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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
___ ACT OF 1934
For the fiscal year ended December 31, 2003
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
___ EXCHANGE ACT OF 1934
Commission file number 0-28538
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Titanium Metals Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-5630895
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 296-5600
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on Which Registered
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Common Stock New York Stock Exchange
($.01 par value per share)
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K X
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
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As of June 30, 2003, 3,192,182 shares of common stock were outstanding. The
aggregate market value of the 1,479,967 shares of voting stock held by
nonaffiliates of Titanium Metals Corporation as of such date approximated $47.5
million. No shares of non-voting stock were held by nonaffiliates. As of March
2, 2004, 3,179,602 shares of common stock were outstanding.
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 ("Annual
Report") that are not historical facts, including, but not limited to,
statements found in the Notes to Consolidated Financial Statements and 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 ("MD&A"), are forward-looking statements that represent management's
beliefs and assumptions based on currently available information.
Forward-looking statements can be identified by the use of words such as
"believes," "intends," "may," "will," "looks," "should," "could," "anticipates,"
"expects" or comparable terminology or by discussions of strategies or trends.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it cannot give any assurances that
these expectations will prove to be correct. Such statements by their nature
involve substantial risks and uncertainties that could significantly affect
expected results. Actual future results could differ materially from those
described in such forward-looking statements, and the Company disclaims any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. Among the
factors that could cause actual results to differ materially are the risks and
uncertainties discussed in this 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 ("SEC") which include, but
are not limited to, the cyclicality of the commercial aerospace industry, the
performance of aerospace manufacturers and the Company under their long-term
agreements, the renewal of certain long-term agreements, the difficulty in
forecasting demand for titanium products, global economic and political
conditions, global productive capacity for titanium, changes in product pricing
and costs, the impact of long-term contracts with vendors on the ability of the
Company to reduce or increase supply or achieve lower costs, the possibility of
labor disruptions, fluctuations in currency exchange rates, control by certain
stockholders and possible conflicts of interest, uncertainties associated with
new product development, the supply of raw materials and services, changes in
raw material and other operating costs (including energy costs), possible
disruption of business or increases in the cost of doing business resulting from
terrorist activities or global conflicts, the Company's ability to achieve
reductions in its cost structure 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") was
originally formed in 1950 and was incorporated in Delaware in 1955. TIMET is one
of the world's leading producers of titanium sponge and titanium melted and mill
products. The Company is the only producer with major titanium production
facilities in both the United States and Europe, the world's principal markets
for titanium consumption.
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 where 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
represented approximately 42% of aggregate mill product shipments in 2003, 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 emerging markets with such diverse
uses as offshore oil and gas production installations, geothermal facilities,
military armor, automotive and architectural applications.
TIMET's products include titanium sponge, melted products, mill products
and industrial fabrications. The titanium industry is comprised of several
manufacturers that, like TIMET, 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 is currently the only major
U.S. titanium sponge producer. The Company estimates that it accounted for
approximately 18% of worldwide industry shipments of titanium mill products in
both 2003 and 2002. The Company also estimates it accounted for approximately 8%
of worldwide titanium sponge production in 2003.
The Company's long-term strategy is to maximize the value of its core
aerospace business while also developing new markets, applications and products
to help reduce its traditional dependence on the aerospace industry. In the
near-term, the Company continues to focus on reducing its cost structure,
reducing inventories, improving the quality of its products and processes and
taking other actions to continue to generate positive cash flow and return to
profitability.
Industry. The titanium industry historically has derived a substantial
portion of its business from the aerospace industry. Aerospace demand for
titanium products, which includes both jet engine components (e.g., blades,
discs, rings and engine cases) and air frame components (e.g., bulkheads, tail
sections, landing gear, wing supports and fasteners) can be broken down into
commercial and military sectors. The commercial aerospace sector has a
significant influence on titanium companies, particularly mill product producers
such as TIMET.
In 2003, the Company estimates the commercial aerospace sector accounted
for mill product shipments of approximately 15,700 metric tons, a 7% decrease
from 2002, and represented approximately 78% of aerospace industry mill product
shipments and 33% of aggregate mill product shipments. Mill product shipments to
the military aerospace sector in 2003 were approximately 4,400 metric tons, a
15% increase from 2002, and represented approximately 22% of aerospace industry
mill product shipments and 9% of aggregate mill product shipments. Military
aerospace sector shipments are largely driven by government defense spending in
North America and Europe. As discussed further below, new aircraft programs
generally are in development for several years, followed by multi-year
procurement contracts. The Company's business is more dependent on aerospace
demand than the overall titanium industry, as approximately 68% of the Company's
mill product shipment volume in 2003 was to the aerospace industry (57%
commercial aerospace and 11% military aerospace).
The cyclical nature of the aerospace industry has been the principal driver
of the historical fluctuations in the performance of most titanium companies.
Over the past 20 years, the titanium industry had cyclical peaks in mill product
shipments in 1989, 1997 and 2001 and cyclical lows in 1983, 1991 and 1999.
Demand for titanium reached its highest level in 1997 when industry mill product
shipments reached approximately 60,000 metric tons. However, since that peak,
industry mill product shipments have fluctuated significantly, primarily due to
a continued change in demand for titanium from the commercial aerospace sector.
In 2002, industry shipments approximated 50,000 metric tons, and in 2003 the
Company estimates industry shipments approximated 48,000 metric tons. The
Company currently expects total industry mill product shipments in 2004 will
increase from 2003 levels to at least 51,000 metric tons.
The Airline Monitor, a leading aerospace publication, traditionally issues
forecasts for commercial aircraft deliveries each January and July. According to
The Airline Monitor, large commercial aircraft deliveries for the 1996 to 2003
period peaked in 1999 with 889 aircraft, including 254 wide body aircraft that
use substantially more titanium than their narrow body counterparts. Large
commercial aircraft deliveries totaled 579 (including 154 wide bodies) in 2003.
The Airline Monitor's most recently issued forecast (January 2004) calls for 575
deliveries in 2004, 540 deliveries in 2005 and 510 deliveries in 2006. Relative
to 2003, these forecasted delivery rates represent anticipated declines of about
1% in 2004, 7% in 2005 and 12% in 2006. From 2007 through 2011, The Airline
Monitor calls for a continued increase each year in large commercial aircraft
deliveries, with forecasted deliveries of 620 aircraft in 2008, exceeding 2003
levels. Deliveries of titanium generally precede aircraft deliveries by about
one year, although this varies considerably by titanium product. This correlates
to the Company's cycle, which historically precedes the cycle of the aircraft
industry and related deliveries.
Although the commercial airline industry continues to face significant
challenges, recent economic data show signs of an improving business environment
in that sector. According to The Airline Monitor, the worldwide commercial
airline industry reported an estimated operating loss of approximately $3.5
billion in 2003, compared to a $7.3 billion loss in 2002 and an $11.7 billion
loss in 2001. The Airline Monitor is currently forecasting operating income of
approximately $6.3 billion for the industry in 2004. Additionally, global
airline passenger traffic returned to pre-September 11, 2001 levels in November
2003. Although these appear to be positive signs, the Company currently believes
that industry mill product shipments into the commercial aerospace sector will
be somewhat flat in 2004 and show a modest upturn in 2005.
2
Military aerospace programs were the first to utilize titanium's unique
properties on a large scale, beginning in the 1950s. Titanium shipments to
military aerospace markets reached a peak in the 1980s before falling to
historical lows in the early 1990s after the end of the Cold War. However, the
importance of military markets to the titanium industry is expected to rise in
coming years as defense spending budgets increase in reaction to terrorist
activities and global conflicts. It is estimated that overall titanium
consumption will increase in this market sector in 2004 and beyond, but
consumption by military applications will offset only a relatively small part of
the decrease seen in the commercial aerospace sector.
Several of today's active U.S. military aircraft programs, including the
C-17, F/A-18, F-16 and F-15 began during the Cold War and are forecast to
continue production for the foreseeable future. In addition to these established
programs, new programs in the United States offer growth opportunities for
increased titanium consumption. The F/A-22 Raptor is currently in low-rate
initial production, and U.S. Air Force officials have expressed a need for a
minimum of 339 airplanes, but cost overruns and development delays may result in
reduced procurement over the life of the program. In October 2001,
Lockheed-Martin Corporation was awarded what could eventually become the largest
military contract ever for the F-35 Joint Strike Fighter ("JSF"). The JSF is
expected to enter low-rate initial production in late 2006, and although no
specific order and delivery patterns have been established, procurement is
expected to extend over the next 30 to 40 years and include as many as 3,000 to
4,000 planes. European military programs also have active aerospace programs
offering the possibility for increased titanium consumption. Production levels
for the Saab Gripen, Eurofighter Typhoon, Dassault Rafale and Dassault Mirage
2000 are all forecasted to increase over the next decade.
Since titanium's initial applications in the aerospace sector, the number
of end-use markets for titanium has significantly expanded. Established
industrial uses for titanium include chemical plants, industrial power plants,
desalination plants and pollution control equipment. Titanium continues to gain
acceptance in many emerging market applications, including automotive, military
armor, energy and architecture. Although titanium is generally higher cost than
other competing metals, in many cases customers find the physical properties of
titanium to be attractive from the standpoint of weight, performance, longevity,
design alternatives, life cycle value and other factors. Although emerging
market demand presently represents only about 5% of the total industry demand
for titanium mill products today, the Company believes emerging market demand,
in the aggregate, could grow at double-digit rates over the next several years.
The Company is actively pursuing these markets.
Although difficult to predict, the automotive market continues to be an
attractive emerging segment due to its potential for sustainable long-term
growth. For this reason, in 2002, TIMET established a new division, TiMET
Automotive, focused on the development of the automobile, truck and motorcycle
markets. The division is tasked with developing and marketing proprietary alloys
and processes specifically suited for automotive applications and supporting
supply chain activities for automotive manufacturers to most cost effectively
engineer titanium components. Titanium is now used in several consumer car
applications, including the Corvette Z06, Toyota Alteeza, Infiniti Q45,
Volkswagen Lupo FSI, Honda S2000 and Mercedes S Class and in numerous
motorcycles.
3
At the present time, titanium is primarily used for exhaust systems,
suspension springs and engine valves in consumer vehicles. In exhaust systems,
titanium provides for significant weight savings, while its corrosion resistance
provides life-of-vehicle durability. In suspension spring applications,
titanium's low modulus of elasticity allows the spring's height to be reduced by
20% to 40% compared to a steel spring, which, when combined with the titanium's
low density, permits 30% to 60% weight savings over steel spring suspension
systems. The lower spring height provides vehicle designers new styling
alternatives and improved performance opportunities. Titanium suspension springs
and exhaust applications are also attractive compared to alternative lightweight
technologies because the titanium component can often be formed and fabricated
on the same tooling used for the steel component it is typically replacing. This
is especially attractive for the rapidly growing niche vehicle market sectors
that often seek the performance attributes that titanium provides, but where
tooling costs prohibit alternative light-weighting or other improved performance
strategies.
Titanium is also making inroads into other automotive applications,
including turbo charger wheels, brake parts and connecting rods. Titanium engine
components provide mass-reduction benefits that directly improve vehicle
performance and fuel economy. In certain applications, titanium engine
components can provide a cost-effective alternative to engine balance shafts to
address noise, vibration and harshness while simultaneously improving
performance. The decision to select titanium components for consumer car, truck
and motorcycle components remains highly cost sensitive; however, the Company
believes titanium's acceptance in consumer vehicles will expand as the
automotive industry continues to better understand the benefits titanium offers.
Utilization of titanium on military ground combat vehicles for armor
applique and integrated armor or structural components continues to gain
acceptance within the military market segment. Titanium armor components provide
the necessary ballistic performance while achieving a mission critical vehicle
performance objective of reduced weight. In order to counteract increased threat
levels, titanium is being utilized on vehicle upgrade programs in addition to
new builds. Based on active programs, as well as programs currently under
evaluation, the Company believes there will be additional usage of titanium on
ground combat vehicles that will provide continued growth in the military market
segment.
The oil and gas market utilizes titanium for down-hole logging tools,
critical riser components, fire water systems and saltwater-cooling systems.
Additionally, as offshore development of new oil and gas fields moves into the
ultra deep-water depths, market demand for titanium's light weight, high
strength and corrosion resistance properties is creating new opportunities for
the material. The Company has a dedicated group that is focused on developing
the expansion of titanium use in this market and in other non-aerospace
applications.
Products and operations. The Company is a vertically integrated titanium
manufacturer whose products include (i) titanium sponge, the basic form of
titanium metal used in processed titanium products, (ii) melted products (ingot
and slab), the result of melting sponge and titanium scrap, either alone or with
various other alloying elements, (iii) mill products that are forged and rolled
from ingot or slab, including long products (billet and bar), flat products
(plate, sheet and strip) and pipe and (iv) fabrications that are cut, formed,
welded and assembled from titanium mill products (spools, pipefittings,
manifolds, vessels, etc.). During the past three years, all of TIMET's sales
revenue was generated by the Company's integrated titanium operations (its
"Titanium melted and mill products" segment), its only business segment.
Business and geographic segment financial information is included in Note 21 to
the Consolidated Financial Statements.
4
Titanium sponge (so called because of its appearance) is the commercially
pure, elemental form of titanium metal. The first step in TIMET's sponge
production involves the chlorination of titanium-containing rutile ores (derived
from beach sand) with chlorine and petroleum 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 facility 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 a vacuum in the chamber. The combination of heat
and vacuum boils the residues from the sponge mass, and then the mass is
mechanically pushed out of the distillation vessel, sheared and crushed, while
the residual magnesium chloride is electrolytically separated and recycled.
Titanium ingot and slab are solid shapes (cylindrical and rectangular,
respectively) that weigh up to 8 metric tons in the case of ingot and up to 16
metric tons in the case of slab. Each ingot or slab is formed by melting
titanium sponge, 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 and components. The melting process for ingot and
slab is closely controlled and monitored utilizing computer control systems to
maintain product quality and consistency and to meet customer specifications. In
most cases, TIMET uses its ingot and slab as the starting material for further
processing into mill products. However, it also sells ingot and slab to third
parties.
Titanium mill products result from the forging, rolling, drawing, welding,
cutting and/or extrusion of titanium ingot or slab into products of various
sizes and grades. These mill products include titanium billet, bar, rod, plate,
sheet, strip and pipe. Fabrications result from the cutting, forming, welding
and assembling of titanium mill products into various products such as spools,
pipefittings, manifolds and vessels. The Company sends certain products either
to the Company's service centers or to outside vendors for further processing
before being shipped to customers. The Company's customers either 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
manufacturing, the Company performs extensive testing on its products. The
inspection process is critical to ensuring that the Company's products meet the
high quality requirements of its customers, particularly in aerospace component
production. The Company certifies that its products meet customer specification
at the time of shipment for substantially all customer orders.
The Company is reliant on several outside processors to perform certain
rolling, finishing and other processing steps in the U.S., and certain melting
and forging steps in France. In the U.S., one of these outside processors is
owned by a competitor, and another is operated by a customer. These processors
are currently TIMET's primary source for these services. Other processors used
in the U.S. are not competitors or customers. In France, the processor is also a
joint venture partner in the Company's 70%-owned subsidiary, TIMET Savoie, S.A.
("TIMET Savoie"). During 2003, the Company made significant strides toward
reducing the reliance on competitor-owned sources for these services, so that
any interruption in these functions should not have a material adverse effect on
the Company's business, results of operations, financial position and liquidity.
5
Distribution. The Company sells its products through its own sales force
based in the U.S. and Europe and through independent agents and distributors
worldwide. The Company's marketing and distribution system also includes eight
Company-owned service centers (five in the U.S. and three in Europe), which sell
the Company's products on a just-in-time basis. The service centers primarily
sell value-added and customized mill products including bar, flat-rolled sheet
and strip. The Company believes its service centers provide a competitive
advantage because of their ability to foster customer relationships, customize
products to suit specific customer requirements and respond quickly to customer
needs.
Raw materials. The principal raw materials used in the production of
titanium ingot, slab and mill products are titanium sponge, titanium scrap and
alloying elements. During 2003, approximately 36% of the Company's melted and
mill product raw material requirements were fulfilled with internally produced
sponge, 28% with purchased sponge, 30% with titanium scrap and 6% with alloying
elements.
The primary raw materials used in the production of titanium sponge are
titanium-containing rutile ore, chlorine, magnesium and petroleum coke. Rutile
ore is currently available from a limited number of suppliers around the world,
principally located in Australia, South Africa and Sri Lanka. The Company
purchases the majority of its supply of rutile ore from Australia. The Company
believes the availability of rutile ore will be adequate for the foreseeable
future and does not anticipate any interruptions of its rutile supplies,
although political or economic instability in the countries from which the
Company purchases its rutile could materially adversely affect availability.
However, there can be no assurance that the Company will not experience
interruptions.
Chlorine is currently obtained from a single supplier near the Company's
sponge plant in Henderson, Nevada. While the Company does not presently
anticipate any chlorine supply problems, there can be no assurances the chlorine
supply will not be interrupted. In the event of supply disruption, the Company
has taken steps to mitigate this risk, including establishing the feasibility of
certain equipment modifications to enable it to utilize material from
alternative chlorine suppliers or to purchase and utilize an intermediate
product which will allow the Company to eliminate the purchase of chlorine if
needed. Magnesium and petroleum coke are generally available from a number of
suppliers.
While the Company was one of five major worldwide producers of titanium
sponge in 2003, it cannot supply all of its needs for all grades of titanium
sponge internally and is dependent, therefore, on third parties for a
substantial portion of its sponge requirements. Titanium melted and mill
products require varying grades of sponge and/or scrap depending on the
customers' specifications and expected end use. TIMET is the only active major
U.S. producer of titanium sponge. Presently, TIMET and certain companies in
Japan are the only producers of premium quality sponge that currently have
complete approval for all significant demanding aerospace applications. During
2003, two other sponge producers received additional qualification of their
products for certain critical aerospace applications. This qualification process
is likely to continue for several more years.
Historically, the Company has purchased sponge predominantly from producers
in Japan and Kazakhstan. In September 2002, the Company entered into a sponge
supply agreement, effective from January 1, 2002 through December 31, 2007,
which requires minimum purchases by the Company of approximately $10 million
annually through 2007. This agreement replaced a 1997 agreement. The Company has
no other long-term sponge supply agreements. Since 2000, the Company has also
purchased sponge from the U.S. Defense Logistics Agency ("DLA") stockpile. In
2004, the Company expects to continue to purchase sponge from a variety of
sources.
6
The Company utilizes a combination of internally produced, customer
returned and externally produced titanium scrap at all of its melting locations.
Such scrap consists of alloyed and commercially pure solids and turnings.
Internally produced scrap is generated in the Company's factories during both
melting and mill product processing. Customer returned scrap is generally part
of a supply agreement with a customer, which provides a "closed loop"
arrangement resulting in supply and cost stability. Externally produced scrap is
purchased from a wide range of sources, including customers, collectors,
processors and brokers. In 2004, the Company anticipates that approximately half
the scrap it will utilize will be purchased from external suppliers. The Company
also sells scrap, usually in a form or grade it cannot economically recycle.
Market forces can significantly impact the supply or cost of externally
produced scrap. During cycles in the titanium business, the amount of scrap
generated in the supply chain varies. During the middle of the cycle, scrap
generation and consumption are in relative equilibrium, minimizing disruptions
in supply or significant changes in market prices for scrap. Increasing or
decreasing cycles tend to cause significant changes in the market price of
scrap. Early in the titanium cycle, when the demand for titanium melted and mill
products begins to increase, the Company's requirements (and those of other
titanium manufacturers) precede the increase in scrap generation by downstream
customers and the supply chain, placing upward pressure on the market price of
scrap. The opposite situation occurs when demand for titanium melted and mill
products begins to decline, placing downward pressure on the market price of
scrap. As a net purchaser of scrap, the Company is susceptible to price
increases during periods of increasing demand, although this phenomena normally
results in higher selling prices for melted and mill products, which tend to
offset the increased material costs.
All of the Company's major competitors utilize scrap as a raw material in
their melt operations. In addition to use by titanium manufacturers, titanium
scrap is used in steel-making operations during production of interstitial-free
steels, stainless steels and high-strength-low-alloy steels. Current demand for
these steel products, especially from China, have produced a significant
increase in demand for titanium scrap at a time when titanium scrap generation
rates are at low levels because of the lower commercial aircraft build rates.
These events are expected to cause a relative shortage of titanium scrap in
2004, resulting in tight supply and higher prices, which will directly impact
the approximate 50% of scrap the Company purchases from external sources. The
Company's ability to recover these material costs via higher selling prices to
its customers is uncertain.
Various alloying elements used in the production of titanium products are
also available from a number of suppliers.
Customer agreements. The Company has long-term agreements ("LTAs") with
certain major aerospace customers, including, among others, The Boeing Company
("Boeing"), Rolls-Royce plc and its German and U.S. affiliates ("Rolls-Royce"),
United Technologies Corporation (Pratt & Whitney and related companies) and
Wyman-Gordon Company ("Wyman-Gordon," a unit of Precision Castparts Corporation
("PCC")). These agreements expire from 2007 through 2008, subject to certain
conditions, and generally provide for (i) minimum market shares of the
customers' titanium requirements or firm annual volume commitments and (ii)
fixed or formula-determined prices (although some contain elements based on
market pricing). Generally, the LTAs require the Company's service and product
performance to meet specified criteria and contain a number of other terms and
conditions customary in transactions of these types.
7
In certain events of nonperformance by the Company, the LTAs may be
terminated early. Although it is possible that some portion of the business
would continue on a non-LTA basis, the termination of one or more of the LTAs
could result in a material and adverse effect on the Company's business, results
of operations, financial position or liquidity. The LTAs were designed to limit
selling price volatility to the customer, while providing TIMET with a committed
base of volume throughout the aerospace business cycles. To varying degrees,
these LTAs effectively obligate TIMET to bear all or part of the risks of
increases in raw material and other costs, but also allow TIMET to benefit from
decreases in such costs.
During the third quarter of 2003, the Company and Wyman-Gordon agreed to
terminate the 1998 purchase and sale agreement associated with the formation of
the titanium castings joint venture previously owned by the two parties. The
Company agreed to pay Wyman-Gordon a total of $6.8 million in three quarterly
installments in connection with this termination, which included the termination
of certain favorable purchase terms. The Company recorded a one-time charge for
the entire $6.8 million as a reduction to sales in the third quarter of 2003.
Concurrently, the Company entered into new long-term purchase and sale
agreements with Wyman-Gordon that expire in 2008.
In April 2001, the Company reached a settlement of the litigation between
TIMET and Boeing related to the parties' LTA entered into in 1997. Pursuant to
the settlement, the Company received a cash payment of $82 million from Boeing.
Under the terms of the LTA, as amended, in years 2002 through 2007, Boeing
advances TIMET $28.5 million annually less $3.80 per pound of titanium product
purchased by Boeing subcontractors during the preceding year. Effectively, the
Company collects $3.80 less from Boeing than the LTA selling price for each
pound of titanium product sold directly to Boeing and reduces the related
customer advance recorded by the Company. For titanium products sold to Boeing
subcontractors, the Company collects the full LTA selling price, but gives
Boeing credit by reducing the next year's annual advance by $3.80 per pound of
titanium product sold to Boeing subcontractors. The Boeing customer advance is
also reduced as take-or-pay benefits are earned, as described in Note 10 to the
Consolidated Financial Statements. Under a separate agreement TIMET must
establish and hold buffer stock for Boeing at TIMET's facilities, for which
Boeing will pay TIMET as such product is produced. See Item 7 - MD&A for
additional information regarding the Boeing LTA.
The Company also has an LTA with VALTIMET SAS ("VALTIMET"), a manufacturer
of welded stainless steel and titanium tubing that is principally sold into the
industrial markets. VALTIMET is a 44%-owned affiliate of TIMET. The LTA was
entered into in 1997 and expires in 2007. Under the LTA, VALTIMET has agreed to
purchase a certain percentage of its titanium requirements from TIMET at
formula-determined selling prices, subject to certain conditions. Certain
provisions of this contract have been amended in the past and may be amended in
the future to meet changing business conditions.
Markets and customer base. Approximately 55% of the Company's 2003 sales
revenue was generated by sales to customers within North America, as compared to
53% in 2002 and 51% in 2001. Approximately 38% of the Company's 2003 sales
revenue was generated by sales to European customers, as compared to 40% in 2002
and 39% in 2001. The balance of the Company's sales was to other regions
throughout the world. Further information regarding the Company's external
sales, net income, long-lived assets and total assets by segment can be found in
the Company's Consolidated Balance Sheets, Consolidated Statements of Operations
and Note 21 to the Consolidated Financial Statements.
8
Approximately 68% of the Company's sales revenue was generated by sales to
the aerospace industry in 2003, as compared to 67% in 2002 and 70% in 2001.
Sales under the Company's LTAs accounted for approximately 41% of its sales
revenue in 2003. Sales to PCC and its related entities approximated 13% of the
Company's sales revenue in 2003. Sales to Rolls-Royce and other Rolls-Royce
suppliers under the Rolls-Royce LTAs (including direct sales to certain of the
PCC-related entities under the terms of the Rolls-Royce LTAs) represented
approximately 15% of the Company's sales revenue in 2003. The Company expects
that a majority of its 2004 sales revenue will be to the aerospace industry.
The primary market for titanium products in the commercial aerospace
industry consists of two major manufacturers of large (over 100 seats)
commercial airframes - Boeing Commercial Airplanes Group (a unit of Boeing) and
Airbus (80% owned by European Aeronautic Defence and Space Company and 20% owned
by BAE Systems). In addition to the airframe manufacturers, the following four
manufacturers of large civil aircraft engines are also significant titanium
users - Rolls-Royce, Pratt & Whitney, General Electric Aircraft Engines and
Societe Nationale d'Etude et de Construction de Moteurs d'Aviation ("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 and/or
jet engine build rates from those currently expected, there could be a material
adverse effect, both directly and indirectly, on the Company.
As of December 31, 2003, the estimated firm order backlog for Boeing and
Airbus, as reported by The Airline Monitor, was 2,555 planes, versus 2,649
planes at the end of 2002 and 2,919 planes at the end of 2001. The estimated
firm order backlog for wide body planes at year-end 2003 was 701 (27% of total
backlog) compared to 709 (27% of total backlog) at the end of 2002 and 801 (27%
of total backlog) at the end of 2001. The backlogs for Boeing and Airbus reflect
orders for aircraft to be delivered over several years. Changes in the economic
environment and the financial condition of airlines can result in rescheduling
or cancellation of contractual orders. Accordingly, aircraft manufacturer
backlogs are not necessarily a reliable indicator of near-term business
activity, but may be indicative of potential business levels over a longer-term
horizon.
Wide body planes (e.g., Boeing 747, 767 and 777 and Airbus A330 and A340)
tend to use a higher percentage of titanium in their airframes, engines and
parts than narrow body planes (e.g., Boeing 737 and 757 and Airbus A318, A319
and A320), and newer models of planes tend to use a higher percentage of
titanium than older models. Additionally, Boeing generally uses a higher
percentage of titanium in its airframes than Airbus. For example, the Company
estimates that approximately 58 metric tons, 43 metric tons and 18 metric tons
of titanium are purchased for the manufacture of each Boeing 777, 747 and 737,
respectively, including both the airframes and engines. The Company estimates
that approximately 24 metric tons, 17 metric tons and 12 metric tons of titanium
are purchased for the manufacture of each Airbus A340, A330 and A320,
respectively, including both the airframes and engines.
At year-end 2003, a total of 129 firm orders had been placed for the Airbus
A380 superjumbo jet, a program officially launched in December 2000 with
anticipated first deliveries in 2006. Current estimates are that approximately
77 metric tons of titanium (50 metric tons for the airframe and 27 metric tons
for the engines) will be purchased for each A380 manufactured, the most of any
commercial aircraft. Additionally, Boeing currently plans a mid-2004 production
launch for its newly announced model, the 7E7 Dreamliner. Although this airplane
will contain more composite materials than a typical Boeing airplane, initial
estimates are that approximately 49 metric tons of titanium will be purchased
for each 7E7 airframe manufactured. Engine estimates are not yet available for
the 7E7.
