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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the fiscal year ended December 31, 1996
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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
(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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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Stock Nasdaq National Market
($.01 par value per share)
Securities registered pursuant to Section 12(g) of the Act:
None.
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of February 28, 1997, 31,456,655 shares of common stock were outstanding.
The aggregate market value of the 16.8 million shares of voting stock held by
nonaffiliates of Titanium Metals Corporation as of such date approximated $459
million.
Documents incorporated by reference:
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this report.
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Forward-Looking Information
The statements contained in this Annual Report on Form 10-K which are
not historical facts, including, but not limited to, statements found in Item 1
- - - Business, Item 3 - Legal Proceedings and Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations are forward-looking
statements or discussions of trends which by their nature involve substantial
risks and uncertainties that could significantly impact expected results.
Actual future results could differ materially from those described in such
forward-looking statements. Among the factors that could cause actual results
to differ materially are the risks and uncertainties discussed in this Annual
Report, including in the portions referenced above and those described from
time to time in the Company's other filings with the Securities and Exchange
Commission, such as the cyclicality of the Company's business and its
dependence on the aerospace industry, the sensitivity of the Company's business
to industry capacity, the possibility of labor disruptions, control by certain
stockholders and possible conflicts of interest, potential difficulties in
integrating acquisitions, uncertainties associated with new product development
and the supply of raw materials and services.
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PART I
ITEM 1: BUSINESS
General. Titanium Metals Corporation ("TIMET" or "the Company") is one
of the world's leading integrated producers of titanium sponge and mill
products, has the largest sales volume worldwide and is the largest supplier of
titanium to the aerospace and industrial markets. The Company believes it is
the low-cost producer of titanium sponge and melt products. Due to its
economies of scale, manufacturing expertise and past investment in technology,
TIMET believes that it is well-positioned to capitalize on the improved
fundamentals in the titanium industry.
TIMET's products include: titanium sponge, the basic form of titanium
metal used in processed titanium products; titanium ingot and slab, the result
of melting sponge and titanium scrap, either alone or with various other
alloying elements; and forged and cast products produced from ingot or slab,
including billet, bar, flat products (plate, sheet, and strip), tubular
products (welded tubing and pipe), extrusions, wire and castings.
Titanium is one of the newest specialty metals, having first been
manufactured for commercial use in the 1950s. Titanium's unique combination of
corrosion resistance, elevated-temperature performance and high
strength-to-weight ratio makes it particularly desirable for use in commercial
and military aerospace applications in which these qualities are essential
design requirements. While aerospace applications have historically accounted
for a substantial portion of the worldwide demand for titanium (more than half
of the Company's sales in 1996), the number of end-use markets for titanium has
expanded substantially. Today, numerous industrial uses for titanium exist,
including chemical plants, industrial power plants, desalination plants and
pollution control equipment. Customer demand for titanium is also increasing in
new and emerging uses such as medical implants, golf club heads, other sporting
equipment, offshore oil and gas production installations, geothermal
facilities, and possible automotive and computer uses.
The titanium industry is comprised of several manufacturers which,
like the Company, produce a relatively complete range of titanium products. The
Company believes that at least 90% of the world's titanium sponge is produced
by six companies. However, there are a significant number of producers
worldwide that manufacture a limited range of titanium mill products.
Recent Acquisitions and Capital Transactions. At the beginning of
1996, the Company was owned by Tremont Corporation (75%) and Union Titanium
Sponge Corporation ("UTSC") (25%), and its operations were conducted primarily
in the United States.
In February 1996, the Company acquired its TIMET UK and TIMET Castings
operations from IMI plc (the "IMI Titanium Acquisition"). TIMET UK is Western
Europe's largest producer of titanium ingot and mill products for aerospace and
industrial applications. TIMET Castings manufactures titanium castings for
aerospace applications and golf club heads. In connection with the IMI Titanium
Acquisition, the Company issued (i) 9.6 million shares of common stock to IMI
valued at $70 million at the date of issue and (ii) $20 million of the
Company's subordinated debt to IMI in exchange for a like amount of debt
previously owed to IMI by its UK titanium subsidiary. In addition, Tremont and
UTSC received an option to acquire from IMI a portion of the common stock
issued to IMI.
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In June 1996, the Company completed an initial public stock offering
(the "Stock Offering") pursuant to which the Company sold 6.2 million shares of
common stock, and its shareholders (Tremont, UTSC and IMI) sold an additional
10.5 million shares of common stock. The price to the public in the Stock
Offering was $23 per share. Following the Stock Offering, approximately 54% of
TIMET's outstanding common stock was held by the public, 6% by IMI, 10% by UTSC
and 30% by Tremont. Tremont and UTSC have the option to acquire the shares
currently held by IMI. The Company's net proceeds from the Stock Offering
approximated $131 million and were used primarily to repay indebtedness,
including all amounts owed to Tremont and IMI.
In October 1996, the Company acquired certain assets from Axel Johnson
Metals, Inc. ("AJM") (the "AJM Acquisition"). The acquired assets included the
50% interest in Titanium Hearth Technologies ("THT") not already owned by the
Company and AJM's titanium scrap business. The purchase price of the AJM
Acquisition, including transaction costs, was $97 million cash, which was
funded by borrowings under the Company's U.S. credit facility.
In November 1996, the Company issued $201 million of Company-obligated
mandatorily redeemable preferred securities (the "Convertible Preferred
Securities") through a trust, TIMET Capital Trust I, and used a portion of the
proceeds to repay the borrowings incurred in conjunction with the AJM
Acquisition. The remaining proceeds will be used for general corporate
purposes. The Convertible Preferred Securities are convertible, subject to
certain limitations, into an aggregate of 5.4 million shares of common stock.
In addition, the Company completed acquisitions of 70% of CEZUS'
titanium business ("TIMET Savoie") in France (August 1996) and 100% of TISTO
(July 1996) and LASAB (January 1997) in Germany to enhance TIMET's titanium
manufacturing, distribution and technology capabilities in Europe.
In March 1997, TIMET announced that it had executed definitive
agreements to combine its welded tubing operations with those of Valinox
Welded, a French manufacturer of welded tubing, principally stainless steel and
titanium, with operations in France and China. The joint venture, "Valtimet",
would be 46% owned by TIMET and 54% owned by Valinox Welded. TIMET will supply
titanium strip product to Valtimet under a long-term contract as the preferred
supplier. The transaction is expected to close during the second quarter of
1997. The effect of the transaction on TIMET's near-term financial results is
not expected to be material.
The Company intends to focus on the following strategic objectives:
o Maximize its participation in the aerospace industry recovery by
focusing on the Company's basic strengths of sponge production,
melting, forging and casting of various shapes of titanium
products.
o Invest in technology and innovative projects aimed at reducing
costs and enhancing productivity, quality and production
capacity.
o Lower the cost of sourcing raw materials.
o Invest in strategic alliances, new markets, applications and
products as well as acquisitions.
o Maintain a strong balance sheet.
Recent Industry Recovery. The titanium industry suffered a downturn in
the early 1990's, and in each of 1991 to 1995 the Company reported a net loss.
The cyclical nature of the aerospace industry has historically been the
principal cause of the fluctuations in performance of titanium companies with
cyclical peaks in mill products shipments in 1980 and 1989, and with cyclical
lows in 1983 and 1991. Industry shipments remained relatively flat from 1991 to
1994.
Since 1995, the titanium industry has improved due to a combination
of factors including a resurgence in commercial aerospace demand, continuing
and stable industrial demand and the emergence of new uses for titanium,
including golf club heads. U.S.
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industry mill product shipments in 1995 increased 26% from 1994. In 1996, U.S.
industry mill product shipments were an estimated 57 million pounds, up 31%
from 1995 with U.S. shipments to the commercial aerospace market an estimated
25 million pounds, up 40% from the prior year. In addition, U. S. industry mill
product shipments to the golf club market in 1996 were approximately 8 to 10
million pounds compared to virtually none in 1994. While worldwide industry
shipments are not as readily tracked as U.S. shipments (in large part due to
uncertainties of shipments by companies located in the former Soviet Union),
the Company believes U.S. trends are a reasonable proxy for worldwide trends.
Aerospace demand for titanium products, which includes both jet
engines and air frames, can be broken down into commercial and military
sectors. Since 1987, sales to the commercial aerospace sector have been more
significant than to the military aerospace markets. The commercial aerospace
sector is expected to continue its predominance as a result of the expected
growth of worldwide airline traffic, new orders for aircraft, and replacement
and repair of the commercial airline fleet. Due to improved fundamentals, the
commercial airline industry reported operating profits of over $16 billion
(estimated) in 1996, $6 billion in 1995 and $2 billion in 1994 compared to
cumulative losses in excess of $5 billion in the 1990 to 1993 period. Most major
carriers are investing in upgrading and expanding their fleets. The Company can
give no assurance as to the extent or duration of any recovery in the commercial
aerospace market or the extent to which such recovery will result in increased
demand for titanium products.
Since titanium's initial aerospace applications, the number of end-use
markets for titanium has expanded substantially. Existing industrial uses for
titanium include chemical plants, industrial power plants, desalination plants,
and pollution control equipment. Titanium is also experiencing increased
customer demand in new and emerging uses such as medical implants, golf club
heads, other sporting equipment, offshore oil and gas production installations,
geothermal facilities, and possible automotive and computer uses. Several of
these applications represent potential growth opportunities that may reduce the
industry's historical dependence on the aerospace market.
TIMET's strategy for investing in new markets and uses for titanium
includes investing in promising ventures and capital opportunities. In this
regard, during March 1997 the Company announced it will invest up to $5 million
in Titanium Memory Systems, Inc. ("TMS") for an approximate 20% equity interest
in TMS. The funds will be used by TMS to continue its development and
production of a titanium substrate for use in computer hard disk drives.
Products and Operations. The Company is a vertically integrated
titanium producer whose products include: titanium sponge, the basic form of
titanium metal used in processed titanium products; titanium ingot and slab,
the result of melting sponge and titanium scrap, either alone or with various
other alloying elements; and forged and cast products produced from ingot or
slab, including billet, bar, flat products (plate, sheet, and strip), tubular
products (welded tubing and pipe), extrusions, wire and castings. The titanium
product chain is described below.
Titanium sponge (so called because of its appearance) is the
commercially pure, elemental form of titanium metal. The first step in sponge
production involves the chlorination of titanium-containing rutile ores,
derived from beach sand, with chlorine and coke to produce titanium
tetrachloride. Titanium tetrachloride is purified and then reacted with
magnesium in a closed system, producing titanium sponge and magnesium chloride
as co-products. A portion of the Company's titanium sponge production capacity
in Henderson, Nevada, incorporates Vacuum Distillation Process ("VDP")
technology, which removes the magnesium and magnesium chloride residues by
applying heat to the sponge mass while maintaining vacuum in the chamber. The
combination of heat and vacuum boils the residues from the reactor mass into
the condensing vessel. The titanium mass is then mechanically pushed out of the
original
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reactor, sheared and crushed, while the residual magnesium chloride is
electrolytically separated and recycled. The balance of the Company's sponge
production capacity uses the original Kroll-leach process, using a leaching
process rather than distillation to remove residues.
Titanium ingots and slab are solid shapes (cylindrical and
rectangular, respectively) that weigh up to 17,500 pounds in the case of ingots
and up to 35,000 pounds in the case of slabs. Each is formed by melting
titanium sponge or scrap or both, usually with various other alloying elements
such as vanadium, aluminum, molybdenum, tin and zirconium. Titanium scrap is a
by-product of milling and machining operations, and significant quantities of
scrap are generated in the production process for most finished titanium
products. The melting process for ingots and slabs is closely controlled and
monitored utilizing computer control systems to maintain product quality and
consistency and meet customer specifications.
Titanium mill products result from the forging, rolling, drawing
and/or extrusion of titanium ingots or slabs into products of various sizes and
grades. These mill products include titanium billet, bar, rod, wire, plate,
sheet, strip, extrusions, pipe and tube. The Company sends certain products to
outside vendors for further processing before being shipped to customers or to
the Company's service centers. The Company's customers usually process the
Company's products for their ultimate end-use or for sale to third parties.
Titanium cast products are produced by remelting ingot or billet and
pouring molten metal into a cast, the cavity of which has been created in the
shape of the part to be produced. After the metal has cooled and solidified,
the part is removed from the cast and delivered to the customer or a third
party for finishing. The casting process provides significant flexibility in
the shapes that can be produced and is frequently utilized in forming tolerance
critical components such as diffusers, fan frames, seal rings, fluid system
components and missile components.
During the production process and following the completion of
products, the Company performs extensive testing on its products, including
sponge, mill products and castings. Testing may involve chemical analysis,
mechanical testing, ultrasonic testing, x-ray and dye penetration testing. The
inspection process is critical to ensuring that the Company's products meet the
high quality requirements of customers, particularly in aerospace components
production.
The Company is dependent upon the services of outside processors to
perform important processing functions with respect to certain of its products.
In particular, the Company currently relies upon a single processor to perform
certain rolling steps with respect to some of its plate, sheet, and strip
products, and upon a single processor to perform certain finishing and
conditioning steps with respect to its THT slab products. Although the Company
believes that there are numerous metal producers with the capability to perform
these same processing functions, arranging for an alternative processor or, in
THT's case, possibly installing comparable capabilities, could take several
months and any interruption in these functions could have a material and
adverse effect on the Company's business, results of operations, financial
condition and cash flows in the short term.
In 1996, proforma for the IMI Titanium and AJM Acquisitions, over 90%
of the Company's sales were generated from the sale of titanium ingot, slab, a
wide variety of mill products and castings with the balance from sales of
titanium tetrachloride, sponge and other by-products.
Raw Materials. The principal raw materials used in the production of
titanium mill and cast products are titanium sponge, titanium scrap and
alloying materials. The Company is the only domestic integrated titanium
products producer that processes rutile ore into titanium tetrachloride and
further processes the titanium tetrachloride into titanium sponge. As a result,
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the Company is less susceptible to fluctuations in the market price of titanium
sponge than its competitors. In 1996, the Company produced 18 million pounds of
sponge, of which 4.4 million pounds were sold to UTSC pursuant to a sponge
purchase agreement and the remainder of which was used internally.
While the Company is one of six major worldwide producers of titanium
sponge, a basic raw material in the production of titanium ingot and mill
products, under current market conditions it cannot supply all of its needs for
titanium sponge internally and is dependent, therefore, on third parties for a
portion of its needs. The Company obtains sponge from four suppliers in Japan
and the former Soviet Union, both on a spot purchase basis and, with respect to
a portion of these purchases from three of such producers, pursuant to
contracts that permitted the Company to purchase an aggregate of 10 million
pounds of sponge at specified or fixed prices through the end of 1996. Each
contract is subject to renegotiation or termination if certain events occur.
The Company has entered into, or expects to enter into, similar contracts with
such suppliers for approximately 25 million pounds of sponge in 1997. Average
spot prices of titanium sponge sold by producers in the former Soviet Union
have more than doubled in the U.S. since the first quarter in 1994 and have
increased substantially outside of the U.S. Market conditions have generally
enabled the Company to pass such increases to its customers.
The primary raw materials used in the production of titanium sponge
are titanium-containing rutile ore, chlorine, magnesium and coke. Chlorine,
magnesium, and coke are generally available from a number of suppliers.
Titanium-containing rutile ore is currently available from a number of
suppliers around the world, principally located in Australia, Africa (South
Africa and Sierra Leone), India and the United States. A majority of the
Company's supply of rutile ore is currently purchased from Australian
suppliers. The Company believes the availability of rutile ore will be adequate
through the remainder of the decade and does not anticipate any interruptions
of its raw material supplies, although political or economic instability in the
countries from which the Company purchases its raw materials could materially
and adversely affect availability. In addition, although the Company believes
that the availability of rutile ore is adequate in the near-term, there can be
no assurance that the Company will not experience interruptions. Various
alloying elements used in the production of titanium ingot are available from a
number of suppliers.
Markets and Customer Base. About 65% of the Company's 1996 sales were
to customers within North America, with about 30% to European customers and the
balance to other regions. No single customer represents more than 10% of the
Company's direct sales. However, in 1996 about 60% of the Company's sales were
used by the Company's customers to produce parts and other materials for the
aerospace industry. The Company expects that while a majority of its 1997 sales
will also be to the aerospace sector, industrial and consumer goods markets
will continue to represent a significant portion of sales.
The aerospace industry is dominated by three major manufacturers of
commercial aircraft (two of which, Boeing and McDonnell Douglas, are proposing
to combine) and four major manufacturers of aircraft engines. Typically, the
Company's sales are not made directly to the major aircraft and engine
manufacturers but rather to companies who use the Company's titanium to produce
parts and other materials for such manufacturers. For example, from 1994
through 1996, less than 1% of the Company's sales were made directly to Boeing,
the largest aircraft manufacturer. However, if any of the major aerospace
manufacturers were to significantly reduce its activities, there could be a
material adverse effect on certain of the Company's direct customers who supply
to such manufacturer and, therefore, indirectly on the Company.
The Company's order backlog was approximately $440 million at December
31, 1996 compared to a combined TIMET/IMI/AJM backlog of $226 million at
December 31, 1995. Approximately 95% of the 1996 year end backlog is expected
to be delivered during 1997.
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Although the Company believes that the backlog is a reliable indicator of
future business activity, conditions in the aerospace industry could change and
result in future cancellations or deferrals of existing aircraft orders and
materially and adversely affect the Company's existing backlog, orders, and
future financial condition and operating results.
As of December 31, 1996, the estimated firm order backlog for Boeing,
McDonnell Douglas and Airbus, as reported by The Airline Monitor, was 2,370
planes versus 1,869 planes on December 31, 1995, an increase of 27%. The newer
wide body planes, such as the Boeing 777, and the Airbus A-330 and A-340, tend
to use a higher percentage of titanium in their frames, engines and parts (as
measured by total fly weight) than narrow body planes. "Fly weight" is the
empty weight of a finished aircraft with engines but without fuel or
passengers. The Boeing 777, for example, utilizes titanium for approximately 9%
of total fly weight, compared to between 2% to 3% on the older 737, 747 and 767
models. The estimated firm order backlog for wide body planes at year end 1996
was 767 (32% of total backlog) compared to 682 at the end of 1995. Growth in
firm order backlog for narrow body aircraft has also been strong, having
increased 35% during 1996 to 1,603.
Through various strategic relationships, the Company seeks to gain
access to unique process technologies for the manufacture of its products and to
expand existing markets and create and develop new markets for titanium. The
Company has explored and will continue to explore strategic arrangements in the
areas of product development, production and distribution. The Company also will
continue to work with existing and potential customers to identify and develop
new or improved applications for titanium that take advantage of its unique
qualities. In this regard, the Company has, among other things, been exploring a
potential strategic relationship with a large titanium producer in Russia. The
Company believes that such a relationship could lead to a substantial expansion
of the market for titanium products worldwide, particularly in emerging
applications. The establishment of this relationship, which the Company does not
currently anticipate would involve significant investment, would entail
significant uncertainty and would be subject to various conditions. No
assurances can be given that the relationship will be formed or, if formed, as
to the nature of the relationship. In connection with the Company's efforts to
establish such a relationship, the Company has purchased 2.8 million pounds of
intermediate and finished mill products from such producer in 1995 and 3 million
pounds in 1996.
