SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the fiscal year ended December 31, 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
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(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
1999 Broadway, Suite 4300, Denver, Colorado 80202
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (303) 296-5600
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Securities registered pursuant to Section 12(b) of the Act:
Common Stock ($.01 par value) New York Stock Exchange
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(Title of each class) (Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
6 3/4% Series A Convertible Preferred Stock ($.01 par value)
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No
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As of June 30, 2004, 15,945,010 shares of common stock were outstanding. The
aggregate market value of the 7,465,975 shares of voting stock held by
nonaffiliates of Titanium Metals Corporation as of such date approximated $138.2
million. There are no shares of non-voting stock outstanding. As of March 14,
2005, 15,988,350 shares of common stock were outstanding.
Documents incorporated by reference:
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
Forward-Looking Information
The statements contained in this Annual Report on Form 10-K ("Annual
Report") that are not historical facts, including, but not limited to,
statements found in the Notes to Consolidated Financial Statements and in Item 1
- - Business, Item 2 - Properties, Item 3 - Legal Proceedings and Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), are forward-looking statements that represent management's
beliefs and assumptions based on currently available information.
Forward-looking statements can be identified by the use of words such as
"believes," "intends," "may," "will," "looks," "should," "could," "anticipates,"
"expects" or comparable terminology or by discussions of strategies or trends.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it cannot give any assurances that
these expectations will prove to be correct. Such statements by their nature
involve substantial risks and uncertainties that could significantly affect
expected results. Actual future results could differ materially from those
described in such forward-looking statements, and the Company disclaims any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. Among the
factors that could cause actual results to differ materially are the risks and
uncertainties discussed in this Annual Report, including 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 potential for adjustment of the Company's
deferred income 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.
PART I
ITEM 1: BUSINESS
General. Titanium Metals Corporation ("TIMET" or the "Company") was
originally formed in 1950 and was incorporated in Delaware in 1955. TIMET is one
of the world's leading producers of titanium melted and mill products. The
Company is the only producer with major titanium production facilities in both
the United States and Europe, the world's principal markets for titanium
consumption. TIMET is currently the only major producer of titanium sponge, a
key raw material, in the United States.
Titanium was first manufactured for commercial use in the 1950s. Titanium's
unique combination of corrosion resistance, elevated-temperature performance and
high strength-to-weight ratio makes it particularly desirable for use in
commercial and military aerospace applications where these qualities are
essential design requirements for certain critical parts such as wing supports
and jet engine components. While aerospace applications have historically
accounted for a substantial portion of the worldwide demand for titanium, the
number of non-aerospace end-use markets for titanium has expanded substantially.
Today, numerous industrial uses for titanium exist, including chemical plants,
power plants, desalination plants and pollution control equipment. Demand for
titanium is also increasing in emerging markets with such diverse uses as
offshore oil and gas production installations, military armor, automotive,
geothermal facilities and architectural applications.
TIMET's products include titanium sponge, melted products, mill products
and industrial fabrications. The titanium industry is comprised of several
manufacturers that, like TIMET, produce a relatively complete range of titanium
products and a significant number of producers worldwide that manufacture a
limited range of titanium mill products. Based on the Company's industry
experience and information obtained from publicly-available external resources
(e.g., United States Geological Survey, International Titanium Association and
Japan Titanium Society), the Company estimates that it accounted for
approximately 18% of worldwide industry shipments of titanium mill products in
2004 and 2003 and approximately 10% and 8% of worldwide titanium sponge
production in 2004 and 2003, respectively.
The Company's long-term strategy is to maximize the value of its core
aerospace business while also developing new markets, applications and products
to help reduce its traditional dependence on the aerospace industry. In the
near-term, the Company continues to focus on maintaining a lean cost structure,
managing its raw material requirements, improving the quality of its products
and processes and taking other actions to continue to generate positive cash
flow and further expand its profitability.
Industry. The titanium industry historically has derived a substantial
portion of its business from the aerospace industry. Aerospace demand for
titanium products, which includes both jet engine components (e.g., blades,
discs, rings and engine cases) and air frame components (e.g., bulkheads, tail
sections, landing gear, wing supports and fasteners) can be broken down into
commercial and military sectors. The commercial aerospace sector has a
significant influence on titanium companies, particularly mill product producers
such as TIMET. Military aerospace sector shipments are largely driven by
government defense spending in North America and Europe.
The following table illustrates the Company's estimates of titanium
industry mill product shipments during 2004 and 2003:
Year ended December 31,
---------------------------------- %
2004 2003 change
---------------- -------------- -----------
(metric tons)
Mill product shipments to:
Commercial aerospace sector 20,900 16,000 +31%
Military aerospace sector 4,000 4,100 -2%
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Total aerospace industry 24,900 20,100 +24%
================ ==============
Aggregate mill product shipments to all industries 61,800 50,200 +23%
================ ==============
The Company's business is more dependent on aerospace demand than is the
overall titanium industry, as approximately 70% of the Company's mill product
shipment volume in 2004 was to the aerospace industry (58% commercial aerospace
and 12% military aerospace), whereas approximately 40% of the overall titanium
industry's shipment volume in 2004 was to the aerospace industry, as indicated
by the above table.
The cyclical nature of the aerospace industry has been the principal driver
of the historical fluctuations in the performance of most titanium companies.
Over the past 20 years, the titanium industry had cyclical peaks in mill product
shipments in 1989, 1997 and 2001 and cyclical lows in 1983, 1991, 1999 and 2002.
Prior to 2004, demand for titanium reached its highest level in 1997 when
industry mill product shipments reached approximately 60,700 metric tons.
However, since 1997, industry mill product shipments have fluctuated
significantly, primarily due to a continued change in demand for titanium from
the commercial aerospace sector. The Company estimates that industry shipments
approximated 50,200 metric tons in 2003 and 61,800 metric tons in 2004. The
Company currently expects total industry mill product shipments will increase
from 2004 levels to approximately 71,000 metric tons in 2005.
The Airline Monitor, a leading aerospace publication, traditionally issues
forecasts for commercial aircraft deliveries each January and July. According to
The Airline Monitor, large commercial aircraft deliveries for the 1996 to 2004
period peaked in 1999 with 889 aircraft, including 254 wide body aircraft that
use substantially more titanium than their narrow body counterparts. Large
commercial aircraft deliveries totaled 602 (including 147 wide bodies) in 2004.
The following table summarizes The Airline Monitor's most recently issued
forecast (January 2005) for large commercial aircraft deliveries over the next
five years:
% increase (decrease)
Forecasted deliveries over previous year
----------------------------------- --------------------------------------
Year Total Wide bodies Total Wide bodies
------------------ -------------- ----------------- ---------------- ------------------
2005 680 172 13% 17%
2006 720 171 6% (1%)
2007 760 200 6% 17%
2008 805 240 6% 20%
2009 795 255 (1%) 6%
2
Deliveries of titanium generally precede aircraft deliveries by about one
year, although this varies considerably by titanium product. This correlates to
the Company's cycle, which historically precedes the cycle of the aircraft
industry and related deliveries. Although global traffic increased in 2004
compared to 2003, persistently high oil prices had an adverse impact on the
commercial airline industry. According to The Airline Monitor, the worldwide
commercial airline industry's estimated operating loss for 2004 was $5.9
billion, and the projected 2005 operating loss is $2.9 billion. According to ROM
Associates, Inc., a leading aerospace research company, global airline passenger
traffic returned to pre-September 11, 2001 levels in October 2003. The Company
estimates that industry mill product shipments into the commercial aerospace
sector will approximate 26,000 metric tons in 2005.
Military aerospace programs were the first to utilize titanium's unique
properties on a large scale, beginning in the 1950s. Titanium shipments to
military aerospace markets reached a peak in the 1980s before falling to
historical lows in the early 1990s after the end of the Cold War. However, the
importance of military markets to the titanium industry is expected to rise in
coming years as defense spending budgets increase in reaction to terrorist
activities and global conflicts.
Several of today's active U.S. military programs, including the C-17,
F/A-18, F-16 and F-15 began during the Cold War and are forecast to continue
production through the end of the current decade. In addition to these
established U.S. programs, new U.S. programs offer growth opportunities for
increased titanium consumption. The F/A-22 Raptor is currently in low-rate
initial production, and the U.S. Air Force currently plans to purchase between
276 and 300 aircraft over the life of the program, depending on funding levels.
The recent budget proposed by President Bush provides for an overall increase in
spending compared to current levels, principally to continue funding military
ground efforts in Iraq and Afghanistan. The current budget proposal also calls
for an end to procurement of the F/A-22 in 2008, with total F/A-22 production
capped at 179 aircraft. However, final procurement decisions must receive
Congressional approval.
In October 2001, Lockheed-Martin Corporation was awarded the contract for
construction of the F-35 Joint Strike Fighter ("JSF"). The JSF is expected to
enter low-rate initial production in 2006, and although no specific delivery
patterns have been established, procurement is expected to extend over the next
30 to 40 years and to include as many as 3,000 to 4,000 planes. European
military programs also have active aerospace programs offering the possibility
for increased titanium consumption. Production levels for the Saab Gripen,
Eurofighter Typhoon, Dassault Rafale and Dassault Mirage 2000 are all forecasted
to remain steady through the end of the decade.
Since titanium's initial applications in the aerospace sector, the number
of end-use markets for titanium has significantly expanded. Established
industrial uses for titanium include chemical plants, power plants, desalination
plants and pollution control equipment. Rapid growth of the Chinese and other
Southeast Asian economies has brought unprecedented demand for
titanium-intensive industrial equipment. Titanium continues to gain acceptance
in many emerging market applications, including automotive, military armor,
energy and architecture. Although titanium is generally higher cost than other
competing metals, in many cases customers find the physical properties of
titanium to be attractive from the standpoint of weight, performance, longevity,
design alternatives, life cycle value and other factors. Although the Company
estimates that emerging market demand presently represents only about 5% of the
2004 total industry demand for titanium mill products, the Company believes
emerging market demand, in the aggregate, could grow at double-digit rates over
the next several years. The Company is actively pursuing these markets.
3
The automotive market continues to be an attractive emerging market segment
due to its potential for sustainable long-term growth. For this reason, in 2002,
TIMET established TiMET Automotive, which is focused on developing and marketing
proprietary alloys and processes specifically suited for automotive
applications. Titanium is now used in several consumer car applications as well
as in numerous motorcycles.
