decrease in
other operating income.
During the third quarter of 2006, our SGA&D increased $3.9 million to $17.2
million compared to the same period of 2005 primarily due to increased employee
compensation as a result of additional personnel to support expansion of our
business and costs incurred in connection with the relocation of our
headquarters to Dallas, Texas and our operational management and information
technology group to Exton, Pennsylvania.
- 21 -
Our other operating income for the third quarter of 2006 decreased $5.3
million to $4.0 million. During the third quarter of 2005, we recorded $8.3
million of other operating income related to the take-or-pay provisions which
were part of our previous LTA with Boeing. Effective July 1, 2005, we entered
into a new LTA with Boeing, pursuant to which, beginning in 2006, the
take-or-pay provisions under the previous LTA were replaced with an annual
makeup payment early in the following year in the event Boeing purchases less
than its annual commitment in any year. Based on the provisions of the new LTA,
no take-or-pay income has been earned in 2006. Somewhat offsetting this decrease
was an increase in our equity in earnings of VALTIMET (our 43.7% owned welded
tube joint venture) in the 2006 period due to stronger demand and increased
pricing in the industrial tubing market.
Income taxes. We incurred income tax expense of $28.6 million in the third
quarter of 2006 compared to $14.4 million in the same period last year. The
increase in income tax expense in 2006 is primarily due to increased earnings
and the $5.7 million reversal of the valuation allowance in 2005 attributable to
our U.S. and U.K. deferred income tax assets.
Dividends on Series A Preferred Stock. Holders of our Series A Preferred
Stock are entitled to receive when, as and if declared by our board of
directors, 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). Shares of our Series A Preferred Stock are convertible, at any time, at
the option of the holder thereof, into thirteen and one-third shares of our
common stock, subject to adjustment in certain events. The Series A Preferred
Stock is not mandatorily redeemable, but is redeemable at our option after
September 1, 2007. During the first two quarters of 2006, holders of the Series
A Preferred Stock converted 1.3 million shares of our Series A Preferred Stock
into 16.9 million shares of our common stock, and during the third quarter of
2006, a nominal number of shares were converted. As a result of these
conversions, cumulative dividends attributable to our Series A Preferred Stock
were $1.4 million during the three months ended September 30, 2006, compared to
$3.1 million during the three months ended September 30, 2005.
First nine months of 2006 compared to first nine months of 2005
Summarized financial information. The following table summarizes certain
information regarding our results of operations for the nine months ended
September 30, 2006 and 2005. Our reported average selling prices are a
reflection of actual selling prices received by us after the effects of currency
exchange rates, customer and product mix, and other related factors realized
throughout a given period. Consequently, changes in average selling prices from
period to period will be impacted by changes in actual prices and these other
factors. The percentage change information presented in the table represents
changes from the respective prior year.
- 22 -
Nine months ended September 30,
---------------------------------------------------------------------
% of Total Net % of Total
2006 Sales 2005 Net Sales
-------------- ---------------- -------------- --------------
(Dollars in thousands, except selling price data)
Net sales:
Melted products $ 156,006 18% $ 77,044 14%
Mill products 600,660 70% 373,793 71%
Other products 102,978 12% 78,176 15%
-------------- ---------------- -------------- --------------
Total net sales 859,644 100% 529,013 100%
Cost of sales (547,246) 64% (396,430) 75%
-------------- ---------------- -------------- --------------
Gross margin 312,398 36% 132,583 25%
Selling, general, administrative and
development expense (49,781) 5% (38,625) 6%
Other operating income and expenses, net 10,633 1% 14,104 3%
-------------- ---------------- -------------- --------------
Operating income $ 273,250 32% $ 108,062 22%
============== ================ ============== ==============
Melted product shipments:
Volume (metric tons) 4,280 4,120
Average selling price (per kilogram) $ 36.45 $ 18.70
Mill product shipments:
Volume (metric tons) 10,575 9,380
Average selling price (per kilogram) $ 56.80 $ 39.85
Net sales. We experienced significant sales growth during the first nine
months of 2006, as net sales increased 62%, or $330.6 million, compared to the
first nine months of 2005. We, and the industry as a whole, have benefited from
significantly increased demand for titanium across all major industry market
sectors that has driven melted and mill titanium prices to record levels. As a
result of these market factors, average selling prices for melted and mill
products have increased 95% and 43%, respectively, over the same period in the
prior year. In addition to the improved pricing we have experienced, we have
delivered 4% more melted products and 13% more mill products compared to the
2005 period. In addition, other product sales increased 32% compared to the
prior year period due principally to improved demand for our fabrication
products related primarily to increased construction of chemical, power and
other industrial facilities.