9
Outside of aerospace markets, the Company manufactures a wide range of
products, including sheet, plate, tube, bar, billet, pipe and skelp, for
customers in the chemical process, oil and gas, consumer, sporting goods,
automotive, power generation and armor/armament industries. Approximately 19% of
the Company's sales revenue in 2003 and 18% in 2002 and 2001 was generated by
sales into industrial and emerging markets, including sales to VALTIMET for the
production of condenser tubing. For the oil and gas industry, the Company
provides seamless pipe for downhole casing, risers, tapered stress joints and
other offshore oil production equipment, including fabrication of sub-sea
manifolds. In armor and armament, the Company sells plate products for
fabrication into door hatches on fighting vehicles, as well as tank/turret
protection.
In addition to melted and mill products, which are sold into the aerospace,
industrial and emerging markets, the Company sells certain other products such
as titanium sponge, titanium tetrachloride and fabricated titanium assemblies.
Sales of these other products represented 13% of the Company's sales revenue in
2003, 15% in 2002 and 12% in 2001.
The Company's backlog of unfilled orders was approximately $180 million at
December 31, 2003, compared to $165 million at December 31, 2002 and $225
million at December 31, 2001. Substantially the entire 2003 year-end backlog is
scheduled for shipment during 2004. The Company's order backlog may not be a
reliable indicator of future business activity.
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 melted and mill products are located primarily in
the United States, Japan, France, Germany, Italy, Russia, China and the United
Kingdom. There are currently five major, and several minor, producers of
titanium sponge in the world. TIMET is currently the only active major U.S.
sponge producer.
Producers of other metal products, such as steel and aluminum, maintain
forging, rolling and finishing facilities that could be used or 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 steel, nickel alloys, steel, plastics, aluminum and
composites in many applications.
The Company's principal competitors in the aerospace market are Allegheny
Technologies Incorporated and RTI International Metals, Inc., both based in the
United States, and Verkhnaya Salda Metallurgical Production Organization
("VSMPO"), based in Russia. These companies, along with certain Japanese
producers and certain other companies, are also principal competitors in the
industrial and emerging 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.
10
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 and, with respect to Japan, Russia,
Kazakhstan and Ukraine, import duties (including antidumping duties). However,
since 1993, imports of titanium sponge, ingot and mill products, principally
from Russia and Kazakhstan, have increased 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 sponge, ingot or
intermediate and finished mill products from such countries for use in its own
operations, the negative effect of these imports on the Company has been
somewhat mitigated.
Generally, imports of titanium products into the U.S. are subject to a 15%
"normal trade relations" tariff. For tariff purposes, titanium products are
broadly classified as either wrought (billet, bar, sheet, strip, plate and
tubing) or unwrought (sponge, ingot and slab).
The U.S. maintains a trade program, referred to as the "generalized system
of preferences" or "GSP" program designed, to promote the economies of a number
of lesser- developed countries (referred to as "beneficiary developing
countries") by eliminating duties on a specific list of products imported from
any of these beneficiary developing countries. Of the key titanium producing
countries outside the U.S., Russia and Kazakhstan are currently regarded as
beneficiary developing countries under the GSP program.
For most periods since 1993, imports of titanium wrought products from any
beneficiary developing country (notably Russia, as a producer of wrought
products) were exempted from U.S. import duties under the GSP program. In 2002,
TIMET filed a petition seeking the removal of duty-free treatment under the GSP
program for imports of titanium wrought products into the U.S. from Russia.
Action on the TIMET petition has been deferred, meaning duty-free treatment on
imports of titanium wrought products into the U.S. from Russia will continue for
the time being.
In 2002, Kazakhstan filed a petition with the Office of the U.S. Trade
Representative seeking GSP status on imports of titanium sponge into the U.S.,
which, if granted, would have eliminated the 15% tariff currently imposed on
titanium sponge imported into the U.S. from any beneficiary developing country
(notably Russia and Kazakhstan, as producers of titanium sponge). On July 1,
2003, Kazakhstan's petition was denied.
TIMET has successfully resisted, and will continue to resist, efforts to
eliminate duties on sponge and unwrought titanium products, and TIMET has
pursued and will continue to pursue the removal of GSP status for titanium
wrought products, although no assurances can be made that the Company will
continue to be successful in these activities. Further reductions in, or the
complete elimination of, any or all of these tariffs, including expansion of the
GSP program to unwrought titanium products, 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, ingot and mill products and thus the Company's
business, results of operations, financial position or liquidity.
11
Research and development. The Company's research and development activities
are directed toward expanding the use of titanium and titanium alloys in all
market sectors. Key research activities include the development of new alloys,
development of technology required to enhance the performance of TIMET's
products in the traditional industrial and aerospace markets and applications
development in the automotive division and other emerging markets. The Company
conducts the majority of its research and development activities at its
Henderson Technical Laboratory in Henderson, Nevada, with additional activities
at its Witton, England facility. The Company incurred research and development
costs of $2.8 million in 2003, $3.3 million in 2002 and $2.6 million in 2001.
In April 2003, the Company was selected by the United States Defense
Advanced Research Projects Agency ("DARPA") to lead a program aimed at
commercializing the "FFC Cambridge Process." The FFC Cambridge Process,
developed by Professor Derek Fray, Dr. Tom Farthing and Dr. George Chen at the
University of Cambridge, represents a potential breakthrough technology in the
process of extracting titanium from titanium-bearing ores. This program will
receive up to approximately $12.3 million in government funding over the next
five years. As part of the program, TIMET is leading a team of scientists from
major defense contractors, including General Electric Aircraft Engines, United
Defense Limited Partners and Pratt & Whitney, as well as the University of
California at Berkeley and the University of Cambridge. The funding is allocated
among all of the program partners (including TIMET) to cover program costs.
Additionally, TIMET contributes unreimbursed personnel time to assist in the
research. In connection with the program, TIMET has negotiated a non-exclusive
development and production license for the FFC Cambridge Process technology from
British Titanium plc. TIMET is conducting the development work at its Henderson
Technical Laboratory. While much work must be done and success is by no means a
certainty, the Company considers this a significant opportunity to achieve a
meaningful reduction in the cost of producing titanium metal. If successful, the
Company believes this would not only make titanium a more attractive material
choice within the aerospace industry, but also could provide opportunities to
use titanium in non-aerospace applications where its cost might have previously
been an obstacle.
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. The Company believes the trademarks TIMET(R) and TIMETAL(R), which are
protected by registration in the U.S. and other countries, are important to its
business. Further, TIMET feels its proprietary TIMETAL Exhaust Grade, patented
TIMETAL 62S connecting rod alloy, patented TIMETAL LCB spring alloy and patented
TIMETAL Ti-1100 engine valve alloy give it competitive advantages in the
automotive market. However, most of the titanium alloys and manufacturing
technology used by the Company do not benefit from patent or other intellectual
property protection.
Employees. The cyclical nature of the aerospace industry and its impact on
the Company's business is the principal reason the Company periodically
implements cost reduction restructurings, reorganizations and other changes that
impact the Company's employment levels. The following table shows the number of
employees at year end for the past 3 years. The 19% decrease in employees from
2001 to 2002 was principally in response to changes in market demand for the
Company's products and met the Company's targeted reductions announced during
the third quarter of 2002. The increase during 2003 reflects the increase in
demand for titanium products during the second half of 2003, somewhat offset by
the Company's continued efforts to operate at more efficient levels. The Company
currently expects employment to slightly increase throughout 2004 as production
continues to increase.
12
Employees at December 31,
-----------------------------------------------------------
2003 2002 2001
------------------ ---------------- -----------------
U.S. 1,266 1,184 1,462
Europe 789 772 948
------------------ ---------------- -----------------
Total 2,055 1,956 2,410
================== ================ =================
The Company's production, maintenance, clerical and technical workers in
Toronto, Ohio, and its production and maintenance workers in Henderson, Nevada
are represented by the United Steelworkers of America under contracts expiring
in June 2005 and October 2004, for the respective locations. Employees at the
Company's other U.S. facilities are not covered by collective bargaining
agreements. Approximately 60% of the salaried and hourly employees at the
Company's European facilities are represented by various European labor unions.
New labor agreements were recently reached with the Company's French employees
for 2004 and with the Company's U.K. employees through 2005.
While the Company currently considers its employee relations to be
satisfactory, it is possible that there could be future work stoppages or other
labor disruptions that could materially and adversely affect the Company's
business, results of operations, financial position or liquidity. The Company
will be negotiating a new labor contract with its Henderson, Nevada hourly
workforce in the third quarter of 2004.
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 Occupational, Safety
and Health Act, 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, extremely hazardous or
toxic under environmental and worker safety and health laws and regulations. The
Company has used and manufactured such substances throughout the history of its
operations. As a result, risk of environmental, health and safety issues 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
assurance 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 position or liquidity.
The Company's operations in Europe are similarly subject to various
countries' laws and regulations respecting environmental and worker safety
matters. Such laws have not had, and are not presently expected to have, a
material adverse effect on the Company's business, results of operations,
financial position or liquidity.
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. The Company incurred capital
expenditures related to health, safety and environmental compliance and
improvement of approximately $1.9 million in 2003, $1.4 million in 2002 and $2.4
million in 2001. The Company's capital budget provides for approximately $2.9
million of such expenditures in 2004.
13
From time to time, the Company may be subject to health, safety or
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. 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
currently estimated to be required for such matters. See Note 19 to the
Consolidated Financial Statements.
Acquisitions and capital transactions during the past five years. In 1998,
TIMET (i) purchased for cash $80 million of non-voting convertible preferred
securities of Special Metals Corporation ("SMC"), a U.S. manufacturer of wrought
nickel-based superalloys and special alloy long products and (ii) entered into a
castings joint venture with Wyman-Gordon. In January 2000, the Company sold its
interest in the castings joint venture for $7 million and realized a gain of
$1.2 million on the sale. In December 2001 and March 2002, the Company
determined there had been an other than temporary decline in the fair value of
its investment in SMC and reduced the carrying amount of these securities and
related dividends and interest to an estimated fair value of $27.5 million and
zero, respectively. See Note 5 to the Consolidated Financial Statements.
Related parties. At December 31, 2003, Valhi, Inc. ("Valhi") and other
entities related to Harold C. Simmons held approximately 49.8% of TIMET's
outstanding common stock and 40.1% of the outstanding 6.625% mandatorily
redeemable convertible preferred securities, beneficial unsecured convertible
securities ("BUCS") of the TIMET Capital Trust I ("Capital Trust"). See Notes 1
and 18 to the Consolidated Financial Statements.
Available information. The Company maintains an Internet website at
www.timet.com. The Company's Annual Reports for the years ended December 31,
2003, 2002 and 2001, the Company's Quarterly Reports on Form 10-Q for 2004, 2003
and 2002, any Current Reports on Form 8-K for 2004 and 2003, and any amendments
thereto, are or will be available free of charge at such website as soon as
reasonably practicable after they are filed or furnished, as applicable, with
the SEC. Additionally, the Company's corporate governance guidelines, Code of
Ethics, and Audit Committee, Nominations Committee and Management Development
and Compensation Committee charters will also be available on the Company's
website prior to the Company's 2004 Annual Shareholder Meeting. Such documents
will also be provided to shareholders upon request. Such requests should be
directed to the attention of TIMET's Corporate Secretary at TIMET's corporate
offices located at 1999 Broadway, Suite 4300, Denver, Colorado 80202.
The general public may read and copy any materials the Company files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549, and may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer,
and the SEC maintains an Internet website at www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC.
14
ITEM 2: PROPERTIES
Set forth below is a listing of the Company's major production facilities.
In addition to its U.S. sponge capacity discussed below, the Company's worldwide
melting capacity presently aggregates approximately 45,000 metric tons
(estimated 29% of world capacity), and its mill product 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, 63% by vacuum arc remelting
("VAR") furnaces and 2% by a vacuum induction melting ("VIM") furnace.
Annual Practical
Capacities (3)
--------------------------------
Melted Mill
Manufacturing Location Products Manufactured Products Products
- ------------------------------------------ ------------------------------------ -------------- -------------
(metric tons)
Henderson, Nevada (1) Sponge, Ingot 12,250 -
Morgantown, Pennsylvania (1) Slab, Ingot, Raw materials
processing 20,000 -
Toronto, Ohio (1) Billet, Bar, Plate, Sheet, Strip - 9,900
Vallejo, California (2) Ingot (including non-titanium
superalloys) 1,600 -
Ugine, France (2) Ingot, Billet 2,450 2,000
Waunarlwydd (Swansea), Wales(1) Bar, Plate, Sheet - 3,900
Witton, England (2) Ingot, Billet, Bar 8,700 8,000
- ----------------------------------------------------------------------------------------------------------------------
(1) Owned facility.
(2) Leased facility.
(3) Practical capacities are variable based on production mix and are not additive.
The Company has operated its major production facilities at varying levels
of practical capacity during the past three years. In 2003, the plants operated
at approximately 56% of practical capacity, as compared to 55% in 2002 and 75%
in 2001. In 2004, the Company's plants are expected to operate at approximately
60% - 65% of practical capacity. However, practical capacity and utilization
measures can vary significantly based upon the mix of products produced.
United States production. The Company's VDP sponge facility is expected to
operate at approximately 92% of its annual practical capacity of 8,600 metric
tons during 2004, up from approximately 73% in 2003. VDP sponge is used
principally as a raw material for the Company's melting facilities in the U.S.
and Europe. Approximately 1,200 metric tons of VDP production from the Company's
Henderson, Nevada facility were used in Europe during 2003, which represented
approximately 32% of the sponge consumed in the Company's European operations.
The Company expects the consumption of VDP sponge in its European operations to
be approximately 35% - 40% of their sponge requirements in 2004. The raw
materials processing facility in Morgantown, Pennsylvania primarily processes
scrap used as melting feedstock, either in combination with sponge or
separately.
Sponge for melting requirements in the U.S. that is not supplied by the
Company's Henderson, Nevada plant is purchased principally from the DLA
stockpile and suppliers in Kazakhstan and Japan.
15
The Company's U.S. melting facilities in Henderson, Nevada and Morgantown,
Pennsylvania produce ingot and slab, which are either sold to third parties or
used as feedstock for the Company's mill products operations. These melting
facilities are expected to operate at approximately 70% of aggregate annual
practical capacity in 2004, up from 58% in 2003.
Titanium mill products are produced by TIMET in the U.S. at its forging and
rolling facility in Toronto, Ohio, which receives ingot or slab principally from
the Company's U.S. melting facilities. The Company's U.S. forging and rolling
facility is expected to operate at approximately 58% of annual practical
capacity in 2004, up from 53% in 2003. Capacity utilization across the Company's
individual mill product lines varies.
European production. The Company conducts its operations in Europe
primarily through its wholly-owned subsidiaries TIMET UK, Ltd. ("TIMET UK") and
Loterios S.p.A. ("Loterios") and its 70%-owned subsidiary TIMET Savoie. TIMET
UK's Witton, England facilities are leased pursuant to long-term capital leases
expiring in 2026. TIMET Savoie has the right to utilize portions of the Ugine,
France plant of Compagnie Europeenne du Zirconium-CEZUS, S.A. ("CEZUS"), the 30%
minority partner in TIMET Savoie, pursuant to an agreement expiring in 2006.
TIMET UK's melting facility in Witton, England produces VAR ingot used
primarily as feedstock for its forging operations, also in Witton. The forging
operations process the ingot principally into billet product for sale to third
parties or into an intermediate product for further processing into bar or plate
at its facility in Waunarlwydd, Wales. TIMET UK's melting and mill products
production in 2004 is expected to operate at approximately 69% and 51%,
respectively, of annual practical capacity, compared to 51% and 47%,
respectively, in 2003.
The capacity of TIMET Savoie in Ugine, France is to a certain extent
dependent upon the level of activity in CEZUS' zirconium business, which may
from time to time provide TIMET Savoie with capacity in excess of that which
CEZUS is contractually required to provide. During 2004, TIMET Savoie expects to
operate at approximately 61% of the maximum annual capacity that CEZUS is
contractually required to provide, which is equivalent to the 2003 level.
Sponge for melting requirements at both TIMET UK and TIMET Savoie that is
not supplied by the Company's Henderson, Nevada plant is purchased principally
from suppliers in Japan and Kazakhstan.
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 19 to
the Consolidated Financial Statements.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the quarter ended December 31, 2003 or through March 2, 2004.
16
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"). The high and low sales prices for the Company's common stock during 2002
and 2003 are set forth below. All prices have been adjusted to reflect the
one-for-ten reverse stock split, which became effective after the close of
trading on February 14, 2003.
Year ended December 31, 2003: High Low
----------------- -----------------
First quarter $ 24.40 $ 15.60
Second quarter 35.00 20.95
Third quarter 38.40 29.15
Fourth quarter 60.20 33.50
Year ended December 31, 2002:
First quarter $ 54.00 $ 32.50
Second quarter 53.00 35.00
Third quarter 40.20 16.50
Fourth quarter 22.90 9.10
On March 2, 2004, the closing price of TIMET common stock was $83.40 per
share. As of March 2, 2004, there were 327 shareholders of record of TIMET
common stock, which the Company estimates represent approximately 5,000 actual
shareholders.
In the third quarter of 1999, the Company suspended payment of quarterly
dividends on its common stock. The Company's U.S. credit agreement, entered into
in early 2000 and as amended in 2001 and 2002, and the Indenture pursuant to
which the Subordinated Debentures were issued, permit the payment of dividends
on the Company's common stock and the repurchase of common shares under
specified conditions. However, in October 2002, the Company exercised its right
to defer future interest payments on TIMET's 6.625% Convertible Junior
Subordinated Debentures due 2026 ("Subordinated Debentures") held by the Capital
Trust for a period of up to 20 consecutive quarters. This deferral was effective
beginning with the Company's December 1, 2002 scheduled interest payment. The
Company's Board of Directors will consider resuming interest payments on the
Subordinated Debentures once the longer-term outlook for the Company's business
improves substantially. The Company is permitted to resume current interest
payments at any time; however, payment of all deferred interest is required to
terminate a deferral period. Since the Company exercised its right to defer
interest payments on the Subordinated Debentures, it is unable under the terms
of these securities to, among other things, pay dividends on, redeem, purchase
or make a liquidation payment with respect to its capital stock during the
deferral period. However, the Company is permitted to purchase BUCS during the
deferral period, subject to certain U.S. credit facility limitations. See Notes
11 and 12 to the Consolidated Financial Statements.
17
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 - MD&A.
Year ended December 31,
-------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ------------ -----------
($ in millions, except per share and selling price data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 385.3 $ 366.5 $ 486.9 $ 426.8 $ 480.0
Gross margin 17.0 (3.1) 39.9 3.9 25.5
Operating income (loss) (1) 5.4 (20.8) 64.5 (41.7) (31.4)
Interest expense (7) 16.4 17.1 18.3 21.5 20.8
Net income (loss) (1) $ (13.1) $ (111.5) $ (41.8) $ (38.9) $ (31.4)
Earnings (loss) per share:
Basic and diluted (1)(2)(6) $ (4.12) $ (35.29) $ (13.26) $ (12.40) $ (10.01)
Cash dividends per share (6) $ - $ - $ - $ - $ 1.20
BALANCE SHEET DATA:
Cash and cash equivalents (8) $ 37.3 $ 6.4 $ 24.5 $ 9.8 $ 20.7
Total assets (1)(7) 567.4 570.1 705.6 765.7 889.4
Bank indebtedness (3) - 19.4 12.4 44.9 117.4
Capital lease obligations 10.3 10.2 8.9 8.8 10.1
Debt payable to TIMET Capital Trust I 207.5 207.5 207.5 207.5 207.5
Stockholders' equity $ 158.8 $ 159.4 $ 298.1 $ 357.5 $ 408.1
OTHER OPERATING DATA:
Cash flows provided (used) by:
Operating activities $ 65.8 $ (13.6) $ 62.6 $ 65.4 $ 19.5
Investing activities (14.5) (7.5) (16.1) (4.2) (21.7)
Financing activities (22.1) 3.6 (31.4) (72.8) 8.6
----------- ----------- ----------- ------------ -----------
Net provided (used) $ 29.2 $ (17.5) $ 15.1 $ (11.6) $ 6.4
Mill product shipments (4) 8.9 8.9 12.2 11.4 11.4
Average mill product prices (4) $ 31.50 $ 31.40 $ 29.80 $ 28.70 $ 33.00
Melted product shipments (4) 4.7 2.4 4.4 3.5 2.5
Average melted product prices (4) $ 12.15 $ 14.50 $ 14.50 $ 13.65 $ 14.20
Active employees at December 31 2,055 1,956 2,410 2,220 2,350
Order backlog at December 31(5) $ 180.0 $ 165.0 $ 225.0 $ 245.0 $ 195.0
Capital expenditures $ 12.5 $ 7.8 $ 16.1 $ 11.2 $ 24.8
- -----------------------------------------------------------------------------------------------------------------------
(1) See the notes to the Consolidated Financial Statements and Item 7 - MD&A
for items that materially affect the 2003, 2002 and 2001 periods. In 2000,
the Company recorded (i) a $2.0 million gain on the termination of a sponge
purchase agreement with Union Titanium Sponge Corporation at the operating
income (loss) level, (ii) a $1.2 million gain on the sale of a castings
joint venture at the non-operating income (loss) level and (iii) a $1.3
million loss on early extinguishment of debt at the non-operating income
(loss) level. In 1999, the Company recorded $4.5 million of pre-tax
restructuring charges at the operating income (loss) level.
(2) Antidilutive in all periods.
(3) Bank indebtedness represents notes payable and current and noncurrent debt.
(4) Shipments in thousands of metric tons. Average selling prices stated per
kilogram.
(5) Order backlog is defined as unfilled purchase orders, which are generally
subject to deferral or cancellation by the customer under certain
conditions.
(6) Amounts have been adjusted to reflect the Company's one-for-ten reverse
stock split, which became effective after the close of trading on February
14, 2003.
(7) Amounts have been retroactively restated from prior year presentation based
upon the Company's deconsolidation of the Capital Trust. See Notes 2 and 12
to the Consolidated Financial Statements.
(8) Includes restricted cash and cash equivalents.
18
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Overview. The titanium industry derives a substantial portion of its demand
from the aerospace industry, most specifically the highly cyclical commercial
aerospace sector. The Company estimates that aggregate industry shipment volume
for titanium mill products in 2003 was derived from the following markets: 42%
from aerospace; 53% from industrial; and 5% from emerging. The commercial
aerospace sector is the principal driver of titanium consumed in the aerospace
markets, accounting for shipments of approximately 15,700 metric tons in 2003,
which represent about 78% of mill product aerospace industry shipments and about
33% of aggregate mill product industry shipments. Mill product shipments into
the military aerospace sector in 2003 were approximately 4,400 metric tons,
which represent about 22% of mill product aerospace industry shipments and about
9% of aggregate mill product shipments. The Company's business is more dependent
on aerospace demand than the overall titanium industry, as approximately 68% of
its mill product sales volume in 2003 was represented by sales to the aerospace
industry (57% commercial aerospace and 11% military aerospace).
During the third quarter of 2003, the Company and Wyman-Gordon agreed to
terminate the 1998 purchase and sale agreement associated with the formation of
the titanium castings joint venture previously owned by the two parties. The
Company agreed to pay Wyman-Gordon a total of $6.8 million in three quarterly
installments in connection with this termination, which included the termination
of certain favorable purchase terms. The Company recorded a one-time charge for
the entire $6.8 million as a reduction to sales in the third quarter of 2003.
The Company paid the first two installments aggregating $4.0 million to
Wyman-Gordon during 2003 and will pay the remaining $2.8 million in the first
quarter of 2004. Concurrently, the Company and Wyman-Gordon entered into new
long-term purchase and sale agreements covering the sale of TIMET products to
various Wyman-Gordon locations through 2008. The Company expects the new
agreements to, among other things, improve its future plant operating rates.
During 2003, the Company focused on (i) vigorously reducing costs
throughout the business, (ii) increasing capacity utilization, (iii) improving
management of working capital, especially inventory, and (iv) improving on-time
delivery and customer service. Based upon this focus, the Company was able to
realize substantial cost savings during 2003, primarily in the areas of
manufacturing and operational performance, yield improvements and selling,
general and administrative costs. While some of these savings were
non-recurring, a majority of the savings will continue and positively affect
future results.
The Company's successful cost reduction efforts and increased capacity
utilization, coupled with increased melted product sales volume, provided for
lower unit costs and decreasing book inventories during 2003, for which the
Company reduced its LIFO inventory reserve at the end of 2003 as compared to the
end of 2002. As a result, the Company reduced cost of sales by $11.4 million in
2003. This compared with an increase in the Company's LIFO inventory reserve at
the end of 2002 as compared to the end of 2001, for which the Company increased
cost of sales by $9.3 million in 2002, and with a decrease in the Company's LIFO
inventory reserve at the end of 2001 as compared to the end of 2000, for which
the Company decreased cost of sales by $5.0 million in 2001.
19
In November 1996, the Capital Trust issued $201.3 million BUCS and $6.2
million 6.625% common securities. TIMET owns all of the outstanding common
securities of the Capital Trust, and the Capital Trust is a wholly-owned
subsidiary of TIMET. The Capital Trust used the proceeds from such issuance to
purchase from the Company $207.5 million principal amount of TIMET's 6.625%
Subordinated Debentures. The sole assets of the Capital Trust are the
Subordinated Debentures. Based on the requirements of Financial Accounting
Standards Board Interpretation No. 46 Revised ("FIN 46R"), the Company
deconsolidated the Capital Trust as of December 31, 2003. Upon such
deconsolidation, the Company now reflects both its investment in the common
securities of the Capital Trust, as well as its debt payable to the Capital
Trust, separately on its Consolidated Balance Sheets. Additionally, interest
payments on the debt are reflected as interest expense and dividends on the
common securities are reflected as equity in earnings of the unconsolidated
Capital Trust on the Consolidated Statements of Operations. Under previous
accounting rules, the Company consolidated the Capital Trust, reflected a
minority interest related to the BUCS on its Consolidated Balance Sheets and
reported minority interest dividend expense on its Consolidated Statements of
Operations. All periods presented in this Annual Report have been retroactively
restated, as permitted by FIN 46R, to allow for comparability with the December
31, 2003 presentation.
Summarized financial information. The table below summarizes certain
information regarding the Company's results of operations for the past three
years. Average selling prices, as reported by the Company, are a reflection not
just of actual selling prices received by the Company, but also include other
related factors such as currency exchange rates and customer and product mix in
a given period. Consequently, changes in average selling prices from period to
period will be impacted by changes occurring not just in actual prices, but by
these other factors as well. The percentage change information presented below
represents changes from the respective prior year. See "Results of Operations -
Outlook" for further discussion of the Company's business expectations for 2004.
Year ended December 31,
------------------------------------------------------
2003 2002 2001
--------------- ---------------- ---------------
($ in thousands)
Net sales $ 385,304 $ 366,501 $ 486,935
Gross margin 17,030 (3,123) 39,893
Operating income (loss) 5,432 (20,849) 64,480
Gross margin percent of net sales 4% -1% 8%
Percentage change in:
Sales volume:
Melted products +97 -46 +27
Mill products - -27 +7
Average selling prices - includes changes in product mix:
Melted products -16 - +6
Mill products - +5 +4
Selling prices - excludes changes in product mix:
Melted products -12 -1 +8
Mill products in U.S. dollars -3 +4 -
Mill products in billing currencies (1) -7 +3 +2
- ----------------------------------------------------------------------------------------------------------------------
(1) Excludes the effect of changes in foreign currencies.
20
Based upon the terms of the Company's amended LTA with Boeing, the Company
receives an annual $28.5 million (less $3.80 per pound of titanium product sold
to Boeing subcontractors in the preceding year) customer advance from Boeing in
January of each year related to Boeing's purchases from TIMET for that year.
This advance continues through 2007. The terms of the amended LTA allow Boeing
to purchase up to 7.5 million pounds of titanium product annually from TIMET
through 2007, but limit TIMET's maximum quarterly volume obligation to 3.0
million pounds. The LTA is structured as a take-or-pay agreement such that,
beginning in calendar year 2002, Boeing forfeits $3.80 per pound of its advance
payment in the event that its orders for delivery are less than 7.5 million
pounds in any given calendar year. The Company recognizes income to the extent
Boeing's year-to-date orders for delivery plus TIMET's maximum quarterly volume
obligations for the remainder of the year total less than 7.5 million pounds.
