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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the fiscal year ended DECEMBER 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-28538
TITANIUM METALS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-5630895
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock New York Stock Exchange
($.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
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 March 16, 2000, 31,371,405 shares of common stock were outstanding. The
aggregate market value of the 16.5 million shares of voting stock held by
nonaffiliates of Titanium Metals Corporation as of such date approximated $77
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.
Forward-Looking Information
The statements contained in this Annual Report on Form 10-K that are
not historical facts, including, but not limited to, statements found in Item 1
- - Business, Item 2 - Properties, Item 3 - Legal Proceedings and Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations are forward-looking statements that represent management's beliefs
and assumptions based on currently available information. Forward-looking
statements can be identified by the use of words such as "believes," "intends,"
"may," "will," "looks," "should," "anticipates," "expected" or comparable
terminology or by discussions of strategy or trends. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it cannot give any assurances that these expectations will prove to
be correct. Such statements by their nature involve substantial risks and
uncertainties that could significantly affect expected results. Actual future
results could differ materially from those described in such forward-looking
statements, and the Company disclaims any intention or obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Among the factors that could cause actual results to
differ materially are the risks and uncertainties discussed in this Annual
Report, including in those portions referenced above and those described from
time to time in the Company's other filings with the Securities and Exchange
Commission include, but are not limited to, the cyclicality of the commercial
aerospace industry, the performance of The Boeing Company and other aerospace
manufacturers under their long-term purchase agreements with the Company, global
economic conditions, global productive capacity for titanium, changes in product
pricing, the impact of long-term contracts with vendors on the ability of the
Company to reduce or increase supply or achieve lower costs, the possibility of
labor disruptions, control by certain stockholders and possible conflicts of
interest, uncertainties associated with new product development and the supply
of raw materials and services and other risks and uncertainties. Should one or
more of these risks materialize (or the consequences of such a development
worsen), or should the underlying assumptions prove incorrect, actual results
could differ materially from those forecasted or expected.
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, ingot, slab and
mill products and has the largest sales volume worldwide. The Company is the
only integrated producer with major titanium processing facilities in both the
United States and Europe, the world's principal markets for titanium. The demand
for titanium reached a peak in 1997 when worldwide mill products shipments
reached 60,000 metric tons. Since this peak, annual shipments declined 10% to
54,000 metric tons in 1998 and a further 11% to 48,000 metric tons in 1999. The
Company estimates that in 1999 it accounted for approximately 24% of worldwide
industry shipments of mill products and approximately 13% of world sponge
production.
Titanium was first 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 for certain critical parts such as
wing supports and jet engine components. While aerospace applications have
historically accounted for a substantial portion of the worldwide demand for
titanium and were approximately 40% of industry mill product shipments in 1999,
the number of non-aerospace end-use markets for titanium has expanded
substantially. Today, numerous industrial uses for titanium exist, including
chemical and industrial power plants, desalination plants and pollution control
equipment. Demand for titanium is also increasing in diverse uses such as
medical implants, sporting equipment, offshore oil and gas production
installations, geothermal facilities, military armor and automotive and
architectural uses.
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 rolled products produced from ingot or slab,
including billet, bar, flat products (plate, sheet and strip), welded pipe, pipe
fittings, extrusions and wire. The Company believes it is among the lower cost
producers of titanium sponge and melt products due in part to its economies of
scale, manufacturing expertise and investment in technology. The titanium
industry is comprised of several manufacturers which, like the Company, produce
a relatively complete range of titanium products and a significant number of
producers worldwide that manufacture a limited range of titanium mill products.
The Company believes that at least 90% of the world's titanium sponge is
produced by six companies.
The Company intends to continue its focus on the following long-term
goals and objectives to change the traditional way business is conducted:
o Maximize the long-term value of its core aerospace business by
focusing on the Company's basic strengths of sponge production,
melting and forging of various shapes of titanium products, and by
entering into strategic agreements with major titanium users to
help mitigate the cyclicality of the Company's aerospace business.
o Invest in strategic alliances, including joint ventures,
acquisitions and entrepreneurial arrangements, as well as new
markets, applications and products, to help reduce traditional
dependence on the aerospace sector.
o Invest in technology, capacity and innovative projects aimed at
reducing costs and enhancing productivity, quality, customer
service and production capabilities.
o Stabilize the cost and supply of raw materials.
o Maintain a strong balance sheet.
The Company's focus in the short-term is to return to profitability as
quickly as possible by reducing costs, improving quality and streamlining its
overall business and manufacturing processes. To that end, the Company has:
o Limited planned capital expenditures to include those principally
intended for capital maintenance, environmental, health and safety
purposes.
o Rationalized staffing and production worldwide to fit current
market conditions.
o Suspended the dividend on its common stock.
o Negotiated new credit agreements to provide liquidity through the
current down-cycle.
o Initiated a plan to reduce overhead, inventory and receivables.
The Company intends to consider further means to reduce costs if the foregoing
do not prove sufficient to return to profitability.
CURRENT INDUSTRY CONDITIONS AND OUTLOOK FOR 2000. The titanium industry
historically has derived the majority of its business from the aerospace
industry. The cyclical nature of the aerospace industry has been the principal
cause of the historical fluctuations in performance of titanium companies, which
had cyclical peaks in mill products shipments in 1980, 1989 and 1997 and
cyclical lows in 1983 and 1991. During the 1996-1998 period, the Company
reported aggregate net income of $176 million, which substantially more than
offset the aggregate net losses of $93 million it reported during the difficult
1991-1995 period. The Company currently expects that the loss in 2000 will
exceed the 1999 loss and looks to return to profitability in late 2001.
Worldwide industry mill products shipments of approximately 60,000
metric tons in 1997 were 65% above 1994 levels. In 1998, industry mill product
shipments declined approximately 10%, to approximately 54,000 metric tons, with
a further 11% decline to approximately 48,000 metric tons in 1999. Expectations
for 2000 are a further decline in mill product shipments although it is expected
to be less than the decline as experienced during each of the last two years.
The Company believes that the reduction in demand for aerospace products is
attributable to a decline in the number of aircraft forecast to be produced,
particularly in titanium-intensive wide body planes, compounded by reductions in
inventories throughout the aerospace industry supply chain as customers adjust
to the decreases in overall production rates. Industrial demand for titanium has
also declined due to weakness in Asian and other economies.
Aerospace demand for titanium products, which includes both jet engine
components such as rotor blades, discs, rings and engine cases, and air frame
components, such as bulkheads, tail sections, landing gear and wing supports,
can be broken down into commercial and military sectors. Industry shipments to
the commercial aerospace sector in 1999 accounted for approximately 85% of total
aerospace demand (35% of total titanium demand).
ACCORDING TO THE AIRLINE MONITOR, a leading aerospace publication, the
commercial airline industry reported operating income of over $17 billion
(estimated) in 1999, compared to $16 billion in each of 1998 and 1997. The
Company believes that commercial aircraft deliveries peaked in 1999. Current
expected deliveries for 2000 and 2001, while below the record levels of 1998 and
1999, are still high by historical standards, and the current generations of
airplanes use substantially more titanium than their predecessors. The demand
for titanium generally precedes aircraft deliveries by about a year, which
results in the Company's cycle preceding that of the cycle of the aircraft
industry and related deliveries. The Company can give no assurance as to the
extent or duration of the current commercial aerospace cycle or the extent to
which it will result in demand for titanium products.
Since titanium's initial applications in the aerospace sector, the
number of end-use markets for titanium has expanded. 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 diverse uses such as medical implants, sporting equipment,
offshore oil and gas production installations, geothermal facilities, military
armor and automotive and architectural uses. Several of these are emerging
applications and represent potential growth opportunities that the Company
believes may reduce the industry's historical dependence on the aerospace
market.
The business environment in which TIMET finds itself in 2000 remains very
different from 1996-1998. During the second half of 1998 it became evident that
the anticipated record rates of aircraft production would not be reached, and
that a decline in overall production rates would begin earlier than forecast,
particularly in titanium-intensive wide body planes. During 1999, aerospace
customers continued to reduce inventories, and customers and end users continue
to indicate that a substantial inventory overhang exists. As a result, a
significant number of the Company's major aerospace customers canceled or
delayed previously scheduled orders. Most importantly, TIMET believes orders
under the Company's long-term contract with The Boeing Company ("Boeing") were
significantly below the contractual volume requirements for 1999. Although
Boeing has informed the Company that it will either order the required
contractual volume under the contract in 2000 or pay the liquidated damages
provided for in the agreement, TIMET has received virtually no Boeing-related
orders under the contract for the year 2000. Boeing has also informed the
Company that it is unwilling to commit to the contract beyond the year 2000, and
TIMET has filed a lawsuit against Boeing for repudiation and breach of the
Boeing contract. These factors lead TIMET to believe that year 2000 sales will
be somewhat lower than the fourth quarter 1999 annualized amount.
Adding to the challenges in the aerospace sector, industrial demand for
titanium remains soft due to the weakness in Asian and other economies. Assuming
overall market demand remains at currently expected levels, which is lower than
1999, the Company currently expects operating and net losses in each quarter of
2000. In both the aerospace and industrial sectors, reduced demand and lower
prices (including prices under new long-term contracts referred to below) are
expected to cause sales, gross margin and operating income excluding special
charges to be lower in 2000 than in 1999.
In the fourth quarter of 1999 and January 2000 TIMET began implementing
a plan of action designed to address current market conditions without
abandoning key elements of its long-term strategy, which it believes remain
sound. The action plan entails the following:
o TIMET's global manufacturing operations and commercial operations
have been consolidated into two organizations with personnel
reductions of about 250 people compared to year end 1999 levels.
This comes on top of a reduction of approximately 700 people
during 1998 and 1999.
o TIMET will focus significant efforts in improving manufacturing
performance. Considerable resources will be devoted to continuous
improvement programs to improve the quality of manufacturing,
customer service and management processes.
o Reductions in plant overhead costs as well as in selling and
administrative costs have been targeted.
o Supply contracts with key vendors have been renegotiated in order
to reduce volumes and, to some extent, prices. Similar efforts
will continue throughout 2000.
o Capital expenditures will be reduced from 1999 levels. Total
capital expenditures are expected to be approximately $15 million
in 2000, compared to approximately $25 million in 1999 and an
aggregate of approximately $180 million in 1997 and 1998.
In addition to its short-term plan of actions as described above, the
Company has long-term agreements with certain major aerospace customers,
including Boeing, Rolls-Royce plc, United Technologies Corporation (and related
companies) and Wyman-Gordon Company. These agreements provide for (i) minimum
market shares of the customers' titanium requirements (generally at least 70%)
for extended periods (nine to ten years) and (ii) fixed or formula-determined
prices generally for at least the first five years. The contracts were
structured to provide incentives to both parties to lower TIMET's costs and
share in the savings. These contracts and others represent the core of the
Company's long-term aerospace strategy. These agreements should limit pricing
volatility (both up and down) for the long term benefit of both parties, while
providing TIMET with a solid base of aerospace volume.
The Boeing contract requires Boeing to purchase a minimum percentage of
their titanium requirements from TIMET. Although Boeing placed orders and
accepted delivery of certain volumes in 1999, TIMET believes the level of orders
was significantly below the contractual volume requirements for 1999. Although
Boeing has informed the Company that it will either order the required
contractual volume under the contract in 2000 or pay the liquidated damages
provided for in the agreement, TIMET has received virtually no Boeing-related
orders under the contract for the year 2000. Boeing has also informed the
Company that it is unwilling to commit to the contract beyond the year 2000. On
March 21, 2000, the Company filed a lawsuit against Boeing in a Colorado state
court seeking damages for Boeing's repudiation and breach of the Boeing
contract. TIMET's complaint seeks damages from Boeing that TIMET believes are in
excess of $600 million and a declaration from the court of TIMET's rights under
the contract.
As a complement to the long-term agreements entered into with the
Company's key customers, the Company has also entered into agreements with
certain key suppliers that were intended to assure anticipated raw material
needs to satisfy production requirements for the Company's key customers.
Primarily because of the lack of Boeing orders, the order flow did not meet
expectations in 1999; therefore, the Company restructured the terms of certain
agreements.
ACQUISITIONS AND CAPITAL TRANSACTIONS DURING THE PAST THREE YEARS.
During 1997, the Company entered into a welded tube joint venture ("ValTimet")
intended to combine best manufacturing practices and market coverage in this
market. In 1998, TIMET (i) acquired Loterios S.p.A. to increase market share in
industrial markets, particularly oil and gas, and provide increased geographic
sales coverage in Europe, (ii) purchased for cash $80 million of non-voting
preferred securities of Special Metals Corporation, a U.S. manufacturer of
wrought nickel-based superalloys and special alloy long products, and (iii)
entered into a castings joint venture with Wyman-Gordon. In January 2000, the
Company sold its interest in the castings joint venture. These transactions are
more fully described in Notes 3 and 4 to the Consolidated Financial Statements.
During the fourth quarter of 1999, the Company recorded a $2.3 million
charge to pretax earnings for the write-down associated with the Company's
investment in certain start-up joint ventures. See Note 4 to the Consolidated
Financial Statements.
In 1998, Tremont Corporation purchased additional TIMET common stock in
market transactions. In 1999, Tremont exercised an option to
purchaseapproximately two million shares of the Company's common stock. At March
1, 2000, Tremont held approximately 39% of TIMET's outstanding common stock. An
additional 8% of TIMET's outstanding common stock is owned by the Combined
Master Retirement Trust, a trust formed by Valhi, Inc., an affiliate of Tremont,
to permit the collective investment by trusts that maintain the assets of
certain employee benefit plans adopted by Valhi and related entities. See Note
15 to the Consolidated Financial Statements.
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 rolled products produced from ingot or slab,
including billet, bar, flat products (plate, sheet and strip), welded pipe, pipe
fittings, extrusions and wire. In 1999, virtually all of TIMET's sales were
generated by the Company's integrated titanium operations (its "Titanium melted
and mill products" segment). 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. 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 reactor, sheared and crushed, while
the residual magnesium chloride is electrolytically separated and recycled.
Titanium ingots and slabs are solid shapes (cylindrical and
rectangular, respectively) that weigh up to 8 metric tons in the case of ingots
and up to 16 metric tons 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 the forging, rolling, milling and machining operations, and
significant quantities of scrap are generated in the production process for
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. Ingots and slabs are
both sold to customers and further processed into mill products.
Titanium mill products result from the forging, rolling, drawing,
welding and/or extrusion of titanium ingots or slabs into products of various
sizes and grades. These mill products include titanium billet, bar, rod, plate,
sheet, strip, welded pipe, pipe fittings, extrusions and wire. 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.
During the production process and following the completion of products,
the Company performs extensive testing on its products, including sponge, ingot
and mill products. Testing may involve chemical analysis, mechanical testing and
ultrasonic and x-ray 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. Although the Company believes that there are other metal producers
with the capability to perform these same processing functions, arranging for
alternative processors, or possibly acquiring or 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. The Company is
exploring ways to lessen its dependence on any individual processor.
RAW MATERIALS. The principal raw materials used in the production of
titanium mill products are titanium sponge, titanium scrap and alloying
elements. The Company processes rutile ore into titanium tetrachloride and
further processes the titanium tetrachloride into titanium sponge. During 1999,
approximately 25% of the Company's production was made from internally produced
sponge, 35% from purchased sponge, 32% from titanium scrap and 8% from alloying
elements.