At the present time, titanium is primarily used for exhaust systems,
suspension springs and engine valves in consumer vehicles. In exhaust systems,
titanium provides for significant weight savings, while its corrosion resistance
provides life-of-vehicle durability. In suspension spring applications,
titanium's low modulus of elasticity allows the spring's height to be reduced by
20% to 40% compared to a steel spring, which, when combined with the titanium's
low density, permits 30% to 60% weight savings over steel spring suspension
systems. Titanium suspension springs and exhaust applications are also
attractive compared to alternative lightweight technologies because the titanium
component can often be formed and fabricated on the same tooling used for the
steel component it is typically replacing. Titanium is also making inroads into
other automotive applications, including turbo charger wheels, brake parts and
connecting rods. Titanium engine components provide mass-reduction benefits that
directly improve vehicle performance and fuel economy. The decision to select
titanium components for consumer car, truck and motorcycle components remains
highly cost sensitive; however, the Company believes titanium's acceptance in
consumer vehicles will expand as the automotive industry continues to better
understand the benefits titanium offers.
Utilization of titanium on military ground combat vehicles for armor
applique and integrated armor or structural components continues to gain
acceptance within the military market segment. Titanium armor components provide
the necessary ballistic performance while achieving a mission critical vehicle
performance objective of reduced weight. In order to counteract increased threat
levels, titanium is being utilized on vehicle upgrade programs in addition to
new builds. Based on active programs, as well as programs currently under
evaluation, the Company believes there will be additional usage of titanium on
ground combat vehicles that will provide continued growth in the military market
segment.
The oil and gas market utilizes titanium for down-hole logging tools,
critical riser components, fire water systems and saltwater-cooling systems.
Additionally, as offshore development of new oil and gas fields moves into the
ultra deep-water depths, market demand for titanium's light-weight,
high-strength and corrosion-resistance properties is creating new opportunities
for the material. The Company has a group dedicated to developing the expansion
of titanium use in this market and in other non-aerospace applications.
Products and operations. The Company is a vertically integrated titanium
manufacturer whose products include:
(i) titanium sponge, the basic form of titanium metal used in processed
titanium products;
(ii) melted products (ingot and slab), the result of melting sponge and
titanium scrap, either alone or with various alloys;
(iii)mill products that are forged and rolled from ingot or slab, including
long products (billet and bar), flat products (plate, sheet and strip)
and pipe; and
(iv) fabrications (spools, pipefittings, manifolds, vessels, etc.) that are
cut, formed, welded and assembled from titanium mill products.
4
During the past three years, all of TIMET's net sales were generated by the
Company's integrated titanium operations (its "Titanium melted and mill
products" segment), its only business segment. Business and geographic segment
financial information is included in Note 21 to the Consolidated Financial
Statements.
Titanium sponge (so called because of its appearance) is the commercially
pure, elemental form of titanium metal. The first step in TIMET's sponge
production involves the chlorination of titanium-containing rutile ores (derived
from beach sand) with chlorine and petroleum coke to produce titanium
tetrachloride. Titanium tetrachloride is purified and then reacted with
magnesium in a closed system, producing titanium sponge and magnesium chloride
as co-products. The Company's titanium sponge production facility in Henderson,
Nevada incorporates vacuum distillation process ("VDP") technology, which
removes the magnesium and magnesium chloride residues by applying heat to the
sponge mass while maintaining a vacuum in the chamber. The combination of heat
and vacuum boils the residues from the sponge mass, and then the mass is
mechanically pushed out of the distillation vessel, sheared and crushed, while
the residual magnesium chloride is electrolytically separated and recycled.
Titanium ingot is a cylindrical solid shape that, in TIMET's case, weighs
up to 8 metric tons. Titanium slab is a rectangular solid shape that, in TIMET's
case, weighs up to 16 metric tons. Each ingot or slab is formed by melting
titanium sponge, scrap or both, usually with various other alloys such as
vanadium, aluminum, molybdenum, tin and zirconium. Titanium scrap is a
by-product of the forging, rolling, milling and machining operations, and
significant quantities of scrap are generated in the production process for
finished titanium products and components. The melting process for ingot and
slab is closely controlled and monitored utilizing computer control systems to
maintain product quality and consistency and to meet customer specifications. In
most cases, TIMET uses its ingot and slab as the starting material for further
processing into mill products. However, it also sells ingot and slab to third
parties.
The Company sends certain products either to the Company's service centers
or to outside vendors for further processing before being shipped to customers.
The Company's customers either process the Company's products for their ultimate
end-use or for sale to third parties.
During the production process and following the completion of
manufacturing, the Company performs extensive testing on its products. The
inspection process is critical to ensuring that the Company's products meet the
high quality requirements of its customers, particularly in aerospace component
production. The Company certifies that its products meet customer specification
at the time of shipment for substantially all customer orders.
The Company currently is reliant on several outside processors (one of
which is owned by a competitor) to perform certain rolling, finishing and other
processing steps in the U.S., and certain melting and forging steps in France.
In France, the processor is also a joint venture partner in the Company's
70%-owned subsidiary, TIMET Savoie, S.A. ("TIMET Savoie"). During the past
several years, the Company has made significant strides toward reducing the
reliance on competitor-owned sources for these services, so that any
interruption in these functions should not have a material adverse effect on the
Company's business, results of operations, financial position or liquidity.
5
Distribution. The Company sells its products through its own sales force
based in the U.S. and Europe and through independent agents and distributors
worldwide. The Company's distribution system also includes eight Company-owned
service centers (five in the U.S. and three in Europe), which sell the Company's
products on a just-in-time basis. The service centers primarily sell value-added
and customized mill products, including bar, flat-rolled sheet and strip. The
Company believes its service centers provide a competitive advantage because of
their ability to foster customer relationships, customize products to suit
specific customer requirements and respond quickly to customer needs.
Raw materials. The principal raw materials used in the production of
titanium ingot, slab and mill products are titanium sponge, titanium scrap and
alloys. The following table summarizes the Company's 2004 raw material usage
requirements for its melted and mill products:
Percentage of total raw
material requirements
-----------------------------
Internally produced sponge 30%
Purchased sponge 32%
Titanium scrap 31%
Alloys 7%
-----------------------------
100%
=============================
The primary raw materials used in the production of titanium sponge are
titanium-containing rutile ore, chlorine, magnesium and petroleum coke. Rutile
ore is currently available from a limited number of suppliers around the world,
principally located in Australia, South Africa and Sri Lanka. The Company
purchases the majority of its supply of rutile ore from Australia. The Company
believes the availability of rutile ore will be adequate for the foreseeable
future and does not anticipate any interruptions of its rutile supplies.
However, there can be no assurance that the Company will not experience
interruptions.
Chlorine is currently obtained from a single supplier near the Company's
sponge plant in Henderson, Nevada. While the Company does not presently
anticipate any chlorine supply problems, there can be no assurances the chlorine
supply will not be interrupted. In the event of supply disruption, the Company
has taken steps to mitigate this risk, including establishing the feasibility of
certain equipment modifications to enable it to utilize material from
alternative chlorine suppliers or to purchase and utilize an intermediate
product which will allow the Company to eliminate the purchase of chlorine if
needed. Magnesium and petroleum coke are generally available from a number of
suppliers.
During 2004, the Company was the only major U.S. producer of titanium
sponge and one of only five major worldwide producers (the others are located in
Russia, Kazakhstan and two in Japan). However, it cannot supply all of its needs
for all grades of titanium sponge internally and is dependent, therefore, on
third parties for a substantial portion of its sponge requirements. Titanium
melted and mill products require varying grades of sponge and/or scrap depending
on the customers' specifications and expected end use. Presently, TIMET and
certain companies in Japan are the only producers of premium quality sponge that
currently have complete approval for all significant demanding aerospace
applications. Over the past few years, sponge producers in Russia and Kazakhstan
have progressed in their efforts to obtain approval for the use of their sponge
into all aerospace applications. This qualification process is likely to
continue for several more years.
6
Historically, the Company has purchased sponge predominantly from producers
in Kazakhstan and Japan. In September 2002, the Company entered into a sponge
supply agreement, effective from January 1, 2002 through December 31, 2007,
which requires minimum annual purchases by the Company. The Company has no other
long-term sponge supply agreements. Since 2000, the Company has also purchased
sponge from the U.S. Defense Logistics Agency ("DLA") stockpile; however, the
DLA stockpile is expected to become fully depleted during 2005. The Company
expects to continue to purchase sponge from a variety of sources during 2005.
The Company utilizes a combination of internally produced, customer
returned and externally purchased titanium scrap at its melting locations. Such
scrap consists of alloyed and commercially pure solids and turnings. Internally
produced scrap is generated in the Company's factories during both melting and
mill product processing. Customer returned scrap is generally part of a supply
agreement with a customer, which provides a "closed loop" arrangement resulting
in supply and cost stability. Externally purchased scrap comes from a wide range
of sources, including customers, collectors, processors and brokers. The Company
anticipates that 50% to 60% of the scrap it will utilize during 2005 will be
purchased from external suppliers, as compared to 52% for 2004. The Company also
occasionally sells scrap, usually in a form or grade it cannot economically
recycle.
Market forces can significantly impact the supply or cost of externally
produced scrap. The amount of scrap generated in the supply chain varies during
the titanium business cycles. During the middle of the cycle, scrap generation
and consumption are in relative equilibrium, minimizing disruptions in supply or
significant changes in market prices for scrap. Increasing or decreasing cycles
tend to cause significant changes in the market price of scrap. Early in the
titanium cycle, when the demand for titanium melted and mill products begins to
increase, the Company's requirements (and those of other titanium manufacturers)
precede the increase in scrap generation by downstream customers and the supply
chain, placing upward pressure on the market price of scrap. The opposite
situation occurs when demand for titanium melted and mill products begins to
decline, placing downward pressure on the market price of scrap. As a net
purchaser of scrap, the Company is susceptible to price increases during periods
of increasing demand. Although this phenomenon normally results in higher
selling prices for melted and mill products, which tends to offset the increased
material costs, the Company is somewhat limited in its ability to raise prices
by the portion of its business that is under long-term pricing agreements.
All of the Company's major competitors utilize scrap as a raw material in
their melt operations. In addition to use by titanium manufacturers, titanium
scrap is used in steel-making operations during production of interstitial-free
steels, stainless steels and high-strength-low-alloy steels. Recent strong
demand for these steel products, especially from China, has produced a
significant increase in demand for titanium scrap at a time when titanium scrap
generation rates are at low levels, partly due to lower commercial aircraft
build rates. These events created a significantly tightened supply of titanium
scrap during 2004, and the Company expects this trend to continue and worsen
during 2005. For TIMET, this will translate to lower availability and higher
cost for externally purchased scrap in the near-term. The Company's ability to
recover these material costs via higher selling prices to its customers is
uncertain. The expected increase in commercial aircraft build rates over the
next several years, as previously discussed, could have the effect of relieving
the shortage of titanium scrap.