This income is recognized as other operating income and is not included in sales
revenue, sales volume or gross margin. During 2003 and 2002, the Company
recognized $23.1 million and $23.4 million, respectively, of other operating
income relative to these take-or-pay provisions. Had the Company not benefited
from such provisions, the Company's results would have been as follows:
Year ended December 31,
--------------------------------------
2003 2002
----------------- -----------------
(In thousands)
Operating income (loss), as reported $ 5,432 $ (20,849)
Less Boeing take-or-pay income 23,083 23,408
----------------- -----------------
Operating loss, excluding Boeing take-or-pay $ (17,651) $ (44,257)
================= =================
Net loss, as reported $ (13,057) $ (111,530)
Less Boeing take-or-pay income 23,083 23,408
----------------- -----------------
Net loss, excluding Boeing take-or-pay $ (36,140) $ (134,938)
================= =================
Because the Boeing take-or-pay income continues only through 2007, the
Company is striving to improve its results of operations such that the Company
will generate net income exclusive of any Boeing take-or-pay income, and the
Company analyses its historical results exclusive of such income. Therefore, the
Company believes that presenting its operating loss and net loss excluding the
Boeing take-or-pay income better measures the results of its underlying
business.
2003 operations. The Company's melted product sales increased 65% from
$34.8 million during 2002 to $57.4 million during 2003 primarily due to a 97%
increase in melted product sales volume, partially offset by a 16% decrease in
melted product average selling prices. Melted products consist of ingot and slab
and are generally only sold in U.S. dollars. Melted product sales increased
principally as a result of new customer relationships, share gains and changes
in product mix. Excluding the effects of changes in product mix, melted product
selling prices decreased 12% during 2003 compared to 2002.
Mill product sales increased 1% from $278.2 million during 2002 to $279.6
million during 2003. This increase was principally due to slight increases in
both mill product sales volume and mill product average selling prices (average
selling prices use actual product mix and foreign currency exchange rates
prevailing during the respective periods) and changes in product mix. Mill
product average selling prices were positively affected by the weakening of the
U.S. dollar compared to the British pound sterling and the euro. Mill product
selling prices expressed in U.S. dollars (using actual foreign currency exchange
rates prevailing during the respective periods) decreased 3% during 2003
compared to 2002. In billing currencies (which exclude the effects of foreign
currency translation), mill product selling prices decreased 7% during 2003
compared to 2002.
21
As previously discussed, net sales during 2003 were reduced by the $6.8
million one-time charge incurred by the Company to terminate a purchase and sale
agreement between the Company and Wyman-Gordon.
Gross margin (net sales less cost of sales) was 4% of net sales during
2003, compared to negative 1% during 2002. The improvement in gross margin was
primarily a result of the Company's continued cost reduction efforts, slightly
improved plant operating rates (from 55% during 2002 to 56% during 2003) and
favorable raw material mix. Additionally, as previously discussed, the Company
reduced its LIFO inventory reserve at the end of 2003 as compared to the end of
2002, resulting in a reduction in cost of sales by $11.4 million in 2003. This
compared with an increase in the Company's LIFO inventory reserve at the end of
2002 compared to the end of 2001, for which the Company increased cost of sales
by $9.3 million in 2002. Gross margin during 2003 was also positively impacted
by the Company's revision of its estimate of probable loss associated with the
previously reported tungsten inclusion matter. Based upon an analysis of
information pertaining to asserted and unasserted claims, the Company reduced
its accrual for pending and future customer claims, resulting in a $1.7 million
reduction in cost of sales during 2003. See Note 19 to the Consolidated
Financial Statements. Gross margin during 2003 was adversely impacted by the
$6.8 million reduction in sales relating to the termination of the Wyman-Gordon
agreement.
Selling, general, administrative and development expenses decreased 15%
from $43.0 million during 2002 to $36.4 million during 2003, principally as a
result of lower personnel and travel costs, as well as focused cost control in
other administrative areas.
Equity in earnings of joint ventures decreased 77% from $2.0 million during
2002 to $0.5 million during 2003, principally due to a decrease in the operating
results of VALTIMET, the Company's minority-owned welded tube joint venture.
Net other operating income (expense) increased 5% from income of $23.3
million during 2002 to income of $24.4 million during 2003, principally due to
gains of $0.5 million and $0.6 million related to the settlement of certain
litigation in the first quarter and fourth quarters, respectively, of 2003.
Based on actual purchases of approximately 1.4 million pounds during 2003, the
Company recognized $23.1 million of other operating income for the 6.1 million
pounds of product that Boeing did not purchase under the LTA during 2003. The
Company recognized $23.4 million of other operating income related to these
take-or-pay provisions during 2002.
2002 operations. The Company's melted product sales decreased 46% from
$64.1 million during 2001 to $34.8 million during 2002 primarily due to a 46%
decrease in melted product sales volume and changes in product mix. Melted
products consist of ingot and slab and are generally only sold in U.S. dollars.
Melted product average selling prices did not change during 2002 compared to
2001. Excluding the effects of changes in product mix, melted product selling
prices decreased 1% during 2002 compared to 2001.
Mill product sales decreased 23% from $363.3 million in 2001 to $278.2
million in 2002. This decrease was principally due to a 27% decrease in mill
product sales volume and changes in product mix. The Company's estimated sales
volume to the commercial aerospace sector declined approximately 37% during 2002
compared to 2001. Mill product average selling prices during 2002 increased 5%
compared to 2001. In billing currencies, mill product selling prices increased
3% over 2001 levels. Mill product selling prices expressed in U.S. dollars
increased 4% during 2002 compared to 2001.
22
Gross margin was negative 1% of net sales during 2002, compared to 8% in
2001. Gross margin in 2002 was most adversely impacted by the decline in
production volume and the related impact on manufacturing overhead costs, as
average plant operating rates declined from approximately 75% of capacity in
2001 to approximately 55% in 2002. Because of higher unit costs and increasing
book inventories during 2002, the Company increased its LIFO inventory reserve
at the end of 2002 as compared to the end of 2001, for which the Company
increased cost of sales by $9.3 million in 2002. This compared with a decrease
in the Company's LIFO inventory reserve at the end of 2001 compared to the end
of 2000, for which the Company decreased cost of sales by $5.0 million in 2001.
In addition, the Company recorded certain provisions for excess and slow moving
inventories during 2002 that, due to business conditions existing during 2002
(including a number of customer order cancellations) were approximately $5.3
million greater than in 2001. The Company also incurred severance costs of
approximately $1.7 million related to global workforce reductions undertaken
throughout 2002. Gross margin during 2001 was adversely impacted by $3.3 million
of estimated costs related to the tungsten inclusion matter described above and
$10.8 million of equipment impairment charges. Gross margin during 2001 was also
adversely impacted by goodwill amortization of $4.6 million, as effective
January 1, 2002 the Company ceased amortization of its goodwill. See Note 7 to
the Consolidated Financial Statements.
Selling, general, administrative and development expenses decreased 17%
from $51.8 million during 2001 to $43.0 million during 2002, principally due to
the inclusion of a one-time payment of $6.2 million of incentive compensation
related to the Boeing settlement in 2001 (discussed in "2001 operations") and
lower personnel related costs in 2002, partially offset by higher selling and
marketing costs in 2002.
Equity in earnings of joint ventures decreased 21% from $2.5 million during
2001 to $2.0 million during 2002 principally due to a decrease in the earnings
of VALTIMET.
Net other operating income (expense) decreased 68% from income of $73.6
million during 2001 to income of $23.3 million during 2002. The decrease was due
to the Company's settlement of litigation with Boeing whereby the Company
recognized $73.0 million of income during 2001, partially offset by the $23.4
million of income the Company recognized under the take-or-pay provisions of its
LTA with Boeing for the 6.2 million pounds of titanium product that Boeing did
not purchase under the LTA during 2002. See Note 15 to the Consolidated
Financial Statements.
Non-operating income (expense).
Year ended December 31,
------------------------------------------------------
2003 2002 2001
--------------- ---------------- ---------------
(In thousands)
Interest expense on bank debt $ (2,017) $ (3,381) $ (4,060)
Interest expense on debt payable to the Capital Trust (14,402) (13,763) (14,273)
--------------- ---------------- ---------------
$ (16,419) $ (17,144) $ (18,333)
=============== ================ ===============
Dividends and interest income $ 383 $ 118 $ 5,460
Equity in earnings of common
securities of the Capital Trust 432 413 423
SMC impairment charge - (27,500) (61,519)
Surety bond guarantee (449) (1,575) -
Foreign exchange (loss) gain (189) (587) 92
Other income (expense), net (471) (762) 18
--------------- ---------------- ---------------
$ (294) $ (29,893) $ (55,526)
=============== ================ ===============
23
Interest expense on bank debt for 2003 decreased 40% compared to 2002,
primarily due to lower average outstanding borrowings, as the Company generated
positive cash flow from operations and was able to reduce its bank borrowings to
zero by year-end 2003. Interest expense on bank debt for 2002 decreased 17%
compared to 2001 primarily due to lower average outstanding borrowings and lower
interest rates during 2002.
Annual interest expense on the Company's Subordinated Debentures payable to
the Capital Trust approximates $13.7 million, exclusive of any accrued interest
on deferred interest payments. In October 2002, the Company exercised its right
to defer future interest payments on this debt effective with the Company's
December 1, 2002 scheduled interest payment. Interest continues to accrue at the
6.625% coupon rate on the principal and unpaid interest and has been classified
as long-term in the Consolidated Financial Statements. The Company's Board of
Directors will consider resuming payment of interest on this debt once the
longer-term outlook for the Company's business improves substantially. In April
2000, the Company also exercised its right to defer future interest payments on
this debt. On June 1, 2001, the Company resumed those interest payments and paid
all previously deferred interest payments. See Note 12 to the Consolidated
Financial Statements.
Dividends and interest income during 2003 and 2002 consisted solely of
interest income earned on cash and cash equivalents. Dividends and interest
income in 2001 consisted principally of dividends on the Company's investment in
$80 million non-voting convertible preferred securities of SMC. As previously
reported, the Company assessed its investment in the SMC securities during the
fourth quarter of 2001 and recorded a $61.5 million impairment charge to reduce
the carrying amount of this investment, including accrued dividends and
interest, to an estimated fair value of $27.5 million as of December 31, 2001.
In March 2002, SMC and its U.S. subsidiaries filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result, the
Company undertook a further assessment of its investment and subsequently
recorded a $27.5 million impairment charge during the first quarter of 2002,
which reduced the Company's carrying amount of its investment in the SMC
securities to zero. Under the terms of SMC's Second Amended Joint Plan of
Reorganization, which was approved by the Bankruptcy Court on November 26, 2003,
the convertible preferred securities were cancelled. Although the Company does
have certain rights as an unsecured creditor under the SMC Plan of
Reorganization related to the unpaid dividends, the Company does not believe
that it will recover any material amount from this investment.
TIMET is the primary obligor on two $1.5 million workers' compensation
bonds issued on behalf of a former subsidiary, Freedom Forge Corporation
("Freedom Forge"), which TIMET sold in 1989. The bonds were provided as part of
the conditions imposed on Freedom Forge in order to self-insure its workers'
compensation obligations. Freedom Forge filed for Chapter 11 bankruptcy
protection on July 13, 2001, and discontinued payment on the underlying workers'
compensation claims in November 2001. During 2002, TIMET received notices that
the issuers of the bonds were required to make payments on one of the bonds with
respect to certain of these claims and were requesting reimbursement from TIMET.
Based upon loss projections, the Company accrued $0.9 million in the third
quarter of 2002 and $0.7 million (including $0.1 million in legal fees
reimbursable to the issuer of the bonds) in the fourth quarter of 2002 for this
bond as other non-operating expense. Through December 31, 2003, TIMET has
reimbursed the issuer approximately $0.8 million under this bond and $0.8
million remains accrued for future payments. During 2003, TIMET received notice
that certain claimants had submitted claims under the second bond. Accordingly,
the Company accrued $50,000 for this bond in the third quarter of 2003 and an
additional $0.4 million for this bond in the fourth quarter of 2003 as other
non-operating expense. As of December 31, 2003, payments under the second bond
have been less than $0.1 million, and $0.4 million remains accrued for future
payments. TIMET may revise its estimated liability under these bonds in the
future as additional facts become known or claims develop.
24
Income taxes. Based on the Company's recent history of U.S. losses, its
near-term outlook and management's evaluation of available tax planning
strategies, in the fourth quarter of 2001 the Company concluded that realization
of its previously recorded U.S. deferred tax assets did not continue to meet the
"more-likely-than-not" recognition criteria and increased its U.S. deferred tax
valuation allowance by $35.5 million. Additionally, the Company determined that
it would not recognize a deferred tax benefit related to either future U.S.
losses or future increases in U.S. minimum pension liabilities continuing for an
uncertain period of time. Accordingly, the Company increased its U.S. deferred
tax valuation allowance by $40.2 million in 2002 and by $0.2 million in 2003.
During the fourth quarter of 2002, the Company was required to record a
charge to other comprehensive loss to reflect an increase in its U.K. minimum
pension liability. The related tax effect of this charge resulted in the
Company's shifting from a net deferred tax liability position to a net deferred
tax asset position. Based on the Company's recent history of U.K. losses, its
near-term outlook and management's evaluation of available tax planning
strategies, the Company determined that it would not recognize this deferred tax
asset because it did not meet the "more-likely-than-not" recognition criteria
and recorded a U.K. deferred tax asset valuation allowance of $7.2 million
through other comprehensive income. Additionally, the Company determined that it
would not recognize deferred tax benefits related either to future U.K. losses
or future increases in U.K. minimum pension liabilities for an uncertain period
of time. Accordingly, the Company increased its U.K. deferred tax valuation
allowance by $5.5 million in 2003.
During the first quarter of 2002, the Job Creation and Worker Assistance
Act of 2002 (the "JCWA Act") was signed into law. The Company benefits from
provisions of the JCWA Act, which liberalized certain net operating loss and
alternative minimum tax restrictions. As a result, the Company recognized $1.8
million of refundable U.S. income taxes during the first quarter of 2002. The
Company received $0.8 million of this refund in the fourth quarter of 2002 and
the remaining $1.0 million in the third quarter of 2003.
See also Note 16 to the Consolidated Financial Statements.
Minority interest. Minority interest relates primarily to the 30% interest
in TIMET Savoie held by CEZUS. See Note 13 to
the Consolidated Financial Statements.
Cumulative effect of change in accounting principle. On January 1, 2003,
the Company adopted Statement of Financial Accounting Standards ("SFAS") No.
143, Accounting for Asset Retirement Obligations, and recognized (i) an asset
retirement cost capitalized as an increase to the carrying value of its
property, plant and equipment of approximately $0.2 million, (ii) accumulated
depreciation on such capitalized cost of approximately $0.1 million and (iii) a
liability for the asset retirement obligation of approximately $0.3 million. The
asset retirement obligation recognized relates primarily to landfill closure and
leasehold restoration costs.
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, and recorded a non-cash goodwill impairment charge of $44.3
million, representing the entire balance of the Company's recorded goodwill at
January 1, 2002.
See further discussion regarding the Company's adoption of these accounting
principles in Notes 2 and 7 to the Consolidated Financial Statements.
25
European operations. The Company has substantial operations and assets
located in Europe, principally in the United Kingdom, France and Italy. Titanium
is sold worldwide, and many similar factors influence the Company's U.S. and
European operations. Approximately 42% of the Company's sales revenue originated
in Europe in 2003, of which approximately 64% was denominated in the British
pound sterling or 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, and the
European subsidiaries are subject to exchange rate fluctuations that may impact
reported earnings and may affect the comparability of period-to-period operating
results. Borrowings of the Company's European operations may be in U.S. dollars
or in functional currencies. The Company's export sales from the U.S. are
denominated in U.S. dollars and as such are not subject to currency exchange
rate fluctuations.
The Company does not use currency contracts to hedge its currency
exposures. Net currency transaction gains/losses included in results of
operations were losses of $0.2 million in 2003 and $0.6 million in 2002 and a
gain of $0.1 million in 2001. At December 31, 2003, consolidated assets and
liabilities denominated in currencies other than functional currencies were
approximately $26.5 million and $41.7 million, respectively, consisting
primarily of U.S. dollar cash, accounts receivable and accounts payable.
Related party transactions. The Company is a party to certain transactions
with related parties. See Note 18 to the Consolidated Financial Statements.
Supplemental information. The Company completed a reverse split of its
common stock (one share of post-split common stock for each outstanding ten
shares of pre-split common stock) effective after the close of trading on
February 14, 2003. All share and per share disclosures for all periods presented
in this MD&A have been adjusted to give effect to the reverse stock split.
Outlook. The Outlook section contains a number of forward-looking
statements, all of which are based on current expectations and exclude the
effect of potential future charges related to restructurings, asset impairments,
valuation allowances, changes in accounting principles and similar items, unless
otherwise noted. Undue reliance should not be placed on these statements, as
more fully discussed in the "Forward-Looking Information" statement of this
Annual Report. Actual results may differ materially. See also Notes to the
Consolidated Financial Statements regarding commitments, contingencies, legal
matters, environmental matters and other matters, including new accounting
principles, which could materially affect the Company's future business, results
of operations, financial position and liquidity.
The cyclical nature of the aerospace industry has been the principal driver
of the historical fluctuations in the performance of most titanium companies.
Over the past 20 years, the titanium industry had cyclical peaks in mill product
shipments in 1989, 1997 and 2001 and cyclical lows in 1983, 1991 and 1999.
Demand for titanium reached its highest level in 1997 when industry mill product
shipments reached approximately 60,000 metric tons. However, since that peak,
industry mill product shipments have fluctuated significantly, primarily due to
a continued change in demand for titanium from the commercial aerospace sector.
In 2002, industry shipments approximated 50,000 metric tons, and in 2003 the
Company estimates industry shipments approximated 48,000 metric tons. The
Company currently expects total industry mill product shipments in 2004 will
increase from 2003 levels to at least 51,000 metric tons.
26
Although the commercial airline industry continues to face significant
challenges, recent economic data show signs of an improving business environment
in that sector. According to The Airline Monitor, the worldwide commercial
airline industry reported an estimated operating loss of approximately $3.5
billion in 2003, compared to a $7.3 billion loss in 2002 and an $11.7 billion
loss in 2001. The Airline Monitor is currently forecasting operating income of
approximately $6.3 billion for the industry in 2004. Furthermore, global airline
passenger traffic returned to pre-September 11, 2001 levels in November of 2003.
Although these appear to be positive signs, the Company currently believes that
industry mill product shipments into the commercial aerospace sector will be
somewhat flat in 2004 and show a modest upturn in 2005.
The Airline Monitor traditionally issues forecasts for commercial aircraft
deliveries each January and July. According to The Airline Monitor, large
commercial aircraft deliveries totaled 579 (including 154 wide bodies) in 2003.
The Airline Monitor's most recently issued forecast (January 2004) calls for 575
deliveries in 2004, 540 deliveries in 2005 and 510 deliveries in 2006. Relative
to 2003, these forecasted delivery rates represent anticipated declines of about
1% in 2004, 7% in 2005 and 12% in 2006. From 2007 through 2011, The Airline
Monitor calls for a continued increase each year in large commercial aircraft
deliveries, with forecasted deliveries of 620 aircraft in 2008, exceeding 2003
levels. Deliveries of titanium generally precede aircraft deliveries by about
one year, although this varies considerably by titanium product. This correlates
to the Company's cycle, which historically precedes the cycle of the aircraft
industry and related deliveries.
Although the current business environment continues to make it difficult to
predict future performance, the Company expects sales revenue in 2004 to
increase to between $425 million and $445 million, reflecting the combined
effects of increases in sales volume and market share and relative weakness of
the U.S. dollar as compared to the British pound sterling and the euro,
partially offset by customer and product mix. Mill product sales volume, which
was 8,875 metric tons in 2003, is expected to increase to between 10,300 and
10,500 metric tons in 2004. Melted product sales volume, which was 4,725 metric
tons in 2003, is expected to increase to between 4,800 and 5,000 metric tons in
2004. The Company expects between 55% and 60% of its 2004 mill and melted
product sales volume will be derived from the commercial aerospace sector (which
would be a slight decrease from 2003), with the balance from military aerospace,
industrial and emerging markets. The expected increase in sales volume in 2004
is principally driven by an anticipated increase in sales volume to industrial
and emerging markets.
Additionally, the Company's backlog of unfilled orders was approximately
$180 million at December 31, 2003, compared to $165 million at December 31, 2002
and $225 million at December 31, 2001. Substantially the entire 2003 year-end
backlog is scheduled for shipment during 2004. The Company's order backlog may
not be a reliable indicator of future business activity.
The Company's cost of sales is affected by a number of factors including
customer and product mix, material yields, plant operating rates, raw material
costs, labor costs and energy costs. Raw material costs represent the largest
portion of the Company's manufacturing cost structure. The Company has recently
been experiencing higher raw material prices due to a tightening in raw material
availability, especially in the scrap markets. The Company also expects an
increase in energy costs in 2004.
The Company expects to manufacture a significant portion of its titanium
sponge requirements in 2004. The unit cost of titanium sponge manufactured at
TIMET's Henderson, Nevada facility is expected to decrease relative to 2003, due
primarily to higher sponge plant operating rates as the plant moves to full
capacity by the third quarter of 2004. The Company expects the aggregate cost of
purchased sponge and scrap to increase during 2004.
27
The Company expects production volumes to increase in 2004, increasing
overall capacity utilization to between 60% and 65% in 2004 (as compared to 56%
in 2003). However, practical capacity utilization measures can vary
significantly based on product mix. The Company continues to identify areas for
potential cost savings, in addition to the savings realized in 2003, and expects
gross margin in 2004 to range from 6% to 8% of net sales.
Selling, general, administrative and development expenses in 2004 should
approximate $35 million.
The Company anticipates that it will receive orders from Boeing for about
1.5 million pounds of product during 2004. At this projected order level, the
Company expects to recognize about $23 million of operating income in 2004 under
the Boeing LTA's take-or-pay provisions.
The current outlook is for 2004 operating income of between $14 million and
$24 million, which includes the effect of a $1.9 million reduction in the
Company's vacation accrual for U.S. employees effective January 1, 2004 (see
Note 9 to the Consolidated Financial Statements). Excluding the Boeing
take-or-pay income, the Company currently expects operating results in 2004 to
range between operating income of $1 million and operating loss of $9 million.
In 2004, interest expense on the Company's Subordinated Debentures held by
the Capital Trust should approximate $15.4 million, including additional
interest costs related to the deferral of the interest payments on the
Subordinated Debentures. The Company's Board of Directors will consider resuming
interest payments on the Subordinated Debentures once the longer-term outlook
for the Company's business improves substantially.
The Company currently expects its 2004 bottom line to range between a net
loss of $3 million and net income of $7 million. Excluding the Boeing
take-or-pay income, the Company currently expects a net loss in 2004 of between
$16 million and $26 million.
The Company expects to generate $25 million to $35 million in cash flows
from operations during 2004, partially driven by the continued deferral of the
interest payments on the Subordinated Debentures. Capital expenditures during
2004 are expected to approximate $16 million. The increase over 2003 relates
primarily to capital needs relative to the increase in sponge production at
TIMET's Henderson, Nevada facility. Depreciation and amortization should
approximate $32 million in 2004. The Company currently expects to make
contributions of approximately $11.5 million to its defined benefit pension
plans during 2004 and expects its pension expense to approximate $8 million in
2004.
The year-on-year improvements in sales and operating income reflect
achievements in many areas, most specifically with regard to vigorous cost and
inventory reduction efforts, and the Company will continue its focus on reducing
costs in 2004. The Company remains cautiously optimistic that the commercial
aerospace industry has begun to improve and feels that with its strong balance
sheet and improved cost structure, the Company is well positioned to maximize
profitability during any upturn. Additionally, solid growth is expected from
sales into the industrial and emerging markets during 2004, two areas in which
the Company's business is continuing to diversify.
28
Non-GAAP financial measures. In an effort to provide investors with
information in addition to the Company's results as determined by accounting
principles generally accepted in the United States of America ("GAAP"), the
Company has provided the following non-GAAP financial disclosures that it
believes may provide useful information to investors:
o The Company discloses percentage changes in its mill and melted
product selling prices in U.S. dollars, which have been adjusted to
exclude the effects of changes in product mix. The Company believes
such disclosure provides useful information to investors by allowing
them to analyze such changes without the impact of changes in product
mix, thereby facilitating period-to-period comparisons of the relative
changes in average selling prices. Depending on the composition of
changes in product mix, the percentage change in selling prices
excluding the effect of changes in product mix can be higher or lower
than such percentage change would be using the actual product mix
prevailing during the respective periods;
o In addition to disclosing percentage changes in its mill product
selling prices adjusted to exclude the effects of changes in product
mix, the Company also discloses such percentage changes in billing
currencies, which have been further adjusted to exclude the effects of
changes in foreign currency exchange rates. The Company believes such
disclosure provides useful information to investors by allowing them
to analyze such changes without the impact of changes in foreign
currency exchange rates, thereby facilitating period-to-period
comparisons of the relative changes in average selling prices in the
various actual billing currencies. Generally, when the U.S. dollar
strengthens (weakens) against other currencies, the percentage change
in selling prices in billing currencies will be higher (lower) than
such percentage changes would be using actual exchange rates
prevailing during the respective periods; and
o The Company discloses operating income and net income excluding the
impact of the Boeing take-or-pay income. The Company believes this
provides investors with useful information to better analyze the
Company's business and possible future earnings during periods after
December 31, 2007, at which time the Company will no longer receive
the positive effects of the take-or-pay income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows for each of the past three years are
presented below. The following should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto.
Year ended December 31,
------------------------------------------------------
2003 2002 2001
--------------- ---------------- ---------------
(In thousands)
Cash provided (used) by:
Operating activities $ 65,821 $ (13,595) $ 62,574
Investing activities (14,534) (7,467) (16,093)
Financing activities (22,068) 3,523 (31,358)
--------------- ---------------- ---------------
Net cash provided (used) by operating,
investing and financing activities $ 29,219 $ (17,539) $ 15,123
=============== ================ ===============
29
Operating activities. The titanium industry historically has derived a
substantial portion of its business from the aerospace industry. The aerospace
industry is cyclical, and changes in economic conditions within the aerospace
industry significantly impact the Company's earnings and operating cash flows.
Cash flow from operations has been a primary source of the Company's liquidity.
Changes in titanium pricing, production volume and customer demand, among other
things, could significantly affect the Company's liquidity.
Certain items included in the determination of net loss have an impact on
cash flows from operating activities, but the impact of such items on cash may
differ from their impact on net loss. For example, pension expense and OPEB
expense will generally differ from the outflows of cash for payment of such
benefits. In addition, relative changes in assets and liabilities generally
result from the timing of production, sales and purchases. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period than that in which the underlying cash transaction occurs. For
example, raw materials may be purchased in one period, but the cash payment for
such raw materials may occur in a subsequent period. Similarly, inventory may be
sold in one period, but the cash collection of the receivable may occur in a
subsequent period.
Net loss decreased from $111.5 million for the year ended December 31,
2002, to $13.1 million for the year ended December 31, 2003. See "Results of
Operations - Cumulative effect of change in accounting principle" and Note 7 to
the Consolidated Financial Statements for discussion of the Company's adoption
of SFAS No. 142 and the related effect on net loss for the year ended December
31, 2002. See "Results of Operations - Non-operating income (expense)" and Note
5 to the Consolidated Financial Statements for discussion of the Company's
impairment of its investment in SMC securities and its effect on net loss for
the years ended December 31, 2002 and 2001.
Accounts receivable decreased during 2003 primarily due to improved
collection efforts with the Company's customers, which resulted in a 13-day
decrease in days sales outstanding ("DSO"), from 75 days at year-end 2002 to 62
days at year-end 2003, partially offset by the weakening of the U.S. dollar
compared to the British pound sterling and the euro. Accounts receivable
decreased significantly during 2002 primarily as a result of reduced sales,
partially offset by an increase in DSO as certain customers extended their
payment terms to the Company in response to unfavorable economic conditions.