While the Company is one of six major worldwide producers of titanium
sponge, it cannot supply all of its needs for all grades of titanium sponge
internally and is dependent, therefore, on third parties for a portion of its
sponge needs in 2000. Based upon the Company's evaluation of the relative cost
of raw materials and the technical requirements of its customers, the Company
expects the mix of raw materials in 2000 to be 25% internally produced sponge,
32% purchased sponge, 36% scrap and 7% alloying elements. Sponge producers in
Japan and Kazakhstan are expected to supply all of the Company's sponge
purchases in 2000.
TIMET has a long-term agreement, concluded in 1997, for the purchase of
titanium sponge produced in Kazakhstan to support demand for both aerospace and
non-aerospace applications. This sponge purchase agreement is for ten years,
with firm pricing for the first five years (subject to certain possible
adjustments). This contract provides for annual purchases by the Company of
6,000 to 10,000 metric tons. The parties agreed to reduced minimums for 1999 and
2000. Due to the decrease in demand for titanium, the Company has abandoned its
plans to purchase on a long-term basis premium quality sponge produced in Japan.
The primary raw materials used in the production of titanium sponge are
titanium-containing rutile ore, chlorine, magnesium and petroleum coke.
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 for the foreseeable
future 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. Chlorine is currently obtained from a
single source near the Company's plant, but alternative suppliers are available.
Magnesium and petroleum coke are generally available from a number of suppliers.
Various alloying elements used in the production of titanium ingot are available
from a number of suppliers.
MARKETS AND CUSTOMER BASE. About 50% of the Company's 1999 sales were
to customers within North America, with about 42% to European customers and the
balance to other regions. While no customer accounts for more than 10% of the
Company's direct sales in 1999, about 85% of the Company's mill product sales
were used by the Company's customers to produce parts and other materials for
the aerospace industry. The Company has long-term agreements with certain major
aerospace customers, which accounted for approximately 44% of aerospace sales in
1999. The Company expects that while a majority of its 2000 sales will be to the
aerospace sector, other markets will continue to represent a significant portion
of sales.
The commercial aerospace industry consists of two major manufacturers
of large (over 100 seats) commercial aircraft (Boeing Commercial Airplane Group
and the Airbus consortium) and four major manufacturers of aircraft engines
(Rolls-Royce, Pratt & Whitney (a unit of United Technologies Corporation),
General Electric and SNECMA). The Company's sales are made both directly to
these major manufacturers and to companies (including forgers such as
Wyman-Gordon) that use the Company's titanium to produce parts and other
materials for such manufacturers. If any of the major aerospace manufacturers
were to significantly reduce aircraft build rates from those currently expected,
there could be a material adverse effect, both directly and indirectly, on the
Company.
The Company's order backlog was approximately $195 million at December
31, 1999, compared to $350 million at December 31, 1998 and $530 million at
December 31, 1997. Substantially all of the 1999 year end backlog is scheduled
to be shipped during 2000. Although the Company believes that the backlog is a
reliable indicator of near-term 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, 1999, the estimated firm order backlog for Boeing
and Airbus, as reported by the airline monitor, was 2,943 planes versus 3,224
planes at the end of 1998 and 2,753 planes at the end of 1997. 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 1999 was 679 (23% of total
backlog) compared to 820 (25% of total backlog) at the end of 1998.
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.
COMPETITION. The titanium metals industry is highly competitive on a
worldwide basis. Producers of mill products are located primarily in the United
States, Japan, Europe, Former Soviet Union ("FSU") and China. The Company is one
of five integrated producers in the world, with "integrated producers" being
considered as those that produce 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 most producers will continue
to generally operate at lower capacity utilization levels in 2000 than in 1999,
increasing price competition.
The Company's principal competitors in aerospace markets are Allegheny
Technologies Inc., RTI International Metals, Inc. and Verkhanya Salda
Metallurgical Production Organization ("VSMPO"). These companies, along with the
Japanese producers and other companies, are also principal competitors in
industrial markets. The Company competes primarily on the basis of price,
quality of products, technical support and the availability of products to meet
customers' delivery schedules.
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 FSU, existing and prior duties (including antidumping duties).
However, imports of titanium sponge, scrap, and mill products, principally from
the FSU, 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 mitigated.
Generally, imports into the U.S. of titanium products from countries
designated by the U.S. Government as "most favored nations" are subject to a 15%
tariff (45% for other countries). Titanium products for tariff purposes are
broadly classified as either wrought or unwrought. Wrought products include bar,
sheet, strip, plate and tubing. Unwrought products include sponge, ingot, slab
and billet. Starting in 1993, imports of titanium wrought products from Russia
were exempted from this duty under the "generalized system of preferences" or
"GSP" program designed to aid developing economies. The GSP program has been
renewed for two years and is scheduled to expire during the second quarter 2001.
In 1997, GSP benefits to these products were suspended when the level
of Russian wrought products imports reached 50% of all imports of titanium
wrought products. A petition was filed in 1997 to restore duty-free status to
these products, and that petition was granted in June 1998. In addition, a
petition was also filed to bring unwrought products under the GSP program, which
would allow such products from the countries of the FSU (notably Russia and, in
the case of sponge, Kazakhstan and Ukraine) to be imported into the U.S. without
the payment of regular duties. This petition concerning unwrought products has
not been acted upon pending further investigation of the merits of such a
change.
In addition to regular duties, titanium sponge imported from countries
of the FSU (Russia, Kazakhstan and Ukraine) had for many years been subject to
substantial antidumping penalties. Titanium sponge imports from Japan were also
subject to a standing antidumping order, but no penalties had been attached in
recent years. In 1998, the International Trade Commission ("ITC") revoked all
outstanding antidumping orders on titanium sponge based upon a determination
that changed circumstances in the industry did not warrant continuation of the
orders. TIMET has appealed that decision, and the briefing of the appeal was
concluded in the third quarter of 1999. A decision is expected during 2000 and
until such decision is reached, the orders remain revoked.
Further reductions in, or the complete elimination of, all or any of
these tariffs could lead to increased imports of foreign sponge, ingot, and mill
products into the U.S. and an increase in the amount of such products on the
market generally, which could adversely affect pricing for titanium sponge and
mill products and thus the business, financial condition, results of operations
and cash flows of the Company. However, the Company has, in recent years, been
one of the largest importers of foreign titanium sponge and mill products into
the U.S. To the extent the Company remains a substantial purchaser of these
products, any adverse effects on product pricing as a result of any reduction
in, or elimination of, any of these tariffs would be partially ameliorated by
the decreased cost to the Company for these products to the extent it currently
bears the cost of the import duties.
Producers of other metal products, such as steel and aluminum, maintain
forging, rolling and finishing facilities that could be modified without
substantial expenditures to process 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 many 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,
aerospace applications continue to grow for some of the Company's proprietary
alloys such as TIMETAL(R) 21S and TIMETAL 834. Additionally, testing of alloys
such as TIMETAL LCB and TIMETAL 5-1-1-1 is increasing for new non-aerospace
applications. The Company conducts the majority of its research and development
activities at its Henderson, 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.
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. The following table shows the significant reduction in the
number of employees over the past 3 years. The 23% reduction in employees from
the peak in 1997 was in response to a 25% reduction in market demand. During
2000, the Company expects to reduce employment by an additional 250 people, or
approximately 10% of TIMET's worldwide workforce. The vast majority of the
employee reductions are expected to occur during the first half of the year.
Employees at December 31,
----------------------------------------------------------
1997 1998 1999
----------------- ---------------- -----------------
U.S. 2,125 1,715 1,490
Europe 900 1,025 860
------------------ ---------------- ----------------
Total 3,025 2,740 2,350
================== ================ ================
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 2002, respectively. Negotiations with respect
to the Henderson contract are expected to begin during the third quarter of
2000. Employees at the Company's other U.S. facilities are not covered by
collective bargaining agreements.
Over 70% of the salaried and hourly employees at the Company's European
facilities are represented by various European labor unions, generally under
annual agreements, the majority of which are still under negotiation for 2000.
The Company expects to complete the negotiation of one year contracts in the
U.K. and France that would include modest wage increases.
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 following
Federal acts: the 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, Nevada 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
throughout the 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 have not had, and are not presently expected to have, a material adverse
effect on the Company.
The Company believes that its operations are in compliance in all
material respects with applicable requirements of environmental and worker
health and safety laws. The Company's policy is to continually strive to improve
environmental, health and safety 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. The Company incurred capital expenditures for health, safety and
environmental compliance matters of approximately $4 million in each of 1997,
1998 and 1999 and its capital budget provides for approximately $5 million of
such expenditures in 2000. However, the imposition of more strict standards or
requirements under environmental, health or safety 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.
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 worldwide
melting capacity in 2000 aggregates approximately 48,000 metric tons (estimated
26% of world capacity), and its mill products capacity aggregates approximately
20,000 metric tons (estimated 16% of world capacity). Approximately 35% of
TIMET's worldwide melting capacity is represented by electron beam cold hearth
melting ("EB") furnaces, 62% by vacuum arc remelting ("VAR") furnaces and 3% by
a vacuum induction melting ("VIM") furnace.
The Company has operated its major production facilities at varying
levels of practical capacity during the past three years. In 1997, the plants
operated at 90% of practical capacity, decreasing to 80% in 1998 and a further
reduction to 55% in 1999. In 2000, the Company's plants are expected to operate
at 50% of practical capacity. During 1998, the Company closed 2,500 metric tons
of melting capacity by permanently shutting down facilities in Verdi, Nevada and
Millbury, Massachusetts. In 1999, the Company temporarily idled its Kroll-leach
process sponge facility in Nevada due to changing market conditions for certain
grades of titanium sponge.
ANNUAL PRACTICAL
CAPACITIES
------------------------
MILL
MANUFACTURING LOCATION PRODUCTS MANUFACTURED MELTING PRODUCTS
(METRIC TONS)
Henderson, Nevada+ Sponge, Ingot 13,600 -
Morgantown, Pennsylvania+ Slab, Ingot, Raw Materials Processing 20,700 -
Vallejo, California* Ingot (including non-titanium 1,600 -
superalloys)
Toronto, Ohio+ Billet, Bar, Plate, Sheet, Strip - 9,200
Witton, England* Ingot, Billet, Bar 9,800 6,000
Ugine, France* Ingot, Bar, Billet, Wire, Extrusions 2,200 1,600
Waunarlwydd (Swansea), Wales+ Bar, Plate, Sheet - 3,400
+ Owned facilities
* Leased facilities
TIMET UK's Witton, England facilities are leased pursuant to long-term
capital leases. TIMET Savoie has the right, on a long-term basis, to utilize
portions of CEZUS' plant in Ugine, France.
UNITED STATES PRODUCTION. The Company's VDP sponge facility is expected
to operate at approximately 60% of its annual practical capacity of 9,100 metric
tons during 2000, which approximates the 1999 level and is down from
approximately 85% in 1998. VDP sponge is used principally as a raw material for
the Company's ingot melting facilities in the U.S. During 1999, the Company
expanded the use of VDP sponge to its European facilities and approximately 900
metric tons of VDP production was used in Europe, which represented
approximately 15% of the sponge consumed in the Company's European operations.
The Company expects the consumption of VDP sponge in its European operations to
increase to one-third of their sponge requirements in 2000, which is expected to
assist the Henderson, Nevada facility in maintaining operating volumes and
manufacturing cost rates. Due to changing market conditions for certain grades
of sponge, the Company's older Kroll-leach process sponge plant in Nevada was
temporarily idled at the end of March 1999. The raw materials processing
facilities in Morgantown primarily process scrap used as melting feedstock,
either in combination with sponge or separately.
The Company's U.S. melting facilities produce ingots and slabs both
sold to customers and used as feedstock for its mill products operations. These
melting facilities are expected to operate at approximately 50% of aggregate
capacity in 2000, with certain production facilities temporarily idled.
Titanium mill products are principally produced at TIMET's forging and
rolling facility in Toronto, Ohio, which receives titanium ingots and slabs from
the Company's U.S. melting facilities. The Company's forging and rolling
facilities are expected to operate at approximately 55% of practical capacity in
2000.
EUROPEAN PRODUCTION. TIMET UK's melting facility in Witton, England
produces VAR ingots used primarily as feedstock for its forging operations, also
in Witton. The forging operations process the ingots principally into billet
product for sale to customers or into an intermediate for further processing
into bar and plate at its facility in Waunarlwydd, Wales. U.K. melting and mill
products production in 2000 is expected to be approximately 60% and 55%,
respectively, of capacity.
Capacity of 70%-owned 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 (the 30% minority partner in
TIMET Savoie). During 2000, TIMET Savoie expects to operate at approximately 70%
of the maximum capacity required to be provided by CEZUS.
Sponge for melting requirements in both the U.K. and France is
purchased principally from suppliers in Japan and Kazakhstan, with approximately
one-third of TIMET's 2000 European requirements expected to be provided by the
Company's Henderson, Nevada VDP plant.
DISTRIBUTION. The Company sells its products through its own sales force
based in the U.S. and Europe, and through independent agents worldwide. The
Company's marketing and distribution system also includes ten Company-owned
service centers (six in the U.S. and four in Europe), which sell the Company's
products on a just-in-time basis.
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. See Note
16 of the Consolidated Financial Statements, which information is incorporated
herein by reference.
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, 1999.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
TIMET's common stock is traded on the New York Stock Exchange (symbol:
"TIE"). On March 16, 2000, the closing price of TIMET common stock was $4.81 per
share. The high and low sales prices for the Company's common stock (NASDAQ
prior to July 16, 1998) are set forth below.
YEAR ENDED DECEMBER 31, 1998: HIGH LOW
First Quarter $ 32.13 $ 24.25
Second Quarter 27.88 21.38
Third Quarter 21.56 11.50
Fourth Quarter 15.81 7.31
YEAR ENDED DECEMBER 31, 1999: HIGH LOW
---- ---
First Quarter 9.88 5.69
Second Quarter 12.13 5.81
Third Quarter 13.06 7.13
Fourth Quarter 6.88 4.12
As of March 16, 2000, there were approximately 10,700 common
shareholders of record.
In the third quarter of 1999, the Company suspended payment of the
regular quarterly common stock dividend that had been paid since the second
quarter of 1998. In September 1998, the Company's Board of Directors authorized
the repurchase of up to four million shares of TIMET common stock in open market
or private transactions. During 1998, the Company repurchased 90,000 shares for
approximately $1.2 million. No shares were repurchased in 1999.
The Company's new U.S. credit facility, entered into in February 2000,
prohibits both the payment of common stock dividends and common stock
repurchases.