Competition. The titanium metals industry is highly competitive on a
worldwide basis as a result of many factors, particularly the presence of
excess capacity in the industry, which has intensified price competition for
available business. Producers of mill products are located primarily in the
United States, Japan, Russia, Europe and China. The Company is one of four
integrated producers in the world. The Company regards as an integrated
producer one that produces at least both sponge and ingot. There are also a
number of non-integrated producers that produce mill products from purchased
sponge, scrap or ingot. The Company believes that the sponge production
capacity and actual production in the former Soviet Union may be as much as
one-half of aggregate worldwide levels and that significant unused production
capacity may exist in this region. Russia is also known to have significant
melting and mill product production capacity.
The Company estimates that in 1996 it accounted for approximately 15%
of world sponge capacity and 24% of worldwide shipments of titanium mill
products. The Company's principal competitors include RMI Titanium Company,
Oregon Metallurgical Corporation ("OREMET"), and Allegheny Teledyne Allvac. The
Company's principal competitors in its U.S. castings business are Precision
Cast Parts, Howmet, Selmet and Coast Cast. The Company competes primarily on
the basis of price, quality of products, technical support and the availability
of products to meet customers' delivery schedules.
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In the U.S. market, the increasing presence of non-U.S. participants
has become a significant competitive factor. Until 1993, imports of foreign
titanium products into the U.S. had not been significant. This was primarily
attributable to relative currency exchange rates, tariffs and, with respect to
Japan and the former Soviet Union, existing and prior duties (including
antidumping duties). However, imports of titanium sponge, scrap, and mill
products, principally from the former Soviet Union, have increased in recent
years and have had a significant competitive impact on the U.S. titanium
industry. To the extent the Company has been able to take advantage of this
situation by purchasing such sponge, scrap or intermediate mill products from
such countries for use in its own operations during recent years, the negative
effect of these imports on the Company has been somewhat diminished.
Currently, imports of titanium ingot and mill products from countries
that receive the Most Favored Nation ("MFN") tariff rate are subject to a 15%
tariff. The tariff rate applicable to imports from countries that do not
receive MFN treatment is 45%. In addition to regular tariffs, imports of
titanium sponge from certain countries of the former Soviet Union (Russia,
Kazakhstan and Ukraine) have been subject to antidumping duties of 84% for a
number of years. In November 1996, the Department of Commerce, based upon its
review of sales during a period in 1994 and 1995, issued its final
determination that this antidumping duty should be eliminated for future sales
by one of the two major importers of Russian sponge, lowered to 28% for the
other importer, and maintained at 84% for the sole Russian producer. A review
of sales for the corresponding 1995-96 period is currently underway. It is
possible that the lowering of the duties for the two importers could lead to
increased imports of Russian sponge into the U.S. and an increase in the amount
of sponge on the market generally, which could adversely affect titanium sponge
and mill product pricing and thus the business, financial condition, results of
operations and cash flows of the Company. However, the Company is also
currently one of the largest importers of Russian-produced sponge into the U.S.
and to the extent the Company remains a substantial purchaser of Russian
sponge, adverse effects on product pricing could be partially ameliorated by
decreased cost to the Company for duty-paid sponge.
The ability of the producers in Russia to compete in the U.S. has also
been enhanced by the elimination since September 1993 of tariffs on most
Russian titanium mill products (excluding titanium ingot, slab and billet,
which continue to carry a 15% duty). Since the Company has been a significant
purchaser of titanium products from Russia in recent years, any failure to
renew this program again upon its scheduled expiration in May 1997 or otherwise
could have an adverse effect on the Company's earnings as it would be more
costly to continue purchases of titanium mill products from Russia. Given the
current political and economic uncertainties in some of the countries of the
former Soviet Union, there can be no assurance that this supply of titanium
products will continue to be available to the Company without interruption or at
attractive prices.
Producers of other metal products, such as steel and aluminum,
maintain forging, rolling and finishing facilities that could be modified
without substantial expenditures to produce titanium products. The Company
believes, however, that entry as a producer of titanium sponge would require a
significant capital investment and substantial technical expertise. Titanium
mill products also compete with stainless steels, nickel alloys, steel,
plastics, aluminum and composites in certain applications.
Research and Development. The Company's research and development
activities are directed toward improving process technology, developing new
alloys, enhancing the performance of the Company's products in current
applications, and searching for new uses of titanium products. For example, one
of the Company's proprietary alloys, TIMETAL(R)21S, has been specified for a
number of aerospace applications including the Boeing 777. Additionally,
TIMETAL LCB, a new low cost beta alloy, is being tested for new non-aerospace
applications; and TIMETAL 15-3 has been introduced into the sporting goods
markets. The Company
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conducts the majority of its research and development activities at its Nevada
laboratory, which the Company believes is one of the largest titanium research
and development centers in the world. Additional research and development
activities are performed at the Witton, England facility. The Company's research
and development expenditures have approximated $2 million during each of the
past three years and are expected to be approximately $3 million in 1997.
Patents and Trademarks. The Company holds U.S. and non-U.S. patents
applicable to certain of its titanium alloys and manufacturing technology. The
Company continually seeks patent protection with respect to its technical base
and has occasionally entered into cross-licensing arrangements with third
parties. However, most of the titanium alloys and manufacturing technology used
by the Company do not benefit from patent or other intellectual property
protection. The Company believes that the trademarks TIMET(R) and TIMETAL,
which are protected by registration in the U.S. and other countries, are
significant to its business.
Employees. As of December 31, 1996, the Company employed approximately
2070 persons in the U.S. and approximately 880 persons in Europe. The Company's
production and maintenance workers in Henderson, Nevada and its production,
maintenance, clerical and technical workers in Toronto, Ohio are represented by
the United Steelworkers of America ("USWA") under contracts expiring in October
2000 and June 1999, respectively. Employees at the Company's other U.S.
facilities are not covered by collective bargaining agreements. In February
1997, employees at TIMET Castings' Albany, Oregon facility voted to not be
represented by the USWA.
Substantially all of the salaried and hourly employees at the
Company's European facilities are members of various European labor unions. In
January 1997, new one-year agreements covering the U.K. and French union
employees were entered into, providing for modest wage increases in 1997.
The USWA engaged in a nine month work stoppage at the Company's
Henderson facility in 1993 - 1994 and in a three month stoppage at the Toronto
facility in 1994. While the Company currently considers its employee relations
to be satisfactory, it is possible that there could be future work stoppages
that could materially and adversely affect the Company's business, financial
condition, results of operations or cash flows.
Regulatory and Environmental Matters. The Company's operations are
governed by various Federal, state, local and foreign environmental and worker
safety laws and regulations. In the U.S., such laws include the Federal Clean
Air Act, the Clean Water Act and the Resource Conservation and Recovery Act.
The Company uses and manufactures substantial quantities of substances that are
considered hazardous or toxic under environmental and worker safety and health
laws and regulations. In addition, at the Company's Henderson facility, the
Company uses substantial quantities of titanium tetrachloride, a material
classified as extremely hazardous under Federal environmental laws. The Company
has used such substances during substantially the entire history of its
operations. As a result, risk of environmental damage is inherent in the
Company's operations. The Company's operations pose a continuing risk of
accidental releases of, and worker exposure to, hazardous or toxic substances.
There is also a risk that government environmental requirements, or enforcement
thereof, may become more stringent in the future. There can be no assurances
that some, or all, of the risks discussed under this heading will not result in
liabilities that would be material to the Company's business, results of
operations, financial condition or cash flows.
The Company's operations in Europe are similarly subject to foreign
laws and regulations respecting environmental and worker safety matters, which
laws are generally less stringent than U.S. laws and which have not had, and
are not presently expected to have, a material adverse effect on the Company.
There can be no assurance that such foreign laws will not become more
stringent.
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The Company believes that its operations are in compliance in all
material respects with applicable requirements of environmental and worker
safety laws. The Company's policy is to continually strive to improve
environmental performance. From time to time, the Company may be subject to
environmental regulatory enforcement under various statutes, resolution of
which typically involves the establishment of compliance programs.
Occasionally, resolution of these matters may result in the payment of
penalties, but to date no material penalties have been incurred. The Company
incurred capital expenditures for environmental protection and compliance of
less than $1 million in each of the past three years and its capital budget
provides less than $1 million for such expenditures in 1997. However, the
imposition of more strict standards or requirements under environmental laws
and regulations could result in expenditures in excess of amounts estimated to
be required for such matters.
See Note 16 to the Consolidated Financial Statements - "Commitments
and Contingencies - Environmental Matters," which information is incorporated
herein by reference. The Company determines the amount of its accruals for
environmental matters on a quarterly basis by analyzing and estimating the
range of possible costs in light of the available information. Because of a
lack of relevant information, 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 or non-operating
facilities, or a determination that the Company is potentially responsible for
the release of hazardous substances at other sites, could result in
expenditures 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. The Company expects to adopt the recognition and disclosure
requirements of AICPA's Statement of Position No. 96-1, "Environmental
Remediation Liabilities" in 1997. The new rule, among other things, expands the
types of costs which must be considered in determining environmental
remediation accruals. The effect of adopting this new Statement of Position is
not expected to be material. The Company currently believes the disposition of
all known environmental matters, individually or in the aggregate, should not
have a material adverse effect on the Company's business, results of
operations, financial condition, or cash flows.
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ITEM 2: PROPERTIES
Set forth below is a listing of the Company's manufacturing
facilities. In addition to its U.S. sponge capacity discussed below, the
Company's current worldwide rated melting capacity aggregates approximately 84
million pounds, and its rated mill products and castings capacity aggregates
approximately 36 million pounds.
Manufacturing Location Products Manufactured
- - ---------------------- ---------------------
Henderson, Nevada+ Sponge, Ingot
Morgantown, Pennsylvania+ Slab, Ingot, Raw Materials Processing
Vallejo, California* Slab, Ingot (including non-titanium
superalloys)
Verdi, Nevada* Slab, Ingot
Toronto, Ohio+ Billet, Bar, Plate, Sheet, Strip, Tube, Pipe
Morristown, Tennessee+ Tube, Sheet, Plate
Albany, Oregon+ Castings
Pomona, California* Castings
Witton, England* Ingot, Billet, Wire, Extrusions
Ugine, France* Ingot, Bar, Billet, Wire, Extrusions
Waunarlwydd (Swansea), Wales+ Bar, Plate, Sheet
- - ----------------
+ Owned facilities
* Leased facilities
TIMET UK's Witton facilities are leased from IMI pursuant to long-term
capital leases. TIMET Savoie has the right, on a long-term basis, to utilize
portions of CEZUS' plant in Ugine. The Company's raw materials processing
operations are currently being relocated from leased facilities to the
company-owned facility in Morgantown.
United States Production. The Company's VDP sponge facility operated
at approximately 85% of its annual practical capacity of 20 million pounds
during 1996, up from 75% in 1995. The plant produces VDP sponge principally as
a raw material for a 30 million pound annual practical capacity ingot melting
facility, also at the Nevada site, and for the THT cold hearth melting
facilities. Titanium mill products are principally produced at a forging and
rolling facility in Ohio, which receives titanium ingots from the Nevada plant,
titanium slabs from THT and titanium slabs and hot bands purchased from outside
vendors including those located in Russia. Certain mill products are also
produced at the Tennessee finishing facility.
The Company's Henderson melting facility operated at about 65% of
capacity in 1996 (1995 - 45%). The Ohio and Tennessee facilities each operated
at about 80% of capacity in 1996, compared to about 40% and 60%, respectively,
in 1995. The Company closed its original 32 million pound rated capacity
Kroll-leach process sponge production facility in Nevada in 1994. However, in
connection with market demand for certain grades of sponge, the Company
reopened its original Kroll-leach plant, producing approximately 1.4 million
pounds in 1996. The Company expects to increase Kroll-leach production to an
annual rate of approximately 10 million pounds during 1997. Costs to restart
the Kroll-leach facility approximated $2 million in 1996.
THT operates four electron beam cold hearth melting furnaces
(aggregate 31.5 million pound annual capacities) located in Pennsylvania (two),
Nevada, and California, raw materials processing operations located in
Pennsylvania, and a 1.5 million pound annual capacity vacuum induction melting
furnace located in California. TIMET Castings, with plants located in
California and Oregon, produces titanium castings used principally for
aerospace applications
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and golf club heads. THT operated at approximately 95% of aggregate capacity in
1996 while TIMET Castings operated at approximately 65% of aggregate capacity.
European Production. TIMET UK operates a 16 million pound practical
capacity melting facility in Witton, England which produces ingots sold to
customers and used as raw material feedstock for its forging and rolling
operations in Witton, which process the ingots principally into billet and
wire. TIMET UK's Witton facility also provides stock to its facility in
Waunarlwydd, Wales, which principally produces bar and plate. TIMET UK
purchases its requirements of sponge principally from suppliers located in
Japan and the former Soviet Union. The Witton facility operated at
approximately 90% of capacity in 1996, while the Wales facility operated at
approximately 60%.
Capacity of TIMET Savoie in Ugine, France is to a certain extent
dependent upon the level of activity in CEZUS' zirconium business, which may
from time to time provide TIMET Savoie with capacity in excess of that
contractually required to be provided by CEZUS. During 1996, TIMET Savoie
operated at approximately 100% of the capacity required to be provided by
CEZUS.
Distribution. The Company's marketing and distribution system includes
seven Company-owned service centers (four in the U.S. and three in Europe)
which sell the Company's products on a just-in-time basis, approximately 70
sales people based in the U.S. and Europe and 30 independent agents worldwide.
The Company believes that it has a competitive sales and cost
advantage arising from the location of its production plants and service
centers, which are in close proximity to major customers. These centers
primarily sell value-added and customized mill products including bar and
flat-rolled sheet and strip. The Company believes its service centers give it a
competitive advantage because of their ability to foster customer
relationships, customize products to suit specific customer requirements and
respond quickly to customer needs.
ITEM 3: LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. Certain
litigation (Cadmus/Sutherin, Ray Cook Golf and Tungsten contamination) is
described in Note 16 of the Consolidated Financial Statements, which
information is incorporated herein by reference.
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ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1996.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
TIMET's common stock is traded on the Nasdaq National Market (symbol:
"TIMT"). On March 27, 1997 the closing price of TIMET common stock according to
the Nasdaq National Market Composite Tape was $25.25 per share. The high and
low sales prices for the Company's common stock, according to the NASDAQ
Composite Tape, are set forth below.
Year ended December 31, 1996: High Low
---- ---
Second quarter (from June 4, 1996) $ 25.875 $ 24.375
Third quarter 30.500 22.500
Fourth quarter 35.875 28.250
As of February 28, 1997, there were approximately 14,000 common
shareholders of record.
The Company has not declared any cash dividends during the last four
years. Any payment of future dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other things, the
Company's earnings, financial condition, capital requirements, extent of
indebtedness and contractual restrictions with respect to payment of dividends.
The Company's U.S. credit facility currently prohibits the payment of dividends
on its common stock in excess of 20% of consolidated net income in any fiscal
year.
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ITEM 6: SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in
conjunction with the Company's Consolidated Financial Statements and Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Years Ended December 31,
-------------------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- ------- --------- ---------
($ in millions, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 153.9 $ 151.2 $ 146.0 $ 184.7 $ 507.1
Operating income (loss) (1) (9.7) (16.7) (34.7) 5.4 59.8
Interest expense 4.2 5.7 7.6 10.4 10.2
Income (loss) before changes in
accounting principles (9.7) (20.2) (42.1) (4.2) 47.6
Net income (loss) (25.7) (20.2) (43.1) (4.2) 47.6
Per common share (2):
Net income (loss) $ (2.27) $ (1.78) $ (2.87) $ (0.27) $ 1.72
Cash dividends -- -- -- -- --
Weighted average common shares
outstanding (millions) (2) 11.3 11.3 15.0 15.4 27.6
BALANCE SHEET DATA:
Cash and cash equivalents $ 5.9 $ 6.7 $ -- $ -- $ 86.5
Total assets 267.0 262.5 240.2 248.8 703.0
Indebtedness (3) 149.3 75.0 92.9 89.6 22.1
Minority interest - Company-obligated
mandatorily redeemable preferred
securities -- -- -- -- 201.2
Stockholders' equity 46.6 109.0 64.7 68.1 326.2
OTHER OPERATING DATA:
EBITDA (4) $ (6.1) $ (12.3) $ (26.7) $ 18.6 $ 79.8
Cash flows provided (used):
Operating activities $ (3.6) $ 12.4 $ (20.0) $ (6.1) $ (1.3)
Investing activities (71.3) (16.3) (4.6) (2.5) (131.4)
Financing activities 70.1 4.7 17.7 8.6 215.7
--------- --------- ------- --------- ---------
Total $ (4.8) $ .8 $ (6.9) $ -- $ 83.0
Mill product shipments (millions of pounds) 10.8 11.2 10.5 12.2 27.2
Active employees at year end 1,170 1,070 880 1,020 2,950
Order backlog at year end (5) $ 90.0 $ 80.0 $ 85.0 $ 125.0 $ 440.0
Capital expenditures 67.3 16.3 4.6 3.0 21.7
(1) Operating income includes restructuring and other special charges
(credit) of $4.7 million in 1993, $10 million in 1994, ($1.2 million)
in 1995 and $4.8 million in 1996. See Note 5 to the Consolidated
Financial Statements.
(2) Per common share data and weighted average common shares outstanding
give effect in all periods presented to the stock split effected in
connection with the Stock Offering. See Notes 1 and 11 to the
Consolidated Financial Statements.
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(3) Includes bank and other debt, capital lease obligations and loans and
interest to related parties.
(4) EBITDA represents income (loss) before cumulative effect of accounting
changes plus minority interest, income taxes, interest expense,
depreciation and amortization less equity in earnings of nonoperating
joint ventures. EBITDA is presented because it is a widely accepted
financial indicator of cash flow and the ability to service debt.
EBITDA should not be considered as an alternative to, or more
meaningful than, operating income, net income or cash flow as an
indicator of the Company's performance.
(5) "Order backlog" is defined as firm purchase orders (which are
generally subject to cancellation by the customer upon payment of
specified charges).
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
General
In 1995, the Company and the worldwide titanium industry began
recovering from the depressed industry conditions that existed during the prior
several years. The aerospace industry in recent history has accounted for
approximately 65% of U.S. and 40% of worldwide titanium mill products
consumption and has had a significant effect on the overall sales and
profitability of the titanium industry. The aerospace industry, and
consequently the titanium metals industry, is highly cyclical. Until recently,
the Company and the industry had been significantly and adversely affected by
excess worldwide production capacity, depressed levels of spending for both
military and commercial aircraft, and depressed selling prices resulting from,
among other things, weak demand, relatively inexpensive titanium scrap, sponge
and other mill products, principally from Russia and other countries comprising
the former Soviet Union. However, the Company estimates that U.S. industry
shipments of titanium mill products in 1995 increased 26% and further increased
31% in 1996 to approximately 57 million pounds. Industry shipments had
previously remained relatively flat in the period between 1991 and 1994. The
Company also estimates that U.S. industry mill products shipments to the
commercial aerospace market in 1996 approximated 25 million pounds, a 40%
increase over 1995 levels following an 18% increase in 1995 over 1994. While
worldwide industry shipments are not as readily tracked as U.S. shipments (in
large part due to uncertainties of shipments by companies located in the
former Soviet Union), the Company believes U.S. trends are a reasonable proxy
for worldwide trends.
The titanium industry's recent improvement is due to a combination of
factors, including a resurgence in commercial aerospace demand, continued and
stable industrial demand, an end to customer inventory drawdowns, and the
emergence of new uses of titanium metal, including golf club heads. The
economic health of the commercial airline industry, the largest end market for
titanium, has improved significantly. Reported orders for new commercial
aircraft have increased significantly, particularly for wide body aircraft like
the Boeing 777, which use more titanium per plane than narrow body aircraft.