Accounts receivable increased in 2001 principally as a result of increased
sales.
Inventories decreased during 2003 due to the Company's concentrated focus
on inventory reduction during 2003. Inventories decreased during 2002 primarily
as a result of reduced production in the fourth quarter of 2002 and an increase
in the Company's reserves for excess inventories, which the Company recorded in
response to decreased demand for its products and other changes in business
conditions. Inventories increased in 2001, reflecting material purchases and
production rates that were based on expected sales levels higher than actual
sales levels achieved. Due to the impact of the September 11, 2001 terrorist
attacks, a number of customer order deferrals and cancellations were received
late in 2001, contributing to the inventory increase.
In April 2001, the Company reached a settlement of the litigation between
TIMET and Boeing. Pursuant to the settlement, the Company received a cash
payment of $82 million ($73 million net of legal fees) and in December 2001
received a $28.5 million customer advance from Boeing related to fiscal 2002
purchases. This advance was reduced to $0.8 million at the end of 2002 as a
result of shipments and orders from Boeing as well as the recognition of
take-or-pay income. The Company received a $27.9 million advance for 2004 in
January 2004. Through 2007 the Company will receive a similar annual advance in
January of the year to which the advance is related. See Notes 9 and 10 to the
Consolidated Financial Statements.
30
Dividends for the period October 1998 through December 1999 on the
Company's investment in SMC 6.625% convertible preferred securities were
deferred by SMC. In April 2000, SMC resumed current dividend payments of $1.3
million each quarter; however, dividends and interest in arrears were not paid.
On October 11, 2001, the Company was notified by SMC of SMC's intention to again
defer the payment of dividends effective with the dividend due on October 28,
2001. As previously discussed, the Company recorded an impairment charge of
$61.5 million related to these securities, including accrued dividends and
interest, in the fourth quarter of 2001 and ceased accruing dividend income on
these securities at that time. Additionally, the Company recorded a charge of
$27.5 million related to these securities in the first quarter of 2002 that
reduced the carrying amount of these securities to zero. See Note 5 to the
Consolidated Financial Statements.
The Company did not record any deferred income tax benefits related to its
U.S. or U.K. losses during 2003. Deferred income tax benefits recognized in 2003
primarily relate to increases in net deferred income tax assets of the Company's
French and Italian subsidiaries. The Company did not record any deferred income
tax benefits related to its U.S. losses during 2002. Deferred income tax
benefits recognized in 2002 primarily relate to increases in net deferred income
tax assets of the Company's European subsidiaries. Deferred income taxes in 2001
were primarily due to an increase in the Company's U.S. deferred tax asset
valuation allowance to offset previously recorded tax benefits that did not meet
the "more-likely-than-not" recognition criteria. See Note 16 to the Consolidated
Financial Statements.
As more fully discussed in "Results of Operations - Non-operating income
(expense)," in October 2002 the Company exercised its right to defer future
interest payments on its Subordinated Debentures held by the Capital Trust,
effective beginning with the Company's December 1, 2002 scheduled interest
payment, although interest continues to accrue at the coupon rate on the
principal and unpaid interest. In April 2000, the Company similarly exercised
its right to defer future interest payments, and in the second quarter of 2001,
as noted above, a portion of the Boeing settlement funds was used to pay the
previously deferred aggregate interest of $14.3 million and resume the regularly
scheduled interest payments. Changes in accrued interest payable to the Capital
Trust reflect this activity.
Investing activities. The Company's capital expenditures were $12.5 million
in 2003, $7.8 million in 2002 and $16.1 million in 2001, principally for
replacement of machinery and equipment and for capacity maintenance. During the
fourth quarter of 2003, the Company deposited funds into certificates of deposit
and other interest bearing accounts as collateral for certain Company
obligations in lieu of entering into letters of credit. These deposits, which
are restricted as to the Company's use, provide the Company with interest income
as opposed to interest expense incurred through the use of letters of credit.
Financing activities. Cash used during 2003 related primarily to the
Company's $19.3 million of net repayments on its outstanding borrowings upon the
Company's receipt of the $27.7 million Boeing advance in January 2003.
Additionally, TIMET Savoie made a $1.9 million dividend payment to CEZUS during
2003. Cash provided during 2002 related primarily to net borrowings of $6.3
million necessary to fulfill the Company's working capital needs. Additionally,
TIMET Savoie made a $1.1 million dividend payment to CEZUS during 2002. The
Company incurred approximately $1.1 million in financing costs in conjunction
with the Company's amendment of its U.S. revolving credit agreement in 2002.
These costs are deferred and amortized over the life of the agreement, which
matures in February 2006. See further discussion below in "Liquidity and Capital
Resources - Borrowing arrangements." Cash used during 2001 related primarily to
net repayments of $31.7 million of indebtedness at the time of the Company's
litigation settlement with Boeing.
31
Borrowing arrangements. Under the terms of the Company's U.S. asset-based
revolving credit agreement, which matures in February 2006, borrowings are
limited to the lesser of $105 million or a formula-determined borrowing base
derived from the value of accounts receivable, inventory and equipment
("borrowing availability"). This facility requires the Company's U.S. daily cash
receipts to be used to reduce outstanding borrowings, which may then be
reborrowed subject to the terms of the agreement. Interest generally accrues at
rates that vary from LIBOR plus 2% to LIBOR plus 2.5%. Borrowings are
collateralized by substantially all of the Company's U.S. assets. The credit
agreement prohibits the payment of distributions in respect of the Capital
Trust's BUCS if "excess availability," as defined, is less than $25 million,
limits additional indebtedness, prohibits the payment of dividends on the
Company's common stock if excess availability is less than $40 million, requires
compliance with certain financial covenants and contains other covenants
customary in lending transactions of this type. The Company was in compliance in
all material respects with all covenants for all periods during the years ended
December 31, 2003 and 2002. Excess availability is defined as borrowing
availability less outstanding borrowings and certain contractual commitments
such as letters of credit. At December 31, 2003, excess availability was
approximately $82 million. There were no outstanding borrowings under the U.S.
credit agreement as of December 31, 2003. The weighted average interest rate on
borrowings outstanding under this credit agreement as of December 31, 2002 was
3.7%.
The Company's U.S. credit agreement allows the lender to modify the
borrowing base formulas at its discretion, subject to certain conditions. During
the second quarter of 2002, the Company's lender elected to exercise such
discretion and modified the Company's borrowing base formulas, which reduced the
amount that the Company could have borrowed against its inventory and equipment
by approximately $7 million. In the event the lender were to exercise this
discretion again in the future, such event could have a material adverse impact
on the Company's liquidity. Borrowings outstanding under this U.S. facility are
classified as a current liability.
The Company's subsidiary, TIMET UK, has a credit agreement that provides
for borrowings limited to the lesser of (pound)22.5 million or a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and property, plant and equipment ("borrowing availability"). The
credit agreement includes revolving and term loan facilities and an overdraft
facility (the "U.K. Facilities") and matures in December 2005. Borrowings under
the U.K. Facilities can be in various currencies including U.S. dollars, British
pounds sterling and euros. Borrowings accrue interest at rates that vary from
LIBOR plus 1% to LIBOR plus 1.25% and are collateralized by substantially all of
TIMET UK's assets. The U.K. Facilities require the maintenance of certain
financial ratios and amounts and other covenants customary in lending
transactions of this type. TIMET UK was in compliance in all material respects
with all covenants for all periods during the years ended December 31, 2003 and
2002. The U.K. overdraft facility is subject to annual review in December of
each year. In the event the overdraft facility is not renewed, the Company
believes it could refinance any outstanding overdraft borrowings under either
the revolving or term loan features of the U.K. Facilities. The overdraft
facility was reviewed and renewed in December 2003. During the second quarter of
2003, TIMET UK received an interest-bearing intercompany loan from a U.S.
subsidiary of the Company enabling TIMET UK to reduce its long-term borrowings
under the U.K. Facilities to zero. Unused borrowing availability at December 31,
2003 under the U.K. Facilities was approximately $40 million. There were no
borrowings outstanding under the U.K. Facilities as of December 31, 2003. The
weighted average interest rate on borrowings outstanding under the U.K.
Facilities as of December 31, 2002 was 4.6%.
32
The Company also has overdraft and other credit facilities at certain of
its other European subsidiaries. These facilities accrue interest at various
rates and are payable on demand. Unused borrowing availability at December 31,
2003 under these facilities was approximately $20 million. There were no
borrowings outstanding under the other European facilities as of December 31,
2003. The weighted average interest rate on borrowings outstanding under these
credit agreements as of December 31, 2002 was 3.7%.
Although excess availability under TIMET's U.S. credit agreement remains
above $40 million, no dividends were paid by TIMET on its common stock during
2003, 2002 or 2001. TIMET does not anticipate paying dividends on its common
stock during 2004 and, as previously discussed, is not permitted to pay such
dividends while deferring interest payments on the Subordinated Debentures held
by the Capital Trust.
Contractual commitments. As more fully described in Notes 11, 12, 18 and 19
to the Consolidated Financial Statements, the Company was a party to various
debt, lease and other agreements at December 31, 2003 that contractually and
unconditionally commit the Company to pay certain amounts in the future. The
following table summarizes such contractual commitments that are unconditional
both in terms of timing and amount by the type and date of payment.
Unconditional Payment Due Date
--------------------------------------------------------------------------
2005/ 2007/ 2009 &
2004 2006 2008 After Total
---------- ------------ ------------ ------------ ------------
Contractual Commitment (In thousands)
- -----------------------------------
Capital leases (1) $ 524 $ 358 $ 424 $ 8,984 $ 10,290
Operating leases 2,724 2,720 585 339 6,368
Debt payable to Capital Trust (and
accrued interest thereon) (2) - - 19,003 207,465 226,468
Purchase obligations (3) 36,843 20,303 10,103 - 67,249
Other contractual obligations 10,067 11,088 1,063 576 22,794
---------- ------------ ------------ ------------ ------------
$ 50,158 $ 34,469 $ 31,178 $ 217,364 $ 333,169
========== ============ ============ ============ ============
- -----------------------------------------------------------------------------------------------------------------------
(1) Excludes interest payments due under the capital lease agreements.
Inclusive of these interest payments, the total contractual commitment is
$24.0 million ($1.5 million in 2004, $2.2 million in 2005/2006, $2.2
million in 2007/2008 and $18.1 million in 2009 and thereafter).
(2) Represents the Company's Subordinated Debentures purchased by the Capital
Trust from TIMET in connection with the Capital Trust's issuance of the
BUCS and total interest accrued on the Subordinated Debentures at December
31, 2003. Under the Indenture related to the Subordinated Debentures, the
currently deferred interest payments may continue to be contractually
deferred until December 1, 2007.
(3) Based on an average price and an assumed constant mix of products
purchased, where appropriate.
The Company has excluded any potential commitment for funding of retirement
and postretirement benefit plans from this table. However, such potential future
contributions are discussed below, as appropriate, in "Liquidity and Capital
Resources - Defined benefit pension plans" and "Liquidity and Capital Resources
- - Postretirement benefit plans other than pensions."
33
Off-balance sheet arrangements. As more fully discussed in "Results of
Operations - Non-operating income (expense)," the Company is the primary obligor
on two $1.5 million workers' compensation bonds issued on behalf of Freedom
Forge. The Company has fully expensed the obligation under one of the bonds, but
based upon current claims analysis, the Company has only expensed $0.5 million
on the other bond, although it is potentially obligated for the remaining $1.0
million.
Defined benefit pension plans. As of December 31, 2003, the Company
maintains three defined benefit pension plans - one each in the U.S., the U.K.
and France. Prior to December 31, 2003, the U.S. maintained two plans, which
were merged as of that date. The majority of the discussion below relates to the
U.S. and U.K. plans, as the French plan is not material to the Company's
Consolidated Balance Sheets, Statements of Operations or Statements of Cash
Flows.
The Company recorded consolidated pension expense of $8.9 million, $4.9
million and $1.4 million for the years ended December 31, 2003, 2002 and 2001,
respectively. Pension expense for these periods was calculated based upon a
number of actuarial assumptions, most significant of which are the discount rate
and the expected long-term rate of return.
The discount rate the Company utilizes for determining pension expense and
pension obligations is based on a review of long-term bonds (10 to 15 year
maturities) that receive one of the two highest ratings given by recognized
rating agencies (generally Merrill Lynch, Moody's, Solomon Smith Barney and UBS
Warburg) as well as composite indices provided by the Company's actuaries.
Changes in the Company's discount rate over the past three years reflect the
decline in such bond rates during that period. The Company establishes a rate
that is used to determine obligations as of the year-end date and expense for
the subsequent year. The Company used the following discount rate assumptions
for its pension plans:
Discount rates used for:
------------------------------------------------------------------------------------------------
Obligation at Obligation at Obligation at
December 31, 2003 December 31, 2002 December 31, 2001
and expense in 2004 and expense in 2003 and expense in 2002
------------------------------ ------------------------------ ---------------------------
U.S. Plan(s) 6.00% 6.25% 7.00%
U.K. Plan 5.50% 5.70% 6.00%
In developing the Company's expected long-term rate of return assumptions,
the Company evaluates historical market rates of return and input from its
actuaries, including a review of asset class return expectations as well as
long-term inflation assumptions. Projected returns are based on broad equity
(large cap, small cap and international) and bond (corporate and government)
indices as well as anticipation that the plans' active investment managers will
generate premiums above the standard market projections. The Company used the
following long-term rate of return assumptions for its pension plans:
Long-term rates of return used for:
------------------------------------------------------------------------------------------------
Obligation at Obligation at Obligation at
December 31, 2003 December 31, 2002 December 31, 2001
and expense in 2004 and expense in 2003 and expense in 2002
------------------------------ ------------------------------ ---------------------------
U.S. Plan(s) 10.00% 8.50% 9.00%
U.K. Plan 7.10% 6.70% 7.50%
34
Lowering the expected long-term rate of return on the Company's U.S. plans'
assets by 0.25% (from 8.50% to 8.25%) would have increased 2003 pension expense
by approximately $0.1 million, and lowering the discount rate assumption by
0.25% (from 6.25% to 6.00%) would similarly have increased the Company's U.S.
plans' 2003 pension expense by approximately $0.1 million. Lowering the expected
long-term rate of return on the Company's U.K. plan's assets by 0.25% (from
7.10% to 6.85%) would have increased 2003 pension expense by approximately $0.5
million, and lowering the discount rate assumption by 0.25% (from 5.70% to
5.45%) would have increased the Company's U.K. plan's 2003 pension expense by
approximately $0.2 million.
Based on continued market declines and losses on the plan assets during
2002, as well as future projected asset mix, the Company reduced its assumed
long-term rate of return for 2003 to 8.50% for its U.S. plans and 6.70% for its
U.K. plan. The Company's future expected long-term rate of return on plan assets
for its U.S. and U.K. plans at December 31, 2002 was based on an asset
allocation assumption of 50% equity securities and 50% fixed income securities.
However, because of market fluctuations and prior funding strategies, actual
asset allocation as of December 31, 2002 was 40% equity securities, 57% fixed
income securities and 3% cash for the U.S. plans and 85% equity securities, 12%
fixed income securities and 3% cash for the U.K. plan.
During the second quarter of 2003, the Company transferred all of its U.S.
plans' assets into the Combined Master Retirement Trust ("CMRT"). The CMRT is a
collective investment trust established by Valhi to permit the collective
investment by certain master trusts which fund certain employee benefits plans
sponsored by Valhi and certain related companies. The CMRT held 9.0% of TIMET
common stock at December 31, 2003; however, the Company's plan assets are
invested only in a portion of the CMRT that does not hold TIMET common stock. At
December 31, 2003, Valhi and related entities or persons held approximately
49.8% of TIMET's outstanding common stock and approximately 40.1% of the Capital
Trust's outstanding BUCS (which are convertible into TIMET common stock). Harold
C. Simmons, Chairman of the Board of Directors for Valhi, is the sole trustee of
the CMRT and a member of the trust investment committee for the CMRT.
The CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indices) utilizing both third-party investment
managers as well as investments directed by Mr. Simmons. During the 16-year
history of the CMRT from inception (in 1987) through December 31, 2003, the
average annual rate of return earned by the CMRT, as calculated based on the
average percentage change in the CMRT's net asset value per CMRT unit for each
applicable year, was 12.7%. The CMRT earned an annual return of 38.4% in 2003,
and the CMRT's last 5-year and 10-year average annual returns were 10.1% and
11.1%, respectively. The CMRT's annual rates of return from inception through
December 31, 2003 have varied from a high of a 42.2% return (in 1998) to a low
of a 20.7% loss (in 1990). During that same period, the S&P 500's annual rates
of return have varied from a high of a 34.1% return (in 1995) to a low of a
23.4% loss (in 2002). The Company believes that such historical volatility is a
reasonable indicator of future levels of volatility, and a higher level of
volatility is consistent with a higher level of risk in the asset mix and a
higher level of expected return over the long-term.
35
At December 31, 2003, the CMRT's asset mix (based on an aggregate asset
value of $502 million) was 62.6% U.S. equity securities, 6.8% foreign equity
securities, 23.6% debt securities and 7.0% cash and other. The CMRT`s trustee
and investment committee actively manage the investments within the CMRT. Such
parties have in the past, and may again in the future, periodically change the
relative asset mix based upon, among other things, advice they receive from
third-party advisors and their expectation as to what asset mix will generate
the greatest overall return. Based on the above, the Company increased its
long-term rate of return assumption to 10.0% for December 31, 2003 pension
obligations and for 2004 pension expense for its U.S. plan.
Based on various factors, including improved economic and market
conditions, gains on the plan assets during 2003 and projected asset mix, the
Company increased its assumed long-term rate of return for December 31, 2003
pension obligations and for 2004 pension expense to 7.10% for its U.K. plan.
Because of market fluctuations and prior funding strategies, actual asset
allocation as of December 31, 2003 was 92% equity securities and 8% fixed income
securities for the U.K. plan. During 2003, the trustees for the U.K. plan
selected a new investment advisor (effective in 2004) for the U.K. plan and
modified its asset allocation goals. As such, the Company's future expected
long-term rate of return on plan assets for its U.K. plan is based on an asset
allocation assumption of 80% equity securities and 20% fixed income securities
by the end of 2005 and 60% equity securities and 40% fixed income securities by
the end of 2007. The Company believes that the plans' long-term asset allocation
on average will approximate the ultimate assumed 60/40 allocation, as all
current contributions to the plan are invested wholly in fixed income securities
in order to gradually effect the shift.
Although the expected rate of return is a long-term measure, the Company
will continue to evaluate its expected rate of return, at least annually, and
will adjust it as considered necessary.
Among other things, the Company bases its determination of pension expense
for all plans on the fair value of plan assets. The expected return on the fair
value of the plan assets, determined based on the expected long-term rate of
return, is a component of pension expense. This methodology further recognizes
actual investment gains or losses (i.e., the difference between the expected and
actual returns based on the market value of assets) in pension expense through
amortization in future periods based upon the expected average remaining service
life of the plan participants. Unrealized gains or losses may impact future
periods to the extent the accumulated gains or losses are outside the "corridor"
as defined by SFAS No. 87.
Based on an expected rate of return on plan assets of 10.00%, a discount
rate of 6.00% and various other assumptions, the Company estimates that its U.S.
plan will have pension expense of approximately $0.3 million in 2004 and pension
income of approximately $0.3 million in 2005 and $0.6 million in 2006. A 0.25%
increase (decrease) in the discount rate would decrease (increase) projected
pension expense by approximately $0.1 million in 2004 and increase (decease)
projected pension income by approximately $0.1 million in 2005 and 2006. A 0.5%
increase (decrease) in the long-term rate of return would decrease (increase)
projected pension expense by approximately $0.3 million in 2004 and increase
(decrease) projected pension income by approximately $0.3 million in 2005 and
approximately $0.4 million in 2006.
36
Based on an expected rate of return on plan assets of 7.10%, a discount
rate of 5.50% and various other assumptions (including an exchange rate of
$1.75/(pound)1.00), the Company estimates that pension expense for its U.K. plan
will approximate $7.5 million in 2004, $6.9 million in 2005 and $6.4 million in
2006. A 0.25% increase (decrease) in the discount rate would decrease (increase)
projected pension expense by approximately $0.8 million in 2004 and $0.7 million
in 2005 and 2006. A 0.25% increase (decrease) in the long-term rate of return
would decrease (increase) projected pension expense by approximately $0.2
million in 2004, $0.3 million in 2005 and $0.4 million in 2006.
Actual future pension expense will depend on actual future investment
performance, changes in future discount rates and various other factors related
to the populations participating in the Company's pension plans.
The Company made cash contributions of approximately $4.4 million in 2003,
$1.2 million in 2002 and $2.7 million in 2001 to the U.S. plans and cash
contributions of approximately $7.3 million in 2003, $6.1 million in 2002 and
$3.6 million in 2001 to the U.K. plan. Based upon the current underfunded status
of the plans and the actuarial assumptions being used for 2004, the Company
believes that it will be required to make the following cash contributions
(exclusive of any required employee contributions) over the next five years:
Projected cash contributions
-----------------------------------------------------------
U.S. Plan U.K. Plan Total
---------------- ----------------- -----------------
(In millions)
Year ending December 31,
2004 $ 4.1 $ 7.4 $ 11.5
2005 $ 3.2 $ 7.7 $ 10.9
2006 $ 1.8 $ 7.9 $ 9.7
2007 $ 0.6 $ 8.2 $ 8.8
2008 $ 0.1 $ 8.4 $ 8.5
The value of the plans' assets has fluctuated dramatically over the past
three years based mainly on performance of the plans' equity securities. The
U.S. plans' assets were $60.7 million, $48.2 million and $56.5 million at
December 31, 2003, 2002 and 2001, respectively, and the U.K. plan's assets were
$97.8 million, $69.8 million and $79.0 million at December 31, 2003, 2002 and
2001, respectively.
The combination of actual investment returns and changing discount rates
has a significant effect on the Company's funded plan status (plan assets
compared to projected benefit obligations). In 2003, the effect of positive
investment returns was only partially offset by the decline in the discount
rate, thereby reducing the underfunded status of the U.S. plan to $10.1 million
at December 31, 2003. In 2003, the effect of positive investment returns in the
U.K. plan was more than offset by the decline in the discount rate and the
effect of the weakening dollar compared to the British pound sterling, thereby
increasing the underfunded status of the U.K. plan to $53.6 million at December
31, 2003. The U.S. and U.K. plans were underfunded by $21.3 million and $46.7
million, respectively, at December 31, 2002. Based upon the change in the funded
status of the plans during 2003, the Company was required to record a net
additional minimum pension liability credit (net of tax) to equity of $1.1
million, reflecting additional comprehensive income of $8.4 million for the U.S.
plan and additional comprehensive loss of $7.3 million related to the U.K. plan.
37
Postretirement benefit plans other than pensions. The Company provides
limited postretirement healthcare and life insurance ("OPEB") benefits to a
portion of its U.S. employees upon retirement. The Company funds such OPEB
benefits as they are incurred, net of any retiree contributions. The Company
paid OPEB benefits, net of retiree contributions, in the amount of $3.1 million,
$4.6 million and $4.0 million during 2003, 2002 and 2001, respectively.
The Company recorded consolidated OPEB expense of $2.7 million, $2.9
million and $1.8 million for the years ended December 31, 2003, 2002 and 2001,
respectively. OPEB expense for these periods was calculated based upon a number
of actuarial assumptions, most significant of which are the discount rate and
the expected long-term health care trend rate.
The discount rate the Company utilizes for determining OPEB expense and
OPEB obligations is the same as that used for the Company's U.S. pension plans.
Lowering the discount rate assumption by 0.25% (from 6.25% to 6.00%) would have
increased the Company's 2003 OPEB expense by less than $0.1 million.
The Company estimates the expected long-term health care trend rate based
upon input from specialists in this area, as provided by the Company's
actuaries. In estimating the health care trend rate, the Company considers
industry trends, the Company's actual healthcare cost experience and the
Company's future benefit structure. For 2003, the Company used a beginning
health care trend rate of 11.35%, which is projected to reduce to an ultimate
rate of 4.25% in 2010. If the health care trend rate changed by 1.00% for each
year, OPEB expense would have increased/decreased by approximately $0.3 million
in 2003.
For 2004, the Company is using a beginning health care trend rate of
10.35%, which is projected to reduce to an ultimate rate of 4.00% in 2010.
Based on a discount rate of 6.00%, a health care trend rate as discussed
above and various other assumptions, the Company estimates that OPEB expense
will approximate $2.6 million in 2004, $2.4 million in 2005 and $2.3 million in
2006. A 0.25% increase (decrease) in the discount rate would decrease (increase)
projected OPEB expense by less than $0.1 million in 2004, 2005 and 2006. A 1.0%
increase (decrease) in the health care trend rate for each year would increase
(decrease) the projected service and interest cost components of OPEB expense by
approximately $0.2 million in 2004, 2005 and 2006.
Environmental matters. See "Business - Regulatory and environmental
matters" in Item 1 and Note 19 to the Consolidated Financial Statements for a
discussion of environmental matters.
Other. The Company periodically evaluates its liquidity requirements,
capital needs and availability of resources in view of, among other things, its
alternative uses of capital, debt service requirements, the cost of debt and
equity capital and estimated future operating cash flows. As a result of this
process, the Company has in the past, or in light of its current outlook, may in
the future, seek to raise additional capital, modify its common and preferred
dividend policies, restructure ownership interests, incur, refinance or
restructure indebtedness, repurchase shares of common stock, purchase BUCS, sell
assets, or take a combination of such steps or other steps to increase or manage
its liquidity and capital resources. In the normal course of business, the
Company investigates, evaluates, discusses and engages in acquisition, joint
venture, strategic relationship and other business combination opportunities in
the titanium, specialty metal and other industries. In the event of any future
acquisition or joint venture opportunities, the Company may consider using
then-available liquidity, issuing equity securities or incurring additional
indebtedness.
38
Corporations that may be deemed to be controlled by or affiliated with
Harold C. Simmons sometimes engage in (i) intercorporate transactions such as
guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds on
open account, and sales, leases and exchanges of assets, including securities
issued by both related and unrelated parties, and (ii) common investment and
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly-held minority equity interest in another related party. The
Company continuously considers, reviews and evaluates such transactions, and
understands that Contran Corporation, Valhi 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.
As of March 2, 2004, the Company had acquired 1,140,900 shares of CompX
International, Inc. ("CompX") Class A common stock (the "Class A Shares,"
representing approximately 22.3% of the outstanding Class A Shares) for $11.1
million in open market or privately-negotiated transactions with unaffiliated
parties. Persons or entities related to Harold C. Simmons other than TIMET hold
an additional 476,300 of the Class A Shares and 100% of the 10,000,000
outstanding shares of CompX Class B common stock (the "Class B Shares"). As
reported in the Schedule 13D filed with the SEC on March 2, 2004, depending upon
the Company's evaluation of the business and prospects of CompX, and upon future
developments (including, but not limited to, performance of the Class A Shares
in the market, availability of funds, alternative uses of funds, and money,
stock market and general economic conditions), TIMET may from time to time
purchase, dispose of, or cease buying or selling Class A Shares. The Class A
Shares held by TIMET, as of March 2, 2004, represented approximately 7.5% of the
aggregate number of outstanding Class A Shares and Class B Shares.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the Company to
make estimates and judgments, and select from a range of possible 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 reported
period. On an on-going basis, the Company evaluates its estimates, including
those related to allowances for uncollectible accounts receivable, inventory
allowances, asset lives, impairments of investments in preferred securities and
investments accounted for by the equity method, the recoverability of other
long-lived assets, including property and equipment, goodwill and other
intangible assets, pension and other post-retirement benefit obligations and the
related underlying actuarial assumptions, the realization of deferred income tax
assets, and accruals for asset retirement obligations, environmental
remediation, litigation, income tax and other contingencies. The Company bases
its estimates and judgments, to varying degrees, on historical experience,
advice of external specialists and various other factors it believes to be
prudent under the circumstances. Actual results may differ from previously
estimated amounts and such estimates, assumptions and judgments are regularly
subject to revision.
39
The policies and estimates discussed below are considered by management to
be critical to an understanding of the Company's financial statements because
their application requires the most significant judgments from management in
estimating matters for financial reporting that are inherently uncertain. See
Notes to the Consolidated Financial Statements for additional information on
these policies and estimates, as well as discussion of additional accounting
policies and estimates.
