SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
Commission file number 0-28538
Titanium Metals Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-5630895
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5600
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Number of shares of common stock outstanding on May 7, 2003: 3,180,182
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in the Notes to Consolidated Financial Statements and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), are forward-looking statements that represent management's
beliefs and assumptions based on currently available information.
Forward-looking statements can be identified by the use of words such as
"believes," "intends," "may," "will," "looks," "should," "could," "anticipates,"
"expects" or comparable terminology or by discussions of strategies or trends.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it cannot give any assurances that
these expectations will prove to be correct. Such statements by their nature
involve substantial risks and uncertainties that could significantly affect
expected results. Actual future results could differ materially from those
described in such forward-looking statements, and the Company disclaims any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. Among the
factors that could cause actual results to differ materially are the risks and
uncertainties discussed in this Quarterly Report, including in those portions
referenced above and those described from time to time in the Company's other
filings with the Securities and Exchange Commission ("SEC") which include, but
are not limited to, the cyclicality of the commercial aerospace industry, the
performance of aerospace manufacturers and the Company under their long-term
agreements, the renewal of certain long-term agreements, the difficulty in
forecasting demand for titanium products, global economic and political
conditions, global productive capacity for titanium, changes in product pricing
and costs, the impact of long-term contracts with the Company's vendors, the
possibility of labor disruptions, fluctuations in currency exchange rates,
control by certain stockholders and possible conflicts of interest,
uncertainties associated with new product development, the supply of raw
materials and services, changes in raw material and other operating costs
(including energy costs), possible disruption of business or increases in the
cost of doing business resulting from terrorist activities or global conflicts,
and other risks and uncertainties. Should one or more of these risks materialize
(or the consequences of such a development worsen), or should the underlying
assumptions prove incorrect, actual results could differ materially from those
forecasted or expected.
TITANIUM METALS CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2003 (unaudited) and
December 31, 2002 2
Consolidated Statements of Operations - Three months
ended March 31, 2003 and 2002 (unaudited) 4
Consolidated Statements of Comprehensive Loss -
Three months ended March 31, 2003 and 2002 (unaudited) 5
Consolidated Statements of Cash Flows - Three months
ended March 31, 2003 and 2002 (unaudited) 6
Consolidated Statement of Changes in Stockholders' Equity -
Three months ended March 31, 2003 (unaudited) 8
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 6. Exhibits and Reports on Form 8-K 29
- 1 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
March 31, December 31,
ASSETS 2003 2002
------------------ ------------------
(unaudited)
Current assets:
Cash and cash equivalents $ 26,556 $ 6,214
Accounts and other receivables, less allowance
of $2,760 and $2,859, respectively 82,950 66,393
Receivable from related parties 1,678 2,398
Refundable income taxes 2,066 1,703
Inventories 167,716 181,932
Prepaid expenses and other 3,036 3,077
Deferred income taxes 807 809
------------------ ------------------
Total current assets 284,809 262,526
------------------ ------------------
Investment in joint ventures 22,831 22,287
Property and equipment, net 245,686 254,672
Intangible assets, net 7,857 8,442
Deferred income taxes 95 -
Other 15,988 15,851
------------------ ------------------
Total assets $ 577,266 $ 563,778
================== ==================
- 2 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
March 31, December 31,
LIABILITIES, MINORITY INTEREST AND 2003 2002
------------------ ------------------
STOCKHOLDERS' EQUITY (unaudited)
Current liabilities:
Notes payable $ 3,293 $ 12,994
Current maturities of long-term debt and capital
lease obligations 574 642
Accounts payable 27,532 26,460
Accrued liabilities 47,652 46,511
Customer advances 32,078 5,416
Payable to related parties 319 602
Income taxes 43 -
------------------ ------------------
Total current liabilities 111,491 92,625
------------------ ------------------
Long-term debt 11,370 6,401
Capital lease obligations 8,929 9,575
Payable to related parties 644 644
Accrued OPEB cost 13,195 13,417
Accrued pension cost 60,172 61,080
Accrued environmental cost 3,531 3,531
Deferred income taxes 1,228 1,036
Accrued dividends on Convertible Preferred Securities 7,869 4,462
Other 1,132 -
------------------ ------------------
Total liabilities 219,561 192,771
------------------ ------------------
Minority interest - Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely subordinated debt securities
("Convertible
Preferred Securities") 201,241 201,241
Other minority interest 10,907 10,416
Stockholders' equity:
Preferred stock $.01 par value; 100 shares authorized,
none outstanding - -
Common stock, $.01 par value; 9,900 shares authorized,
3,189 and 3,194 shares issued 32 32
Additional paid-in capital 350,679 350,889
Accumulated deficit (140,961) (127,371)
Accumulated other comprehensive loss (62,828) (62,737)
Treasury stock, at cost (9 shares) (1,208) (1,208)
Deferred compensation (157) (255)
------------------ ------------------
Total stockholders' equity 145,557 159,350
------------------ ------------------
Total liabilities and stockholders' equity $ 577,266 $ 563,778
================== ==================
Commitments and contingencies (Note 14)
See accompanying Notes to Consolidated Financial Statements.
- 3 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share data)
Three months ended March 31,
------------------------------------------
2003 2002
------------------- -------------------
Net sales $ 99,294 $ 104,440
Cost of sales 98,276 99,332
------------------- -------------------
Gross margin 1,018 5,108
Selling, general, administrative and development expense 9,895 10,379
Equity in earnings of joint ventures 185 505
Other income (expense), net 628 51
------------------- -------------------
Operating loss (8,064) (4,715)
Interest expense 688 738
Other non-operating income (expense), net (520) (28,129)
------------------- -------------------
Loss before income taxes, minority interest and
cumulative effect of change in accounting principles (9,272) (33,582)
Income tax expense (benefit) 457 (1,454)
Minority interest - Convertible Preferred Securities 3,407 3,333
Other minority interest, net of tax 263 621
------------------- -------------------
Loss before cumulative effect of change in
accounting principles (13,399) (36,082)
Cumulative effect of change in accounting principles (191) (44,310)
------------------- -------------------
Net loss $ (13,590) $ (80,392)
=================== ===================
Basic and diluted loss per share:
Before cumulative effect of change in
accounting principles $ (4.23) $ (11.43)
Cumulative effect of change in accounting principles (0.06) (14.04)
------------------- -------------------
Basic and diluted loss per share $ (4.29) $ (25.47)
=================== ===================
Weighted average shares outstanding 3,165 3,156
Pro forma amounts assuming SFAS No. 143 was applied
during all periods affected:
Net loss $ (13,399) $ (80,401)
Basic and diluted loss per share $ (4.23) $ (25.47)
See accompanying Notes to Consolidated Financial Statements.
- 4 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)
(In thousands)
Three months ended March 31,
------------------------------------------
2003 2002
------------------- -------------------
Net loss $ (13,590) $ (80,392)
Other comprehensive loss -
currency translation adjustment (91) (1,276)
------------------- -------------------
Comprehensive loss $ (13,681) $ (81,668)
=================== ===================
See accompanying Notes to Consolidated Financial Statements.