Cost of sales. Our cost of sales increased $150.8 million, or 38%, in the
first nine months of 2006 compared to the first nine months of 2005. Consistent
with our quarter-to-quarter comparisons, a substantial portion of the inrease in
our cost of sales is due to higher cost of raw materials, including purchased
titanium sponge and titanium scrap. In addition to the impact of higher raw
material costs, our cost of sales increased as we increased our manufacturing
employee headcount by approximately 170 full time equivalents compared to the
2005 period in order to support the continued growth of our business. Despite
these increases, cost of sales improved to 64% of sales for the first nine
months of 2006 compared to 75% for the first nine months of 2005 as increases in
selling prices more than offset higher raw material, energy and other operating
costs.
- 23 -
Our cost of sales was favorably impacted by our increased production
levels, as our plant operating rate improved in the first nine months of 2006 to
88% compared to the prior year period plant operating rate of 78%. We expect to
maintain production levels near 90% of practical capacity for the remainder of
2006. As a result of current production levels, current demand and future
outlook of the demand for our products, we have initiated several strategic
capital improvement projects at our existing facilities that will add capacity
to capitalize on the anticipated increase in demand, as further discussed below.
Gross margin. During the first nine months of 2006, our gross margin
increased 136% to $312.4 million compared to the same period in 2005. Our gross
margin percentage increased to 36% in the first nine months of 2006 from 25% in
the first nine months of 2005. The improved profitability was generally driven
by the increase in sales prices for each of our products and improved plant
operating rates, which more than offset the effect of our higher raw materials
and energy costs.
Operating income. Our operating income for the first nine months of 2006
increased 153% to $273.3 million compared to the same period in 2005, and our
operating income percentage increased to 32% in the first nine months of 2006
from 22% in the first nine months of 2005. The increase in operating income is
driven primarily by an increase in gross margin which is somewhat offset by
increases in SGA&D and a decrease in other operating income.
During the first nine months of 2006, our SGA&D increased $11.2 million to
$49.8 million compared to the same period of 2005 primarily due to (i) $7.5
million of travel, relocation and severance expenses incurred in connection with
the relocation of our headquarters to Dallas, Texas and our operational
management and information technology group to Exton, Pennsylvania and (ii)
increased employee compensation as a result of additional personnel to support
expansion of our business.
Our other operating income for the first nine months of 2006 decreased $3.4
million to $10.7 million. During the first nine months of 2005, we recorded $8.7
million of other operating income related to the take-or-pay provisions which
were part of our previous LTA with Boeing. As previously discussed, under our
current LTA with Boeing, beginning in 2006 the take-or-pay provisions under the
previous LTA were replaced with an annual makeup payment early in the following
year in the event Boeing purchases less than its annual commitment in any year.
Based on the provisions of the new LTA, no take-or-pay income has been earned in
2006. Also contributing to this decrease in other operating income for the nine
months ended September 30, 2006, we recognized other operating income of $1.8
million in the first quarter of 2005 related to our settlement of a customer
claim regarding prior order cancellations. Somewhat offsetting these decreases
was an increase of $7.7 million in our equity in earnings of VALTIMET in the
2006 period due to stronger demand and increased pricing in the industrial
tubing market.
Net other non-operating income and expense. During the nine months ended
September 30, 2006, we recognized other non-operating expense of $0.8 million
compared to other non-operating income of $17.5 million during the nine months
ended September 30, 2005. As disclosed previously, our net other non-operating
expense during the first nine months of 2006 included expense of $1.3 million
related to a change in our estimated liability for certain worker's compensation
bonds, and net other non-operating income during the first nine months of 2005
included a gain on the sale of certain real property of $13.9 million.