Although military aircraft deliveries continue to remain lower than deliveries
in the 1980s due to constrained defense budgets, sales to industrial markets in
1995 and 1996 have continued at strong levels and are expected to do so during
1997.
The Company's order backlog increased to approximately $440 million at
December 31, 1996, from $226 million at December 31, 1995 (which amount is pro
forma for the IMI Titanium and AJM Acquisitions). The Company defines "order
backlog" as firm purchase
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orders (which are generally subject to cancellation by the customer upon
payment of specified charges).
Beginning during the second half of 1995 and continuing into 1997, the
Company has experienced a significant increase in requests for quotations,
increased orders and increased prices on accepted orders. The Company estimates
that as of December 31, 1996, orders for over half of its anticipated 1997
shipments have been booked at average selling prices (contracted or anticipated
based upon current negotiations) approximately 10% higher than its 1996 average
selling prices. The increase in average selling prices on new orders is partly
attributable to the renegotiation of certain long-term customer agreements at
higher prices. The increase in industry demand has been driven primarily by the
recovery in the commercial aerospace market. As capacity utilization in the
titanium industry continues to grow and delivery lead times lengthen, the
Company expects prices on new orders to continue to strengthen in 1997,
although there can be no assurance that this trend will continue or not be
reversed.
The increase in demand for titanium products has contributed to the
upward pressure on prices for certain raw materials used by the Company,
including alloying materials, titanium scrap and titanium sponge. The Company
currently is a significant purchaser of titanium sponge, despite having over 30
million pounds of internal practical sponge production capacity. Prices for
titanium sponge under the terms of the Company's sponge purchase contracts are
specified for 1997 for the contracted quantity. Purchases of sponge above the
contracted quantity would likely be at higher prices. The Company expects
increased selling prices to more than offset any raw material cost increases in
1997, although there can be no assurance that recent price increases will
continue or not be reversed.
The Company's castings sales to the golf club market were
approximately 5% of its pro forma 1996 sales. In December 1996, TIMET Castings
laid off approximately one-half of its production employees at its Pomona,
California facility following a reduction in demand from one of its major golf
club manufacturing customers. The reduction in golf club business and the
related layoffs are not expected to have a material adverse effect on the
Company.
The Company's 1996 results include the effects of acquisitions
accounted for by the purchase method and, accordingly, are not directly
comparable to results for 1995. See Note 4 to the Consolidated Financial
Statements.
Sales and Operating Income
1996 compared to 1995. All 1996 to 1995 mill products price and volume
comparisons in this discussion are pro forma assuming the IMI Titanium
Acquisition and the AJM Acquisition occurred at the beginning of 1995. The pro
forma effect of TISTO and TIMET Savoie on price and volume information is not
material.
The significant improvement in sales and operating income in 1996 was
driven by price and volume increases for titanium products in both commercial
aerospace and other markets. Sales volume of titanium mill products increased
27% to 27.2 million pounds while average selling prices in 1996 were up
approximately 16% over 1995.
The selling price increases reflect both the pass-through of cost
increases, particularly raw material costs, and real price improvement
associated with increased market demand. Although the Company and the titanium
industry are continuing to experience increases in the cost of certain raw
materials, the Company's increased selling prices have more than offset those
cost increases. Prices on recent orders for titanium products have continued to
increase relative to 1996 levels although there can be no assurance that this
trend will continue.
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Operating levels at the Company's plants in 1996 were higher than in
1995 and contributed to the better operating results. The VDP titanium sponge
plant operated at approximately 85% of its annual practical capacity of 20
million pounds in 1996 compared to about 75% of capacity in 1995. The Company
presently expects its VDP plant to operate at about practical capacity in 1997
if current conditions continue. The Company restarted production of titanium
sponge at its original Kroll-leach facility during the second quarter of 1996
in response to demand for certain grades of titanium sponge. TIMET presently
intends to increase Kroll-leach titanium sponge production to approximately 10
million pounds of annual production in 1997. Costs to restart the Kroll-leach
facility in 1996 approximated $2 million. In 1996, the Company's worldwide mill
product capacity utilization approximated 80%.
Operating income in 1996 also included a special charge of $4.8
million compared to a restructuring credit of $1.2 million in 1995. See Note 5
to the Consolidated Financial Statements.
The Company has substantial operations and assets located in Europe,
principally the United Kingdom. The U.S. dollar value of the Company's foreign
sales and operating costs are subject to currency exchange rate fluctuations
which may slightly impact reported earnings and may affect the comparability of
period-to-period operating results. Approximately one-half of the Company's
European sales are denominated in currencies other than the U.S. dollar,
principally major European currencies. Certain purchases of raw materials,
principally titanium sponge, for the Company's European operations are
denominated in U.S. dollars while labor and other production costs are
primarily denominated in local currencies.
1995 compared to 1994. Sales volume of sponge, ingot and mill products
in 1995 increased to 18.7 million pounds, a 20% improvement over 1994 levels.
Shipments of titanium products for industrial applications were up moderately
compared to 1994 while aerospace volumes showed greater improvement than
industrial applications. The 9% increase in average selling prices in 1995 over
1994 reflects both the pass-through of certain cost increases and real price
improvement associated with increased market demand. The Company's dollar
denominated export sales benefited during 1995 from the relative weakness in
the value of the U.S. dollar versus certain other currencies.
Operating levels at all of the Company's plants were higher in 1995
than 1994 and contributed to the better operating results relative to 1994. The
higher production levels were partly attributable to the absence of work
stoppages in 1995, and improved VDP related equipment reliability during the
second half of 1995. The VDP plant operated at about 75% of its practical
capacity in 1995, compared with 45% in 1994. Depreciation expense increased
$4.9 million in 1995 over 1994 principally as a result of the units of
production method used to depreciate the VDP plant.
The Company's operating income in 1995 includes $3.7 million of equity
in earnings of then 50%-owned THT, more than double the $1.6 million in 1994.
Operating income in 1995 also included a restructuring credit of $1.2
million compared to a $10 million charge in 1994. See Note 5 to the
Consolidated Financial Statements.
Interest Expense
Interest expense in 1996 was slightly lower than in 1995 principally
due to relative average borrowing levels. Annual interest expense related to
the 6.625% Convertible Preferred Securities issued in November 1996
approximates $13.6 million, including amortization of financing costs.
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Interest expense increased in 1995 compared to 1994 principally due to
higher average borrowings under the Company's U.S. credit facility and higher
average interest rates effective on such debt.
Income Taxes
The Company's income tax rate in 1996 varied from the U.S. statutory
rate principally due to a $7 million reduction in the deferred tax valuation
allowance to reflect the utilization of a portion of its U.S. net operating
loss carryforwards ("NOLs") in 1996 and a $10 million reduction in the deferred
tax valuation allowance resulting from a change in estimate of the NOL and AMT
carryforwards that will more likely than not be realized in the future. The
Company's effective income tax rates in each of 1994 and 1995 varied from the
U.S. statutory rate due to losses for which recognition of a deferred tax asset
was not considered appropriate at the time. See Note 12 to the Consolidated
Financial Statements.
The Company operates in several tax jurisdictions and is subject to
varying income tax rates. For financial reporting purposes, the Company has
recognized substantially all of its carryforwards and, accordingly, expects
that its effective income tax rate beginning in 1997 will increase. Such
effective rate may be slightly higher than the statutory U.S. federal rate due
to the combined effects of state income taxes and varying non-U.S. rates.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial position was significantly improved during
1996 through the combined effects of (i) improved industry conditions, (ii)
acquisitions made during the year, (iii) the Stock Offering, and (iv) issuance
of the Trust Convertible Preferred Securities.
At December 31, 1996, the Company had $87 million of cash and
equivalents and $110 million of borrowing availability under its U.S. and
European bank credit lines. Indebtedness consisted primarily of capital lease
obligations related to certain of its European manufacturing facilities and a
relatively nominal amount of European working capital borrowings. The
Convertible Preferred Securities do not require principal amortization and the
Company has the right to defer interest payments for one or more periods of up
to 20 consecutive quarters.
Operating Activities. Reflecting improved operating results, cash
provided by operating activities (before changes in assets and liabilities) was
$53 million in 1996 compared to $4 million provided in 1995 and $22 million
used in 1994. Changes in assets and liabilities used $54 million of cash in
1996 compared to $10 million in 1995 and $2 million provided in 1994. While
receivable and inventory levels (excluding acquisitions) increased an aggregate
of $43 million in 1996 as a result of the higher levels of working capital
necessary to support the higher production and sales levels, days sales
outstanding ("DSO") in receivables and days sales in inventory ("DSI") did not
increase significantly. The Company's goal is to better manage working capital
such that both DSO and DSI improve in 1997 over 1996.
Investing Activities. The Company's capital expenditures in 1996
approximated $22 million compared to $3 million in 1995 and $5 million in 1994.
The companies acquired during 1996 accounted for $10 million of the increase
with much of the remaining $9 million increase resulting from projects deferred
in prior years. The Company estimates capital expenditures in 1997 to be $50
million to $55 million, including capacity expansion and a major project to
redesign business processes and implement integrated information systems
throughout Timet. About one-third of planned capital expenditures in 1997 relate
to capacity expansion projects, the largest of which is a 20 million pound
electron beam furnace to be completed by THT in the second half of 1998. Capital
spending related to the business processes/information systems project is
currently estimated at over $30 million during the next few years, about
one-half of which is expected to be incurred in 1997.
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Acquisitions aggregated $180 million in 1996 ($110 million cash; $70
million stock). The Company believes the IMI Titanium Acquisition, along with
other smaller European acquisitions, among other things, augmented the
Company's scale and geographic reach and increased its production flexibility.
In addition, the acquisition of the AJM scrap processing business enhanced the
Company's flexibility in optimizing its mix of its raw material purchases.
Financing Activities. The Company's net proceeds from the June 1996
Stock Offering approximated $131 million. The Company used approximately $125
million of such net proceeds to repay existing indebtedness ($23 million to
Tremont, $20 million to IMI and $82 million under its U.S. credit facility).
The Company received net proceeds from TIMET Capital Trust I's sale of
the Convertible Preferred Securities of approximately $192 million. The Company
used approximately $96 million of such net proceeds to prepay indebtedness
incurred in conjunction with the AJM Acquisition with the rest for general
corporate purposes.
Reductions of indebtedness in 1995 include approximately $5 million of
installments on the term loan portion of the Company's U.S. credit facility and
payment of the final $2 million installment due on the note associated with the
Company's purchase of its original 50% interest in THT in 1992. In April 1994,
the Company entered into its current U.S. credit facility, which replaced its
prior U.S. bank agreement, and the Company repaid $45 million of borrowings
outstanding thereunder at closing.
The Company is negotiating to increase its borrowing availability, and
expects, among other things, to be able to reduce current restrictions on use
of borrowed proceeds in order to further enhance its financial flexibility.
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 has in the past and may in the future seek to raise
additional capital, modify its dividend policy, restructure ownership
interests, refinance or restructure indebtedness, repurchase shares of capital
stock, sell marketable securities or other 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 may investigate,
evaluate, discuss and engage in acquisition, joint venture and other business
combination opportunities in the titanium and specialty metal industries. In
the event of any future acquisition or joint venture opportunities, the Company
may consider using available cash, issuing equity securities or incurring
indebtedness.
Environmental Matters. See Item 1 - "Business--Regulatory and
Environmental Matters" and Note 16 to the Consolidated Financial Statements for
a discussion of environmental matters.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in a separate
section of this Annual Report. See "Index of Financial Statements and
Schedules" on page F-1.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information with regard to executive
officers of the Company. The information required with respect to Directors and
by Item 405 of Regulation S-K is incorporated by reference to TIMET's
definitive Proxy Statement to be filed with the Securities and Exchange
Commission (the "Commission") pursuant to Regulation 14A within 120 days after
the end of the fiscal year covered by this report (the "TIMET Proxy
Statement").
Name Age Position(s)
- - ---------------------- --- ----------------------------------------------------
J. Landis Martin 51 Chairman and Chief Executive Officer
Andrew R. Dixey 46 President, Chief Operating Officer and Director
Joseph S. Compofelice 47 Vice President, Chief Financial Officer and Director
William C. Acton 43 Vice President--THT Operations
Paul J. Bania 46 Vice President--Quality and Technology
Thomas A. Buck 47 Vice President--U.S. Manufacturing
Brian J. Hadley 54 Vice President--European Manufacturing
Leslie P. Lundberg 39 Vice President--Human Resources
Richard D. McKinney 54 Vice President--Castings Operations
John P. Monahan 51 Vice President--Sales and Marketing
J. Thomas Montgomery, Jr 50 Vice President--Finance and Treasurer
Robert E. Musgraves 42 Vice President--General Counsel and Secretary
Mark A. Wallace 39 Vice President--Strategic Change
J. LANDIS MARTIN, 51, has been Chairman of the Company and a director
since 1987 and Chief Executive Officer of the Company since 1995. He also
served as President of the Company from 1995 to 1996. Mr. Martin has served as
Chairman of Tremont since 1990 and as Chief Executive Officer of NL Industries,
Inc., a manufacturer of specialty chemicals, since 1987 and as a director of NL
since 1986. From 1990 until its acquisition by Dresser Industries, Inc. in
1994, Mr. Martin served as Chairman of the Board and Chief Executive Officer of
Baroid, an oilfield services company which may have been deemed to have been
an affiliate of NL and Tremont for a portion of such period. In addition to
Tremont and NL, Mr. Martin is a director of Dresser, which is engaged in the
petroleum services, hydrocarbon processing and engineering industries, and
Apartment Investment Management Corporation, a real estate
investment trust.
ANDREW R. DIXEY, 46, has been President, Chief Operating Officer and a
director of the Company since 1996. Prior to this appointment, Mr. Dixey was,
from 1995, Managing Director of IMI Titanium Ltd., where he had responsibility
for IMI's titanium interests in both Europe and North America. During 1995, Mr.
Dixey was Chief Executive Officer of Helix plc, which is engaged in the
scholastic supplies business, and from prior to 1990 to 1994, Mr. Dixey held
various executive positions in the GKN plc Group of companies, a manufacturer of
automobile components.
19
22
23
JOSEPH S. COMPOFELICE, 47, has been Vice President and Chief Financial
Officer of the Company since 1996 and has been a director of the Company since
1994 (except for the period from March 1996 to July 1996). Mr. Compofelice has
also served as Vice President and Chief Financial Officer of Tremont since 1994.
Since 1994, he has been Vice President and Chief Financial Officer of Tremont
and NL and, since 1995, a director of NL. Since 1994, Mr. Compofelice has also
been Executive Vice President of Valhi, Inc. which is principally engaged
through NL, in the chemical industry, and may be deemed to be an affiliate of
the Company. From 1990 until 1993, he was Vice President and Chief Financial
Officer of Baroid.
WILLIAM A. ACTON has been Vice-President--THT Operations since the AJM
Acquisition in October 1996. Prior to October 1996, he had been, since 1993,
President of AJM and THT, and was Senior Vice President of AJM from 1991 until
1993.
PAUL J. BANIA has been Vice President--Quality and Technology since
1994. Dr. Bania was the Company's Vice President--Research and Market
Development from 1992 to 1994 and Director of Product Development from 1989
until 1992.
THOMAS A. BUCK has been Vice President--U.S. Manufacturing since 1991.
BRIAN J. HADLEY has been Vice President--European Manufacturing since
February 1996. He has been Operations Director for TIMET UK Since 1987. Prior
to joining IMI he was Works Director of APV Paramount, Ltd., an operator of
high alloy and stainless steel foundries.
LESLIE P. LUNDBERG has been Vice President--Human Resources since
1997. From 1995 until joining the Company, she was Vice President, Human
Resources for Dade International, Inc., a distributor of diagnostic equipment
for use in clinical laboratories, and from 1991 until 1995 she was Vice
President, Human Resources for the Edwards CVS division of Baxter Healthcare
International, a manufacturer of heart valves and angioplasty rings.
RICHARD D. MCKINNEY has been Vice President--Castings Operations since
February 1996. He has been President and Chief Executive Officer of TIMET
Castings since 1994. From 1993 until 1994, he served as Vice President
Operations of Teledyne Casting Services, which produces iron sand castings, and
from 1989 until 1993 he was the President of Teledyne Metal Forming, which
manufactures formed metal shapes.
JOHN P. MONAHAN has been Vice President--Sales and marketing since
1995, and was Vice President--North American Sales and Marketing from 1990 to
1995.
J. THOMAS MONTGOMERY, JR. has been Vice President--Finance and
Treasurer since December 1996. Prior to that, he was Vice President and
Controller of Valhi and Contran since 1987.
ROBERT E. MUSGRAVES has been Vice President and General Counsel of the
Company since 1990. He has also served as Secretary of the Company since 1991.
Since 1993, Mr. Musgraves has been General Counsel and Secretary of Tremont,
and since 1994 has also served as Vice President of Tremont. He was an
Assistant Secretary of Tremont from 1990 to 1993.
MARK A. WALLACE has been Vice President--Strategic Change since
December 1996. Prior to that, he was Vice President--Finance and Treasurer of
the Company since
20
24
1996. Prior to that, he was Vice President-Finance and Treasurer of the Company
since 1992. He has also served as Vice President and Controller of Tremont since
1992. From 1990 to 1992, Mr. Wallace was Assistant Controller of Valhi.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the TIMET Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference to
the TIMET Proxy Statement.
ITEM 13: CERTAIN REGULATIONS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the TIMET Proxy Statement. See also Note 15 to the Consolidated Financial
Statements.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
The consolidated financial statements and schedules listed by the
Registrant on the accompanying Index of Financial Statements and Schedules (see
page F-1) are filed as part of this Annual Report.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended December 31, 1996 and the
months of January and February 1997:
October 1, 1996 - reported items 2 and 7.
October 18, 1996 - reported items 5 and 7.
November 12, 1996 - reported items 5 and 7.
November 20, 1996 - reported items 5 and 7.
December 5, 1996 - reported items 5 and 7.
January 24, 1997 - reported items 5 and 7.
(c) Exhibits
Included as exhibits are the items listed in the Exhibit Index. TIMET
will furnish a copy of any of the exhibits listed below upon payment of $4.00
per exhibit to cover the costs to TIMET of furnishing the exhibits. Instruments
defining the rights of holders of long-term debt issues which do not exceed 10%
of consolidated total assets will be furnished to the Commission upon request.
21
25
Item No. Exhibit Index
- - -------- --------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of Titanium
Metals Corporation, incorporated by reference to Exhibit 3.1
to Titanium Metals Corporation's Registration Statement on
Form S-1 (No. 333-2940).
3.2 Bylaws of Titanium Metals Corporation as Amended and Restated,
dated February 14, 1997.
4.1 Certificate of Trust of TIMET Capital Trust I, dated November
13, 1996, incorporated by reference to Exhibit 4.1 to
Titanium Metals Corporation's Current Report on Form 8-K
filed with the Commission on December 5, 1996.
4.2 Amended and Restated Declaration of Trust of TIMET Capital
Trust I, dated as of November 20, 1996, among Titanium Metals
Corporation, as Sponsor, The Chase Manhattan Bank, as
Property Trustee, Chase Manhattan Bank (Delaware), as
Delaware Trustee and Joseph S. Compofelice, Robert E.
Musgraves and Mark A. Wallace, as Regular Trustees,
incorporated by reference to Exhibit 4.2 to Titanium Metals
Corporation's Current Report on Form 8-K filed with the
Commission on December 5, 1996.
