1
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 quarter ended March 31, 2001
OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
Commission file number 0-28538
Titanium Metals Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-5630895
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5600
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Number of shares of common stock outstanding on April 30, 2001: 31,817,801.
-----------
2
Forward-Looking Information
The statements contained in this Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in the Notes to Consolidated Financial Statements and under the
captions "Results of Operations" and "Liquidity and Capital Resources" (both
contained in Management's Discussion and Analysis of Financial Condition and
Results of Operations), are forward-looking statements that represent
management's beliefs and assumptions based on currently available information.
Forward-looking statements can be identified by the use of words such as
"believes," "intends," "may," "will," "looks," "should," "could," "anticipates,"
"expects" or comparable terminology or by discussions of strategies or trends.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it cannot give any assurances that
these expectations will prove to be correct. Such statements by their nature
involve substantial risks and uncertainties that could significantly affect
expected results. Actual future results could differ materially from those
described in such forward-looking statements, and the Company disclaims any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. Among the
factors that could cause actual results to differ materially are the risks and
uncertainties discussed in this Quarterly Report, including in those portions
referenced above and those described from time to time in the Company's other
filings with the Securities and Exchange Commission which include, but are not
limited to, the cyclicality of the commercial aerospace industry, the
performance of aerospace manufacturers under their long-term purchase agreements
with the Company, the difficulty in forecasting demand for titanium products,
global economic conditions, global productive capacity for titanium, changes in
product pricing and costs, the impact of long-term contracts with vendors on the
ability of the Company to reduce or increase supply or achieve lower costs, the
possibility of labor disruptions, fluctuations in currency exchange rates,
control by certain stockholders and possible conflicts of interest,
uncertainties associated with new product development, the supply of raw
materials and services, changes in raw material and other operating costs
(including energy costs) 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.
3
TITANIUM METALS CORPORATION
INDEX
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Page
number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2001 and
December 31, 2000 2-3
Consolidated Statements of Operations - Three months
ended March 31, 2001 and 2000 4
Consolidated Statements of Comprehensive Loss - Three
months ended March 31, 2001 and 2000 5
Consolidated Statements of Cash Flows - Three months
ended March 31, 2001 and 2000 6-7
Consolidated Statement of Stockholders' Equity - Three
months ended March 31, 2001 8
Notes to Consolidated Financial Statements 9-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 24
-1-
4
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
MARCH 31, December 31,
ASSETS 2001 2000
--------- ------------
Current assets:
Cash and cash equivalents $ 4,841 $ 9,796
Accounts and other receivables, less
allowance of $2,501 and $2,927 89,585 75,913
Receivable from related parties 4,015 5,029
Refundable income taxes 550 637
Inventories 141,986 148,384
Prepaid expenses and other 10,013 8,049
Deferred income taxes 672 397
-------- --------
Total current assets 251,662 248,205
-------- --------
Other assets:
Investments in joint ventures 18,853 18,136
Preferred securities 80,000 80,000
Accrued dividends on preferred securities 8,284 8,136
Goodwill 47,674 49,305
Other intangible assets 12,342 13,258
Deferred income taxes 30,797 27,820
Other 12,286 12,156
-------- --------
Total other assets 210,236 208,811
-------- --------
Property and equipment:
Land 6,129 6,158
Buildings 37,144 37,593
Information technology systems 54,191 54,426
Manufacturing and other 304,549 305,856
Construction in progress 9,256 8,811
-------- --------
411,269 412,844
Less accumulated depreciation 117,346 110,714
-------- --------
Net property and equipment 293,923 302,130
-------- --------
$755,821 $759,146
======== ========
-2-
5
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES, MINORITY INTEREST AND MARCH 31, December 31,
STOCKHOLDERS' EQUITY 2001 2000
---------- ------------
Current liabilities:
Notes payable $ 37,213 $ 24,112
Current maturities of long-term debt and
capital lease obligations 495 2,011
Accounts payable 43,832 50,456
Accrued liabilities 33,739 36,180
Payable to related parties 1,172 1,099
Income taxes 1,188 852
Deferred income taxes 1,306 1,132
Accrued dividends on Convertible Preferred Securities 14,506 --
--------- ---------
Total current liabilities 133,451 115,842
--------- ---------
Noncurrent liabilities:
Long-term debt 17,303 18,953
Capital lease obligations 8,290 8,642
Payable to related parties 1,332 1,332
Accrued OPEB cost 18,015 18,219
Accrued pension cost 5,633 5,361
Accrued environmental cost 3,262 3,262
Deferred income taxes 9,587 9,655
Accrued dividends on Convertible Preferred Securities -- 11,154
Other 113 117
--------- ---------
Total noncurrent liabilities 63,535 76,695
--------- ---------
Minority interest - Company-obligated mandatorily
redeemable preferred securities of subsidiary trust
holding solely subordinated debt securities
("Convertible Preferred Securities") 201,250 201,250
Other minority interest 7,772 7,844
Stockholders' equity:
Preferred stock -- --
Common stock 319 319
Additional paid-in capital 350,087 350,078
Retained earnings 22,309 25,925
Accumulated other comprehensive loss (20,716) (16,408)
Treasury stock, at cost (90 shares) (1,208) (1,208)
Deferred compensation (978) (1,191)
--------- ---------
Total stockholders' equity 349,813 357,515
--------- ---------
$ 755,821 $ 759,146
========= =========
Commitments and contingencies (Note 10)
See accompanying notes to consolidated financial statements.