- 5 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
Three months ended March 31,
------------------------------------------
2003 2002
------------------- -------------------
Cash flows from operating activities:
Net loss $ (13,590) $ (80,392)
Depreciation and amortization 9,547 9,034
Cumulative effect of change in accounting principles 191 44,310
Noncash impairment of investment in Special Metals
Corporation preferred securities - 27,500
Equity in earnings of joint ventures, net of distributions (135) (385)
Deferred income taxes 113 (1,016)
Other minority interest 263 621
Other, net 175 674
Change in assets and liabilities:
Receivables (17,007) 3,077
Inventories 13,906 (8,704)
Prepaid expenses and other 30 2,769
Accounts payable and accrued liabilities 3,264 (9,952)
Customer advances 26,656 (3,960)
Income taxes (321) (1,129)
Accounts with related parties, net 432 (1,333)
Accrued OPEB and pension costs (120) (857)
Accrued dividends on Convertible Preferred Securities 3,407 -
Other, net (377) 542
------------------- -------------------
Net cash provided (used) by operating activities 26,434 (19,201)
------------------- -------------------
Cash flows from investing activities:
Capital expenditures (1,487) (1,282)
------------------- -------------------
Net cash used by investing activities (1,487) (1,282)
------------------- -------------------
Cash flows from financing activities:
Indebtedness:
Borrowings 122,762 102,704
Repayments (127,385) (100,512)
Other, net (493) (182)
------------------- -------------------
Net cash (used) provided by financing activities (5,116) 2,010
------------------- -------------------
Net cash provided (used) by operating, investing
and financing activities $ 19,831 $ (18,473)
=================== ===================
See accompanying Notes to Consolidated Financial Statements.
- 6 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (CONTINUED)
(In thousands)
Three months ended March 31,
------------------------------------------
2003 2002
------------------- -------------------
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $ 19,831 $ (18,473)
Currency translation 511 (114)
------------------- -------------------
20,342 (18,587)
Cash at beginning of period 6,214 24,500
------------------- -------------------
Cash at end of period $ 26,556 $ 5,913
=================== ===================
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 455 $ 413
Convertible Preferred Securities dividends $ - $ 3,333
Income taxes, net $ 677 $ 691
Noncash investing and financing activities:
Capital lease obligations of $684 were incurred
during the three months ended March 31, 2002
when the Company entered into certain leases
for new equipment
See accompanying Notes to Consolidated Financial Statements.
- 7 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
Three months ended March 31, 2003
(In thousands)
Accumulated Other
Comprehensive Loss
Additional ---------------------- Total
Common Common Paid-In Accumulated Currency Pension Treasury Deferred Stockholders'
Shares Stock Capital Deficit Translation Liabilities Stock Compensation Equity
-------- ------- ---------- ---------- --------- ----------- -------- ---------- -----------
Balance at December 31, 2002 3,185 $ 32 $ 350,889 $(127,371) $ (1,036) $ (61,701) $(1,208) $ (255) $ 159,350
Components of comprehensive
income (loss):
Net loss - - - (13,590) - - - - (13,590)
Change in cumulative
currency translation
adjustment - - - - (91) - - - (91)
Stock award cancellations (5) - (210) - - - - 210 -
Amortization of deferred
compensation, net of effects of
stock award cancellations - - - - - - - (112) (112)
-------- ------- ---------- ---------- --------- ----------- -------- ---------- -----------
Balance at March 31, 2003 3,180 $ 32 $ 350,679 $(140,961) $ (1,127) $ (61,701) $(1,208) $ (157) $ 145,557
======== ======= ========== ========== ========= =========== ======== ========== ===========
See accompanying Notes to Consolidated Financial Statements.
- 8 -
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1 - Organization and basis of presentation
Titanium Metals Corporation ("TIMET") is a vertically integrated producer
of titanium sponge, melted products and a variety of mill products for
aerospace, industrial and other applications. At March 31, 2003, (i) Tremont LLC
("Tremont"), a wholly-owned subsidiary of Valhi, Inc. ("Valhi"), held
approximately 39.7% of TIMET's outstanding common stock, (ii) the Combined
Master Retirement Trust ("CMRT"), a trust formed by Valhi to permit the
collective investment by trusts that maintain the assets of certain employee
benefit plans adopted by Valhi and certain related companies (TIMET currently
expects to begin participating in the CMRT in the second quarter of 2003), held
approximately 9% of TIMET's common stock and (iii) Valhi held approximately 0.1%
of TIMET common stock. At March 31, 2003, Contran Corporation ("Contran") held,
directly or through subsidiaries, approximately 90% of Valhi's outstanding
common stock. Substantially all of Contran's outstanding voting stock is held by
trusts established for the benefit of certain children and grandchildren of
Harold C. Simmons, of which Mr. Simmons is sole trustee. In addition, Mr.
Simmons is the sole trustee of the CMRT and a member of the trust investment
committee for the CMRT. Mr. Simmons may be deemed to control each of Contran,
Valhi and TIMET.
The accompanying Consolidated Financial Statements include the accounts of
TIMET and its majority-owned subsidiaries (collectively, the "Company"). All
material intercompany transactions and balances have been eliminated. The
Consolidated Balance Sheet at March 31, 2003 and the Consolidated Statements of
Operations, Comprehensive Loss, Changes in Stockholders' Equity and Cash Flows
for the interim periods ended March 31, 2003 and 2002 have been prepared by the
Company without audit. In the opinion of management, all adjustments necessary
to present fairly the consolidated financial position, results of operations and
cash flows have been made. The results of operations for interim periods are not
necessarily indicative of the operating results of a full year or of future
operations. Certain prior year amounts have been reclassified to conform to the
current year presentation. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The accompanying
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002 (the "2002 Annual Report").
On February 4, 2003, the Company's stockholders approved a proposal to
amend TIMET's Certificate of Incorporation to effect a reverse stock split of
the Company's common stock at a ratio of one share of post-split common stock
for each eight, nine or ten shares of pre-split common stock issued and
outstanding, with the final exchange ratio to be selected by the Board of
Directors. Subsequently, the Company's Board of Directors unanimously approved
the reverse stock split on the basis of one share of post-split common stock for
each outstanding ten shares of pre-split common stock. The reverse stock split
became effective after the close of trading on February 14, 2003. All share and
per share disclosures for all periods presented in the Consolidated Financial
Statements and Notes thereto have been adjusted to give effect to the reverse
stock split.
- 9 -
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 143, Accounting for Asset Retirement Obligations on January 1, 2003. Under
SFAS No. 143, the fair value of a liability for an asset retirement obligation
covered under the scope of SFAS No. 143 is recognized in the period in which the
liability is incurred, with an offsetting increase in the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its future
value, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
Under the transition provisions of SFAS No. 143, the Company recognized (i)
an asset retirement cost capitalized as an increase to the carrying value of its
property, plant and equipment of approximately $0.2 million, (ii) accumulated
depreciation on such capitalized cost of approximately $0.1 million and (iii) an
other noncurrent liability for the asset retirement obligation of approximately
$0.3 million. Amounts resulting from the initial application of SFAS No. 143
were measured using information, assumptions and interest rates all as of
January 1, 2003. The amount recognized as the asset retirement cost was measured
as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement obligation and accumulated depreciation on the
asset retirement cost were recognized for the time period from the date the
asset retirement cost and liability would have been recognized had the
provisions of SFAS No. 143 been in effect at the date the liability was
incurred, through January 1, 2003. The difference between the amounts to be
recognized as described above and any associated amounts recognized in the
Company's balance sheet as of December 31, 2002 was recognized as a cumulative
effect of a change in accounting principle as of January 1, 2003. The asset
retirement obligation recognized as a result of adopting SFAS No. 143 relates
primarily to landfill closure and leasehold restoration costs.
The following table shows pro forma amounts relating to the Company's asset
retirement obligations as if SFAS No. 143 was applied throughout 2002, as well
as a roll forward of the asset retirement obligation through March 31, 2003:
(In thousands)
Asset retirement obligation, 1/1/2002 $ 312
Accretion expense 15
---------------------
Asset retirement obligation, 12/31/2002 327
Accretion expense 4
---------------------
Asset retirement obligation, 3/31/2003 $ 331
=====================
Accretion expense during the first three months of 2003 is reported as a
component of cost of sales.
The Company has elected the disclosure alternative prescribed by SFAS No.
123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure, and has
chosen to account for its stock-based employee compensation related to stock
options in accordance with Accounting Principles Board Opinion ("APB") No. 25,
Accounting for Stock Issued to Employees and its various interpretations. Under
APB Opinion No. 25, compensation cost is generally recognized for fixed stock
options for which the exercise price is less than the market price of the
Company's common stock on the grant date. The Company recognized no compensation
cost for fixed stock options during the three months ended March 31, 2003 and
2002.