4.3 Indenture for the 6 5/8% Convertible Subordinated Debentures,
dated as of November 20, 1996, among Titanium Metals
Corporation and The Chase Manhattan Bank, as Trustee,
incorporated by reference to Exhibit 4.3 to Titanium Metals
Corporation's Current Report on Form 8-K filed with the
Commission on December 5, 1996.
4.4 Form of 6 5/8% Convertible Preferred Securities (included in
Exhibit 4.1 above), incorporated by reference to Exhibit 4.5
to Titanium Metals Corporation's Current Report on Form 8-K
filed with the Commission on December 5, 1996.
4.5 Form of 6 5/8% Convertible Subordinated Debentures (included
in Exhibit 4.2 above), incorporated by reference to Exhibit
4.5 to Titanium Metals Corporation's Current Report on Form
8-K filed with the Commission on December 5, 1996.
4.6 Form of 6 5/8% Trust Common Securities (Included in Exhibit
4.2 above), incorporated by reference to Exhibit 4.5 to
Titanium Metals Corporation's Current Report on Form 8-K
filed with the Commission on December 5, 1996.
4.7 Convertible Preferred Securities Guarantee, dated as of
November 20, 1996, between Titanium Metals Corporation, as
Guarantor, and The Chase Manhattan Bank, as Guarantee
Trustee, incorporated by reference to Exhibit 4.6 to Titanium
Metals Corporation's Current Report on Form 8-K filed with
the Commission on December 5, 1996.
9.1 Shareholders' Agreement, dated February 15, 1996, among
Titanium Metals Corporation, Tremont Corporation, IMI plc,
IMI Kynoch Ltd., and IMI Americas, Inc., incorporated by
reference to Exhibit 2.2 to Tremont Corporation's Current
Report on Form 8-K (No. 1-10126) filed with the Commission on
March 1, 1996.
9.2 Amendment to the Shareholders' Agreement, dated March 29,
1996, among Titanium Metals Corporation, Tremont Corporation,
IMI plc, IMI Kynoch Ltd., and IMI Americas Inc., incorporated
by reference to Exhibit 10.30 to Tremont Corporation's Annual
Report on Form 10-K (No. 1-10126) for the year ended December
31, 1995.
9.3 Investors' Agreement between Union Titanium Sponge
Corporation, Toho Titanium Co., Ltd., Nippon Mining Co.,
Ltd., Mitsui & Co., Ltd., Mitsui & Co. (U.S.A.), Inc.,
Tremont Corporation and Titanium Metals Corporation, dated
May 30, 1990, incorporated by reference to Exhibit 10.33 of
Baroid Corporation's registration statement on Form 10 (No.
1-10624) filed with the Commission on August 31, 1990.
22
26
9.4 Amendment No. 3 to Investors' Agreement between Union
Titanium Sponge Corporation, Toho Titanium Co., Ltd., Nippon
Mining Co., Ltd., Mitsui & Co., Ltd., Mitsui & Co., (U.S.A.),
Inc., Tremont Corporation and Titanium Metals Corporation,
dated May 30, 1990, incorporated by reference to Exhibit 9.1
to Tremont Corporation's Quarterly Report on Form 10-Q (No.
1-10126) for the quarter ended March 31, 1996.
9.5 Amendment No. 4 to Investors' Agreement among Union Titanium
Sponge Corporation, Toho Titanium Co., Ltd., Nippon Mining
Co., Ltd., Mitsui & Co., Ltd., Mitsui & Co., (U.S.A.) Inc.,
Tremont Corporation and Titanium Metals Corporation, dated
February 21, 1997, incorporated by reference to Exhibit 9.5
to Titanium Metals Corporation's Amendment No. 1 to
Registration Statement on Form S-1 (No. 333-18829).
10.1 Acquisition Agreement, dated February 15, 1996, by and between
Titanium Metals Corporation, IMI Kynoch Ltd., and IMI
Americas Inc., incorporated by reference to Exhibit 2.1 to
Tremont Corporation's Current Report on Form 8-K (No.
1-10126) filed with the Commission on March 1, 1996.
10.2 Amended and Restated Subordinated Promissory Note, dated as of
January 1, 1996, between Titanium Metals Corporation and
Tremont Corporation, incorporated by reference to Exhibit
10.2 to Titanium Metals Corporation's Registration Statement
on Form S-1 (No. 333-2940).
10.3 Amended and Restated Loan Agreement between Titanium Metals
Corporation and Congress Financial Corporation (Central),
dated March 24, 1995, incorporated by reference to Exhibit
10.4 of Tremont Corporation's Amended Annual Report on Form
10-K/A (No. 1-10126) for the year ended December 31, 1994.
10.4 Amendment to Amended and Restated Loan and Security Agreement
between Congress Financial Corporation and Titanium Metals
Corporation, dated September 29, 1995, incorporated by
reference to Exhibit 10.16 to Tremont Corporation's Annual
Report on Form 10-K (No. 1-10126) for the year ended December
31, 1995.
10.5 Amendment to Amended and Restated Loan and Security Agreement
between Congress Financial Corporation and Titanium Metals
Corporation, dated February 15, 1996, incorporated by
reference to Exhibit 10.17 to Tremont Corporation's Annual
Report on Form 10-K (No. 1-10126) for the year ended December
31, 1995.
10.6 Sponge Purchase Agreement, dated May 30, 1990, between
Titanium Metals Corporation and Union Titanium Sponge
Corporation and Amendments No. 1 and 2, incorporated by
reference to Exhibit 10.25 of Tremont Corporation's Annual
Report on Form 10-K (No. 1-10126) for the year ended December
31, 1991.
10.7 Amendment No. 3 to the Sponge Purchase Agreement, dated
December 3, 1993, between Titanium Metals Corporation and
Union Titanium Sponge Corporation, incorporated by reference
to Exhibit 10.33 of Tremont Corporation's Annual Report on
Form 10-K (No. 1-10126) for the year ended December 31, 1993.
10.8 Amendment No. 4 to the Sponge Purchase Agreement, dated May 2,
1996, between Titanium Metals Corporation and Union Titanium
Sponge Corporation, incorporated by reference to Exhibit 10.1
to Tremont Corporation's Quarterly Report on Form 10-Q (No.
1-10126) for the quarter ended March 31, 1996.
10.9 Amendment to Amended and Restated Loan and Security Agreement
between Congress Financial Corporation (Central) and Titanium
Metals Corporation, dated May 31, 1996, incorporated by
reference to Exhibit 10.26 to Titanium Metals Corporation's
Registration Statement on Form S-1 (No. 333-2940).
23
27
10.10 Amended and Restated Term Promissory Note in the principal
amount of $10,150,000 issued by Titanium Metals Corporation
to Congress Financial Corporation (Central), dated May 31,
1996, incorporated by reference to Exhibit 10.27 to Titanium
Metals Corporation's Registration Statement on Form S-1 (No.
333-2940).
10.11 Amended and Restated Term-B Promissory Note in the principal
amount of $13,000,000 issued by Titanium Metals Corporation
to Congress Financial Corporation (Central), dated May 31,
1996, incorporated by reference to Exhibit 10.28 to Titanium
Metals Corporation's Registration Statement on Form S-1 (No.
333-2940).
10.12 Amendment to Amended and Restated Loan and Security Agreement
between Congress Financial Corporation and Titanium Metals
Corporation, dated November 26, 1996, incorporated by
reference to exhibit 10.34 to Titanium Metals Corporation's
Amendment No. 1 to Registration Statement on Form S-1 (No.
333-18829).
10.13 Lease Agreement, dated January 1, 1996, between Holford
Estates Ltd. and IMI Titanium Ltd. related to the building
known as Titanium Number 2 Plant at Witton, England,
incorporated by reference to Exhibit 10.23 to Tremont
Corporation's Annual Report on Form 10-K (No. 1-10126) for
the year ended December 31, 1995.
10.14 Intercorporate Services Agreement between Titanium Metals
Corporation and Tremont Corporation, dated March 28, 1996,
incorporated by reference to Exhibit 10.29 to Tremont
Corporation's Annual Report on Form 10-K (No. 1-10126) for
the year ended December 31, 1995.
10.15* 1996 Long Term Performance Incentive Plan of Titanium Metals
Corporation, incorporated by reference to Exhibit 10.19 to
Titanium Metals Corporation's Amendment No. 1 to Registration
Statement on Form S-1 (No. 333-18829).
10.16* 1996 Non-Employee Director Compensation Plan, incorporated by
reference to Exhibit 10.20 to Titanium Metals Corporation's
Amendment No. 1 to Registration Statement on S-1 (No.
333-18829).
10.17* Employment Agreement between Andrew R. Dixey and Titanium
Metals Corporation, dated February 13, 1996, incorporated by
reference to Exhibit 10.21 to Titanium Metals Corporation's
Registration Statement on Form S-1 (No. 333-2940).
10.18* Form of Agreement relating to a grant of Management Shares
between Titanium Metals Corporation and certain executive
officers, effective as of February 15, 1996, incorporated by
reference to Exhibit 10.22 to Titanium Metals Corporation's
Registration Statement on Form S-1 (No.
333-2940).
10.19 Agreement, dated June 28, 1995, among Titanium Metals
Corporation, Tremont Corporation and Union Titanium Sponge
Corporation, incorporated by reference to Exhibit 10.24 to
Titanium Metals Corporation's Registration Statement on Form
S-1 (No. 333-2940).
10.20 Asset Purchase Agreement, dated October 1, 1996, by and
between Titanium Metals Corporation and Axel Johnson Metals,
Inc., incorporated by reference to Exhibit 2.1 to Titanium
Metals Corporation's Current Report on Form 8-K filed with
the Commission on October 16, 1996.
10.21 Purchase Agreement, dated November 20, 1996, between Titanium
Metals Corporation, TIMET Capital Trust I, Salomon Brothers
Inc, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley & Co. Incorporated, as Initial Purchasers,
incorporated by reference to Exhibit 99.1 to Titanium Metals
Corporation's Current Report on Form 8-K filed with the
Commission on December 5, 1996.
24
28
10.22 Registration Agreement, dated November 20, 1996, between
TIMET Capital Trust I and Salomon Brothers Inc, as
Representative of the Initial Purchasers, incorporated by
reference to Exhibit 99.1 to Titanium Metals Corporation's
Current Report on Form 8-K filed with the Commission on
December 5, 1996.
10.23 $20,000,000 Subordinated Promissory Note issued by Titanium
Metals Corporation to IMI Kynoch Ltd., dated January 1, 1996,
incorporated by reference to Exhibit 10.21 to Tremont
Corporation's Annual Report on Form 10-K (No. 1-10126) for
the year ended December 31, 1995.
10.24 Amended and Restated Subordination Agreement between Tremont
Corporation and Congress Financial Corporation, dated
February 15, 1996, incorporated by reference to Exhibit 10.24
to Tremont Corporation's Annual Report on Form 10-K (No.
1-10126) for the year ended December 31, 1995.
10.25 Subordination Agreement between Tremont Corporation and
Titanium Metals Corporation, dated February 15, 1996,
incorporated by reference to Exhibit 10.25 to Tremont
Corporation's Annual Report on Form 10-K (No. 1-10126) for
the year ended December 31, 1995.
10.26 Subordination Agreement between IMI Kynoch Ltd. and Titanium
Metals Corporation, dated February 15, 1996, incorporated by
reference to Exhibit 10.26 to Tremont Corporation's Annual
Report on Form 10-K (No. 1-10126) for the year ended December
31, 1995.
10.27 Subordination Agreement between Tremont Corporation and IMI
Kynoch Ltd., dated February 15, 1996, incorporated by
reference to Exhibit 10.27 to Tremont Corporation's Annual
Report on Form 10-K (No. 1-10126) for the year ended December
31, 1995.
10.28 Subordination Agreement between IMI Kynoch Ltd. and Congress
Financial Corporation, dated February 15, 1996, incorporated
by reference to Exhibit 10.28 to Tremont Corporation's Annual
Report on Form 10-K (No. 1-10126) for the year ended December
31, 1995.
10.29 First Amendment to Subordination Agreement by and between IMI
Kynoch, Ltd. and Congress Financial Corporation (Central),
dated May 31, 1996, incorporated by reference to Exhibit
10.29 to Titanium Metals Corporation's Registration Statement
on Form S-1 (No. 333-2940).
10.30 First Amendment to Amended and Restated Subordination
Agreement by and between Tremont Corporation and Congress
Financial Corporation (Central), dated May 31, 1996,
incorporated by reference to Exhibit 10.30 to Titanium Metals
Corporation's Registration Statement on Form S-1 (No.
333-2940).
11.1 Statement Regarding Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant
23.1 Consent of Coopers & Lybrand, L.L.P.
27.1 Financial Data Schedule for the year ended December 31, 1996
* Management contract, compensatory plan or arrangement.
25
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By /s/ J. Landis Martin
---------------------------------
J. Landis Martin, March 24, 1997
(Chairman of the Board
and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ J. Landis Martin /s/ Andrew R. Dixey
- - ---------------------------------------- -----------------------------------------
J. Landis Martin, March 24, 1997 Andrew R. Dixey, March 24, 1997
(Chairman of the Board (President, Chief Operating
and Chief Executive Officer) Officer and Director)
/s/ Edward C. Hutcheson /s/ Joseph S. Compofelice
- - ---------------------------------------- -----------------------------------------
Edward C. Hutcheson, Jr., March 24, 1997 Joseph S. Compofelice, March 24, 1997
(Director) (Vice President, Chief
Financial Officer and Director)
/s/ Thomas P. Stafford /s/ J. Thomas Montgomery, Jr.
- - ---------------------------------------- -----------------------------------------
Thomas P. Stafford, March 24, 1997 J. Thomas Montgomery, Jr., March 24, 1997
(Director) (Vice President - Finance and Treasurer)
/s/ Yukiji Tadokoro
- - ----------------------------------------
Yukiji Tadokoro, March 24, 1997
(Director)
26
30
TITANIUM METALS CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(a) and 14(d)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Financial Statements
Report of Independent Accountants F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 F-3/F-4
Consolidated Statements of Operations for the Years ended
December 31, 1994, 1995 and 1996 F-5
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1994, 1995 and 1996 F-6
Consolidated Statements of Cash Flows for the Years ended
December 31, 1994, 1995 and 1996 F-7/F-8
Notes to Consolidated Financial Statements F-9/F-30
Financial Statement Schedules
Report of Independent Accountants S-1
Schedule I -- Condensed financial information of Registrant S-2/S-7
Schedule II -- Valuation and qualifying accounts S-8
Schedules III and IV are omitted because they are not applicable.
31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Titanium Metals Corporation:
We have audited the accompanying consolidated balance sheets of
Titanium Metals Corporation as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Titanium Metals Corporation as of December 31, 1995 and 1996, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Note 14 to the consolidated financial statements, in
1994 the Company changed its method of accounting for postemployment benefits
in accordance with Statement of Financial Accounting Standards No. 112.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
January 21, 1997
32
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1996
(In thousands, except per share data)
ASSETS 1995 1996
-------- --------
Current assets:
Cash and cash equivalents $ 24 $ 86,526
Accounts and other receivables, less
allowance of $3,620 and $4,788 27,932 114,100
Receivable from related parties 3,070 1,676
Inventories 69,134 155,488
Prepaid expenses 3,452 12,510
Deferred income taxes -- 718
-------- --------
Total current assets 103,612 371,018
-------- --------
Other assets:
Investment in joint ventures 13,853 270
Goodwill -- 67,430
Other intangible assets 1,424 19,314
Other 5,027 13,799
Deferred income taxes -- 11,618
-------- --------
Total other assets 20,304 112,431
-------- --------
Property and equipment:
Land 4,598 6,129
Buildings 17,783 32,929
Equipment 127,228 207,046
Construction in progress 3,120 17,513
-------- --------
152,729 263,617
Less accumulated depreciation 27,861 44,048
-------- --------
Net property and equipment 124,868 219,569
-------- --------
$248,784 $703,018
======== ========
See accompanying notes to consolidated financial statements.
F-3
33
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1995 and 1996
(In thousands, except per share data)
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
--------- -------
Current liabilities:
Notes payable $ -- 7,992
Current maturities of long-term debt 45,695 397
Payable to related parties 2,627 1,649
Accounts payable 27,136 49,628
Accrued liabilities 20,963 46,173
Income taxes 47 6,638
Deferred income taxes 596 348
--------- ---------
Total current liabilities 97,064 112,825
--------- ---------
Noncurrent liabilities:
Long-term debt 21,540 1,158
Capital lease obligations to related parties -- 11,562
Payable to related parties 23,942 996
Accrued OPEB cost 28,152 27,512
Accrued pension cost 5,966 2,743
Deferred income taxes 789 10,629
Other 3,203 3,920
--------- ---------
Total noncurrent liabilities 83,592 58,520
--------- ---------
Minority interest - Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debt securities -- 201,250
Other minority interest -- 4,207
Stockholders' equity:
Preferred stock, $.01 par value; 1 million shares
authorized, none outstanding -- --
Common stock, $.01 par value; 99 million shares
authorized, 15.7 million and 31.5 million shares
issued and outstanding 157 315
Additional paid-in capital 142,720 346,133
Accumulated deficit (72,653) (25,009)
Currency translation adjustment 283 5,635
Pension liabilities adjustment (2,379) (858)
--------- ---------
Total stockholders' equity 68,128 326,216
--------- ---------
$ 248,784 $ 703,018
========= =========
Commitments and contingencies (Notes 15 and 16)
F-4
34
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1994, 1995 and 1996
(In thousands, except per share data)
1994 1995 1996
--------- --------- ---------
Revenues and other income:
Net sales $ 145,984 $ 184,723 $ 507,074
Equity in earnings of joint ventures 2,263 4,824 6,237
Other, net (187) 469 1,049
--------- --------- ---------
148,060 190,016 514,360
--------- --------- ---------
Costs and expenses:
Cost of sales 159,958 170,699 418,775
Selling, general, administrative and development 12,462 14,065 29,917
Special charges (credit) 10,000 (1,200) 4,824
Interest 7,562 10,414 10,223
--------- --------- ---------
189,982 193,978 463,739
--------- --------- ---------
Income (loss) before income taxes (41,922) (3,962) 50,621
Income tax expense 155 255 1,892
Minority interest and preacquisition earnings -- -- 1,085
--------- --------- ---------
Income (loss) before cumulative effect of a
change in accounting principle (42,077) (4,217) 47,644
Change in accounting principle (1,000) -- --
--------- --------- ---------
Net income (loss) $ (43,077) $ (4,217) $ 47,644
========= ========= =========
Per common share:
Income (loss) before cumulative effect of
a change in accounting principle $ (2.80) $ (.27) 1.72
Change in accounting principle (.07) -- --
--------- --------- ---------
Net income (loss) $ (2.87) $ (.27) $ 1.72
========= ========= =========
Weighted average common shares outstanding 15,010 15,383 27,623
========= ========= =========
See accompanying notes to consolidated financial statements.