ITEM 6: SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in
conjunction with the Company's Consolidated Financial Statements and Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Years Ended December 31,
-------------------------------------------------------------------------
1995 1996(1) 1997 1998 1999
---- ------- ---- ---- ----
($ in millions, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 184.7 $ 507.1 $ 733.6 $ 707.7 $ 480.0
Operating income (loss) 5.4 59.8 133.0 82.7 (31.4)
Interest expense 10.4 9.0 2.0 2.9 7.1
Net income (loss) (4.2) 47.6 83.0 45.8 (31.4)
Earnings per share (2):
Basic $ (.27) $ 1.72 $ 2.64 $ 1.46 $ (1.00)
Diluted (3) - 1.72 2.49 - -
Cash dividends per share - - - .12 .12
BALANCE SHEET DATA:
Cash and cash equivalents $ - $ 86.5 $ 69.0 $ 15.5 $ 20.7
Total assets 248.8 703.0 793.1 953.2 883.1
Indebtedness (4) 89.6 10.5 5.0 105.6 117.4
Capital lease obligations - 11.6 11.2 10.3 10.1
Minority interest - Convertible
Preferred Securities - 201.2 201.2 201.2 201.2
Stockholders' equity 68.1 326.2 408.9 448.4 408.1
OTHER OPERATING DATA:
Cash flows provided (used):
Operating activities $ (6.1) $ (.7) $ 72.6 $ 76.1 $ 19.5
Investing activities (2.5) (131.4) (79.8) (223.2) (21.7)
Financing activities 8.6 215.1 (9.8) 92.2 8.6
------------- ----------- ----------- ------------ ----------
Net provided (used) $ - $ 83.0 $ (17.0) $ (54.9) $ 6.4
Mill product shipments (metric tons 5.5 12.4 15.1 14.8 11.4
000's)
Average mill product prices per Kg $ 26.00 $ 32.00 $ 35.00 $ 35.25 $ 33.00
Active employees at year end 1,020 2,950 3,025 2,740 2,350
Order backlog at year end (5) $ 125.0 $ 440.0 $ 530.0 $ 350.0 $ 195.0
Capital expenditures $ 3.0 $ 21.7 $ 66.3 $ 115.2 $ 24.8
(1) Significant acquisitions accounted for by the purchase method were made
during 1996, which included the acquisitions of the titanium metals
businesses of IMI plc and affiliates, Axel Johnson Metals, Inc.
(including the remaining 50% interest in Titanium Hearth Technologies)
and a 70% interest in TIMET Savoie.
(2) Common shares used to compute earnings per share have been adjusted to
reflect the 65-for-1 split of the Company's common stock effected in
connection with TIMET's June 1996 initial public offering of common
stock.
(3) Antidilutive in 1995, 1998 and 1999.
(4) Includes bank and other debt, including loans payable to related parties.
(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. The aerospace industry in recent history has accounted for
approximately three-fourths of U.S. and 40% to 50% 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. During the second half of
1998, it became evident to the Company that the anticipated record rates of
aircraft production would not be reached and that a decline in overall
production rates would begin earlier than forecast, particularly in
titanium-intensive wide body planes. During 1999, aerospace customers reduced
inventories and adjusted to decreases in overall production rates and, as a
result, the Company's mill products shipments declined 23% to 11,400 metric
tons. The Company's fourth quarter 1999 sales of $105.5 million was the lowest
quarterly sales amount in four years. At present, a substantial inventory
overhang still exists throughout the aerospace industry supply chain and current
expectations are that 2000 sales will be somewhat below the fourth quarter 1999
annualized due to lower expected sales volumes and selling prices. Industrial
demand for titanium has also declined due to weakness in Asian and other
economies and is expected to remain soft during 2000.
The Company estimates that worldwide industry shipments of titanium
mill products peaked in 1997 at approximately 60,000 metric tons and decreased
10% in 1998 to approximately 54,000 metric tons and decreased a further 11% in
1999 to 48,000 metric tons. Expectations for 2000 are a further decline in mill
product shipments although the decline is expected to be less than that
experienced during each of the last two years.
The Company's order backlog decreased to approximately $195 million at
December 31, 1999 from $350 million at December 31, 1998 and $530 million at
December 31, 1997. Substantially all of the 1999 year end backlog is scheduled
to be shipped during 2000.
The Company expects that production levels, capacity utilization, sales
volumes, sales prices, gross margins and operating income excluding special
charges, will all be lower in 2000 than they were in 1999. Accordingly, the
Company currently expects that its 2000 loss before special charges will exceed
its 1999 loss before special charges and looks to return to profitability in
late 2001. In January 2000, the Company adopted a plan to restructure the
organization and reduce costs. As part of this reorganization, the global
manufacturing and commercial operations have been consolidated into two
organizations, and the Company will further reduce personnel by about 10%, or
250 employees, primarily during the first half of 2000. Additional resources
will be focused in an effort to significantly improve the quality of the
Company's manufacturing, customer service and management processes to return to
profitability. The restructuring actions taken in January are expected to result
in an additional restructuring charge in the first quarter of 2000 of up to $10
million, primarily related to employee termination costs. Additionally, in
February 2000, the Company entered into new U.S. and U.K. credit facilities. In
connection therewith, the Company wrote off $1.3 million of deferred financing
costs associated with its previous U.S. facility.
SALES AND OPERATING INCOME (LOSS) - 1999 COMPARED WITH 1998. The
"Titanium melted and mill product" segment net sales in 1999 decreased 30%
compared to 1998 primarily due to a 23% decrease in mill products shipment
volume resulting primarily from reduced demand in the aerospace market, as
described above. Average selling prices for 1999 were approximately 7% lower
than 1998 reflecting both the price effect of long-term agreements and increased
price competition on non-contract business. Average prices on 2000 shipments are
expected to be as much as 15% lower than average 1999 in certain product lines,
but only slightly lower than average prices in the fourth quarter of 1999. As
described in Note 9 to the Consolidated Financial Statements, the Company
produced approximately $16 million of titanium ingot in 1999, for which the
customer was billed but income recognition was deferred. The Company anticipates
the majority of this ingot will be converted and shipped in 2000, at which time
the related income will be recorded.
The decrease in net sales of the "Other" segment is a result of the
Company's ceasing to consolidate its castings business after July 1998. See Note
4 to the Consolidated Financial Statements.
Total cost of sales in 1999 was 95% of sales compared to 77% in 1998.
The increase in the percentage is a result of the lower selling prices, lower
production volumes, higher depreciation, and increased reserves for slow-moving
inventory. Yield, rework and deviated material costs were also higher and plant
operating rates were lower. Selling, general, administrative and developmental
expenses in 1999 were lower than 1998 in dollar terms due in large part to the
completion of the implementation of the initial phase of the Company's
business-enterprise system during the first half of 1999. These costs as a
percentage of sales, however, increased to approximately 10% primarily due to
the decline in sales.
In the fourth quarter of 1999, the Company recorded $6.8 million of
special charges consisting of $4.5 million of restructuring charges and $2.3
million of write-downs associated with the Company's investment in certain
start-up joint ventures. During the same quarter, the Company also recorded a
$4.3 million charge to cost of sales for slow-moving inventory. Approximately
half of the restructuring charges were non-cash, primarily related to the
disposition of a Germany subsidiary, with the cash component relating to the
termination of 100 people. The $4.3 million charge for slow-moving inventory and
$4.7 million of the $6.8 million of special charges are included in the
operating loss of the "Titanium melted and mill products" segment in 1999.
Operating income of the "Titanium melted and mill products" segment in 1998
included special charges of $19.5 million. Operating losses of the "Other"
segment included $4.5 million and $2.1 million of special charges in 1998 and
1999, respectively. See Note 6 to the Consolidated Financial Statements.
Equity in earnings (losses) of joint ventures of the "Titanium melted
and mill products" segment decreased by $1.3 million from 1998 principally due
to the decline in earnings of ValTimet. Equity in losses of the "Other" segment
were higher in 1999 due to the Company recording a higher share of the losses
for a full year in 1999 as a result of increased ownership in certain of these
ventures in mid-1998.
SALES AND OPERATING INCOME - 1998 COMPARED WITH 1997. Net sales of the
"Titanium melted and mill products" segment in 1998 were 2% below 1997 levels
primarily due to lower volumes from reduced demand during the last half of the
year in both aerospace and industrial markets, as described above. Mill product
shipment volume for the year declined 2% to 14,800 metric tons. Selling prices
on shipments were relatively flat, in large part due to prices on orders entered
prior to the decline in demand.
Net sales of the "Other" segment were down 34% primarily as a result of
the Company's ceasing to consolidate its castings business after July 1998. See
Note 4 to the Consolidated Financial Statements.
Total cost of sales was 77% of sales in 1998, comparable to 76% of
sales in 1997. Selling, general, administrative and developmental expenses in
1998 were higher than in 1997, in both total dollar and percent of sales terms
(8.5%, up from 6.2%), in large part due to information technology costs,
including implementation of the Company's business-enterprise information system
and addressing Y2K issues.
Equity in earnings of joint ventures of the "Titanium melted and mill
products" segment improved in 1998 over 1997 principally due to improved
earnings of ValTimet. Equity losses of the "Other" segment were higher in 1998
as certain ventures were held for the full year, compared to a part year in
1997.
EUROPEAN OPERATIONS. The Company has substantial operations and assets
located in Europe, principally the United Kingdom, with smaller operations in
France, Italy and Germany. Titanium is a worldwide market and the factors
influencing the Company's U.S. and European operations are substantially the
same.
Approximately 60% of the Company's European sales are denominated in
currencies other than the U.S. dollar, principally the British pound and
European currencies tied to the euro. Certain purchases of raw materials,
principally titanium sponge and alloys, for the Company's European operations
are denominated in U.S. dollars, while labor and other production costs are
primarily denominated in local currencies. The functional currencies of the
Company's European subsidiaries are those of their respective countries; thus,
the U.S. dollar value of these subsidiaries' sales and costs denominated in
currencies other than their functional currency, including sales and costs
denominated in U.S. dollars, are subject to exchange rate fluctuations which may
impact reported earnings and may affect the comparability of period-to-period
operating results. Borrowings of the Company's European operations may be in
U.S. dollars or in functional currencies. The Company's export sales from the
U.S. are denominated in U.S. dollars and as such are not subject to currency
exchange rate fluctuations.
The U.S. dollar sales and purchases of the Company's European
operations described above provide some natural hedge of non-functional
currencies, and the Company does not use currency contracts to hedge its
currency exposures. Net currency transaction gains/losses included in earnings
was a $1.2 million loss in 1999, a $.4 million gain in 1998 and nominal in 1997.
At December 31, 1999, consolidated assets and liabilities denominated in
currencies other than functional currencies were approximately $20 million and
$24 million, respectively, consisting primarily of U. S. dollar cash, accounts
receivable, accounts payable and borrowings. Exchange rates among 11 European
currencies (including the French franc, Italian lira and German mark, but
excluding the British pound) became fixed relative to each other as a result of
the implementation of the euro effective in 1999. Costs associated with
modifications of systems to handle euro-denominated transactions were not
significant.
DIVIDENDS AND INTEREST INCOME. In 1999, dividends and interest income
consists principally of accrued dividends on $80 million of non-voting preferred
securities of Special Metals Corporation, which were purchased by the Company in
October 1998. In 1997 and 1998, the amount represents primarily earnings on
corporate cash equivalents and varies with cash levels and interest rates.
See "Liquidity and Capital Resources - Financing Activities".
GENERAL CORPORATE INCOME (EXPENSE). General corporate income (expense)
consists principally of currency transaction gains/losses.
INTEREST EXPENSE. Interest expense for 1999 more than doubled from the
levels of 1998 primarily due to higher levels of average debt and increased
interest rates. Also contributing to the higher comparative interest expense is
a lower level of interest being capitalized in 1999 compared to 1998 as major
capital projects have been completed. While average borrowing levels increased
in 1998 over 1997, interest rates declined and interest capitalized increased.
Interest expense in 2000 is expected to be higher than 1999 due to higher
average borrowing levels and higher interest rates on the new credit facilities.
See Note 10 to the Consolidated Financial Statements.
MINORITY INTEREST. Annual dividend expense related to the 6.625%
Convertible Preferred Securities, issued in November 1996, approximates $13
million and is reported as minority interest net of allocable income taxes.
Other minority interest relates primarily to the 30% interest in TIMET Savoie
held by Compagnie Europeene du Zirconium-CEZUS, S.A. ("CEZUS").
INCOME TAXES. The Company operates in several tax jurisdictions and is
subject to varying income tax rates. As a result, the geographic mix of pretax
income (loss) can impact the Company's overall effective tax rate. In 1997, the
Company's income tax rate also varied from the U.S. statutory rate due to
reductions in the deferred tax valuation allowance related to current year
utilization of tax attributes. For financial reporting purposes, the Company has
recognized the tax benefit of all of its net operating loss carryforwards, and
expects that tax benefits to be recognized during 2000 will be deferred. See
Note 13 to the Consolidated Financial Statements.
YEAR 2000 ("Y2K"). As a result of many computer systems and
applications being written to use two-digit fields to designate a year, many
date-sensitive systems may have recognized the year 2000 as 1900, or not at all.
This could have resulted in a system failure or miscalculations causing systems
to incorrectly process critical financial, manufacturing and operational
information. These are generally referred to as the "Y2K Issues".
During 1999, the Company, with the help of outside specialists and
consultants, completed all Y2K readiness procedures and did not experience any
significant adverse effects on its systems or operations as a result of the Y2K
Issues. These readiness procedures included (i) an initial assessment of
potential Y2K Issues in its non-information systems (e.g., its manufacturing and
communication systems), as well as in those information systems that were not
replaced by the new business-enterprise system, (ii) determining, prioritizing
and implementing remedial actions, including testing, and (iii) developing
contingency plans in the event internal or external Y2K Issues were not resolved
by the target date for completion. The Company expended in the aggregate
approximately $4.5 million in 1998-99 ($2.5 million in 1999) on these specific
non-information system Y2K Issues, principally embedded system technology.
Additionally, most of the Company's information systems have been replaced in
connection with the implementation of the Company's business-enterprise system,
the initial implementation of which was substantially completed with the rollout
of the system to the U.K. sites in 1999. The cost of the new system, including
related equipment and networks, aggregated approximately $54.0 million in
1997-99 ($43.5 million capital; $10.5 million expense), of which $4.0 million
($2.5 million capital; $1.5 million expense) was expended in 1999. To date in
2000, none of the Company's manufacturing facilities have suffered any downtime
due to noncompliant systems, nor have any significant problems associated with
the Y2K Issues been identified in any systems. The Company will continue to
monitor its major systems in order to ensure that such systems continue to be
year 2000 compliant. However, based primarily upon success to date, the Company
does not currently expect any significant Y2K Issues will develop for any of its
systems. Furthermore, the Company is not aware of any significant adverse Y2K
Issues that may have arisen for its key suppliers or customers.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had $21 million of cash and cash
equivalents and $21 million of borrowing availability under its U.S. and
European bank credit lines. Net debt at year end 1999 was approximately $96
million ($21 million of cash and equivalents and $117 million of notes payable
and debt, principally borrowings under the Company's U.S. and U.K. credit
agreements).
In February 2000, the Company completed a new $125 million, three-year
U.S.-based revolving credit agreement replacing its previous U.S. bank credit
facility. Borrowings under the new facility are limited to a formula-determined
borrowing base derived from the value of accounts receivable, inventory and
equipment. The credit agreement limits additional indebtedness, prohibits the
payment of common stock dividends, and contains other covenants customary in
lending transactions of this type. The Company also increased its U.K. credit
agreement from (pound)18 million ($29 million) to (pound)30 million ($48
million) with its existing U.K. lender.
Borrowings under these U.S. and U.K. agreements at closing were used to
repay the $58 million in then-outstanding borrowings under the prior U.S. credit
agreement, which was terminated. Upon closing on the new credit facilities on
February 25, 2000, the Company had about $96 million of borrowing availability
under these agreements. See Note 10 to the Consolidated Financial Statements.
The Company believes the new U.S. and U.K. credit facilities will provide it
with the liquidity necessary for current market and operating conditions.
OPERATING ACTIVITIES. Cash provided by operating activities was
approximately $19 million in 1999, $76 million in 1998 and $73 million in 1997.