7
Various alloys used in the production of titanium products are also
available from a number of suppliers. However, the recent high level of global
demand for steel products also has resulted in a significant increase in the
prices for several alloys, such as vanadium and molybdenum. Although
availability is not expected to be a problem, the Company's cost for these
alloys during 2005 could be as much as double that of 2004.
Customer agreements. The Company has long-term agreements ("LTAs") with
certain major aerospace customers, including, among others, The Boeing Company
("Boeing"), Rolls-Royce plc and its German and U.S. affiliates ("Rolls-Royce"),
United Technologies Corporation (Pratt & Whitney and related companies) and
Wyman-Gordon Company ("Wyman-Gordon," a unit of Precision Castparts Corporation
("PCC")). Most of these LTAs expire from 2005 through 2008, subject to certain
conditions, and generally provide for (i) minimum market shares of the
customers' titanium requirements or firm annual volume commitments and (ii)
fixed or formula-determined prices (although some contain elements based on
market pricing). Generally, the LTAs require the Company's service and product
performance to meet specified criteria and contain a number of other terms and
conditions customary in transactions of these types. Certain provisions of these
LTAs have been amended in the past and may be amended in the future to meet
changing business conditions.
In certain events of nonperformance by the Company or the customer, the
LTAs may be terminated early. Although it is possible that some portion of the
business would continue on a non-LTA basis, the termination of one or more of
the LTAs could result in a material effect on the Company's business, results of
operations, financial position or liquidity. The LTAs were designed to limit
selling price volatility to the customer, while providing TIMET with a committed
base of volume throughout the aerospace business cycles. To varying degrees,
these LTAs effectively obligate TIMET to bear the majority of the risks of
increases in raw material and other costs, but also allow TIMET to benefit from
decreases in such costs.
During the third quarter of 2003, the Company and Wyman-Gordon agreed to
terminate the 1998 purchase and sale agreement associated with the formation of
the titanium castings joint venture previously owned by the two parties. The
Company paid Wyman-Gordon a total of $6.8 million in three quarterly
installments in connection with this termination, which included the termination
of certain favorable purchase terms. The Company recorded a one-time charge for
the entire $6.8 million as a reduction to sales in the third quarter of 2003.
Concurrently, the Company entered into new long-term purchase and sale
agreements with Wyman-Gordon that expire in 2008.
During 2001, the Company reached a settlement of certain litigation between
TIMET and Boeing related to the parties' LTA entered into in 1997. Pursuant to
the settlement, the Company received a cash payment of $82 million from Boeing.
Under the terms of the LTA, as amended, in 2002 through 2007, Boeing advances
TIMET $28.5 million annually less $3.80 per pound of titanium product purchased
by Boeing subcontractors under the Boeing LTA during the preceding year.
Effectively, the Company collects $3.80 less from Boeing than the LTA selling
price for each pound of titanium product sold directly to Boeing and reduces the
related customer advance recorded by the Company. For titanium products sold to
Boeing subcontractors, the Company collects the full LTA selling price, but
gives Boeing credit by reducing the next year's annual advance by $3.80 per
pound. The Boeing customer advance is also reduced as the Company recognizes
income under the take-or-pay provisions of the LTA, as described in Note 10 to
the Consolidated Financial Statements. Under a separate agreement, TIMET must
establish and hold buffer stock for Boeing at TIMET's facilities, for which
Boeing will be invoiced for an LTA sale by TIMET when such material is produced
into a mill product by TIMET. See Item 7 - MD&A for additional information
regarding the Boeing LTA.
8
The Company also has an LTA with VALTIMET SAS ("VALTIMET"), a manufacturer
of welded stainless steel and titanium tubing that is principally sold into the
industrial markets. VALTIMET is a 44%-owned affiliate of TIMET. The LTA was
entered into in 1997 and expires in 2007. Under the LTA, TIMET has agreed to
provide a certain percentage of VALTIMET's titanium requirements at
formula-determined selling prices, subject to certain conditions. Certain
provisions of this contract have been amended in the past and may be amended in
the future to meet changing business conditions.
Markets and customer base. The following table summarizes the Company's
sales revenue by geographical location:
Year ended December 31,
-------------------------------------------------
2004 2003 2002
-------------- -------------- -------------
(Percentage of total sales revenue)
Sales revenue to customers within:
North America 55% 55% 53%
Europe 40% 38% 40%
Other 5% 7% 7%
-------------- -------------- -------------
100% 100% 100%
============== ============== =============
Further information regarding the Company's external sales, net income,
long-lived assets and total assets by segment can be found in the Company's
Consolidated Balance Sheets, Consolidated Statements of Operations and Notes 6
and 21 to the Consolidated Financial Statements.
Substantially all of the Company's sales and operating income are derived
from operations based in the U.S., the U.K., France and Italy. As shown in the
below table, the Company generates over two-thirds of its sales revenue from
sales to the aerospace industry (commercial and military sectors). The Company
expects that a similar percentage of its 2005 sales revenue will be to the
aerospace industry. As previously noted, the Company has LTAs with certain major
aerospace customers, including Boeing, Rolls-Royce, UTC and Wyman-Gordon. This
concentration of customers may impact the Company's overall exposure to credit
and other risks, either positively or negatively, in that all of these customers
may be similarly affected by the same economic or other conditions. The
following table provides supplemental sales revenue information regarding the
Company's dependence on certain industries and customer relationships:
9
Year ended December 31,
--------------------------------------------------
2004 2003 2002
--------------- -------------- -------------
(Percentage of total sales revenue)
Sales revenue to:
Aerospace industry:
Commercial aerospace sector 57% 57% 56%
Military aerospace sector 13% 11% 11%
--------------- ------------- --------------
Total aerospace industry 70% 68% 67%
=============== ============= ==============
Customers under LTAs 44% 41% 37%
=============== ============= ==============
Significant customers under LTAs: (1)
Rolls-Royce and other Rolls-Royce suppliers (2) 15% 15% 12%
=============== ============= ==============
Ten largest customers 48% 44% 43%
=============== ============= ==============
Significant customers: (1)
PCC and related entities 13% 13% 9%
=============== ============= ==============
- --------------------------------------------------------------------------------------------------------------------
(1) Greater than 10% of net sales.
(2) Includes direct sales to certain of the PCC-related entities under the
terms of the Rolls-Royce LTAs.
The primary market for titanium products in the commercial aerospace
industry consists of two major manufacturers of large (over 100 seats)
commercial airframes - Boeing Commercial Airplanes Group (a unit of Boeing) and
Airbus (80% owned by European Aeronautic Defence and Space Company and 20% owned
by BAE Systems). In addition to the airframe manufacturers, the following four
manufacturers of large civil aircraft engines are also significant titanium
users - Rolls-Royce, General Electric Aircraft Engines, Pratt & Whitney and
Societe Nationale d<180>Etude et de Construction de Moteurs d<180>Aviation
("Snecma"). The Company's sales are made both directly to these major
manufacturers and to companies (including forgers such as Wyman-Gordon) that use
the Company's titanium to produce parts and other materials for such
manufacturers. If any of the major aerospace manufacturers were to significantly
reduce aircraft and/or jet engine build rates from those currently expected,
there could be a material adverse effect, both directly and indirectly, on the
Company.
The backlogs for Boeing and Airbus reflect orders for aircraft to be
delivered over several years. Changes in the economic environment and the
financial condition of airlines can result in rescheduling or cancellation of
contractual orders. Accordingly, aircraft manufacturer backlogs are not
necessarily a reliable indicator of near-term business activity, but may be
indicative of potential business levels over a longer-term horizon. The
following table shows the estimated firm order backlogs for Boeing and Airbus,
as reported by The Airline Monitor:
10
At December 31,
-------------------------------------------------
2004 2003 2002
-------------- ------------- --------------
Firm order backlog - all planes:
Airbus 1,500 1,454 1,505
Boeing 1,089 1,101 1,144
-------------- ------------- --------------
2,589 2,555 2,649
============== ============= ==============
Firm order backlog - wide body planes:
Airbus 466 471 423
Boeing 287 230 286
-------------- ------------- --------------
753 701 709
============== ============= ==============
Wide body planes as % of total firm order backlog 29% 27% 27%
============== ============= ==============
Wide body planes (e.g., Boeing 747, 767, 777 and 787 and Airbus A330, A340
and A380) tend to use a higher percentage of titanium in their airframes,
engines and parts than narrow body planes (e.g., Boeing 737 and 757 and Airbus
A318, A319 and A320), and newer models of planes tend to use a higher percentage
of titanium than older models. Additionally, Boeing generally uses a higher
percentage of titanium in its airframes than Airbus. For example, the Company
estimates that approximately 58 metric tons, 43 metric tons and 18 metric tons
of titanium are purchased for the manufacture of each Boeing 777, 747 and 737,
respectively, including both the airframes and engines. The Company estimates
that approximately 24 metric tons, 17 metric tons and 12 metric tons of titanium
are purchased for the manufacture of each Airbus A340, A330 and A320,
respectively, including both the airframes and engines.
At year-end 2004, a total of 139 firm orders had been placed for the Airbus
A380 superjumbo jet, a program officially launched in 2000 with anticipated
first deliveries in 2006. Current estimates are that approximately 77 metric
tons of titanium (50 metric tons for the airframe and 27 metric tons for the
engines) will be purchased for each A380 manufactured. Additionally, at year-end
2004, a total of 56 firm orders have been placed for the Boeing 787 Dreamliner,
a program officially launched in April 2004 with anticipated first deliveries in
2008. Although the 787 will contain more composite materials than a typical
Boeing airplane, the Company's preliminary estimates are that approximately 91
metric tons of titanium (80 metric tons for the airframe and 11 metric tons for
the engines) will be purchased for each 787 manufactured. However, the final
titanium buy weight is likely to vary because the 787 is still in the design
phase.
Outside of aerospace markets, the Company manufactures a wide range of
products for customers in the chemical process, oil and gas, consumer, sporting
goods, automotive, power generation and armor/armament industries. Approximately
17% of the Company's sales revenue in 2004, 19% in 2003 and 18% in 2002 was
generated by sales into industrial and emerging markets, including sales to
VALTIMET for the production of welded tubing. For the oil and gas industry, the
Company provides seamless pipe for downhole casing, risers, tapered stress
joints and other offshore oil and gas production equipment, along with firewater
piping systems. In armor and armament, the Company sells plate products for
fabrication into applique plate for protection of the entire ground combat
vehicle as well as the primary vehicle structure.