F-5
35
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1994, 1995 and 1996
(In thousands)
Adjustments
Additional ------------------------
Common Common paid-in Accumulated Currency Pension
shares stock capital deficit translation liabilities Total
------ --------- --------- ----------- ----------- ----------- ------
Balance at December 31, 1993 15,066 $ 150 $ 135,290 $ (25,359) $ (18) $ (1,081) $ 108,982
Net loss -- -- -- (43,077) -- -- (43,077)
Cash contribution -- -- 419 -- -- -- 419
Adjustments, net -- -- -- -- 178 (1,754) (1,576)
------ --------- --------- --------- --------- --------- ---------
Balance at December 31, 1994 15,066 150 135,709 (68,436) 160 (2,835) 64,748
Net loss -- -- -- (4,217) -- -- (4,217)
Conversion of stockholder indebtedness 568 6 10,846 -- -- -- 10,852
Cash contribution 59 1 1,147 -- -- -- 1,148
Noncash distribution to stockholders -- -- (4,982) -- -- -- (4,982)
Adjustments, net -- -- -- -- 123 456 579
------ --------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 15,693 157 142,720 (72,653) 283 (2,379) 68,128
Net income -- -- -- 47,644 -- -- 47,644
Common stock issued:
IMI Titanium Acquisition (Note 4) 9,561 96 69,904 -- -- -- 70,000
Stock Offering (Note 11) 6,200 62 132,926 -- -- -- 132,988
Other 1 -- 28 -- -- -- 28
Other, net -- -- 555 -- -- -- 555
Adjustments, net -- -- -- -- 5,352 1,521 6,873
------ --------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 31,455 $ 315 $ 346,133 $ (25,009) $ 5,635 $ (858) $ 326,216
====== ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements.
F-6
36
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1994, 1995 and 1996
(In thousands)
1994 1995 1996
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ (43,077) $ (4,217) $ 47,644
Depreciation and amortization 8,334 13,218 18,974
Earnings of joint ventures in excess of distributions (1,195) (3,824) (5,992)
Special charges (credit) 10,000 (1,200) 4,824
Deferred income taxes -- -- (10,416)
Minority interest and preacquisition earnings -- -- 1,085
Other, net 3,449 (86) (3,071)
--------- --------- ---------
(22,489) 3,891 53,048
Change in assets and liabilities, net of acquisitions:
Accounts and other receivables 5,273 (870) (29,998)
Inventories (738) (15,477) (13,309)
Prepaid expenses 194 19 (6,786)
Accounts payable and accrued liabilities (2,590) 6,036 (106)
Income taxes (9) 165 4,521
Accounts with related parties 116 (275) (8,412)
Other, net 222 396 (269)
--------- --------- ---------
Net cash used by operating activities (20,021) (6,115) (1,311)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (4,609) (2,981) (21,679)
Business acquisitions:
IMI Titanium Acquisition -- -- (2,250)
AJM Acquisition -- -- (96,799)
Other -- -- (10,885)
Other, net 40 421 213
--------- --------- ---------
Net cash used by investing activities (4,569) (2,560) (131,400)
--------- --------- ---------
See accompanying notes to consolidated financial statements.
F-7
37
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1994, 1995 and 1996
(In thousands)
1994 1995 1996
--------- --------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings $ 63,625 $ 9,371 $ 113,793
Reductions (48,829) (7,371) (179,480)
Proceeds from issuance of common stock, net -- -- 131,488
Proceeds from issuance of Company-obligated
mandatorily redeemable preferred securities, net -- -- 192,409
Capital contributions from related parties 419 1,148 --
Related parties loans (repayments) 2,500 5,500 (42,521)
--------- --------- ---------
Net cash provided by financing activities 17,715 8,648 215,689
--------- --------- ---------
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities (6,875) (27) 82,978
Cash acquired -- -- 3,053
Currency translation 146 51 471
--------- --------- ---------
(6,729) 24 86,502
Balance at beginning of year 6,729 -- 24
--------- --------- ---------
Balance at end of year $ -- $ 24 $ 86,526
--------- --------- ---------
Supplemental disclosures:
Cash paid for:
Interest expense $ 6,497 $ 9,970 $ 8,958
Income taxes 120 112 6,348
Acquisitions:
Cash and cash equivalents $ -- $ -- $ 3,053
Goodwill and other intangibles -- -- 85,158
Other noncash assets -- -- 180,847
Liabilities -- -- (89,124)
Common stock issued to IMI -- -- (70,000)
--------- --------- ---------
Cash paid $ -- $ -- $ 109,934
========= ========= =========
See accompanying notes to consolidated financial statements.
F-8
38
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Organization:
Titanium Metals Corporation ("TIMET") was a 75%-owned subsidiary of
Tremont Corporation during 1994 and 1995 with the remaining 25% held by Union
Titanium Sponge Corporation ("UTSC"), a consortium of Japanese companies. In
February 1996, TIMET acquired the titanium businesses of IMI plc and affiliates
("IMI") for stock and in June 1996 completed an initial public offering of
common stock (the "Stock Offering") which together reduced Tremont's ownership
in TIMET to 30% and UTSC's ownership to 10%. Contran Corporation holds,
directly or through subsidiaries, approximately 44% of Tremont's outstanding
common stock. Substantially all of Contran's outstanding voting stock is held
by trusts established for the benefit of the children and grandchildren of
Harold C. Simmons, of which Mr. Simmons is the sole trustee. Mr. Simmons may be
deemed to control each of Contran, Tremont and TIMET.
Note 2--Summary of significant accounting policies:
Principles of consolidation. The accompanying consolidated financial
statements include the accounts of TIMET and its majority-owned subsidiaries
(collectively, the "Company"). All material intercompany accounts and balances
have been eliminated. Certain prior year amounts have been reclassified to
conform to the current year presentation.
Use of estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amount of revenues and expenses
during the reporting period. Ultimate actual results may, in some instances,
differ from previously estimated amounts.
Fiscal year. The Company uses a fiscal year ending on the Sunday
closest to December 31 of each year. Each of the past three fiscal years
reflect the results of operations for 52 weeks.
Translation of foreign currencies. Assets and liabilities of
subsidiaries whose functional currency is deemed to be other than the U.S.
dollar are translated at year end rates of exchange and revenues and expenses
are translated at average exchange rates prevailing during the year. Resulting
translation adjustments are accumulated in the currency translation adjustments
component of stockholders' equity, net of related deferred income taxes.
Currency transaction gains and losses are recognized in income currently.
Net sales. Sales are recognized when products are shipped.
Inventories and cost of sales. Inventories are stated at the lower of
cost or market. The first-in, first-out ("FIFO") method is used to determine
the cost of approximately 50% of inventories at December 31, 1996 with the
last-in, first-out ("LIFO") method used to determine the cost of other
inventories.
Cash and cash equivalents. Cash equivalents include highly liquid
investments with original maturities of three months or less.
Investment in joint ventures. Investments in 20% to 50%-owned joint
ventures are accounted for by the equity method.
F-9
39
Intangible assets and amortization. Goodwill, representing the excess
of cost over the fair value of individual net assets acquired in business
combinations accounted for by the purchase method, is amortized by the straight
line method over 15 years and is stated net of accumulated amortization of $1.6
million at December 31, 1996. Patents and other intangible assets, except
intangible pension assets, are amortized by the straight-line method over the
periods expected to be benefited, generally approximately nine years.
Property, equipment and depreciation. Property and equipment are
stated at cost. Maintenance, repairs and minor renewals are expensed; major
improvements are capitalized. Interest costs related to major, long-term
capital projects are capitalized as a component of construction costs and were
nil in each of the past three years. Software development and conversion costs
(excluding training) are capitalized and amortized over the software's
estimated useful life.
Depreciation related to TIMET's vacuum distillation process ("VDP")
titanium sponge facility is computed on a units-of-production method based on
the pounds of sponge produced and a rated annual production capacity of 22
million pounds. The amount of depreciation expense recognized in the future
periods related to VDP is not expected to vary materially from the
straight-line method. Other depreciation is computed principally on the
straight-line method over the estimated useful lives of 15 to 40 years for
buildings and 3 to 25 years for machinery and equipment.
Employee benefit plans. Accounting and funding policies for retirement
plans and postretirement benefits other than pensions ("OPEB") are described in
Note 13.
Stock-based compensation. The Company has elected the disclosure
alternative proscribed by Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," and to account for the
Company's stock-based employee compensation in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and its various interpretations. Under APB No. 25, no compensation
cost is generally recognized for fixed stock options for which the exercise
price is not less than the market price of the Company's common stock on the
grant date. See Note 11.
Research and development. Research and development expense
approximated $2 million in each of the past three years.
Advertising costs. Advertising costs, which are not significant, are
expensed as incurred.
Income taxes. Deferred income tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the income tax and financial reporting carrying amounts of assets and
liabilities, including investments in subsidiaries not included in TIMET's
consolidated U.S. tax group.
Stock split and earnings per share. Common shares outstanding for all
periods presented have been adjusted to reflect the 65-for-1 split (the "Stock
Split") of the Company's common stock effected in connection with the Stock
Offering. Earnings per share is based upon the weighted average number of
common shares outstanding after giving effect to the Stock Split. Common stock
equivalents are excluded from the calculation because the effect for each of
the past three years is either antidilutive or not material. See Note 17.
F-10
40
Fair value of financial instruments. The Company's bank debt reprices
with changes in market interest rates and, accordingly, the carrying amount
of such debt is believed to approximate market value. See Note 9. At
December 31, 1996, the fair value of Company-obligated mandatorily redeemable
preferred securities (see Note 10) approximated $220 million based on quoted
market prices (book value - $201 million).
At December 31, 1996, the fair value of the Company's common equity,
based on a quoted market price at that date of $32.875 per share, was
approximately $1 billion (book value - $326 million).
Note 3--Business and geographic segments:
The Company's operations are conducted in one business segment,
titanium metals operations. The Company is a vertically integrated producer of
titanium sponge, ingot, slab and mill forged or cast products for aerospace,
industrial, and other applications. The Company's production facilities are
located principally in the United States, United Kingdom, and France with its
products sold throughout the world.
1994 1995 1996
--------- --------- ---------
(In thousands)
Sales $ 145,984 $ 184,723 $ 507,074
========= ========= =========
Operating income (loss) $ (34,676) $ 5,378 $ 59,849
General corporate income, net 316 1,074 995
Interest expense (7,562) (10,414) (10,223)
--------- --------- ---------
Income (loss) before income taxes $ (41,922) $ (3,962) $ 50,621
========= ========= =========
Geographic segments
Net sales - point of origin:
United States $ 123,485 $ 174,802 $ 354,651
Europe 30,542 13,862 186,063
Eliminations (8,043) (3,941) (33,640)
--------- --------- ---------
$ 145,984 $ 184,723 $ 507,074
========= ========= =========
Net sales - point of destination:
United States $ 89,519 $ 135,421 $ 312,640
Europe 34,475 33,520 155,364
Other 21,990 15,782 39,070
--------- --------- ---------
$ 145,984 $ 184,723 $ 507,074
========= ========= =========
Operating income (loss):
United States $ (34,278) $ 4,408 $ 39,014
Europe (398) 970 20,835
--------- --------- ---------
$ (34,676) $ 5,378 $ 59,849
========= ========= =========
Identifiable assets:
United States $ 227,361 $ 235,844 $ 442,163
Europe 9,174 12,940 173,210
General corporate - U.S. 3,687 -- 87,645
--------- --------- ---------
$ 240,222 $ 248,784 $ 703,018
========= ========= =========
F-11
41
Operating income (loss) includes restructuring charges of $10 million
in 1994, a restructuring credit of $1.2 million in 1995 and $4.7 million of
special charges related to the IMI Titanium Acquisition in 1996. See Note 5.
General corporate income includes the Company's equity in earnings of
Basic Investments, Inc. ("BII") and Victory Valley Land Company L.P. ("VVLC")
of $.7 million in 1994 and $1.1 million in 1995, and interest income of $.4
million in 1996 on general corporate cash equivalents.
Export sales from U.S. based operations approximated $35 million in
1994, $40 million in 1995 and $58 million in 1996. At December 31, 1996, the
net assets of non-U.S. subsidiaries included in consolidated net assets
approximated $73 million.
Note 4--Business combinations and joint ventures:
IMI Titanium Acquisition. In February 1996, the Company acquired IMI's
titanium metals businesses (the "IMI Titanium Acquisition"). IMI previously
conducted its titanium business principally through its wholly owned United
Kingdom subsidiary, IMI Titanium Ltd. (now known as TIMET UK), and its U.S.
subsidiary, IMI Titanium, Inc. (now known as TIMET Castings). IMI conveyed all
of its titanium related businesses to the Company in exchange for 9.6 million
newly issued shares of common stock valued at $70 million, and the Company
issued $20 million of the Company's subordinated debt to IMI in exchange for a
like amount of debt previously owed to IMI by its U.K. subsidiary. In
connection with the IMI Titanium Acquisition, Tremont was granted a three year
option to purchase up to 2 million shares of the Company's common stock from
IMI for $16 million. Tremont assigned to UTSC the right to acquire from IMI .5
million shares of the Company's common stock under the option.
The Company accounted for the IMI Titanium Acquisition by the purchase
method of accounting (purchase price approximately $72 million, including
transaction costs). The Company has included the results of operations of the
IMI titanium business in its consolidated results of operations effective at
the beginning of 1996 with preacquisition earnings of approximately $.4 million
deducted in determining net income for 1996. Preacquisition sales of the IMI
titanium business included in consolidated sales for 1996 approximated $11.7
million.
Axel Johnson Metals Acquisition. In October 1996, the Company acquired
substantially all of the assets and assumed substantially all of the
liabilities of Axel Johnson Metals, Inc. ("AJM") for approximately $97 million
cash (the "AJM Acquisition"). The AJM Acquisition was completed through a
newly-formed subsidiary, Titanium Hearth Technologies, Inc. ("THT, Inc."), and
included the acquisition of the 50% partnership interest in Titanium Hearth
Technologies ("THT") that TIMET did not previously own. THT, Inc. and
subsidiaries operate titanium scrap processing facilities and electron beam
cold hearth melting furnaces.
The Company accounted for the AJM Acquisition by the purchase method
and consolidated THT, Inc.'s results effective October 1, 1996; revenues for
the fourth quarter of 1996 approximated $21 million. TIMET's purchases from THT
approximated $8 million in 1994, $10 million in 1995, and $9 million in 1996
prior to the acquisition.
TISTO. The Company held a 26% interest in TISTO, a German distributor
of titanium products, prior to June 30, 1996. In July 1996, the Company
purchased the remaining 74% equity interest for approximately $2 million in
cash and TIMET UK guaranteed approximately $2 million in existing loans from
former TISTO shareholders ($1.4 million outstanding at December 31, 1996). See
Note 9. TISTO's results were consolidated effective July 1, 1996; revenues
approximated $10 million for the six months ended December 31, 1996.
F-12
42
TIMET Savoie. In August 1996, TIMET and Compagnie Europeenne du
Zirconium - CEZUS, S.A. ("CEZUS") completed an agreement to form a new
jointly-owned French company ("TIMET Savoie") to manufacture and sell titanium
products. TIMET Savoie is 70%-owned by TIMET and 30%-owned by CEZUS. CEZUS
contributed cash, equipment and the CEZUS titanium business to TIMET Savoie,
and certain CEZUS employees became employees of TIMET Savoie. TIMET contributed
proprietary technology, all of its interest in its previously existing
France-based distribution businesses and cash valued at a total of
approximately $8 million and purchased inventory of $8 million from CEZUS.
TIMET Savoie will manufacture products inside CEZUS' production facility in
Ugine, France both directly, utilizing its own personnel and equipment, and,
for melting and forging and certain other operations, indirectly by
subcontracting to CEZUS under a long-term manufacturing agreement with CEZUS.
The Company consolidated TIMET Savoie effective August 1, 1996; revenues for
the five months ended December 31, 1996 were approximately $18 million.
LASAB. In January 1997, the Company purchased LASAB Laser
Applications-und Bearbeitungs GmbH ("LASAB") for less than $1 million cash and
guaranteed, through its wholly-owned subsidiary, TIMET Deutschland,
approximately $1 million of LASAB outstanding bank indebtedness. LASAB is in
the titanium and stainless steel laser-welded tube and pipe and laser cutting
business.
Proforma financial information (unaudited). The following unaudited
proforma financial information has been prepared assuming the IMI Titanium
Acquisition and the AJM Acquisition occurred at the beginning of 1995. The
proforma effect of the TISTO, TIMET Savoie and LASAB transactions is not
material. The proforma financial information is not necessarily indicative of
the operating results that might have occurred if the transactions had been
completed at such earlier dates or the operating results which may occur in the
future.
1995 1996
------- -------
(In millions, except per share amounts)
Sales $ 380.0 $ 564.4
Operating income (loss) (37.7) 59.8
Interest expense 24.4 17.3
Net income (loss) (48.6) 43.2
Earnings per common share $ (1.94) $ 1.50
Weighted average shares outstanding 25.0 28.8
Joint ventures. The Company's investment in joint ventures at December
31, 1996 consisted of its one-third interest in MZI, LLC, which owns a
technologically advanced ultrasonic unit for inspecting titanium billet.
Prior to the October 1996 AJM Acquisition discussed above, the Company
accounted for its 50% interest in THT by the equity method.
Prior to October 1995, TIMET owned (i) a 32% equity interest in BII,
which, among other things, provides utility services in the industrial park
where one of TIMET's plants is located, and (ii) a 12% interest in VVLC, which
is actively engaged in efforts to develop certain real estate. BII, through a
wholly-owned subsidiary, owns an additional 50% interest in VVLC. In October
1995, TIMET made a pro rata distribution to its shareholders consisting of its
interest in BII and VVLC, and certain real estate. The Company distributed the
assets at their net carrying amount, which approximated $5 million.
F-13
43
Summarized 1996 financial information of unconsolidated joint ventures
for 1996 is omitted because (i) THT is now consolidated by the Company and
proforma consolidated financial information is presented above and (ii) other
joint ventures are insignificant. Summarized combined financial information of
unconsolidated joint ventures for 1994 and 1995, principally THT, is shown
below.
1994 1995
------- -------
(In thousands)
Income statement data:
Revenues $43,043 $69,107
Operating costs and expenses 38,598 54,764
Interest and other expenses 582 1,153
Net income $ 3,863 $13,190
Balance sheet data:
Current assets $23,098 $23,980
Noncurrent assets 44,050 21,190
Current liabilities 11,520 4,484
Noncurrent liabilities 21,409 16,099
Equity $34,219 $24,587
Note 5-- Special charges (credit):
IMI titanium business. During 1996, TIMET recorded $4.7 million of
special charges resulting from the IMI Titanium Acquisition and related
integration of the operations acquired. Certain key executive officers of TIMET
received common stock and cash payments with a combined value of approximately
$3 million ($1.5 million common stock and $1.5 million cash) in consideration
for their services in connection with the IMI Titanium Acquisition. TIMET also
incurred $1.7 million of integration and other costs relating principally to
the relocation of personnel and the consolidation of certain facilities.
Integration costs are charged to operations as incurred.
F-14
44
Restructuring charges. The Company's restructuring charges in 1994 and
prior years were related to cost reduction and containment efforts taken in
response to depressed industry conditions existing in those years. In the
fourth quarter of 1995, the Company determined that its restructuring costs
would ultimately be less than previously estimated and reversed $1.2 million of
previously accrued restructuring charges. At December 31, 1996 all amounts were
utilized and no restructuring charges remained accrued. Cash costs charged to
the restructuring accrual were $1.2 million in 1994, $1.7 million in 1995 and
$.8 million in 1996.
1994 1995 1996
------ ------ ------
(In millions)
Special charges (credit) to operating income:
IMI titanium business $ -- $ -- $ 4.7
Workforce related 3.7 (.7) --
Excess space and other 1.3 (.5) .1
Idled assets 4.5 -- --
Other .5 -- --
------ ------ ------
$ 10.0 $ (1.2) $ 4.8
====== ====== ======
Note 6--Inventories:
1995 1996
-------- --------
(In thousands)
Raw materials $ 7,778 $ 22,806
In process and finished products 57,538 125,137
Supplies 3,818 7,545
-------- --------
$ 69,134 $155,488
======== ========
The average cost of LIFO inventories exceeded the net carrying amount
of such inventories by approximately $19 million at December 31, 1995 and $32
million at December 31, 1996.
