SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended June 30, 2004
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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
- -------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
incorporation ororganization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5600
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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Number of shares of common stock outstanding on August 4, 2004: 3,180,002
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in the Notes to Consolidated Financial Statements and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), are forward-looking statements that represent management's
beliefs and assumptions based on currently available information.
Forward-looking statements can generally 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
assurance that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly affect expected results. Actual future results could differ
materially from those described in such forward-looking statements, and the
Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Among the factors that could cause actual results to differ
materially are the risks and uncertainties discussed in this Quarterly Report,
including risks and uncertainties 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, fluctuations in the market price of
marketable securities, 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, the
completion of the exchange offer related to the 6.625% mandatorily redeemable
convertible preferred securities, beneficial unsecured convertible securities
issued by the TIMET Capital Trust I, the potential for adjustment of the
Company's deferred tax asset valuation allowance and other risks and
uncertainties. Should one or more of these risks materialize (or the
consequences of such a development worsen), or should the underlying assumptions
prove incorrect, actual results could differ materially from those forecasted or
expected.
TITANIUM METALS CORPORATION
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 2004 (unaudited)
and December 31, 2003 2
Consolidated Statements of Operations - Three and six months
ended June 30, 2004 and 2003 (unaudited) 4
Consolidated Statements of Comprehensive Income (Loss) -
Three and six months ended June 30, 2004 and 2003 (unaudited) 5
Consolidated Statements of Cash Flows - Six months ended
June 30, 2004 and 2003 (unaudited) 6
Consolidated Statement of Changes in Stockholders' Equity -
Six months ended June 30, 2004 (unaudited) 8
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 33
Item 4. Controls and Procedures 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 6. Exhibits and Reports on Form 8-K 36
- 1 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2004 2003
-------------------- ------------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 9,216 $ 35,040
Restricted cash and cash equivalents 2,248 2,248
Accounts and other receivables, less allowance
of $1,668 and $2,347 86,286 67,432
Refundable income taxes 207 2,155
Inventories 187,039 165,721
Prepaid expenses and other 1,727 2,604
Deferred income taxes 710 778
-------------------- ------------------
Total current assets 287,433 275,978
Marketable securities 23,118 -
Investment in joint ventures 20,967 22,469
Investment in common securities of TIMET Capital Trust I 6,259 6,794
Property and equipment, net 230,886 239,182
Intangible assets, net 5,545 6,294
Other 17,131 16,692
-------------------- ------------------
Total assets $ 591,339 $ 567,409
==================== ==================
See accompanying Notes to Consolidated Financial Statements
- 2 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
June 30, December 31,
LIABILITIES, MINORITY INTEREST AND 2004 2003
STOCKHOLDERS' EQUITY --------------------- -------------------
(unaudited)
Current liabilities:
Notes payable $ 1,000 $ -
Current maturities of capital lease obligations 170 524
Accounts payable 38,248 29,200
Accrued liabilities 44,535 45,163
Customer advances 27,767 3,356
Income taxes payable 944 11
Other 320 251
--------------------- -------------------
Total current liabilities 112,984 78,505
Capital lease obligations 9,814 9,766
Accrued OPEB cost 13,838 13,661
Accrued pension cost 65,396 62,366
Accrued environmental cost 3,230 3,930
Deferred income taxes 497 637
Accrued interest on debt payable to TIMET Capital Trust I - 19,003
Debt payable to TIMET Capital Trust I 207,465 207,465
Other 1,819 2,188
--------------------- -------------------
Total liabilities 415,043 397,521
--------------------- -------------------
Minority interest 10,791 11,131
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Stockholders' equity:
Preferred stock, $.01 par value; 100 shares authorized,
none issued - -
Common stock, $.01 par value; 9,900 shares authorized,
3,189 and 3,190 shares issued 32 32
Additional paid-in capital 350,635 350,643
Accumulated deficit (140,216) (140,428)
Accumulated other comprehensive loss (43,713) (50,226)
Treasury stock, at cost (9 shares) (1,208) (1,208)
Deferred compensation (25) (56)
--------------------- -------------------
Total stockholders' equity 165,505 158,757
--------------------- -------------------
Total liabilities, minority interest and
stockholders' equity $ 591,339 $ 567,409
===================== ===================
Commitments and contingencies (Note 13)
See accompanying Notes to Consolidated Financial Statements
- 3 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
---------------------------------- ----------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Net sales $ 124,125 $ 101,813 $ 244,613 $ 201,106
Cost of sales 108,639 97,455 216,771 195,730
--------------- --------------- --------------- ---------------
Gross margin 15,486 4,358 27,842 5,376
Selling, general, administrative and
development expense 11,151 9,583 20,668 19,478
Equity in (losses) earnings of joint ventures (149) 228 (232) 413
Other income (expense), net 2,778 2,910 2,853 3,538
--------------- --------------- --------------- ---------------
Operating income (loss) 6,964 (2,087) 9,795 (10,151)
Interest expense 4,088 4,059 8,398 8,259
Other non-operating income (expense), net 159 (161) 897 (577)
--------------- --------------- --------------- ---------------
Income (loss) before income taxes,
minority interest and cumulative effect
of change in accounting principle 3,035 (6,307) 2,294 (18,987)
Income tax expense 799 24 1,321 481
Minority interest, net of tax 371 20 761 283
--------------- --------------- --------------- ---------------
Income (loss) before cumulative effect of
change in accounting principle 1,865 (6,351) 212 (19,751)
Cumulative effect of change in
accounting principle - - - (191)
--------------- --------------- --------------- ---------------
Net income (loss) $ 1,865 $ (6,351) $ 212 $ (19,942)
=============== =============== =============== ===============
Basic and diluted earnings (loss) per share:
Before cumulative effect of change in
accounting principle $ 0.59 $ (2.00) $ 0.07 $ (6.24)
Cumulative effect of change in
accounting principle - - - (0.06)
--------------- --------------- --------------- ---------------
Basic and diluted earnings (loss) per share $ 0.59 $ (2.00) $ 0.07 $ (6.30)
=============== =============== =============== ===============
Weighted average shares outstanding:
Basic 3,176 3,170 3,174 3,167
=============== =============== =============== ===============
Diluted 3,187 3,170 3,183 3,167
=============== =============== =============== ===============
See accompanying Notes to Consolidated Financial Statements
- 4 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
(In thousands)
Three months ended Six months ended
June 30, June 30,
---------------------------------- ----------------------------------
2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Net income (loss) $ 1,865 $ (6,351) $ 212 $ (19,942)
--------------- --------------- --------------- ---------------
Other comprehensive income (loss):
Currency translation adjustment (1,634) 4,830 (18) 4,740
Unrealized gains on marketable
securities 2,135 - 6,585 -
TIMET's share of VALTIMET's
unrealized net losses on
derivative financial instruments
qualifying as cash flow hedges (304) - (54) -
--------------- --------------- --------------- ---------------
Total other comprehensive income 197 4,830 6,513 4,740
--------------- --------------- --------------- ---------------
Comprehensive income (loss) $ 2,062 $ (1,521) $ 6,725 $ (15,202)
=============== =============== =============== ===============
See accompanying Notes to Consolidated Financial Statements
- 5 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
Six months ended June 30,
----------------------------------------
2004 2003
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Cash flows from operating activities:
Net income (loss) $ 212 $ (19,942)
Depreciation and amortization 16,385 18,986
Cumulative effect of change in accounting principle - 191
Equity in earnings of joint ventures, net of distributions 232 (362)
Equity in earnings of common securities of TIMET