11
In addition to melted and mill products, which are sold into the aerospace,
industrial and emerging markets, the Company sells certain other products such
as titanium sponge, titanium tetrachloride and titanium fabrications. Sales of
these other products represented 13% of the Company's sales revenue in both 2004
and 2003 and 15% in 2002.
During 2004, the Company modified its method of calculating its backlog to
include replenishment purchase orders placed under consignment relationships.
The Company believes inclusion of these orders provides a more accurate
reflection of the Company's overall backlog. Using the modified methodology for
all periods, the Company's backlog of unfilled orders was approximately $450
million at December 31, 2004, compared to $205 million at December 31, 2003 and
$185 million at December 31, 2002. Over 94% of the 2004 year-end backlog is
scheduled for shipment during 2005. The Company's order backlog may not be a
reliable indicator of future business activity.
The Company has explored and will continue to explore strategic
arrangements in the areas of product development, production and distribution.
The Company will also continue to work with existing and potential customers to
identify and develop new or improved applications for titanium that take
advantage of its unique qualities.
Competition. The titanium metals industry is highly competitive on a
worldwide basis. Producers of melted and mill products are located primarily in
the United States, Japan, France, Germany, Italy, Russia, China and the United
Kingdom. In addition, producers of other metal products, such as steel and
aluminum, maintain forging, rolling and finishing facilities that could be used
or modified without substantial capital expenditures to process titanium
products.
There are currently five major, and several minor, producers of titanium
sponge in the world. Three of the major producers have announced plans to
increase sponge production capacity. TIMET is currently the only major U.S.
sponge producer. The Company believes that entry as a producer of titanium
sponge would require a significant capital investment and substantial technical
expertise.
The Company's principal competitors in the aerospace titanium market are
Allegheny Technologies Incorporated ("ATI") and RTI International Metals, Inc.
("RTI"), both based in the United States, and Verkhnaya Salda Metallurgical
Production Organization ("VSMPO"), based in Russia. UNITI (a joint venture
between ATI and VSMPO), RTI and certain Japanese producers are the Company's
principal competitors in the industrial and emerging markets. The Company
competes primarily on the basis of price, quality of products, technical support
and the availability of products to meet customers' delivery schedules.
In the U.S. market, the increasing presence of non-U.S. participants has
become a significant competitive factor. Until 1993, imports of foreign titanium
products into the U.S. had not been significant. This was primarily attributable
to relative currency exchange rates and, with respect to Japan, Russia,
Kazakhstan and Ukraine, import duties (including antidumping duties). However,
since 1993, imports of titanium sponge, ingot and mill products, principally
from Russia and Kazakhstan, have increased and have had a significant
competitive impact on the U.S. titanium industry. To the extent the Company is
able to take advantage of this situation by purchasing sponge from such
countries for use in its own operations, the negative effect of these imports on
the Company can be somewhat mitigated.
12
Generally, imports of titanium products into the U.S. are subject to a 15%
"normal trade relations" tariff. For tariff purposes, titanium products are
broadly classified as either wrought (billet, bar, sheet, strip, plate and
tubing) or unwrought (sponge, ingot and slab).
The United States maintains a trade program, referred to as the
"generalized system of preferences" or "GSP" program, designed to promote the
economies of a number of lesser- developed countries (referred to as
"beneficiary developing countries") by eliminating duties on a specific list of
products imported from any of these beneficiary developing countries. Of the key
titanium producing countries outside the U.S., Russia and Kazakhstan are
currently regarded as beneficiary developing countries under the GSP program.
For most periods since 1993, imports of titanium wrought products from any
beneficiary developing country (notably Russia, as a producer of wrought
products) were exempted from U.S. import duties under the GSP program. In 2002,
TIMET filed a petition seeking the removal of duty-free treatment under the GSP
program for imports of titanium wrought products into the U.S. from Russia.
During the third quarter of 2004, President Bush approved the petition. This
action resulted in a return to the normal 15% tariff on imports of titanium
wrought product from Russia.
In 2002, Kazakhstan filed a petition seeking GSP status on imports of
titanium sponge into the U.S., which, if granted, would have eliminated the 15%
tariff currently imposed on titanium sponge imported into the U.S. from any
beneficiary developing country (notably Russia and Kazakhstan, as producers of
titanium sponge). Kazakhstan's petition was denied in 2003.
The Japanese government has recently raised the elimination or
harmonization of tariffs on titanium products, including titanium sponge, for
consideration in the next round of multi-lateral trade negotiations through the
World Trade Organization (the so-called "Doha Round"), scheduled to start in
late 2005. A U.S. competitor has recommended the elimination of U.S. tariffs on
titanium sponge imports for consideration in the Doha Round. The Company has
urged that no change be made to these tariffs, either on wrought or unwrought
products.
TIMET has successfully resisted, and will continue to resist, efforts to
eliminate duties on sponge and unwrought titanium products (whether through the
GSP program or otherwise), although no assurances can be made that the Company
will continue to be successful in these activities. Further reductions in, or
the complete elimination of, any or all of these tariffs could lead to increased
imports of foreign sponge, ingot and mill products into the U.S. and an increase
in the amount of such products on the market generally, which could adversely
affect pricing for titanium sponge, ingot and mill products and thus the
Company's business, results of operations, financial position or liquidity.
Research and development. The Company's research and development activities
are directed toward expanding the use of titanium and titanium alloys in all
market sectors. Key research activities include the development of new alloys,
development of technology required to enhance the performance of TIMET's
products in the traditional industrial and aerospace markets and applications
development for automotive and other emerging markets. The Company conducts the
majority of its research and development activities at its Henderson Technical
Laboratory in Henderson, Nevada, with additional activities at its Witton,
England facility. The Company incurred research and development costs of $2.9
million in 2004, $2.8 million in 2003 and $3.3 million in 2002.
13
In April 2003, the Company was selected by the United States Defense
Advanced Research Projects Agency ("DARPA") to lead a program aimed at
commercializing the "FFC Cambridge Process." Development work is continuing at
the Henderson Technical Laboratory and progress has been made in establishing
the fundamentals of the process. While much work remains to be done and success
is not certain, research into alternative low cost extraction technologies is
one of the Company's core research and development areas. The Company believes
that a meaningful reduction in the cost of producing titanium metal would not
only make titanium a more attractive material choice within the aerospace
industry, but also could provide further opportunities to use titanium in
non-aerospace applications where its current cost might be an obstacle.
Patents and trademarks. The Company holds U.S. and non-U.S. patents
applicable to certain of its titanium alloys and manufacturing technology. The
Company continually seeks patent protection with respect to its technical base
and has occasionally entered into cross-licensing arrangements with third
parties. The Company believes the trademarks TIMET(R) and TIMETAL(R), which are
protected by registration in the U.S. and other countries, are important to its
business. Further, TIMET feels its proprietary TIMETAL Exhaust Grade, patented
TIMETAL 62S connecting rod alloy, patented TIMETAL LCB spring alloy and patented
TIMETAL Ti-1100 engine valve alloy give it competitive advantages in the
automotive market. However, most of the titanium alloys and manufacturing
technology used by the Company do not benefit from patent or other intellectual
property protection. These patents expire at various times from 2007 through
2013.
Employees. The following table shows the number of employees at year end
for the past 3 years. The cyclical nature of the aerospace industry and its
impact on the Company's business is the principal reason the Company
periodically implements cost reduction restructurings, reorganizations and other
changes that impact the Company's employment levels. The increases during 2003
and 2004 reflect the increase in demand for titanium products during the second
half of 2003 and during 2004, somewhat offset by the Company's continued efforts
to operate at more efficient levels. The Company currently expects employment to
slightly increase throughout 2005 as production continues to increase.
Employees at December 31,
-------------------------------------------------------
2004 2003 2002
---------------- ---------------- ---------------
U.S. 1,376 1,266 1,184
Europe 851 789 772
---------------- ---------------- ---------------
2,227 2,055 1,956
================ ================ ===============
The Company's production, maintenance, clerical and technical workers in
Toronto, Ohio, and its production and maintenance workers in Henderson, Nevada
are represented by the United Steelworkers of America under contracts expiring
in July 2008 and January 2008, respectively. Employees at the Company's other
U.S. facilities are not covered by collective bargaining agreements.
Approximately 60% of the salaried and hourly employees at the Company's European
facilities are represented by various European labor unions. The Company
currently has a labor agreement in place with the Company's U.K. employees
through 2005. The Company's labor agreement with its French employees is renewed
annually.
The Company currently considers its employee relations to be satisfactory.
However, it is possible that there could be future work stoppages or other labor
disruptions that could materially and adversely affect the Company's business,
results of operations, financial position or liquidity.
14
Regulatory and environmental matters. The Company's operations are governed
by various Federal, state, local and foreign environmental and worker safety
laws and regulations. In the U.S., such laws include the Occupational, Safety
and Health Act, the Clean Air Act, the Clean Water Act and the Resource
Conservation and Recovery Act. The Company uses and manufactures substantial
quantities of substances that are considered hazardous, extremely hazardous or
toxic under environmental and worker safety and health laws and regulations. The
Company has used and manufactured such substances throughout the history of its
operations. As a result, risk of environmental, health and safety issues is
inherent in the Company's operations. The Company's operations pose a continuing
risk of accidental releases of, and worker exposure to, hazardous or toxic
substances. There is also a risk that government environmental requirements, or
enforcement thereof, may become more stringent in the future. There can be no
assurance that some, or all, of the risks discussed under this heading will not
result in liabilities that would be material to the Company's business, results
of operations, financial position or liquidity.
The Company believes that its operations are in compliance in all material
respects with applicable requirements of environmental and worker health and
safety laws. The Company's policy is to continually strive to improve
environmental, health and safety performance. The Company incurred capital
expenditures related to health, safety and environmental compliance and
improvement of approximately $5.1 million in 2004, $1.9 million in 2003 and $1.4
million in 2002. The 2004 amount includes $3.9 million related to the
construction of a wastewater treatment facility at its Henderson, Nevada
location. The Company's capital budget provides for approximately $16 million
for environmental, health and safety capital expenditures in 2005, including
approximately $13 million for completion of the wastewater treatment facility.
From time to time, the Company may be subject to health, safety or
environmental regulatory enforcement under various statutes, resolution of which
typically involves the establishment of compliance programs. Occasionally,
resolution of these matters may result in the payment of penalties. However, the
imposition of more strict standards or requirements under environmental, health
or safety laws and regulations could result in expenditures in excess of amounts
currently estimated to be required for such matters. See Note 19 to the
Consolidated Financial Statements.