-3-
6
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31, 2001 and 2000
(In thousands, except per share data)
2001 2000
--------- ---------
Revenues and other income:
Net sales $ 124,008 $ 104,712
Equity in earnings (losses) of joint ventures 866 (53)
Other, net 2,236 2,529
--------- ---------
127,110 107,188
--------- ---------
Costs and expenses:
Cost of sales 116,745 108,011
Selling, general, administrative and development 10,700 11,339
Restructuring charge (income) (220) 3,702
Interest 1,512 2,262
--------- ---------
128,737 125,314
--------- ---------
Loss before income taxes, minority interest
and extraordinary item (1,627) (18,126)
Income tax benefit (570) (6,384)
Minority interest - Convertible Preferred Securities, net of tax 2,186 2,167
Other minority interest, net of tax 373 339
--------- ---------
Loss before extraordinary item (3,616) (14,248)
Extraordinary item, net of tax -- 873
--------- ---------
Net loss $ (3,616) $ (15,121)
========= =========
Basic and diluted loss per share:
Before extraordinary item $ (.12) $ (.45)
Extraordinary item -- (.03)
--------- ---------
$ (.12) $ (.48)
========= =========
Basic and diluted weighted average
shares outstanding 31,417 31,371
========= =========
See accompanying notes to consolidated financial statements.
-4-
7
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Three months ended March 31, 2001 and 2000
(In thousands)
2001 2000
-------- --------
Net loss $ (3,616) $(15,121)
Other comprehensive loss - currency
translation adjustment (4,308) (2,634)
-------- --------
Comprehensive loss $ (7,924) $(17,755)
======== ========
See accompanying notes to consolidated financial statements.
-5-
8
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2001 and 2000
(In thousands)
2001 2000
--------- ---------
Cash flows from operating activities:
Net loss $ (3,616) $ (15,121)
Depreciation and amortization 10,072 10,790
Non cash restructuring charge (220) 3,301
Non cash special charges -- 6,729
Gain on sale of castings joint venture -- (1,205)
Extraordinary loss -- 873
Losses (income) of joint ventures, net of distributions (716) 53
Deferred income taxes (1,701) (7,204)
Other minority interest 373 339
Other, net 161 144
Change in assets and liabilities:
Receivables (14,633) 30,020
Accrued dividends receivable on preferred securities (148) (1,469)
Inventories 4,188 1,798
Prepaid expenses and other (1,952) 894
Accounts payable and accrued liabilities (8,692) (9,870)
Accrued restructuring charges (275) (327)
Income taxes 480 (682)
Accounts with related parties, net 1,450 (890)
Accrued OPEB and pension costs 73 (237)
Accrued dividends on Convertible Preferred Securities 3,352 --
Other, net (1,218) (27)
--------- ---------
Net cash provided (used) by operating activities (13,022) 17,909
--------- ---------
Cash flows from investing activities:
Capital expenditures (2,601) (2,115)
Proceeds from sale of castings joint venture -- 7,000
--------- ---------
Net cash provided (used) by investing activities (2,601) 4,885
--------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings 165,540 124,009
Repayments (154,903) (160,786)
--------- ---------
Net cash provided (used) by financing activities 10,637 (36,777)
--------- ---------
Net cash used by operating, investing
and financing activities $ (4,986) $ (13,983)
========= =========
-6-
9
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 2001 and 2000
(In thousands)
2001 2000
-------- --------
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $ (4,986) $(13,983)
Currency translation 31 (384)
-------- --------
(4,955) (14,367)
Balance at beginning of period 9,796 20,671
-------- --------
Balance at end of period $ 4,841 $ 6,304
======== ========
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 1,323 $ 1,703
Convertible Preferred Securities dividends -- 3,333
Income taxes, net 668 521
See accompanying notes to consolidated financial statements.