Capital Trust I, net of distributions 536 (212)
Deferred income taxes (96) (248)
Minority interest, net of tax 761 284
Other, net (246) 575
Change in assets and liabilities:
Receivables (16,860) (10,953)
Inventories (21,580) 24,862
Prepaid expenses and other 884 497
Accounts payable and accrued liabilities 7,543 (1,226)
Customer advances 23,957 22,691
Income taxes 2,814 (562)
Accrued OPEB and pension costs 2,260 (896)
Accrued interest on debt payable to TIMET Capital Trust I (17,857) 7,083
Other, net (1,328) (543)
------------------- ------------------
Net cash (used) provided by operating activities (2,383) 40,225
------------------- ------------------
Cash flows from investing activities:
Capital expenditures (6,714) (3,579)
Purchase of marketable securities (16,533) -
Other - 37
------------------- ------------------
Net cash used by investing activities (23,247) (3,542)
------------------- ------------------
Cash flows from financing activities:
Indebtedness:
Borrowings 21,070 86,930
Repayments (20,070) (101,079)
Dividends paid to minority interest (691) (1,892)
Other, net (446) (632)
------------------- ------------------
Net cash used by financing activities (137) (16,673)
------------------- ------------------
Net cash (used) provided by operating,
investing and financing activities $ (25,767) $ 20,010
=================== ==================
See accompanying Notes to Consolidated Financial Statements
- 6 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (CONTINUED)
(In thousands)
Six months ended June 30,
----------------------------------------
2004 2003
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Cash and cash equivalents:
Net (decrease) increase from:
Operating, investing and financing activities $ (25,767) $ 20,010
Currency translation (57) 210
------------------ ------------------
(25,824) 20,220
Cash and cash equivalents at beginning of period 35,040 6,214
------------------ ------------------
Cash and cash equivalents at end of period $ 9,216 $ 26,434
------------------ ------------------
Supplemental disclosures:
Cash paid for:
Interest $ 25,860 $ 799
Income taxes, net $ - $ 1,291
See accompanying Notes to Consolidated Financial Statements
- 7 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
Six months ended June 30, 2004
(In thousands)
Accumulated
Additional Other Total
Common Common Paid-In Accumulated Comprehensive Treasury Deferred Stockholders'
Shares Stock Capital Deficit Income (Loss) Stock Compensation Equity
-------- ------- ----------- ----------- ------------ --------- --------- -----------
Balance at December 31, 2003 3,181 $ 32 $ 350,643 $ (140,428) $ (50,226) $ (1,208) $ (56) $ 158,757
Components of comprehensive
income (loss):
Net income - - - 212 - - - 212
Change in cumulative currency
translation adjustment - - - - (18) - - (18)
Unrealized gains on marketable
securities - - - - 6,585 - - 6,585
TIMET's share of VALTIMET's
unrealized net gains on
derivative financial instruments
qualifying as cash flow hedges - - - - (54) - - (54)
Issuance of common stock - - 53 - - - - 53
Stock award cancellations (1) - (61) - - - 61 -
Amortization of deferred
compensation, net of effects of
stock award cancellations - - - - - - (30) (30)
-------- ------- ----------- ----------- ------------ --------- --------- -----------
Balance at June 30, 2004 3,180 $ 32 $ 350,635 $ (140,216) $ (43,713) $ (1,208) $ (25) $ 165,505
======== ======= =========== =========== ============ ========= ========= ===========
See accompanying Notes to Consolidated Financial Statements
- 8 -
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1 - Organization and basis of presentation
Titanium Metals Corporation ("TIMET") is a vertically integrated producer
of titanium sponge, melted products and a variety of mill products for
aerospace, industrial and other applications. The accompanying Consolidated
Financial Statements include the accounts of TIMET and 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 income (loss), stockholders' equity
or cash flow from operations for any prior period. 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. The Consolidated Balance Sheet at June 30, 2004, and the
Consolidated Statements of Operations, Comprehensive Income (Loss), Changes in
Stockholders' Equity and Cash Flows for the interim periods ended June 30, 2004
and 2003, as applicable, have been prepared by the Company without audit in
accordance with accounting principles generally accepted in the United States of
America ("GAAP"). In the opinion of management, all adjustments necessary to
present fairly the consolidated financial position, results of operations and
cash flows have been made. The results of operations for interim periods are not
necessarily indicative of the operating results of a full year or of future
operations. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been condensed or
omitted. The Company's first three fiscal quarters reported are the approximate
13-week periods ending on the Saturday generally nearest to March 31, June 30
and September 30. The Company's fourth fiscal quarter and fiscal year always end
on December 31. For presentation purposes, the Company's Consolidated Financial
Statements and notes thereto have been presented as ending on March 31, June 30,
September 30 and December 31, as applicable. The accompanying Consolidated
Financial Statements should be read in conjunction with the Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2003, as amended (the "2003 Annual Report").
At June 30, 2004, 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 June 30,
2004, 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 8% of TIMET's common stock. TIMET's U.S. pension plans invest in a
portion of the CMRT that does not hold TIMET common stock. At June 30, 2004,
Contran Corporation ("Contran") held, directly or through subsidiaries,
approximately 90% of Valhi's outstanding common stock. Substantially all of
Contran's outstanding voting stock is held by trusts established for the benefit
of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons
is sole trustee, or is held by Mr. Simmons or persons or other entities related
to Mr. Simmons. In addition, Mr. Simmons is the sole trustee of the CMRT and a
member of the trust investment committee for the CMRT. At June 30, 2004, Mr.
Simmons' spouse owned 39.8% of the outstanding BUCS. Mr. Simmons may be deemed
to control each of Contran, Valhi and TIMET.
- 9 -
The Company has elected the disclosure alternative prescribed by Statement
of Financial Accounting Standards ("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 ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and its various interpretations. Under APB Opinion No. 25,
compensation cost is generally recognized for fixed stock options for which the
exercise price is less than the market price of the 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 during the
three and six months ended June 30, 2004 and 2003. The following table
illustrates the effect on net income (loss) and earnings (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:
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- ------------- -------------- -------------
(In thousands, except per share data)
Net income (loss), as reported $ 1,865 $ (6,351) $ 212 $ (19,942)
Less stock option related stock-based
employee compensation expense
determined under SFAS No. 123 (11) (52) (42) (161)
-------------- ------------- -------------- -------------
Pro forma net income (loss) $ 1,854 $ (6,403) $ 170 $ (20,103)
============== ============= ============== =============
Basic and diluted earnings (loss)
per share:
As reported $ 0.59 $ (2.00) $ 0.07 $ (6.30)
============== ============= ============== =============
Pro forma $ 0.59 $ (2.02) $ 0.05 $ (6.35)
============== ============= ============== =============
VALTIMET, the Company's 43.7% owned affiliate accounted for by the equity
method, has entered into certain derivative financial instruments that qualify
as cash flow hedges under GAAP. The Company's pro-rata share of VALTIMET's
unrealized net gains (losses) on such derivative financial instruments is
included as a component of other comprehensive income.
In March 2004 the Company's Board of Directors approved a proposal to amend
the Company's Certificate of Incorporation to increase the number of authorized
shares of the Company's capital stock, one of the purposes of which is to permit
a split of the Company's common stock at a ratio of five shares of post-split
common stock for each outstanding one share of pre-split common stock, to be
effected in the form of a stock dividend following the New York Stock Exchange's
("NYSE") approval of the Company's Supplemental Listing Application ("SLA"). The
Company's Board of Directors approved the stock split at the same time. On
August 5, 2004, the Company's stockholders approved the proposed amendment to
the Company's Certificate of Incorporation. When the stock split is completed
upon approval of the Company's SLA, the Company will retroactively adjust all
earnings per share data for the effect of the stock split in all future filings.