Related parties. At December 31, 2004, Valhi, Inc. ("Valhi") and other
entities related to Harold C. Simmons held approximately 52.9% of TIMET's
outstanding common stock and 41.3% of the Company's Series A Preferred Stock.
See Notes 1 and 18 to the Consolidated Financial Statements.
Available information. The Company maintains an Internet website at
www.timet.com. The Company's Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q and Current Reports on Form 8-K, and any amendments thereto, are or
will be available free of charge at such website as soon as reasonably
practicable after they are filed or furnished, as applicable, with the SEC.
Additionally, the Company's (i) Corporate Governance Guidelines, (ii) Code of
Business Conduct and Ethics and (iii) Audit Committee, Management Development
and Compensation Committee and Pension and Employee Benefits Committee charters
are also available on the Company's website. Such documents will also be
provided to shareholders upon request. Such requests should be directed to the
attention of TIMET's Investor Relations Department at TIMET's corporate offices
located at 1999 Broadway, Suite 4300, Denver, Colorado 80202.
15
The general public may read and copy any materials the Company files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549, and may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer,
and the SEC maintains an Internet website at www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC.
ITEM 2: PROPERTIES
Set forth below is a listing of the Company's major production facilities.
In addition to its U.S. sponge capacity discussed below, the Company's worldwide
melting capacity presently aggregates approximately 44,000 metric tons
(estimated 28% of world capacity), and its mill product capacity aggregates
approximately 19,000 metric tons (estimated 15% of world apacity). Of the
Company's worldwide melting capacity, 36% is represented by electron beam cold
hearth melting ("EB") furnaces, 62% by vacuum arc remelting ("VAR") furnaces and
2% by a vacuum induction melting ("VIM") furnace.
Annual Practical
Capacities (3)
--------------------------------
Melted Mill
Manufacturing Location Products Manufactured Products Products
- ------------------------------------------ ------------------------------------ -------------- -------------
(metric tons)
Henderson, Nevada (1) Sponge, Ingot 12,250 -
Morgantown, Pennsylvania (1) Slab, Ingot, Raw materials
processing 20,000 -
Toronto, Ohio (1) Billet, Bar, Plate, Sheet, Strip - 9,900
Vallejo, California (2) Ingot (including non-titanium
superalloys) 1,600 -
Ugine, France (2) (4) Ingot, Billet 1,800 1,300
Waunarlwydd (Swansea), Wales(1) Bar, Plate, Sheet - 3,900
Witton, England (2) Ingot, Billet, Bar 8,700 8,000
- ----------------------------------------------------------------------------------------------------------------------
(1) Owned facility.
(2) Leased facility.
(3) Practical capacities are variable based on production mix and are not
additive.
(4) Practical capacities are based on the approximate maximum equivalent
product that CEZUS is contractually obligated to provide.
The Company has operated its major production facilities at varying levels
of practical capacity during the past three years. In 2004, the plants operated
at approximately 73% of practical capacity, as compared to 56% in 2003 and 55%
in 2002. In 2005, the Company's plants are expected to operate at approximately
75% to 80% of practical capacity. However, practical capacity and utilization
measures can vary significantly based upon the mix of products produced.
United States production. The Company's VDP sponge facility is expected to
operate at its full annual practical capacity of 8,600 metric tons during 2005,
which is comparable to 2004. VDP sponge is used principally as a raw material
for the Company's melting facilities in the U.S. and Europe. The raw materials
processing facility in Morgantown, Pennsylvania primarily processes scrap used
as melting feedstock, either in combination with sponge or separately.
16
The Company's U.S. melting facilities in Henderson, Nevada, Morgantown,
Pennsylvania and Vallejo, California produce ingot and slab, which are either
used as feedstock for the Company's mill products operations or sold to third
parties. These melting facilities are expected to operate at approximately 85%
of aggregate annual practical capacity in 2005, up from 76% in 2004.
Titanium mill products are produced by TIMET in the U.S. at its forging and
rolling facility in Toronto, Ohio, which receives ingot or slab principally from
the Company's U.S. melting facilities. The Company's U.S. forging and rolling
facility is expected to operate at approximately 83% of annual practical
capacity in 2005, up from 66% in 2004. Capacity utilization across the Company's
individual mill product lines varies.
European production. The Company conducts its operations in Europe
primarily through its wholly owned subsidiaries TIMET UK, Ltd. ("TIMET UK") and
Loterios S.p.A. ("Loterios") and its 70% owned subsidiary TIMET Savoie. TIMET
UK's Witton, England laboratory and manufacturing facilities are leased pursuant
to long-term operating leases expiring in 2014 and 2024, respectively. TIMET
Savoie has the right to utilize portions of the Ugine, France plant of Compagnie
Europeenne du Zirconium-CEZUS, S.A. ("CEZUS"), the 30% minority partner in TIMET
Savoie, pursuant to an agreement expiring in August 2006. The Company and CEZUS
have reached an agreement in principle to extend this operating agreement
through 2011.
TIMET UK's melting facility in Witton, England produces VAR ingot used
primarily as feedstock for its Witton forging operations. The forging operations
process the ingot into billet product for sale to third parties or into an
intermediate product for further processing into bar or plate at its facility in
Waunarlwydd, Wales. TIMET UK's melting and mill products production in 2005 is
expected to operate at approximately 76% and 59%, respectively, of annual
practical capacity, compared to 73% and 54%, respectively, in 2004.
The capacity of TIMET Savoie in Ugine, France is to a certain extent
dependent upon the level of activity in CEZUS' zirconium business, which may
from time to time provide TIMET Savoie with capacity in excess of that which
CEZUS is contractually required to provide. During 2004, TIMET Savoie utilized
107% of the maximum annual capacity CEZUS is contractually required to provide
and the Company expects this amount to increase to 123% for 2005.
Sponge for melting requirements at both TIMET UK and TIMET Savoie that is
not supplied by the Company's Henderson, Nevada plant is purchased principally
from suppliers in Kazakhstan and Japan.
ITEM 3: LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. See Note 19 to
the Consolidated Financial Statements.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the quarter ended December 31, 2004 or through March 14, 2005.
17
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
TIMET's common stock is traded on the New York Stock Exchange (symbol:
"TIE"). The high and low sales prices for the Company's common stock during 2003
and 2004 are set forth below. All prices have been adjusted to reflect the
five-for-one stock split, which became effective after the close of trading on
August 27, 2004, and the one-for-ten reverse stock split, which became effective
after the close of trading on February 14, 2003.
Year ended December 31, 2004: High Low
----------------- -----------------
First quarter $ 20.70 $ 8.48
Second quarter $ 21.58 $ 14.35
Third quarter $ 24.90 $ 18.40
Fourth quarter $ 26.60 $ 18.51
Year ended December 31, 2003:
First quarter $ 4.88 $ 3.12
Second quarter $ 7.00 $ 4.19
Third quarter $ 7.68 $ 5.83
Fourth quarter $ 12.04 $ 6.70
On March 14, 2005, the closing price of TIMET common stock was $36.14 per
share. As of March 14, 2005, there were 279 shareholders of record of TIMET
common stock, which the Company estimates represent approximately 6,900 actual
shareholders.
In October 2002, the Company exercised its right to defer future interest
payments on TIMET's 6.625% Convertible Junior Subordinated Debentures due 2026
("Subordinated Debentures") held by the TIMET Capital Trust I (the "Capital
Trust"), effective for the December 1, 2002 scheduled interest payment. Interest
continued to accrue at the 6.625% coupon rate on the principal and unpaid
interest until 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 6.625% mandatorily redeemable convertible
preferred securities, beneficial unsecured convertible securities ("BUCS")
issued by the Capital Trust.
18
In August 2004, the Company completed an exchange offer pursuant to which
the Company had offered to exchange all of the 4,024,820 outstanding BUCS issued
by the Capital Trust for shares of the Company's 6.75% Series A Convertible
Preferred Stock (the "Series A Preferred Stock") at the exchange rate of one
share of Series A Preferred Stock for each BUCS. Based upon the 3,909,103 BUCS
tendered and accepted for exchange as of the close of the offer on August 31,
2004, the Company issued 3,909,103 shares of Series A Preferred Stock in
exchange for such BUCS. Holders of the Series A Preferred Stock are entitled to
receive cumulative cash dividends at the rate of 6.75% of the $50 per share
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. During the
third quarter of 2004, the Company recognized a $15.5 million non-cash,
non-operating gain related to the BUCS exchange. See Notes 12 and 14 to the
Consolidated Financial Statements.
The Company's U.S. credit agreement prohibits the payment of dividends on
the Company's common stock or the payment of distributions on the BUCS if excess
availability, as determined under the agreement, is less than $25 million. See
Note 11 to the Consolidated Financial Statements.
19
ITEM 6: SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with the Company's Consolidated Financial Statements and Item 7 - MD&A.