- 10 -
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS No.
123:
Three months ended March 31,
-----------------------------------------
2003 2002
------------------- ------------------
(In thousands, except per share data)
Net loss, as reported $ (13,590) $ (80,392)
Less: total stock option related stock-based employee
compensation expense determined under SFAS No. 123 (103) (230)
------------------- ------------------
Pro forma net loss $ (13,693) $ (80,622)
=================== ==================
Basic and diluted loss per share:
As reported $ (4.29) $ (25.47)
=================== ==================
Pro forma $ (4.33) $ (25.55)
=================== ==================
Note 2 - Segment information
The Company's production facilities are located in the United States,
United Kingdom, France and Italy, and its products are sold throughout the
world. The Company's worldwide integrated activities are conducted through its
"Titanium melted and mill products" segment, currently the Company's only
segment. Sales, gross margin, operating income (loss), inventory and receivables
are the key management measures used to evaluate segment performance. The
following table provides supplemental segment information to the Company's
Consolidated Financial Statements:
Three months ended March 31,
-------------------------------------------
2003 2002
-------------------- -------------------
($ in thousands, except selling prices)
Net sales - Titanium melted and mill products:
Mill product net sales $ 73,617 $ 79,745
Melted product net sales 12,854 9,965
Other 12,823 14,730
-------------------- -------------------
$ 99,294 $ 104,440
==================== ===================
Mill product shipments:
Volume (metric tons) 2,315 2,685
Average price ($ per kilogram) $ 31.80 $ 29.70
Melted product shipments:
Volume (metric tons) 985 645
Average price ($ per kilogram) $ 13.05 $ 15.45
- 11 -
Note 3 - Inventories
March 31, December 31,
2003 2002
--------------------- ------------------
(In thousands)
Raw materials $ 46,594 $ 52,825
Work-in-process 79,028 82,190
Finished products 58,765 63,458
Supplies 13,825 13,829
--------------------- ------------------
198,212 212,302
Less adjustment of certain inventories to LIFO basis 30,496 30,370
--------------------- ------------------
$ 167,716 $ 181,932
===================== ==================
Note 4 - Preferred securities of Special Metals Corporation ("SMC")
As previously disclosed in the Company's 2002 Annual Report, SMC and its
U.S. subsidiaries filed a voluntary petition for reorganization under Chapter 11
of the U.S. Bankruptcy Code in March 2002. As a result, the Company undertook an
assessment of its investment in SMC with the assistance of an external valuation
specialist and recorded a $27.5 million impairment charge to other non-operating
expense during the first quarter of 2002 for an other than temporary decline in
the estimated fair value of its investment in SMC. This charge reduced the
Company's carrying amount of its investment in the SMC securities to zero. The
Company currently believes it is unlikely that it will recover any amount from
this investment.
Note 5 - Property and equipment
March 31, December 31,
2003 2002
--------------------- ------------------
(In thousands)
Land $ 6,238 $ 6,224
Buildings 38,810 38,874
Information technology systems 57,931 58,217
Manufacturing and other 310,552 312,163
Construction in progress 4,209 3,493
--------------------- ------------------
417,740 418,971
Less accumulated depreciation 172,054 164,299
--------------------- ------------------
$ 245,686 $ 254,672
===================== ==================
Note 6 - Goodwill
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. Under SFAS No. 142, goodwill is no longer amortized on a
periodic basis, but instead is subject to a two-step impairment test to be
performed on at least an annual basis. As a result of the adoption of SFAS No.
142, the Company recorded a non-cash goodwill impairment charge of $44.3
million, or $14.04 per share, representing the entire balance of the Company's
recorded goodwill at January 1, 2002. Pursuant to the transition requirements of
SFAS No. 142, this charge was reported in the Company's Consolidated Statement
of Operations as a cumulative effect of a change in accounting principle as of
January 1, 2002.
- 12 -
Note 7 - Other noncurrent assets
March 31, December 31,
2003 2002
--------------------- ------------------
(In thousands)
Deferred financing costs $ 8,074 $ 8,244
Prepaid pension cost 7,602 7,295
Notes receivable from officers 163 163
Other 149 149
--------------------- ------------------
$ 15,988 $ 15,851
===================== ==================
Note 8 - Accrued liabilities
March 31, December 31,
2003 2002
--------------------- ------------------
(In thousands)
OPEB cost $ 3,785 $ 3,818
Pension cost 8,060 7,969
Payroll and vacation 6,964 6,007
Incentive compensation 945 1,326
Other employee benefits 10,427 11,141
Deferred income 1,670 1,679
Environmental costs 803 803
Accrued tungsten costs 2,190 2,190
Taxes, other than income 4,107 3,519
Other 8,701 8,059
--------------------- ------------------
$ 47,652 $ 46,511
===================== ==================
Note 9 - Boeing advance
Under the terms of the amended long-term agreement ("LTA") between TIMET
and The Boeing Company ("Boeing"), in years 2002 through 2007, Boeing is
required to advance TIMET $28.5 million annually less $3.80 per pound of
titanium product purchased by Boeing subcontractors during the preceding year.
Effectively, the Company collects $3.80 less from Boeing than the LTA selling
price for each pound of titanium product sold directly to Boeing and reduces the
related customer advance recorded by the Company. For titanium products sold to
Boeing subcontractors, the Company collects the full LTA selling price, but
gives Boeing credit by reducing the next year's annual advance by $3.80 per
pound of titanium product sold to Boeing subcontractors. The Boeing customer
advance is also reduced as take-or-pay benefits are earned. As of March 31,
2003, approximately $27.3 million of customer advances related to the Company's
LTA with Boeing.
- 13 -
Note 10 - Notes payable, long-term debt and capital lease obligations
March 31, December 31,
2003 2002
------------------- ------------------
(In thousands)
Notes payable:
U.S. credit agreement $ - $ 11,944
European credit agreements 3,293 1,050
------------------- ------------------
$ 3,293 $ 12,994
=================== ==================
Long-term debt:
Bank credit agreement - U.K. $ 11,370 $ 6,401
=================== ==================
Capital lease obligations $ 9,503 $ 10,217
Less current maturities 574 642
------------------- ------------------
$ 8,929 $ 9,575
=================== ==================
As of March 31, 2003, the Company had aggregate unused borrowing
availability under its U.S. and European credit facilities of approximately $132
million.
Note 11 - Minority interest
In October 2002, the Company exercised its right to defer future dividend
payments on its Convertible Preferred Securities for a period of up to 20
consecutive quarters, effective beginning with the Company's December 1, 2002
scheduled dividend payment. Dividends continue to accrue at the coupon rate on
the principal and unpaid dividends. Based on this deferral, accrued dividends on
these Convertible Preferred Securities are reflected as long-term liabilities in
the Consolidated Balance Sheets. Dividends are reported in the Consolidated
Statements of Operations as minority interest.
Note 12 - Other income (expense)
Three months ended March 31,
-----------------------------------------
2003 2002
------------------ ------------------
Other operating income (expense):
Litigation settlement $ 475 $ -
Other income (expense), net 153 51
------------------ ------------------
$ 628 $ 51
================== ==================
Other non-operating income (expense):
Interest income $ 112 $ 65
Impairment of investment in SMC preferred securities - (27,500)
Foreign exchange loss (630) (117)
Other income (expense), net (2) (577)
------------------ ------------------
$ (520) $ (28,129)
================== ==================
During the first quarter of 2003, the Company received $0.5 million related
to its settlement of certain litigation relating to power outages suffered at
its Henderson, Nevada facility in 1997 and 1998 as a result of contractor
activity.