- 10 -
Note 2 - Inventories
June 30, December 31,
2004 2003
------------------- -------------------
(In thousands)
Raw materials $ 49,389 $ 33,198
Work-in-process 85,010 76,573
Finished products 60,646 62,687
Supplies 12,927 12,248
------------------- -------------------
207,972 184,706
Less adjustment of certain inventories to LIFO basis 20,933 18,985
------------------- -------------------
$ 187,039 $ 165,721
=================== ===================
Note 3 - Marketable securities
During the first six months of 2004, the Company purchased 1,365,510 shares
of CompX International, Inc. ("CompX") Class A common stock for an aggregate of
$14.0 million in open market or privately negotiated transactions with
unaffiliated parties, representing approximately 9.0% of the total number of
shares of all classes of CompX common stock outstanding. Valhi and a wholly
owned subsidiary of Valhi own approximately 68.4% of all classes of CompX common
stock outstanding. At June 30, 2004, the quoted market price for CompX's Class A
common stock was $15.00 per share. Subsequent to June 30, 2004 and through
August 4, 2004, the Company purchased an additional 843,110 shares of CompX
Class A common stock for an aggregate of $12.6 million, increasing the Company's
total holdings of all classes of CompX common stock to 14.6%.
During the second quarter of 2004, the Company purchased 221,100 shares of
NL Industries, Inc. ("NL") common stock for an aggregate of $2.5 million in open
market transactions, representing approximately 0.5% of the total number of
shares of NL common stock outstanding. Valhi and a wholly owned subsidiary of
Valhi own an additional 83.4% of NL common stock outstanding. At June 30, 2004,
the quoted market price for NL common stock was $14.50 per share.
The Company's shares of CompX and NL common stock are classified as
noncurrent available-for-sale marketable securities carried at fair value on the
Company's Consolidated Balance Sheet as of June 30, 2004, with all unrealized
gains reported as a component of other comprehensive income.
- 11 -
Note 4 - Property and equipment
June 30, December 31,
2004 2003
------------------- ------------------
(In thousands)
Land and improvements $ 6,372 $ 6,358
Buildings and improvements 41,616 41,700
Information technology systems 60,704 59,782
Manufacturing equipment and other 324,096 318,364
Construction in progress 6,455 6,754
------------------- ------------------
439,243 432,958
Less accumulated depreciation 208,357 193,776
------------------- ------------------
$ 230,886 $ 239,182
=================== ==================
Note 5 - Other noncurrent assets
June 30, December 31,
2004 2003
-------------------- ------------------
(In thousands)
Deferred financing costs $ 7,438 $ 7,563
Prepaid pension cost 9,574 8,981
Notes receivable from officers 119 145
Other - 3
-------------------- ------------------
$ 17,131 $ 16,692
==================== ==================
Note 6 - Accrued liabilities
June 30, December 31,
2004 2003
--------------------- ------------------
(In thousands)
OPEB cost $ 3,095 $ 3,135
Pension cost 6,609 8,466
Payroll and vacation 6,144 6,891
Incentive compensation 5,018 579
Other employee benefits 8,257 9,731
Deferred income 1,544 1,664
Environmental costs 833 301
Taxes, other than income 4,595 4,408
Accrued interest on debt payable to the Capital Trust 1,145 -
Wyman-Gordon installment - 2,800
Other 7,295 7,188
--------------------- ------------------
$ 44,535 $ 45,163
===================== ==================
- 12 -
During the third quarter of 2003, the Company and Wyman-Gordon Company
("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 paid the remaining $2.8
million in the first quarter of 2004.
Effective January 1, 2004, the Company modified the vacation policy for its
U.S. salaried employees. Such employees 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, the Company's
reduced its vacation accrual for these employees from $1.9 million to zero
during the first quarter of 2004, resulting in one-time reductions in cost of
sales of $1.6 million and selling, general, administrative and development
expense of $0.3 million.
See Note 9 with respect to accrued interest on debt payable to the Capital
Trust.
Note 7 - Boeing advance
Under the terms of the amended long-term agreement ("LTA") between TIMET
and The Boeing Company ("Boeing"), in years 2002 through 2007, Boeing is
required to advance TIMET $28.5 million annually less $3.80 per pound of
titanium product purchased by Boeing subcontractors from TIMET 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 of June 30, 2004, approximately $23.1 million of customer advances related to
the Company's LTA with Boeing.
Note 8 - Bank debt
During the first quarter of 2004, the Company amended its U.S. credit
facility to, among other things, allow the Company the flexibility to remove the
equipment component from the determination of the Company's borrowing
availability in order to avoid the costs of an appraisal. The Company took
advantage of this flexibility during the first quarter of 2004, effectively
reducing the Company's current borrowing availability in the U.S. by $12
million. However, the Company can regain this availability by completing an
updated equipment appraisal. As of June 30, 2004, the Company had outstanding
borrowings of $1.0 million under one of its European credit facilities and had
aggregate unused borrowing availability of approximately $147 million under its
U.S. and European credit facilities.
- 13 -
Note 9 - 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 finance
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"). Interest on the Subordinated Debentures is recorded as interest
expense. The Subordinated Debentures and accrued interest receivable were the
sole assets of the Capital Trust at June 30, 2004.
In October 2002, the Company exercised its right to defer future interest
payments on the Subordinated Debentures, effective beginning with the Company's
December 1, 2002 scheduled interest payment. Based on the deferral, accrued
interest on the Subordinated Debentures was reflected as a long-term liability
in the Consolidated Balance Sheet at December 31, 2003. On March 24, 2004, the
Company's Board of Directors approved resumption of scheduled quarterly interest
payments on the Subordinated Debentures beginning with the June 1, 2004 payment.
The Company's Board also approved payment of all previously deferred interest on
the Subordinated Debentures. On April 15, 2004, the Company paid the deferred
interest in the amount of $21.7 million, $21.0 million of which related to the
BUCS.
The Company's Board of Directors and stockholders have approved an exchange
offer, which commenced on July 30, 2004, pursuant to which the Company has
offered to exchange any and all of the outstanding 4,024,820 BUCS issued by the
Capital Trust for shares of a newly created 6.75% Series A Convertible Preferred
Stock to be issued by the Company (the "Series A Preferred Stock") at the
exchange rate of one share of Series A Preferred Stock for each BUCS. When
issued, each share of Series A Preferred Stock will be convertible, in whole or
in part, at any time, at the option of the holder thereof, into one-third of a
share of TIMET common stock (or at a rate of one and two-thirds shares of TIMET
common stock per one share of Series A Preferred Stock, following completion of
the five-for-one stock split discussed in Note 1), subject to adjustment in
certain events. The exchange offer is subject to the satisfaction of several
conditions, including the continued effectiveness of a registration statement
and prospectus on Form S-4.
The holders of shares of the Series A Preferred Stock will be entitled to
receive cumulative cash dividends at the rate of 6.75% of the liquidation
preference per annum per share (equivalent to $3.375 per annum per share), when,
as and if declared by the Company's Board of Directors out of funds of TIMET
legally available for the payment of dividends. The Series A Preferred Stock
will not be mandatorily redeemable, but will be redeemable at the option of the
Company under certain circumstances.
- 14 -
Note 10 - Other income (expense)
Three months ended Six months ended
June 30, June 30,
------------------------------ ------------------------------
2004 2003 2004 2003
-------------- ------------ -------------- ------------
(In thousands)
Other operating income (expense):
Litigation settlement $ - $ - $ - $ 475
Boeing take-or-pay 2,507 2,820 2,507 2,820
Other, net 271 90 346 243
-------------- ------------ -------------- ------------
$ 2,778 $ 2,910 $ 2,853 $ 3,538
============== ============ ============== ============
Other non-operating income (expense):
Interest income $ 35 $ 69 $ 187 $ 181
Equity in earnings of common
securities of the Capital Trust 103 107 217 212
Foreign exchange gains (losses) 99 (257) 571 (887)
Other, net (78) (80) (78) (83)
-------------- ------------ -------------- ------------
$ 159 $ (161) $ 897 $ (577)
============== ============ ============== ============
During the first quarter of 2003, the Company received $0.5 million related
to its settlement of certain litigation relating to power outages suffered at
its Henderson, Nevada facility in 1997 and 1998 as a result of contractor
activity.