Additionally, during the nine months ended September 30, 2006, the U.S. dollar
weakened relative to British pound sterling and euro, which resulted in net
currency transaction losses of $1.7 million. In contrast, we realized net
currency transaction gains of $2.0 million during the nine months ended
September 30, 2005 as the U.S. dollar strengthened relative to the British pound
sterling and the euro.
- 24 -
Income taxes. We incurred income tax expense of $94.7 million in the first
nine months of 2006 compared to an income tax expense of $4.9 million in the
same period last year. The increase in income tax expense in the first nine
months of 2006 is primarily due to increased earnings and the $41.3 million
benefit resulting from the reversal of the valuation allowance in 2005
attributable to our U.S. and U.K. deferred income tax assets.
Minority interest. Minority interest relates principally to Compagnie
Europeenne du Zirconium-CEZUS, S.A. ("CEZUS"), the 30% holder of our 70%-owned
French subsidiary, TIMET Savoie, S.A. ("TIMET Savoie"). Minority interest during
the first nine months of 2006 increased $2.8 million over the comparable period
in 2005 due to increased net income at TIMET Savoie.
Dividends on Series A Preferred Stock. During the first nine months of
2006, holders of the Series A Preferred Stock converted 1.3 million shares of
our Series A Preferred Stock into 16.9 million shares of our common stock. As a
result of these conversions, cumulative dividends attributable to our Series A
Preferred Stock were $5.7 million during the nine months ended September 30,
2006, compared to $9.7 million during the nine months ended September 30, 2005.
European operations
We have substantial operations located in the U.K., France and Italy.
Approximately 36% of our sales originated in Europe for the nine months ended
September 30, 2006, of which approximately 53% were denominated in the British
pound sterling or the euro. Certain purchases of raw materials, principally
titanium sponge and alloys, for our European operations are denominated in U.S.
dollars, while labor and other production costs are primarily denominated in
local currencies. The functional currencies of our 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 our
European operations may be in U.S. dollars or in functional currencies. Our
export sales from the U.S. are denominated in U.S. dollars and are not subject
to currency exchange rate fluctuations.
We do not use currency contracts to hedge our currency exposures. At
September 30, 2006, consolidated assets and liabilities denominated in
currencies other than functional currencies were approximately $84.5 million and
$65.5 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. Our pro-rata share of VALTIMET's
unrealized net losses on such derivative financial instruments is included as a
component of other comprehensive income.
- 25 -
Outlook
We continued to achieve record levels for net sales, operating income and
net income through the first nine months of 2006. These operating results were
largely driven by increased demand in all market sectors including commercial
aerospace, industrial, military and other emerging markets, as well as cost
efficiency benefits of improved production levels. Capacity constraints for both
melted and mill products in the titanium industry coupled with relatively tight
supplies of raw materials also contributed to improved selling prices for both
melted and mill products. With our plant production levels near practical
capacity, we have initiated several strategic capital improvement projects at
our existing facilities that will add capacity to capitalize on the anticipated
increase in demand, as further discussed below. We are also in the process of
pursuing additional capacity expansion alternatives in melted and mill products
conversion, which could provide a significant increase in existing production
capabilities. Our backlog at September 30, 2006 was $1.0 billion, compared to
$870 million at December 31, 2005 and $710 million at September 30, 2005.
We expect that industry-wide demand trends will continue for the
foreseeable future. However, we are seeing a near-term decrease in demand
relative to the production delays for the Airbus A380 commercial aircraft. We do
not know the degree to which our average selling prices will increase as a
result of the expected continuing growth in demand. We currently expect
production volumes to remain at current levels for the remainder of 2006, with
overall capacity utilization expected to approximate 90% of practical capacity
for the full year 2006 (as compared to 80% in 2005). However, practical capacity
utilization measures can vary significantly based on product mix. We further
anticipate maintaining high production levels through 2007, and once our
additional electron beam ("EB") cold hearth melt capacity becomes operational in
2008, we anticipate our EB melt practical capacity to increase 54% or 8,500
metric tons.