- 14 -
Note 13 - Income taxes
Three months ended March 31,
----------------------------------------
2003 2002
------------------ ------------------
(In thousands)
Expected income tax benefit, at 35% $ (3,245) $ (11,754)
Non-U.S. tax rates 214 230
U.S. state income taxes, net 8 25
Extraterritorial income exclusion (93) -
Change in valuation allowance:
Effect of change in tax law - (1,797)
Adjustment of deferred tax valuation allowance 3,576 11,877
Other, net (3) (35)
------------------ ------------------
$ 457 $ (1,454)
================== ==================
During the first quarter of 2002, the Job Creation and Worker Assistance
Act of 2002 (the "JCWA Act") was signed into law. The Company benefits from
certain provisions of the JCWA Act, which liberalized certain net operating loss
("NOL") and alternative minimum tax ("AMT") restrictions. As a result, the
Company recognized $1.8 million of refundable U.S. income taxes during the first
quarter of 2002. The Company received $0.8 million of this refund in the fourth
quarter of 2002 and anticipates receiving the remaining $1.0 million during
2003.
At March 31, 2003, the Company had, for U.S. federal income tax purposes,
NOL carryforwards of approximately $132 million that expire between 2020 and
2023. At March 31, 2003, the Company had AMT credit carryforwards of
approximately $4 million, which can be utilized to offset regular income taxes
payable in future years. The AMT credit carryforward has an indefinite
carryforward period. At March 31, 2003, the Company had the equivalent of a $20
million NOL carryforward in the United Kingdom and a $2 million NOL carryforward
in Germany, both of which have indefinite carryforward periods. As previously
disclosed in the Company's 2002 Annual Report, in 2002 the German government
proposed changes to its income tax law that limited the annual utilization of
NOL carryforwards; however, the final version of the law passed by the German
parliament in April 2003 did not include this limitation.
Note 14 - Commitments and contingencies
Environmental matters. As previously disclosed in the Company's 2002 Annual
Report, in 1999 TIMET and Basic Management, Inc. ("BMI") agreed that upon
payment by BMI of the cost to design, purchase and install the technology and
equipment necessary to allow the Company to stop discharging liquid and solid
effluents and co-products into settling ponds located on certain lands owned by
the Company adjacent to its Henderson, Nevada plant site (the "TIMET Pond
Property"), the Company would convey to BMI, at no additional cost, the TIMET
Pond Property. Under this agreement, BMI will pay 100% of the first $15.9
million cost for this project, and TIMET agreed to contribute 50% of the cost in
excess of $15.9 million, up to a maximum payment by TIMET of $2 million. The
Company presently expects that the total cost of this project will not exceed
$15.9 million. The Company and BMI are continuing investigation with respect to
certain additional issues associated with properties in the vicinity of the BMI
industrial complex, including any possible groundwater issues.
- 15 -
The Company is also continuing assessment work with respect to its own
active plant site in Henderson, Nevada. During 2000, a preliminary study was
completed of certain groundwater remediation issues at the Company's plant site
and other Company-owned sites within the BMI Complex. The Company accrued $3.3
million in 2000 based on the undiscounted cost estimates set forth in the study.
During 2002, the Company updated this study and accrued an additional $0.3
million based on revised cost estimates. These expenses are expected to be paid
over a period of up to thirty years.
At March 31, 2003, the Company had accrued an aggregate of approximately
$4.3 million for environmental matters, including those discussed above. The
Company records liabilities related to environmental remediation obligations
when estimated future costs are probable and reasonably estimable. Such accruals
are adjusted as further information becomes available or circumstances change.
Estimated future costs are not discounted to their present value. It is not
possible to estimate the range of costs for certain sites. The imposition of
more stringent standards or requirements under environmental laws or
regulations, the results of future testing and analysis undertaken by the
Company at its operating facilities, or a determination that the Company is
potentially responsible for the release of hazardous substances at other sites,
could result in costs in excess of amounts currently estimated to be required
for such matters. No assurance can be given that actual costs will not exceed
accrued amounts or that costs will not be incurred with respect to sites as to
which no problem is currently known or where no estimate can presently be made.
Further, there can be no assurance that additional environmental matters will
not arise in the future.
Legal proceedings. In September 2000, the Company was named in an action
filed by the U.S. Equal Employment Opportunity Commission ("EEOC") in Federal
District Court in Las Vegas, Nevada (U.S. Equal Employment Opportunity
Commission v. Titanium Metals Corporation, CV-S-00-1172DWH-RJJ). The complaint,
as amended, alleged that several female employees at the Company's Henderson,
Nevada plant were the subject of sexual harassment and retaliation. In April
2003, the EEOC and TIMET agreed in principle on the terms of settlement of the
litigation, which is expected to be finalized during the second quarter of 2003.
The Company records liabilities related to legal proceedings when estimated
costs are probable and reasonably estimable. Such accruals are adjusted as
further information becomes available or circumstances change. Estimated future
costs are not discounted to their present value. It is not possible to estimate
the range of costs for certain matters. No assurance can be given that actual
costs will not exceed accrued amounts or that costs will not be incurred with
respect to matters as to which no problem is currently known or where no
estimate can presently be made. Further, there can be no assurance that
additional legal proceedings will not arise in the future.
- 16 -
Other. TIMET is the primary obligor on two $1.5 million workers'
compensation bonds issued on behalf of a former subsidiary, Freedom Forge
Corporation ("Freedom Forge"), which TIMET sold in 1989. The bonds were provided
as part of the conditions imposed on Freedom Forge in order to self-insure its
workers' compensation obligations. Freedom Forge filed for Chapter 11 bankruptcy
protection on July 13, 2001, and discontinued payment on the underlying workers'
compensation claims in November 2001. During 2002 TIMET received notices that
the issuers of the bonds were required to make payments on one of the bonds with
respect to certain of these claims and were requesting reimbursement from TIMET.
Based upon loss projections, the Company accrued $1.6 million for this bond
(including $0.1 million in legal fees reimbursable to the issuer of the bonds)
as other non-operating expense in 2002. Through March 31, 2003, TIMET has
reimbursed the issuer approximately $0.5 million under this bond and $1.1
million remains accrued for future payments. At this time one minor claim (which
is expected to recur annually) has been submitted under the second bond and is
currently under review. No payments have been made as of March 31, 2003 on this
claim, and no additional claims are currently anticipated. Accordingly, no
accrual has been recorded for potential claims that could be filed under the
second bond. TIMET may revise its estimated liability under these bonds in the
future as additional facts become known or claims develop.
As of March 31, 2003, the Company has $2.2 million accrued for pending and
potential future customer claims associated with certain standard grade material
produced by the Company, which was subsequently found to contain tungsten
inclusions as a result of tungsten contaminated silicon sold to the Company by a
third-party supplier. This accrual represents the Company's best estimate of the
most likely amount of loss to be incurred. This amount does not represent the
maximum possible loss (which is not possible for the Company to estimate at this
time) and may be periodically revised in the future as more facts become known.
As of March 31, 2003, the Company has received claims aggregating approximately
$5 million and has made settlement payments aggregating $0.6 million. Pending
claims are being investigated and negotiated. The Company believes that certain
claims are without merit or can be settled for less than the amount of the
original claim. There is no assurance that all potential claims have been
submitted to the Company. The Company has filed suit seeking full recovery from
its silicon supplier for any liability the Company might incur, although no
assurances can be given that the Company will ultimately be able to recover all
or any portion of such amounts. In April 2003, the Company received notice that
this silicon supplier had filed a voluntary petition in bankruptcy under Chapter
11. TIMET is currently investigating what effect, if any, this bankruptcy may
have on the Company's potential recovery. The Company has not recorded any
recoveries related to this matter as of March 31, 2003.
The Company is involved in various employment, environmental, contractual,
product liability and other claims, disputes and litigation incidental to its
business including those discussed above. While management, including internal
counsel, currently believes that the outcome of these matters, individually and
in the aggregate, will not have a material adverse effect on the Company's
financial position, liquidity or overall trends in results of operations, all
such matters are subject to inherent uncertainties. If an unfavorable outcome
were to occur in any given period, it is possible that it could have a material
adverse impact on the results of operations or cash flows in that particular
period.