Note 11 - Income taxes
Six months ended
June 30,
-----------------------------------------
2004 2003
------------------ -------------------
(In thousands)
Expected income tax expense (benefit), at 35% $ 803 $ (6,645)
Non-U.S. tax rates (166) 193
Incremental tax on earnings of non-U.S. tax group affiliates 125 7
U.S. state income taxes, net (208) (765)
Dividends received deduction (13) (312)
Nontaxable income - (187)
Adjustment of deferred tax valuation allowance 726 8,085
Other, net 54 105
------------------ -------------------
$ 1,321 $ 481
================== ===================
At June 30, 2004, the Company had, for U.S. federal income tax purposes,
(i) net operating loss ("NOL") carryforwards of $119 million that expire in 2020
through 2024, (ii) a capital loss carryforward of $89 million that expires in
2008 and (iii) AMT credit carryforwards of $4 million, which can be utilized to
offset regular income taxes payable in future years, with an indefinite
carryforward period. In addition, at June 30, 2004, the Company had the
equivalent of (i) a $26 million NOL carryforward in the United Kingdom and a $2
million NOL carryforward in Germany, both of which have indefinite carryforward
periods, and (ii) $0.6 million of NOL carryforwards in Italy that expire in 2008
and 2009.
- 15 -
Note 12 - Employee benefits
Defined benefit pension plans. The components of the net periodic pension
expense are set forth below:
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- ------------- -------------- -------------
(In thousands)
Service cost $ 792 $ 712 $ 1,677 $ 1,427
Interest cost 3,143 2,724 6,294 5,459
Expected return on plan assets (3,265) (2,236) (6,534) (4,480)
Amortization of unrecognized
prior service cost 122 144 244 288
Amortization of net losses 1,091 1,059 2,184 2,121
-------------- ------------- -------------- -------------
Net periodic pension expense $ 1,883 $ 2,403 $ 3,865 $ 4,815
============== ============= ============== =============
Through June 30, 2004, the Company has made $4.1 million of cash
contributions to its defined benefit pension plans in 2004 (all of which relate
to the UK plan), and the Company currently expects to make additional cash
contributions of approximately $5.7 million to its defined benefit pension plans
during 2004 ($1.8 million to the US plan and $3.9 million to the UK plan). The
current aggregate estimate for full-year 2004 cash contributions represents a
$1.7 million decrease from estimates as of December 31, 2003, based upon the
effects on the US plan of the Company's application of the Pension Funding
Equity Act of 2004, which was enacted on April 9, 2004.
Postretirement benefits other than pensions. The components of net periodic
OPEB expense are set forth below:
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2004 2003 2004 2003
-------------- ------------- -------------- -------------
(In thousands)
Service cost $ 126 $ 176 $ 253 $ 352
Interest cost 403 385 806 770
Amortization of unrecognized
prior service cost (116) (94) (232) (188)
Amortization of net losses 227 199 454 398
-------------- ------------- -------------- -------------
Net periodic OPEB expense $ 640 $ 666 $ 1,281 $ 1,332
============== ============= ============== =============
- 16 -
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the "Medicare Act of 2003"), enacted in December 2003, introduced a
prescription drug benefit under Medicare (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 actuarially equivalent to Medicare Part D. Detailed regulations
necessary to implement the Medicare Act of 2003 were not issued upon enactment,
including those that would specify the manner in which actuarial equivalency
would be determined, the evidence required to demonstrate actuarial equivalence
and the documentation requirements necessary to receive the subsidy. In
accordance with FASB Staff Position ("FSP") No. 106-1, the Company elected to
defer accounting for the effects of the Medicare Act of 2003 until authoritative
guidance on how to account for such effects was issued. Accordingly, the
Company's accumulated postretirement benefit obligation and net periodic OPEB
cost, as reflected in the accompanying consolidated financial statements, do not
reflect any effect of the federal subsidy because the Company is currently
unable to conclude whether the benefits provided by its plans are actuarially
equivalent. In May 2004, the FASB issued FSP No. 106-2, which is applicable to
the Company beginning in the quarter ended September 30, 2004. FSP No. 106-2
provides guidance on (i) accounting for the effects of the Medicare Act of 2003
once the Company is able to determine actuarial equivalency and (ii) various
required disclosures. Based upon guidance recently issued (in July 2004) by the
Centers for Medicare and Medicaid Services, the Company currently anticipates
being able to determine during the quarter ended September 30, 2004 whether the
benefits provided by its plans are actuarially equivalent, at which time the
Company will account for the effect of the federal subsidy, if any,
prospectively from that date, as permitted by and in accordance with FSP No.
106-2.
Note 13 - Commitments and contingencies
Environmental matters. TIMET and Basic Management, Inc. ("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 modifications to the original project scope and
also to the 1999 agreement, and are 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. In 2000 through 2002, the Company
commissioned studies of certain remediation issues at the Company's plant site
and other Company-owned sites within the BMI Complex. The Company currently has
$3.8 million accrued based on the undiscounted cost estimates of the probable
costs for remediation of these sites. The Company expects these accrued expenses
to be paid over a period of up to thirty years.
- 17 -
As of June 30, 2004, the Company had accrued an aggregate of approximately
$4.1 million for environmental matters, including those discussed above. The
upper end of the range of reasonably possible costs to remediate these matters
is approximately $8.9 million. 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. 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.
Other. TIMET is the primary obligor on workers' compensation bonds (having
a maximum aggregate exposure of $3.0 million) issued on behalf of a divested
subsidiary that is currently under Chapter 11 bankruptcy protection. The issuers
of the bonds have been required to make payments on the bonds for claims and
have requested reimbursement from TIMET. Since the third quarter of 2002, TIMET
has reimbursed the issuers approximately $1.0 million for claims under these
bonds, and $1.0 million remains accrued for future payments as of June 30, 2004.
TIMET may revise its estimated liability under these bonds in the future as
additional facts become known or claims develop.
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.
See the 2003 Annual Report and the March 31, 2004 Quarterly Report for
additional information concerning certain legal and environmental matters,
commitments and contingencies.
- 18 -
Note 14 - Earnings per share
Basic earnings (loss) per share is based on the weighted average number of
unrestricted common shares outstanding during each period. Diluted earnings
(loss) per share reflects the dilutive effect of common stock options,
restricted stock and the assumed conversion of the BUCS. The assumed conversion
of the BUCS was omitted from the diluted earnings (loss) per share calculation
for the three and six months ended June 30, 2004 and 2003 because the effect was
antidilutive. Had the assumed conversion of the BUCS not been antidilutive,
diluted earnings (loss) would have decreased by $3.4 million and $3.5 million,
respectively, for the three months ended June 30, 2004 and 2003 and by $7.0
million and $6.9 million, respectively, for the six months ended June 30, 2004
and 2003. Diluted average shares outstanding would have increased by
approximately 540,000 shares for each of these periods from the assumed
conversion of the BUCS. Stock options to purchase approximately 63,000 shares of
common stock during the three months ended June 30, 2004 and 91,000 shares of
common stock during the six months ended June 30, 2004 were excluded from the
calculation because the options' exercise price was greater than the average
market price of the common shares and were therefore antidilutive during the
respective period. Stock options and restricted shares excluded from the
calculation because they were antidilutive were approximately 130,000 for the
three and six months ended June 30, 2003.