Inventory allowances. The Company values approximately one-half of its
inventory using the LIFO method with the remainder stated primarily using an
average cost method. The Company periodically reviews its inventory for
estimated obsolescence or unmarketable inventory and records any write-down
equal to the difference between the cost of inventory and its estimated net
realizable value based upon assumptions about alternative uses, market
conditions and other factors.
Impairment of long-lived assets. Generally, when events or changes in
circumstances indicate that the carrying amount of long-lived assets, including
property and equipment, goodwill and other intangible assets, may not be
recoverable, the Company prepares an evaluation of the assets or asset group. If
this evaluation indicates that the carrying amount of the asset or asset group
is not recoverable, the amount of the impairment would typically be calculated
using discounted expected future cash flows or appraised values. All relevant
factors are considered in determining whether an impairment exists. In 2003, no
such events or circumstances indicated the need to perform such evaluation.
During the fourth quarter of 2002, the Company completed an entity-wide
impairment assessment in response to continued poor conditions in the commercial
aerospace market. In order to complete this assessment, the Company identified
its lowest level of identifiable cash flows, resulting in the identification of
four asset groups - U.S., U.K., France and Italy. Of these asset groups, Italy
is not reliant on sales into the commercial aerospace market and therefore an
analysis of its potential impairment was not considered necessary. The result of
this assessment led the Company to conclude that there was no impairment related
to the long-lived assets in the three asset groups tested, as the undiscounted
cash flows exceeded the net carrying value of the applicable net assets in each
of the three asset groups. Although management utilizes certain external
information sources such as The Airline Monitor as the basis for aerospace sales
volume projections, significant management judgment is required in estimating
other factors that are material to future cash flows including, but not limited
to, customer demand, the Company's market position, selling prices, competitive
forces and manufacturing costs. Future cash flows are inherently uncertain, and
there can be no assurance that the Company will achieve the future cash flows
reflected in its projections.
The Company also completed an impairment assessment of its goodwill and
intangible assets under SFAS No. 142, during 2002, as discussed in "Results of
Operations - Cumulative effect of change in accounting principle" and Note 7 to
the Consolidated Financial Statements. Management judgment was required in order
to identify the Company's reporting units, determine the carrying amount of each
reporting unit by assigning its assets and liabilities, including existing
goodwill and intangible assets, to those reporting units as of January 1, 2002,
and determine the implied fair value of its goodwill. This evaluation, which was
completed with the assistance of an external valuation specialist and considered
a combination of fair value indicators including quoted market prices, prices of
comparable businesses and discounted projected cash flows, indicated that the
Company's recorded goodwill might be impaired and required the Company to
complete the second step of the impairment test. Based on the results of the
impairment test, the Company recorded a non-cash goodwill impairment charge of
$44.3 million, representing the entire balance of the Company's recorded
goodwill at January 1, 2002.
40
Valuation and impairment of securities. In accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the Company
evaluates its investments in debt and equity securities whenever events or
conditions occur to indicate that the fair value of such investments has
declined below their carrying amounts. If the decline in fair value is judged to
be other than temporary, the carrying amount of the security is written down to
fair value.
In response to certain events previously described in this MD&A, the
Company undertook assessments in the fourth quarter of 2001 and the first
quarter of 2002 of its investment in SMC with the assistance of an external
valuation specialist. Those assessments indicated that it was unlikely that the
Company would recover its then existing carrying amount of the SMC securities in
accordance with the securities' contractual terms and that an other than
temporary decline in the fair value of its investment had occurred. Accordingly,
the Company recorded impairment charges of $61.5 million in the fourth quarter
of 2001 and $27.5 million in the first quarter of 2002. The securities were not
publicly traded and, accordingly, quoted market prices were unavailable. The
estimate of fair value required significant judgment and considered a number of
factors including, but not limited to, the financial health and prospects of SMC
and market yields of comparable securities.
Deferred income tax valuation allowances. Under SFAS No. 109, Accounting
for Income Taxes, and related guidance, the Company is required to record a
valuation allowance if realization of deferred tax assets is not
"more-likely-than-not." Substantial weight must be given to recent historical
results and near-term projections, and management must assess the availability
of tax planning strategies that might impact either the need for, or amount of,
any valuation allowance.
As more fully discussed in "Results of Operations - Income taxes," the
Company has concluded that realization of its previously recorded U.S. and U.K.
deferred tax assets does not meet the "more-likely-than-not" recognition
criteria. Additionally, the Company has determined that it will not recognize
deferred tax benefits related to future U.S. or U.K. losses or future increases
in the U.S. or U.K. minimum pension liabilities continuing for an uncertain
period of time. Accordingly, the Company increased its deferred tax valuation
allowance in 2001 through 2003 to offset deferred tax benefits related to net
U.S. deferred tax assets and in 2002 and 2003 to offset deferred tax benefits
related to net U.K. deferred tax assets.
Regular reviews of the "more-likely-than-not" criteria and availability of
tax planning strategies will continue to require significant management
judgment.
Pension and OPEB expenses and obligations. The Company's pension and OPEB
expenses and obligations are calculated based on several estimates, including
discount rates, expected rates of returns on plan assets and expected health
care trend rates. The Company reviews these rates annually with the assistance
of its actuaries. See further discussion of the factors considered and potential
effect of these estimates in "Liquidity and Capital Resources - Defined benefit
pension plans" and "Liquidity and Capital Resources - Postretirement benefit
plans other than pensions."
Revenue recognition. Sales revenue is generally recognized when the Company
has certified that its product meets the related customer specifications, the
product has been shipped, and title and substantially all the risks and rewards
of ownership have passed to the customer. Payments received from customers in
advance of these criteria being met are recorded as customer advances until
earned. Amounts charged to customers for shipping and handling are included in
net sales. Sales revenue is stated net of price and early payment discounts.
41
Other loss contingencies. Accruals for estimated loss contingencies,
including, but not limited to, product-related liabilities, environmental
remediation and litigation, are recorded when it is probable that a liability
has been incurred and the amount of the loss can be reasonably estimated.
Disclosure is made when there is a reasonable possibility that a loss may have
been incurred. Contingent liabilities are often resolved over long time periods.
Estimating probable losses often requires analysis of various projections that
are dependent upon the future outcome of multiple factors, including costs, the
findings of investigations and actions by the Company and third parties.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rates. The Company is exposed to market risk from changes in
interest rates related to indebtedness. The Company typically does not enter
into interest rate swaps or other types of contracts in order to manage its
interest rate market risk. At December 31, 2003, the Company had no bank
indebtedness. At December 31, 2002 all of the Company's bank indebtedness was
denominated in U.S. dollars, British pounds sterling or euros and bore interest
at variable rates, primarily related to spreads over LIBOR. Because the
Company's bank indebtedness reprices with changes in market interest rates, the
carrying amount of such debt is believed to approximate fair value. The
following table summarizes the Company's bank indebtedness and related
maturities as of December 31, 2002:
Contractual maturity date (1)
--------------------------------------------------------------------- Interest
2003 2004 2005 2006 2007 rate (2)
----------- ---------- ----------- ---------- ----------- -----------
(In millions)
Variable rate debt:
U. S. dollars $ 11.9 $ - $ 2.0 $ - $ - 3.7%
British pounds sterling - - 4.4 - - 5.3%
Euros 1.1 - - - - 3.7%
- -----------------------------------------------------------------------------------------------------------------------
(1) Non-U. S. dollar denominated amounts are translated at year-end rates of
exchange.
(2) Weighted average.
The $207.5 million Subordinated Debentures held by the Capital Trust
provide a fixed 6.625% coupon and are exposed to market risk from changing
interest rates. At December 31, 2003, accrued but unpaid interest on the
Subordinated Debentures was $19.0 million. The BUCS issued by the Capital Trust
are publicly traded, and the Company believes they provide the best available
proxy for the fair value of the underlying Subordinated Debentures. Based upon
the last traded value of the BUCS on or before December 31, 2003, the fair value
of the Subordinated Debentures, including the accrued and unpaid interest,
approximated $137 million at December 31, 2003.
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. The Company typically does not enter into currency
forward contracts to manage its foreign exchange market risk associated with
receivables, payables or indebtedness denominated in a currency other than the
functional currency of the particular entity. See "Results of Operations -
European operations" in Item 7 - MD&A for further discussion.
42
Commodity prices. The Company is exposed to market risk arising from
changes in commodity prices as a result of its long-term purchase and supply
agreements with certain suppliers and customers. These agreements, which offer
various fixed or formula-determined pricing arrangements, effectively obligate
the Company to bear (i) the risk of increased raw material and other costs to
the Company that cannot be passed on to the Company's customers through
increased titanium product prices (in whole or in part) or (ii) the risk of
decreasing raw material costs to the Company's suppliers that are not passed on
to the Company in the form of lower raw material prices.
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 9A: CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures of the Company that are designed to ensure
that information required to be disclosed in the reports that the Company files
or submits to the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), is recorded, processed, summarized and reported, within the
time periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits to the SEC under the Exchange Act is accumulated and
communicated to the Company's management, including its principal executive
officer and its principal financial officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure. Both J. Landis Martin, the Company's Chief Executive Officer, and
Bruce P. Inglis, the Company's Vice President - Finance and Corporate
Controller, have evaluated the Company's disclosure controls and procedures as
of December 31, 2003. Based upon their evaluation, these executive officers have
concluded that the Company's disclosure controls and procedures are effective as
of the date of such evaluation.
The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP, and includes
those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
43
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and
directors of the Company; and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the Company's consolidated
financial statements.
There has been no change to the Company's system of internal control over
financial reporting during the quarter ended December 31, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
TIMET's definitive proxy statement to be filed with the SEC pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
Annual Report (the "TIMET Proxy Statement").
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 AND
RELATED STOCKHOLDER MATTERS
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 18 to the Consolidated Financial
Statements.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement.
44
PART IV
ITEM 15: 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, 2003 and through
March 2, 2004:
Date of Report Items Reported
--------------------- ------------------
October 6, 2003 5 and 7
October 14, 2003 5 and 7
October 14, 2003 9
October 22, 2003 5 and 7
October 23, 2003 7 and 12
January 28, 2004 7 and 12
January 29, 2004 7 and 9
February 26, 2004 5 and 7
(c) Exhibits
The Exhibit Index lists all items included as exhibits to this Annual
Report. 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
SEC upon request.
Item No. Exhibit Index
- -------- ----------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of Titanium Metals
Corporation, as amended effective February 14, 2003.
3.2 Bylaws of Titanium Metals Corporation as Amended and Restated, dated
February 4, 2003.
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 SEC 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 SEC on
December 5, 1996.
45
Item No. Exhibit Index
- -------- ----------------------------------------------------------------------
4.3 Indenture for the 6 5/8% Convertible Junior 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 SEC on December 5,
1996.
4.4 Form of 6 5/8% Convertible Preferred Securities (included in Exhibit 4.2
above), incorporated by reference to Exhibit 4.4 to the Registrant's
Current Report on Form 8-K filed with the SEC on December 5, 1996.
4.5 Form of 6 5/8% Convertible Junior Subordinated Debentures (included in
Exhibit 4.3 above), incorporated by reference to Exhibit 4.6 to the
Registrant's Current Report on Form 8-K filed with the SEC 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 SEC 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 4.7 to the
Registrant's Current Report on Form 8-K filed with the SEC on December 5,
1996.
4.8 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 SEC on December 5,
1996.
4.9 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 99.2 to the Registrant's
Current Report on Form 8-K filed with the SEC 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 SEC
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 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.
46
Item No. Exhibit Index
- -------- ----------------------------------------------------------------------
10.2 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, incorporated by
reference to Exhibit 10.12 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1999.
10.3 Amendment No. 1 to 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 September 7,
2001, incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
10.4 Amendment No. 2 to 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 October 23,
2002, incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.
10.5 Loan and Overdraft Facilities between Lloyds TSB Bank plc and TIMET UK
Limited dated December 19, 2003.
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*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.
10.8*Executive Severance Policy, as amended and restated effective May 17,
2000, incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
10.9*Titanium Metals Corporation Executive Stock Ownership Loan Plan, as
amended and restated effective February 28, 2001, incorporated by reference
to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2000.
10.10* 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 10.18 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000.
10.11* Titanium Metals Corporation Amended and Restated 1996 Non-Employee
Director Compensation Plan, as amended and restated effective May 20, 2003,
incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003.
47
Item No. Exhibit Index
- -------- ----------------------------------------------------------------------
10.12* Amendment to Employment Contract between TIMET Savoie, S.A., Christian
Leonhard and Titanium Metals Corporation, executed as of November 25, 2003.
10.13Settlement Agreement and Release of Claims dated April 19, 2001 between
Titanium Metals Corporation and The Boeing Company, incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001.
10.14Intercorporate Services Agreement among Contran Corporation, Tremont LLC
and Titanium Metals Corporation, effective as of January 1, 2004.
10.15Purchase and Sale Agreement (For Titanium Products) between The Boeing
Company, acting through its division, Boeing Commercial Airplanes, and
Titanium Metals Corporation (as amended and restated effective April 19,
2001), incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
10.16Purchase and Sale Agreement between Rolls-Royce plc and Titanium Metals
Corporation dated December 22, 1998, incorporated by reference to Exhibit
10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002.
10.17First Amendment to Purchase and Sale Agreement between Rolls-Royce plc and
Titanium Metals Corporation.
10.18Second Amendment to Purchase and Sale Agreement between Rolls-Royce plc
and Titanium Metals Corporation.
10.19Termination Agreement by and between Wyman-Gordon Company and Titanium
Metals Corporation effective as of September 28, 2003, incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003.
10.20Agreement Regarding Shared Insurance by and between CompX International
Inc., Contran Corporation, Keystone Consolidated Industries, Inc., Kronos
Worldwide, Inc., NL Industries, Inc., Titanium Metals Corporation and
Valhi, Inc. dated October 30, 2003.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Management contract, compensatory plan or arrangement.
48
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 4, 2004
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/ Glenn R. Simmons
- ------------------------------------ --------------------------------
J. Landis Martin, March 4, 2004 Glenn R. Simmons, March 4, 2004
Chairman of the Board, President Director
and Chief Executive Officer
/s/ Norman N. Green /s/ Steven L. Watson
- ------------------------------------ --------------------------------
Norman N. Green, March 4, 2004 Steven L. Watson, March 4, 2004
Director Director
/s/ Gary C. Hutchison /s/ Paul J. Zucconi
- ------------------------------------ --------------------------------
Gary C. Hutchison, March 4, 2004 Paul J. Zucconi, March 4, 2004
Director Director
/s/ Albert W. Niemi, Jr. /s/ Bruce P. Inglis
- ------------------------------------ --------------------------------
Albert W. Niemi, Jr., March 4, 2004 Bruce P. Inglis, March 4, 2004
Director Vice President - Finance and
Corporate Controller
Principal Financial Officer
Principal Accounting Officer
49
TITANIUM METALS CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 15(a) and 15(d)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
Page
Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheets - December 31, 2003 and 2002 F-2
Consolidated Statements of Operations -
Years ended December 31, 2003, 2002 and 2001 F-4
Consolidated Statements of Comprehensive Loss -
Years ended December 31, 2003, 2002 and 2001 F-6
Consolidated Statements of Cash Flows -
Years ended December 31, 2003, 2002 and 2001 F-7
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 2003, 2002 and 2001 F-9
Notes to Consolidated Financial Statements F-10
Financial Statement Schedules
Report of Independent Auditors on Financial Statement Schedule 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 AUDITORS
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, of comprehensive loss, of changes
in stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Titanium Metals Corporation and Subsidiaries
at December 31, 2003 and 2002, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America. 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 of
America, 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 our opinion.
As discussed in Note 2 to the consolidated financial statements, effective
December 31, 2003 the Company changed its method of accounting for its
investment in a wholly-owned trust holding subordinated debentures and
retroactively restated all periods, effective January 1, 2003 the Company
changed its method of accounting for asset retirement obligations, and effective
January 1, 2002 the Company changed its method of accounting for goodwill and
other intangible assets.
/s/ PricewaterhouseCoopers LLP
Denver, Colorado
March 2, 2004
F-1
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
-----------------------------------
ASSETS 2003 2002
---------------- ----------------
Current assets:
Cash and cash equivalents $ 35,040 $ 6,214
Restricted cash and cash equivalents 2,248 146
Accounts and other receivables, less
allowance of $2,347 and $2,859 67,432 68,791
Refundable income taxes 2,155 1,703
Inventories 165,721 181,932
Prepaid expenses and other 2,604 3,077
Deferred income taxes 778 809
---------------- ----------------
Total current assets 275,978 262,672
---------------- ----------------
Investment in joint ventures 22,469 22,287
Investment in common securities of TIMET Capital Trust I 6,794 6,362
Property and equipment, net 239,182 254,672
Intangible assets, net 6,294 8,442
Other 16,692 15,705
---------------- ----------------
Total assets $ 567,409 $ 570,140
================ ================
F-2
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
December 31,
-----------------------------------
LIABILITIES, MINORITY INTEREST AND 2003 2002
STOCKHOLDERS' EQUITY ---------------- ----------------
Current liabilities:
Notes payable $ - $ 12,994
Current maturities of capital lease obligations 524 642
Accounts payable 29,200 26,460
Accrued liabilities 45,163 46,511
Customer advances 3,356 5,416
Other 262 602
---------------- ----------------
Total current liabilities 78,505 92,625
---------------- ----------------
Long-term debt - 6,401
Capital lease obligations 9,766 9,575
Accrued OPEB cost 13,661 13,417
Accrued pension cost 62,366 61,080
Accrued environmental cost 3,930 3,531
Deferred income taxes 637 1,036
Accrued interest on debt payable to TIMET Capital Trust I 19,003 4,600
Debt payable to TIMET Capital Trust I 207,465 207,465
Other 2,188 644
---------------- ----------------
Total liabilities 397,521 400,374
---------------- ----------------
Minority interest 11,131 10,416
---------------- ----------------
Stockholders' equity:
Preferred stock $.01 par value; 100 shares authorized,
none outstanding - -
Common stock, $.01 par value; 9,900 shares authorized,
3,190 and 3,194 shares issued, respectively 32 32
Additional paid-in capital 350,643 350,889
Accumulated deficit (140,428) (127,371)
Accumulated other comprehensive loss (50,226) (62,737)
Treasury stock, at cost (9 shares) (1,208) (1,208)
Deferred compensation (56) (255)
---------------- ----------------
Total stockholders' equity 158,757 159,350
---------------- ----------------
Total liabilities and stockholders' equity $ 567,409 $ 570,140
================ ================
Commitments and contingencies (Note 19)
See accompanying notes to consolidated financial statements.
F-3
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year ended December 31,
---------------------------------------------------
2003 2002 2001
---------------- -------------- -------------
Net sales $ 385,304 $ 366,501 $ 486,935
Cost of sales 368,274 369,624 447,042
---------------- -------------- -------------
Gross margin 17,030 (3,123) 39,893
Selling, general, administrative and
development expense 36,438 42,998 51,788
Equity in earnings of joint ventures 451 1,990 2,515
Other income (expense), net 24,389 23,282 73,420
---------------- -------------- -------------
Operating income (loss) 5,432 (20,849) 64,480
Interest expense 16,419 17,144 18,333
Other non-operating income (expense), net (294) (29,893) (55,526)
---------------- -------------- -------------
Loss before income taxes, minority interest
and cumulative effect of change in
accounting principle (11,281) (67,886) (9,379)
Income tax expense (benefit) 1,207 (1,952) 31,112
Minority interest, net of tax 378 1,286 1,275
---------------- -------------- -------------
Loss before cumulative effect of change in
accounting principle (12,866) (67,220) (41,766)
Cumulative effect of change in accounting principle (191) (44,310) -
---------------- -------------- -------------
Net loss $ (13,057) $ (111,530) $ (41,766)
================ ============== =============
See accompanying notes to consolidated financial statements.
F-4
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Year ended December 31,
---------------------------------------------------
2003 2002 2001
---------------- -------------- -------------
Basic and diluted loss per share:
Before cumulative effect of change
in accounting principle $ (4.06) $ (21.27) $ (13.26)
Cumulative effect of change in accounting
principle (0.06) (14.02) -
---------------- -------------- -------------
Basic and diluted loss per share $ (4.12) $ (35.29) $ (13.26)
================ ============== =============
Weighted average shares outstanding 3,169 3,161 3,150
================ ============== =============
Pro forma amounts assuming Statement of Financial
Accounting Standards No. 143 was applied as of
January 1, 2001 (Note 2):
Net loss $ (12,866) $ (111,556) $ (41,791)
================ ============== =============
Basic and diluted loss per share $ (4.06) $ (35.30) $ (13.27)
================ ============== =============
See accompanying notes to consolidated financial statements.
F-5
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Year ended December 31,
-------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Net loss $ (13,057) $ (111,530) $ (41,766)
-------------- -------------- --------------
Other comprehensive income (loss):
Currency translation adjustment 11,443 13,359 (3,475)
Pension liabilities adjustment, net of tax benefit
of $0, $1,588 and $4,834 1,068 (40,822) (15,391)
-------------- -------------- --------------
12,511 (27,463) (18,866)
-------------- -------------- --------------
Comprehensive loss $ (546) $ (138,993) $ (60,632)
============== ============== ==============
See accompanying notes to consolidated financial statements.
F-6
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
--------------------------------------------------
2003 2002 2001
--------------- -------------- --------------
Cash flows from operating activities:
Net loss $ (13,057) $ (111,530) $ (41,766)
Depreciation and amortization 36,572 37,098 40,134
Cumulative effect of change in accounting principle 191 44,310 -
Loss on disposal of fixed assets 655 - -
Noncash equipment impairment charge - - 10,840
Noncash impairment of Special Metals Corporation
preferred securities - 27,500 61,519
Equity in earnings of joint ventures, net of
distributions 796 (961) (2,040)
Equity in earnings of common securities of
TIMET Capital Trust I, net of distributions (432) (104) 316
Deferred income taxes (259) (3,694) 26,822
Minority interest 378 1,286 1,275
Other, net (39) 1,891 1,115
Change in assets and liabilities:
Receivables 4,798 24,088 (8,830)
Inventories 24,462 10,756 (38,631)
Prepaid expenses and other 461 6,072 (3,112)
Accounts payable and accrued liabilities (1,014) (17,159) 3,895
Customer advances (207) (26,386) 29,291
Income taxes (256) (1,863) 98
Accrued OPEB and pension costs (2,007) (6,998) (4,288)
Accrued interest on debt payable to
TIMET Capital Trust I 14,403 3,455 (10,350)
Other, net 376 (1,356) (3,714)
--------------- -------------- --------------
Net cash provided (used) by operating activities 65,821 (13,595) 62,574
--------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures (12,467) (7,767) (16,124)
Change in restricted cash, net (2,102) - -
Other, net 35 300 31
--------------- -------------- --------------
Net cash used by investing activities (14,534) (7,467) (16,093)
--------------- -------------- --------------
Cash flows from financing activities:
Indebtedness:
Borrowings 449,789 420,146 537,884
Repayments (469,042) (413,842) (569,569)
Dividends paid to minority interest (1,892) (1,115) -
Deferred financing costs - (1,050) -
Other, net (923) (616) 327
--------------- -------------- --------------
Net cash (used) provided by financing activities (22,068) 3,523 (31,358)
--------------- -------------- --------------
Net cash provided (used) by operating, investing
and financing activities $ 29,219 $ (17,539) $ 15,123
=============== ============== ==============
F-7
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Year ended December 31,
-------------------------------------------------
2003 2002 2001
-------------- -------------- --------------
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $ 29,219 $ (17,539) $ 15,123
Effect of exchange rate changes on cash (393) (747) (419)
-------------- -------------- --------------
28,826 (18,286) 14,704
Cash and cash equivalents at beginning of year 6,214 24,500 9,796
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 35,040 $ 6,214 $ 24,500
============== ============== ==============
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 1,325 $ 12,352 $ 27,697
Income taxes, net $ 1,561 $ 3,605 $ 4,192
Noncash investing and financing activities:
Capital lease obligations incurred when
the Company entered into certain leases
for equipment $ - $ 969 $ 519
Issuance of common stock upon conversion
of preferred securities issued by
TIMET Capital Trust I $ - $ - $ 9
See accompanying notes to consolidated financial statements.
F-8
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2003, 2002 and 2001
(In thousands)
Accumulated Other
Comprehensive Income (Loss)
Additional Retained ---------------------
Common Common Paid-in Earnings Currency Pension Treasury Deferred
Shares Stock Capital (Deficit) Translation Liabilities Stock Compensation Total
------- ------ ---------- ---------- --------- ---------- --------- --------- ----------
Balance at December 31, 2000 3,182 $ 32 $ 350,365 $ 25,925 $ 10,920) $ (5,488) $ (1,208) $ (1,191) $ 357,515
Comprehensive income (loss) - - - (41,766) (3,475) (15,391) - - (60,632)
Issuance of common stock 8 - 581 - - - - - 581
Stock award cancellations (4) - (322) - - - - 322 -
Amortization of deferred
compensation, net of effects of
stock award cancellations - - - - - - - 473 473
Other - - 177 - - - - - 177
------- ------ ---------- ---------- --------- ---------- --------- --------- ----------
Balance at December 31, 2001 3,186 32 350,801 (15,841) 14,395) (20,879) (1,208) (396) 298,114
Comprehensive income (loss) - - - (111,530) 13,359 (40,822) - - 138,993)
Issuance of common stock - - 21 - - - - - 21
Stock award cancellations (1) - (66) - - - - 66 -
Amortization of deferred
compensation, net of effects of
stock award cancellations - - - - - - - 208 208
Other - - 133 - - - - (133) -
------- ------ ---------- ---------- --------- ---------- --------- --------- ----------
Balance at December 31, 2002 3,185 32 350,889 (127,371) (1,036) (61,701) (1,208) (255) 159,350
Comprehensive income (loss) - - - (13,057) 11,443 1,068 - - (546)
Issuance of common stock 3 - 72 - - - - - 72
Stock award cancellations (7) - (318) - - - - 318 -
Amortization of deferred
compensation, net of effects of
stock award cancellations - - - - - - - (119) (119)
------- ------ ---------- ---------- --------- ---------- --------- --------- ----------
Balance at December 31, 2003 3,181 $ 32 $ 350,643 $(140,428) $ 10,407 $ (60,633) $ (1,208) $ (56) $ 158,757
======= ====== ========== ========== ========= ========== ========= ========= ==========
See accompanying notes to consolidated financial statements.
F-9
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation
Titanium Metals Corporation ("TIMET") is a vertically integrated producer
of titanium sponge, melted products and a variety of mill products for
aerospace, industrial and other applications. The accompanying Consolidated
Financial Statements include the accounts of TIMET and all of its majority-owned
subsidiaries (collectively, the "Company") except the TIMET Capital Trust I (the
"Capital Trust"), a wholly-owned subsidiary which was deconsolidated at December
31, 2003 and for which all prior periods were retroactively restated. Such
retroactive restatement did not impact net loss, stockholders' equity or cash
flow from operations for any prior periods. See further discussion in Notes 2
and 12. All material intercompany transactions and balances with consolidated
subsidiaries have been eliminated, and certain prior year amounts have been
reclassified to conform to the current year presentation.
At December 31, 2003, Valhi, Inc. and subsidiaries ("Valhi") held
approximately 40.8% of TIMET's outstanding common stock and approximately 0.4%
of the Capital Trust's outstanding 6.625% mandatorily redeemable convertible
preferred securities, beneficial unsecured convertible securities ("BUCS"). At
December 31, 2003, the Combined Master Retirement Trust ("CMRT"), a trust formed
by Valhi to permit the collective investment by trusts that maintain the assets
of certain employee benefit plans adopted by Valhi and certain related
companies, held approximately 9.0% of TIMET's common stock. TIMET's U.S. pension
plan began investing in the CMRT in the second quarter of 2003; however, the
plan invests only in a portion of the CMRT that does not hold TIMET common
stock. At December 31, 2003, Contran Corporation ("Contran") held directly an
additional 39.8% of the Capital Trust's outstanding BUCS and held, directly or
through subsidiaries, approximately 90% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee. In addition, Mr. Simmons is the
sole trustee of the CMRT and a member of the trust investment committee for the
CMRT. Mr. Simmons may be deemed to control each of Contran, Valhi and TIMET.