For additional information concerning certain legal and environmental
matters, commitments and contingencies related to the Company, see the Company's
2002 Annual Report on Form 10-K.
- 17 -
Note 15 - Earnings (loss) per share
Basic earnings (loss) per share is based on the weighted average number of
unrestricted common shares outstanding during each period. Diluted earnings
(loss) per share reflect the dilutive effect of common stock options, restricted
stock and the assumed conversion of the Convertible Preferred Securities, if
applicable. The assumed conversion of the Convertible Preferred Securities was
omitted from the diluted loss per share calculation for the three months ended
March 31, 2003 and 2002 because the effect was antidilutive. Had the Convertible
Preferred Securities not been antidilutive, diluted losses would have been
decreased by $3.4 million and $3.3 million for the three months ended March 31,
2003 and 2002, respectively. Diluted average shares outstanding would have been
increased by 540,000 shares for each of these periods. Stock options and
restricted shares excluded from the calculation because they were antidilutive
approximated 149,000 for the three months ended March 31, 2003 and 167,000 for
the three months ended March 31, 2002.
Note 16 - Accounting principles not yet adopted
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46, Consolidation of Variable Interest Entities. Except
for TIMET Capital Trust I, a wholly-owned subsidiary of TIMET that issued the
Company's Convertible Preferred Securities, the Company does not believe it has
involvement with any variable interest entity covered by the scope of FASB
Interpretation No. 46 that would require consolidation. The Company has
consolidated TIMET Capital Trust I since its formation, as the Company owns 100%
of the trust's outstanding voting securities. The Company will adopt this
Interpretation no later than the quarter ending September 30, 2003. The adoption
of this Interpretation is not expected to have a material effect on the Company.
Note 17 - Subsequent event
On May 5, 2003, Valhi commenced a tender offer to purchase up to 1.0
million of TIMET's Convertible Preferred Securities for investment purposes, at
a net cash price of $10 per security. The tender offer expires at 12:00 midnight
(EDT) on June 2, 2003 unless extended by Valhi. The terms and conditions of the
tender offer appear in Valhi's Offer to Purchase dated May 5, 2003, and the
related Letter of Transmittal. Copies of these documents are being mailed to
holders of TIMET's Convertible Preferred Securities. Completion of the tender
offer is conditioned upon certain terms and conditions described in the Offer to
Purchase. Subject to applicable law, Valhi may waive any condition applicable to
the tender offer and may extend or otherwise amend the tender offer. There are
currently 4,024,820 of TIMET's Convertible Preferred Securities outstanding. The
securities are convertible into TIMET's common stock at a conversion ratio of
0.1339 shares of common stock per Convertible Preferred Security and have a
liquidation preference of $50 (plus accrued but unpaid dividends) per security.
Harold C. Simmons may be deemed to beneficially own approximately 42% of the
outstanding Convertible Preferred Securities (owned directly by Contran and Mr.
Simmons' wife), and J. Landis Martin, TIMET's Chairman, President and Chief
Executive Officer, currently owns 13,000 (less than 1%) of the outstanding
Convertible Preferred Securities. Based on a review by TIMET's non-employee
directors not related to Valhi, TIMET has determined that none of TIMET, its
board of directors nor any of its officers will express an opinion or make any
recommendation to any holder of the securities, and TIMET and all of such
persons will remain neutral toward the tender offer.
- 18 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes certain information regarding the Company's
results of operations for the three months ended March 31, 2003 and 2002. The
2003 percentage change information represents first quarter 2002 to first
quarter 2003 changes, and the 2002 percentage change information represents
first quarter 2001 to first quarter 2002 changes. See "Outlook" for further
discussion of the Company's business expectations for the remainder of 2003.
Three months ended March 31,
---------------------------------------
2003 2002
------------------ -----------------
($ in thousands)
Net sales $ 99,294 $ 104,440
Gross margin 1,018 5,108
Operating loss (8,064) (4,715)
Gross margin percent of net sales 1% 5%
Percent change in:
Sales volume:
Mill product sales volume -14 -16
Melted product sales volume +53 -37
Selling prices - excludes changes in product mix:
Mill product selling prices in U.S. dollars -1 +6
Mill product selling prices in billing currencies (1) -6 +7
Melted product selling prices in U.S. dollars -12 +8
Selling prices - includes changes in product mix:
Mill product average selling prices +7 +1
Melted product average selling prices -16 +8
------------------------------------------------------------------------------------------------------------------
(1) Excludes the effect of changes in foreign currencies.
First quarter of 2003 compared to first quarter of 2002. The Company's
sales of mill products decreased 8% from $79.7 million in the first quarter 2002
to $73.6 million in the first quarter of 2003. This decrease was principally due
to a 14% decrease in mill product sales volume and changes in customer and
product mix. Mill product selling prices expressed in U.S. dollars (using actual
foreign currency exchange rates prevailing during the respective periods)
decreased 1% during the first quarter of 2003 compared to the first quarter of
2002. In billing currencies (which exclude the effects of foreign currency
translation), mill product selling prices decreased 6% compared to the first
quarter of 2002. Melted product sales increased 29% from $10.0 million in the
first quarter of 2002 to $12.9 million in the first quarter of 2003 primarily
due to a 53% increase in melted product sales volume and changes in product mix.
Melted product selling prices decreased 12% during the first quarter of 2003, as
compared to the first quarter 2002. Substantially all melted products are sold
in U.S. dollars.
- 19 -
Gross margin (net sales less cost of sales) was 1% of sales in the first
quarter of 2003, compared to 5% in the year-ago period. Gross margin in the
first quarter of 2003 was most adversely impacted by the decline in mill product
volume and average selling prices and the related impact on manufacturing
overhead costs. As the Company reduces production volume in response to reduced
requirements, certain manufacturing overhead costs decrease at a slower rate and
to a lesser extent than production volume changes, generally resulting in higher
costs relative to production levels. Average plant operating rates declined from
approximately 64% of capacity in the first quarter of 2002 to approximately 52%
in the first quarter of 2003.
Selling, general, administrative and development expenses during the first
quarter of 2003 decreased by approximately 5% from year-ago levels, principally
as a result of lower personnel related costs.
Equity in earnings of joint ventures during the first quarter of 2003 was
$0.3 million lower than the year-ago period, principally due to a decrease in
earnings of VALTIMET, the Company's minority-owned welded tube joint venture.
Net other income (expense) during the first quarter of 2003 was $0.6
million higher than the year-ago period principally due to a $0.5 million
litigation settlement gain related to the Company's settlement of certain
litigation relating to power outages suffered at its Henderson, Nevada facility
in 1997 and 1998 as a result of contractor activity.
Non-operating income (expense).
Three months ended March 31,
-----------------------------------------
2003 2002
------------------ -------------------
(In thousands)
Interest income $ 112 $ 65
SMC impairment charge - (27,500)
Foreign exchange loss (630) (117)
Interest expense (688) (738)
Other income (expense), net (2) (577)
------------------ -------------------
$ (1,208) $ (28,867)
================== ===================
In March 2002, SMC and its U.S. subsidiaries filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result, the
Company undertook an assessment of its investment in SMC with the assistance of
an external valuation specialist and recorded an additional $27.5 million
impairment charge during the first quarter of 2002 for an other than temporary
decline in the estimated fair value of its investment in SMC. This charge
reduced the Company's carrying amount of its investment in the SMC securities to
zero. The Company currently believes it is unlikely that it will recover any
amount from this investment.
Income taxes. The Company operates in several tax jurisdictions and is
subject to varying income tax rates. As a result, the geographic mix of pretax
income can impact the Company's overall effective tax rate. For the three months
ended March 31, 2003 and 2002, the Company's income tax rate varied from the
U.S. statutory rate primarily due to an increase in the deferred tax valuation
allowance related to the Company's tax attributes that did not meet the
"more-likely-than-not" recognition criteria during those periods. See Note 13 to
the Consolidated Financial Statements.