Year ended December 31,
-------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ------------ ------------
($ in millions, except per share and selling price data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 501.8 $ 385.3 $ 366.5 $ 486.9 $ 426.8
Gross margin $ 55.9 $ 17.0 $ (3.1) $ 39.9 $ 3.9
Operating income (loss) (1) $ 35.3 $ 5.4 $ (20.8) $ 64.5 $ (41.7)
Interest expense $ 12.5 $ 16.4 $ 17.1 $ 18.3 $ 21.5
Net income (loss) attributable to
common stockholders(1) $ 35.5 $ (13.1) $ (111.5) $ (41.8) $ (38.9)
Earnings (loss) per share:
Basic (1)(2) $ 2.24 $ (0.82) $ (7.06) $ (2.65) $ (2.48)
Diluted (1)(2) $ 2.20 $ (0.82) $ (7.06) $ (2.65) $ (2.48)
BALANCE SHEET DATA:
Cash and cash equivalents (3) $ 7.9 $ 37.3 $ 6.4 $ 24.5 $ 9.8
Total assets (1) $ 665.5 $ 567.4 $ 570.1 $ 705.6 $ 765.7
Bank indebtedness (4) $ 43.2 $ - $ 19.4 $ 12.4 $ 44.9
Capital lease obligations $ 0.2 $ 10.3 $ 10.2 $ 8.9 $ 8.8
Debt payable to Capital Trust $ 12.0 $ 207.5 $ 207.5 $ 207.5 $ 207.5
Stockholders' equity $ 379.7 $ 158.8 $ 159.4 $ 298.1 $ 357.5
OTHER OPERATING DATA:
Cash flows provided (used) by:
Operating activities $ (22.4) $ 65.8 $ (13.6) $ 62.6 $ 65.4
Investing activities (44.5) (14.5) (7.5) (16.1) (4.2)
Financing activities 38.7 (22.1) 3.6 (31.4) (72.8)
----------- ----------- ----------- ------------ ------------
Net cash (used) provided $ (28.2) $ 29.2 $ (17.5) $ 15.1 $ (11.6)
Melted product shipments (5) 5.4 4.7 2.4 4.4 3.5
Average melted product prices (5) $ 13.45 $ 12.15 $ 14.50 $ 14.50 $ 13.65
Mill product shipments (5) 11.4 8.9 8.9 12.2 11.4
Average mill product prices (5) $ 32.05 $ 31.50 $ 31.40 $ 29.80 $ 28.70
Active employees at December 31 2,227 2,055 1,956 2,410 2,220
Order backlog at December 31(6) $ 450.0 $ 205.0 $ 185.0 $ 240.0 $ 265.0
Capital expenditures $ 23.6 $ 12.5 $ 7.8 $ 16.1 $ 11.2
- -----------------------------------------------------------------------------------------------------------------------
(1) See the notes to the Consolidated Financial Statements and Item 7 - MD&A
for items that materially affect the 2004, 2003 and 2002 periods. In 2001,
the Company recorded (i) net other operating income of $73 million related
to the settlement of litigation between TIMET and The Boeing Company, (ii)
a $10.8 million pre-tax equipment impairment charge to cost of sales, (iii)
a $3.3 million charge to cost of sales for costs related to a tungsten
inclusion matter and (iv) a $61.5 million pre-tax impairment charge to
other non-operating expense related to the Company's investment in Special
Metals Corporation preferred securities. In 2000, the Company recorded (i)
a $2.0 million gain on the termination of a sponge purchase agreement with
Union Titanium Sponge Corporation at the operating income (loss) level,
(ii) a $1.2 million gain on the sale of a castings joint venture at the
non-operating income (loss) level and (iii) a $1.3 million loss on early
extinguishment of debt at the non-operating income (loss) level.
(2) Amounts have been adjusted to reflect the Company's five-for-one stock
split, which became effective after the close of trading on August 27, 2004
and the Company's one-for-ten reverse stock split, which became effective
after the close of trading on February 14, 2003.
(3) Includes restricted cash and cash equivalents of $0.7 million in 2004, $2.2
million in 2003 and $0.1 million in each of 2002, 2001 and 2000.
(4) Bank indebtedness represents notes payable and current and noncurrent debt.
(5) Shipments in thousands of metric tons. Average selling prices stated
per kilogram.
(6) Order backlog is defined as unfilled purchase orders (including those under
consignment arrangements) which are generally subject to deferral or
cancellation by the customer under certain conditions.
20
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Overview. The Company estimates that aggregate shipment volumes for
titanium mill products in 2004 was derived from the following markets:
TIMET Titanium Industry (1)
---------------------------------- ----------------------------------
Mill product Mill product
shipments % of total shipments % of total
--------------- -------------- --------------- ---------------
(Metric tons) (Metric tons)
Aerospace:
Commercial aerospace 6,575 58% 20,900 34%
Military aerospace 1,395 12% 4,000 6%
--------------- -------------- --------------- ---------------
Total aerospace 7,970 70% 24,900 40%
Industrial 2,770 24% 33,900 55%
Emerging 625 6% 3,000 5%
--------------- -------------- --------------- ---------------
11,365 100% 61,800 100%
=============== ============== =============== ===============
- --------------------------------------------------------------------------------------------------------------------
(1) Estimates based on the Company's industry experience and information
obtained from publicly-available external resources (e.g., United States
Geological Survey, International Titanium Association and Japan Titanium
Society).
The titanium industry derives a substantial portion of its demand from the
aerospace industry, particularly the highly cyclical commercial aerospace
sector. As shown in the table, the Company's business is more dependent on
aerospace demand than is the overall titanium industry, and the Company's sales
growth during 2004 has benefited from growth in the commercial aerospace sector
during this same period.
Increased sales revenue, however, has been somewhat offset by increased
costs. As a result of higher raw material costs and increasing book inventories
during 2004, partially offset by increased capacity utilization, the Company's
LIFO inventory reserve increased at the end of 2004 as compared to 2003,
resulting in a charge to cost of sales of $7.8 million for the full year 2004.
Conversely, during 2003, the Company's successful cost reduction efforts and
increased capacity utilization provided for lower unit costs, which, when
coupled with decreasing book inventories, reduced the Company's LIFO inventory
reserve at the end of 2003 as compared to the end of 2002, resulting in a
reduction to cost of sales of $11.4 million in 2003.
In August 2004, the Company completed an exchange offer, pursuant to which
the Company had offered to exchange all of the 4,024,820 outstanding BUCS issued
by the Capital Trust for shares of the Company's Series A Preferred Stock at the
exchange rate of one share of Series A Preferred Stock for each BUCS. Based upon
the 3,909,103 BUCS tendered and accepted for exchange as of the close of the
offer on August 31, 2004, the Company issued 3,909,103 shares of Series A
Preferred Stock in exchange for such BUCS. During the third quarter of 2004, the
Company recognized a $15.5 million non-cash, non-operating gain related to the
BUCS exchange. See Note 12 to the Consolidated Financial Statements.
21
During 2004, the Company recorded $13.6 million ($10.8 million to cost of
sales and $2.8 million to selling, general, administrative and development
expense) related to certain employee incentive compensation payments expected to
be made in 2005 for service in 2004. Comparably, the Company accrued $0.4
million in 2003 related to incentive compensation payments made in 2004 for
service in 2003. The increase in incentive compensation expenses in 2004 is
primarily due to the Company's improved financial performance during the year.
Summarized financial information. The following table summarizes certain
information regarding the Company's results of operations for the past three
years. Average selling prices, as reported by the Company, are a reflection not
just of actual selling prices received by the Company, but also include other
related factors such as currency exchange rates and customer and product mix in
a given period. Consequently, changes in average selling prices from period to
period will be impacted by changes occurring not just in actual prices, but by
these other factors as well. The percentage change information presented below
represents changes from the respective prior year. See "Results of Operations -
Outlook" for further discussion of the Company's business expectations for 2005.
Year ended December 31,
------------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
($ in thousands, except product shipment data)
Net sales:
Melted products $ 72,092 $ 57,409 $ 34,800
Mill products 364,248 279,563 278,204
Other products 65,488 55,132 53,497
Other (1) - (6,800) -
--------------- --------------- ---------------
Net sales $ 501,828 $ 385,304 $ 366,501
Gross margin 55,918 17,030 (3,123)
Gross margin percent of net sales 11% 4% -1%
Melted products shipments:
Volume (metric tons) 5,360 4,725 2,400
Average selling prices ($ per kilogram) $ 13.45 $ 12.15 $ 14.50
Mill products shipments:
Volume (metric tons) 11,365 8,875 8,860
Average selling prices ($ per kilogram) $ 32.05 $ 31.50 $ 31.40
Percentage change in:
Sales volume:
Melted products +13 +97 -46
Mill products +28 - -27
Average selling prices:
Melted products +11 -16 -
Mill products +2 - +5
Selling prices - excludes changes in product mix:
Melted products +7 -12 -1
Mill products in U.S. dollars +6 -3 +4
Mill products in billing currencies (2) +2 -7 +3
- --------------------------------------------------------------------------------------------------------------------
(1) Represents the effect of a $6.8 million reduction to sales related to the
termination of a purchase and sale agreement with Wyman-Gordon. See
"Results of Operations -- 2004 operations."
(2) Excludes the effect of changes in foreign currencies.
22
Based upon the terms of the Company's LTA with Boeing, the Company receives
an annual $28.5 million (less $3.80 per pound of titanium product sold to Boeing
subcontractors in the preceding year) customer advance from Boeing in January of
each year related to Boeing's purchases from TIMET for that year. This advance
continues through 2007. The terms of the LTA allow Boeing to purchase up to 7.5
million pounds of titanium product annually from TIMET through 2007, but limit
TIMET's maximum quarterly volume obligation to 3.0 million pounds, only 40% of
which may be ingot. The LTA is structured as a take-or-pay agreement such that,
beginning in calendar year 2002, Boeing forfeits $3.80 per pound of its advance
payment in the event that its orders for delivery are less than 7.5 million
pounds in any given calendar year. The Company recognizes income to the extent
Boeing's year-to-date orders for delivery plus TIMET's maximum quarterly volume
obligations for the remainder of the year total less than 7.5 million pounds.
This income is recognized as other operating income and is not included in sales
revenue, sales volume or gross margin. Based on actual purchases of
approximately 1.7 million pounds during 2004, the Company recognized $22.1
million of take-or-pay income for the year ended December 31, 2004. The Company
recognized $23.1 million and $23.4 million of such income during 2003 and 2002,
respectively. Had the Company not benefited from such provisions, the Company's
results would have been as follows:
Year ended December 31,
--------------------------------------------------------
2004 2003 2002
---------------- ---------------- ----------------
Operating income (loss), as reported $ 35,277 $ 5,432 $ (20,849)
Less take-or-pay income 22,093 23,083 23,408
---------------- ---------------- ----------------
Operating income (loss), excluding take-or-pay $ 13,184 $ (17,651) $ (44,257)
================ ================ ================
Net income (loss) attributable to common $ 35,540 $ (13,057) $ (111,530)
stockholders, as reported
Less take-or-pay income 22,093 23,083 23,408
---------------- ---------------- ----------------
Net income (loss) attributable to common
stockholders, excluding take-or-pay $ 13,447 $ (36,140) $ (134,938)
================ ================ ================
2004 operations. Melted product sales increased 26% and mill product sales
increased 30% during 2004 as compared to 2003, principally as a result of
increased sales volume due to greater market demand and/or share gains across
all markets. More specifically, large commercial aircraft deliveries increased
from 575 in 2003 to 602 in 2004, and 2005 deliveries are expected to be 680
aircraft. As previously discussed, a substantial portion of the Company's
business is tied to the commercial aerospace industry, and sales of titanium
generally precede aircraft deliveries by about one year. Therefore, the
Company's 2004 net sales have significantly benefited from the increase in
production of large commercial aircraft scheduled for delivery in 2005.
Average selling prices use actual customer and product mix and foreign
currency exchange rates prevailing during the respective periods. The Company's
melted products are generally sold only in U.S. dollars. Melted product average
selling prices during 2004, as compared to 2003, were positively affected by
current market conditions and changes in customer and product mix. Mill product
average selling prices during 2004, as compared to 2003, were positively
affected by the weakening of the U.S. dollar compared to both the British pound
sterling and the euro and negatively affected by changes in customer and product
mix.