Note 15 - Business segment information
The Company's production facilities are located in the United States,
United Kingdom, France and Italy, and its products are sold throughout the
world. The Company's Chief Executive Officer is the Company's chief operating
decision maker ("CODM") as that term is defined in SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. The CODM receives
financial information about TIMET from which he makes decisions concerning
resource utilization and performance analysis only on a global, consolidated
basis. Based upon this level of decision making, the Company currently has one
segment, its worldwide "Titanium melted and mill products" segment. Sales, gross
margin, operating income (loss), inventory and receivables are the key
management measures used to evaluate segment performance. The following table
provides segment information supplemental to the Company's Consolidated
Financial Statements:
Three months ended Six months ended
June 30, June 30,
--------------------------------- ------------------------------
2004 2003 2004 2003
--------------- -------------- ------------- -------------
($ in thousands, except selling product shipment data)
Titanium melted and mill products:
Melted product net sales $ 18,089 $ 16,252 $ 35,402 $ 29,070
Mill product net sales 89,755 69,760 180,730 143,391
Other product sales 16,281 15,801 28,481 28,645
--------------- -------------- ------------- -------------
$ 124,125 $ 101,813 $ 244,613 $ 201,106
=============== ============== ============= =============
Melted product shipments:
Volume (metric tons) 1,335 1,295 2,755 2,280
Average selling price ($ per kilogram) $ 13.55 $ 12.55 $ 12.85 $ 12.75
Mill product shipments:
Volume (metric tons) 2,900 2,180 5,830 4,495
Average selling price ($ per kilogram) $ 30.95 $ 32.00 $ 31.00 $ 31.90
- 19 -
Note 16 - Accounting principles not yet adopted
In June 2004, the FASB's Emerging Issues Task Force ("EITF") published EITF
03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments. EITF 03-1, which is applicable to the Company beginning
with the quarter ending September 30, 2004, provides guidance for determining
when an investment is considered impaired, whether that impairment is other than
temporary and the measurement date of an impairment loss. Based upon the current
market prices of CompX and NL, EITF 03-1 is not currently applicable to the
Company.
- 20 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Summarized financial information. The following table summarizes certain
information regarding the Company's results of operations for the three and six
months ended June 30, 2004 and 2003. Average selling prices, as reported by the
Company, are a reflection of not just actual selling prices received by the
Company, but also include other related factors such as currency exchange rates
and customer and product mix during 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 the remainder of 2004.
Three months ended Six months ended
June 30, June 30,
--------------------------------- -------------------------------
2004 2003 2004 2003
-------------- --------------- ------------- --------------
($ in thousands)
Net sales $ 124,125 $ 101,813 $ 244,613 $ 201,106
Gross margin $ 15,486 $ 4,358 $ 27,842 $ 5,376
Operating income (loss) $ 6,964 $ (2,087) $ 9,795 $ (10,151)
Gross margin percent of net sales 12% 4% 11% 3%
Percentage change in:
Sales volume:
Melted product sales volume +3 +109 +21 +80
Mill product sales volume +33 +2 +30 -7
Average selling prices - includes
changes in product mix:
Melted products +8 -16 +1 -16
Mill products -3 -3 -3 +2
Selling prices - excludes changes
in product mix:
Melted products +6 -13 +2 -13
Mill products in U.S. dollars +3 -2 +3 -2
Mill products in
billing currencies (1) -2 -8 -2 -7
-------------------------------------------------------------------------------------------------------------------
(1) Excludes the effect of changes in foreign currencies.
- 21 -
Second quarter of 2004 compared to second quarter of 2003. The Company's
melted product sales increased 11% from $16.3 million during the second quarter
of 2003 to $18.1 million during the second quarter of 2004, primarily due to an
8% increase in melted product average selling prices and a 3% increase in melted
product sales volume. Melted products consist of ingot and slab and are
generally sold only in U.S. dollars. Melted product sales volume increased
principally as a result of increased market demands and share gains. Excluding
the effects of changes in product mix, melted product selling prices during the
second quarter of 2004 increased 6% compared to the second quarter of 2003.
The Company's mill product sales increased 29% from $69.8 million during
the second quarter of 2003 to $89.8 million during the second quarter of 2004.
This increase was principally due to a 33% increase in mill product sales volume
primarily due to increased sales to the aerospace (commercial and military
sectors) and industrial markets, partially offset by a 3% decrease in mill
product average selling prices. As compared to the second quarter of 2003, mill
product average selling prices in the second quarter of 2004 were positively
affected by the weakening of the U.S. dollar compared to the British pound
sterling and the euro and negatively affected by changes in product mix.
Gross margin (net sales less cost of sales) was 12% of net sales during the
second quarter of 2004, compared to 4% during the year-ago period. The
improvement in gross margin was primarily a result of improved plant operating
rates (from 59% in the second quarter of 2003 to 72% in the second quarter of
2004) and the Company's continued cost management efforts. Offsetting these
positive effects were charges to cost of sales for (i) a net increase in the
Company's LIFO inventory reserve and (ii) an accrual for potential profit
sharing payments. Due to higher raw material costs (including scrap and alloys),
higher energy costs and increasing book inventories, the Company currently
expects its LIFO inventory reserve to increase at the end of 2004 as compared to
the end of 2003. As a result, the Company increased cost of sales by $1.5
million in the second quarter of 2004. This compared to a decrease in the
Company's LIFO inventory reserve during the second quarter of 2003, which
decreased cost of sales by $0.7 million in the second quarter of 2003.
Additionally, the Company accrued $2.8 million to cost of sales during the
second quarter of 2004 for potential employee profit sharing payments expected
to be paid under the Company's various incentive compensation arrangements, as
compared to an accrual of $0.1 million during the second quarter of 2003.
Selling, general, administrative and development expenses increased 16%
from $9.6 million during the second quarter of 2003 to $11.2 million during the
second quarter of 2004, principally as a result of an $0.8 million accrual
during the second quarter of 2004 for potential payments expected to be paid
under the Company's various incentive compensation arrangements and additional
auditing and consulting costs relative to the Company's compliance with the
Sarbanes-Oxley Act's internal control requirements.
Equity in (losses) earnings of joint ventures decreased from earnings of
$0.2 million during the second quarter of 2003 to a loss of $0.1 million during
the second quarter of 2004, principally due to a decrease in the operating
results of VALTIMET, the Company's minority-owned welded tube joint venture.
Net other income (expense) is primarily related to Boeing take-or-pay
income, which decreased from $2.8 million during the second quarter of 2003 to
$2.5 million during the second quarter of 2004 due to an increase in the amount
of product shipped to Boeing during the current period.
- 22 -
First six months of 2004 compared to first six months of 2003. The
Company's melted product sales increased 22% from $29.1 million during the first
six months of 2003 to $35.4 million during the first six months of 2004,
primarily due to a 21% increase in melted product sales volume and a 1% increase
in melted product average selling prices. Melted product sales volume increased
principally as a result of increased market demand and share gains. Excluding
the effects of changes in product mix, melted product selling prices during the
first six months of 2004 increased 2% compared to the first six months of 2003.
The Company's mill product sales increased 26% from $143.4 million during
the first six months of 2003 to $180.7 million during the first six months of
2004. This increase was principally due to a 30% increase in mill product sales
volume primarily due to increased sales to the aerospace (commercial and
military sectors) and industrial markets, partially offset by a 3% decrease in
mill product average selling prices. As compared to the first six months of
2003, mill product average selling prices in the first six months of 2004 were
positively affected by the weakening of the U.S. dollar compared to the British
pound sterling and the euro and negatively affected by changes in product mix.
Gross margin was 11% of net sales during the first six months of 2004,
compared to 3% during the year-ago period. The improvement in gross margin was
primarily a result of improved plant operating rates (from 55% during the first
six months of 2003 to 72% during the first six months of 2004) and the Company's
continued cost management efforts. Gross margin during the first six months of
2004 was also positively affected by a $1.6 million reduction in cost of sales
related to the Company's elimination of its vacation accrual for U.S. salaried
employees. On January 1, 2004, the Company modified its vacation policy for its
U.S. salaried employees, whereby such employees 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. Additionally, gross
margin was positively affected by the elimination of $1.0 million of previously
recorded rebate accruals that are no longer required. Offsetting these positive
effects were charges to cost of sales for (i) a net increase in the Company's
LIFO inventory reserve and (ii) an accrual for potential profit sharing
payments. Due to higher raw material costs (including scrap and alloys), higher
energy costs and increasing book inventories, the Company currently expects its
LIFO inventory reserve to increase at the end of 2004 as compared to the end of
2003. As a result, the Company increased cost of sales by $1.9 million in the
first six months of 2004. This compared to a decrease in the Company's LIFO
inventory reserve during the first six months of 2003, which decreased cost of
sales by $0.6 million in the first six months of 2003. Additionally, the Company
accrued $3.6 million to cost of sales during the first half of 2004 for
potential employee profit sharing payments expected to be paid under the
Company's various incentive compensation arrangements, as compared to an accrual
of $0.1 million during the first six months of 2003.