- 20 -
Minority interest. Dividend expense related to the Company's 6.625%
Convertible Preferred Securities generally approximates $3.3 million per quarter
and is reported in the Consolidated Statement of Operations as minority
interest. No income tax benefit is associated with this expense. In October
2002, the Company exercised its right to defer future dividend payments on these
securities effective with the Company's December 1, 2002 scheduled dividend
payment. Dividends continue to accrue at the coupon rate on the principal and
unpaid dividends. The Company will consider resuming payment of dividends on the
Convertible Preferred Securities once the outlook for the Company's business
improves substantially. See Note 11 to the Consolidated Financial Statements.
Cumulative effect of change in accounting principles. On January 1, 2003,
the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations,
and recognized (i) an asset retirement cost capitalized as an increase to the
carrying value of its property, plant and equipment of approximately $0.2
million, (ii) accumulated depreciation on such capitalized cost of approximately
$0.1 million and (iii) a liability for the asset retirement obligation of
approximately $0.3 million. The asset retirement obligation recognized relates
primarily to landfill closure and leasehold restoration costs.
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, and recorded a non-cash goodwill impairment charge of $44.3
million, or $14.04 per share, representing the entire balance of the Company's
recorded goodwill at January 1, 2002.
See further discussion regarding the Company's adoption of these accounting
principles in Notes 1 and 6 to the Consolidated Financial Statements.
European operations. The Company has substantial operations and assets
located in Europe, principally the United Kingdom, with smaller operations in
France and Italy. Titanium is sold worldwide, and many factors influencing the
Company's U.S. and European operations are similar. Approximately 44% of the
Company's sales originated in Europe for the three months ended March 31, 2003,
of which approximately 60% were denominated in currencies other than the U.S.
dollar, principally the British pound and the euro. Certain purchases of raw
materials, principally titanium sponge and alloys, for the Company's European
operations are denominated in U.S. dollars, while labor and other production
costs are primarily denominated in local currencies. The functional currencies
of the Company's European subsidiaries are those of their respective countries;
thus, the U.S. dollar value of these subsidiaries' sales and costs denominated
in currencies other than their functional currency, including sales and costs
denominated in U.S. dollars, are subject to exchange rate fluctuations that may
impact reported earnings and may affect the comparability of period-to-period
operating results. Borrowings of the Company's European operations may be in
U.S. dollars or in functional currencies. The Company's export sales from the
U.S. are denominated in U.S. dollars and as such are not subject to currency
exchange rate fluctuations.
The Company does not use currency contracts to hedge its currency
exposures. Net currency transaction losses included in earnings were $0.6
million in the first quarter of 2003 and $0.1 million in the first quarter of
2002. At March 31, 2003, consolidated assets and liabilities denominated in
currencies other than functional currencies were approximately $31.1 million and
$40.8 million, respectively, consisting primarily of U.S. dollar cash, accounts
receivable, accounts payable and borrowings.
- 21 -
Supplemental information. On February 4, 2003, the Company's stockholders
approved a proposal to amend TIMET's Certificate of Incorporation to effect a
reverse stock split of the Company's common stock at a ratio of one share of
post-split common stock for each eight, nine or ten shares of pre-split common
stock issued and outstanding, with the final exchange ratio to be selected by
the Board of Directors. Subsequently, the Company's Board of Directors
unanimously approved the reverse stock split on the basis of one share of
post-split common stock for each outstanding ten shares of pre-split common
stock. The reverse stock split became effective after the close of trading on
February 14, 2003. All share and per share disclosures for all periods presented
in MD&A have been adjusted to give effect to the reverse stock split.
Outlook. The Outlook section contains a number of forward-looking
statements, all of which are based on current expectations, and exclude the
effect of potential future charges related to restructurings, asset impairments,
valuation allowances, changes in accounting principles and similar items, unless
otherwise noted. Undue reliance should not be placed on forward-looking
statements, as more fully discussed in the "Forward-Looking Information"
statement of this Quarterly Report. Actual results may differ materially. See
also Notes to the Consolidated Financial Statements regarding commitments,
contingencies, legal matters, environmental matters and other matters, including
new accounting principles not yet adopted, which could materially affect the
Company's future business, results of operations, financial position and
liquidity.
Commercial airlines will continue to face unprecedented challenges during
2003. Global conflicts, the threat of terrorist attacks, a sluggish global
economy and the outbreak of the Severe Acute Respiratory Syndrome ("SARS") virus
have all contributed to lower airline traffic levels. Traffic results from the
major U.S. airlines, despite showing improvement in the months immediately
following the terrorist attacks in the U.S., have not returned to pre-attack
levels. As a result, according to The Airline Monitor, the major U.S. airlines
recorded operating losses of approximately $9 billion in 2002 after losing
nearly $11 billion in 2001. Four airlines based in North America have been
forced to seek legal protection from their creditors. The most recent forecast
of large commercial aircraft deliveries published by The Airline Monitor
projects 2003 deliveries for Boeing and Airbus to be 580 airplanes and to fall
slightly in 2004 to 570 airplanes. However, these projections do not fully
incorporate the potential adverse impacts of the worldwide events discussed
above. Finally, the current weakened state of the economy could prolong any
meaningful recovery in airline passenger traffic and demand for titanium in the
commercial aerospace market.
The Company currently expects that sales revenue for the full year 2003
will be approximately $365 million to $375 million, principally as a result of
expected increased volumes for both mill and melt products. Mill product sales
volume in 2003 is expected to approximate 9,200 metric tons, which reflects a 4%
increase over 2002 levels. Melted product sales volume in 2003 is expected to
approximate 3,500 metric tons, which reflects a 46% increase over 2002 levels.
These sales volume gains are being driven principally by a return to more
normalized inventory levels within the aerospace market supply chain, increased
military aerospace business and gains in commercial aerospace market share.
The Company's cost of sales is affected by a number of factors including,
among others, customer and product mix, material yields, plant operating rates,
raw material costs, labor and energy costs. Raw material costs represent the
largest portion of our manufacturing cost structure. The Company expects to
manufacture a significant portion of its titanium sponge requirements in 2003
and purchase the balance.
- 22 -
The Company expects the aggregate cost of purchased sponge to remain
relatively stable in 2003. The Company is experiencing higher prices for certain
types of scrap but has mitigated those increased costs by utilizing other
cheaper raw material inputs. Overall capacity utilization should average about
50% in 2003; however, the Company's practical capacity utilization measures can
vary significantly based on product mix. The Company has implemented a number of
actions to reduce its manufacturing costs, including supplier price concessions,
stringent spending controls and programs to improve manufacturing yields. These
cost reduction efforts have improved gross margins, and it is now expected that
gross margins will be near break even for the year.
Selling, general, administrative and development expenses for 2003 should
be approximately $39 million. Interest expense in 2003 should approximate $2
million. Minority interest on the Company's Convertible Preferred Securities in
2003 should approximate $14 million, including additional interest costs related
to the deferral of the related dividend payments.
The Company anticipates that Boeing will purchase about 0.8 million pounds
of product in 2003. At this projected order level, the Company expects to
recognize about $25 million of income under the Boeing LTA's take-or-pay
provisions in 2003, substantially all of which is expected to be recognized in
the third and fourth quarters of 2003. Any such earnings will be reported as
operating income, but will not be included in sales revenue, sales volume or
gross margin.
The Company operates in several tax jurisdictions and is subject to varying
income tax rates. As a result, the geographic mix of pretax income (or loss)
significantly impacts the overall effective income tax rate. The Company
anticipates its effective consolidated income tax rate will be significantly
below the U.S. statutory rate, because it does not expect to record any income
tax benefit on U.S. losses generated in 2003. Additionally, the Company does not
expect to record any income tax benefit on U.K. losses generated in 2003. Income
tax expense recorded in the first quarter of 2003 is primarily the result of
operations in other European jurisdictions.