Our business is more dependent on commercial aerospace demand than the
titanium industry as a whole. As such, we monitor various information sources
including The Airline Monitor, a leading aerospace publication, for commercial
aerospace industry demand and forecast information. In July 2006, The Airline
Monitor issued its latest forecast for commercial aircraft deliveries. This
forecast delays the expected delivery timeline for approximately one percent of
the planes previously forecasted for delivery in 2006 and 2007. However, with an
increase in expected deliveries from 2008 through 2010, this forecast confirms
the previously projected trend of increasing large commercial aircraft
deliveries in the five years ending in 2010, and the current estimate of 3,800
delivered aircraft exceeds previous five-year estimates by 80 planes. The
current estimate of large commercial aircraft deliveries through 2010 includes
210 Boeing 787 wide bodies (which currently require a higher percentage of
titanium in their airframes, engines and other parts than any other commercial
aircraft). This updated forecast supports our belief that industry-wide demand
trends will likely continue for the foreseeable future.
- 26 -
Our 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, which include sponge, scrap and
alloys, represent the largest portion of our manufacturing cost structure, and,
as previously discussed, continued cost increases for certain raw materials have
occurred during the first nine months of 2006. We expect the availability of
certain raw materials to remain tight in the near term and improve as announced
capacity expansion throughout the industry becomes operational. Consequently,
while prices have somewhat fluctuated in 2006, we expect prices for these raw
materials to remain high for the remainder of 2006 and in 2007, and we are
unable to predict the extent to which these market driven costs will impact our
future results of operations. In addition, we have certain long-term customer
agreements that will somewhat limit our ability to pass on all of our increased
raw material costs. However, we expect that the impact of higher average selling
prices for melted and mill products in the remainder of 2006 will more than
offset such increased raw materials costs, as has been the case to date during
2006.
Based on the foregoing, we anticipate our full year 2006 net sales revenue
to range from $1.1 billion to $1.2 billion and our full year 2006 operating
income to range from $350 million to $365 million.
LIQUIDITY AND CAPITAL RESOURCES
Our consolidated cash flows for the nine months ended September 30, 2006
and 2005 are summarized below. The following discussion should be read in
conjunction with our Condensed Consolidated Financial Statements and notes
thereto.
Nine months ended September 30,
--------------------------------------------
2006 2005
-------------------- --------------------
Cash provided by (used in):
Operating activities $ 57,508 $ 17,052
Investing activities (63,120) (43,650)
Financing activities 13,797 25,884
-------------------- --------------------
Net cash provided by (used in) operating, investing
and financing activities $ 8,185 $ (714)
==================== ====================
Operating activities. Cash flow from operations is considered a primary
source of our liquidity. Changes in titanium pricing, production volume and
customer demand, among other things, could significantly affect our liquidity.
The increase in cash provided by operating activities was driven by the
increase in net income which increased by $54.6 million to $169.2 million for
the nine months ended September 30, 2006, compared to net income of $114.6
million for the nine months ended September 30, 2005.
The increase in net income was offset by additional cash used by working
capital during the nine months ended September 30, 2006. Accounts receivable
increased during the first nine months of 2006 and 2005 primarily as a result of
increased sales. Inventories increased during the first nine months of 2006 and
2005 as a result of increased run rates and related inventory build in order to
meet expected customer demand, as well as the effects of increased raw material
costs.
- 27 -
Changes in accounts payable and accrued liabilities reflect, among other
things, the timing of (i) payments to suppliers of titanium sponge, titanium
scrap and other raw material purchases and (ii) changes to accrued employee
benefits, including performance-based employee incentive compensation. During
the first nine months of 2006, we made cash payments of approximately $20
million to employees related to amounts earned during 2005 under our incentive
based compensation plans compared to approximately $13 million paid in 2005
related to amounts earned during 2004.
The increase in customer advances during the first nine months of 2005
primarily reflects our receipt of a $27.9 million advance from Boeing in January
2005, partially offset by the application against customer purchases. Under our
previous LTA with Boeing, we received an annual $28.5 million (less $3.80 per
pound of titanium product sold to Boeing subcontractors in the preceding year)
customer advance from Boeing in January of each year related to Boeing purchases
from us for that year. Effective July 1, 2005, we entered into a new LTA with
Boeing, pursuant to which, beginning in 2006, the Boeing customer advance
payments received each January under the previous LTA were replaced with an
annual makeup payment early in the following year in the event Boeing purchases
less than its annual commitment in any year. Accordingly, Boeing was not
required to make an advance payment in January 2006.