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10
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2001
(In thousands)
Accumulated Other
Comprehensive Loss
-------------------------
Common Additional
Shares Common Paid-In Retained Currency Pension
Stock Capital Earnings Translation Liabilities
--------- --------- --------- --------- ----------- -----------
Balance at December 31, 2000 31,817 $ 319 $ 350,078 $ 25,925 $ (10,920) $ (5,488)
Comprehensive loss -- -- -- (3,616) (4,308) --
Issuance of common stock 10 -- 59 -- -- --
Long-term incentive plan
stock awards (cancellations) (10) -- (50) -- -- --
Amortization of deferred
compensation -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Balance at March 31, 2001 31,817 $ 319 $ 350,087 $ 22,309 $ (15,228) $ (5,488)
========= ========= ========= ========= ========= =========
Total
Treasury Deferred Stockholders'
Stock Compensation Equity
--------- ------------ -------------
Balance at December 31, 2000 $ (1,208) $ (1,191) $ 357,515
Comprehensive loss -- -- (7,924)
Issuance of common stock -- -- 59
Long-term incentive plan
stock awards (cancellations) -- 50 --
Amortization of deferred
compensation -- 163 163
--------- --------- ---------
Balance at March 31, 2001 $ (1,208) $ (978) $ 349,813
========= ========= =========
See accompanying notes to consolidated financial statements.
-8-
11
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2001, Tremont
Corporation ("Tremont") held approximately 39% of TIMET's outstanding common
stock. The Combined Master Retirement Trust, a trust formed by Valhi, Inc.,
("Valhi") to permit the collective investment by trusts that maintain the assets
of certain employee benefit plans adopted by Valhi and related companies, held
approximately an additional 8% of TIMET's common stock. At March 31, 2001,
subsidiaries of Valhi held an aggregate of approximately 80% of Tremont's
outstanding common stock, and Contran Corporation held, directly or through
subsidiaries, approximately 93% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee. In addition, Mr. Simmons is the
sole trustee of the CMRT and a member of the trust investment committee for the
CMRT. Mr. Simmons may be deemed to control each of Contran, Valhi, Tremont and
TIMET.
The consolidated balance sheet of TIMET and subsidiaries (collectively,
the "Company") at December 31, 2000 has been condensed from the Company's
audited consolidated financial statements at that date. The consolidated balance
sheet at March 31, 2001 and the consolidated statements of operations,
comprehensive loss, stockholders' equity and cash flows for the interim periods
ended March 31, 2001 and 2000 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, 2000 (the "2000 Annual Report").
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, effective January 1, 2001. As permitted by the
transition requirements of SFAS No. 133, as amended, the Company has exempted
from the scope of SFAS No. 133 all host contracts containing embedded
derivatives which were issued or acquired prior to January 1, 1999. The adoption
of SFAS No. 133 had no material effect on the Company's consolidated financial
position, liquidity or results of operations.
-9-
12
Basic earnings per share is based on the weighted average number of
unrestricted common shares outstanding during each period. Diluted earnings per
share reflects the dilutive effect of common stock options, restricted stock and
the assumed conversion of the Convertible Preferred Securities, if applicable.
The assumed conversion of the Convertible Preferred Securities was omitted from
the diluted earnings per share calculation for the interim periods ended March
31, 2001 and 2000 because the effect was antidilutive. The effect of the
conversion on diluted earnings per share for the 2001 and 2000 periods would
have been to decrease net losses by $2.2 million and increase average shares
outstanding by 5.4 million shares. Stock options and restricted stock omitted
from diluted shares because they were antidilutive were 1.9 million and 1.5
million in the 2001 and 2000 periods, respectively.
-10-
13
Note 2 - Business segment information:
The Company's worldwide operations are conducted through one business
segment - the production and sale of titanium melted and mill products.
Three months ended March 31,
----------------------------
2001 2000
--------- ---------
(In thousands)
Net sales $ 124,008 $ 104,712
Cost of sales 116,745 108,011
--------- ---------
Gross margin 7,263 (3,299)
Selling, general, administrative and development 10,700 11,339
Equity in (earnings) loss of joint ventures (866) 53
Restructuring charge (income) (220) 3,702
Other expense (income) (536) 23
--------- ---------
Operating loss (1,815) (18,416)
General corporate income:
Dividends and interest income 1,532 1,648
Gain on sale of castings joint venture -- 1,205
Currency transactions and other, net 168 (301)
Interest expense 1,512 2,262
--------- ---------
Loss before income taxes, minority interest,
and extraordinary item $ (1,627) $ (18,126)
========= =========
Titanium melted and mill products:
Mill product net sales $ 93,798 $ 83,430
Melted product net sales 14,678 8,349
Other 15,532 12,933
--------- ---------
$ 124,008 $ 104,712
========= =========
Mill product shipments:
Volume (metric tons) 3,185 2,700
Average price ($ per kilogram) $ 29.45 $ 30.90
Melted product shipments:
Volume (metric tons) 1,030 590
Average price ($ per kilogram) $ 14.25 $ 14.15
See Note 7 regarding restructuring and other special charges.