The Company expects an operating loss in 2003 of $10 million to $20 million
and a net loss of $30 million to $40 million, excluding the effects of any
potential restructuring or other special charges. The Company currently
anticipates its results in the last half of 2003 will be improved compared to
the first half because of the estimated income expected to be earned under the
take-or-pay provisions of the Boeing LTA and, to a lesser extent, because of
cost reduction efforts.
The Company expects to generate $25 million to $35 million in cash flow
from operations during 2003. This is principally driven by reductions in working
capital, especially inventory, and the deferral of the dividends on the
Convertible Preferred Securities. Capital expenditures in 2003 are expected to
approximate $12 million, principally covering capital maintenance, safety and
environmental programs. Depreciation and amortization should approximate $35
million.
- 23 -
In April 2003, the Company was selected by the United States Defense
Advanced Research Projects Agency ("DARPA") to lead a program aimed at
commercializing the "FFC Cambridge Process." The FFC Cambridge Process,
developed by Professor Derek Fray, Dr. Tom Farthing and Dr. George Chen at the
University of Cambridge, represents a potential breakthrough technology in the
process of extracting titanium from titanium-bearing ores. This program will
receive up to approximately $12.3 million in government funding over the next
five years.
As part of the program, TIMET will be leading a team of scientists from
major defense contractors, including General Electric Aircraft Engines, United
Defense Limited Partners and Pratt & Whitney, as well as the University of
California at Berkeley and the University of Cambridge. The funding will be
allocated among all of the program partners (including TIMET) to cover program
costs. Additionally, TIMET will contribute unreimbursed personnel time to assist
in the research. In connection with the program, TIMET has negotiated a
development and production license for the FFC Cambridge Process technology from
British Titanium plc. TIMET will conduct the development work at its technical
laboratory in Henderson, Nevada. While much work must be done and success is by
no means a certainty, TIMET considers this a significant opportunity to achieve
a meaningful reduction in the cost of producing titanium metal. If successful,
the Company believes this would not only make titanium a more attractive
material choice within the aerospace industry, but also could provide
opportunities to use titanium in non-aerospace applications where its cost might
have previously been an obstacle.
The outlook for 2003 remains difficult given the softness in the commercial
aerospace market. The Company is committed to increasing the scope of its cost
reduction efforts. On a longer-term basis, the Company continues to evaluate
certain facility and product line consolidation opportunities toward the goal of
meaningfully reducing its fixed cost structure. Despite the current difficulties
facing aerospace manufacturers and TIMET, the titanium industry has a promising
future once aircraft deliveries eventually return to more healthy levels and
because of promising growth opportunities in military aerospace and emerging
markets. The Company remains committed to positioning itself to take advantage
of those opportunities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows provided by operating, investing and
financing activities for the three months ended March 31, 2003 and 2002 are
presented below. The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto.
Three months ended March 31,
------------------------------------------
2003 2002
------------------- -------------------
(In thousands)
Cash provided (used) by:
Operating activities:
Excluding changes in assets and liabilities $ (3,436) $ 346
Changes in assets and liabilities 29,870 (19,547)
------------------- -------------------
26,434 (19,201)
Investing activities (1,487) (1,282)
Financing activities (5,116) 2,010
------------------- -------------------
Net cash provided (used) by operating,
investing and financing activities $ 19,831 $ (18,473)
=================== ===================
- 24 -
Operating activities. Cash provided (used) by operating activities,
excluding changes in assets and liabilities, generally followed the trend in
operating results. Changes in assets and liabilities reflect primarily the
timing of purchases, production and sales and can vary significantly from period
to period.
Accounts receivable increased during the first three months of 2003
primarily as a result of increased sales and an increase in days sales
outstanding as certain customers extended their payment terms with the Company.
Accounts receivable decreased during the first quarter of 2002 primarily as a
result of decreased sales. Inventories decreased during the first three months
of 2003 as a result of reduced run rates at the Company's sponge plant, improved
turnover within the Company's inventory consignment programs and reduced cycle
times. The Company expects inventory levels to decline further during the
remainder of 2003. Inventories increased during the first quarter of 2002
principally due to production begun by the Company prior to certain customer
cancellations and push-outs related to the downturn in the commercial aerospace
market at that time.
Changes in accounts payable and accrued liabilities reflect, among other
things, the timing of payments to suppliers of titanium sponge, titanium scrap
and other raw materials purchases. Changes in customer advances reflect the
application of customer purchases and the Company's receipt in January 2003 of
the $27.7 million advance from Boeing. Under the terms of the amended Boeing
LTA, in years 2002 through 2007, Boeing advances TIMET $28.5 million annually,
less $3.80 per pound of titanium product purchased by Boeing subcontractors
during the preceding year. Effectively, the Company collects $3.80 less from
Boeing than the LTA selling price for each pound of titanium product sold
directly to Boeing, which reduces the related customer advance recorded by the
Company. For titanium products sold to Boeing subcontractors, the Company
collects the full LTA selling price, but gives Boeing credit by reducing the
next year's annual advance by $3.80 per pound of titanium product sold to Boeing
subcontractors. The Company currently estimates that the reduction against the
2003 advance from Boeing will be less than $1 million. The LTA is structured as
a take-or-pay agreement such that, beginning in calendar year 2002, Boeing
forfeits $3.80 per pound in the event that its orders for delivery are less than
7.5 million pounds in any given calendar year. No take-or-pay income was
recognized by the Company during the first quarter of 2003 or 2002.
See "Results of Operations - Non-operating income (expense), net" and Note
4 to the Consolidated Financial Statements for discussion of the Company's
impairment of SMC securities.
In October 2002, the Company exercised its right to defer future dividend
payments on its Convertible Preferred Securities for a period of up to 20
consecutive quarters, effective beginning with the Company's December 1, 2002
scheduled dividend payment. Dividends continue to accrue at the coupon rate on
the principal and unpaid dividends and are reflected as long-term liabilities in
the Consolidated Balance Sheet. The Company may consider resuming payment of
dividends on the Convertible Preferred Securities once the outlook for the
Company's business improves substantially. Since the Company exercised its right
to defer dividend payments, it is unable under the terms of these securities to,
among other things, pay dividends on or reacquire its capital stock during the
deferral period. However, the Company is permitted to reacquire the Convertible
Preferred Securities during the deferral period provided the Company has
satisfied certain conditions under its U.S. credit facility, including
maintenance of the Company's excess availability above $25 million before and
after such reacquisition.
Investing activities. The Company's capital expenditures were $1.5 million
for the three months ended March 31, 2003 compared to $1.3 million for the same
period in 2002, principally for capital maintenance and safety and environmental
projects.
- 25 -
Financing activities. Cash used during the first quarter of 2003 was due
primarily to the Company's $4.6 million of net repayments on its outstanding
borrowings upon the Company's receipt of the $27.7 million Boeing advance in
January 2003. Cash provided during the first quarter of 2002 was due primarily
to $2.2 million of net borrowings necessary to fulfill the Company's working
capital needs.
Borrowing arrangements. At March 31, 2003, the Company's net cash (cash and
cash equivalents less indebtedness, excluding capital lease obligations,
Convertible Preferred Securities and deferred dividends thereon) was
approximately $11.9 million, consisting of $26.6 million of cash and equivalents
and $14.7 million of debt (principally borrowings under the Company's U.S. and
U.K. credit agreements). This compares to a net debt position of $8.6 million as
of March 31, 2002. During January 2003, the Company received approximately $27.7
million from Boeing under the terms of the parties' amended LTA, a portion of
which was used to reduce outstanding borrowings under the Company's U.S. credit
agreement.