We utilized the remainder of our U.S. net operating loss carryforward
during the first quarter of 2006, which loss carryforward only partially offset
the U.S. current tax provision for the nine months ended September 30, 2006. As
a result, our provision for income taxes includes a provision for current income
taxes of approximately $84.9 million (including a provision for U.S. taxes of
approximately $59.3 million). We also recognized a current income tax benefit in
the first nine months of 2006 of $10.0 million related to the tax benefit from
the exercise of stock options. In accordance with GAAP, such income tax benefit
is recognized as a direct increase in additional paid-in capital. We made
aggregate cash payments for income taxes of $75.0 million in the first nine
months of 2006 compared to $5.2 million in the first nine months of 2005. As a
result of the changes in our provision for income taxes and tax payments
discussed above, our income taxes payable increased from $13.2 million at
December 31, 2005 to $18.2 million at September 30, 2006. See also "Results of
Operations - Income taxes" for further discussion of income taxes.
Investing activities. Our capital expenditures were $62.5 million for the
nine months ended September 30, 2006, compared to $43.3 million for the
comparable period in 2005. The 2006 amount includes expenditures related to our
sponge plant expansion in Henderson, Nevada and our new electron beam cold
hearth melt furnace at our facility in Morgantown, Pennsylvania. The 2005 amount
includes expenditures related to construction on our now completed water
conservation facility located in Henderson, Nevada as well as the expansion of
our sponge plant.
Financing activities. Cash provided during the nine months ended September
30, 2006 related primarily to $10.7 million of proceeds from the issuance of
common stock upon exercise of options and the related tax benefit of $10.0
million. These cash inflows were partially offset by our net debt repayments of
$2.7 million, dividends paid on our Series A Preferred Stock of $5.7 million and
dividends paid to CEZUS of $3.0 million during the first nine months of 2006.
- 28 -
Cash provided during the nine months ended September 30, 2005 related
primarily to our net borrowings of $32.5 million used in part to fund the
ongoing construction projects and support the increase in inventory levels
required to meet anticipated customer demand. Additionally, we received $5.3
million of cash from the issuance of common stock related to the exercise of
certain employee stock options during the 2005 period. These cash inflows during
the first nine months of 2005 were partially offset by dividends paid on our
Series A Preferred Stock of $9.7 million and dividends paid to CEZUS of $2.2
million.
During the first quarter of 2006, 113,467 of our BUCS that were outstanding
at December 31, 2005 were converted into an aggregate of 0.6 million shares of
our common stock, and during the first nine months of 2006, 1.3 million shares
of our Series A Preferred Stock were converted into an aggregate of 16.9 million
shares of our common stock. The cash impact from these transactions was nominal.
Borrowing arrangements. On February 17, 2006, we entered into a new $175
million long-term credit agreement, replacing our previous U.S credit agreement,
which was terminated on that date. The U.S. credit agreement is secured
primarily by our U.S. accounts receivable, inventory, personal property,
intangible assets, a pledge of 65% of TIMET UK's common stock and a negative
pledge on U.S. fixed assets, and matures in February 2011. Borrowings under the
U.S. credit agreement accrue interest at the U.S. prime rate or varying
LIBOR-based rates based on a quarterly ratio of outstanding debt to EBITDA as
defined by the agreement. The U.S. credit agreement also provides for the
issuance of up to $10 million of letters of credit.
The U.S. credit agreement contains certain restrictive covenants that,
among other things, limit or restrict our ability to incur debt, incur liens,
make investments, make capital expenditures or pay dividends. The U.S. credit
agreement also requires compliance with certain financial covenants, including a
minimum tangible net worth covenant, a fixed charge coverage ratio and a
leverage ratio, and contains other covenants customary in lending transactions
of this type including cross-default provisions with respect to our other debt
and obligations. Borrowings under the U.S. credit agreement are limited to the
lesser of $175 million or a formula-determined amount based upon U.S. accounts
receivable, inventory and fixed assets (subject to pledging fixed assets). The
formula-determined amount only applies if borrowings exceed 60% of the
commitment amount or the leverage ratio exceeds a certain level, but based on
our outstanding borrowings and leverage ratio at September 30, 2006, the
formula-determined borrowing ceiling was not applicable at September 30, 2006.