-11-
14
Note 3 - Inventories:
MARCH 31, December 31,
2001 2000
---------- ------------
(In thousands)
Raw materials $ 32,109 $ 31,127
Work-in-process 75,020 74,631
Finished products 47,690 53,685
Supplies 13,217 14,991
---------- ------------
168,036 174,434
Less adjustment of certain
Inventories to LIFO basis 26,050 26,050
---------- ------------
$ 141,986 $ 148,384
========== ============
Note 4 - Intangible and other noncurrent assets:
MARCH 31, December 31,
2001 2000
---------- ------------
Intangible assets:
Patents $ 13,185 $ 13,521
Covenants not to compete 8,500 8,500
---------- ------------
21,685 22,021
Less accumulated amortization 13,032 12,452
---------- ------------
8,653 9,569
Intangible pension assets 3,689 3,689
---------- ------------
$ 12,342 $ 13,258
========== ============
Other noncurrent assets:
Deferred financing costs $ 9,010 $ 9,194
Notes receivable from officers 549 544
Prepaid pension cost 1,941 1,359
Other 786 1,059
---------- ------------
$ 12,286 $ 12,156
========== ============
-12-
15
Note 5 - Accrued liabilities:
MARCH 31, December 31,
2001 2000
-------- ------------
(In thousands)
OPEB cost $ 3,061 $ 3,129
Pension cost 706 1,251
Other employee benefits 15,133 15,120
Deferred income 1,391 2,558
Environmental costs 814 818
Restructuring costs 514 1,012
Taxes, other than income 4,564 3,593
Other 7,556 8,699
------- -------
$33,739 $36,180
======= =======
See Note 7 regarding accrued restructuring costs.
Note 6 - Notes payable, long-term debt and capital lease obligations:
MARCH 31, December 31,
2001 2000
--------- ------------
(In thousands)
Notes payable:
U.S. credit agreement $33,270 $19,893
European credit agreements 3,943 4,219
------- -------
$37,213 $24,112
======= =======
Long-term debt:
Bank credit agreement - U.K $17,132 $20,263
Other 490 514
------- -------
17,622 20,777
Less current maturities 319 1,824
------- -------
$17,303 $18,953
======= =======
Capital lease obligations $ 8,466 $ 8,829
Less current maturities 176 187
------- -------
$ 8,290 $ 8,642
======= =======
Upon entering into new U.S. and U.K. credit facilities in February
2000, the Company's previous U.S. credit facility was repaid and terminated. The
deferred financing costs associated with the previous U.S. facility were written
off and reflected as an extraordinary item in 2000 of $.9 million, net of tax.
The weighted average interest rate on borrowings outstanding under the
U.S. and U.K. credit agreements at March 31, 2001 was 7.7% and 6.9%,
respectively. As of March 31, 2001, the Company had approximately $107 million
of unused borrowing availability under its U.S. and European credit agreements.
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16
Note 7- Restructuring and other special charges:
Three months ended March 31,
-----------------------------
2001 2000
-------- --------
(In thousands)
Restructuring charges (income):
Property and equipment $ -- $ 352
Disposition of German subsidiary -- 162
Personnel severance and benefits (220) 3,188
-------- --------
$ (220) $ 3,702
======== ========
Accrued restructuring costs at March 31, 2001 consist of unpaid
personnel severance and benefits and other exit costs (primarily carrying costs
on closed leased facilities) relating to the Company's restructuring plans
implemented during 1999 and 2000. During the first quarter of 2001, payments of
$.3 million were applied against the accruals related to the 2000 plan, while
payments related to the 1999 plan were insignificant. During the first quarter
of 2001, the Company also recorded income of $.2 million related to revisions to
estimates of previously established restructuring accruals. Most of the
remaining accrued costs are expected to be paid by mid-2001.
During the three months ended March 31, 2000, the Company recorded
additional special charges to cost of sales aggregating $6.7 million consisting
of $3.4 million in equipment-related impairment charges and $3.3 million of
environmental charges. Certain accrued environmental costs are reflected as
noncurrent liabilities in the consolidated balance sheet at March 31, 2001 as
they are expected to be paid over a period of up to thirty years.
Note 8 - Income taxes:
The difference between the Company's income tax benefit attributable to
pretax loss and the amounts that would be expected using the U.S. federal
statutory income tax rate of 35% is summarized below.
Three months ended March 31,
----------------------------
2001 2000
---------- ----------
(In thousands)
Expected income tax benefit, at 35% $ (569) $ (6,345)
Non-U.S. tax rates 144 195
U.S. state income taxes, net 109 (235)
Dividends received deduction (324) (360)
Adjustment of deferred tax valuation allowance (18) 423
Other, net 88 (62)
---------- ----------
$ (570) $ (6,384)
========== ==========
-14-
17
Note 9 - Other, net:
Three months ended March 31,
--------------------------------------
2001 2000
------------ -------------
(In thousands)
Dividends and interest income $ 1,532 $ 1,648
Gain on sale of castings joint venture -- 1,205
Other income (expense) 704 (324)
------------ -------------
$ 2,236 $ 2,529
============ =============
Note 10 - Commitments and contingencies:
For additional information concerning certain legal proceedings and
contingencies related to the Company, see (i) Part I, Item 2 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations," (ii)
Part II, Item 1 - "Legal Proceedings," and (iii) the 2000 Annual Report on Form
10K.