Selling, general, administrative and development expenses increased 6% from
$19.5 million during the first six months of 2003 to $20.7 million during the
first six months of 2004, principally as a result of a $1.0 million accrual
during the first half of 2004 for potential payments expected to be paid under
the Company's various incentive compensation arrangements employee profit
sharing and additional auditing and consulting costs incurred relative to the
Company's compliance with the Sarbanes-Oxley Act's internal control
requirements.
Equity in (losses) earnings of joint ventures decreased from earnings of
$0.4 million during the first six months of 2003 to a loss of $0.2 million
during the first six months of 2004, principally due to a decrease in the
operating results of VALTIMET.
- 23 -
Net other income (expense) is primarily related to Boeing take-or-pay
income, which decreased from $2.8 million during the first six months of 2003 to
$2.5 million during the first six months of 2004 due to an increase in the
amount of product shipped to Boeing during the current period. In addition, net
other income (expense) decreased related to the one-time settlement of certain
litigation during the first six months of 2003.
Non-operating income (expense).
Three months ended Six months ended
June 30, June 30,
--------------------------------- -------------------------------
2004 2003 2004 2003
-------------- --------------- ------------- --------------
(In thousands)
Interest expense on debt payable
to the Capital Trust $ (3,495) $ (3,571) $ (7,246) $ (7,083)
Other interest expense (593) (488) (1,152) (1,176)
-------------- --------------- ------------- --------------
$ (4,088) $ (4,059) $ (8,398) $ (8,259)
============== =============== ============= ==============
Interest income $ 35 $ 69 $ 187 $ 181
Equity in earnings of common
securities of the Capital Trust 103 107 217 212
Foreign exchange gains (losses) 99 (257) 571 (887)
Other, net (78) (80) (78) (83)
-------------- --------------- ------------- --------------
$ 159 $ (161) $ 897 $ (577)
============== =============== ============= ==============
Quarterly interest expense on the Company's Subordinated Debentures payable
to the Capital Trust approximates $3.4 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. On March
24, 2004, the Company's Board of Directors approved resumption of scheduled
quarterly interest payments on the Subordinated Debentures beginning with the
payment on June 1, 2004. The Company's Board also approved payment of all
previously deferred interest on the Subordinated Debentures. On April 15, 2004,
the Company paid the deferred interest in the amount of $21.7 million, $21.0
million of which related to the BUCS.
Income taxes. The Company operates in several tax jurisdictions and is
subject to varying income tax rates. As a result, the geographic mix of pretax
income or loss can impact the Company's overall effective tax rate. For the
three and six months ended June 30, 2004 and 2003, the Company's income tax rate
varied from the U.S. statutory rate primarily due to an increase in the deferred
tax valuation allowance related to the Company's tax attributes that did not
meet the "more-likely-than-not" recognition criteria during those periods. See
Note 11 to the Consolidated Financial Statements. The Company's current income
tax expense during the three and six months ended June 30, 2004 and 2003 relates
primarily to its operations in France.
- 24 -
At June 30, 2004, the Company had an aggregate $90 million deferred tax
asset valuation allowance related to certain tax attributes (including net
operating loss carryforwards primarily in the U.S. and United Kingdom) which the
Company currently does not believe meet the "more-likely-than-not" recognition
criteria. However, the Company periodically evaluates the "more-likely-than-not"
recognition criteria with respect to such tax attributes, and it is possible in
the future that the Company may conclude that some of such tax attributes do
meet the recognition criteria, at which time the Company would reverse a portion
of the deferred tax asset valuation allowance related to such attributes.
European operations. The Company has substantial operations located in
Europe, principally the United Kingdom, France and Italy. Approximately 43% of
the Company's sales originated in Europe for the six months ended June 30, 2004,
of which approximately 61% were 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 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 the Company's
results of operations were a gain of $0.1 million during the three months ended
June 30, 2004 and a loss of $0.3 million during the three months ended June 30,
2003. Net currency transaction gains/losses were a gain of $0.6 million during
the six months ended June 30, 2004 and a loss of $0.9 million during the six
months ended June 30, 2003. At June 30, 2004, consolidated assets and
liabilities denominated in currencies other than functional currencies were
approximately $42.5 million and $45.4 million, respectively, consisting
primarily of U.S. dollar cash, accounts receivable and accounts payable.
VALTIMET has entered into certain derivative financial instruments that
qualify as cash flow hedges under GAAP. The Company's pro-rata share of
VALTIMET's unrealized net gains on such derivative financial instruments is
included as a component of other comprehensive income.
Outlook. The "Outlook" section contains a number of forward-looking
statements, all of which are based, unless otherwise noted, 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. Additionally, unless otherwise noted, the
"Outlook" section excludes any potential effects from the BUCS exchange offer
discussed further in the "Liquidity and Capital Resources - Other" section of
this MD&A. Undue reliance should not be placed on these statements, as more
fully discussed in the "Forward-Looking Information" statement of this Quarterly
Report. Actual results may differ materially. See also Notes to the Consolidated
Financial Statements regarding commitments, contingencies, legal matters,
environmental matters and other matters, including new accounting principles,
which could materially affect the Company's future business, results of
operations, financial position and liquidity.
- 25 -
The Company currently expects its full year 2004 sales revenue to range
from $490 million to $510 million, which is a $30 million increase from our
previous guidance, primarily related to significant increases in sales volume
and somewhat higher average selling prices. Melted product sales volume for the
full year 2004 is expected to approximate 5,300 metric tons, a 12% increase over
2003 levels, and mill product sales volume for the full year 2004 is expected to
approximate 11,900 metric tons, a 34% increase over 2003 levels. These increases
reflect expected volume improvements in all key markets - commercial and
military aerospace, industrial and emerging.
The Company currently expects production volume to remain relatively stable
throughout the remainder of 2004, resulting in overall full year 2004 capacity
utilization of approximately 70% to 75%. Capacity utilization was 72% during the
first half of 2004. The Company's backlog of unfilled orders was approximately
$265 million at June 30, 2004, up from $220 million at March 31, 2004 and $140
million at June 30, 2003. Substantially all the June 30, 2004 backlog is
scheduled to ship within the next 12 months. The Company's order backlog may not
be a reliable indicator of future business activity.
The Airline Monitor, a leading aerospace publication, recently issued its
July 2004 forecast for commercial aircraft deliveries, which indicated a
significant increase in large commercial aircraft deliveries in 2005 through
2008 as compared to its January 2004 forecast. Although the U.S. commercial
airline industry continues to struggle financially, this improved forecast is
consistent with the recent signs of an improving global operating environment in
the commercial airline industry, and the Company expects strong sales volumes to
continue in the commercial aerospace sector for the remainder of 2004.
Additionally, the Company expects sales volume growth in emerging markets,
primarily in the military armor sectors, during the second half of 2004.
The Company expects full year 2004 gross margin to range from 9% to 11% of
net sales. 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
expects to manufacture about one-third of its titanium sponge requirements
during 2004. The unit cost in 2004 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 reached full
capacity in the second quarter of 2004. The Company expects the aggregate cost
of purchased sponge and alloys to increase through the remainder of 2004 and
into 2005. Additionally, the industry is currently experiencing higher prices
for scrap, and the Company expects those costs to continue to increase
throughout 2004 and into 2005. When the demand for titanium melted and mill
products begins to increase, the Company's requirements precede the increase in
scrap generation by downstream customers and the supply chain, placing upward
pressure on the market price of scrap. In February 2004, the Company announced
an increase in prices on all non-contract titanium melted and mill products in
an effort to offset the effects of increased raw material and energy costs. In
the event the Company is unable to realize certain of these price increases, the
Company may not be able to meet all demand because of its inability to obtain
certain raw materials at acceptable prices.