Note 2 - Summary of significant accounting policies
Use of estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
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. Estimates are used in
accounting for, among other things, allowances for uncollectible accounts,
inventory allowances, environmental accruals, self insurance accruals, deferred
tax valuation allowances, loss contingencies, fair values of financial
instruments, the determination of discount and other rate assumptions for
pension and postretirement employee benefit costs, asset impairments, useful
lives of property and equipment, asset retirement obligations, restructuring
accruals and other special items. Actual results may, in some instances, differ
from previously estimated amounts. Estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected in the period they are
determined to be necessary.
Cash and cash equivalents. Cash equivalents include highly liquid
investments with original maturities of three months or less.
F-10
Restricted cash and cash equivalents. Restricted cash and cash equivalents
generally consist of certificates of deposit and other interest bearing accounts
collateralizing certain Company obligations. Such restricted amounts are
generally classified as either a current or noncurrent asset depending on the
classification of the obligation to which the restricted amount relates. All
restricted amounts are classified as current at December 31, 2003 and 2002.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Inventories and cost of sales. Inventories include material, labor and
overhead and are stated at the lower of cost or market, net of an allowance for
slow-moving inventories. Approximately one-half of inventories are costed using
the last-in, first-out ("LIFO") method with the balance stated primarily using
an average cost method. Cost of sales includes costs for materials, packing and
finishing, utilities, maintenance and depreciation, shipping and handling, and
salaries and benefits.
Investments. Investments in 20% to 50%-owned joint ventures are accounted
for by the equity method. Additionally, TIMET's 100%-owned investment in the
Capital Trust is accounted for by the equity method as of December 31, 2003, as
further discussed below in the "Recently adopted accounting principles" section
of this Note. Differences between the Company's investment in joint ventures and
its proportionate share of the joint ventures' reported equity are amortized
based upon the respective useful lives of the assets to which the differences
relate, which is generally over not more than 15 years.
Property, equipment and depreciation. Property and equipment are recorded
at cost and depreciated 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. Capitalized software costs are amortized over the
software's estimated useful life, generally three to five years. Maintenance
(including planned major maintenance), repairs and minor renewals are expensed
as incurred and included in cost of sales. Major improvements are capitalized
and depreciated over the estimated period to be benefited. No interest was
capitalized during 2003 or 2002.
Generally, when events or changes in circumstances indicate the carrying
amount of long-lived assets, including property and equipment, may not be
recoverable, the Company prepares an evaluation comparing the carrying amount of
the assets to the undiscounted expected future cash flows of the assets or asset
group. If this comparison indicates the carrying amount is not recoverable, the
amount of the impairment would typically be calculated using discounted expected
future cash flows or appraised values. All relevant factors are considered in
determining whether an impairment exists.
F-11
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, was amortized using the
straight-line method over 15 years and was stated net of accumulated
amortization through December 31, 2001. On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets, and recorded an impairment charge for its remaining goodwill
balance. See Note 7. Patents and other intangible assets, except intangible
pension assets, are amortized using the straight-line method over the periods
expected to be benefited, generally seven to nine years. The Company assesses
the amortization period and recoverability of the carrying amount of patents and
other intangible assets at least annually or when events or circumstances
require, and the effects of revisions are reflected in the period they are
determined to be necessary.
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). Currency transaction gains and
losses are recognized in income currently. The Company recognized net currency
transaction losses of $0.2 million in 2003 and $0.6 million in 2002 and a net
currency transaction gain of $0.1 million in 2001.
Fair value of financial instruments. Carrying amounts of certain of the
Company's financial instruments including, among others, cash and cash
equivalents, accounts receivable, accrued compensation, and other accrued
liabilities approximate fair value because of their short maturities. 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 Company's $207.5 million Subordinated Debentures held by the Capital
Trust were issued at a fixed rate and at December 31, 2003 had $19.0 million of
accrued but unpaid interest outstanding. However, the BUCS issued by the Capital
Trust are publicly traded, and the Company believes they provide the best
available proxy for the fair value of the underlying Subordinated Debentures.
Based upon the last traded value of the BUCS on or before December 31, 2003, the
fair value of the Subordinated Debentures, including the accrued and unpaid
interest, approximated $137 million at December 31, 2003.
Stock-based compensation. The Company has elected the disclosure
alternative prescribed by SFAS No. 123, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure, and has chosen to account for its stock-based employee
compensation related to stock options in accordance with Accounting Principles
Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and its
various interpretations. Under APB No. 25, compensation expense is generally
recognized for fixed stock options for which the exercise price is less than the
market price of the underlying stock on the grant date. All of the Company's
stock options have been granted with exercise prices equal to or in excess of
the market price on the date of grant, and the Company recognized no
compensation expense for fixed stock options in 2003, 2002 or 2001. The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS No. 123 to all
options granted since January 1, 1995:
F-12
Year ended December 31,
-------------------------------------------------------
2003 2002 2001
---------------- ---------------- ----------------
(In thousands)
Net loss, as reported $ (13,057) $ (111,530) $ (41,766)
Less stock option related stock-based
employee compensation expense determined
under SFAS No. 123 (253) (782) (1,711)
---------------- ---------------- ----------------
Pro forma net loss $ (13,311) $ (112,312) $ (43,477)
================ ================ ================
Basic and diluted loss per share:
As reported $ (4.12) $ (35.29) $ (13.26)
================ ================ ================
Pro forma $ (4.20) $ (35.53) $ (13.80)
================ ================ ================
Employee benefit plans. Accounting and funding policies for retirement
plans and postretirement benefits other than pensions ("OPEB") are described in
Note 17.
Revenue recognition. Sales revenue is generally recognized when the Company
has certified that its product meets the related customer specifications, the
product has been shipped, and title and substantially all the risks and rewards
of ownership have passed to the customer. Payments received from customers in
advance of these criteria being met are recorded as customer advances until
earned. Amounts charged to customers for shipping and handling are included in
net sales. Sales revenue is stated net of price and early payment discounts.
Research and development. Research and development expense, which includes
activities directed toward expanding the use of titanium and titanium alloys in
all market sectors, is recorded as selling, general, administrative and
development expense and totaled $2.8 million in 2003, $3.3 million in 2002 and
$2.6 million 2001. Related engineering and experimentation costs associated with
ongoing commercial production are recorded in cost of sales.
Advertising costs. Advertising costs, which are not significant, are
expensed as incurred.
Self insurance. The Company is self insured for certain losses relating to
workers' compensation claims, employee medical benefits, environmental, product
and other liabilities. The Company maintains certain stop loss and other
insurance to reduce its exposure and provides accruals for estimates of known
liabilities and incurred but not reported claims. See Notes 18 and 19.
Income taxes. Deferred income tax assets and liabilities are recognized
based on 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. The Company periodically reviews its deferred tax
assets to determine if future realization is "more-likely-than-not," and a
change in the valuation allowance is recorded in the period it is determined to
be necessary. See Note 16.
F-13
Recently adopted accounting principles. The Company adopted SFAS No. 143,
Accounting for Asset Retirement Obligations, on January 1, 2003. Under SFAS No.
143, the fair value of a liability for an asset retirement obligation covered
under the scope of SFAS No. 143 is recognized in the period in which the
liability is incurred, with an offsetting increase in the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its future
value, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
Under the transition provisions of SFAS No. 143, the Company recognized (i)
an asset retirement cost capitalized as an increase to the carrying value of its
property, plant and equipment of approximately $0.2 million, (ii) accumulated
depreciation on such capitalized cost of approximately $0.1 million and (iii) an
other noncurrent liability for the asset retirement obligation of approximately
$0.3 million. Amounts resulting from the initial application of SFAS No. 143
were measured using information, assumptions and interest rates all as of
January 1, 2003. The amount recognized as the asset retirement cost was measured
as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement obligation and accumulated depreciation on the
asset retirement cost were recognized for the time period from the date the
asset retirement cost and liability would have been recognized had the
provisions of SFAS No. 143 been in effect at the date the liability was
incurred, through January 1, 2003.
The difference between the amounts to be recognized as previously described
and any associated amounts recognized in the Company's balance sheet as of
December 31, 2002 was recognized as a cumulative effect of a change in
accounting principle as of January 1, 2003. The asset retirement obligation
recognized as a result of adopting SFAS No. 143 relates primarily to landfill
closure and leasehold restoration costs.
The following table shows pro forma amounts relating to the Company's asset
retirement obligations as if SFAS No. 143 were applied on January 1, 2002, as
well as a roll forward of the asset retirement obligation through December 31,
2003:
Amount
--------------
(In thousands)
Asset retirement obligation, 1/1/2002 $ 312
Accretion expense 15
--------------
Asset retirement obligation, 12/31/2002 327
New obligations 160
Revisions to cash flow estimates (48)
Accretion expense (1) 14
Currency translation adjustment 34
--------------
Asset retirement obligation, 12/31/2003 $ 487
==============
- --------------------------------------------------------------------------------------------------------------
(1) Reported as a component of other operating expense.
The Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest Entities
(an interpretation of Accounting Research Bulletin No. 51), in January 2003.
Subsequently, in December 2003, FIN 46 was revised and superseded when FASB
Interpretation No. 46 Revised ("FIN 46R") was issued. Both FIN 46 and FIN 46R
address consolidation and/or disclosure by business enterprises of certain
entities, defined as a variable interest entity ("VIE").
F-14
Under the transition requirements of FIN 46R, TIMET is required to adopt
FIN 46R no later than March 31, 2004. However, with respect to any interest in a
special purpose entity ("SPE"), as defined, TIMET must adopt either FIN 46 or
FIN 46R no later than December 31, 2003. TIMET has elected to adopt FIN 46R as
of December 31, 2003, retroactive to January 1, 2001.
If a company has an interest in an entity deemed to be a VIE, then FIN 46R
is applied to determine if consolidation is appropriate. Under FIN 46R, a
company consolidates a VIE if the company is deemed to be the primary
beneficiary, as defined, of that VIE. If a company has an interest in an entity
not deemed to be a VIE, then the SFAS No. 94 model under which consolidation is
based upon control (generally defined as ownership of more than 50% of an
entity) is applied. Entities that were previously consolidated under the SFAS
No. 94 model must still be evaluated to determine if they are a VIE (in which
case FIN 46R would be followed, not SFAS No. 94).
Upon the issuance of FIN 46R, the Company completed a review for
applicability to TIMET relative to (i) the Capital Trust, (ii) TIMET's joint
venture investments in VALTIMET SAS ("VALTIMET") and MZI, LLC ("MZI") and (iii)
TIMET's presently consolidated subsidiaries. The Company believes these are the
only entities possibly covered by the scope of FIN 46R as of December 31, 2003.
Based upon guidance in FIN 46R, the Company concluded that the Capital
Trust is considered to be both an SPE and a VIE. Accordingly, TIMET must comply
with either the guidance in FIN 46 or FIN 46R at December 31, 2003. TIMET has
concluded it is not the primary beneficiary of the Capital Trust, and therefore
TIMET is required to deconsolidate the Capital Trust as of December 31, 2003.
Upon deconsolidation, the Company now reflects its investment in the common
securities issued by the Capital Trust as an asset accounted for by the equity
method and the Subordinated Debentures held by the Capital Trust as long-term
debt. Additionally, interest expense incurred on the Subordinated Debentures is
reported as interest expense, while dividends earned on the common securities
are reported through equity in earnings of the unconsolidated Capital Trust.
Previously, the Company reflected a minority interest related to the BUCS on its
Consolidated Balance Sheets and minority interest dividend expense in its
Consolidated Statements of Operations. All periods presented in this Annual
Report have been retroactively restated, as permitted by FIN 46R, to allow for
comparability with the December 31, 2003 presentation. Such retroactive
restatement did not impact net loss, stockholders' equity or cash flow from
operations for any prior periods. Additionally, all disclosures have been
updated to reflect this new presentation.
VALTIMET and MZI are exempted from the scope of FIN 46R, and the Company's
presently consolidated subsidiaries are not considered to be VIEs under FIN 46R.
Therefore, the current SFAS No. 94 consolidation model continues to apply to all
of these entities.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), Employers'
Disclosures about Pensions and Other Postretirement Benefits ("SFAS No. 132R").
SFAS No. 132R revises employers' disclosures about pension plans and other
postretirement benefit plans but does not change the measurement or recognition
of such plans. SFAS No. 132R retains the disclosure requirements obtained in
SFAS No. 132, Employers' Disclosures about Pensions and Other Postretirement
Benefits, which it replaces. SFAS No. 132R requires additional disclosures
regarding assets, obligations, cash flows and net periodic benefit costs of
defined benefit pension plans and other defined benefit postretirement plans.
See Note 17, which complies with these new disclosure requirements.
F-15
Note 3 - Inventories
December 31,
--------------------------------------
2003 2002
----------------- -----------------
(In thousands)
Raw materials $ 33,198 $ 53,830
Work-in-process 76,573 81,185
Finished products 62,687 63,458
Supplies 12,248 13,829
----------------- -----------------
184,706 212,302
Less adjustment of certain inventories to LIFO basis 18,985 30,370
----------------- -----------------
$ 165,721 $ 181,932
================= =================
Note 4 - Investment in joint ventures
December 31,
--------------------------------------
2003 2002
----------------- -----------------
(In thousands)
Joint ventures:
VALTIMET $ 22,252 $ 22,017
MZI 217 270
----------------- -----------------
$ 22,469 $ 22,287
================= =================
VALTIMET is a manufacturer of welded stainless steel and titanium tubing
with operations in the United States, France and China. At December 31, 2003,
VALTIMET was owned 43.7% by TIMET, 51.3% by Valinox Welded, a French
manufacturer of welded tubing, and 5.0% by Sumitomo Metals Industries, Ltd., a
Japanese manufacturer of steel products.
At December 31, 2003, the unamortized net difference between the Company's
carrying amount of its investment in VALTIMET and its proportionate share of
VALTIMET's net assets was $4.3 million, and is principally attributable to the
difference between the carrying amount and fair value of fixed assets initially
contributed by TIMET. This difference is being amortized over 15 years and
reduces the amount of equity in earnings or increases the amount of equity in
losses that the Company reports related to its investment in VALTIMET.
The consolidated financial statements of VALTIMET reflected the following
summarized financial information:
Year ended December 31,
-----------------------------------------------------------
2003 2002 2001
---------------- ----------------- -----------------
(In thousands)
Net sales $ 89,274 $ 90,318 $ 80,800
Gross margin $ 15,860 $ 18,911 $ 19,017
Net income $ 1,014 $ 4,523 $ 4,251
F-16
December 31,
--------------------------------------
2003 2002
----------------- -----------------
(In thousands)
Current assets $ 53,965 $ 51,806
Noncurrent assets $ 19,778 $ 19,945
Current liabilities $ 26,790 $ 25,010
Noncurrent liabilities $ 1,703 $ 3,966
Minority interest $ 2,848 $ 2,235
MZI provides certain testing services and is 33.3% owned by TIMET with the
remainder owned by another titanium manufacturer.
Note 5 - Preferred securities of Special Metals Corporation ("SMC")
In 1998, the Company purchased $80 million in non-voting convertible
preferred securities (which accrued dividends at the annual rate of 6.625%) of
SMC, a U.S. manufacturer of wrought nickel-based superalloys and special alloy
long products. As previously reported, the Company assessed its investment in
the SMC securities during the fourth quarter of 2001 and recorded a $61.5
million impairment charge to reduce the carrying amount of this investment,
including accrued dividends and interest, to an estimated fair value of $27.5
million as of December 31, 2001. In March 2002, SMC and its U.S. subsidiaries
filed a voluntary petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. As a result, the Company undertook a further assessment of its
investment in SMC and subsequently recorded a $27.5 million impairment charge
during the first quarter of 2002, which reduced the Company's carrying amount of
its investment in the SMC securities to zero. Both of these charges were
classified as other non-operating expenses. Under the terms of SMC's Second
Amended Joint Plan of Reorganization, which was effected by the Bankruptcy Court
on November 26, 2003, the convertible preferred securities were cancelled.
Although the Company does have certain rights as an unsecured creditor under the
SMC Plan of Reorganization related to the unpaid dividends, the Company does not
believe that it will recover any material amount from this investment.
Note 6 - Property and equipment
December 31,
---------------------------------------
2003 2002
------------------ -----------------
(In thousands)
Land $ 6,358 $ 6,224
Buildings 41,700 38,874
Information technology systems 59,782 58,217
Manufacturing and other 318,364 312,163
Construction in progress 6,754 3,493
------------------ -----------------
432,958 418,971
Less accumulated depreciation 193,776 164,299
------------------ -----------------
$ 239,182 $ 254,672
================== =================
F-17
In 2001, the Company recorded a $10.8 million charge to cost of sales for
the impairment of the melting equipment acquired from Wyman-Gordon Company
("Wyman-Gordon") in 1998. The Company completed studies of the potential uses of
this equipment in the foreseeable future as well as the economic viability of
those alternatives, resulting in the determination that the equipment's
undiscounted future cash flows could no longer support its carrying value. The
loss on impairment represented the difference between the equipment's estimated
fair value, as determined through a third-party appraisal, and its previous
carrying amount.
Note 7 - Intangible assets
On January 1, 2002, the Company adopted SFAS No. 142. Under SFAS No. 142,
goodwill is no longer amortized on a periodic basis, but instead is subject to a
two-step impairment test to be performed on at least an annual basis. As a
result of the adoption of SFAS No. 142, the Company recorded a non-cash goodwill
impairment charge of $44.3 million, representing the entire balance of the
Company's recorded goodwill at January 1, 2002. Pursuant to the transition
requirements of SFAS No. 142, this charge has been reported in the Company's
Consolidated Statements of Operations as a cumulative effect of a change in
accounting principle as of January 1, 2002.
The Company has evaluated the remaining useful lives of its intangible
assets with definite lives, comprised of patents and covenants not to compete.
Based on this evaluation, the Company's patents will continue to be amortized
over their weighted average remaining amortization periods of two years as of
December 31, 2003. The Company's covenants not to compete became fully amortized
during the first half of 2003. The carrying amount and accumulated amortization
of the Company's intangible assets are as follows:
December 31, 2003 December 31, 2002
---------------------------------- --------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------------- --------------- -------------- --------------
(In thousands)
Intangible assets:
Definite lives, subject to amortization:
Patents $ 14,475 $ 11,322 $ 13,903 $ 9,375
Covenants not to compete - - 3,967 3,769
Other intangible asset - pension asset (1) 3,141 - 3,716 -
-------------- --------------- -------------- --------------
$ 17,616 $ 11,322 $ 21,586 $ 13,144
============== =============== ============== ==============
- -----------------------------------------------------------------------------------------------------------------------
(1) Not covered by the scope of SFAS No. 142.
F-18
The Company's amortization expense relating to its intangible assets was
$1.7 million in 2003, $2.1 million in 2002 and $2.8 million in 2001. The
estimated aggregate annual amortization expense for the Company's patents for
the next five fiscal years is summarized in the table below:
Estimated Annual
Amortization Expense
----------------------------------
(In thousands)
Year ending December 31,
2004 $ 1,511
2005 $ 963
2006 $ 679
2007 $ -
2008 $ -
Note 8 - Other noncurrent assets
December 31,
---------------------------------------
2003 2002
------------------ -----------------
(In thousands)
Deferred financing costs $ 7,563 $ 8,244
Prepaid pension cost 8,981 7,295
Notes receivable from officers 145 163
Other 3 3
------------------ -----------------
$ 16,692 $ 15,705
================== =================
Note 9 - Accrued liabilities
December 31,
--------------------------------------
2003 2002
----------------- -----------------
(In thousands)
OPEB cost $ 3,135 $ 3,818
Pension cost 8,466 7,969
Payroll and vacation 6,891 6,007
Incentive compensation 579 1,326
Other employee benefits 9,731 11,141
Deferred income 1,664 1,679
Environmental costs 301 803
Accrued tungsten costs 85 2,190
Taxes, other than income 4,408 3,519
Wyman-Gordon installment 2,800 -
Other 7,103 8,059
----------------- -----------------
$ 45,163 $ 46,511
================= =================
F-19
During the third quarter of 2003, the Company and Wyman-Gordon agreed to
terminate the 1998 purchase and sale agreement associated with the formation of
the titanium castings joint venture previously owned by the two parties. The
Company agreed to pay Wyman-Gordon a total of $6.8 million in three quarterly
installments in connection with this termination, which included the termination
of certain favorable purchase terms. The Company recorded a one-time charge for
the entire $6.8 million as a reduction to sales in the third quarter of 2003.
The Company paid the first two installments aggregating $4.0 million to
Wyman-Gordon during 2003 and will pay the remaining $2.8 million in the first
quarter of 2004.
During 2003, the Company reduced its accrual for potential claims related
to the tungsten inclusion matter. See further discussion in Note 19.
During the third quarter of 2002, the Company implemented a program to
reduce global employment levels by approximately 300 employees or approximately
13% of the workforce. Severance costs aggregating $2.4 million were recorded
during the third and fourth quarter of 2002 for actual and probable terminations
based upon benefit agreements and/or arrangements applicable to the affected
salaried and hourly positions. Depending upon the terminated employees' years of
service and payroll classification, severance benefits could include
continuation of pay as well as continuation of certain health and life insurance
benefits. As of December 31, 2003, the Company has made all payments related to
these severance benefits.
In April 2001, the Company reached a settlement of the litigation between
TIMET and The Boeing Company ("Boeing") related to the parties' long-term
agreement ("LTA") entered into in 1997. Under the terms of an agreement with
Boeing entered into in conjunction with the litigation settlement, Boeing is
required to purchase from the Company a buffer inventory of titanium products
for use by the Company in the production of titanium products ordered by Boeing
in the future. As the buffer inventory is completed, Boeing is billed and takes
title to the inventory, although the Company may retain an obligation to further
process the material as directed by Boeing. Accordingly, the revenue and costs
of sales on the buffer inventory is deferred and subsequently recognized at the
time the final product is delivered to Boeing. As of December 31, 2003, $1.6
million of deferred revenue related to the Boeing buffer inventory.
In 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
ingot and stored the material at the Company's facilities. As agreed with the
customer, the customer was billed for and took title to the ingot in 1999;
however, the Company retained an obligation to convert the ingot into mill
products in the future. Accordingly, the revenue (and related cost of sales) on
this product was deferred and subsequently recognized during 2002, 2001 and 2000
in the amounts of $0.1 million, $2.5 million and $13.4 million, respectively.
Effective January 1, 2004, the Company modified the vacation policy for its
U.S. salaried employees. Such employees will no longer accrue their entire
year's vacation entitlement on January 1, but rather will accrue the current
year's vacation entitlement over the course of the year. As a result, in January
2004 the Company reduced its $1.9 million vacation accrual as of December 31,
2003 for these employees to zero.
F-20
Note 10 - Boeing advance
Under the terms of the amended Boeing LTA, in years 2002 through 2007,
Boeing is required to advance TIMET $28.5 million annually less $3.80 per pound
of titanium product purchased by Boeing subcontractors during the preceding
year. The advance relates to Boeing's take-or-pay obligations under the LTA.
Effectively, the Company collects $3.80 less from Boeing than the LTA selling
price for each pound of titanium product sold directly to Boeing and reduces the
related customer advance recorded by the Company. For titanium products sold to
Boeing subcontractors, the Company collects the full LTA selling price, but
gives Boeing credit by reducing the next year's annual advance by $3.80 per
pound of titanium product sold to Boeing subcontractors. The Boeing customer
advance is also reduced as take-or-pay benefits are earned, as described in Note
15. As of December 31, 2003, $0.6 million of customer advances related to the
Company's LTA with Boeing and represented amounts to be credited against the
2004 advance for 2003 subcontractor purchases.
Note 11 - Bank debt and capital lease obligations
December 31,
---------------------------------------
2003 2002
------------------ -----------------
(In thousands)
Notes payable:
U.S. credit agreement $ - $ 11,944
European credit agreements - 1,050
------------------ -----------------
$ - $ 12,994
================== =================
Long-term debt:
Bank credit agreement - U.K. $ - $ 6,401
================== =================
Capital lease obligations $ 10,290 $ 10,217
Less current maturities 524 642
------------------ -----------------
$ 9,766 $ 9,575
================== =================
Long-term bank credit agreements. On October 23, 2002, the Company amended
its existing U.S. asset-based revolving credit agreement, extending the maturity
date to February 2006. Under the terms of the amendment, borrowings are limited
to the lesser of $105 million or a formula-determined borrowing base derived
from the value of accounts receivable, inventory and equipment ("borrowing
availability"). This facility requires the Company's U.S. daily cash receipts to
be used to reduce outstanding borrowings, which may then be reborrowed, subject
to the terms of the agreement. Interest generally accrues at rates that vary
from LIBOR plus 2% to LIBOR plus 2.5%. Borrowings are collateralized by
substantially all of the Company's U.S. assets. The credit agreement prohibits
the payment of distributions on the Capital Trust's BUCS if "excess
availability," as defined, is less than $25 million, limits additional
indebtedness, prohibits the payment of dividends on the Company's common stock
if excess availability is less than $40 million, requires compliance with
certain financial covenants and contains other covenants customary in lending
transactions of this type. The Company was in compliance in all material
respects with all covenants for all periods during the years ended December 31,
2003 and 2002. Excess availability is defined as borrowing availability less
outstanding borrowings and certain contractual commitments such as letters of
credit. As of December 31, 2003, excess availability was approximately $82
million. There were no outstanding borrowings under the U.S. credit agreement as
of December 31, 2003. The weighted average interest rate on borrowings
outstanding under this credit agreement as of December 31, 2002 was 3.7%.
F-21
The Company's U.S. credit agreement allows the lender to modify the
borrowing base formulas at its discretion, subject to certain conditions. During
the second quarter of 2002, the Company's lender elected to exercise such
discretion and modified the Company's borrowing base formulas, which reduced the
amount that the Company could have borrowed against its inventory and equipment
by approximately $7 million. In the event the lender were to exercise this
discretion again in the future, such event could have a material adverse impact
on the Company's liquidity. Borrowings outstanding under this U.S. facility are
classified as a current liability.
The Company's subsidiary, TIMET UK, has a credit agreement that provides
for borrowings limited to the lesser of (pound)22.5 million or a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and property, plant and equipment ("borrowing availability"). The
credit agreement includes revolving and term loan facilities and an overdraft
facility (the "U.K. Facilities") and matures in December 2005. Borrowings under
the U.K. Facilities can be in various currencies including U.S. dollars, British
pounds sterling and euros. Borrowings accrue interest at rates that vary from
LIBOR plus 1% to LIBOR plus 1.25% and are collateralized by substantially all of
TIMET UK's assets. The U.K. Facilities require the maintenance of certain
financial ratios and amounts and other covenants customary in lending
transactions of this type. TIMET UK was in compliance in all material respects
with all covenants for all periods during the years ended December 31, 2003 and
2002. The U.K. overdraft facility is subject to annual review in December of
each year. In the event the overdraft facility is not renewed, the Company
believes it could refinance any outstanding overdraft borrowings under either
the revolving or term loan features of the U.K. Facilities. The overdraft
facility was reviewed and renewed in December 2003. During the second quarter of
2003, TIMET UK received an interest-bearing intercompany loan from a U.S.
subsidiary of the Company enabling TIMET UK to reduce its long-term borrowings
under the U.K. Facilities to zero. Unused borrowing availability as of December
31, 2003 under the U.K. Facilities was approximately $40 million. There were no
outstanding borrowings under the U.K. Facilities as of December 31, 2003. The
weighted average interest rate on borrowings outstanding under the U.K.
Facilities as of December 31, 2002 was 4.6%.
The Company also has overdraft and other credit facilities at certain of
its other European subsidiaries. These facilities accrue interest at various
rates and are payable on demand. Unused borrowing availability as of December
31, 2003 under these facilities was approximately $20 million. There were no
outstanding borrowings under the other European facilities as of December 31,
2003. The weighted average interest rate on borrowings outstanding under these
credit agreements as of December 31, 2002 was 3.7%.