In March 2001, the Company was notified by one of its customers that a
product manufactured from standard grade titanium produced by the Company
contained what has been confirmed to be a tungsten inclusion. The Company
believes that the source of this tungsten was contaminated silicon purchased
from an outside vendor in 1998. The silicon was used as an alloying addition to
the titanium at the melting stage. The Company is currently investigating the
possible scope of this problem, including an evaluation of the applications to
which such material has been placed by customers.
At the present time, the Company is aware of three ingots that have
been demonstrated to contain tungsten inclusions; however, further investigation
may identify other material that has been similarly affected. During the first
quarter of 2001, the Company accrued an estimated loss of $1 million related to
this matter for costs that are reasonably estimable. Until this investigation is
completed, the Company is unable to determine the possible remedial steps that
may be required and the ultimate liability the Company may incur with respect to
this matter. The Company currently believes that it is unlikely that its
insurance policies will provide coverage for any costs that may be associated
with this matter. However, the Company currently intends to seek full recovery
from the silicon supplier for any liability the Company might incur in this
matter, although no assurances can be given that the Company will ultimately be
able to recover all or any portion of such amounts.
The Company is involved in various other environmental, contractual,
product liability and other claims, disputes and litigation incidental to its
business.
The Company currently believes the disposition of all claims and
disputes, individually or in the aggregate, should not have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
-15-
18
Note 11 - Subsequent events:
In April 2001, Valtimet, the Company's minority owned joint venture,
issued additional shares to a new joint venture partner, reducing TIMET's
ownership from 46% to 44%.
In April 2001, the Company reached a settlement of the previously
reported litigation between TIMET and The Boeing Company ("Boeing") relating to
the parties' 1997 long-term titanium purchase and supply agreement. Pursuant to
the settlement, TIMET received a cash payment of $82 million. The parties also
entered into an amended long-term agreement that, among other things, allows
Boeing to purchase up to 7.5 million pounds of titanium product annually from
TIMET through 2007,subject to certain maximum quarterly volume levels. Under a
separate agreement, TIMET will establish and hold titanium buffer stock for
Boeing at TIMET's facilities. See Part I, Item 2 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Outlook" for
additional information regarding the settlement with Boeing.
-16-
19
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Sales and Operations:
Three months ended March 31,
-------------------------------------
2001 2000
------------- --------------
($ in millions)
Net sales $ 124.0 $ 104.7
Gross margin 7.3 (3.3)
Operating loss (1.8) (18.4)
Percent change in:
Mill product sales volume +18
Mill product selling prices (1) -4
Melted product sales volume +75
Melted product selling prices (1) -3
(1) Change expressed in U.S. dollars and mix adjusted
Sales of $124 million in the first quarter of 2001 were 18% higher than
the first quarter of last year due principally from the net effects of an 18%
increase in mill product volume, a 4% decline in mill product selling prices
(expressed in U.S. dollars using actual foreign currency exchange rates
prevailing during the respective periods) and changes in product mix. In billing
currencies (which exclude the effects of foreign currency translation), mill
product prices decreased 1%. Melted product sales volume increased 75% from year
ago levels while selling prices declined 3%.
Gross margin (net sales less cost of sales) was 6% of sales in the
first quarter of 2001 compared to a negative 3% in the year-ago period,
principally reflecting changes in selling prices and product mix, higher
operating rates, and the effect of special items. Gross margins in 2000 were
adversely impacted by $6.7 million of special charges, consisting of a $3.4
million charge for the write-down associated with an impairment of certain
equipment and a $3.3 million charge for anticipated environmental remediation
costs.
Selling, general, administrative and development expenses in the first
quarter of 2001 decreased by approximately 6% from year-ago levels, principally
as a result of a $.4 million reduction in the Company's estimated allowance for
accounts receivable as well as reduced travel and other personnel costs.
Approximately 46% of the Company's European sales in the first quarter
of 2001 were denominated in currencies other than the U.S. dollar, principally
the British pound and European currencies tied to 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.
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The Company does not use currency contracts to hedge its currency
exposures. At March 31, 2001, consolidated assets and liabilities denominated in
currencies other than functional currencies were approximately $27 million and
$8 million, respectively, consisting primarily of U.S. dollar cash, accounts
receivable, accounts payable and borrowings.
Equity in earnings of joint ventures was $.9 million higher in the
first quarter of 2001 compared to the same period in 2000 principally due to an
increase in earnings of Valtimet, the Company's minority-owned welded tube joint
venture.
General corporate. General corporate income in both periods includes
interest income and dividend income on $80 million of nonvoting preferred
securities of Special Metals Corporation which accrues at an annual rate of
6.625%. General corporate income in the first quarter of 2000 includes a $1.2
million gain on the previously reported sale of the Company's interest in its
castings joint venture.