1997 1998 1999
-------------- -------------- --------------
(In millions)
Excluding changes in assets and liabilities $ 121.3 $ 108.7 $ 23.9
Changes in assets and liabilities (48.7) (32.6) (4.4)
-------------- -------------- --------------
$ 72.6 $ 76.1 $ 19.5
============== ============== ==============
Cash provided by operating activities, excluding changes in assets and
liabilities, during the past three years generally follows the trend in
operating results. Changes in assets and liabilities reflect the timing of
purchases, production and sales, and can vary significantly from period to
period. Accounts receivable increased (used cash) in 1997 primarily because
sales levels were increasing, and provided cash in 1998 and 1999 as sales levels
were decreasing.
Inventories decreased in 1997 as a result of very high shipment levels
in the fourth quarter of that year. Inventories increased significantly in 1998,
reflecting material purchases and production rates that were based on expected
sales levels higher than the actual sales level turned out to be. The Company
reduced inventories during 1999 as excess raw materials were consumed and other
reduction and control efforts were put in place. The Company expects a further
reduction during 2000 in raw materials and finished goods inventory.
Changes in net current income taxes payable increased in 1997 and
decreased in 1998 in part due to the delayed timing of cash payments for taxes
in Europe relative to earnings. In 1999, income taxes payable decreased and is
principally a receivable at December 31, 1999 as the current year's losses will
be carried back to recover a portion of prior years' taxes paid. Changes in
accounts with related parties resulted primarily from relative changes in
receivable levels with joint ventures in 1997, 1998 and 1999.
INVESTING ACTIVITIES. The Company's capital expenditures were $25
million in 1999, down from $115 million in 1998 and $66 million in 1997. About
one-half of capital expenditures during the two-year period 1997-1998 related to
capacity expansion projects associated with long-term customer agreements.
Capital expenditures in 1999 are primarily related to the expansion of forging
capacity at the Toronto, Ohio facility, the installation of the
business-enterprise system in Europe and various environmental and other
projects.
Approximately 10% of the Company's capital spending in 1999 related to
the major business-enterprise information systems and information technology
project implemented at various sites throughout the Company. Approximately
one-fourth of the two-year period 1997-1998 capital spending related to this
project. The new system was implemented in stages in the U.S. during 1998, with
initial implementation substantially completed with the rollout to the U.K. in
February 1999. Certain costs associated with the business-enterprise information
systems project, including training and reengineering, are expensed as incurred.
Capital spending for 2000 is currently expected to be about $15 million
covering principally capital maintenance and health, safety and environmental
projects, which is less than the expected depreciation and amortization expense
of approximately $44 million.
Cash used for business acquisitions and joint ventures in 1998 related
primarily to the Loterios and Wyman-Gordon transactions more fully described in
Notes 3 and 4 to the Consolidated Financial Statements. In 1997, such
investments consisted primarily of cash contributions in connection with the
formation of ValTimet and investments in companies developing new markets and
uses for titanium.
In October 1998, the Company purchased for cash $80 million of Special
Metals Corporation 6.625% convertible preferred stock (the "SMC Preferred
Stock") in conjunction with, and concurrent with, SMC's acquisition of the Inco
Alloys International high performance nickel alloys business unit of Inco
Limited. TIMET is accruing dividends on the SMC Preferred Stock, although
dividends cannot currently be paid by SMC due to limitations imposed by an
amendment of SMC's bank credit agreement. The Company understands that SMC has
sued Inco Limited alleging that it made various misrepresentations to SMC in
connection with the acquisition. The Company is evaluating the position it will
take with respect to SMC's claims.
FINANCING ACTIVITIES. Net borrowings of $13 million in 1999 and $97
million in 1998 were primarily to fund capital expenditures and in 1998 the
Loterios acquisition. Net debt repayments of $6 million in 1997 related
primarily to reductions in European working capital borrowings, including
amounts due to CEZUS, the Company's minority partner in TIMET Savoie.
In November 1999, the Company's Board of Directors ("Board") voted to
suspend the regular quarterly dividend on its common stock in view of, among
other things, the continuing weakness in overall market demand for titanium
metal products. The Company's new U.S. credit agreement entered into in February
2000 now prohibits the payment of dividends on the Company's common stock.
The Company's Convertible Preferred Securities do not require principal
amortization, and TIMET has the right to defer dividend payments for one or more
periods of up to 20 consecutive quarters for each period. The Company's new U.S.
credit agreement prohibits the payment of Convertible Preferred Securities
dividends if "excess availability", as determined under the agreement, is less
than $25 million. Upon closing of the new U.S. credit facility on February 25,
2000, the Company had approximately $80 million of borrowing availability under
this agreement. The Company's Board will continue to evaluate the payment of
dividends on the Convertible Preferred Securities on a quarter-by-quarter basis
based upon, among other things, the Company's actual and forecasted results of
operations, financial condition, cash requirements for its businesses,
contractual requirements and other factors deemed relevant.
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, in light of its current outlook, may
in the future seek to raise additional capital, modify its common and preferred
dividend policies, restructure ownership interests, incur, refinance or
restructure indebtedness, repurchase shares of capital stock, sell assets, or
take a combination of such steps or other steps to increase or manage its
liquidity and capital resources.
In the normal course of business, the Company investigates, evaluates,
discusses and engages in acquisition, joint venture, strategic relationship and
other business combination opportunities in the titanium, specialty metal and
related industries. In the event of any future acquisition or joint venture
opportunities, the Company may consider using then-available liquidity, issuing
equity securities or incurring additional indebtedness.
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 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL. The Company is exposed to market risk from changes in foreign
currency exchange rates and interest rates. The Company typically does not enter
into interest rate swaps or other types of contracts in order to manage its
interest rate market risk and typically does not enter into currency forward
contracts to manage its foreign exchange market risk associated with
receivables, payables and indebtedness denominated in a currency other than the
functional currency of the particular entity. The Company was not a party to any
type of forward or derivative option contract at December 31, 1998 or 1999.
INTEREST RATES. The Company is exposed to market risk from changes in
interest rates related to indebtedness. At December 31, 1999, substantially all
of the Company's indebtedness was denominated in U.S. dollars and bore interest
at variable rates, primarily related to spreads over LIBOR, as summarized below.
Contractual maturity date (1)
-------------------------------------- Interest
2000 2001 2002 rate (2)
-------- -------- -------- ----------
(In millions)
Variable rate debt:
U. S. dollars $ 2.9 $ - $101.9 7.06%
British pounds - - 5.0 6.25%
Italian lira 5.1 .6 - 4.26%
French francs 2.0 - - 3.06%
(1) Non-U. S. dollar denominated amounts are translated at year-end rates of exchange.
(2) Weighted average.
At December 31, 1998, substantially all of the Company's outstanding
indebtedness consisted of $80 million of U.S. dollar-denominated variable rate
debt.
FOREIGN CURRENCY EXCHANGE RATES. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of its
international operations. See Item 7 -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations --Results of Operations --
European Operations," which information is incorporated herein by reference.
OTHER. The Company holds $80 million of preferred securities that are
not publicly traded, are accounted for by the cost method and are considered
"held-to-maturity" securities. See Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Investing Activities" and Note 5 to the Consolidated
Financial Statements.
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.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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 54 Chairman, President and Chief Executive Officer
Charles H. Entrekin, Jr. 51 Executive Vice President--Commercial
Christian Leonhard 54 Executive Vice President--Operations
Robert E. Musgraves 45 Executive Vice President and General Counsel
Mark A. Wallace 42 Executive Vice President and Chief Financial Officer
J. LANDIS MARTIN has been Chairman and a director of the Company since
1987, has served as Chief Executive Officer of the Company since 1995, and as
President of the Company from 1995 to 1996 and since January 2000. Mr. Martin
has been the Chief Executive Officer and a director of Tremont since 1988, and
has served as Chairman of Tremont since 1990. Mr. Martin has also been President
of Tremont since 1987 (except for a brief period in 1990). He has also served as
President and Chief Executive Officer of NL Industries, Inc., a manufacturer of
titanium dioxide pigments, since 1987 and as a director of NL since 1986.
Tremont and NL may be deemed to be affiliates of the Company. Mr. Martin is also
a director of Haliburton Company, a provider of energy services and engineering
and construction services, Apartment Investment & Management Corporation, a real
estate investment trust, and Crown Castle International Corporation, a
communications company.
CHARLES H. ENTREKIN, JR. has been Executive Vice President-Commercial
since January 2000. Prior to that, he served as Vice President since 1997 and
Vice President; President-North American Operations since January 1999. From
1997 to January 1999, he served as President-THT Operations. Prior to that
time, Dr. Entrekin served as Vice President-Commercial for THT since 1993 and
as its Vice President-Technology from 1985 to 1993.
CHRISTIAN LEONHARD has been Executive Vice President-Operations since
January 2000. Prior to that, he served as Vice President; President-European
Mill Products Operations since 1997. Prior to that time, he was in charge of the
Company's operations and sales activities in France since 1988.
ROBERT E. MUSGRAVES has been Executive Vice President and General
Counsel since January 2000. Prior to that, he served as 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.
MARK A. WALLACE has been Executive Vice President and Chief Financial
Officer since January 2000. Prior to that, he served as Vice President-Strategic
Change and Information Technology since 1996. Mr. Wallace served as Vice
President-Finance and Treasurer of the Company from 1992 to 1996. He also served
as Vice President and Controller of Tremont from 1992 until 1997 and was
appointed Vice President and Chief Financial Officer of Tremont in February
2000.
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 RELATIONSHIPS 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) 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, 1999
and the months of January and February 2000:
Filing Date Items Reported
-------------------------------- -----------------------------
October 1, 1999 - 5 and 7.
October 27, 1999 - 5 and 7.
November 2, 1999 - 5 and 7.
December 22, 1999 - 5 and 7.
January 18, 2000 - 5 and 7.
January 28, 2000 - 5 and 7.
February 28, 2000 - 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.
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 23, 1999, incorporated by reference to Exhibit
3.2 to Titanium Metals Corporation's Annual Report on Form
10-K (No. 1-14368) for the year ended December 31, 1998.
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 the Registrant'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 the Registrant'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 the Registrant'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 the Registrant'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
the Registrant'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 the
Registrant'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.
10.1 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.
10.2 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.
10.3 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.
10.4 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.
10.5 Intercorporate Services Agreement between Titanium Metals
Corporation and Tremont Corporation, effective as of January
1, 1999, incorporated by reference to Exhibit 10.6 to a
Quarterly Report on Form 10-Q for the quarter ended March 31,
1999 filed by Tremont Corporation (No. 1-10126).
10.6* 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).
10.7* Titanium Metals Corporation Amended and Restated 1996
Non-Employee Director Compensation Plan, as amended and
restated effective February 23, 1999.
10.8* Senior Executive Cash Incentive Plan, incorporated by
reference to Appendix B to Titanium Metals Corporation's proxy
statement included as part of a statement on Schedule 14A
dated April 17, 1997.
10.9* Executive Severance Policy.
10.10 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 the Registrant's
Current Report on Form 8-K filed with the Commission on
December 5, 1996.
10.11 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 the Registrant's Current Report on Form 8-K filed with
the Commission on December 5, 1996.
10.12 Loan and Security Agreement by and among Congress Financial
Corporation (Southwest) as Lender and Titanium Metals
Corporation and Titanium Hearth Technologies, Inc. as
borrowers, dated February 25, 2000.
10.13 Investment Agreement dated July 9, 1998, between Titanium
Metals Corporation, TIMET Finance Management Company and
Special Metals Corporation, incorporated by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K
dated July 9, 1998.
10.14 Intercorporate Services Agreement between Titanium Metals
Corporation and NL Industries, Inc. effective as of January 1,
1999, incorporated by reference to Exhibit 10.3 to a Quarterly
Report on Form 10-Q for the quarter ended March 31,
1999 filed by NL Industries, Inc. (No. 1-640).
10.15 Form of Loan and Pledge Agreement by and between Titanium
Metals Corporation and individual TIMET executives under the
Corporation's Executive Stock Ownership Loan Program,
incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1998.
10.16 Amendment to Investment Agreement, dated October 28, 1998,
among Titanium Metals Corporation, TIMET Finance Management
Company and Special Metals Corporation, incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.
10.17 Registration Rights Agreement, dated October 28, 1998, between
TIMET Finance Management Company and Special Metals
Corporation, incorporated by reference to Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.
10.18 Certificate of Designations for the Special Metals Corporation
Series A Preferred Stock, filed on October 28, 1998, with the
Secretary of State of Delaware, incorporated by reference to
Exhibit 4.5 of a Current Report on Form 8-K dated October 28,
1998, filed by Special Metals Corporation (No. 000-22029).
10.19* Severance Agreement between Titanium Metals Corporation and
Andrew R. Dixey dated February 25, 2000.
10.20* Executive Severance Agreement, dated as of September 27, 1996,
between Titanium Hearth Technologies, Inc. and
William C. Acton.
10.21* Severance Agreement, dated February 19, 1999, between Titanium
Metals Corporation and William C. Acton.
10.22* Executive Agreement dated as of September 27, 1996, between
Titanium Hearth Technologies, Inc. and Charles H. Entrekin,
Jr.
99.1 Complaint and Jury Demand filed by Titanium Metals Corporation
against The Boeing Company in District Court, City and County
of Denver, State of Colorado, on March 21, 2000, Case
No. 00CV1402, including Exhibit A, Purchase and Sale Agreement
(for titanium products) dated as of November 5, 1997 by and
between The Boeing Company, acting through its division,
Boeing Commercial Airplane Group, and Titanium Metals
Corporation, incorporated by reference to Exhibit 99.2 to
the Registrant's Current Report on Form 8-K dated
March 22, 2000.
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule for the year ended December 31, 1999
* Management contract, compensatory plan or arrangement.
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 22, 2000
(Chairman of the Board, President
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/ STEVEN L. WATSON
- ------------------------------------- --------------------------------
J. Landis Martin, March 22, 2000 Steven L. Watson, March 22, 2000
(Chairman of the Board, President (Director)
and Chief Executive Officer)
/S/ EDWARD C. HUTCHESON, JR. /S/ JOSEPH S. COMPOFELICE
- ------------------------------------- ---------------------------------
Edward C. Hutcheson, Jr., March 22, 2000 Joseph S. Compofelice, March 22, 2000
(Director) (Director)
/S/ THOMAS P. STAFFORD /S/ MARK A. WALLACE
- ------------------------------------- --------------------------------
Thomas P. Stafford, March 22, 2000 Mark A. Wallace, March 22, 2000
(Director) (Executive Vice President and
Chief Financial Officer)
/S/ GLENN R. SIMMONS /S/ DAVID P. BURLAGE
- ------------------------------------- ---------------------------------
Glenn R. Simmons, March 22, 2000 David P. Burlage, March 22, 2000
(Director) (Corporate Controller)
(Principal Accounting Officer)
TITANIUM METALS CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(a) and 14(d)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
FINANCIAL STATEMENTS PAGE
Report of Independent Accountants F-1
Consolidated Balance Sheets - December 31, 1998 and 1999 F-2/F-3
Consolidated Statements of Operations - Years ended F-4
December 31, 1997, 1998 and 1999
Consolidated Statements of Comprehensive Income - Years ended
December 31, 1997, 1998 and 1999 F-5
Consolidated Statements of Cash Flows - Years ended
December 31, 1997, 1998 and 1999 F-6/F-7
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1997, 1998 and 1999 F-8
Notes to Consolidated Financial Statements F-9/F-31
FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants S-1
Schedule II - Valuation and qualifying accounts S-2
Schedules I, III and IV are omitted because they are not applicable.