Capital lease obligations. Certain of the Company's U.K. production
facilities are under thirty year leases expiring in 2026. The rents under the
U.K. leases are subject to adjustment every five years based on changes in
certain published price indices. TIMET has guaranteed TIMET UK's obligations
under its leases. Through December 31, 2002, the Company's 70%-owned French
subsidiary, TIMET Savoie, S.A. ("TIMET Savoie"), leased certain machinery and
equipment from Compagnie Europeenne du Zirconium-CEZUS, S.A. ("CEZUS"), the 30%
minority shareholder, under a ten year agreement expiring in 2006. In the first
quarter of 2003, TIMET Savoie purchased the machinery and equipment from CEZUS,
thus terminating the agreement.
At December 31, 2003, certain of the Company's U.S. equipment is held under
three year leases expiring at various times during 2004 and 2005. Capital lease
obligations relating to this equipment approximated $0.4 million in 2004 and
less than five thousand dollars in 2005. In January 2004, the Company purchased
substantially all of the U.S. equipment held under these capital leases for $0.7
million.
F-22
Assets held under capital leases included in buildings were $10.4 million
and $9.4 million, and assets included in equipment were $1.9 million and $2.6
million, at December 31, 2003 and 2002, respectively. The related aggregate
accumulated depreciation for both buildings and equipment was $4.1 million and
$3.5 million at December 31, 2003 and 2002, respectively.
Aggregate maturities of capital lease obligations as of December 31, 2003
are reflected in the following table:
Amount
----------------------
(In thousands)
Year ending December 31,
2004 $ 1,476
2005 1,095
2006 1,089
2007 1,089
2008 1,089
2009 and thereafter 18,126
----------------------
23,964
Less amounts representing interest 13,674
----------------------
$ 10,290
======================
Note 12 - Capital Trust
In November 1996, the Capital Trust issued $201.3 million BUCS and $6.2
million 6.625% common securities. TIMET owns all of the outstanding common
securities of the Capital Trust, and the Capital Trust is a wholly-owned
subsidiary of TIMET. The Capital Trust used the proceeds from such issuance to
purchase from the Company $207.5 million principal amount of TIMET's 6.625%
convertible junior subordinated debentures due 2026 (the "Subordinated
Debentures"). The Subordinated Debentures and accrued interest receivable are
the sole assets of the Capital Trust at December 31, 2003.
Prior to December 31, 2003, the Company consolidated the Capital Trust.
Based on the requirements of FIN 46R, as previously discussed in Note 2, the
Company deconsolidated the Capital Trust as of December 31, 2003, retroactive to
January 1, 2001. Upon such deconsolidation, the Company reflects its investment
in the common securities of the Capital Trust as an asset accounted for by the
equity method, and the Company reflects its debt payable to the Capital Trust as
a long-term liability. All interest payments on the debt are reflected as
interest expense, while dividends earned on the common securities are reported
through equity in earnings of the unconsolidated Capital Trust. Previously, the
Company reflected a minority interest related to the BUCS on its Consolidated
Balance Sheets and minority interest dividend expense in its Consolidated
Statements of Operations.
F-23
TIMET's guarantee of payment of the BUCS (in accordance with the terms
thereof) and its obligations under the Capital Trust documents constitute, in
the aggregate, a full and unconditional guarantee by the Company of the Capital
Trust's obligations under the BUCS. The BUCS represent undivided beneficial
ownership interests in the Capital Trust, are entitled to cumulative preferred
distributions from the Capital 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 0.1339 shares of common stock per BUCS (an equivalent price of $373.40
per share), for an aggregate of approximately 0.5 million common shares if fully
converted. Based on limited trading data, the fair value of the BUCS, including
the accrued and unpaid dividends, was approximately $132.8 million based upon
the last quoted trade on or before December 31, 2003.
The BUCS, which mature December 2026, do not require principal amortization
and are redeemable at the Company's option. The redemption price approximates
102% of the principal amount as of December 1, 2003 and declines annually to
100% on December 1, 2006. The Company's U.S. credit agreement prohibits the
payment of distributions on the BUCS if excess availability, as determined under
the agreement, is less than $25 million. The Subordinated Debentures allow the
Company the right to defer interest payments for a period of up to 20
consecutive quarters, although interest continues to accrue at the coupon rate
on the principal and unpaid interest. Similarly, the Capital Trust is permitted
by the terms of the BUCS to defer its quarterly dividend payments on the BUCS
when TIMET defers interest payment on the Subordinated Debentures. In April
2000, the Company exercised its right to defer future interest payments on the
Subordinated Debentures. On June 1, 2001, the Company resumed interest payments
on the Subordinated Debentures, made the scheduled payment of $3.4 million and
paid the previously deferred aggregate interest of $14.3 million. In October
2002, the Company again exercised its right to defer future interest payments on
the Subordinated Debentures, effective beginning with the Company's December 1,
2002 scheduled interest payment. The Company's Board of Directors will consider
resuming interest payments on the Subordinated Debentures once the longer-term
outlook for the Company's business improves substantially. The Company is
permitted to resume current interest payments at any time; however, payment of
all deferred interest is required to terminate a deferral period.
Based on the deferral, accrued interest on the Subordinated Debentures is
reflected as a long-term liability in the Consolidated Balance Sheet. Interest
on the Subordinated Debentures is recorded as interest expense. Since the
Company exercised its right to defer interest payments, it is unable under the
terms of these securities to, among other things, pay dividends on or reacquire
its capital stock during the deferral period. However, the Company is permitted
to purchase the BUCS during the deferral period provided the Company has
satisfied certain conditions under its U.S. credit facility, including
maintenance of the Company's excess availability of at least $25 million before
and after such purchase.
Note 13 - Minority interest
Minority interest relates principally to the Company's 70%-owned French
subsidiary, TIMET Savoie. The Company has the right to purchase from CEZUS, the
holder of the remaining 30% interest, CEZUS' interest in TIMET Savoie for 30% of
TIMET Savoie's equity determined under French accounting principles, or $11.2
million as of December 31, 2003. CEZUS has the right to require the Company to
purchase its interest in TIMET Savoie for 30% of TIMET Savoie's registered
capital, or $3.2 million as of December 31, 2003. TIMET Savoie made dividend
payments to CEZUS of $1.9 million and $1.1 million during 2003 and 2002,
respectively.
F-24
Note 14 - Stockholders' equity
Preferred stock. At December 31, 2003, the Company was authorized to issue
100,000 shares of preferred stock. The Board of Directors determines the rights
of preferred stock as to, among other things, dividends, liquidation,
redemption, conversions and voting rights.
Common stock. At December 31, 2003, the Company was authorized to issue 9.9
million shares of common stock. The Company's U.S. credit agreement, as amended,
and the Indenture pursuant to which the Subordinated Debentures were issued,
limit the payment of common stock dividends. See Notes 11 and 12.
Restricted stock and common stock options. The Company's 1996 Long-Term
Performance Incentive Plan (the "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.
During 2000, the Company awarded 46,750 shares of TIMET restricted common
stock under the Incentive Plan to certain officers and employees. No shares or
options have been awarded since 2000. The restrictions on the stock grants lapse
ratably on an annual basis over a five-year period. Since holders of restricted
stock have all of the rights of other common stockholders, subject to forfeiture
unless certain periods of employment are completed, all such shares of
restricted stock are considered to be currently issued and outstanding. During
2003, 2002 and 2001, respectively, 2,400, 6,560 and 3,370 shares of restricted
stock were forfeited. The market value of the restricted stock awards was
approximately $2.0 million on the date of grant ($43.75 per share), and this
amount has been recorded as deferred compensation, a separate component of
stockholders' equity. The Company amortizes deferred compensation to expense on
a straight-line basis for each tranche of the award over the period during which
the restrictions lapse. Compensation expense recognized by the Company related
to restricted stock awards was $0.1 million in 2003, $0.2 million in 2002 and
$0.5 million in 2001.
Additionally, the Company offers a separate plan to eligible non-employee
directors (the "Director Plan"). In 2003, the Director Plan provided for annual
grants of between 500 and 2,000 shares of the Company's common stock (dependent
upon the closing price per share of the common stock on the date of the grant)
as partial payment of director fees. In 2002 and 2001, the Director Plan
provided for (i) annual grants of options to purchase 500 shares of the
Company's common stock at a price equal to the market price on the date of grant
and (ii) annual grants of 100 shares of common stock as partial payment of
director fees. Options granted to eligible directors vest in one year and expire
ten years from date of grant (five year expiration for grants prior to 1998).
The weighted average remaining life of options outstanding was 4.5 years at
December 31, 2003 and 4.8 years at December 31, 2002. At December 31, 2003, 2002
and 2001, options to purchase 94,674, 105,386 and 89,594 shares, respectively,
were exercisable at average exercise prices of $194.20, $217.70 and $237.80,
respectively. Options to purchase 10,476 shares become exercisable in 2004 based
on the options outstanding at December 31, 2003. In February 2001, the Director
Plan was amended to authorize an additional 20,000 shares for future grants
under such plan. At December 31, 2003, 156,882 shares and 17,626 shares,
respectively, were available for future grant under the Incentive Plan and the
Director Plan.
F-25
The following table summarizes information about the Company's stock
options:
Amount
payable Weighted Weighted
Exercise upon average average fair
price per exercise exercise value at
Options option (in thousands) price grant date
----------- -------------- -------------- ----------- ------------
Outstanding at December 31, 2000 165,150 $39.40-353.10 $ 32,022 $ 193.90
Granted - at market 3,000 36.00-142.10 362 120.70 $ 81.10
Canceled (12,840) 79.70-353.10 (2,427) 163.50
----------- -------------- -------------- -----------
Outstanding at December 31, 2001 155,310 36.00-353.10 29,957 195.40
Granted - at market 3,000 16.60-38.60 105 34.90 $ 23.00
Canceled (18,568) 79.70-353.10 (3,385) 182.30
----------- -------------- -------------- -----------
Outstanding at December 31, 2002 139,742 16.60-353.10 26,677 190.90
Canceled (29,592) 38.60-353.10 (6,962) 235.30
----------- -------------- -------------- -----------
Outstanding at December 31, 2003 110,150 $16.60-353.10 $ 19,715 $ 179.00
=========== ============== ============== ===========
The following table summarizes the Company's options outstanding and
exercisable as of December 31, 2003 by price range:
Options Outstanding Options Exercisable
---------------------------------------------------------- -----------------------------------
Weighted
average
remaining Weighted Weighted
Range of exercise Outstanding at contractual average Exercisable average
prices 12/31/03 life (in years) exercise price at 12/31/03 exercise price
- -------------------- ----------------- ---------------- ----------------- --------------- ---------------
$ 16.60-35.30 500 9.0 $ 16.60 500 $ 16.60
35.31-70.62 13,000 6.6 62.70 9,000 59.40
70.63-105.93 38,770 5.3 86.20 29,294 85.80
105.94-141.25 5,000 6.1 110.00 3,000 110.00
141.26-176.56 1,000 7.4 142.10 1,000 142.10
211.88-247.18 9,180 2.3 230.00 9,180 230.00
247.19-282.50 11,332 2.9 274.70 11,332 274.70
282.51-317.81 21,968 3.5 293.70 21,968 293.70
317.82-353.10 9,400 3.8 338.70 9,400 338.70
----------------- ---------------- ----------------- --------------- ---------------
110,150 4.5 $ 179.00 94,674 $ 194.20
================= ================ ================= =============== ===============
Weighted average fair values of options at grant date were estimated using
the Black-Scholes model and assumptions listed below (there were no options
granted during 2003):
2002 2001
------------------ -------------------
Assumptions at date of grant:
Expected life (years) 6 7
Risk-free interest rate 2.01% 3.44%
Volatility 74% 68%
Dividend yield 0% 0%
F-26
Note 15 - Other income (expense)
Year ended December 31,
----------------------------------------------------
2003 2002 2001
-------------- -------------- ---------------
(In thousands)
Other operating income (expense):
Boeing settlement, net $ - $ - $ 73,000 (1)
Boeing take-or-pay 23,083 23,408 -
Litigation settlements 1,113 - -
Other, net 193 (126) 420
-------------- -------------- ---------------
$ 24,389 $ 23,282 $ 73,420
============== ============== ===============
Other non-operating income (expense):
Dividends and interest $ 383 $ 118 $ 5,460
Equity in earnings of common securities
of TIMET Capital Trust I 432 413 423
Surety bond guarantee (449) (1,575) -
Impairment of investment in SMC
preferred securities - (27,500) (61,519)
Foreign exchange (loss) gain (189) (587) 92
Other, net (471) (762) 18
-------------- -------------- ---------------
$ (294) $ (29,893) $ (55,526)
============== ============== ===============
- --------------------------------------------------------------------------------------------------------------------
(1) The Boeing settlement includes cash received from Boeing at settlement of
$82.0 million less legal fees of $9.0 million. Additionally, $6.2 million
in related employee incentive compensation was recorded as a component of
selling, general administrative and development expense.
The terms of the amended Boeing LTA allow Boeing to purchase up to 7.5
million pounds of titanium product annually from TIMET through 2007, but limit
TIMET's maximum quarterly volume obligation to 3.0 million pounds. The LTA is
structured as a take-or-pay agreement such that, beginning in calendar year
2002, Boeing forfeits $3.80 per pound of its advance payment in the event that
its orders for delivery are less than 7.5 million pounds in any given calendar
year. The Company recognizes income to the extent Boeing's year-to-date orders
for delivery plus TIMET's maximum quarterly volume obligations for the remainder
of the year total less than 7.5 million pounds. This income is recognized as
other operating income and is not included in sales revenue, sales volume or
gross margin. Based on actual purchases of approximately 1.4 million pounds
during 2003 and 1.3 million pounds during 2002, the Company recognized $23.1
million and $23.4 million of income for the years ended December 31, 2003 and
2002, respectively. Recognition of the take-or-pay income reduces the Boeing
customer advance as described in Note 10.
The Company received $0.5 million and $0.6 million related to its
settlement of certain litigation claims in the first and fourth quarters of
2003, respectively. Both of these settlements were recorded as other operating
income for the year ended December 31, 2003.
F-27
Note 16 - Income taxes
Summarized in the following table are (i) the components of income (loss)
before income taxes and minority interest ("pre-tax income (loss)"), (ii) the
difference between the income tax expense (benefit) attributable to pre-tax
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 pre-tax income (loss) and (iv) the components of the
comprehensive tax provision (benefit):
Year ended December 31,
-------------------------------------------------------
2003 2002 2001
---------------- ---------------- ----------------
(In thousands)
Pre-tax income (loss):
U.S. $ (3,431) $ (64,705) $ (20,569)
Non-U.S. (7,850) (3,181) 11,190
---------------- ---------------- ----------------
$ (11,281) $ (67,886) $ (9,379)
================ ================ ================
Expected income tax expense (benefit), at 35% $ (3,948) $ (23,760) $ (3,283)
Non-U.S. tax rates 696 175 521
U.S. state income taxes, net (1,050) (1,650) 307
Dividends received deduction (312) (241) (1,110)
Extraterritorial income exclusion (140) (373) (462)
Change in valuation allowance:
Effect of change in tax law - (1,797) -
Adjustment of deferred tax valuation allowance 6,196 25,470 34,950
Other, net (235) 224 189
---------------- ---------------- ----------------
$ 1,207 $ (1,952) $ 31,112
================ ================ ================
Income tax expense (benefit):
Current income taxes (benefit):
U.S. $ 30 $ (1,688) $ 787
Non-U.S. 1,436 3,430 3,503
---------------- ---------------- ----------------
1,466 1,742 4,290
---------------- ---------------- ----------------
Deferred income taxes (benefit):
U.S. - - 26,061
Non-U.S. (259) (3,694) 761
---------------- ---------------- ----------------
(259) (3,694) 26,822
---------------- ---------------- ----------------
$ 1,207 $ (1,952) $ 31,112
================ ================ ================
Comprehensive tax provision (benefit) allocable to:
Pre-tax income (loss) $ 1,207 $ (1,952) $ 31,112
Stockholders' equity, including amounts allocated
to other comprehensive income - (1,588) (4,834)
---------------- ---------------- ----------------
$ 1,207 $ (3,540) $ 26,278
================ ================ ================
F-28
The following table summarizes the Company's deferred tax assets and
deferred tax liabilities as of December 31, 2003 and 2002:
December 31,
-----------------------------------------------------------
2003 2002
---------------------------- ---------------------------
Assets Liabilities Assets Liabilities
------------ ------------ ----------- ------------
(In millions)
Temporary differences relating to net assets:
Inventories $ 1.4 $ - $ 0.3 $ -
Property and equipment, including software - (36.7) - (39.6)
Goodwill 8.8 - 10.0 -
Accrued OPEB cost 6.1 - 6.2 -
Accrued liabilities and other deductible differences 36.6 - 59.7 -
Other taxable differences - (9.9) - (3.0)
Tax loss and credit carryforwards 85.5 - 51.0 -
Valuation allowance (91.6) - (84.8) -
------------ ------------ ----------- ------------
Gross deferred tax assets (liabilities) 46.8 (46.6) 42.4 (42.6)
Netting (46.0) 46.0 (41.6) 41.6
------------ ------------ ----------- ------------
Total deferred taxes 0.8 (0.6) 0.8 (1.0)
Less current deferred taxes 0.8 - 0.8 -
------------ ------------ ----------- ------------
Net noncurrent deferred taxes $ - $ (0.6) $ - $ (1.0)
============ ============ =========== ============
The Company has concluded that realization of its previously recorded U.S.
and U.K. deferred tax assets do not meet the "more-likely-than-not" recognition
criteria. Additionally, the Company has determined that it will not recognize a
deferred tax benefit related to future U.S. or U.K. losses or future increases
in the U.S. or U.K. minimum pension liabilities continuing for an uncertain
period of time. The Company increased its U.S. deferred tax valuation allowance
by $0.2 million in 2003, due to additional U.S. losses, and by $40.2 million in
2002, due to additional U.S. losses and increases to the U.S. minimum pension
liability. The Company increased its U.K. deferred tax valuation allowance by
$5.5 million in 2003 and by $7.2 million in 2002 due to additional losses and
increases in the U.K. minimum pension liabilities.
The following table summarizes the components of the change in the
Company's deferred tax asset valuation allowance in 2003, 2002 and 2001:
Year ended December 31,
-------------------------------------------------------
2003 2002 2001
---------------- ---------------- ----------------
(In thousands)
Income before income taxes $ 6,196 $ 23,673 $ 34,950
Cumulative effect of change in accounting principle 60 11,761 -
Accumulated other comprehensive loss (533) 11,966 554
Currency translation adjustment 1,122 - -
---------------- ---------------- ----------------
$ 6,845 $ 47,400 $ 35,504
================ ================ ================
During the first quarter of 2002, the Job Creation and Worker Assistance
Act of 2002 (the "JCWA Act") was signed into law. The Company benefits from
provisions of the JCWA Act, which liberalized certain net operating loss ("NOL")
and alternative minimum tax ("AMT") restrictions. As a result, the Company
recognized $1.8 million of refundable U.S. income taxes during the first quarter
of 2002. The Company received $0.8 million of this refund in the fourth quarter
of 2002 and the remaining $1.0 million in the third quarter of 2003.
F-29
At December 31, 2003 the Company had, for U.S. federal income tax purposes,
NOL carryforwards of $114 million, which will expire in 2020 through 2023. At
December 31, 2003, the Company had, for U.S. federal income tax purposes, a
capital loss carryforward of $89 million, which will expire in 2008. At December
31, 2003, the Company had AMT credit carryforwards of $4 million, which can be
utilized to offset regular income taxes payable in future years. The AMT credit
carryforward has an indefinite carryforward period. At December 31, 2003, the
Company had the equivalent of a $30 million NOL carryforward in the United
Kingdom and a $2 million NOL carryforward in Germany, both of which have
indefinite carryforward periods. At December 31, 2003, the Company had the
equivalent of a $0.3 million NOL carryforward in Italy, which will expire in
2008.
Note 17 - Employee benefit plans
Variable compensation plans. The majority of the Company's worldwide
employees, including a significant portion of its U.S. hourly employees,
participate in compensation programs providing 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
approximately $0.5 million in 2003, $1.3 million in 2002 and $7.2 million in
2001.
Defined contribution plans. Approximately 40% of the Company's worldwide
employees at December 31, 2003 participate in a defined contribution pension
plan with employer contributions based upon a fixed percentage of the employee's
eligible earnings. All of the Company's U.S. hourly and salaried employees (60%
of worldwide employees at December 31, 2003) are also eligible to participate in
contributory savings plans with partial matching employer contributions,
although the Company suspended making such partial matching contributions for
certain employees effective April 1, 2003. The Company will consider resuming
such partial matching contributions for those affected employees in the future.
For approximately 80% of these participants, the Company makes additional
matching contributions based on higher levels of Company annual financial
performance. The cost of these pension and savings plans approximated $1.9
million in 2003, $2.4 million in 2002 and $2.8 million in 2001.
Defined benefit pension plans. The Company maintains contributory and
noncontributory defined benefit pension plans covering the majority of its
European employees and a minority of its U.S. 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 annually contribute amounts satisfying the
funding requirements of the Employee Retirement Income Security Act of 1974, as
amended. The Company's European defined benefit pension plans are funded in
accordance with applicable statutory requirements. Between 1989 and 1995, the
U.S. defined benefit pension plans were closed to new participants and have
remained closed. Additionally, in some cases, benefit levels have been frozen.
As of December 31, 2003, the U.S. plans were merged into one plan. The U.K.
defined benefit plan was closed to new participants in 1996; however, employees
participating in the plan continue to accrue additional benefits based on
increases in compensation and service.
F-30
Information concerning the Company's defined benefit pension plans, based
on a December 31 measurement date, is set forth in the following tables:
Year ended December 31,
---------------------------------------
2003 2002
------------------ -----------------
(In thousands)
Change in projected benefit obligations:
Balance at beginning of year $ 186,609 $ 161,668
Service cost 3,855 3,960
Interest cost 11,087 10,410
Plan amendments - 48
Actuarial loss 16,314 8,825
Benefits paid (9,922) (9,486)
Change in currency exchange rates 15,148 11,184
------------------ -----------------
Balance at end of year $ 223,091 $ 186,609
================== =================
Change in plan assets:
Fair value at beginning of year $ 118,280 $ 135,762
Actual return on plan assets 28,053 (22,436)
Employer contributions 11,817 7,357
Plan participants' contributions 997 716
Benefits paid (9,922) (9,486)
Change in currency exchange rates 9,698 7,290
Other - (923)
------------------ -----------------
Fair value at end of year $ 158,923 $ 118,280
================== =================
Funded status:
Plan assets under projected benefit obligations $ (64,168) $ (68,329)
Unrecognized:
Actuarial loss 79,347 79,382
Prior service cost 3,141 3,716
------------------ -----------------
Total prepaid pension cost $ 18,320 $ 14,769
================== =================
Amounts recognized in balance sheets:
Intangible pension asset $ 3,141 $ 3,716
Noncurrent prepaid pension cost 8,981 7,295
Current pension liability (8,466) (7,969)
Noncurrent pension liability (62,366) (61,080)
Accumulated other comprehensive loss 77,030 72,807
------------------ -----------------
$ 18,320 $ 14,769
================== =================
As of December 31, 2003 and 2002, all of the Company's defined benefit
pension plans have accumulated benefit obligations in excess of fair value of
plan assets. The accumulated benefit obligations were $220.1 million and $179.6
million at December 31, 2003 and 2002, respectively.
F-31
The components of the net periodic pension expense are set forth below:
Year ended December 31,
-------------------------------------------------------
2003 2002 2001
---------------- ---------------- ----------------
(In thousands)
Service cost $ 2,858 $ 3,410 $ 2,919
Interest cost 11,087 10,410 9,534
Expected return on plan assets (9,504) (11,035) (11,737)
Amortization of unrecognized prior service cost 576 479 491
Amortization of net losses 3,875 1,598 241
---------------- ---------------- ----------------
Net pension expense $ 8,892 $ 4,862 $ 1,448
================ ================ ================
The Company used the following discount rate, long-term rate of return
("LTRR") and salary rate increase weighted-average assumptions to arrive at the
aforementioned benefit obligations and net periodic expense:
Significant assumptions used to calculate projected and accumulated
benefit obligations at December 31,
-------------------------------------------------------------------------------------------
2003 2002
--------------------------------------------- ------------------------------------------
Discount Salary increase Discount Salary
rate LTRR rate LTRR increase
-------------- ------------- ---------------- ------------- -------------- -------------
U.S. plans 6.00% 10.00% 2.00% 6.25% 8.50% 2.00%
U.K. plan 5.50% 7.10% 3.25% 5.70% 6.70% 3.00%
Savoie plan 5.50% 5.25% 2.50% 5.70% 6.00% 2.00%
Significant assumptions used to calculate net periodic pension expense
for the year ended December 31,
-------------------------------------------------------------------------------------------
2003 2002 2001
---------------------------- --------------------------- ----------------------------
Discount Discount Discount
rate LTRR rate LTRR rate LTRR
-------------- ------------- -------------- ------------ -------------- -------------
U.S. plans 6.25% 8.50% 7.00% 9.00% 7.25% 9.00%
U.K. plan 5.70% 6.70% 6.00% 7.50% 6.00% 6.00%
Savoie plan 5.70% 6.00% 6.00% 6.00% 6.00% 6.00%
The Company currently expects to make cash contributions of approximately
$11.5 million to its defined benefit pension plans during 2004.
F-32
The assets of the defined benefit pension plans are invested as follows:
December 31,
---------------------------------------
2003 2002
------------------ -----------------
US plan(s):
Equity securities 69.4% 39.5%
Debt securities 23.6% 57.8%
Cash and other 7.0% 2.7%
------------------ -----------------
100.0% 100.0%
================== =================
European plans:
Equity securities 91.9% 84.7%
Debt securities 7.3% 12.6%
Cash and other 0.8% 2.7%
------------------ -----------------
100.0% 100.0%
================== =================
During the second quarter of 2003, the Company transferred all of its U.S.
plans' assets into the CMRT; however, the assets are invested only in a portion
of the CMRT that does not hold TIMET common stock. The CMRT's long-term
investment objective is to provide a rate of return exceeding a composite of
broad market equity and fixed income indices (including the S&P 500 and certain
Russell indices) utilizing both third-party investment managers as well as
investments directed by Mr. Harold C. Simmons. During the 16-year history of the
CMRT from inception (in 1987) through December 31, 2003, the average annual rate
of return earned by the CMRT, as calculated based on the average percentage
change in the CMRT's net asset value per CMRT unit for each applicable year, was
12.7%. The CMRT earned an annual return of 38.4% in 2003, and the CMRT's last
5-year and 10-year average annual returns were 10.1% and 11.1%, respectively.
The CMRT`s trustee and investment committee actively manage the investments
within the CMRT. Such parties have in the past, and may again in the future,
periodically change the relative asset mix based upon, among other things,
advice they receive from third-party advisors and their expectation as to what
asset mix will generate the greatest overall return. Based on the above, the
Company increased its long-term rate of return assumption to 10.0% for December
31, 2003 pension obligations and for 2004 pension expense for its U.S. plan. The
Company believes that such historical volatility is a reasonable indicator of
future levels of volatility, and a higher level of volatility is consistent with
a higher level of risk in the asset mix and a higher level of expected return
over the long-term.
Based on various factors, including improved economic and market
conditions, gains on the plan assets during 2003 and projected asset mix, the
Company increased its assumed long-term rate of return to 7.10% for December 31,
2003 pension obligations and for 2004 pension expense for its U.K. plan. During
2003 the Company switched trustees/investment advisors for the U.K. plan and
modified its asset allocation goals. The Company's future expected long-term
rate of return on plan assets for its U.K. plan is based on an asset allocation
assumption of 80% equity securities and 20% fixed income securities by the end
of 2005 and 60% equity securities and 40% fixed income securities by the end of
2007. The Company believes that the U.K. plan's long-term asset allocation on
average will approximate the ultimate assumed 60/40 allocation, as all current
contributions to the plan are invested wholly in fixed income securities in
order to gradually effect the shift.