Interest expense. Interest expense in the first quarter of 2001 was
lower than in the comparable 2000 period, primarily due to lower borrowing
levels and slightly lower interest rates.
Income taxes. The Company's consolidated effective income tax rate
approximated the U.S. statutory rate in both periods. The Company operates in
several tax jurisdictions and is subject to various income tax rates. As a
result, the geographical mix of pretax income (loss) can impact the Company's
effective tax rate. See Note 8 to the Consolidated Financial Statements.
Minority interest. Dividend expense related to the Company's 6.625%
Convertible Preferred Securities approximated $3.3 million in both the 2001 and
2000 periods and is reported as minority interest, net of allocable income
taxes.
Outlook. The outlook section contains a number of forward looking
statements, all of which are based on current expectations. Actual results may
differ materially. See Note 10 to the Consolidated Condensed Financial
Statements - "Commitments and Contingencies" regarding commitments,
contingencies, legal, environmental, and other matters, which information is
incorporated herein by reference and may affect the Company's future results of
operations and liquidity.
Sales revenues in 2001 are expected to range from $500 million to $510
million, reflecting the net effects of increased sales volume, price increases
in certain products and changes in mix. The Company currently expects both mill
and melted product sales volume to increase 15% to 20% in 2001 over prior year
levels. Selling prices (expressed in U.S. dollars using actual currency exchange
rates during the respective periods) on aerospace product shipments, while
difficult to forecast, are expected to rise during 2001. However, recently
announced selling price increases are expected to principally affect the second
half of 2001 due to associated product lead times. Average selling prices per
kilogram, as reported by the Company, reflect the net effects of changes in
selling prices, currency exchange rates, and customer and product mix.
Accordingly, average selling prices are not necessarily indicative of any one
factor.
The Company's firm order backlog at the end of March 2001 was
approximately $290 million. Comparable backlogs at the end of December 2000 and
March 2000 were approximately $245 million and $185 million, respectively.
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Gross margins as a percent of sales are presently expected to increase
over the year, however, energy, raw material and other cost increases could
substantially offset expected realized selling price increases in 2001. TIMET is
experiencing increases in energy cost as a result of higher natural gas and
electricity prices in the U.S. The Company is also experiencing increases in the
cost for purchased titanium scrap. The Company currently believes its gross
margin for 2001 will approximate 7.5% of sales. Selling, general,
administrative, and development expenses should approximate $45 million,
excluding Boeing special items discussed below, while interest expense is
expected to approximate $3 million. Minority interest expense on the Company's
Convertible Preferred Securities is expected to approximate 2000 levels.
Excluding the Boeing special items, the Company expects to report an operating
loss and a net loss in 2001, but at substantially lower levels than 2000.
For the second quarter of 2001, sales revenue is expected to
approximate $120 million. Mill product sales volume is likely to be comparable
to first quarter levels while melted product sales volume may decline about 10%.
Most of the melted product (ingot and slab) that the Company produces is
consumed internally in the manufacture of mill products. Accordingly, melted
product sales volume can vary significantly from period to period and is
influenced by customer order mix and capacity availability. Gross margin in the
second quarter is expected to approximate 6.5% of sales. Selling, general,
administrative, and development expenses in the second quarter of 2001 should
increase slightly over first quarter levels, excluding Boeing special items.
Interest expense in the second quarter of 2001 is expected to approximate $1
million. Minority interest expense on the Company's Convertible Preferred
Securities is expected to approximate first quarter 2001 levels. Boeing special
items that are expected to be reported in the second quarter of 2001 are
discussed below.
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. Restructuring,
asset impairments and other special charges have occurred in the past and may
occur in the future causing operating results to vary from expectations.
In March 2001, the Company was notified by one of its customers that a
product manufactured from standard grade titanium produced by the Company
contained what has been confirmed to be a tungsten inclusion. The Company
believes that the source of this tungsten was contaminated silicon purchased
from an outside vendor in 1998. The silicon was used as an alloying addition to
the titanium at the melting stage. The Company is currently investigating the
possible scope of this problem, including an evaluation of the identities of
customers who received material manufactured using this silicon and the
applications to which such material has been placed by such customers.
At the present time, the Company is aware of only three ingots that
have been demonstrated to contain tungsten inclusions; however, further
investigation may identify other material that has been similarly affected.
During the first quarter of 2001, the Company accrued an estimated loss of $1
million related to this matter for costs that are reasonably estimable. Until
this investigation is completed, the Company is unable to determine the possible
remedial steps that may be required and whether the Company might incur any
material liability with respect to this matter. The Company currently believes
that it is unlikely that its insurance policies will provide coverage for any
costs that may be associated with this matter. However the Company currently
intends to seek full recovery from the silicon supplier for any liability the
Company might incur in this matter, although no assurances can be given that the
Company will ultimately be able to recover all or any portion of such amounts.