F
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Titanium Metals Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, comprehensive income,
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of Titanium Metals Corporation and Subsidiaries as of
December 31, 1998 and 1999 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
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 of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
January 28, 2000, except for the fourth and fifth paragraphs of Note 10, as
to which the date is February 25, 2000, and the second paragraph of Note 16,
as to which the date is March 21, 2000.
F-1
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
(In thousands, except per share data)
ASSETS 1998 1999
-------------- ---------------
Current assets:
Cash and cash equivalents $ 15,464 $ 20,671
Accounts and other receivables, less
Allowance of $1,932 And $3,330 126,098 106,204
Receivable from related parties 8,119 4,071
Refundable income taxes 6,819 10,651
Inventories 225,880 191,535
Prepaid expenses and other 10,650 7,177
Deferred income taxes 1,900 2,250
-------------- ---------------
Total current assets 394,930 342,559
-------------- ---------------
Other assets:
Investment in joint ventures 32,633 26,938
Preferred securities 80,000 80,000
Accrued dividends on preferred securities 890 6,530
Goodwill 59,547 54,789
Other intangible assets 19,894 16,326
Deferred income taxes - 9,600
Other 14,129 12,979
-------------- ---------------
Total other assets 207,093 207,162
-------------- ---------------
Property and equipment:
Land 5,974 6,230
Buildings 25,610 24,647
Information technology systems 56,089 55,226
Manufacturing and other 278,669 331,591
Construction in progress 52,651 8,122
-------------- ---------------
418,993 425,816
Less accumulated depreciation 67,770 92,432
-------------- ---------------
Net property and equipment 351,223 333,384
-------------- ---------------
$ 953,246 $ 883,105
============== ===============
F-2
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1998 and 1999
(In thousands, except per share data)
LIabilities, Minority Interest and Stockholders' Equity 1998 1999
-------------- ---------------
Current liabilities:
Notes payable $ 5,134 $ 9,635
Current maturities of long-term debt and
Capital lease obligations 771 85,679
Accounts payable 69,302 48,679
Accrued liabilities 50,628 42,879
Payable to related parties 3,223 1,984
Income taxes 5,391 516
Deferred income taxes 2,500 5,049
-------------- ---------------
Total current liabilities 136,949 194,421
-------------- ---------------
Noncurrent liabilities:
Long-term debt 99,950 22,425
Capital lease obligations 10,069 9,776
Payable to related parties 1,395 1,332
Accrued OPEB Cost 24,065 19,961
Accrued pension cost 8,754 5,634
Deferred income taxes 14,200 12,950
-------------- ---------------
Total noncurrent liabilities 158,433 72,078
-------------- ---------------
Minority interest - Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debt securities ("convertible preferred securities") 201,250 201,250
other minority interest 8,237 7,275
Stockholders' equity:
Preferred stock $.01 par value; 1,000 shares authorized,
None outstanding - -
Common stock, $.01 par value; 99,000 shares authorized,
31,459 and 31,461 shares issued, respectively 315 315
Additional paid-in capital 347,972 347,984
Retained earnings 99,981 64,827
Accumulated other comprehensive income (loss) 1,317 (3,837)
Treasury stock, at cost (90 Shares) (1,208) (1,208)
-------------- ---------------
Total stockholders' equity 448,377 408,081
-------------- ---------------
$ 953,246 $ 883,105
============== ===============
Commitments and contingencies (Note 16)
See accompanying notes to consolidated financial statements.
F-3
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997, 1998 and 1999
(In thousands, except per share data)
1997 1998 1999
--------------- --------------- ---------------
Revenues and other income:
Net sales $ 733,577 $ 707,677 $ 480,029
Equity in earnings (losses) of joint ventures (1,013) 351 (1,709)
Other, net 4,530 6,859 4,952
--------------- --------------- ---------------
737,094 714,887 483,272
--------------- --------------- ---------------
Costs and expenses:
Cost of sales 554,546 542,285 454,506
Selling, general, administrative and development 45,319 59,837 48,577
Special charges - 24,000 6,834
Interest 2,066 2,916 7,093
--------------- --------------- ---------------
601,931 629,038 517,010
--------------- --------------- ---------------
Income (loss) before income taxes and minority interest 135,163 85,849 (33,738)
Income tax expense (benefit) 41,004 29,197 (12,021)
Minority interest - convertible preferred securities 8,840 8,840 8,667
Other minority interest 2,309 2,060 1,006
--------------- --------------- ---------------
Net income (loss) $ 83,010 $ 45,752 $ (31,390)
=============== =============== ===============
Diluted net income (loss) $ 91,850 $ 54,592 $ (22,723)
=============== =============== ===============
Earnings (loss) per share:
Basic $ 2.64 $ 1.46 $ (1.00)
Diluted 2.49 * *
Weighted average shares outstanding:
Basic 31,457 31,435 31,371
Diluted 36,955 36,846 36,782
* Antidilutive.
See accompanying notes to consolidated financial statements.
F-4
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
--------------- --------------- --------------
Net income (loss) $ 83,010 $ 45,752 $ (31,390)
Other comprehensive income (loss), net of tax:
Currency translation adjustment (1,727) 1,692 (5,637)
Pension liabilities adjustment 858 (4,283) 483
--------------- --------------- --------------
Comprehensive income (loss) $ 82,141 $ 43,161 $ (36,544)
=============== =============== ==============
See accompanying notes to consolidated financial statements.
F-5
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
-------------- --------------- --------------
Cash flows from operating activities:
Net income (loss) $ 83,010 $ 45,752 $ (31,390)
Depreciation and amortization 28,384 32,514 42,693
Special charges - non cash portion - 15,425 3,936
Earnings of joint ventures, net of distributions 1,013 170 3,730
Deferred income taxes 6,578 13,172 (464)
Other minority interest 2,309 2,060 1,006
Other, net (36) (433) 4,447
Change in assets and liabilities, net of acquisitions:
Receivables (41,781) 37,454 17,406
Inventories 294 (62,990) 23,598
Prepaid expenses 1,600 2,539 3,137
Accounts payable and accrued liabilities 1,231 (9,497) (24,151)
Accrued restructuring charges - 6,727 (5,042)
Income taxes 5,526 (12,213) (16,220)
Accounts with related parties, net (13,292) 9,650 2,409
Accrued dividends on preferred securities - (890) (5,640)
Other, net (2,266) (3,323) 88
-------------- --------------- --------------
Net cash provided by operating activities 72,570 76,117 19,543
-------------- --------------- --------------
Cash flows from investing activities:
Capital expenditures (66,295) (115,155) (24,772)
Business acquisitions and joint ventures (13,496) (27,413) -
Purchase of preferred securities - (80,000) -
Disposition of fixed assets - - 2,900
Other, net - (647) 209
-------------- --------------- --------------
Net cash used by investing activities (79,791) (223,215) (21,663)
-------------- --------------- --------------
Cash flows from financing activities:
Indebtedness:
Borrowings - 153,765 111,900
Repayments (4,833) (56,670) (99,284)
Deferred financing costs (2,230) - -
Repayment of related parties loans (930) - -
Dividends paid - (3,772) (3,764)
Treasury stock purchased - (1,208) -
Other, net (1,830) 117 (289)
-------------- --------------- --------------
Net cash provided (used) by financing activities (9,823) 92,232 8,563
-------------- --------------- --------------
$ (17,044) $ (54,866) $ 6,443
============== =============== ==============
F-6
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1997, 1998 and 1999
(In thousands)
1997 1998 1999
-------------- --------------- --------------
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $ (17,044) $ (54,866) $ 6,443
Cash acquired - 1,187 -
Currency translation (525) 186 (1,236)
-------------- --------------- --------------
(17,569) (53,493) 5,207
Balance at beginning of year 86,526 68,957 15,464
-------------- --------------- --------------
Balance at end of year $ 68,957 $ 15,464 $ 20,671
============== =============== ==============
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 2,159 $ 2,215 $ 6,669
Convertible preferred securities dividends 13,332 13,332 13,332
Income taxes, net 22,483 23,737 148
Business acquisitions and joint ventures:
Cash acquired $ - $ 1,187 $ -
Receivables 736 6,574 -
Inventories 769 15,352 -
Property, equipment and other 1,998 21,765 -
Investments in joint ventures 24,307 8,460 -
Goodwill and other intangibles 577 8,566 -
Liabilities assumed (3,604) (18,117) -
-------------- --------------- --------------
24,783 43,787 -
Less noncash consideration, principally
Property and equipment (11,287) (16,374) -
-------------- --------------- --------------
Cash paid $ 13,496 $ 27,413 $
-
============== =============== ==============
See accompanying notes to consolidated financial statements.
F-7
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997, 1998 and 1999
(In thousands)
Accumulated Other
Additional Retained Comprehensive Income (Loss)
---------------------------
Common Common Paid-in Earnings Currency Pension Treasury
Shares Stock Capital (Deficit) Translation Liabilities Stock Total
-------- ------- ----------- --------- ------------ ----------- --------- ---------
Balance at December 31, 1996 31,455 $ 315 $ 346,133 $(25,009) $ 5,635 $ (858) $ $ 326,216
-
Comprehensive income - - - 83,010 (1,727) 858 - 82,141
Other, net 3 - 590 - - - - 590
--------- -------- ----------- --------- ----------- --------- -------- ----------
Balance at December 31, 1997 31,458 315 346,723 58,001 3,908 - - 408,947
Comprehensive income - - - 45,752 1,692 (4,283) - 43,161
Dividends paid ($.12 per share) - - - (3,772) - - - (3,772)
Treasury stock purchases (90) - - - - - (1,208) (1,208)
Other, net 1 - 1,249 - - - - 1,249
--------- -------- ----------- --------- ---------- ---------- -------- ----------
Balance at December 31, 1998 31,369 315 347,972 99,981 5,600 (4,283) (1,208) 448,377
Comprehensive income (loss) - - - (31,390) (5,637) 483 - (36,544)
Dividends paid ($.12 per share) - - - (3,764) - - - (3,764)
Other, net 2 - 12 - - - - 12
--------- -------- ---------- --------- ---------- ----------- -------- ----------
Balance at December 31, 1999 31,371 $ 315 $ 347,984 $ 64,827 $ (37) $ (3,800) $(1,208) $ 408,081
========= ======== =========== ========= ========== =========== ======== ==========
F-8
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial
statements include the accounts of Titanium Metals Corporation ("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.
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 other comprehensive income (loss), net of related income taxes.
Currency transaction gains and losses are recognized in income currently, and
were nominal in 1997, a net gain of $.4 million in 1998 and a net loss of $1.2
million in 1999.
NET SALES. Sales are generally recognized when products are shipped.
Sales may occasionally be recognized before shipment when, among other things,
the title has passed, the customer has assumed substantial risks of ownership
and the Company has substantially met its performance obligations.
INVENTORIES AND COST OF SALES. Inventories are stated at the lower of
cost or market. Approximately one-half of inventories are costed using the
last-in, first-out ("LIFO") method with the remainder primarily costed using an
average method.
CASH AND CASH EQUIVALENTS. Cash equivalents include highly liquid
investments with original maturities of three months or less.
OTHER INVESTMENTS. Investments in 20% to 50%-owned joint ventures are
accounted for by the equity method. Differences between the Company's investment
in joint ventures and its proportionate share of the joint ventures' reported
equity are amortized over not more than 15 years.
Nonmarketable preferred securities are accounted for by the cost method
and are considered to be "held-to-maturity" securities.
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 $10.5 million and $15.2 million at December 31, 1998 and 1999, respectively.
Patents and other intangible assets, except intangible pension assets, are
amortized by the straight-line method over the periods expected to be benefited,
generally nine years.
F-9
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 $1.0
million in 1997, $2.6 million in 1998 and $1.3 million in 1999. Software
development costs are capitalized; training, reengineering and similar costs are
expensed as incurred.
Depreciation is computed principally on the straight-line method over
the estimated useful lives of 15 to 40 years for buildings and three to 25 years
for machinery and equipment. Software costs are amortized over the software's
estimated useful life, generally three to five years.
LONG-LIVED ASSETS. When events or changes in circumstances indicate
that long-lived assets, including goodwill or other intangible assets, may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or circumstances include, among other things, significant current and
prior periods or current and projected periods with operating losses related to
the applicable business unit. All relevant factors are considered in determining
whether impairment exists. If an impairment is determined to exist, the
underlying long-lived assets and the associated goodwill are written down to
reflect the estimated future discounted cash flows expected to be generated by
the underlying business.
STOCK-BASED COMPENSATION. The Company has elected the disclosure
alternative prescribed 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 12.
EMPLOYEE BENEFIT PLANS. Accounting and funding policies for retirement
plans and postretirement benefits other than pensions ("OPEB") are described in
Note 14. The Company retroactively adopted SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits" in 1998.
RESEARCH AND DEVELOPMENT. Research and development expense approximated
$3.6 million in 1997, $3.4 million in 1998 and $2.5 million in 1999.
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. See Note 13.
COMPREHENSIVE INCOME. The Company retroactively adopted SFAS No. 130,
"Reporting Comprehensive Income" in 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS. The Company currently expects that
it will be able to realize the carrying value of its investment in nonmarketable
preferred securities, purchased in October 1998, and as such believes the
carrying value of the securities approximate fair value.
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. The fair value of the Convertible Preferred Securities based on
quoted market prices approximated $102 million and $46 million at December 31,
1998 and 1999, respectively (net carrying value at both dates - $201 million).
F-10
NEW ACCOUNTING PRINCIPLES NOT YET ADOPTED. The Company will adopt SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," no
later than the first quarter of 2001. SFAS No. 133 establishes accounting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. Under SFAS No. 133, all
derivatives will be recognized as either assets or liabilities and measured at
fair value. The accounting for changes in fair value of derivatives will depend
upon the intended use of the derivative. The Company is currently studying this
newly issued accounting rule, and the impact of adopting SFAS No. 133, if any,
will be dependent upon the extent to which the Company is then a party to
derivative contracts or engaged in hedging activities.
Note 2 - Segment information:
In 1998, the Company retroactively adopted SFAS No. 131 "Disclosure
about Segments of an Enterprise and Related Information". The Company is a
vertically integrated producer of titanium sponge, melted products (ingot and
slab) and a variety of mill products for aerospace, industrial and other
applications. The Company's production facilities are located principally in the
United States, United Kingdom and France, and its products are sold throughout
the world. These worldwide integrated activities compose the Company's principal
segment, "Titanium melted and mill products".
In 1997 and 1998, the "Other" segment consisted primarily of the
Company's titanium castings operations, which were combined in a joint venture
during 1998 and subsequently sold in January 2000 (see Note 4). In 1999, the
"Other" segment consists of the Company's nonintegrated joint ventures.
Operating income, inventory and receivables are the key management
measures used to evaluate segment performance. Segment operating income is
defined as income before income taxes, minority interest and interest expense,
exclusive of certain general corporate income and expense items (including
dividends and interest income). Operating income of the "Titanium melted and
mill products" segment includes special charges of $19.5 million and $4.7
million in 1998 and 1999, respectively. In 1999, the operating loss of this
segment also included $4.3 million of charges for slow-moving inventory (see
Note 7). Operating income of the "Other" segment includes special charges of
$4.5 million and $2.1 million in 1998 and 1999, respectively. The special
charges are more fully described in Note 6.