23
Gross margin (net sales less cost of sales) increased during 2004 as
compared to 2003 primarily as a result of improved plant operating rates (from
56% during 2003 to 73% during 2004), partially offset by increased raw material
costs and higher energy costs. Gross margin during 2004 was also impacted by:
o A $1.6 million reduction in cost of sales related to the modification
of the Company's vacation policy. 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 accrue the current year's
vacation entitlement over the course of the year;
o A $10.8 million charge to cost of sales related to the accrual of
previously discussed employee incentive compensation payments expected
to be made for 2004; and
o A $7.8 million charge to cost of sales related to the previously
discussed increase in the Company's LIFO inventory reserve.
Comparatively, gross margin during 2003 was impacted by:
o An $11.4 million reduction in cost of sales related to the previously
discussed decrease in the Company's LIFO inventory reserve;
o A $1.7 million reduction in cost of sales related to a revision of the
Company's estimate of probable loss associated with a previously
reported tungsten inclusion matter; and
o A $6.8 million reduction in sales related to the termination of a
purchase and sale agreement with Wyman-Gordon. Concurrently, the
Company and Wyman-Gordon entered into new long-term purchase and sale
agreements covering the sale of TIMET products to various Wyman-Gordon
locations through 2008.
Selling, general, administrative and development expenses increased 23%,
from $36.4 million during 2003 to $44.9 million during 2004, principally as a
result of (i) a $2.8 million accrual related to certain employee incentive
compensation payments expected to be made in 2005, (ii) $2.0 million of
additional auditing and consulting costs relative to the Company's compliance
with the Sarbanes-Oxley Act's internal control requirements and (iii) $1.0
million of increased costs related to the Company's intercompany services
agreement with Contran Corporation ("Contran").
Equity in earnings of joint ventures increased 183%, from $0.5 million
during 2003 to $1.3 million during 2004, due to an increase in the operating
results of VALTIMET, the Company's minority owned welded tube joint venture.
Net other operating income (expense) decreased 6% from income of $24.4
million during 2003 to income of $23.0 million during 2004, principally due to a
decrease in the amount of previously discussed take-or-pay income recognized by
the Company during 2004. See Note 15 to the Consolidated Financial Statements.
24
2003 operations. Melted product sales increased 65%, principally as a
result of new customer relationships, share gains and changes in product mix
during 2003 as compared to 2002. Mill product sales remained relatively flat
during 2003 as compared to 2002, as average selling prices and sales volumes
were relatively unchanged. Mill product average selling prices were positively
affected during 2003 by the weakening of the U.S. dollar compared to the British
pound sterling and the euro.
Gross margin increased during 2003 as compared to 2002 primarily as a
result of the Company's cost reduction efforts, slightly improved plant
operating rates (from 55% during 2002 to 56% during 2003) and favorable raw
material mix. Additionally, as previously discussed, the Company's LIFO
inventory reserve decreased at the end of 2003 as compared to the end of 2002,
resulting in a reduction in cost of sales of $11.4 million in 2003. This
compared with an increase in the Company's LIFO inventory reserve at the end of
2002 compared to the end of 2001, for which the Company increased cost of sales
by $9.3 million in 2002. Gross margin during 2003 was also positively impacted
by the previously discussed $1.7 million reduction in cost of sales related to a
tungsten inclusion matter. Gross margin during 2003 was adversely impacted by
the previously discussed $6.8 million reduction in sales relating to the
termination of the Wyman-Gordon agreement.
Selling, general, administrative and development expenses decreased 15%
from $43.0 million during 2002 to $36.4 million during 2003, principally as a
result of lower personnel and travel costs, as well as focused cost control in
other administrative areas.
Equity in earnings of joint ventures decreased 77% from $2.0 million during
2002 to $0.5 million during 2003, principally due to a decrease in the operating
results of VALTIMET.
Net other operating income (expense) increased 5% from income of $23.3
million during 2002 to income of $24.4 million during 2003, principally due to
gains of $0.5 million and $0.6 million related to the settlement of certain
litigation in the first quarter and fourth quarters, respectively, of 2003. See
Note 15 to the Consolidated Financial Statements.
Non-operating income (expense).
Year ended December 31,
------------------------------------------------------
2004 2003 2002
--------------- ---------------- ---------------
(In thousands)
Interest expense on bank debt $ (2,649) $ (2,017) $ (3,381)
Interest expense on debt payable to the Capital Trust (9,802) (14,402) (13,763)
--------------- ---------------- ---------------
$ (12,451) $ (16,419) $ (17,144)
=============== ================ ===============
Dividends and interest income $ 687 $ 383 $ 118
Equity in earnings of common
securities of the Capital Trust 424 432 413
Gain on BUCS exchange, net 15,465 - -
Impairment of investment in Special Metals
Corporation ("SMC") preferred securities - - (27,500)
Surety bond guarantee credit (expense) 221 (449) (1,575)
Foreign exchange loss, net (477) (189) (587)
Other, net (121) (471) (762)
--------------- ---------------- ---------------
$ 16,199 $ (294) $ (29,893)
=============== ================ ===============
25
Interest expense on bank debt for 2004 increased 31% compared to 2003
primarily due to higher average outstanding borrowings during 2004 compared to
2003, which the Company used primarily to support its accumulation of inventory
to meet expected customer demand during 2005. Interest expense on bank debt for
2003 decreased 40% compared to 2002, primarily due to lower average outstanding
borrowings, as the Company generated positive cash flow from operations and was
able to reduce its bank borrowings to zero by year-end 2003.
Prior to 2004, annual interest expense on the Company's debt payable to the
Capital Trust approximated $13.7 million, exclusive of any accrued interest on
deferred interest payments. On September 1, 2004, the Company exchanged 97.1% of
its outstanding BUCS for its Series A Preferred Stock, resulting in a $15.5
million non-cash, non-operating gain (see "Liquidity and Capital Resources -
Other" and Note 12 to the Consolidated Financial Statements). Interest expense
related to the remaining debt payable to the Capital Trust ($12.0 million at
December 31, 2004) is approximately $0.8 million per year. Dividends on the
Series A Preferred Stock will approximate the reduction of interest expense on
debt payable to the Capital Trust in determining income attributable to common
stockholders.
During 2002, the Company exercised its right to defer interest payments on
the Subordinated Debentures, effective for the December 1, 2002 scheduled
interest payment. Interest continued to accrue at the 6.625% coupon rate on the
principal and unpaid interest until 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.
Dividends and interest income during 2004 consisted of dividends received
on the Company's investments in marketable securities and interest income earned
on cash and cash equivalents. Dividends and interest income during 2003 and 2002
consisted solely of interest income earned on cash and cash equivalents.
In March 2002, SMC and its U.S. subsidiaries filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result, the
Company undertook a further assessment of its investment in SMC and subsequently
recorded a $27.5 million impairment charge during the first quarter of 2002,
which reduced the Company's carrying amount of its investment in the SMC
securities to zero. This charge was classified as other non-operating expense.
Under the terms of SMC's Second Amended Joint Plan of Reorganization, approved
by the Bankruptcy Court in 2003, the convertible preferred securities were
cancelled. Although the Company does have certain rights as an unsecured
creditor under the SMC Plan of Reorganization related to the unpaid dividends,
the Company does not believe that it will recover any material amount from this
investment.
TIMET is the primary obligor on two $1.5 million workers' compensation
bonds issued on behalf of a former subsidiary, Freedom Forge Corporation
("Freedom Forge"), which TIMET sold in 1989. Freedom Forge filed for Chapter 11
bankruptcy protection in 2001, and discontinued payment on the underlying
workers' compensation claims. During 2002, TIMET received notices that the
issuers of the bonds were required to make payments on the first bond with
respect to certain of these claims and were requesting reimbursement from TIMET.
As of December 31, 2004, the Company has made aggregate payments under the two
bonds of $1.1 million, and $0.6 million remains accrued for future payments.
TIMET may revise its estimated liability under these bonds in the future as
additional facts become known or claims develop.
26
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
years ended December 31, 2004, 2003 and 2002, the Company's income tax rate
varied from the U.S. statutory rate primarily due to changes in the deferred
income tax valuation allowance related to the Company's tax attributes with
respect to the "more-likely-than-not" recognition criteria during those periods.
The Company did not recognize a deferred tax benefit related to its 2002 or
2003 U.S. losses and, accordingly, increased its U.S. deferred tax valuation
allowance by $40.2 million in 2002 and by $0.2 million in 2003. During the
fourth quarter of 2002, the Company recorded a charge to other comprehensive
loss to reflect an increase in its U.K. minimum pension liability. The related
tax effect of this charge resulted in the Company's shifting from a net deferred
tax liability position to a net deferred tax asset position. Based on the
Company's recent history of U.K. losses, its near-term outlook and management's
evaluation of available tax planning strategies, the Company determined that it
would not recognize this deferred tax asset because it did not meet the
"more-likely-than-not" recognition criteria and recorded a U.K. deferred tax
asset valuation allowance of $7.2 million through other comprehensive income.
Additionally, the Company determined that it would not recognize deferred tax
benefits related either to future U.K. losses or future increases in U.K.
minimum pension liabilities for an uncertain period of time. Accordingly, the
Company increased its U.K. deferred tax valuation allowance by $5.5 million in
2003.
During 2004, the Company's deferred income tax asset valuation allowance
related to income from continuing operations decreased by $13.7 million
primarily due to the utilization of the U.S. and U.K. net operating loss ("NOL")
carryforwards, the benefit of which had previously not met the
"more-likely-than-not" recognition criteria. As of December 31, 2004, the
Company had cumulative valuation allowances in the U.S. and U.K. of
approximately $80.8 million offsetting its deferred income tax assets, primarily
related to net operating loss carryforwards, capital loss carryforwards, minimum
pension liability and other temporary differences. The Company has concluded
that the benefit from these items does not currently meet the
"more-likely-than-not" recognition criteria, in part because the Company has not
demonstrated a recent pattern of taxable income for a time period sufficient to
overcome the negative evidence generated by prior operating losses. The Company
will continue to monitor and evaluate these deferred income tax asset valuation
allowances in light of all available evidence, and it is possible that at some
point in the future the Company will conclude that the weight of positive
evidence is sufficient to support reversal of some or all of its valuation
allowances.
The Company periodically reviews its deferred income tax assets to
determine if future realization is more likely than not. During the third
quarter of 2004, due to a change in estimate of the Company's ability to utilize
the benefits of its NOL carryforwards in Germany, the Company determined that
its deferred income tax asset in Germany now meets the "more-likely-than-not"
recognition criteria. Accordingly, the Company reversed the $0.7 million
valuation allowance attributable to such deferred income tax asset.