F-15
45
Note 7-- Intangible and other noncurrent assets:
December 31,
-------------------
1995 1996
------- -------
(In thousands)
Intangible assets:
Patents $ -- $14,103
Convenants not to compete -- 5,000
Intangible pension assets 1,424 1,199
------- -------
1,424 20,302
Less accumulated amortization -- 988
------- -------
$ 1,424 $19,314
======= =======
Other noncurrent assets:
Deferred financing costs $ -- $ 8,775
Prepaid pension costs 1,253 1,340
Other 3,774 3,684
------- -------
$ 5,027 $13,799
======= =======
Note 8--Accrued liabilities:
December 31,
-------------------
1995 1996
------- -------
(In thousands)
OPEB cost $ 2,240 $ 2,024
Pension cost 1,378 1,507
Other employee benefits 9,210 21,360
Environmental cost 1,143 1,643
Taxes, other than income 1,655 2,292
Interest 3 1,304
Other 5,334 16,043
------- -------
$20,963 $46,173
======= =======
F-16
46
Note 9--Notes payable, long-term debt and capital lease obligations to related
parties:
December 31,
-------------------
1995 1996
------- -------
(In thousands)
Notes payable - non U.S. credit agreements $ -- $ 7,992
======= =======
Long-term debt:
U.S. credit agreement $66,955 $ --
Former TISTO shareholders -- 1,415
Other 280 140
------- -------
67,235 1,555
Less current maturities 45,695 397
------- -------
$21,540 $ 1,158
======= =======
Capital lease obligations to related parties:
IMI $ -- $10,671
CEZUS -- 963
------- -------
-- 11,634
Less current maturities -- 72
------- -------
$ -- $11,562
======= =======
U.S. credit agreement. TIMET's $105 million U.S. credit facility
provides for term loans aggregating $24 million with the balance of the
facility available as a revolving credit/letter of credit facility. Borrowings
under the revolving portion are limited to a formula-determined amount (the
"borrowing base") of accounts receivable and inventories. Interest accrues, at
the Company's option, at the prime rate plus .75% or LIBOR plus 2.25%. The
credit facility matures on December 31, 1998. The weighted average interest
rate on outstanding revolver and term loan borrowings was 11% at December 31,
1995 (none outstanding at December 31, 1996). Borrowings are collateralized by
substantially all of TIMET's assets. The credit agreement prohibits dividends
on the Company's common stock in excess of 20% of net income in any year,
limits additional indebtedness and transactions with affiliates, requires the
maintenance of certain financial amounts and contains other covenants customary
in transactions of this type. At December 31, 1996, the Company had about $102
million of borrowing availability under this credit agreement.
Non-U.S. credit agreements. At December 31, 1996, TIMET UK had a
(pound)10 million ($15 million) overdraft/revolving bank credit facility. The
agreement restricts payments of dividends from TIMET UK, loans and other
transactions with related parties and contains other covenants customary in
agreements of this type. Borrowings are collateralized by substantially all of
TIMET UK's assets and bear interest generally at the bank's base rate plus 2%
(8% at December 31, 1996). Borrowings of approximately $2.9 million were
outstanding at December 31, 1996. The TIMET UK facility was revised in 1997 to,
among other things, increase the facility to (pound)21 million ($35 million),
reduce the interest rate by up to .75% and extend the agreement through March
1998.
F-17
47
TISTO has Deutsche mark ("DM") denominated short-term bank credit
agreements with outstanding balances of $1.2 million at December 31, 1996.
Interest accrues based on a variable rate (9.25% at December 31, 1996).
TIMET Savoie has French franc denominated short-term bank credit
facilities providing for aggregate borrowings of approximately $3.8 million.
Interest accrues at PIBOR plus .6% (4% at December 31, 1996) and outstanding
borrowings approximated $3.8 million at December 31, 1996. TIMET UK has
guaranteed outstanding indebtedness under these facilities. In addition, TIMET
Savoie has a $6 million factoring agreement with a French finance company.
During 1996, TIMET Savoie factored trade receivables approximating $7.2 million
and at December 31, 1996 was contingently liable for receivables factored with
recourse of approximately $1.6 million. Under the terms of the factoring
agreement, TIMET Savoie pays a fee equal to .2% of the amount factored and
interest accrues at PIBOR plus .45%. TIMET UK has guaranteed payment on
factored amounts. See Note 15 for a related party credit agreement TIMET Savoie
has with CEZUS.
At December 31, 1996, unused borrowing availability under the
Company's non-U.S. bank credit agreements approximated $8 million.
Capital lease obligations. In connection with the IMI Titanium
Acquisition, the Company entered into long-term leases with IMI principally
covering its production facilities within England and in connection with the
TIMET Savoie transaction, entered into long-term leases with CEZUS covering
machinery and equipment. The terms of these capital leases range from 10 to 30
years. The UK rentals are subject to adjustment every five years based on
changes in certain published price indexes. TIMET has guaranteed TIMET UK's
obligations under its leases. Assets held under capital leases included in
buildings and equipment at December 31, 1996 were $10.7 million and $1 million,
respectively, with related accumulated depreciation of $.3 million.
Aggregate maturities of long-term debt and capital lease obligations:
Capital Long-term
Leases Debt
-------- --------
(In thousands)
Years ending December 31,
1997 $ 1,219 $ 397
1998 1,219 1,158
1999 1,219 --
2000 1,219 --
2001 1,219 --
2002 and thereafter 26,750 --
Less amounts representing interest (21,211) --
-------- --------
$ 11,634 $ 1,555
======== ========
F-18
48
Note 10--Minority interest - Company-obligated mandatorily redeemable preferred
securities:
In November 1996, TIMET Capital Trust I (the "Trust"), a wholly-owned
subsidiary of TIMET, issued $201 million of 6.625% Company-obligated
mandatorily redeemable preferred securities (the "Convertible Preferred
Securities") and $6 million of 6.625% common securities. TIMET holds all of the
outstanding common securities of the Trust. The Trust used the proceeds from
such issuance to purchase from the Company $207 million principal amount of
TIMET's 6.625% convertible junior subordinated debentures due 2026 (the
"Subordinated Debentures") and, in the aggregate, constitute a full and
unconditional guarantee by the Company of the Trust's obligations under the
Convertible Preferred Securities. The sole assets of the Trust are the
Subordinated Debentures. The Convertible Preferred Securities represent
undivided beneficial ownership interests in the Trust, are entitled to
cumulative preferred distributions from the Trust of 6.625% per annum,
compounded quarterly, and are convertible, at the option of the holder, into
TIMET common stock at the rate of 1.339 shares of common stock per Convertible
Preferred Security (an equivalent price of $37.34 per share), for an aggregate
of 5.4 million common shares if fully converted.
The Convertible Preferred Securities mature December 2026 and are
redeemable at the Company's option beginning December 1999, initially at
approximately 104.6% of principal amount declining to 100% from December 2006.
The Company has the right to defer interest payments for up to 20 consecutive
quarters ("Extension Period") on one or more occasions. In the event the
Company exercises this right, it would be unable during any Extension Period
to, among other things, pay dividends on or reacquire its capital stock.
Note 11--Stockholders' equity:
Common stock. In June 1996, the Company completed the sale of 6.2
million shares of its common stock in the Stock Offering at an initial price to
the public of $23 per share. In connection with the Stock Offering, the Company
effected the Stock Split, increased its authorized common shares to 99 million
shares, increased its authorized preferred stock to 1 million shares, and
reserved up to 3.1 million shares to be issued under the 1996 Long Term
Incentive Plan (the "TIMET Incentive Plan"). The Company's net proceeds from
the Stock Offering approximated $131 million. The Company used approximately
$42.5 million of the net proceeds to repay existing indebtedness to
stockholders ($22.5 million to Tremont and $20 million to IMI) and $82 million
to repay indebtedness under its U.S. credit agreement. Supplemental earnings
per common share, assuming the stock offering had been completed at the
beginning of 1996, would have been $1.75 per share.
Certain key executive officers of the Company received shares (the
"Management Shares") of the Company's Class B common stock and cash payments
with a combined value of approximately $3 million in consideration for their
services in connection with the IMI Titanium Acquisition. The Class B
Management Shares were converted into 93,000 shares of the Company's common
stock in connection with the Stock Offering, and no Class B shares are
currently outstanding or authorized.
Preferred stock. Effective with the Stock Offering, the Company is
authorized to issue 1 million shares of preferred stock. The rights of
preferred stock as to, among other things, dividends, liquidation, redemption,
conversions, and voting rights are determined by the Board of Directors.
Common stock options. The TIMET Incentive Plan provides for the
discretionary grant of restricted common stock, stock options, stock
appreciation rights and other incentive compensation to officers and other key
employees of the Company. Effective with the Stock Offering, options were
granted to acquire 437,400 shares at prices equal to or greater than the market
price at the date of grant ($23 to $29 per share). Other options granted in
1996, principally in conjunction with the AJM Acquisition, aggregated 98,000
shares at market prices
F-19
49
ranging from $28.56 to $31.25. Options vest over five years and expire ten
years from date of grant.
Additionally, the Board of Directors authorized, effective with the
Stock Offering, a plan for its nonemployee directors that provides for eligible
directors to receive 625 options effective with the Stock Offering and to
annually be granted options to purchase 625 shares of the Company's common
stock at a price equal to the market price on the date of grant and to receive,
as partial payment of director fees, annual grants of 400 shares of common
stock. In 1996, options to purchase 3,750 shares of the Company's common stock
were granted to nonemployee directors of the Company at exercise prices ranging
from $23 to $32.875 per share. Options granted to nonemployee directors vest in
one year and expire five years from date of grant. In February 1997, the
non-eligible members of the Board of Directors amended this plan to increase
the number of shares granted under options to 1,500 per year beginning in 1998,
and to increase the term of future options to ten years.
At December 31, 1996, 538,150 options were outstanding at prices
ranging from $23 to $32.875 ($13.8 million aggregate amount payable upon
exercise), no options were exercisable, and 1,875 nonemployee director options
become exercisable in 1997. At December 31, 1996, 1,964,600 shares and 58,750
shares were available for future grant under the TIMET Incentive Plan and the
nonemployee director plan, respectively.
The following table summarizes information about the Company's stock
options outstanding at December 31, 1996. Weighted average fair values were
estimated using the Black-Scholes model and assumptions listed below.
Weighted Average
----------------------------------
Option Exercise Exercise Fair Remaining
Grants Shares Prices Price Value Life (years)
------ ------- ----------- --------- --------- ------------
At market 371,150 $23-$32.875 $ 24.64 $ 12.47
Above market 167,000 $26-$29 27.50 $ 10.22
------- ----------- --------- ---------
538,150 $23-$32.875 $ 25.53 $ 11.77 9.5
======= =========== ========= ========= ======
Assumptions:
Expected life (years) 6
Risk-free interest rate 6.67%
Volatility 40%
Dividend yield 0%
Had stock-based compensation cost been determined based on the
estimated fair values of options granted and recognized as compensation expense
over the vesting period of the grants in accordance with SFAS No. 123, the
Company's pretax income, net income and earnings per share for 1996 would have
been reduced by $1.1 million, $.7 million and $.03 per share, respectively.
F-20
50
Note 12--Income taxes:
Summarized below are (i) the components of income (loss) before income
taxes, minority interest, preacquisition earnings and cumulative effect of a
change in accounting principle ("pretax income (loss)"), (ii) the difference
between the income tax expense (benefit) attributable to pretax income (loss)
and the amounts that would be expected using the U.S. federal statutory income
tax rate of 35%, and (iii) the components of the income tax expense (benefit)
attributable to pretax income (loss).
1994 1995 1996
-------- -------- --------
(In thousands)
Expected income tax expense (benefit) $(14,673) $ (1,387) 17,717
Adjustment of deferred tax valuation allowance:
Related to current year results 14,900 1,502 (6,519)
Change in estimate of future realization -- -- (10,000)
Incremental tax on non-tax group companies (164) (1) (46)
U.S. state income taxes, net 97 -- 848
Other, net (5) 141 (108)
-------- -------- --------
$ 155 $ 255 1,892
======== ======== ========
Income tax expense:
Current income taxes:
U.S $ 149 $ -- $ 6,072
Non-U.S 6 255 6,236
-------- -------- --------
155 255 12,308
======== ======== ========
Deferred income taxes (benefit):
U.S -- -- (10,809)
Non-U.S -- -- 393
-------- -------- --------
-- -- (10,416)
-------- -------- --------
$ 155 $ 255 $ 1,892
======== ======== ========
Pretax income (loss):
U.S $(41,284) $ (4,589) $ 32,671
Non-U.S (638) 627 17,950
-------- -------- --------
$(41,922) $ (3,962) $ 50,621
======== ======== ========
Comprehensive tax provision allocable to:
Pretax income $ 155 $ 255 $ 1,892
Stockholders' equity, principally deferred taxes
allocable to adjustment components -- -- 2,500
-------- -------- --------
$ 155 $ 255 $ 4,392
======== ======== ========
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51
December 31,
--------------------------------------------------
1995 1996
--------------------- ----------------------
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
(In millions)
Temporary differences relating to net assets:
Inventories $ -- $ (5.0) $ -- $ (4.9)
Property and equipment -- (3.8) -- (13.0)
Accrued OPEB cost 11.7 -- 11.4 --
Accrued liabilities and other deductible differences 8.3 -- 10.9 --
Other taxable differences -- (2.5) -- (5.5)
Investments in subsidiaries and affiliates not
included in the consolidated tax group -- (3.2) -- (3.0)
Tax loss and credit carryforwards 15.8 -- 11.7 --
Valuation allowance (22.7) -- (6.2) --
------- ------- ------- -------
Gross deferred tax assets (liabilities) 13.1 (14.5) 27.8 (26.4)
Netting (13.1) 13.1 (15.5) 15.5
------- ------- ------- -------
Total deferred taxes -- (1.4) 12.3 (10.9)
Less current deferred taxes -- (.6) 0.7 (.3)
------- ------- ------- -------
Net noncurrent deferred taxes $ -- $ (.8) $ 11.6 $ (10.6)
======= ======= ======= =======
The Company's valuation allowance increased in the aggregate
(including amounts allocated to items other than continuing operations) by
$14.7 million in 1994 and decreased by $.9 million in 1995 and $16.5 million in
1996. The 1996 valuation allowance reduction included $10 million due to a
change in estimate of the future tax benefits of certain tax net operating loss
carryforwards ("NOLs") and alternative minimum tax credit ("AMT") carryforwards
that will more likely than not be realized.
At December 31, 1996, the Company had, for U.S. federal income tax
purposes, NOLs of approximately $24 million expiring in 2008 and 2009. The
utilization of the Company's NOLs is subject to an annual limitation. At
December 31, 1996, the Company had an AMT carryforward of approximately $3
million, which can be utilized to offset regular income taxes payable in future
years. The AMT carryforward has an indefinite carryforward period.
Note 13--Employee benefit plans:
Variable compensation plans. Approximately 85% of the Company's total
worldwide employees, including a significant portion of its domestic hourly
employees, participate in compensation programs which provide for variable
compensation based upon the financial performance of the Company and, in
certain circumstances, the individual performance of the employee. The cost of
these plans was $.8 million in 1994, $.3 million in 1995 and $12 million in
1996.
Defined contribution plans. All of the Company's domestic hourly and
salaried employees (70% of total worldwide employees at December 31, 1996) are
eligible to participate in contributory savings plans with partial matching
employer contributions. Company matching contributions are based on company
profitability for 60% of eligible employees. Approximately 40% of the Company's
total employees at December 31, 1996 also participate in a defined contribution
pension plan with contributions based, beginning in 1996, upon a fixed
percentage of the employee's eligible earnings. The cost of these pension and
savings plans was $3 million in 1996 and was insignificant in 1994 and 1995 due
to the Company reporting net losses in those years.
F-22
52
Defined benefit pension plans. The Company maintains contributory and
noncontributory defined benefit pension plans covering approximately 50% of
employees at December 31, 1996 (substantially all European employees and
one-third of its domestic workforce). Defined pension benefits are generally
based on years of service and compensation, and the related expense is based
upon independent actuarial valuations. The Company's funding policy for U.S.
plans is to contribute annually amounts satisfying the funding requirements of
the Employee Retirement Income Security Act of 1974, as amended. Non-U.S.
defined benefit pension plans are funded in accordance with applicable
statutory requirements. The defined benefit pension plans for domestic
employees were closed to new participants prior to 1996 and, in addition with
respect to salaried employees, benefit levels have been frozen.
The funded status of the Company's defined benefit pension plans and
the components of net periodic defined benefit pension cost are set forth
below. The rates used in determining the actuarial present value of benefit
obligations at December 31, 1996 were: (i) discount rates -- 7% to 8.75% (7.5%
in 1995), and (ii) rates of increase in future compensation levels -- 3% to
6.5% (3% in 1995). The expected long-term rates of return on assets used was 7%
to 9.75% in 1996 and 9% in 1995. The benefit obligations are sensitive to
changes in these estimated rates and actual results may differ from the
obligations noted below. At December 31, 1996, the assets of the plans are
primarily comprised of U.S. government obligations, corporate stocks and bonds.
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
------------------------- -------------------------
December 31, December 31,
1995 1996 1995 1996
-------- -------- -------- --------
(In thousands)
Actuarial present value of benefit obligations:
Vested benefit obligations $ 16,183 $ 47,733 $ 34,705 $ 34,424
Nonvested benefits 955 3,040 1,510 1,448
-------- -------- -------- --------
Accumulated benefit obligations 17,138 50,773 36,215 35,872
Effect of projected salary increases 65 27,766 110 114
-------- -------- -------- --------
Projected benefit obligations 17,203 78,539 36,325 35,986
Plan assets at fair value 18,146 82,118 28,884 31,624
-------- -------- -------- --------
Plan assets over (under) projected benefit
obligations 943 3,579 (7,441) (4,362)
Unrecognized net loss from experience
different from actuarial assumptions 1,186 (2,674) 3,837 1,981
Unrecognized prior service cost 235 1,269 1,424 1,199
Unrecognized net assets being amortized
over 14 years (1,111) (834) (1,349) (1,011)
Adjustment to recognize minimum liability -- -- (3,815) (2,057)
-------- -------- -------- --------
Total prepaid (accrued) pension cost 1,253 1,340 (7,344) (4,250)
Current portion -- -- (1,378) (1,507)
-------- -------- -------- --------
Noncurrent prepaid (accrued) pension cost $ 1,253 $ 1,340 $ (5,966) $ (2,743)
======== ======== ======== ========
F-23
53
1994 1995 1996
------- ------- -------
(In thousands)
Service cost benefits earned $ 846 $ 630 $ 3,260
Interest cost on projected benefit obligations 3,457 3,959 7,696
Actual return on plan assets 1,163 (9,560) (7,256)
Net amortization and deferrals (5,254) 5,910 (1,951)
------- ------- -------
Net pension expense $ 212 $ 939 $ 1,749
======= ======= =======
Postretirement benefits other than pensions. The Company provides
certain postretirement health care and life insurance benefits to certain of
its domestic eligible retired employees. The Company funds such benefits as
they are incurred, net of any contributions by the retirees. Under plans
currently in effect, a majority of TIMET's active domestic employees would
become eligible for these benefits if they reach normal retirement age while
working for TIMET. These plans have been revised to discontinue employer-paid
health care coverage for future retirees once they become Medicare-eligible.