F-11
Years Ended December 31,
----------------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
(In thousands)
OPERATING SEGMENTS:
Net sales:
Titanium melted and mill products $ 700,427 $ 686,677 $ 479,466
Other 36,217 23,936 2,233
Eliminations (3,067) (2,936) (1,670)
---------------- --------------- ----------------
$ 733,577 $ 707,677 $ 480,029
================ =============== ================
Mill product shipments:
Volume (metric tons) 15,100 14,800 11,400
Average price ($ per kilogram) $ 35.00 $ 35.25 $ 33.00
Operating income (loss):
Titanium melted and mill products $ 139,252 $ 87,411 $ (27,685)
Other (6,290) (4,706) (3,748)
---------------- --------------- ----------------
132,962 82,705 (31,433)
Dividends and interest income 1,407 6,303 6,034
General corporate income (expense), net 2,860 (243) (1,246)
Interest expense (2,066) (2,916) (7,093)
---------------- --------------- ----------------
Income (loss) before income taxes
And minority interest $ 135,163 $ 85,849 $ (33,738)
================ =============== ================
Depreciation and amortization:
Titanium melted and mill products $ 26,463 $ 31,599 $ 42,693
Other 1,921 915 -
================ ============== ================
$ 28,384 $ 32,514 $ 42,693
================ ============== ================
Capital expenditures:
Titanium melted and mill products $ 62,869 $ 115,103 $ 24,770
Other 3,426 52 2
================ ============== ================
$ 66,295 $ 115,155 $ 24,772
================ ============== ================
F-12
Years Ended December 31,
------------------------------------------------------
1997 1998 1999
---------------- -------------- ----------------
(In thousands)
Inventories:
Titanium melted and mill products $ 146,782 $ 225,073 $ 190,390
Other 7,165 871 1,209
Eliminations (129) (64) (64)
---------------- -------------- ----------------
$ 153,818 $ 225,880 $ 191,535
================ ============== ================
Accounts receivable:
Titanium melted and mill products $ 149,293 $ 124,010 $ 105,202
Other 6,385 2,088 1,002
---------------- -------------- ----------------
$ 155,678 $ 126,098 $ 106,204
================ ============== ================
Investment in joint ventures:
Titanium melted and mill products $ 20,114 $ 22,044 $ 21,143
Other 3,156 10,589 5,795
---------------- -------------- ----------------
$ 23,270 $ 32,633 $ 26,938
================ ============== ================
Equity in earnings (losses) of joint ventures:
Titanium melted and mill products $ (517) $ 1,869 $ 549
Other (496) (1,518) (2,258)
---------------- -------------- ----------------
$ (1,013) $ 351 $ (1,709)
================ ============== ================
Geographic segments:
Net sales - point of origin:
United states $ 534,440 $ 465,519 $ 365,652
United kingdom 223,573 217,709 160,765
Other europe 96,659 109,347 89,433
Eliminations (121,095) (84,898) (135,821)
---------------- --------------- ----------------
$ 733,577 $ 707,677 $ 480,029
================ =============== ================
Net sales - point of destination:
United states $ 401,217 $ 354,001 $ 239,797
Europe 276,419 290,988 203,858
Other 55,941 62,688 36,374
---------------- --------------- ----------------
$ 733,577 $ 707,677 $ 480,029
================ =============== ================
Operating income (loss):
United states $ 76,434 $ 45,760 $ (31,636)
Europe 56,528 36,945 203
---------------- --------------- ----------------
$ 132,962 $ 82,705 $ (31,433)
================ =============== ================
Long-lived assets - property and equipment, net:
United states $ 188,564 $ 264,856 $ 246,744
United kingdom 69,470 78,731 81,607
Other europe 4,392 7,636 5,033
---------------- --------------- ----------------
$ 262,426 $ 351,223 $ 333,384
================ =============== ================
Export sales from U.S. based operations approximated $97 million in 1997,
$81 million in 1998 and $65 million in 1999.
F-13
Geographic segment operating income of the U.S. includes special
charges in 1998 and 1999 of $14.5 million and $3.2 million, respectively.
Operating income of the Europe segment in 1998 and 1999 includes special charges
of $9.5 million and $3.6 million, respectively. The 1999 geographic segment
operating income also includes a charge for slow-moving inventory of $2.4
million and $1.9 million in U.S. and Europe, respectively.
Note 3 - Business combinations:
In January 1997, the Company purchased LASAB Laser Applikations-und
Bearbeitungs GmbH, which is in the titanium and stainless steel laser-welded
tube and pipe and laser cutting business.
In April 1998, the Company acquired Loterios S.p.A., a producer and
distributor, based in Italy, of titanium pipe and fittings primarily to the
offshore oil and gas drilling and production markets. The cost of the Loterios
acquisition, accounted for by the purchase method, was approximately $19 million
in cash. Additional consideration of up to approximately $7 million is
contingent upon Loterios' achieving certain operating targets through 2000. No
additional consideration has been earned to date based upon Loterios' operating
results. The results of Loterios' operations have been reflected in the
consolidated financial statements from the date of acquisition. Net sales in
1998 subsequent to the acquisition approximated $23 million; net sales in 1999
approximated $20 million.
Note 4 - Joint ventures:
December 31,
--------------------------------
1998 1999
-------------- --------------
(In thousands)
Joint ventures:
Valtimet $ 21,658 $ 20,863
Wyman-gordon titanium castings 6,158 5,795
Other 4,817 280
-------------- --------------
$ 32,633 $ 26,938
============== ==============
In July 1997, TIMET combined its Tennessee-based 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", is 46% owned by TIMET and 54% owned by Valinox
Welded. The Company's initial investment in ValTimet aggregated $19.8 million,
consisting of $11.3 million of noncash consideration contributed at net carrying
value (principally property and equipment) plus cash of $8.5 million to fund
working capital. During the six months ended December 31, 1997 and the years
ended December 31, 1998 and 1999, ValTimet reported sales of $56.6 million,
$119.3 million and $71.2 million and net income of $.1 million, $4.1 million and
$.5 million, respectively. At December 31, 1998 and 1999, ValTimet reported
total assets of $69.1 million and $57.8 million and equity of $31.8 million and
$29.9 million, respectively.
In August 1998, the Company completed a series of strategic
transactions with Wyman-Gordon Company. The principal components were: (i) the
Company exchanged certain of its titanium castings assets and $5 million in cash
for Wyman-Gordon's Millbury, Massachusetts vacuum arc remelting facility, which
produced titanium ingot; (ii) Wyman-Gordon and the Company combined their
respective titanium castings business into a new joint venture, Wyman-Gordon
Titanium Castings LLC, 80% owned by Wyman-Gordon and 20% by the Company; and
(iii) the Company and Wyman-Gordon entered into a contract pursuant to which the
Company will be the principal supplier of titanium material to Wyman-Gordon
through 2007. The Company accounts for its interest in the castings joint
venture by the equity method. The Company accounted for the castings
business/melting facility transaction at fair value, which approximated the $18
million net carrying value of the assets exchanged, and, accordingly, recognized
nil gain
F-14
on the transaction. For the five months ended December 31, 1998 and the year
ended December 31, 1999, Wyman-Gordon Titanium Castings reported sales of $16.6
million and $37.7 million, respectively, and net income (loss) of ($.4) million
and less than $.1 million, respectively. At December 31, 1998 and 1999,
Wyman-Gordon Titanium Castings reported total assets of $29.2 million and $20
million, respectively, and equity of $25.3 million and $19.4 million,
respectively. In the first quarter of 2000, the Company sold its interest in the
castings joint venture to Wyman-Gordon for approximately $7 million and recorded
a pretax gain of approximately $1.2 million.
TIMET's strategy for developing new markets and uses for titanium has
included providing funds to third parties to potentially prove out a new use or
uses of titanium. Other joint ventures consist principally of such investments.
During the fourth quarter 1999, the Company recorded a $2.3 million charge to
earnings for the write-down associated with an impairment of the Company's
investment in certain start-up joint ventures.
Note 5 - Preferred securities:
In October 1998, the Company purchased for cash $80 million of
non-voting preferred securities of Special Metals Corporation ("SMC"), a U.S.
manufacturer of wrought nickel-based superalloys and special alloy long
products. The investment was made in conjunction with, and concurrent with, the
acquisition by SMC of the Inco Alloys International unit of Inco, Ltd. The
preferred securities accrue dividends at the annual rate of 6.625%, are
mandatorily redeemable in April 2006 and are convertible into SMC common stock
at $16.50 per share. The Company is accruing dividends on the SMC preferred
securities, although dividends cannot currently be paid by SMC due to
limitations imposed by an amendment of SMC's bank credit agreement.
Note 6 - Special charges:
In 1998 and 1999, the Company implemented plans of action designed to
address current market and operating conditions, which resulted in recognizing
$24 million of restructuring charges in 1998 and $4.5 million of such charges in
1999. The plans included the permanent closure or disposition of four plants,
permanent or temporary closure of three other plants and termination of an
aggregate of 700 people, or approximately 23% of TIMET's worldwide workforce
prior to the restructurings. Additionally, in 1999, the Company recorded a $2.3
million charge to earnings associated with the write-downs of the Company's
investment in certain start-up joint ventures. The components of the 1998 and
1999 restructuring charges are summarized below.
1998 1999
-------------------------------- ------------------------------
SEGMENT SEGMENT
-------------------------------- ------------------------------
MELTED AND MELTED AND
MILL PRODUCTS OTHER MILL PRODUCTS OTHER
----------------- ----------- ---------------- ----------
(In millions)
Property and equipment $ 7.1 $ 2.6 $ .3 $ -
Disposition of german subsidiary - - 2.0 -
Pension and opeb costs, net 5.7 - (.1) -
Personnel severance and benefits 5.3 .5 2.5 -
Other exit costs, principally
Related to leased facilities 1.4 1.4 - (.2)
----------------- ----------- ---------------- ----------
$ 19.5 $ 4.5 $ 4.7 $ (.2)
================= =========== ================ ==========
F-15
Substantially all of the property and equipment loss relates to items
sold, scrapped or abandoned. Depreciation of equipment temporarily idled but not
impaired was not suspended. The disposition of the German subsidiary is expected
to be completed in the first quarter of 2000. The pension and OPEB costs relate
to actuarial valuations of accelerated defined benefits of employees terminated
and curtailment of OPEB liabilities.
At December 31, 1999, substantially all of the planned 1998-1999
aggregate personnel reductions had been accomplished, with the remainder to be
accomplished in the first quarter of 2000. Of the aggregate $10.9 million
personnel and other exit costs accrued, $1.9 million was paid in 1998 and $7.5
million was paid in 1999. Substantially all of the remaining $1.5 million of
accrued costs is expected to be paid during the first half of 2000.
The Company is implementing additional personnel reductions and
production rationalization which will result in additional restructuring charges
in 2000. Such charges are currently estimated to be up to $10 million,
principally related to personnel severance and benefits for the approximately
250 employees to be terminated.
Note 7 - Inventories:
December 31,
----------------------------------
1998 1999
-------------- ---------------
(In thousands)
Raw materials $ 62,820 $ 45,004
Work-in-process 110,096 69,809
Finished products 70,353 83,893
Supplies 10,611 18,329
-------------- ---------------
253,880 217,035
Less adjustment of certain
inventories to LIFO basis 28,000 25,500
-------------- ---------------
$ 225,880 $ 191,535
============== ===============
During 1999, the Company recorded a $4.3 million charge to cost of
sales for slow-moving inventory.
Note 8 - Intangible and other noncurrent assets:
December 31,
--------------------------------
1998 1999
-------------- --------------
(In thousands)
Intangible assets:
Patents $ 14,381 $ 13,934
Covenants not to compete 8,759 8,881
Intangible pension assets 2,783 3,190
-------------- --------------
25,923 26,005
Less accumulated amortization 6,029 9,679
-------------- --------------
$ 19,894 $ 16,326
============== ==============
Other noncurrent assets:
Deferred financing costs $ 9,911 $ 9,417
Notes receivable from officers 580 489
Other 3,638 3,073
-------------- --------------
$ 14,129 $ 12,979
============== ==============
F-16
Note 9 - Accrued liabilities:
December 31,
-------------------------------
1998 1999
-------------- -------------
(In thousands)
OPEB cost $ 2,371 $ 3,269
Pension cost 1,482 1,287
Other employee benefits 20,881 14,375
Deferred income - 9,295
Environmental costs 2,273 1,238
Restructuring costs 6,727 1,490
Taxes, other than income 1,292 1,209
Accrued dividends - convertible preferred securities 1,111 1,111
Other 14,491 9,605
-------------- -------------
$ 50,628 $ 42,879
============== =============
During 1999, the Company had customer orders for approximately $16
million of titanium ingot for which the customer had not yet determined the
final mill product specifications. At the customer's request, the Company
manufactured the ingots and is storing the material at the Company's facilities.
It is anticipated that most of this ingot will be shipped or converted into mill
products and delivered during 2000. As agreed with the customer, they were
billed for and took title to the ingots in 1999. The ingots continue to be
stored at the Company's facilities and the Company is obligated to perform
additional processing of this metal at the customer's request. Accordingly, the
revenue and cost of sales on this product was not recognized in 1999. The income
has been deferred until the related sale is recorded. See Note 1 for the
Company's revenue recognition policy.
F-17
Note 10 - Notes payable, long-term debt and capital lease obligations:
December 31,
--------------------------------
1998 1999
-------------- --------------
(In thousands)
Notes payable - european credit agreements $ 5,134 $ 9,635
============== ==============
Long-term debt:
Bank credit agreement - U.S. $ 80,000 $ 85,000
Bank credit agreement - U.K. 18,781 21,867
Other 1,740 922
-------------- --------------
100,521 107,789
Less current maturities 571 85,364
-------------- --------------
$ 99,950 $ 22,425
============== ==============
Capital lease obligations $ 10,269 $ 10,091
Less current maturities 200 315
-------------- --------------
$ 10,069 $ 9,776
============== ==============
EUROPEAN CREDIT AGREEMENTS. At December 31, 1999, aggregate unused
borrowing availability under short-term bank credit agreements in France and
Italy approximated $5 million. The weighted average interest rate on borrowings
outstanding under these credit agreements at December 31, 1998 and 1999 was
6.88% and 4.58%, respectively.
LONG-TERM BANK CREDIT AGREEMENTS. At December 31, 1999, TIMET had a
$200 million revolving bank credit facility expiring in July 2002. Borrowings
accrued interest at LIBOR plus 1.50% (7.50% at December 31, 1999) and were
collateralized by substantially all of TIMET's assets. The credit agreement
generally limited dividends on TIMET's common stock to 25% of net income,
limited additional indebtedness and transactions with affiliates, required the
maintenance of certain financial ratios and contained other covenants customary
in transactions of this type. At December 31, 1999, the Company had received a
waiver of compliance through February 2000 with certain financial covenants
contained in its U.S. bank credit facility.
At December 31, 1999, TIMET UK had an (pound)18 million ($29 million)
overdraft/revolving bank credit facility maturing in April 2001. Borrowings may
be in any major currency and at December 31, 1999 were in British pounds and
U.S. dollars. These borrowings are collateralized by TIMET UK's inventories and
receivables, and accrued interest at a base rate plus 0.75% (6.75% at December
31, 1999).