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In April 2001, the Company reached a settlement of the litigation
between TIMET and Boeing related to the parties' 1997 long term purchase and
supply agreement ("LTA"). Pursuant to the settlement, the Company received a
cash payment of $82 million. In the second quarter of 2001, the Company expects
to report approximately $73 million (cash settlement less legal fees) as other
operating income, with partially offsetting operating expenses of approximately
$8 million to $13 million for profit sharing and other costs to be reported as a
component of selling, general, administrative and development expense
(collectively the "Boeing special items"), resulting in a net pre-tax income
effect of $60 million to $65 million in such period.
In connection with the settlement, TIMET and Boeing also entered into
an amended LTA that, among other things, allows Boeing to purchase up to 7.5
million pounds of titanium product annually from TIMET through 2007, subject to
certain maximum quarterly volume levels. Under the amended LTA, Boeing will
advance TIMET $28.5 million annually for 2002 through 2007 (in December 2001 for
2002, with subsequent advances early each calendar year beginning 2003). The LTA
is structured as a take-or-pay agreement such that Boeing will forfeit a
proportionate part of the $28.5 million annual advance in the event that its
orders for delivery for such calendar year are less than 7.5 million pounds.
Under a separate agreement TIMET will establish and hold buffer stock for Boeing
at TIMET's facilities.
The Company's effective consolidated tax rate in 2001 should
approximate the U.S. statutory rate. However, the Company operates in several
tax jurisdictions and is subject to varying income tax rates. As a result, the
geographic mix of pretax income (loss) can impact the Company's overall
effective tax rate. For financial reporting purposes, the Company has recognized
the tax benefit of substantially all of its net operating loss carryforwards,
and expects that tax provisions and benefits to be recognized during 2001 will
principally be deferred income tax items with cash income tax payments expected
in certain foreign jurisdictions. For U.S. federal income tax purposes, the
Company had net operating loss carryforwards of approximately $100 million at
March 31, 2001 and, accordingly, does not expect the Boeing settlement to result
in any material cash income tax payments. The Company periodically reviews the
recoverability of its deferred tax assets to determine whether future
realization is more likely than not. Based on such periodic reviews, the Company
could record an additional valuation allowance related to its deferred tax
assets in the future.
The Company expects to generate positive cash flow from operations in
2001 in the range of $70 million to $90 million principally due to the Boeing
settlement and the related $28.5 million advance. Depreciation and amortization
expense should approximate $41 million in 2001. Receivables and inventory levels
are expected to increase in 2001 to support the anticipated increase in sales.
In April 2001, the Company announced that it intends to resume payment of
dividends on its Convertible Preferred Securities with the next scheduled
payment due on June 1, 2001. The Company also intends to pay the aggregate
amount of dividends that have been previously deferred on or before that date.
At March 31, 2001, accrued dividends approximated $14.5 million. Dividends on
the Company's common stock are prohibited under the Company's U.S. credit
agreement. Capital spending for 2001 is currently expected to range from $15
million to $20 million, covering principally capacity enhancements, capital
maintenance, and safety and environmental projects. The Company expects its
current net debt position to change to a net cash position during 2001. At March
31, 2001, the Company had approximately $107 million of borrowing availability
under its various worldwide credit agreements. The Company believes its cash,
cash flow from operations, and borrowing availability will satisfy its expected
working capital, capital expenditures and other requirements in 2001.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows provided by operating,
investing, and financing activities are presented below:
Three months ended March 31,
---------------------------------------
2001 2000
------------ ------------
(In millions)
Cash provided (used) by:
Operating activities:
Excluding changes in assets and liabilities $ 4.4 $ (1.3)
Changes in assets and liabilities (17.4) 19.2
------------ ------------
(13.0) 17.9
Investing activities (2.6) 4.9
Financing activities 10.6 (36.8)
------------ ------------
Net cash provided (used) by operating, investing
and financing activities $ (5.0) $ (14.0)
============ ============
Operating activities. Cash used by operating activities, excluding
changes in assets and liabilities, generally followed the trend in operating
results. Changes in assets and liabilities reflect primarily the timing of
purchases, production and sales and can vary significantly from period to
period. Accounts receivable increased in the first quarter of 2001 as a result
of both the increase in sales as well as sales levels being higher in the later
part of the quarter. Additionally, in the first quarter of 2000, there was a
significant reduction in receivables attributable to $16 million of customer
payments related to a previously reported bill and hold shipment in 1999.
Inventories decreased in the first quarter of 2001 principally as a result of a
continued emphasis on inventory management. Changes in accounts payable and
accrued liabilities reflect, among other things, the timing of payments to
suppliers of titanium sponge and other raw materials purchases.
Dividends on the Company's $80 million of Special Metals Corporation
6.625% convertible preferred securities had been deferred by SMC. However, in
April 2000, SMC resumed dividend payments of $1.3 million each quarter. There
can be no assurance that TIMET will continue to receive additional dividends in
the future.