The components of the periodic OPEB cost and accumulated OPEB
obligations are set forth below. The rates used in determining the actuarial
present value of the accumulated OPEB obligations at December 31, 1996 were:
(i) discount rate--7.75% (7.5% in 1995), (ii) rate of increase in future
compensation levels -- 3% and (iii) rate of increase in future health care
costs--11% in 1997, gradually declining to 6% in 2016 and thereafter. If the
health care cost trend rate was increased by one percentage point for each
year, OPEB expense would have increased approximately $.2 million in 1996, and
the actuarial present value of accumulated OPEB obligations at December 31,
1996 would have increased approximately $1.5 million. The accrued OPEB cost is
sensitive to changes in these estimated rates and actual results may differ
from the obligations noted below.
December 31,
----------------------
1995 1996
------- -------
(In thousands)
Actuarial present value of accumulated OPEB obligations:
Retiree benefits $18,805 $16,266
Other fully eligible active plan participants 1,227 1,236
Other active plan participants 5,456 3,750
------- -------
25,488 21,252
Unrecognized net gain from experience different from
actuarial assumptions 730 4,536
Unrecognized prior service credits 4,174 3,748
------- -------
Total accrued OPEB cost 30,392 29,536
Less current portion 2,240 2,024
------- -------
Noncurrent accrued OPEB cost $28,152 $27,512
======= =======
F-24
54
1994 1995 1996
------- ------- -------
(In thousands)
Service cost benefits earned $ 395 $ 242 $ 407
Interest cost on accumulated OPEB obligations 1,791 2,060 1,567
Net amortization and deferrals (244) (475) (653)
------- ------- -------
Net OPEB expense $ 1,942 $ 1,827 $ 1,321
======= ======= =======
Note 14--Changes in accounting principles:
In 1994, the Company adopted SFAS No. 112, "Employers' Accounting for
Postemployment Benefits" and recorded a $1 million charge for this change in
accounting principle.
SFAS No. 128, "Earnings per Share," issued in February 1997 is
effective for the Company in 1997. Had SFAS No. 128 been effective during
1994, 1995 and 1996, (i) "Basic earnings per share" under SFAS No. 128 would
have been the same as earnings per common share reported by the Company and
(ii) "Dilutive earnings per share" under SFAS No. 128 would have been the same
as fully diluted earnings per share reported by the Company.
Note 15--Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (i) intercorporate transactions with related
companies such as guarantees, management and expense sharing arrangements,
shared fee arrangements, joint ventures, partnerships, loans, options, advances
of funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (ii) common
investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly-held minority equity interest in another related party. The
Company continuously considers, reviews and evaluates, and understands that
Contran, Tremont and related entities consider, review and evaluate such
transactions. Depending upon the business, tax and other objectives then
relevant, it is possible that the Company might be a party to one or more such
transactions in the future.
It is the policy of the Company to engage in transactions with related
parties on terms which are, in the opinion of the Company, no less favorable to
the Company than could be obtained from unrelated parties.
The Company has an intercorporate services agreement with Tremont
whereby the Company will provide certain management, financial and other
services to Tremont for approximately $.4 million in 1996, subject to renewal
for future years. Charges to (from) Tremont approximated nil in 1994 and $(.9)
million in 1995 pursuant to similar arrangements for compensation and
intercorporate services.
The Company purchases certain utility services from BMI. The amount
paid to BMI approximated $1 million in each of the past three years.
Receivables from related parties relate principally to sales to UTSC.
Current payables to related parties include current portions of capital leases
and loans from CEZUS. Noncurrent
F-25
55
payables to related parties, excluding long-term capital lease obligations (see
Note 9), are summarized below.
December 31,
----------------------
1995 1996
------- -------
(In thousands)
Noncurrent liabilities - Tremont:
Loans and interest $22,460 $ --
Other 1,482 996
------- -------
$23,942 $ 996
======= =======
Interest expense on related party indebtedness was $2.4 million in
1994, $2.1 million in 1995 and $2.9 million in 1996. In connection with the IMI
Titanium Acquisition, the Company issued $20 million of TIMET subordinated debt
payable to IMI in exchange for a like amount of debt previously owed to IMI by
the IMI titanium businesses. The subordinated debt to both IMI and Tremont
accrued interest at 10.4%. See Note 11 regarding, among other things, the
repayment of loans due to IMI and Tremont with proceeds from the Stock
Offering.
TIMET Savoie has a French franc denominated short term credit facility
available from CEZUS which provides, under certain circumstances, for
borrowings up to $13 million. Interest accrues at a weighted average rate
published by Banque de France plus .125% (4% at December 31, 1996). At December
31, 1996 approximately $1 million was outstanding under this agreement.
Additionally, CEZUS has the right to sell their interest in TIMET Savoie to the
Company for 30% of TIMET Savoie's registered capital after TIMET Savoie has had
two consecutive years of profitable operations and all outstanding borrowings
to CEZUS have been repaid. The Company has the right to purchase CEZUS' 30%
interest in TIMET Savoie for 30% of TIMET Savoie's equity determined under
French accounting principles on or after December 31, 1997 and following the
repayment of all outstanding borrowings to CEZUS.
TIMET completed a recapitalization in 1995 under which, among other
things, (i) Tremont made a $1 million cash capital contribution to TIMET and
exchanged $8 million of TIMET subordinated debt into TIMET common equity, (ii)
TIMET made a $1 million cash prepayment of accrued interest to UTSC, and (iii)
UTSC exchanged $3 million of interest owed by TIMET to UTSC into TIMET common
equity. In connection with the recapitalization, TIMET issued .5 million shares
of common stock pro rata to its then-existing shareholders.
In connection with amendments of the Company's credit facility during
1995, Tremont advanced TIMET $8 million as additional subordinated TIMET debt
($2.5 million advanced in 1994 and $5.5 million advanced in 1995), guaranteed
$5 million of the term loans, collateralized such guarantee with approximately
600,000 shares of NL Industries, Inc. common stock held by Tremont, and agreed
to pledge additional NL shares as necessary to meet certain market value
thresholds. NL is an indirect subsidiary of Contran. Contran entered into an
agreement with TIMET's lenders whereby Contran was obligated to purchase the
pledged shares from TIMET's lenders under certain conditions. In connection
with the Stock Offering, the security arrangements between the Company's
lenders and Tremont and Contran were terminated.
UTSC made a $.4 million capital contribution to TIMET during 1994.
In connection with the construction and financing of TIMET's VDP
plant, UTSC licensed certain technology to TIMET in exchange for the right,
effective after UTSC's conversion of debt into TIMET common stock, to acquire
up to 20% of TIMET's annual production capacity of VDP sponge at agreed-upon
prices through early 1997 and higher formula-determined prices
F-26
56
thereafter through 2008. TIMET's December 1996 selling prices to UTSC were
approximately 15% below the cost at which TIMET was purchasing titanium sponge
under agreements with third parties. The discount from fair market value
represents TIMET's consideration to UTSC for the licensed technology. Sales to
UTSC approximated $2 million in 1994, $9 million in 1995 and $12 million in
1996.
Note 16--Commitments and contingencies:
Operating leases. The Company leases certain manufacturing and office
facilities and various equipment. Most of the leases contain purchase and/or
various term renewal options at fair market and fair rental values,
respectively. In most cases management expects that, in the normal course of
business, leases will be renewed or replaced by other leases. Net rent expense
was approximately $1.3 million in 1994, $1.4 million in 1995 and $2.7 million
in 1996.
At December 31, 1996, future minimum payments under noncancellable
operating leases having an initial or remaining term in excess of one year were
as follows:
Amount
------
(In thousands)
Years ending December 31,
- - -------------------------
1997 $3,003
1998 1,701
1999 832
2000 339
2001 189
------
6,064
LESS SUBLEASE INCOME 614
------
$5,450
======
Legal proceedings and contingencies.
Cadmus/Sutherin. In May 1995, TIMET received notice of two separate
actions naming TIMET as a defendant, each brought by a former employee alleging
that TIMET intentionally exposed such employee to dangerous levels of certain
chemicals and/or metals during his employment at TIMET's plant in Toronto, Ohio
(Sutherin v. Titanium Metals Corporation, No. 95 CV 00168, Court of Common
Pleas, Jefferson County, Ohio; Cadmus v. Titanium Metals Corporation, No. 94 CV
00469, Court of Common Pleas, Jefferson County, Ohio). The complaints seek
compensatory and punitive damages totaling approximately $2.5 million each.
Both of these cases were subsequently removed to U.S. District Court for the
Southern District of Ohio (Sutherin, No. C2-95-551; Cadmus, No. C2-95-586). The
Sutherin case was dismissed without prejudice by the plaintiff in June 1996.
The Cadmus action is currently in discovery.
Plaintiff's claims in Cadmus are similar to previous claims made by
plaintiff and rejected by the Ohio Industrial Commission (which decision is
currently on appeal in state court in Ohio). TIMET intends to vigorously defend
this action as well. At December 31, 1996, TIMET had not accrued any amounts
related to either of these matters.
F-27
57
Ray Cook Golf. In April 1996, TIMET Castings received a letter from a
golf club manufacturer, Ray Cook Golf Company ("Ray Cook"), claiming breach of
contract and trademark infringement. Ray Cook asserted damages in the
approximate amount of $.6 million for lost profits and delivery delays relating
to the production of golf club heads by TIMET Castings. In March 1997, the
Company received notice that Ray Cook had filed (but not yet served) an action
claiming damages in excess of $5 million with respect to this matter. The
Company believes that this action is without merit, intends to continue to deny
all allegations of liability and to defend this action vigorously. The Company
has not accrued any amounts related to this matter.
Tungsten contamination. In 1993, TIMET discovered an anomaly in
certain alloyed titanium material manufactured by TIMET for shipment to a jet
engine manufacturer, resulting from tungsten carbide contaminated chromium sold
to TIMET by a third-party vendor and used as an alloying addition to this
titanium material. In June 1996, the Company entered into a settlement
agreement with the purchaser of the material which calls for payment by the
Company of an aggregate $2 million; a $.2 million lump-sum payment with the
balance payable in equal quarterly payments ($1.5 million unpaid and accrued at
December 31, 1996). The Company has filed an action against the chromium
supplier (Titanium Metals Corp. v. Elkem Metals, Case No. 97-0369, W.D. Pa.)
seeking recovery of the cost to TIMET to settle with its customer plus related
costs. The Company's estimate of any recovery from the chromium supplier and/or
TIMET's insurance carrier is based on management's judgment of the likely
outcome based on facts and circumstances known at the time and is subject to
future revisions.
In addition, in 1995 TIMET learned that a jet engine disk that had
been in service since 1989 was discovered during routine inspection to have a
high density inclusion that was not identified during manufacture and testing
by TIMET or the subsequent forger of the material. The inclusion was completely
intact and showed no signs of cracking or fatigue that would suggest that it
posed a safety problem. Subsequent metallurgical inspection identified the
inclusion as pure tungsten, which TIMET believes would have resulted from
contaminated chromium used in the manufacture of the titanium alloy. TIMET
currently believes that the engine manufacturer will require that engines
containing disks manufactured from titanium having a link to the potentially
contaminated lot of chromium be subjected to a higher level of inspection or to
more frequent inspection to assure that there is no safety issue involved.
While TIMET does not currently anticipate that it will incur any material
liability in connection with this matter, no assurances can be given in this
regard. At December 31, 1996, TIMET had not accrued any amount with respect to
this matter.
Environmental matters.
BMI Companies. TIMET and certain other companies, including Kerr-McGee
Chemical Corporation, Chemstar Lime Company and Pioneer Chlor Alkali, Inc.
(successor to Stauffer Chemical Company) operate facilities in a complex (the
"BMI Complex") owned by BMI, adjacent to TIMET's Henderson, Nevada plant. In
1993, TIMET and each of such companies, along with certain other companies who
previously operated facilities in the common areas of the BMI Complex
(collectively the "BMI Companies") completed a Phase I environmental assessment
of the common areas of the BMI Complex and each of the individual company sites
pursuant to consent agreements with the Nevada Division of Environmental
Protection ("NDEP"). In July 1996, the Company signed a consent agreement with
NDEP regarding implementation of the Phase II assessment of the Company
property within the BMI Complex. A report regarding the Phase II assessment of
the common areas of the BMI Complex was submitted to NDEP in August 1996. At
December 31, 1996, the Company had accrued $1 million with respect to this
matter. Until completion of the sampling and analysis that will be involved in
the Phase II assessment of the Company property and any further Phase II
testing that NDEP may require for the BMI Complex common areas, it is not
possible to provide a
F-28
58
reasonable estimate of the additional remediation costs, if any, or the
Company's likely share of any such costs.
In November 1995, TIMET and other BMI Companies were contacted by a
company proposing to develop a parcel of land adjacent to the BMI Complex,
alleging that the parcel had been contaminated by the BMI Companies through
their operations and threatening legal action to recover its development costs
to date of approximately $2.8 million. Based on the results of the
investigation in late 1995 and early 1996, the Company does not believe there
is any basis for the claim, and the claimants have not pursued the matter
further. At December 31, 1996, TIMET had not accrued any amounts with respect
to this matter. The parties are currently negotiating a complete settlement of
this matter in connection with a sale of certain other properties by VVLC to
the claimant.
Pomona facility. The Company has conducted an additional study and
assessment work as required by the California Regional Water Quality Control
Board--Los Angeles Region (the "Water Quality Board") related to soil and
possible groundwater contamination at TIMET Castings' Pomona, California
facility. The site is near an area that has been designated as a U.S.
Environmental Protection Agency "Superfund" site. At December 31, 1996, the
Company had accrued $.6 million related to this matter. Although the Company
does not believe it will incur a material liability in respect of the Pomona
facility, the Water Quality Board has not completed its review.
The Company determines the amount of its accruals for environmental
matters on a quarterly basis by analyzing and estimating the range of possible
costs in light of the available information. 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 expenditures 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.
Other. The Company is involved in various other environmental,
contractual, product liability and other claims and disputes 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.
Concentration of credit and other risks. Substantially all of the
Company's operating income and most of its sales are derived from U.S. and
Europe-based operations. The majority of the Company's sales are to customers
in the aerospace industry (including airframe and engine construction). Such
concentration of customers may impact the Company's overall exposure to credit
and other risks, either positively or negatively, in that such customers may be
similarly affected by economic or other conditions. The Company's ten largest
customers accounted for about one-third of net sales in each of the past three
years and about one-third of accounts receivable at December 31, 1995 and 1996.
Receivables are generally not collateralized.
At December 31, 1996, substantially all of the Company's cash and cash
equivalents were held by one financial institution.
F-29
59
Note 17--Quarterly results of operations (unaudited):
Quarters ended
---------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
--------- --------- --------- ---------
(In millions, except per share data)
Year ended December 31, 1996:
Net sales $ 107.6 $ 118.8 $ 123.4 $ 157.3
Operating income 6.8 13.8 17.8 21.4
Net income $ 2.1 $ 8.1 $ 13.3 $ 24.1
Net income per common share .10 .30 .42 .77
Fully diluted net income per share .75
Year ended December 31, 1995:
Net sales $ 41.7 $ 45.6 $ 47.9 $ 49.5
Operating income (loss) (1.6) 1.1 2.3 3.6
Net income (loss) $ (4.0) $ (2.2) $ (.3) $ 2.3
Net income (loss) per common share (.26) (.14) (.02) .14
Due to the timing of the issuance of common stock, such as the Stock
Offering, the sum of 1996 quarterly earnings per share is different than
earnings per share for the full year. Fully diluted earnings per share is not
presented for periods prior to the fourth quarter of 1996 as, prior to the
issuance of the Convertible Preferred Securities in November 1996 (see Note
10), the dilutive effect was nil.
F-30
60
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Stockholders and Board of Directors of Titanium Metals Corporation:
Our report on the consolidated financial statements of Titanium Metals
Corporation as of December 31, 1995 and 1996 and for each of the three years in
the period ended December 31, 1996 is included on page F-2 of this Form 10-K.
As discussed in Note 14 to the consolidated financial statements, in 1994 the
Company changed its method of accounting for postemployment benefits in
accordance with Statement of Financial Accounting Standards No. 112. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedules listed in the index on page F-1 of
this Annual Report on Form 10-K.
In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
January 21, 1997
S-1
61
TITANIUM METALS CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
Condensed Balance Sheets
December 31, 1995 and 1996
(In thousands)
1995 1996
-------- --------
Current assets:
Cash and cash equivalents $ 24 $ 82,846
Accounts receivable, net 27,932 50,421
Receivable from subsidiaries and related parties 3,070 12,476
Inventories 69,134 76,318
Prepaid expenses 3,452 5,563
Income taxes receivable -- 467
-------- --------
Total current assets 103,612 228,091
-------- --------
Other assets:
Investment in subsidiaries and joint ventures 13,853 217,207
Notes receivable from subsidiaries -- 25,000
Deferred income taxes -- 11,618
Other 6,451 15,069
-------- --------
Total other assets 20,304 268,894
-------- --------
Property and equipment, net 124,868 126,295
-------- --------
$248,784 $623,280
======== ========
Current liabilities:
Current maturities of long-term debt $ 45,695 $ 140
Accounts payable and accrued liabilities 48,146 50,023
Payable to subsidiaries and related parties 2,627 3,984
Deferred income taxes 596 348
-------- --------
Total current liabilities 97,064 54,495
-------- --------
Noncurrent liabilities:
Long-term debt 21,540 --
Payable to related parties:
6 5/8% convertible junior subordinated debentures
payable to TIMET Capital Trust I 207,474
Other 23,942 997
Accrued postretirement benefit cost 28,152 27,512
Deferred income taxes 789 1,385
Other 9,169 5,202
-------- --------
83,592 242,570
-------- --------
Stockholders' equity 68,128 326,215
-------- --------
$248,784 $623,280
======== ========
S-2
62
TITANIUM METALS CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Operations
Years ended December 31, 1994, 1995 and 1996
(In thousands)
1994 1995 1996
--------- --------- ---------
Revenues and other income:
Net sales $ 145,984 $ 184,723 $ 289,390
Other, net 2,076 5,293 8,170
--------- --------- ---------
148,060 190,016 297,560
--------- --------- ---------
Costs and expenses:
Cost of sales 159,958 170,699 239,681
Selling, general, administrative
and development 12,462 14,065 16,113
Special charges (credit) 10,000 (1,200) 3,928
Interest 7,562 10,414 8,028
--------- --------- ---------
189,982 193,978 267,750
--------- --------- ---------
(41,922) (3,962) 29,810
Equity in earnings of consolidated subsidiaries -- -- 10,567
--------- --------- ---------
Income (loss) before income taxes (41,922) (3,962) 40,377
Income tax expense (benefit) 155 255 (7,267)
--------- --------- ---------
Income (loss) before cumulative effect of a
change in accounting principle (42,077) (4,217) 47,644
Change in accounting principle (1,000) -- --
--------- --------- ---------
Net income (loss) ($ 43,077) $ (4,217) $ 47,644
========= ========= =========
S-3
63
TITANIUM METALS CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Condensed Statements of Cash Flows
Years ended December 31, 1994, 1995 and 1996
(In thousands)
1994 1995 1996
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ (43,077) $ (4,217) $ 47,644
Depreciation and amortization 8,334 13,218 9,525
Earnings of subsidiaries and joint
ventures in excess of distributions (1,195) (3,824) (16,559)
Deferred income taxes -- -- (11,032)
Other, net 13,449 (1,286) 1,318
Change in assets and liabilities, net 2,468 (10,006) (48,070)
--------- --------- ---------
Net cash used by operating activities (20,021) (6,115) (17,174)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (4,609) (2,981) (11,897)
Purchase of interest in subsidiaries -- -- (98,049)
Other, net 40 421 (12)
--------- --------- ---------
Net cash used by investing activities (4,569) (2,560) (109,958)
--------- --------- ---------
Cash flows from financing activities:
Indebtedness:
Borrowings 63,625 9,371 100,264
Reductions (48,829) (7,371) (167,359)
Proceeds from issuance of common stock, net -- -- 131,488
Proceeds from issuance of convertible
junior subordinated debentures, net -- -- 192,409
Capital contributions from related parties 419 1,148 --
Related parties loans (repayments) 2,500 5,500 (42,460)
--------- --------- ---------
Net cash provided by financing activities 17,715 8,648 214,342
--------- --------- ---------
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities (6,875) (27) 87,210
Cash acquired, net -- -- (4,420)
Currency translation 146 51 32
--------- --------- ---------
(6,729) 24 82,822
Balance at beginning of year 6,729 -- 24
--------- --------- ---------
Balance at end of year $ -- $ 24 $ 82,846
========= ========= =========
Supplemental disclosures - cash paid for:
Interest expense $ 6,497 $ 9,970 $ 7,596
Income taxes 120 112 5,056
S-4
64
TITANIUM METALS CORPORATION
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
Notes to Condensed Financial Information
Note 1 - Basis of presentation:
The Consolidated Financial Statements of Titanium Metals Corporation
(the "Company") and the related Notes to Consolidated Financial Statements are
incorporated herein by reference. The Company is primarily an operating
company, however certain operations, principally acquired in 1996 (See Note 4
to the Consolidated Financial Statements), are conducted through subsidiaries.