In February 2000, the Company completed a new $125 million, three-year
U.S.-based revolving credit agreement replacing its previous U.S. bank credit
facility. Borrowings under the new facility are limited to a formula-determined
borrowing base derived from the value of accounts receivable, inventory and
equipment. Interest generally accrues at rates that vary from LIBOR plus 2% to
LIBOR plus 2.5%. Borrowings are collateralized by substantially all of the
Company's U.S. assets. The credit agreement limits additional indebtedness,
prohibits the payment of common stock dividends, and contains other covenants
customary in lending transactions of this type. In addition, the credit
agreement prohibits the payment of dividends on TIMET's Convertible Preferred
Securities if "excess availability," as determined under the agreement, is less
than $25 million. Borrowings outstanding under this new U.S. facility will be
classified as a current liability.
F-18
The Company's subsidiary, TIMET UK, also increased its U.K. credit
agreement from (pound)18 million ($29 million) to (pound)30 million ($48
million) with its existing U.K. lender. Borrowings under the U.K. facility
accrue interest at rates that vary from LIBOR plus 1% to LIBOR plus 1.25% and
borrowings are collateralized by TIMET UK's accounts receivable, inventories,
buildings and equipment and shares in certain European subsidiaries. This
facility also contains covenants customary in lending transactions of this type.
Borrowings under these U.S. and U.K. credit agreements at closing were used to
repay the $58 million in then-outstanding borrowings under the prior U.S. credit
agreement, which was terminated. As a result of entering into these new
agreements, the Company recorded a $1.3 million charge to earnings in the first
quarter of 2000 related to the deferred financing costs associated with the
previous U.S. credit facility.
At December 31, 1999, the Company had approximately $16 million of
unused borrowing availability under its U.S. and U.K. bank credit agreements.
Upon closing of the new credit facilities on February 25, 2000, as discussed
above, the Company had approximately $96 million of borrowing availability under
these agreements.
CAPITAL LEASE OBLIGATIONS. Certain of the Company's U.K. production
facilities are under long-term leases. The Company's French subsidiary has
entered into long-term leases with Compagnie Europeenne du Zirconium-CEZUS, S.A.
("CEZUS") (the 30% minority shareholder) covering machinery and equipment. The
terms of these capital leases range from 10-30 years. The U.K. 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 in equipment at
December 31, 1999 were $9.4 million and $1.3 million, respectively, with related
aggregate accumulated depreciation of $1.7 million.
Aggregate maturities of long-term debt and capital lease obligations:
Capital Long-term
Leases Debt
---------------- ----------------
(In thousands)
Years ending December 31,
2000 $ 1,190 $ 85,364
2001 1,124 558
2002 1,118 21,867
2003 1,118 -
2004 1,110 -
2005 and thereafter 20,305 -
Less amounts representing interest 15,874) -
---------------- ----------------
$ 10,091 $ 107,789
================ ================
F-19
Note 11 - Minority interest:
CONVERTIBLE 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 and $6
million of 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"). TIMET's guarantee of payment of the Convertible Preferred
Securities (in accordance with the terms thereof) and its obligations under the
Trust documents constitute, in the aggregate, 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 approximately 5.4 million common shares if fully
converted.
The Convertible Preferred Securities mature December 2026 and are
redeemable at the Company's option, currently at approximately 104.6% of
principal amount declining to 100% from December 2006. The Company's new U.S.
credit agreement prohibits the payment of dividends on these securities if
"excess availability," as determined under the agreement, is less than $25
million. The Company also has the right to defer dividend 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.
Dividends on the Convertible Preferred Securities are reported in the
Consolidated Statements of Operations as minority interest, net of allocable
income tax benefit.
OTHER. Other minority interest relates principally to TIMET Savoie. The
Company has the right to purchase from CEZUS the remaining 30% interest in TIMET
Savoie for 30% of TIMET Savoie's equity determined under French accounting
principles ($7.5 million and $7.3 million at December 31, 1998 and 1999,
respectively), which amount is recorded as minority interest. CEZUS has the
right to sell its interest in TIMET Savoie to the Company for 30% of TIMET
Savoie's registered capital ($2.9 million and $2.5 million at December 31, 1998
and 1999, respectively).
Note 12 - Stockholders' equity:
PREFERRED STOCK. 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. The Company's new U.S. credit agreement prohibits the payment
of common stock dividends (see Note 10).
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. Options generally vest over five years and expire ten
years from date of grant.
Additionally, a plan for TIMET's nonemployee directors provides for
eligible directors to annually be granted options to purchase 5,000 shares of
the Company's common stock (1,500 prior to 1999) 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 500 shares of common stock. Options granted to nonemployee
directors vest in one year and expire ten years from date of grant (five year
expiration for grants prior to 1998).
F-20
The weighted average remaining life of options outstanding at December
31, 1999 was 7.9 years (1998 - 8.2 years). At December 31, 1997, 1998 and 1999
options to purchase approximately 2,500, 199,000 and 431,000 shares,
respectively, were exercisable at average exercise prices of $23.00, $25.89 and
$25.85, respectively. Options to purchase 318,000 shares become exercisable in
2000. At December 31, 1999, approximately 1.5 million shares and 30,350 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.
Amount
payable Weighted
Exercise upon Weighted average fair
price per exercise average value at
Shares share (thousands) exercise price grant date
----------- -------------- -------------- --------------- ---------------
Outstanding at December 31, 536,275 $23.00-$31.25 $ 13,679 $ 25.51
Granted:
At market 230,075 25.94-29.50 6,414 27.88 $ 12.72
Above market 134,000 31.00-34.00 4,355 32.50 11.99
Exercised (1,250) 23.00-29.50 (33) 26.25
Canceled (79,100) 23.00-34.00 (2,045) 25.86
----------- -------------- -------------- ---------------
Outstanding at December 31, 1997 820,000 23.00-34.00 22,370 27.28
Granted:
At market 320,900 26.13-29.31 9,392 29.27 14.08
Above market 142,000 32.31-35.31 4,802 33.81 12.79
Canceled (65,200) 23.00-35.31 (1,878) 28.80
----------- -------------- -------------- ---------------
Outstanding at December 31, 1998 1,217,700 23.00-35.31 34,686 28.48
Granted:
At market 433,000 7.38-7.97 3,445 7.96 3.98
Above market 206,000 8.97-9.97 1,951 9.47 3.59
Canceled (118,500) 7.97-35.31 (3,023) 25.51
----------- -------------- -------------- ---------------
Outstanding at December 31, 1999 1,738,200 $7.38-$35.31 $ 37,059 $ 21.32
=========== ============== ============== ===============
Weighted average fair values of options at grant date were estimated
using the Black-Scholes model and assumptions listed below.
Assumptions at date of grant: 1997 1998 1999
-------------- --------------- --------------
Expected life (years) 6 6 6
Risk-free interest rate 6.00% 5.56% 5.14%
Volatility 35% 40% 45%
Dividend yield 0% 0% 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 net income and earnings per share would have been reduced in 1997 by
$2.4 million and $.06 per share, respectively, in 1998 by $3.5 million and $.11
per share, respectively, and in 1999 by $3.1 million and $.10 per share,
respectively.
F-21
Note 13 - Income taxes:
Summarized below are (i) the components of income (loss) before income
taxes and minority interest ("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%, (iii) the components of the income tax expense (benefit)
attributable to pretax income (loss), and (iv) the components of the
comprehensive tax provision (benefit).
Years Ended December 31,
---------------------------------------------------
1997 1998 1999
-------------- -------------- --------------
(In thousands)
Pretax income (loss):
U.S. $ 81,766 $ 51,090 $ (30,485)
NON-U.S. 53,397 34,759 (3,253)
-------------- -------------- --------------
$135,163 $ 85,849 $ (33,738)
============== ============== ==============
Expected income tax expense (benefit), at 35% $ 47,307 $30,047 $ (11,809)
Non-U.S. tax rates (464) 41 893
U.S. State income taxes, net 126 472 (1,705)
Dividends received deduction - (218) (1,382)
Export sales credit (361) (979) -
Adjustment of deferred tax valuation allowance (5,785) - 1,869
Other, net 181 (166) 113
-------------- -------------- --------------
$ 41,004 $ 29,197 $ (12,021)
============== ============== ==============
Income tax expense (benefit):
Current income taxes (benefit):
U.S. $ 17,146 $ 4,617 $ (11,225)
Non-U.S. 17,280 11,408 (332)
-------------- -------------- --------------
34,426 16,025 (11,557)
-------------- -------------- --------------
Deferred income taxes (benefit):
U.S. 5,998 12,374 (1,850)
Non-U.S. 580 798 1,386
-------------- -------------- --------------
6,578 13,172 (464)
-------------- -------------- --------------
$ 41,004 $ 29,197 $ (12,021)
============== ============== ==============
Comprehensive tax provision (benefit) allocable to:
Pretax income (loss) $ 41,004 $ 29,197 $ (12,021)
Minority interest - convertible preferred securities (4,760) (4,703) (4,666)
Stockholders' equity, including amounts allocated
to other comprehensive income (533) (3,520) (55)
-------------- -------------- --------------
$ 35,711 $ 20,974 $ (16,742)
============== ============== ==============
F-22
December 31,
---------------------------------------------------------
1998 1999
-------------------------- ---------------------------
Assets Liabilities Assets Liabilities
---------- ------------ ---------- -------------
(In millions)
Temporary differences relating to net assets:
Inventories $ .1 $ (5.1) $ .2 $ (5.5)
Property and equipment, including software 1.4 (30.5) - (30.7)
Accrued opeb cost 11.0 - 11.3 -
Accrued liabilities and other deductible differences 11.1 - 12.6 (1.0)
Other taxable differences - (7.7) 4.7 (8.8)
Tax loss and credit carryforwards 4.9 - 13.1 -
Valuation allowance - - (1.9) -
---------- ------------ ---------- -------------
Gross deferred tax assets (liabilities) 28.5 (43.3) 40.0 (46.0)
Netting (26.6) 26.6 (28.1) 28.1
---------- ------------ ---------- -------------
Total deferred taxes 1.9 (16.7) 11.9 (17.9)
Less current deferred taxes 1.9 (2.5) 2.3 (5.0)
---------- ------------ ---------- -------------
Net noncurrent deferred taxes $ - $ (14.2) $ 9.6 $ (12.9)
========== ============ ========== =============
The Company's valuation allowance decreased in the aggregate (including
amounts allocated to items other than pretax income) by $5.8 million in 1997 and
$.4 million in 1998. The increase in valuation allowance during 1999 relates to
deferred taxes related to certain capital losses and certain non-U.S. losses
that do not currently meet the "more-likely-than-not" recognition criteria.
At December 31, 1999, the Company had, for U.S. federal income tax
purposes, NOLs of approximately $18.5 million, of which $6.8 million and $11.7
million expire in 2010 and 2019, respectively. At December 31, 1999, the Company
had an AMT credit carryforward of approximately $5.8 million, which can be
utilized to offset regular income taxes payable in future years. The AMT credit
carryforward has an indefinite carryforward period.
Note 14 - Employee benefit plans:
VARIABLE COMPENSATION PLANS. Substantially all 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 $11 million in 1997, $6 million in 1998 and $1 million in 1999.
DEFINED CONTRIBUTION PLANS. All of the Company's domestic hourly and
salaried employees (65% of total worldwide employees at December 31, 1999) are
eligible to participate in contributory savings plans with partial matching
employer contributions. Company matching contributions are based on Company
profitability for approximately 80% of eligible employees. Approximately 44% of
the Company's total employees at December 31, 1999 also participate in a defined
contribution pension plan with contributions based upon a fixed percentage of
the employee's eligible earnings. The cost of these pension and savings plans
approximated $3 million in each of 1997 and 1998 and $2 million in 1999.
DEFINED BENEFIT PENSION PLANS. The Company maintains contributory and
noncontributory defined benefit pension plans covering substantially all
European employees and a minority 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 U.S. defined benefit pension plans were
closed to new participants prior to 1996 and, in some cases, benefit levels have
been frozen.
F-23
The rates used in determining the actuarial present value of benefit
obligations at December 31, 1999 were: (i) discount rates - 6% to 7.5% (1998 -
6% to 6.5%), and (ii) rates of increase in future compensation levels - 3% (1998
- - 3%). The expected long-term rates of return on assets used was 7.5% to 9%
(1998 - 7.5% to 9%). The benefit obligations are sensitive to changes in these
estimated rates and actual results may differ from the obligations noted below.
At December 31, 1999, the assets of the plans are primarily comprised of
government obligations, corporate stocks and bonds. The funded status of the
Company's defined benefit pension plans is set forth below.
Years Ended December 31,
---------------------------------
1998 1999
-------------- ---------------
(In thousands)
Change in projected benefit obligations:
Balance at beginning of year $ 136,367 $ 152,292
Service cost 5,462 4,053
Interest cost 9,377 8,939
Plan amendments - 977
Curtailment loss (gain) 5,725 (103)
Actuarial loss (gain) 553 (5,353)
Benefits paid (5,334) (8,917)
Change in currency exchange rates 142 (3,200)
-------------- ---------------
Balance at end of year $ 152,292 $ 148,688
============== ===============
Change in plan assets:
Fair value at beginning of year $ 136,827 $ 133,100
Actual return on plan assets (3,039) 28,516
Contributions 4,606 6,345
Benefits paid (5,334) (8,917)
Change in currency exchange rates 40 (2,408)
-------------- ---------------
Fair value at end of year $ 133,100 $ 156,636
============== ===============
Funded status:
Plan assets over (under) projected benefit obligations $ (19,192) $ 7,948
Unrecognized:
Actuarial loss (gain) 16,154 (9,029)
Prior service cost 2,783 3,190
Transition obligation (615) -
-------------- ---------------
Total prepaid (accrued) pension cost $ (870) $ 2,109
============== ===============
Amounts recognized in balance sheet:
Intangible pension asset $ 2,783 $ 3,190
Current pension liability (1,482) (1,287)
Noncurrent pension liability (8,754) (5,634)
Accumulated other comprehensive income 6,583 5,840
-------------- ---------------
$ (870) $ 2,109
============== ===============
F-24
Selected information related to the Company's defined benefit
pension plans that have accumulated benefit obligations in excess of fair value
of plan assets is presented below.
December 31,
---------------------------------
1998 1999
-------------- ---------------
(In thousands)
Projected benefit obligation $ 63,123 $ 59,129
Accumulated benefit obligation 62,831 59,129
Fair value of plan assets 56,707 54,154
The components of the net periodic defined benefit pension cost,
excluding curtailment, are set forth below.
Years Ended December 31,
----------------------------------------------------
1997 1998 1999
--------------- -------------- --------------
(In thousands)
Service cost benefits earned $ 3,906 $ 5,462 $ 4,053
Interest cost on projected benefit obligations 9,201 9,519 8,939
Expected return on plan assets (20,555) (12,247) (10,650)
Net amortization 9,724 (2,030) 120
--------------- -------------- --------------
Net pension expense $ 2,276 $ 704 $ 2,462
=============== ============== ==============
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. The Company provides
certain postretirement health care and life insurance benefits to certain of its
domestic 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 change in the accumulated
OPEB obligations are set forth below. The plan is unfunded and contributions to
the plan during the year equal benefits paid. The rates used in determining the
actuarial present value of the accumulated OPEB obligations at December 31, 1999
were: (i) discount rate - 7.5% (1998 - 6.5%), (ii) rate of increase in health
care costs for the following period - 9.2% (1998 - 8.9%) (iii) ultimate health
care trend rate (achieved in 2016) - 6.0% (1998 - 4.75%). 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 1999, and the
actuarial present value of accumulated OPEB obligations at December 31, 1999
would have increased approximately $2.7 million. A one percentage point decrease
would have a similar, but opposite, effect. The accrued OPEB cost is sensitive
to changes in these estimated rates and actual results may differ from the
obligations noted below.