- 26 -
Selling, general, administrative and development expenses for 2004 should
approximate $43 million, an increase of $7 million from 2003. This increase
relates primarily to (i) potential employee profit sharing payouts based upon
the Company's various incentive compensation arrangements, (ii) increases in
costs related to the Company's intercompany services agreement with Contran and
(iii) additional auditing and consulting costs expected to be incurred relative
to the Company's compliance with the Sarbanes-Oxley Act's internal control
requirements.
The Company currently 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 income in 2004
under the Boeing LTA's take-or-pay provisions.
The current outlook is for 2004 operating income to range between $28
million and $38 million, which is a $12 million increase from previous guidance.
Excluding the Boeing take-or-pay income, operating income in 2004 is expected to
range from $5 million to $15 million.
Interest expense should approximate $17 million in 2004, including interest
on the Company's Subordinated Debentures held by the Capital Trust.
The Company currently expects 2004 full year net income to range between $8
million and $18 million, which is an $8 million increase from previous guidance.
Excluding the Boeing take-or-pay income, the Company would expect a net loss in
2004 to range from $5 million to $15 million. These net income (loss) estimates,
however, exclude any effects from (i) a non-operating gain the Company may
recognize in the second half of 2004 related to the sale of certain real
property at the Company's Henderson, Nevada facility and (ii) any increase in
net income from the potential for reversal of a portion of the Company's
deferred tax asset valuation allowance at some point in the second half of 2004
(see Results of Operations - Income taxes).
The Company expects its cash flows from operating activities to be slightly
positive during 2004, reflecting in part the 2004 resumption of quarterly
interest payments on the Subordinated Debentures and payment of the $19 million
of deferred interest payments on the Subordinated Debentures that were accrued
as of December 31, 2003. Capital expenditures during 2004 are expected to
approximate $29 million, an increase of $11 million over previous guidance
primarily related to $9 million for the construction of a wastewater
neutralization plant at the Henderson facility (which is scheduled to be
completed in the first half of 2005). Depreciation and amortization should
approximate $33 million in 2004. The Company currently expects its full-year
cash contributions to its defined benefit pension plans to approximate $10
million and expects its pension expense to approximate $8 million in 2004.
- 27 -
The Company's results of operations and cash flows from operating and
financing activities will be affected by the consummation of the BUCS exchange
offer (see Note 9 to the Consolidated Financial Statements), should the offer
close. If 100% of the BUCS were exchanged, the Company's interest expense would
be reduced by $3.4 million per quarter. However, net income available for common
stockholders would reflect the impact of preferred stock dividends of $3.4
million per quarter. Additionally, the Company would recognize either a
non-operating gain or loss on the exchange, which would result from the
difference, if any, between the carrying value of the Subordinated Debentures
eliminated from the Consolidated Balance Sheet and the shares of Series A
Preferred Stock issued in the exchange (which will be recorded at fair value on
the date the exchange is completed), reduced by the carrying value of any
unamortized deferred financing costs related to the BUCS that will be written
off upon exchange. If 100% of the BUCS had been exchanged as of June 30, 2004,
such gain would have been $32.8 million, reflecting the $201.2 million book
value of related Subordinated Debentures, less the $161.9 million estimated fair
value of Series A Preferred Stock (at $40.50 per share, based on the last
reported trade of the BUCS through June 30, 2004 according to NASDAQ's website,
less $1.1 million attributable to accrued and unpaid dividends) and the $6.6
million carrying value of unamortized deferred financing costs.
Non-GAAP financial measures. In an effort to provide investors with
information in addition to the Company's results as determined by 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 melted and mill
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 forecasted 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.
- 28 -
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows for the six months ended June 30,
2004 and 2003 are presented below. The following discussion should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto.
Six months ended June 30,
--------------------------------------------
2004 2003
-------------------- --------------------
(In thousands)
Cash (used) provided by:
Operating activities $ (2,383) $ 40,225
Investing activities (23,247) (3,542)
Financing activities (137) (16,673)
-------------------- --------------------
Net cash (used) provided by operating,
investing and financing activities $ (25,767) $ 20,010
==================== ====================
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 is considered 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 income (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 income. 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.
The Company's bottom line increased from a net loss of $19.9 million for
the six months ended June 30, 2003, to net income of $0.2 million for the six
months ended June 30, 2004.
Accounts receivable increased during the first six months of 2004 and 2003
primarily as a result of increased sales during those respective periods.
Inventories increased during the first six months of 2004 as a result of
increased run rates and related inventory build in order to meet the anticipated
sales volume increases during the next several months, as well as the effects of
increased raw material costs. Inventories decreased during the first six months
of 2003 as a result of higher melted product sales volumes during the first half
of 2003 and the Company's focus on inventory reduction.
- 29 -
Changes in accounts payable and accrued liabilities reflect, among other
things, the timing of payments to suppliers of titanium sponge, titanium scrap
and other raw material purchases. Additionally, accrued liabilities decreased
slightly during the first six months of 2004 due to (i) the $2.8 million final
installment related to termination of the prior Wyman-Gordon agreement and (ii)
a $2.1 million reclassification of the Company's defined benefit pension
liability from current to noncurrent, as the current cash contribution
requirements were reduced significantly based on the Pension Funding Equity Act
of 2004, which were principally offset by the $4.6 million accrual for potential
profit sharing payments.
The increase in customer advances during the first six months of 2004 and
2003 primarily reflects the Company's receipt of the $27.9 million and $27.7
million advances from Boeing in January 2004 and 2003, respectively, partially
offset by the recognition of Boeing-related take-or-pay income and the
application of customer purchases. Under the terms of the amended Boeing LTA, in
years 2002 through 2007, Boeing advances TIMET $28.5 million annually, less
$3.80 per pound of titanium product purchased from TIMET by Boeing
subcontractors during the preceding year.
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 continued to accrue at the coupon rate on the principal and
unpaid interest. On April 15, 2004, the Company paid all previously deferred and
accrued interest in the amount of $21.7 million ($21.0 million of which related
to the BUCS) and on June 1, 2004, the Company resumed its quarterly interest
payments on the Subordinated Debentures. Changes in accrued interest on debt
payable to the Capital Trust reflect this activity. See further discussion in
Note 9 to the Consolidated Financial Statements.
Investing activities. The Company's capital expenditures were $6.7 million
for the six months ended June 30, 2004, compared to $3.6 million for the same
period in 2003, principally for replacement of machinery and equipment and
capacity maintenance. During the first half of 2004, the Company purchased
1,365,510 shares of CompX Class A common stock for $14.0 million and 221,100
shares of NL common stock for $2.5 million. See further discussion in Note 3 to
the Consolidated Financial Statements. Subsequent to June 30, 2004 and through
August 4, 2004, the Company purchased an additional 843,110 shares of CompX
Class A common stock for an aggregate of $12.6 million.
Financing activities. The Company had $1.0 million of net borrowings during
the six months ended June 30, 2004, primarily to support short-term working
capital needs in Italy. Cash used during the six months ended June 30, 2003 was
due primarily to the Company's $14.1 million of net repayments on its
outstanding borrowings upon the Company's receipt of the $27.7 million Boeing
advance in January 2003. In addition, the Company's 70%-owned subsidiary, TIMET
Savoie, S.A. made dividend payments of $0.7 million and $1.9 million during the
second quarter of 2004 and 2003, respectively, to its 30% minority partner.
- 30 -
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"). During the first quarter of 2004, the Company
amended its U.S. credit facility to, among other things, allow the Company the
flexibility to remove the equipment component from the determination of the
Company's borrowing availability in order to avoid the costs of an appraisal.
The Company took advantage of this flexibility during the first quarter of 2004,
effectively reducing the Company's current borrowing availability in the U.S. by
$12 million. However, the Company can regain this availability by completing an
updated equipment appraisal. 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 the
three and six months ended June 30, 2004 and for all periods during the year
ended December 31, 2003. At June 30, 2004, the Company had no outstanding
borrowings and excess availability (defined as borrowing availability less
outstanding borrowings and certain contractual commitments such as letters of
credit) was approximately $90 million, under the U.S. credit agreement.