Condensed financial information for all periods presented is classified based
on the Company's organizational structure as of December 31, 1996.
At December 31, 1996, net assets of subsidiaries subject to
restrictions aggregated $92 million. Commitments and contingencies are
discussed in Note 16 to the Consolidated Financial Statements.
Note 2 - Investment in subsidiaries and joint ventures:
December 31,
-----------------------
1995 1996
-------- --------
(In thousands)
Timet UK, Ltd. $ -- $ 72,811
Timet Castings Corporation -- 19,659
Titanium Hearth Technologies 13,853 118,243
TIMET Capital Trust I -- 6,224
Other -- 270
-------- --------
$ 13,853 $217,207
======== ========
Note 3 - Inventories:
December 31,
---------------------
1995 1996
------- -------
(In thousands)
Raw materials $ 7,778 $10,332
In process and finished products 57,538 61,259
Supplies 3,818 4,727
------- -------
$69,134 $76,318
======= =======
The average cost of LIFO inventories exceeded the net carrying amount
of such inventories by approximately $19 million at December 31, 1995 and $32
million at December 31, 1996.
S-5
65
Note 4 - Net receivable from (payable to) subsidiaries and related parties:
December 31,
------------------------
1995 1996
-------- --------
(In thousands)
Current:
UTSC $ 3,070 $ 1,676
Tremont -- (624)
Subsidiaries (2,627) 7,440
-------- --------
$ 443 $ 8,492
======== ========
Noncurrent:
Notes receivable from subsidiaries:
TIMET UK $ -- $ 20,000
TIMET Castings -- 5,000
-------- --------
-- 25,000
Tremont (23,942) (997)
-------- --------
$(23,942) $ 24,003
======== ========
Note 5 - Convertible junior subordinated debentures:
In November 1996, the Company issued to TIMET Capital Trust I $207
million principal amount of TIMET's 6.625% convertible junior subordinated
debentures due 2026 and, in the aggregate, constitute a full and unconditional
guarantee by the Company of the Trust's obligation under the Convertible
Preferred Securities. See Note 10 to the Consolidated Financial Statements.
Note 6 - Long-term debt:
December 31,
---------------------
1995 1996
------- -------
(In thousands)
US credit agreement $66,955 $ --
Other 280 140
------- -------
67,235 140
Less current maturities 45,695 140
------- -------
$21,540 $ --
======= =======
S-6
66
TITANIUM METALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
ADDITIONS
CHARGED
BALANCE AT (CREDITED) TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OTHER OF YEAR
----------- --------- -------- ---------- ----- -------
YEAR ENDED DECEMBER 31, 1996:
Allowance for doubtful accounts $ 3,620 $ 4,695 $(4,598) (a) $ 1,071 (b) $ 4,788
======== ======== ======== ======= ========
Valuation allowance for deferred
income taxes $ 22,677 $(16,519) $ -- $ -- $ 6,158
======== ======== ======== ======= ========
Reserve for excess and slow
moving inventories $ 6,000 $ (2,500) $ -- $ -- $ 3,500
======== ======== ======== ======= ========
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful accounts $ 3,143 $ 2,453 $ (1,976) (a) $ -- $ 3,620
======== ======== ======== ======= ========
Valuation allowance for deferred
income taxes $ 23,599 $ (922) $ -- $ -- $ 22,677
======== ======== ======== ======= ========
Reserve for excess and
slow moving inventories $ 5,000 $ 1,000 $ -- $ -- $ 6,000
======== ======== ======== ======= ========
YEAR ENDED DECEMBER 31, 1994:
Allowance for doubtful accounts $ 2,143 $ 4,007 $ (3,007) (a) $ -- $ 3,143
======== ======== ======== ======= ========
Valuation allowance for deferred
income taxes $ 8,910 $ 14,689 $ -- $ -- $ 23,599
======== ======== ======== ======= ========
Reserve for excess and
slow moving inventories $ -- $ 5,000 $ -- $ -- $ 5,000
======== ======== ======== ======= ========
- - -----------------------------
(a) Amounts written off, less recoveries.
(b) Represents the effect of the IMI Titanium Acquisition and the AJM
Acquisition.
S-7
67
Item No. Exhibit Index
- - -------- --------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of Titanium
Metals Corporation, incorporated by reference to Exhibit 3.1
to Titanium Metals Corporation's Registration Statement on
Form S-1 (No. 333-2940).
3.2 Bylaws of Titanium Metals Corporation as Amended and Restated,
dated February 14, 1997.
4.1 Certificate of Trust of TIMET Capital Trust I, dated November
13, 1996, incorporated by reference to Exhibit 4.1 to
Titanium Metals Corporation's Current Report on Form 8-K
filed with the Commission on December 5, 1996.
4.2 Amended and Restated Declaration of Trust of TIMET Capital
Trust I, dated as of November 20, 1996, among Titanium Metals
Corporation, as Sponsor, The Chase Manhattan Bank, as
Property Trustee, Chase Manhattan Bank (Delaware), as
Delaware Trustee and Joseph S. Compofelice, Robert E.
Musgraves and Mark A. Wallace, as Regular Trustees,
incorporated by reference to Exhibit 4.2 to Titanium Metals
Corporation's Current Report on Form 8-K filed with the
Commission on December 5, 1996.
4.3 Indenture for the 6 5/8% Convertible Subordinated Debentures,
dated as of November 20, 1996, among Titanium Metals
Corporation and The Chase Manhattan Bank, as Trustee,
incorporated by reference to Exhibit 4.3 to Titanium Metals
Corporation's Current Report on Form 8-K filed with the
Commission on December 5, 1996.
4.4 Form of 6 5/8% Convertible Preferred Securities (included in
Exhibit 4.1 above), incorporated by reference to Exhibit 4.5
to Titanium Metals Corporation's Current Report on Form 8-K
filed with the Commission on December 5, 1996.
4.5 Form of 6 5/8% Convertible Subordinated Debentures (included
in Exhibit 4.2 above), incorporated by reference to Exhibit
4.5 to Titanium Metals Corporation's Current Report on Form
8-K filed with the Commission on December 5, 1996.
4.6 Form of 6 5/8% Trust Common Securities (Included in Exhibit
4.2 above), incorporated by reference to Exhibit 4.5 to
Titanium Metals Corporation's Current Report on Form 8-K
filed with the Commission on December 5, 1996.
4.7 Convertible Preferred Securities Guarantee, dated as of
November 20, 1996, between Titanium Metals Corporation, as
Guarantor, and The Chase Manhattan Bank, as Guarantee
Trustee, incorporated by reference to Exhibit 4.6 to Titanium
Metals Corporation's Current Report on Form 8-K filed with
the Commission on December 5, 1996.
9.1 Shareholders' Agreement, dated February 15, 1996, among
Titanium Metals Corporation, Tremont Corporation, IMI plc,
IMI Kynoch Ltd., and IMI Americas, Inc., incorporated by
reference to Exhibit 2.2 to Tremont Corporation's Current
Report on Form 8-K (No. 1-10126) filed with the Commission on
March 1, 1996.
9.2 Amendment to the Shareholders' Agreement, dated March 29,
1996, among Titanium Metals Corporation, Tremont Corporation,
IMI plc, IMI Kynoch Ltd., and IMI Americas Inc., incorporated
by reference to Exhibit 10.30 to Tremont Corporation's Annual
Report on Form 10-K (No. 1-10126) for the year ended December
31, 1995.
9.3 Investors' Agreement between Union Titanium Sponge
Corporation, Toho Titanium Co., Ltd., Nippon Mining Co.,
Ltd., Mitsui & Co., Ltd., Mitsui & Co. (U.S.A.), Inc.,
Tremont Corporation and Titanium Metals Corporation, dated
May 30, 1990, incorporated by reference to Exhibit 10.33 of
Baroid Corporation's registration statement on Form 10 (No.
1-10624) filed with the Commission on August 31, 1990.
68
9.4 Amendment No. 3 to Investors' Agreement between Union
Titanium Sponge Corporation, Toho Titanium Co., Ltd., Nippon
Mining Co., Ltd., Mitsui & Co., Ltd., Mitsui & Co., (U.S.A.),
Inc., Tremont Corporation and Titanium Metals Corporation,
dated May 30, 1990, incorporated by reference to Exhibit 9.1
to Tremont Corporation's Quarterly Report on Form 10-Q (No.
1-10126) for the quarter ended March 31, 1996.
9.5 Amendment No. 4 to Investors' Agreement among Union Titanium
Sponge Corporation, Toho Titanium Co., Ltd., Nippon Mining
Co., Ltd., Mitsui & Co., Ltd., Mitsui & Co., (U.S.A.) Inc.,
Tremont Corporation and Titanium Metals Corporation, dated
February 21, 1997, incorporated by reference to Exhibit 9.5
to Titanium Metals Corporation's Amendment No. 1 to
Registration Statement on Form S-1 (No. 333-18829).
10.1 Acquisition Agreement, dated February 15, 1996, by and between
Titanium Metals Corporation, IMI Kynoch Ltd., and IMI
Americas Inc., incorporated by reference to Exhibit 2.1 to
Tremont Corporation's Current Report on Form 8-K (No.
1-10126) filed with the Commission on March 1, 1996.
10.2 Amended and Restated Subordinated Promissory Note, dated as of
January 1, 1996, between Titanium Metals Corporation and
Tremont Corporation, incorporated by reference to Exhibit
10.2 to Titanium Metals Corporation's Registration Statement
on Form S-1 (No. 333-2940).
10.3 Amended and Restated Loan Agreement between Titanium Metals
Corporation and Congress Financial Corporation (Central),
dated March 24, 1995, incorporated by reference to Exhibit
10.4 of Tremont Corporation's Amended Annual Report on Form
10-K/A (No. 1-10126) for the year ended December 31, 1994.
10.4 Amendment to Amended and Restated Loan and Security Agreement
between Congress Financial Corporation and Titanium Metals
Corporation, dated September 29, 1995, incorporated by
reference to Exhibit 10.16 to Tremont Corporation's Annual
Report on Form 10-K (No. 1-10126) for the year ended December
31, 1995.
10.5 Amendment to Amended and Restated Loan and Security Agreement
between Congress Financial Corporation and Titanium Metals
Corporation, dated February 15, 1996, incorporated by
reference to Exhibit 10.17 to Tremont Corporation's Annual
Report on Form 10-K (No. 1-10126) for the year ended December
31, 1995.
10.6 Sponge Purchase Agreement, dated May 30, 1990, between
Titanium Metals Corporation and Union Titanium Sponge
Corporation and Amendments No. 1 and 2, incorporated by
reference to Exhibit 10.25 of Tremont Corporation's Annual
Report on Form 10-K (No. 1-10126) for the year ended December
31, 1991.
10.7 Amendment No. 3 to the Sponge Purchase Agreement, dated
December 3, 1993, between Titanium Metals Corporation and
Union Titanium Sponge Corporation, incorporated by reference
to Exhibit 10.33 of Tremont Corporation's Annual Report on
Form 10-K (No. 1-10126) for the year ended December 31, 1993.
10.8 Amendment No. 4 to the Sponge Purchase Agreement, dated May 2,
1996, between Titanium Metals Corporation and Union Titanium
Sponge Corporation, incorporated by reference to Exhibit 10.1
to Tremont Corporation's Quarterly Report on Form 10-Q (No.
1-10126) for the quarter ended March 31, 1996.
10.9 Amendment to Amended and Restated Loan and Security Agreement
between Congress Financial Corporation (Central) and Titanium
Metals Corporation, dated May 31, 1996, incorporated by
reference to Exhibit 10.26 to Titanium Metals Corporation's
Registration Statement on Form S-1 (No. 333-2940).
69
10.10 Amended and Restated Term Promissory Note in the principal
amount of $10,150,000 issued by Titanium Metals Corporation
to Congress Financial Corporation (Central), dated May 31,
1996, incorporated by reference to Exhibit 10.27 to Titanium
Metals Corporation's Registration Statement on Form S-1 (No.
333-2940).
10.11 Amended and Restated Term-B Promissory Note in the principal
amount of $13,000,000 issued by Titanium Metals Corporation
to Congress Financial Corporation (Central), dated May 31,
1996, incorporated by reference to Exhibit 10.28 to Titanium
Metals Corporation's Registration Statement on Form S-1 (No.
333-2940).
10.12 Amendment to Amended and Restated Loan and Security Agreement
between Congress Financial Corporation and Titanium Metals
Corporation, dated November 26, 1996, incorporated by
reference to exhibit 10.34 to Titanium Metals Corporation's
Amendment No. 1 to Registration Statement on Form S-1 (No.
333-18829).
10.13 Lease Agreement, dated January 1, 1996, between Holford
Estates Ltd. and IMI Titanium Ltd. related to the building
known as Titanium Number 2 Plant at Witton, England,
incorporated by reference to Exhibit 10.23 to Tremont
Corporation's Annual Report on Form 10-K (No. 1-10126) for
the year ended December 31, 1995.
10.14 Intercorporate Services Agreement between Titanium Metals
Corporation and Tremont Corporation, dated March 28, 1996,
incorporated by reference to Exhibit 10.29 to Tremont
Corporation's Annual Report on Form 10-K (No. 1-10126) for
the year ended December 31, 1995.
10.15* 1996 Long Term Performance Incentive Plan of Titanium Metals
Corporation, incorporated by reference to Exhibit 10.19 to
Titanium Metals Corporation's Amendment No. 1 to Registration
Statement on Form S-1 (No. 333-18829).
10.16* 1996 Non-Employee Director Compensation Plan, incorporated by
reference to Exhibit 10.20 to Titanium Metals Corporation's
Amendment No. 1 to Registration Statement on S-1 (No.
333-18829).
10.17* Employment Agreement between Andrew R. Dixey and Titanium
Metals Corporation, dated February 13, 1996, incorporated by
reference to Exhibit 10.21 to Titanium Metals Corporation's
Registration Statement on Form S-1 (No. 333-2940).
10.18* Form of Agreement relating to a grant of Management Shares
between Titanium Metals Corporation and certain executive
officers, effective as of February 15, 1996, incorporated by
reference to Exhibit 10.22 to Titanium Metals Corporation's
Registration Statement on Form S-1 (No.
333-2940).
10.19 Agreement, dated June 28, 1995, among Titanium Metals
Corporation, Tremont Corporation and Union Titanium Sponge
Corporation, incorporated by reference to Exhibit 10.24 to
Titanium Metals Corporation's Registration Statement on Form
S-1 (No. 333-2940).
10.20 Asset Purchase Agreement, dated October 1, 1996, by and
between Titanium Metals Corporation and Axel Johnson Metals,
Inc., incorporated by reference to Exhibit 2.1 to Titanium
Metals Corporation's Current Report on Form 8-K filed with
the Commission on October 16, 1996.
10.21 Purchase Agreement, dated November 20, 1996, between Titanium
Metals Corporation, TIMET Capital Trust I, Salomon Brothers
Inc, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley & Co. Incorporated, as Initial Purchasers,
incorporated by reference to Exhibit 99.1 to Titanium Metals
Corporation's Current Report on Form 8-K filed with the
Commission on December 5, 1996.
70
10.22 Registration Agreement, dated November 20, 1996, between
TIMET Capital Trust I and Salomon Brothers Inc, as
Representative of the Initial Purchasers, incorporated by
reference to Exhibit 99.1 to Titanium Metals Corporation's
Current Report on Form 8-K filed with the Commission on
December 5, 1996.
10.23 $20,000,000 Subordinated Promissory Note issued by Titanium
Metals Corporation to IMI Kynoch Ltd., dated January 1, 1996,
incorporated by reference to Exhibit 10.21 to Tremont
Corporation's Annual Report on Form 10-K (No. 1-10126) for
the year ended December 31, 1995.
10.24 Amended and Restated Subordination Agreement between Tremont
Corporation and Congress Financial Corporation, dated
February 15, 1996, incorporated by reference to Exhibit 10.24
to Tremont Corporation's Annual Report on Form 10-K (No.
1-10126) for the year ended December 31, 1995.
10.25 Subordination Agreement between Tremont Corporation and
Titanium Metals Corporation, dated February 15, 1996,
incorporated by reference to Exhibit 10.25 to Tremont
Corporation's Annual Report on Form 10-K (No. 1-10126) for
the year ended December 31, 1995.
10.26 Subordination Agreement between IMI Kynoch Ltd. and Titanium
Metals Corporation, dated February 15, 1996, incorporated by
reference to Exhibit 10.26 to Tremont Corporation's Annual
Report on Form 10-K (No. 1-10126) for the year ended December
31, 1995.
10.27 Subordination Agreement between Tremont Corporation and IMI
Kynoch Ltd., dated February 15, 1996, incorporated by
reference to Exhibit 10.27 to Tremont Corporation's Annual
Report on Form 10-K (No. 1-10126) for the year ended December
31, 1995.
10.28 Subordination Agreement between IMI Kynoch Ltd. and Congress
Financial Corporation, dated February 15, 1996, incorporated
by reference to Exhibit 10.28 to Tremont Corporation's Annual
Report on Form 10-K (No. 1-10126) for the year ended December
31, 1995.
10.29 First Amendment to Subordination Agreement by and between IMI
Kynoch, Ltd. and Congress Financial Corporation (Central),
dated May 31, 1996, incorporated by reference to Exhibit
10.29 to Titanium Metals Corporation's Registration Statement
on Form S-1 (No. 333-2940).
10.30 First Amendment to Amended and Restated Subordination
Agreement by and between Tremont Corporation and Congress
Financial Corporation (Central), dated May 31, 1996,
incorporated by reference to Exhibit 10.30 to Titanium Metals
Corporation's Registration Statement on Form S-1 (No.
333-2940).
11.1 Statement Regarding Computation of Per Share Earnings.
21.1 Subsidiaries of the Registrant
23.1 Consent of Coopers & Lybrand, L.L.P.
27.1 Financial Data Schedule for the year ended December 31, 1996
* Management contract, compensatory plan or arrangement.