We were in compliance with all such covenants during the nine months ended
September 30, 2006.
Under our U.K. facility, TIMET UK may borrow up to (pound)22.5 million,
subject to a formula-determined borrowing base derived from the value of
accounts receivable, inventory and property, plant and equipment. Borrowings
under the U.K. facility can be in various currencies, including U.S. dollars,
British pounds sterling and euros and are collateralized by substantially all of
TIMET UK's assets. Interest on outstanding borrowings generally accrues at rates
that vary from 1.125% to 1.375% above the lender's published base rate. The U.K.
facility also contains financial ratios and covenants customary in lending
transactions of this type, including a minimum net worth covenant. TIMET UK was
in compliance with all covenants during the nine months ended September 30,
2006.
As of September 30, 2006, we had outstanding borrowings of $55.3 million
under our U.S. credit agreement and no borrowings under our U.K. credit
facility. As of September 30, 2006, the weighted average interest rate on
borrowings outstanding under our U.S. credit facility was 6.3%.
- 29 -
As of September 30, 2006, we had $4.1 million of letters of credit
outstanding under our U.S. credit facility required by various utilities and
government entities for performance and insurance guarantees, and we had $3.6
million of letters of credit outstanding under our European credit facilities as
collateral under certain inventory purchase contracts. These letters of credit
reduce our borrowing availability under our credit facilities. Aggregate unused
borrowing availability under our U.S. and U.K. credit facilities was
approximately $157.8 million as of September 30, 2006. We also have overdraft
and other credit facilities at certain of our other European subsidiaries, with
aggregate unused borrowing availability of $15.0 million at September 30, 2006.
Future cash requirements
Liquidity. Our primary source of liquidity on an on-going basis is our cash
flows from operating activities and borrowings under various credit facilities.
We generally use these amounts to (i) fund capital expenditures, (ii) repay
indebtedness incurred primarily for working capital purposes and (iii) provide
for the payment of dividends. From time-to-time we will incur indebtedness,
generally to (i) fund short-term working capital needs, (ii) refinance existing
indebtedness, (iii) make investments in marketable and other securities
(including the acquisition of securities issued by our subsidiaries and
affiliates) or (iv) fund major capital expenditures or the acquisition of other
assets outside the ordinary course of business.
We routinely evaluate our liquidity requirements, capital needs and
availability of resources in view of, among other things, our 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, we have in
the past, or in light of our current outlook, may in the future, seek to raise
additional capital, modify our common and preferred dividend policies,
restructure ownership interests, incur, refinance or restructure indebtedness,
repurchase shares of common stock, purchase or redeem Series A Preferred Stock,
sell assets, or take a combination of such steps or other steps to increase or
manage our liquidity and capital resources. In the normal course of business, we
investigate, evaluate, discuss and engage 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, we may consider using then-available
liquidity, issuing equity securities or incurring additional indebtedness.
Based upon our expectations of our operating performance, and the
anticipated demands on our cash resources we expect to have sufficient liquidity
to meet our short-term obligations (defined as the next twelve-month period) and
our long-term obligations. If actual developments differ from our expectations,
our liquidity could be adversely affected.
At September 30, 2006, we had credit available under existing U.S and
European credit facilities of $172.7 million, and we had an aggregate of $26.8
million of restricted and unrestricted cash and cash equivalents. Our U.S.
credit facility matures in February 2011, and our U.K. credit facility matures
in April 2008. We expect to be able to provide sufficient liquidity from our
cash flows from operations and our expected borrowing availability to fund our
operations after the maturity of these credit facilities.
Capital expenditures. We intend to invest a total of approximately $100
million to $110 million for capital expenditures during 2006. Capital
expenditures are primarily for improvements and upgrades to existing facilities,
including expansions of sponge and melting capacity, and other additions of
plant machinery and equipment. We have spent $62.5 million on capital
expenditures through September 30, 2006.
- 30 -
In May 2005, we announced our plans to expand our existing titanium sponge
facility in Nevada. This expansion, on which we currently expect to commence
startup and commissioning near the end of 2006, will provide the capacity to
produce an additional 4,000 metric tons of sponge annually, an increase of
approximately 47% over the current sponge production capacity levels at our
Nevada facility.