F-25
December 31,
-------------------------------
1998 1999
------------- -------------
(In thousands)
Actuarial present value of accumulated OPEB obligations:
Balance at beginning of year $ 22,297 $ 22,637
Service cost 326 252
Interest cost 1,553 1,577
Actuarial loss 1,648 3,754
Curtailment gain - (115)
Benefits paid, net of participant contributions (3,187) (3,919)
------------- -------------
Balance at end of year 22,637 24,186
Unrecognized net actuarial gain (loss) 900 (3,411)
Unrecognized prior service credits 2,899 2,455
------------- -------------
Total accrued OPEB cost 26,436 23,230
Less current portion 2,371 3,269
------------- -------------
Noncurrent accrued OPEB cost $ 24,065 $ 19,961
============= =============
Years Ended December 31,
--------------------------------------------
1997 1998 1999
----------- ------------ ------------
(In thousands)
Service cost benefits earned $ 357 $ 326 $ 252
Interest cost on accumulated OPEB obligations 1,613 1,553 1,577
Curtailment gain - - (115)
Net amortization and deferrals (635) (550) (364)
----------- ------------ ------------
Net OPEB expense $ 1,335 $ 1,329 $ 1,350
=========== ============ ============
Note 15 - Related party transactions:
At December 31, 1996, Tremont Corporation held 36% of the Company's
outstanding common stock. During 1998 and 1999, Tremont purchased additional
shares of the Company's common stock in market or private transactions,
increasing its ownership of TIMET common stock to 39% at December 31, 1999.
During 1999, the Combined Master Retirement Trust ("CMRT"), a trust formed by
Valhi, Inc. to permit the collective investment by trusts that maintain the
assets of certain employee benefit plans adopted by Valhi and related companies,
purchased shares of TIMET common stock in market transactions. At December 31,
1999, the CMRT held 8% of TIMET's common stock. At December 31, 1999, Valhi and
other entities related to Harold C. Simmons held 55% of Tremont's outstanding
common stock, and Contran Corporation held, directly or through subsidiaries,
approximately 93% of Valhi's outstanding common stock. Substantially all of
Contran's outstanding voting common stock is held either by trusts established
for the benefit of certain children and grandchildren of Mr. Simmons, of which
Mr. Simmons is sole trustee, or by Mr. Simmons directly. In addition, Mr.
Simmons is the sole trustee of the CMRT and a member of the trust investment
committee for the CMRT. Mr. Simmons may be deemed to control each of Contran,
Valhi, Tremont and TIMET.
F-26
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.
TIMET supplies titanium strip product to ValTimet under a long-term
contract as the preferred supplier and supplied castings ingot to Wyman-Gordon
Titanium Castings. Sales to these joint ventures were $40 million in 1998 and
$19 million in 1999. Receivables from related parties at December 31, 1998 and
1999 relate principally to sales to these joint ventures. In January 2000, TIMET
sold its interest in the castings joint venture.
In connection with the construction and financing of TIMET's vacuum
distillation process ("VDP") titanium sponge plant, Union Titanium Sponge
Corporation ("UTSC") licensed certain technology to TIMET in exchange for the
right 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
thereafter through 2008. A discount from market value represents TIMET's
consideration to UTSC for the licensed technology. Sales to UTSC approximated
$17 million in 1997, $7 million in 1998 and $5 million in 1999.
The Company has an intercorporate services agreement with Tremont
whereby the Company provides certain management, financial and other services to
Tremont for approximately $.4 million in each of 1997 and 1998 and approximately
$.2 million in 1999, subject to renewal for future years.
The Company has an intercorporate services agreement with NL
Industries, Inc., a majority-owned subsidiary of Valhi. Under the terms of the
agreement, NL provides certain management, financial and other services to TIMET
for approximately $.3 million in each of 1997, 1998 and 1999.
The Company extended market-rate loans in 1998 and 1999 to certain
officers pursuant to a Board-approved program to facilitate the purchase of
Company stock and 6.625% Convertible Preferred Securities. The loans are
generally payable in five annual installments beginning six years from date of
loan and bear interest at a rate tied to the Company's borrowing rate, payable
quarterly. For certain executive officers whose positions have been eliminated,
the Board has approved the deferral of interest (to be added to principal
quarterly) and principal payments for a period of up to five years commencing on
the date of each such officer's severance. At December 31, 1999, the outstanding
balance of officer notes receivable was approximately $.5 million.
F-27
EWI RE, Inc. arranges for and brokers certain of the Company's
insurance policies. Parties related to Contran own 90% of the outstanding common
stock of EWI, and a son-in-law of Harold C. Simmons manages the operations of
EWI. Consistent with insurance industry practices, EWI receives a commission
from the insurance underwriters for the policies that it arranges or brokers.
The Company paid an aggregate of approximately $1.8 million and $2.0 million for
such policies in 1998 and 1999, respectively, which amount principally included
premiums for the insurance policies paid to third parties, but also included
commissions paid to EWI. In the Company's opinion, the premiums paid for these
insurance policies are reasonable and similar to those the Company could have
obtained through an unrelated insurance broker. The Company expects that these
relationships with EWI will continue in 2000.
Note 16 - Commitments and contingencies:
LONG-TERM AGREEMENTS. The Company has long-term agreements with certain
major aerospace customers, including Boeing, Rolls-Royce plc, United
Technologies Corporation (and related companies) and Wyman-Gordon Company,
pursuant to which the Company expects to be a major supplier of titanium
products to these customers. The Boeing agreement was effective in 1998, but was
not expected to reach volume levels until 1999. The other agreements mentioned
were effective in 1999. These agreements provide for (i) minimum market shares
of the customers' titanium requirements (generally at least 70%) for extended
periods (nine to ten years) and (ii) fixed or formula-determined prices
generally for at least the first five years.
The Boeing contract requires Boeing to purchase a minimum percentage of
their titanium requirements from TIMET. Although Boeing placed orders and
accepted delivery of certain volumes in 1999, TIMET believes the level of orders
was significantly below the contractual volume requirements. Although Boeing has
informed the Company that it will either order the required contractual volume
under the contract in 2000 or pay the liquidated damages provided for in the
agreement, TIMET has received virtually no Boeing-related orders under the
contract for the year 2000. Boeing has also informed the Company that it is
unwilling to commit to the contract beyond the year 2000. On March 21, 2000 the
Company filed a lawsuit against Boeing in a Colorado state court seeking damages
for Boeing's repudiation and breach of the Boeing contract. TIMET's complaint
seeks damages from Boeing that TIMET believes are in excess of $600 million and
a declaration from the court of TIMET's rights under the contract.
The Company also has long-term arrangements with certain suppliers for
the purchase of certain raw materials, including titanium sponge and various
alloying elements, at fixed and/or formula determined prices. TIMET believes
these arrangements will help stabilize the cost and supply of raw materials. The
sponge contract provides for annual purchases by the Company of 6,000 to 10,000
metric tons. The parties agreed to reduced minimums for 1999 and 2000.
CONCENTRATION OF CREDIT AND OTHER RISKS. Substantially all of the
Company's sales and operating income are derived from operations based in the
U.S., the U.K. and France. The majority of the Company's sales are to customers
in the aerospace industry (including airframe and engine construction). As
described above, the Company has long-term agreements with certain major
aerospace customers, including Boeing, Rolls-Royce plc, United Technologies
Corporation (and related companies) and Wyman-Gordon Company. These agreements
and others accounted for approximately 44% of aerospace revenues in 1999. 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. While no customer accounts
for more than 10% of the Company's direct sales, the Company's ten largest
customers accounted for about one-third of net sales in 1997, about 40% of net
sales in 1998 and about 30% of net sales in 1999.
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 $3.6 million in 1997, $5.0 million in 1998 and $5.9 million in
1999.
F-28
At December 31, 1999, 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,
2000 $ 5,495
2001 3,461
2002 1,781
2003 1,048
2004 97
2005 and thereafter 48
-------------------
$ 11,930
===================
ENVIRONMENTAL MATTERS.
BMI COMPLEX. In the early 1990s, TIMET and certain other companies (the
"Steering Committee Companies") that currently have or formerly had operations
within a Henderson, Nevada industrial complex (the "BMI Complex") began
environmental assessments of the BMI Complex and each of the individual company
sites located within the BMI Complex pursuant to a series of consent agreements
entered into with the Nevada Division of Environmental Protection ("NDEP"). Most
of this assessment work has now been completed, although some of the assessment
work with respect to TIMET's property is continuing. In 1999, TIMET entered into
a series of agreements with Basic Management, Inc. (together with its
subsidiaries, "BMI") and, in certain cases, other Steering Committee Companies,
pursuant to which, among other things, BMI assumed responsibility for the
conduct of soils remediation activities on the properties described, including,
subject to final NDEP approval, the responsibility to complete all outstanding
requirements under the consent agreements with NDEP insofar as they relate to
the investigation and remediation of soils conditions on such properties. BMI
also agreed to indemnify TIMET and the other Steering Committee Companies
against certain future liabilities associated with any soils contamination on
such properties. The Company contributed $2.8 million to the cost of this
remediation (which payment was charged against accrued liabilities). The Company
also agreed to convey to BMI, at no additional cost, certain lands owned by the
Company adjacent to its plant site (the "TIMET Pond Property") upon payment by
BMI of the cost to design, purchase, and install the technology and equipment
necessary to allow the Company to stop discharging liquid and solid effluents
and co-products onto the TIMET Pond Property (BMI will pay 100% of the first
$15.9 million cost for this project, and TIMET will contribute 50% of the cost
in excess of $15.9 million, up to a maximum payment by TIMET of $2 million; the
Company does not currently expect to incur any cost in connection with this
project). The Company, BMI and the other Steering Committee Companies are
continuing investigation with respect to certain additional issues associated
with the properties described above, including any possible groundwater issues.
In addition, the Company is continuing assessment work with respect to its own
active plant site.
HENDERSON FACILITY. In April 1998, the U. S. Environmental Protection
Agency ("EPA") filed a civil ACTION AGAINST TIMET (UNITED STATES OF AMERICA V.
TITANIUM METALS CORPORATION; Civil Action No. CV-S-98-682-HDM (RLH), U. S.
District Court, District of Nevada) in connection with an earlier notice of
violation alleging that TIMET violated several provisions of the Clean Air Act
in connection with the start-up and operation of certain environmental equipment
at TIMET's Henderson, Nevada facility during the early to mid-1990s. A
settlement agreement in this case was approved by the court in February 2000,
pursuant to which TIMET will make cash payments totaling approximately $.4
million from 2000 through 2002 and undertake certain additional monitoring and
emissions controls at a primarily capital cost of approximately $1.5 million.
F-29
At December 31, 1999, the Company had accrued an aggregate of
approximately $1.2 million primarily for THE ENVIRONMENTAL MATTERS DISCUSSED
ABOVE UNDER BMI COMPANIES AND HENDERSON FACILITY. The Company records
liabilities related to environmental remediation obligations when estimated
future expenditures are probable and reasonably estimable. Such accruals are
adjusted as further information becomes available or circumstances change.
Estimated future expenditures are not discounted to their present value. It is
not possible to estimate the range of costs for certain sites. The imposition of
more stringent standards or requirements under environmental laws or
regulations, the results of future testing and analysis undertaken by the
Company at its operating facilities, or a determination that the Company is
potentially responsible for the release of hazardous substances at other sites,
could result in 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.
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, 1999:
Net sales $ 134.1 $ 127.6 $ 112.7 $ 105.5
Operating income (loss) (1.4) 1.1 (7.8) (23.2)
Net loss (3.9) (2.5) (7.5) (17.5)
Net loss per share:
Basic $ (.12) $ (.08) $ (.24) $ (.56)
Diluted * * * *
Year ended december 31, 1998:
Net sales $ 187.1 $ 190.8 $ 173.5 $ 156.3
Operating income (loss) 31.6 23.9 27.3 (.2)
Net income (loss) 18.3 13.8 16.1 (2.5)
Net income (loss) per share:
Basic $ .58 $ .44 $ .51 $ (.08)
Diluted .56 .44 .50 *
* Antidilutive.
Due to the timing of the issuance and repurchase of common stock and
rounding in calculations, the sum of quarterly earnings per share may be
different than earnings per share for the full year.
F-30
Note 18 - Earnings per share:
A reconciliation of the numerator and denominator used in the
calculation of basic and diluted earnings per share is presented below. In 1998
and 1999, the effect of the assumed conversion of the Convertible Preferred
Securities was antidilutive. Stock options omitted from the denominator because
they were antidilutive approximated: not material in 1997, 1.2 million in 1998
and 1.7 million in 1999.
Years Ended December 31,
------------------------------------------------------
1997 1998 1999
--------------- -------------- ---------------
(In thousands)
Numerator:
Net income (loss) $ 83,010 $ 45,752 $ (31,390)
Minority interest - Convertible
Preferred Securities 8,840 8,840 8,667
--------------- -------------- ---------------
Diluted net income (loss) $ 91,850 $ 54,592 $ (22,723)
=============== ============== ===============
Denominator:
Average common shares outstanding 31,457 31,435 31,371
Convertible Preferred Securities 5,389 5,389 5,389
Average dilutive stock options 109 22 22
--------------- -------------- ---------------
Diluted shares 36,955 36,846 36,782
=============== ============== ===============
F-31
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of Titanium Metals Corporation:
Our audits of the consolidated financial statements referred to in our
report dated January 28, 2000, except for the fourth and fifth paragraphs of
Note 10, as to which the date is February 25, 2000, and the second paragraph of
Note 16, as to which the date is March 21, 2000, appearing in the 1999 Annual
Report on Form 10-K also included an audit of the financial statement schedule
listed in the Index on page F of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
PricewaterhouseCoopers LLP
Denver, Colorado
January 28, 2000
S-1
TITANIUM METALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
charged
Balance at (credited) to Balance
DESCRIPTION beginning costs and at end
of year expenses Deductions Other of year
------------- ------------- ------------- ---------- -----------
Year ended December 31, 1999:
Allowance for doubtful accounts $ 1,932 $ 1,628 $ (230) $ - $ 3,330
============= =========== ============= =========== ===========
Valuation allowance for deferred
income taxes $ - $ 1,869 $ - $ - $ 1,869
============= =========== ============= =========== ===========
Reserve for excess and slow
moving inventories $ 6,520 $ 4,423 $ (406) $ 3,327 (b) $ 13,864
============= =========== ============== =========== ===========
Year ended December 31, 1998:
Allowance for doubtful accounts $ 2,218 $ 39 $ (325)(a) $ - $ 1,932
============= =========== ============= =========== ===========
Valuation allowance for deferred
income taxes $ 373 $ - $ (373) $ - $ -
============= =========== ============= =========== ===========
Reserve for excess and slow
moving inventories $ 6,292 $ 228 $ - $ - $ 6,520
============= =========== ============= =========== ===========
Year ended December 31, 1997:
Allowance for doubtful accounts $ 4,788 $ 2 $ (2,572)(a) $ - $ 2,218
=============== =========== ============= =========== ===========
Valuation allowance for deferred
income taxes $ 6,158 $ (5,785) $ - $ - $ 373
=============== =========== ============== =========== ===========
Reserve for excess and slow
moving inventories $ 7,719 $ (1,427) $ - $ - $ 6,292
=============== =========== ============== =========== ===========
(a) Amounts written off, less recoveries.
(b) Adjustment for slow moving inventory previously carried at zero value.
S-2