F-33
Postretirement benefits other than pensions. The Company provides certain
postretirement health care and life insurance benefits on a cost-sharing basis
to its U.S. bargaining unit employees upon attaining eligibility for retirement
based on previously negotiated agreements. The Company also provides certain
postretirement health care benefits on a cost-sharing basis to a closed group of
salaried employees who reached age 60 by January 1, 2004, and subsequently
become eligible for retirement from active service. Health care coverage under
the plans terminates once the retiree (or eligible dependent) becomes
Medicare-eligible, effectively limiting coverage for most participants to less
than five years. The Company funds such benefits as they are incurred, net of
any contributions by the retirees.
The plan is unfunded and contributions to the plan during the year equal
benefits paid. The components of accumulated OPEB obligations and periodic OPEB
cost, based on a December 31 measurement date, are set forth in the following
tables:
December 31,
---------------------------------------
2003 2002
------------------ -----------------
(In thousands)
Actuarial present value of accumulated OPEB obligations:
Balance at beginning of year $ 27,116 $ 23,245
Service cost 487 565
Interest cost 1,722 1,799
Amendments (2,940) 731
Actuarial loss 5,339 5,383
Benefits paid, net of participant contributions (3,140) (4,607)
------------------ -----------------
Balance at end of year 28,584 27,116
Unrecognized net actuarial loss (14,679) (10,471)
Unrecognized prior service cost 2,891 590
------------------ -----------------
Total accrued OPEB cost 16,796 17,235
Less current portion 3,135 3,818
------------------ -----------------
Noncurrent accrued OPEB cost $ 13,661 $ 13,417
================== =================
Year ended December 31,
-------------------------------------------------
2003 2002 2001
-------------- -------------- -------------
(In thousands)
Service cost $ 487 $ 565 $ 271
Interest cost 1,722 1,799 1,686
Amortization of unrecognized prior service cost (464) (376) (425)
Amortization of net losses 956 905 222
-------------- -------------- -------------
Net OPEB expense $ 2,701 $ 2,893 $ 1,754
============== ============== =============
F-34
The Company used the following weighted-average discount rate and health
care cost trend rate ("HCCTR") assumptions to arrive at the aforementioned
benefit obligations and net periodic expense:
Significant assumptions used to calculate
accumulated OPEB obligation at December 31,
----------------------------------------------------------------
2003 2002
---------------------------- -----------------------------
Discount rate 6.00% 6.25%
Beginning HCCTR 10.35% 11.35%
Ultimate HCCTR 4.00% 4.25%
Ultimate year 2010 2010
Significant assumptions used to calculate net periodic
OPEB expense for the year ended December 31,
------------------------------------------------------------------------------
2003 2002 2001
----------------------- ----------------------- ----------------------
Discount rate 6.25% 7.00% 7.25%
Beginning HCCTR 11.35% 11.15% 8.90%
Ultimate HCCTR 4.25% 5.00% 6.00%
Ultimate year 2010 2010 2010
If the health care cost trend rate were increased by one percentage point
for each year, the aggregate of the service and interest cost components of OPEB
expense would have increased approximately $0.3 million in 2003, and the
actuarial present value of accumulated OPEB obligations at December 31, 2003
would have increased approximately $3.3 million. If the health care cost trend
rate were decreased by one percentage point for each year, the aggregate of the
service and interest cost components of OPEB expense would have decreased
approximately $0.3 million in 2003, and the actuarial present value of
accumulated OPEB obligations at December 31, 2003 would have decreased
approximately $3.6 million.
In December 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "Medicare Act of 2003") was enacted. The Medicare
Act of 2003 introduced a prescription drug benefit under Medicare Part D as well
as a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least equivalent to Medicare Part D. Detailed
regulations necessary to implement the Medicare Act of 2003 have not been
issued, including those that would specify the manner in which plan sponsors
could demonstrate their eligibility to receive the subsidy. Additionally,
certain accounting issues raised by the Medicare Act of 2003, including how to
account for the federal subsidy, are not explicitly addressed by current
existing authoritative guidance. In accordance with FASB Staff Position FAS No.
106-1, the Company has elected to defer accounting for the effects of the
Medicare Act of 2003 until authoritative guidance on how to account for the
federal subsidiary has been issued. Consequently, the Company's accumulated
postretirement benefit obligation and net periodic postretirement benefit cost,
as reflected in the accompanying Consolidated Financial Statements, do not
reflect any effect of the Medicare Act of 2003. Specific authoritative guidance
on the accounting for the federal subsidy is pending, and that guidance, when
issued, could require the Company to change previously reported financial
information, depending on the transition provisions of such guidance.
F-35
Note 18 - Related party transactions
Corporations that may be deemed to be controlled by or affiliated with Mr.
Harold C. Simmons sometimes engage in (i) intercorporate transactions such as
guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds on
open account, and sales, leases and exchanges of assets, including securities
issued by both related and unrelated parties, and (ii) common investment and
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly-held minority equity interest in another related party. The
Company continuously considers, reviews and evaluates such transactions, and
understands that Contran, Valhi and related entities consider, review and
evaluate such transactions. Depending upon the business, tax and other
objectives then relevant, it is possible that the Company might be a party to
one or more such transactions in the future.
Under the terms of various intercorporate services agreements ("ISAs") that
the Company has historically entered into with various related parties,
employees of one company provide certain management, tax planning, financial,
risk management, environmental, administrative, facility or other services to
the other company on a fee basis. Such charges are based upon estimates of the
time devoted by the employees of the provider of the services to the affairs of
the recipient and the compensation of such persons, or the cost of facilities,
equipment or supplies provided. These ISAs are reviewed and approved by the
independent directors of the companies that are parties to the agreements.
In 2003, the Company had an ISA with Tremont LLC, a wholly-owned subsidiary
of Valhi, to provide certain management, financial, environmental, human
resources and other services to Tremont LLC, under which Tremont LLC paid the
Company approximately $0.2 million. The Company had a similar ISA with Tremont
Corporation, Tremont LLC's predecessor, in each of 2002 and 2001 pursuant to
which Tremont Corporation paid the Company approximately $0.4 million per year.
The Company had an ISA with NL Industries, Inc. ("NL"), a majority-owned
subsidiary of Valhi, whereby NL provided certain financial and other services to
TIMET at a cost to TIMET of approximately $0.3 million in each of 2002 and 2001.
The Company renewed this agreement for 2003 at a substantially reduced fee, as
the Company now performs a majority of these services internally. During 2003,
TIMET paid NL approximately $15,000 related to this agreement.
In 2003, the Company entered into an ISA with Contran whereby Contran
provides certain business, financial and other services to TIMET. During 2003,
TIMET paid Contran approximately $0.3 million related to this agreement.
In 2004, the Company, Tremont LLC and Contran agreed to enter into a
single, combined ISA covering the provision of services by Contran to TIMET and
the provision of services by TIMET to Tremont LLC. Under the 2004 combined ISA,
TIMET will pay Contran approximately $1.2 million, representing the net cost of
the Contran services to TIMET less the TIMET services to Tremont LLC.
F-36
The Company previously extended market-rate loans to certain officers
pursuant to a Board-approved program to facilitate the officers' purchase of
Company stock and BUCS and to pay applicable taxes on shares of restricted
Company stock as such shares vested. The loans were generally payable in five
annual installments beginning six years from date of loan and bore interest at a
rate tied to the Company's borrowing rate, payable quarterly. At December 31,
2003, approximately $0.2 million of officer notes receivable remain outstanding.
The Company terminated this program effective July 30, 2002, subject to
continuing only those loans outstanding at that time in accordance with their
then-current terms.
Tall Pines Insurance Company ("Tall Pines"), Valmont Insurance Company
("Valmont") and EWI RE, Inc. ("EWI") provide for or broker certain insurance
policies for Contran and certain of its subsidiaries and affiliates, including
the Company. Tall Pines and Valmont are wholly-owned subsidiaries of Valhi, and
EWI is a wholly-owned subsidiary of NL. Prior to January 2002, an entity
controlled by one of Harold C. Simmons' daughters owned a majority of EWI, and
Contran owned the remainder of EWI. In January 2002, NL purchased EWI from its
previous owners for an aggregate cash purchase price of approximately $9
million. The purchase was approved by a special committee of NL's board of
directors consisting of two of its independent directors, and the purchase price
was negotiated by the special committee based upon its consideration of relevant
factors, including but not limited to due diligence performed by independent
consultants and an appraisal of EWI conducted by an independent third party
selected by the special committee. Consistent with insurance industry practices,
Tall Pines, Valmont and EWI receive commissions from the insurance and
reinsurance underwriters for the policies that they provide or broker. The
Company's aggregate premiums for such policies were approximately $3.8 million
in 2003, $3.4 million in 2002 and $2.8 million in 2001. The Company expects that
these relationships with Tall Pines, Valmont and EWI will continue in 2004.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and affiliates, including the Company, have entered
into a loss sharing agreement under which any uninsured loss is shared by those
entities that have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justify the risk associated
with the potential for any uninsured loss.
TIMET supplies titanium strip to VALTIMET under a long-term contract. The
LTA was entered into in 1997 and expires in 2007. Under the LTA, VALTIMET has
agreed to purchase a certain percentage of its titanium requirements from TIMET
at formula-determined selling prices, subject to certain conditions. Certain
provisions of this contract have been amended in the past and may be amended in
the future to meet changing business conditions. Sales to VALTIMET were $9
million in 2003, $20 million in 2002 and $22 million in 2001.
F-37
Tremont LLC owns 32% of Basic Management, Inc. ("BMI"). Among other things,
BMI provides utility services (primarily water distribution, maintenance of a
common electrical facility and sewage disposal monitoring) to the Company and
other manufacturers within an industrial complex located in Henderson, Nevada.
Power transmission and sewer services are provided on a cost reimbursement
basis, similar to a cooperative, while water delivery is currently provided at
the same rates as are charged by BMI to an unrelated third party. Amounts paid
by the Company to BMI for these utility services were $1.7 million during 2003
and $1.6 million during each of 2002 and 2001. The Company paid BMI an
electrical facilities usage fee of $1.3 million in each of 2003, 2002 and 2001.
This usage fee continues at $1.3 million per year through 2004 and declines to
$0.6 million for 2005, to $0.5 million annually for 2006 through 2009, and
terminates completely after January 2010.
Based on the previous agreements and relationships, receivables from and
payables to related parties included in the Company's Consolidated Balance
Sheets are summarized in the following table:
December 31,
--------------------------------------
2003 2002
----------------- -----------------
(In thousands)
Receivables from related parties:
VALTIMET $ 891 $ 2,398
Notes receivable from officers 163 163
----------------- -----------------
$ 1,054 $ 2,561
================= =================
Payables to related parties:
VALTIMET $ 819 $ 1,246
Contran 71 -
NL 3 -
----------------- -----------------
$ 893 $ 1,246
================= =================
Note 19 - Commitments and contingencies
Long-term agreements. The Company has LTAs with certain major aerospace
customers, including, among others, Boeing, Rolls-Royce plc and its German and
U.S. affiliates ("Rolls-Royce"), United Technologies Corporation ("UTC", Pratt &
Whitney and related companies) and Wyman-Gordon (a unit of Precision Castparts
Corporation ("PCC")). These agreements expire from 2007 through 2008, subject to
certain conditions, and generally provide for (i) minimum market shares of the
customers' titanium requirements or firm annual volume commitments and (ii)
fixed or formula-determined prices (although some contain elements based on
market pricing). Generally, the LTAs require the Company's service and product
performance to meet specified criteria and contain a number of other terms and
conditions customary in transactions of these types. In certain events of
nonperformance by the Company, the LTAs may be terminated early. Although it is
possible that some portion of the business would continue on a non-LTA basis,
the termination of one or more of the LTAs could result in a material and
adverse effect on the Company's business, results of operations, financial
position or liquidity.
F-38
During 2001, the Company recorded a charge of $3.0 million relating to a
titanium sponge supplier's agreement to renegotiate certain components of an
agreement entered into in 1997, including minimum purchase commitments for 1999
through 2001. As of December 31, 2003 and 2002, $1.1 million and $1.7 million,
respectively, of this amount remained accrued and unpaid. In September 2002, the
Company entered into a new agreement with this supplier, effective from January
1, 2002 through December 31, 2007. This new agreement replaced the 1997
agreement. The new agreement requires minimum annual purchases by the Company of
approximately $10 million in 2002 through 2007.
In April 2001, the Company reached a settlement of the litigation between
TIMET and Boeing related to the parties' LTA entered into in 1997. In connection
with the settlement, TIMET and Boeing entered into an amended LTA. See Notes 9,
10 and 15.
TIMET supplies titanium strip to VALTIMET under a long-term agreement. See
Note 18.
Concentration of credit and other risks. Substantially all of the Company's
sales and operating income (loss) are derived from operations based in the U.S.,
the U.K., France and Italy. Approximately 68% of the Company's 2003 net sales
was generated from customers in the aerospace industry (including airframe and
engine construction). As described previously, the Company has LTAs with certain
major aerospace customers, including Boeing, Rolls-Royce, UTC and Wyman-Gordon.
These and other long-term agreements accounted for approximately 41%, 37% and
43% of sales revenue in 2003, 2002 and 2001, respectively. Sales to PCC and
related entities approximated 13% of the Company's sales revenue in 2003. Sales
to Rolls-Royce and other Rolls-Royce suppliers under the Rolls-Royce LTAs
(including direct sales to certain of the PCC-related entities under the terms
of the Rolls-Royce LTAs) represented approximately 15% of the Company's sales
revenue in 2003. The Company's ten largest customers accounted for approximately
38% of sales revenue in 2003, 40% of sales revenue in 2002 and 50% of sales
revenue in 2001. 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.
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 leases will be renewed or
replaced by other leases in the normal course of business. Net rent expense was
$4.0 million in 2003, $5.0 million in 2002 and $6.1 million in 2001.
At December 31, 2003, future minimum payments under noncancellable
operating leases having an initial or remaining term in excess of one year were
as follows:
Amount
-------------------
(In thousands)
Year ending December 31,
2004 $ 2,724
2005 1,497
2006 1,223
2007 380
2008 205
2009 and thereafter 339
-------------------
$ 6,368
===================
F-39
Environmental matters. TIMET and BMI entered into an agreement in 1999
providing that upon payment by BMI of the cost to design, purchase and install
the technology and equipment necessary to allow the Company to stop discharging
liquid and solid effluents and co-products into settling ponds located on
certain lands owned by the Company adjacent to its Henderson, Nevada plant site
(the "TIMET Pond Property"), the Company would convey the TIMET Pond Property to
BMI, at no additional cost. Under this agreement, BMI will pay 100% of the first
$15.9 million of the cost for this project, and TIMET will pay 50% of the cost
in excess of $15.9 million, up to a maximum payment by TIMET of $2 million. The
Company presently expects that the total cost of this project will not exceed
$15.9 million. The Company and BMI are continuing discussions about this project
and also continuing investigation with respect to certain environmental issues
associated with the TIMET Pond Property, including possible groundwater issues.
Under certain circumstances (not presently in effect), TIMET may be
required to restore some portion of the TIMET Pond Property to the condition it
was in prior to TIMET's use of the property, before returning title of the
affected property to BMI. The Company currently believes any liability it may
have under this obligation to be remote. The Company is continuing to
investigate this potential liability, and is presently unable to estimate the
magnitude of such potential liability.
The Company is also continuing assessment work with respect to its own
active plant site in Henderson, Nevada. During 2000, an initial study of certain
groundwater remediation issues at the Company's plant site and other
Company-owned sites within the BMI Complex was completed. The Company accrued
$3.3 million in 2000 based on the undiscounted cost estimates set forth in the
initial study. During 2002, the Company updated this study and accrued an
additional $0.3 million based on revised cost estimates. The Company expects
these accrued expenses to be paid over a period of up to thirty years.
At December 31, 2003, the Company had accrued an aggregate of approximately
$4.2 million for environmental matters, including those discussed above. The
Company records liabilities related to environmental remediation obligations
when estimated future costs are probable and reasonably estimable. Such accruals
are adjusted as further information becomes available or circumstances change.
Estimated future costs are not discounted to their present value. It is not
possible to estimate the range of costs for certain sites. The imposition of
more stringent standards or requirements under environmental laws or
regulations, the results of future testing and analysis undertaken by the
Company at its operating facilities, or a determination that the Company is
potentially responsible for the release of hazardous substances at other sites,
could result in costs in excess of amounts currently estimated to be required
for such matters. No assurance can be given that actual costs will not exceed
accrued amounts or that costs will not be incurred with respect to sites as to
which no problem is currently known or where no estimate can presently be made.
Further, there can be no assurance that additional environmental matters will
not arise in the future.
Legal proceedings. At December 31, 2003, the Company had accrued an
aggregate of $0.4 million for expected costs related to various legal
proceedings. The Company records liabilities related to legal proceedings when
estimated costs are probable and reasonably estimable. Such accruals are
adjusted as further information becomes available or circumstances change.
Estimated future costs are not discounted to their present value. It is not
possible to estimate the range of costs for certain matters. No assurance can be
given that actual costs will not exceed accrued amounts or that costs will not
be incurred with respect to matters as to which no problem is currently known or
where no estimate can presently be made. Further, there can be no assurance that
additional legal proceedings will not arise in the future.
F-40
Other. TIMET is the primary obligor on two $1.5 million workers'
compensation bonds issued on behalf of a former subsidiary, Freedom Forge
Corporation ("Freedom Forge"), which TIMET sold in 1989. The bonds were provided
as part of the conditions imposed on Freedom Forge in order to self-insure its
workers' compensation obligations. Freedom Forge filed for Chapter 11 bankruptcy
protection on July 13, 2001, and discontinued payment on the underlying workers'
compensation claims in November 2001. During 2002, TIMET received notices that
the issuers of the bonds were required to make payments on one of the bonds with
respect to certain of these claims and were requesting reimbursement from TIMET.
Based upon loss projections, the Company accrued $0.9 million in the third
quarter of 2002 and $0.7 million (including $0.1 million in legal fees
reimbursable to the issuer of the bonds) in the fourth quarter of 2002 for this
bond as other non-operating expense. Through December 31, 2003, TIMET has
reimbursed the issuer approximately $0.8 million under this bond and $0.8
million remains accrued for future payments. During 2003, TIMET received notice
that certain claimants had submitted claims under the second bond. Accordingly,
the Company accrued $50,000 for this bond in the third quarter of 2003 and an
additional $0.4 million for this bond in the fourth quarter of 2003 as other
non-operating expense. As of December 31, 2003, payments under the second bond
have been less than $0.1 million, and $0.4 million remains accrued for future
payments. TIMET may revise its estimated liability under these bonds in the
future as additional facts become known or claims develop.
As of December 31, 2003, the Company has $0.1 million accrued for pending
customer claims associated with certain standard grade material produced by the
Company which was found (in March 2001) to contain tungsten inclusions as a
result of tungsten contaminated silicon sold to the Company by a third-party
supplier. Based upon an analysis of information pertaining to asserted and
unasserted claims during the third quarter of 2003, the Company revised its
estimate of probable loss and reduced its accrual for pending and future
customer claims, resulting in a $1.7 million reduction in cost of sales during
the third quarter of 2003. The Company has paid $1.1 million in claims related
to this matter since initial identification through December 31, 2003. All
pending claims have been investigated, and subsequent to December 31, 2003, the
final pending claim was resolved for less than the accrued amount. However,
there is no assurance that all potential claims have been submitted to the
Company. The Company has filed suit seeking full recovery from its silicon
supplier for any liability the Company has incurred or might incur, although no
assurance can be given that the Company will ultimately be able to recover all
or any portion of such amounts. In April 2003, the Company received notice that
this silicon supplier had filed a voluntary petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. TIMET's motion for relief from the
automatic stay in bankruptcy was granted in the fourth quarter of 2003. The
Company has not recorded any recoveries related to this matter as of December
31, 2003.
The Company is involved in various employment, environmental, contractual,
product liability and other claims, disputes and litigation incidental to its
business including those discussed above. While management currently believes
that the outcome of these matters, individually and in the aggregate, will not
have a material adverse effect on the Company's financial position, liquidity or
overall trends in results of operations, all such matters are subject to
inherent uncertainties. Were an unfavorable outcome to occur in any given
period, it is possible that it could have a material adverse impact on the
results of operations or cash flows in that particular period.
F-41
Note 20 - Earnings per share
Basic earnings (loss) per share is based on the weighted average number of
unrestricted common shares outstanding during each year. Diluted earnings (loss)
per share reflect the dilutive effect of common stock options, restricted stock
and the assumed conversion of the BUCS, if applicable. Basic and diluted
earnings (loss) per share amounts for all periods presented have been
retroactively adjusted for the effects of the Company's one-for-ten reverse
stock split, which was effective after the close of trading on February 14,
2003. The assumed conversion of the BUCS was omitted from the diluted earnings
(loss) per share calculation for 2003, 2002 and 2001 because the effect was
antidilutive. Had the BUCS not been antidilutive, diluted losses would have been
decreased by $14.0 million in 2003, $13.4 million in 2002 and $13.9 million in
2001. Diluted average shares outstanding would have been increased by
approximately 540,000 shares for each of these periods from the assumed
conversion of the BUCS. Stock options and restricted shares excluded from the
calculation because they were antidilutive were 119,337 in 2003, 140,798 in 2002
and 162,764 in 2001.
Note 21 - Segment information
The Company's production facilities are located in the United States,
United Kingdom, France and Italy, and its products are sold throughout the
world. The Company's worldwide integrated activities are conducted through its
"Titanium melted and mill products" segment, currently the Company's only
segment. Sales, gross margin, operating income (loss), inventory and receivables
are the key management measures used to evaluate segment performance. The
following table provides supplemental segment information to the Company's
Consolidated Financial Statements:
Year ended December 31,
-------------------------------------------------------
2003 2002 2001
---------------- --------------- ----------------
($ in thousands, except selling price data)
Titanium melted and mill products:
Mill product net sales $ 279,563 $ 278,204 $ 363,257
Melted product net sales 57,409 34,800 64,063
Other product sales 55,132 53,497 59,615
Other (1) (6,800) - -
---------------- --------------- ----------------
$ 385,304 $ 366,501 $ 486,935
================ =============== ================
Mill product shipments:
Volume (metric tons) 8,875 8,860 12,180
Average price ($ per kilogram) $ 31.50 $ 31.40 $ 29.80
Melted product shipments:
Volume (metric tons) 4,725 2,400 4,415
Average price ($ per kilogram) $ 12.15 $ 14.50 $ 14.50
F-42
Year ended December 31,
-------------------------------------------------------
2003 2002 2001
---------------- --------------- ----------------
(In thousands)
Geographic segments:
Net sales - point of origin:
United States $ 340,616 $ 311,194 $ 399,708
United Kingdom 111,313 91,467 139,210
Other Europe 75,443 68,487 70,079
Other (1) (6,800) - -
Eliminations (135,268) (104,647) (122,062)
---------------- --------------- ----------------
$ 385,304 $ 366,501 $ 486,935
================ =============== ================
Net sales - point of destination:
United States $ 217,653 $ 193,740 $ 247,410
Europe 149,424 145,118 188,729
Other locations 25,027 27,643 50,796
Other (1) (6,800) - -
---------------- --------------- ----------------
$ 385,304 $ 366,501 $ 486,935
================ =============== ================
Long-lived assets - property and equipment, net:
United States $ 170,400 $ 186,777 $ 208,069
United Kingdom 62,287 62,369 62,463
Other Europe 6,495 5,526 4,776
---------------- --------------- ----------------
$ 239,182 $ 254,672 $ 275,308
================ =============== ================
- ----------------------------------------------------------------------------------------------------------------------
(1) Represents the effect of a $6.8 million reduction to sales during 2003
related to termination of a purchase and sale agreement with Wyman-Gordon.
See further discussion in Note 9.
Export sales from U.S.-based operations approximated $16 million in 2003,
$18 million in 2002 and $37 million in 2001.
F-43
Note 22 - Quarterly results of operations (unaudited)
For the quarter ended
----------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------------- -------------- ------------- -------------
(In millions, except per share data)
Year ended December 31, 2003:
Net sales $ 99.3 $ 101.8 $ 83.6 $ 100.6
Gross margin(1) 1.0 4.4 - 11.7
Operating (loss) income (8.1) (2.1) 1.3 14.3
(Loss) income before cumulative effect of
change in accounting principle (13.4) (6.4) (3.0) 9.9
Net (loss) income $ (13.6) $ (6.4) $ (3.0) $ 9.9
Basic and diluted loss per share:
Before cumulative effect of change in
accounting principle $ (4.23) $ (2.00) $ (0.94) $ 3.11
Basic and diluted loss per share $ (4.29) $ (2.00) $ (0.94) $ 3.11
Year ended December 31, 2002:
Net sales $ 104.4 $ 94.3 $ 82.8 $ 85.0
Gross margin 5.1 1.4 (4.9) (4.7)
Operating loss (1) (4.7) (7.0) (4.4) (4.8)
Loss before cumulative effect of change in
accounting principle (1) (4) (36.1) (12.3) (9.1) (9.6)
Net loss (1) (2) (4) $ (80.4) $ (12.3) $ (9.1) $ (9.6)
Basic and diluted loss per share (2) (3) (4):
Before cumulative effect of change in
accounting principle $ (11.43) $ (3.91) $ (2.89) $ (3.05)
Basic and diluted loss per share
$ (25.47) $ (3.91) $ (2.89) $ (3.05)
- ----------------------------------------------------------------------------------------------------------------------
(1) The sum of quarterly amounts do not agree to the full year results due to
rounding.
(2) As compared to amounts previously reported on Form 10-Q, net loss and loss
per share for the quarter ended March 31, 2002 were increased by the $44.3
million ($14.04 per share) cumulative effect of change in accounting
principle recorded for the Company's goodwill impairment charge determined
during the third quarter of 2002.
(3) The sum of quarterly amounts may not agree to the full year results due to
rounding and the timing of potential conversion of options to common stock,
which would have an antidilutive effect on the calculation. All per share
amounts have been adjusted to reflect the Company's one-for-ten reverse
stock split, which became effective after the close of trading on February
14, 2003.
(4) The first quarter 2002 results included a $27.5 million impairment charge
related to the impairment of the Company's investment in SMC securities, as
discussed in Note 5.
F-44
REPORT OF INDEPENDENT AUDITORS
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 March 2, 2004 appearing in this 2003 Annual Report on Form 10-K of
Titanium Metals Corporation 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.
/s/ PricewaterhouseCoopers LLP
Denver, Colorado
March 2, 2004
S-1
TITANIUM METALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
-----------------------------
Balance Charged
at to Charged Balance
beginning costs and to other at end
Description of year expenses accounts Deductions of year
- ------------------------------------ ------------- ------------- ------------ ------------- ------------
Year ended December 31, 2003:
Allowance for doubtful
accounts $ 2,859 $ 623 $ 144 (1) $ (1,279 (2) $ 2,347
============= ============= ============ ============= ============
Allowance for excess and
slow moving inventories $ 15,090 $ 2,324 $ 1,125 (1) $ (1,816) $ 16,723
============= ============= ============ ============= ============
Reserve for business
restructuring $ 80 $ - $ - $ (80)(3) $ -
============= ============= ============ ============= ============
Year ended December 31, 2002:
Allowance for doubtful
accounts $ 2,739 $ 1,000 $ 152 (1) $ (1,032)(2) $ 2,859
============= ============= ============ ============= ============
Allowance for excess and
slow moving inventories $ 13,621 $ 3,757 $ 901 (1) $ (3,189) $ 15,090
============= ============= ============ ============= ============
Reserve for business
restructuring $ 198 $ - $ - $ (118)(3) $ 80
============= ============= ============ ============= ============
Year ended December 31, 2001:
Allowance for doubtful
accounts $ 2,927 $ 4 $ (22)(1) $ (170)(2) $ 2,739
============= ============= ============ ============= ============
Allowance for excess and
slow moving inventories $ 14,846 $ 1,755 $ (218)(1) $ (2,762) $ 13,621
============= ============= ============ ============= ============
Reserve for business
restructuring $ 1,012 $ (227) $ - $ (587)(3) $ 198
============= ============= ============ ============= ============
- ----------------------------------------------------------------------------------------------------------------------
(1) Amounts represent foreign currency translation adjustments for the related
account.
(2) Amounts written off, credit memos and reductions in reserve, less
recoveries.
(3) Amounts represent cash payments for restructuring severance obligations and
credits to reduce the initial restructuring charge.
S-2