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 a revolving and term loan facility and an overdraft
facility (the "U.K. Facilities") and matures in December 2005. Borrowings under
the U.K. Facilities can be in various currencies, including U.S. dollars,
British pounds sterling and euros. 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 the three and six months ended June 30, 2004 and for all
periods during the year ended December 31, 2003. At June 30, 2004, the Company
had no outstanding borrowings, and unused borrowing availability was
approximately $41 million, under the U.K. Facilities.
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. At June 30, 2004, the Company had outstanding
borrowings of $1.0 million, and unused borrowing availability was approximately
$16 million, under these facilities.
Legal and environmental matters. See Note 13 to the Consolidated Financial
Statements for discussion of legal and environmental matters, commitments and
contingencies.
- 31 -
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 or redeem
BUCS or Series A Preferred Stock, sell assets, or take a combination of such
steps or other steps to increase or manage its liquidity and capital resources.
In the normal course of business, the Company investigates, evaluates, discusses
and engages in acquisition, joint venture, strategic relationship and other
business combination opportunities in the titanium, specialty metal and 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.
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, 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.
In March 2004 the Company's Board of Directors approved a proposal to amend
the Company's Certificate of Incorporation to increase the number of authorized
shares of the Company's capital stock, one of the purposes of which is to permit
a split of the Company's common stock at a ratio of five shares of post-split
common stock for each outstanding one share of pre-split common stock, to be
effected in the form of a stock dividend following the NYSE approval of the
Company's SLA. The Company's Board of Directors approved the stock split at the
same time. On August 5, 2004, the Company's stockholders approved the proposed
amendment to the Company's Certificate of Incorporation. When the stock split is
completed upon approval of the Company's SLA, the Company will retroactively
adjust all earnings per share data for the effect of the stock split in all
future filings.
The Company's Board of Directors and stockholders have approved an exchange
offer which commenced on July 30, 2004, pursuant to which the Company has
offered to exchange any and all of the outstanding 4,024,820 BUCS issued by the
Capital Trust for shares of newly created Series A Preferred Stock at the
exchange rate of one share of Series A Preferred Stock for each BUCS. When
issued, each share of Series A Preferred Stock will be convertible, in whole or
in part, at any time, at the option of the holder thereof, into one-third of a
share of TIMET common stock (or at a rate of one and two-thirds shares of TIMET
common stock per one share of Series A Preferred Stock, following completion of
the five-for-one stock split discussed above), subject to adjustment in certain
events.
- 32 -
The holders of shares of the Series A Preferred Stock will be entitled to
receive cumulative cash dividends at the rate of 6.75% of the liquidation
preference per annum per share (equivalent to $3.375 per annum per share), when,
as and if declared by the Company's Board of Directors out of funds of TIMET
legally available for the payment of dividends. The Series A Preferred Stock
will not be mandatorily redeemable, but will be redeemable at the option of the
Company under certain circumstances. See further discussion of the exchange
offer in Note 9 to the Consolidated Financial Statements.
This Quarterly Report is not a solicitation or recommendation to security
holders in connection with the exchange offer. Security holders are urged to
read carefully the Company's Prospectus, filed with the SEC and declared
effective as of July 30, 2004, and its Schedule TO, filed with the SEC on July
30, 2004, copies of which have been mailed to all BUCS holders, because these
documents contain important information concerning the exchange offer.
Additional copies of the Prospectus and Schedule TO are available to security
holders without charge by telephone (303-296-5600), in writing (Investor
Relations Department, Titanium Metals Corporation, 1999 Broadway, Suite 4300,
Denver, Colorado 80202) or on TIMET's website at www.timet.com. In addition,
security holders can obtain copies of the Prospectus and Schedule TO filed by
TIMET with the SEC without charge on the SEC's website at www.sec.gov.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a complete discussion of the Company's market risks, refer to the Item
7A, "Quantitative and Qualitative Disclosures About Market Risk," in the 2003
Annual Report. During the six months ended June 30, 2004, the Company purchased
certain publicly-traded marketable equity securities that are exposed to market
risk due to changes in prices of the securities as reported on the New York
Stock Exchange. The fair value of these marketable equity securities at June 30,
2004 was $23.1 million, as compared to a cost basis of $16.5 million. The
potential change in the fair value of these securities, assuming a 10% change in
prices, would be $2.3 million at June 30, 2004. See also Note 3 to the
Consolidated Financial Statements.
Item 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures 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 June 30, 2004. 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.
- 33 -
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;
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 June 30, 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's system of
internal controls over financial reporting.
- 34 -
PART II. - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Note 13 of the Consolidated Financial Statements,
which information is incorporated herein by reference, and to the Company's 2003
Annual Report for descriptions of certain previously reported legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on August 5, 2004, for
the following purposes:
1. To elect seven directors to serve until the 2005 Annual Meeting of
Stockholders and until their successors are duly elected and
qualified. All nominees for director were elected with the following
vote:
Director Votes For Votes Withheld
---------------------- ---------------- --------------------
Norman N. Green 2,800,228 167,674
Gary C. Hutchison 2,798,346 169,556
J. Landis Martin 2,798,596 169,306
Albert W. Niemi, Jr. 2,800,762 167,140
Glenn R. Simmons 2,800,058 167,844
Steven L. Watson 2,800,906 166,996
Paul J. Zucconi 2,799,868 168,034
2. To consider and vote on an amendment to the Company's Amended and
Restated Certificate of Incorporation to increase the number of
authorized shares of the Company's capital stock from 10,000,000
shares (9,900,000 shares of common stock, $.01 par value, and 100,000
shares of preferred stock, $.01 par value) to 100,000,000 shares
(90,000,000 shares of common stock, $.01 par value, and 10,000,000
shares of preferred stock, $.01 par value). The amendment was approved
with the following vote:
Votes For Votes Against
----------------------------- -------------------------
1,958,855 375,089
3. To consider and vote on an exchange offer pursuant to which the
Company would issue shares of newly created Series A Preferred Stock
in exchange for the 6.625% Convertible Preferred Securities,
Beneficial Unsecured Convertible Securities of TIMET Capital Trust I.
The exchange offer was approved with the following vote:
Votes For Votes Against
----------------------------- -------------------------
1,846,199 478,319
- 35 -
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Titanium Metals Corporations, effective August
5, 2004
10.1** First Amendment to Purchase and Sale Agreement between
Rolls-Royce plc and Titanium Metals Corporation
10.2** Second Amendment to Purchase and Sale Agreement between
Rolls-Royce plc and Titanium Metals Corporation
10.3** Termination Agreement by and between Wyman-Gordon Company and
Titanium Metals Corporation, effective as of September 28, 2003
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
** Portions of the exhibit have been omitted pursuant to a request
for confidential treatment.
Note:The Company has retained a signed original of any exhibit listed
above that contains signatures, and the Company will provide any
such exhibit to the SEC or its staff upon request. Such request
should be directed to the attention of the Company's Corporate
Secretary at the Company's corporate offices located at 1999
Broadway, Suite 4300, Denver, Colorado 80202.
(b) Reports on Form 8-K filed by the registrant for the quarter ended June
30, 2004 and through August 5, 2004:
Date of Report Items Reported
------------------------ ------------------------
May 3, 2004 7 and 12
June 28, 2004 9
July 2, 2004 9
August 5, 2004 9 and 12
- 36 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TITANIUM METALS CORPORATION
-------------------------------------
Date: August 5, 2004 By /s/ J. Landis Martin
-------------------------------------
J. Landis Martin
Chairman of the Board, President and
Chief Executive Officer
Date: August 5, 2004 By /s/ Bruce P. Inglis
-------------------------------------
Bruce P. Inglis
Vice President - Finance and Corporate
Controller
- 37 -