In April 2006, we announced our plans for the expansion of our electron
beam cold hearth melt capacity in Pennsylvania. This expansion, which we
currently expect to complete by early 2008, will have, depending on product mix,
the capacity to produce an additional 8,500 metric tons of melted products, an
increase of approximately 54% over the current production capacity levels at our
Pennsylvania facility.
We continue to evaluate additional opportunities to expand our production
capacity including capital projects, acquisitions or other investments which, if
consummated, any required funding would be provided by borrowings under our U.S.
or European credit facilities.
Other
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (i) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties, and (ii) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. We continuously
consider, review and evaluate such transactions, and understand 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 we might be a party to one or more such transactions in the
future.
- 31 -
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, including foreign currency exchange rates,
interest rates and security prices. There have been no material changes in these
market risks since we filed our 2005 Annual Report, and we refer you to the
report for a complete description of these risks.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. We maintain a system of
disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by Rule 13a-15(e) of the Securities Exchange Act of 1934
(the "Exchange Act"), as amended, means controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that
we file or submit to the SEC under 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 us in the reports that we file or submit to the SEC under the
Exchange Act is accumulated and communicated to our management, including our
principal executive officer and our principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Steven L. Watson, our Chief Executive
Officer, and Bobby D. O'Brien, our Executive Vice President and Chief Financial
Officer, have evaluated our disclosure controls and procedures as of September
30, 2006. Based upon their evaluation, and as a result of the material
weaknesses identified in the 2005 Annual Report, these executive officers have
concluded that our disclosure controls and procedures are not effective as of
September 30, 2006. We have performed additional procedures in completing these
Condensed Consolidated Financial Statements as of and for the quarter ended
September 30, 2006 to ensure that the disclosures included were fairly presented
in all material respects in accordance with GAAP.
Scope of management's report on internal control over financial reporting.
We also maintain internal control over financial reporting. The term "internal
control over financial reporting," as defined by rule 13a-15(f) of the Exchange
Act, means a process designed by, or under the supervision of, our principal
executive and principal financial officers, or persons performing similar
functions, and effected by our 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:
Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of our
assets;
Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that our receipts and expenditures are being made only
in accordance with authorizations of our management and directors; and
Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition our assets that could
have a material effect on our Consolidated Financial Statements.
- 32 -
Changes in internal control over financial reporting. There has been no
change to our internal control over financial reporting during the quarter ended
September 30, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting, except as
specifically discussed below. We are in the process of remediating the three
material weaknesses discussed in our 2005 Annual Report and continue to work
toward completion of such remediation by or before December 31, 2006. To date,
we have completed the following remediation activities:
We are in the process of hiring additional accounting and finance
personnel, and to the extent necessary, critical functions or
processes have been augmented by or transitioned to the additional
associates;
We have implemented additional levels of manual review and
authorization of journal entries at all of our significant locations.
We will also further explore our IT solution options as deemed
appropriate; and
We have continued to update certain key accounting policies and
procedures and will continue to prioritize the preparation and
distribution of such key policies and procedures throughout the
remainder of 2006.
PART II. - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Refer to Note 11 of the Condensed Consolidated Financial Statements and to
our 2005 Annual Report for descriptions of certain previously reported legal
proceedings.
Item 1A. RISK FACTORS
There have been no material changes in the first nine months of 2006 with
respect to our risk factors presented in Item 1A. in our 2005 Annual Report on
Form 10-K.
Item 6. EXHIBITS
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: We have retained a signed original of any exhibit listed above
that contains signatures, and we will provide any such exhibit to
the SEC or its staff upon request. Such request should be
directed to the attention of our Corporate Secretary at our
corporate offices located at 5430 LBJ Freeway, Suite 1700,
Dallas, Texas 75240.
- 33 -
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 7, 2006 By /s/ Bobby D. O'Brien
----------------------------------------
Bobby D. O'Brien
Executive Vice President and
Chief Financial Officer
Date: November 7, 2006 By /s/ Scott E. Sullivan
----------------------------------------
Scott E. Sullivan
Vice President and Controller
Principal Accounting Officer