The Company's Convertible Preferred Securities do not require principal
amortization, and TIMET has the right to defer dividend payments for one or more
periods of up to 20 consecutive quarters for each period. In April 2000, the
Company exercised its right to defer future dividend payments on these
securities for a period of 10 quarters, although interest continued to accrue at
the coupon rate on the principal and unpaid dividends. In April 2001, the
Company announced that it intends to resume payment of dividends on its
Convertible Preferred Securities with the next scheduled payment on June 1,
2001. The Company also intends to pay the aggregate amount of dividends that
have previously been deferred on or before the same date. At March 31, 2001,
accrued dividends on the Convertible Preferred Securities were approximately
$14.5 million.
Restructuring and special items are described in Note 7 to the
Consolidated Financial Statements.
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Investing activities. The Company's capital expenditures were $2.6
million for the three months ended March 31, 2001 compared to $2.1 million for
the same period in 2000 principally for capacity enhancements, capital
maintenance, and safety and environmental projects. In the first quarter of
2000, the Company sold its interest in the castings joint venture to
Wyman-Gordon for $7 million and recorded a pretax gain of $1.2 million.
Financing activities. At March 31, 2001, the Company's net debt was
approximately $50 million ($55 million of notes payable and debt, principally
borrowings under the Company's U.S. and U.K. credit agreements, less $5 million
of cash and equivalents). The Company also had approximately $107 million of
borrowing availability under its various worldwide credit agreements. Net
borrowings in the 2001 period were primarily attributed to funding of increases
in working capital. Net repayments in the 2000 period reflect reductions of
outstanding borrowings principally in the U.S.
Commitments and Contingencies. In April 2001, the Company received a
cash payment of $82 million in connection with the settlement of its litigation
with Boeing. The Company anticipates that such proceeds will be used to (i)
repay a substantial portion of the Company's outstanding revolving bank debt,
(ii) pay the deferred dividends on the Company's Convertible Preferred
Securities, and (iii) pay legal and other costs associated with the Boeing
settlement. See Part I, Item 2 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Outlook" for additional
information regarding the Boeing settlement, which information is incorporated
herein by reference.
See Note 10 to the Consolidated Financial Statements for additional
discussion of environmental and legal matters.
Other. The Company periodically evaluates its liquidity requirements,
capital needs and availability of resources in view of, among other things, its
alternative uses of capital, its debt service requirements, the cost of debt and
equity capital, and estimated future operating cash flows. As a result of this
process, the Company in the past has sought and in the future may seek, to raise
additional capital, modify its common and preferred dividend policies,
restructure ownership interests, incur, refinance or restructure indebtedness,
repurchase shares of capital stock, sell assets, or take a combination of such
steps or other steps to increase or manage its liquidity and capital resources.
In the normal course of business, the Company investigates, evaluates,
discusses and engages in acquisition, joint venture, strategic relationship and
other business combination opportunities in the titanium, specialty metal and
related 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.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The Company is exposed to market risk from changes in foreign
currency exchange rates and interest rates. The Company typically does not enter
into interest rate swaps or other types of contracts in order to manage its
interest rate market risk and typically does not enter into currency forward
contracts to manage its foreign exchange market risk associated with
receivables, payables and indebtedness denominated in a currency other than the
functional currency of the particular entity.
Interest Rates. Information regarding the Company's market risk
relating to interest rate volatility was disclosed in the Company's Form 10-K
for the year ended December 31, 2000 and should be read in conjunction with this
interim financial information. Since December 31, 2000, there has been no
significant change in the Company's exposure to market risks.
Foreign Currency Exchange Rates. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of its
international operations. See Item 2 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations," which information is
incorporated herein by reference.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Note 10 of the Consolidated Financial
Statements which information is incorporated herein by reference and to the
Company's 2000 Annual Report on Form 10K for descriptions of certain previously
reported legal proceedings.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Settlement Agreement and Release of Claims dated
April 19, 2001 between Titanium Metals Corporation
and the Boeing Company
(b) Reports on Form 8-K:
Reports on Form 8-K filed by the Registrant for the quarter
ended March 31, 2001 and the month of April, 2001:
Date of Report Items Reported
---------------------- ------------------
January 11, 2001 - 5 and 7
January 12, 2001 - 5 and 7
January 29, 2001 - 5 and 7
April 23, 2001 - 5 and 7
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TITANIUM METALS CORPORATION
------------------------------------------
(Registrant)
Date: May 7, 2001 By /s/ Mark A. Wallace
------------------------ ------------------------------------------
Mark A. Wallace
(Executive Vice President and
Chief Financial Officer)
Date: May 7, 2001 By /s/ JoAnne A. Nadalin
------------------------ ------------------------------------------
JoAnne A. Nadalin
Vice President and Corporate Controller
(Principal Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Settlement Agreement and Release of Claims dated April 19, 2001 between
Titanium Metals Corporation and the Boeing Company