Under the terms of the Company's U.S. asset-based revolving credit
agreement, which matures in February 2006, borrowings are limited to the lesser
of $105 million or a formula-determined borrowing base derived from the value of
accounts receivable, inventory and equipment ("borrowing availability"). This
facility requires the Company's U.S. daily cash receipts to be used to reduce
outstanding borrowings, which may then be reborrowed, subject to the terms of
the agreement. Interest generally accrues at rates that vary from LIBOR plus 2%
to LIBOR plus 2.5%. Borrowings are collateralized by substantially all of the
Company's U.S. assets. The credit agreement prohibits the payment of dividends
on TIMET's Convertible Preferred Securities if "excess availability," as
defined, is less than $25 million, limits additional indebtedness, prohibits the
payment of dividends on the Company's common stock if excess availability is
less than $40 million, requires compliance with certain financial covenants and
contains other covenants customary in lending transactions of this type. The
Company was in compliance in all material respects with all covenants for the
quarter ended March 31, 2003 and for all periods during the year ended December
31, 2002. Excess availability is essentially unused borrowing availability and
is defined as borrowing availability less outstanding borrowings and certain
contractual commitments such as letters of credit. As of March 31, 2003, excess
availability was approximately $95 million.
The Company's subsidiary, TIMET UK, has a credit agreement that provides
for borrowings limited to the lesser of (pound)22.5 million or a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and equipment ("borrowing availability"). The credit agreement
includes a revolving and term loan facility and an overdraft facility (the "U.K.
facilities") and matures in December 2005. Borrowings under the U.K. facilities
can be in various currencies including U.S. dollars, British pounds sterling and
euros; accrue interest at rates that vary from LIBOR plus 1% to LIBOR plus
1.25%; and are collateralized by substantially all of TIMET UK's assets. The
U.K. facilities require the maintenance of certain financial ratios and amounts
and other covenants customary in lending transactions of this type. TIMET UK was
in compliance in all material respects with all covenants for the quarter ended
March 31, 2003 and for all periods during the year ended December 31, 2002. The
U.K. overdraft facility is subject to annual review in December of each year. In
the event the overdraft facility is not renewed, the Company believes it could
refinance any outstanding overdraft borrowings under either the revolving or
term loan features of the U.K. facilities. Unused borrowing availability as of
March 31, 2003 under the U.K. facilities was approximately $24 million.
The Company also has overdraft and other credit facilities at certain of
its other European subsidiaries. These facilities accrue interest at various
rates and are payable on demand. Unused borrowing availability as of March 31,
2003 under these facilities was approximately $13 million.
- 26 -
Although excess availability under TIMET's U.S. credit agreement remains
above $40 million, no dividends were paid by TIMET during the three months
period ended March 31, 2003 and 2002. TIMET does not presently anticipate paying
dividends on its common shares during 2003 and, as previously discussed, is not
permitted to pay such dividends while deferring dividend payments on its
Convertible Preferred Securities.
Legal and environmental matters. See Note 14 to the Consolidated Financial
Statements for discussion of legal and environmental matters, commitments and
contingencies.
Other. The Company periodically evaluates its liquidity requirements,
capital needs and availability of resources in view of, among other things, its
alternative uses of capital, debt service requirements, the cost of debt and
equity capital and estimated future operating cash flows. As a result of this
process, the Company has in the past, or in light of its current outlook, may in
the future, seek to raise additional capital, modify its common and preferred
dividend policies, restructure ownership interests, incur, refinance or
restructure indebtedness, repurchase shares of common stock or Convertible
Preferred Securities, sell assets, or take a combination of such steps or other
steps to increase or manage its liquidity and capital resources.
In the normal course of business, the Company investigates, evaluates,
discusses and engages in acquisition, joint venture, strategic relationship and
other business combination opportunities in the titanium, specialty metal and
other industries. In the event of any future acquisition or joint venture
opportunities, the Company may consider using then-available liquidity, issuing
equity securities or incurring additional indebtedness.
Non-GAAP financial measures
In an effort to provide investors with information in addition to the
Company's results as determined by accounting principles generally accepted in
the United States of America ("GAAP"), the Company has provided the following
non-GAAP financial disclosures that it believes provide useful information to
investors:
o The Company discloses percentage changes in its mill and melted
product selling prices in U.S. dollars, but which have been adjusted
to exclude the effects of changes in product mix, thereby facilitating
period-to-period comparisons. Depending on the composition of changes
in product mix, the percentage change in selling prices excluding the
effect of changes in product mix can be higher or lower than such
percentage change would be using the actual product mix prevailing
during the respective periods.
o In addition to disclosing percentage changes in its mill product
selling prices adjusted to exclude the effects of changes in product
mix, the Company also discloses such percentage changes in billing
currencies which have been further adjusted to exclude the effects of
changes in foreign currency exchange rates, also thereby facilitating
period-to-period comparisons. Generally, when the U.S. dollar
strengthens (weakens) against other currencies, the percentage change
in selling prices in billing currencies will be higher (lower) than
such percentage changes would be using actual exchange rates
prevailing during the respective periods.
o The Company discloses net cash or net debt (as previously defined) to
aid in analyzing the Company's liquidity position.
- 27 -
Item 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that the Company files or submits to the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it files
or submits to the SEC under the Exchange Act is accumulated and communicated to
the Company's management, including its principal executive officer and its
principal financial officer, as appropriate, to allow timely decisions to be
made regarding required disclosure. Both J. Landis Martin, the Company's Chief
Executive Officer, and Ivan J. Muzljakovich, the Company's Vice President and
Controller, North American Operations, and Acting Principal Financial and
Accounting Officer, have evaluated the Company's disclosure controls and
procedures as of a date within 90 days of the filing of this Form 10-Q. Based
upon their evaluation, these executive officers have concluded that the
Company's disclosure controls and procedures are effective as of the date of
such evaluation.
The Company also maintains a system of internal controls. The term
"internal controls," as defined by the American Institute of Certified Public
Accountants' Codification of Statement on Auditing Standards, AU Section 319,
means controls and other procedures designed to provide reasonable assurance
regarding the achievement of objectives in the reliability of the Company's
financial reporting, the effectiveness and efficiency of the Company's
operations and the Company's compliance with applicable laws and regulations.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date of their last evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
- 28 -
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Note 14 of the Consolidated Financial Statements which
information is incorporated herein by reference and to the Company's 2002 Annual
Report for descriptions of certain previously reported legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Reference is made to Item 4 of the Company's 2002 Annual Report for details
regarding the results of the vote at the Special Meeting of Stockholders held on
February 4, 2003.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K filed by the Registrant for the quarter ended
March 31, 2003 and through May 9, 2003:
Date of Report Items Reported
----------------------------------- ---------------------------------
February 4, 2003 5 and 7
February 5, 2003 5 and 7
February 14, 2003 5 and 7
March 4, 2003 5 and 7
April 2, 2003 5 and 7
April 14, 2003 5 and 7
April 23, 2003 12 (under 9)
May 7, 2003 5 and 7
- 29 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TITANIUM METALS CORPORATION
---------------------------------------------------
(Registrant)
Date: May 9, 2003 By /s/ J. Landis Martin
--------------------
J. Landis Martin
Chairman of the Board, President and
Chief Executive Officer
Date: May 9, 2003 By /s/ Ivan J. Muzljakovich
------------------------
Ivan J. Muzljakovich
Vice President and Controller, North American
Operations
Acting Principal Financial and Accounting Officer
- 30 -
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, J. Landis Martin, Chairman of the Board, President and Chief Executive
Officer of Titanium Metals Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Titanium Metals
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
- 31 -
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 9, 2003
/s/ J. Landis Martin
--------------------
J. Landis Martin
Chairman of the Board, President
and Chief Executive Officer
- 32 -
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ivan J. Muzljakovich, Vice President and Controller, North American
Operations, and Acting Principal Financial and Accounting Officer of Titanium
Metals Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Titanium Metals
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
- 33 -
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Ivan J. Muzljakovich
------------------------
Ivan J. Muzljakovich
Vice President and Controller, North American Operations
Acting Principal Financial and Accounting Officer
- 34 -