During the fourth quarter of 2004, the Company recognized a deferred income
tax benefit related to a $4.2 million decrease in the Company's U.S. deferred
income tax asset valuation allowance attributable to the Company's recognition,
for U.S. income tax purposes only, of a capital gain on the fourth quarter sale
of certain property located at the Company's Henderson, Nevada facility (see
Note 6 to the Consolidated Financial Statements). The Company expects to
recognize a corresponding deferred income tax expense in 2005, when the gain is
recognized under accounting principles generally accepted in the United States
of America.
27
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law provides for a special 85% deduction for certain dividends
received in 2005 from controlled foreign corporations. Because certain details
in the new law lack clarification, and the impact of the special dividend
received deduction to the Company is dependent, in part, on the Company's 2005
foreign and domestic taxable income, the Company has not yet determined whether
it will benefit from the new law. In 2005, the Company plans to evaluate both
clarifying guidance on the new law from the Internal Revenue Service and its
year-to-date taxable income activity to determine the level of benefit, if any,
the Company will derive from the special dividend received deduction.
Beginning in 2005, the new law also provides for a special deduction from
U.S. taxable income equal to a stipulated percentage of a U.S. company's
qualified income from domestic manufacturing activities (as defined). Although
the Company believes that the majority of its operations meet the definition of
qualified domestic manufacturing activities, the Company does not expect to
benefit from the special manufacturing deduction in 2005, primarily because the
Company projects its U.S. taxable income in 2005 will be fully offset by its
existing U.S. NOL carryforwards.
During the first quarter of 2002, the Job Creation and Worker Assistance
Act of 2002 (the "JCWA Act") was signed into law. The Company benefited from
provisions of the JCWA Act, which liberalized certain net operating loss and
alternative minimum tax restrictions. As a result, the Company recognized $1.8
million of refundable U.S. income taxes during the first quarter of 2002. The
Company received $0.8 million of this refund in the fourth quarter of 2002 and
the remaining $1.0 million in the third quarter of 2003.
See also Note 16 to the Consolidated Financial Statements.
Dividends on Series A Preferred Stock. Shares of the Company's Series A
Preferred Stock are convertible, at any time, at the option of the holder
thereof, into one and two-thirds shares of the Company's common stock, subject
to adjustment in certain events. The Series A Preferred Stock is not mandatorily
redeemable, but is redeemable at the option of the Company at any time after the
third anniversary of the date of issuance if, prior to the notice of such
redemption, the closing price of the Company's common stock exceeds the
conversion price for 30 consecutive days. When, as and if declared by the
Company's board of directors, holders of the Series A Preferred Stock are
entitled to receive cumulative cash dividends at the rate of 6.75% of the $50
per share liquidation preference per annum per share (equivalent to $3.375 per
annum per share). The Company paid dividends of $3.3 million to holders of the
Series A Preferred Stock during 2004. Subsequent to December 31, 2004, the
Company's board of directors declared a dividend of $0.84375 per share, payable
on March 15, 2005 to holders of record of Series A Preferred Stock as of the
close of trading on March 1, 2005.
Cumulative effect of change in accounting principle. On January 1, 2003,
the Company adopted Statement of Financial Accounting Standards ("SFAS") No.
143, Accounting for Asset Retirement Obligations, and recognized (i) an asset
retirement cost capitalized as an increase to the carrying value of its
property, plant and equipment of approximately $0.2 million, (ii) accumulated
depreciation on such capitalized cost of approximately $0.1 million and (iii) a
liability for the asset retirement obligation of approximately $0.3 million. The
asset retirement obligation recognized relates primarily to landfill closure and
leasehold restoration costs.
28
In 2002, the Company completed an impairment assessment of its goodwill and
intangible assets upon its adoption of SFAS No. 142, Goodwill and Other
Intangible Assets, in 2002. Management judgment was used to identify the
Company's reporting units, determine the carrying amount of each reporting unit
by assigning its assets and liabilities, including existing goodwill and
intangible assets, to those reporting units as of January 1, 2002, and determine
the implied fair value of its goodwill. This evaluation considered, among other
things, a combination of fair value indicators including quoted market prices,
prices of comparable businesses and discounted projected cash flows based upon
Company forecasts, which considered information obtained from review of The
Airline Monitor and from discussions with the Company's customers throughout the
first half of 2002, both of which assisted the Company in better estimating the
impact of the September 11, 2001 terrorist attacks on its business. As a result
of this information, step one of the impairment evaluation completed in the
second quarter of 2002 indicated that the Company's recorded goodwill might be
impaired, which obligated the Company to complete the second step of the
impairment test. Based on the results of the second step of the impairment test
completed during the third quarter of 2002, which indicated the Company's
goodwill was impaired, the Company recorded a non-cash goodwill impairment
charge of $44.3 million, representing the entire balance of the Company's
recorded goodwill at January 1, 2002.
See further discussion regarding the Company's adoption of these accounting
principles in Notes 2 and 7 to the Consolidated Financial Statements.
European operations. The Company has substantial operations located in
Europe, principally in the United Kingdom, France and Italy. Approximately 43%
of the Company's sales revenue originated in Europe in 2004, of which
approximately 61% was denominated in the British pound sterling or the euro.
Certain purchases of raw materials, principally titanium sponge and alloys, for
the Company's European operations are denominated in U.S. dollars, while labor
and other production costs are primarily denominated in local currencies. The
functional currencies of the Company's European subsidiaries are those of their
respective countries, and the European subsidiaries are subject to exchange rate
fluctuations that may impact reported earnings and may affect the comparability
of period-to-period operating results. Borrowings of the Company's European
operations may be in U.S. dollars or in functional currencies. The Company's
export sales from the U.S. are denominated in U.S. dollars and as such are not
subject to currency exchange rate fluctuations.
The Company does not use currency contracts to hedge its currency
exposures. Net currency transaction losses included in results of operations
were $0.5 million in 2004, $0.2 million in 2003 and $0.6 million in 2002. At
December 31, 2004, consolidated assets and liabilities denominated in currencies
other than functional currencies were approximately $39.7 million and $35.0
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.
Related party transactions. The Company is a party to certain transactions
with related parties. See Note 18 to the Consolidated Financial Statements.
29
Outlook. The Outlook section contains a number of forward-looking
statements, all of which are based on current expectations and exclude the
effect of potential future charges related to restructurings, asset impairments,
valuation allowances, changes in accounting principles and similar items, unless
otherwise noted. Undue reliance should not be placed on these statements, as
more fully discussed in the "Forward-Looking Information" statement of this
Annual Report. Actual results may differ materially. See also Notes to the
Consolidated Financial Statements regarding commitments, contingencies, legal
matters, environmental matters and other matters, including new accounting
principles, which could materially affect the Company's future business, results
of operations, financial position and liquidity.
In 2004, TIMET returned to full-year profitability for the first time since
1998. This was primarily achieved due to significant increases in demand for the
Company's products into all markets, as well as continued focus on controlling
costs. The Company is encouraged by what it expects for the near future, with
prices for its products continuing to rise, build rates of commercial aircraft
forecasted to increase, and greater potential for increases in several emerging
markets, including military armor, energy and automotive applications.
Over the past several quarters, the Company has seen the availability of
raw materials tighten, and, consequently, the prices for such raw materials
increase. The Company currently expects that a shortage in raw materials is
likely to continue throughout 2005 and into 2006, which could limit the
Company's ability to produce enough titanium products to fully meet customer
demand. In addition, TIMET has certain customer long-term agreements that limit
the Company's ability to pass on all of its increased raw material costs.
The Company currently expects its 2005 net sales revenue to range from $650
million to $680 million, which is an increase of 30% to 36% from 2004. Mill
product sales volume, which was 11,365 metric tons in 2004, is expected to range
from 13,600 and 14,300 metric tons in 2005, an increase of 20% to 26%. Melted
product sales volume, which was 5,360 metric tons in 2004, is expected to range
from 5,400 and 5,700 metric tons in 2005, an increase of 1% to 6%. The Company
also expects mill product average selling prices to increase by 10% to 15% in
2005, as compared to 2004, and melted product average selling prices to increase
from 17% to 22% in 2005, as compared to 2004.
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 and energy costs. Raw material costs, which include sponge, scrap
and alloys, represent the largest portion of the Company's manufacturing cost
structure, and, as previously discussed, continued cost increases are expected
during 2005. Scrap and certain alloy prices have more than doubled from year ago
prices, and increased energy costs also continue to have a negative impact on
gross margin. In addition, the Company's cost of sales can be significantly
affected by adjustments to its LIFO inventory reserve, as was the case during
2004 and 2003. The Company currently expects production volumes to continue to
increase in 2005, with overall capacity utilization expected to approximate 75%
to 80% in 2005 (as compared to 73% in 2004). However, practical capacity
utilization measures can vary significantly based on product mix. Current
expectations are that gross margin during 2005 will range from 11% to 13% of net
sales.
Selling, general, administrative and development expenses is expected to
increase from $45 million during 2004 to approximately $48 million during 2005,
or from 7.1% to 7.4% of projected net sales, which is a decrease from 8.9% of
net sales in 2004.
30
The Company anticipates that Boeing will purchase a significantly higher
amount of titanium during 2005 as compared to 2004 and, therefore, expects the
amount of take-or-pay income recognized during 2005 to decrease to between $15
million and $20 million. The take-or-pay income will continue to be reported as
operating income, but will not be included in sales revenue, sales volume or
gross margin.
The Company presently expects operating income for 2005 of $50 million to
$65 million, which represents a 42% to 84% increase from operating income earned
in 2004. Dividends on the Company's Series A Preferred Stock should approximate
$13.2 million in 2005. The Company expects net income attributable to common
stockholders to range from $35 million to $50 million.
These net income estimates include a $12.6 million non-operating gain
related to the sale of certain property adjacent to the Company's Henderson,
Nevada plant site to Basic Management, Inc. and certain affiliates ("BMI"), a
32%-owned subsidiary of Valhi. This gain is primarily comprised of (i) $12.0
million in cash received upon closing of the sale (in November 2004) and (ii)
the anticipated reversal of a $0.6 million accrual currently recorded by the
Company for potential environmental issues related to the property, which
obligation will be assumed by BMI. This gain has been deferred and will be
recognized when the Company completes its construction of a wastewater treatment
facility on its Henderson plant site and can cease use of certain settling ponds
located on the property sold to BMI. The Company currently expects the
wastewater treatment facility to be completed and operational in the second
quarter of 2005.
These net income estimates exclude a net income tax benefit of $35 million
to $40 million that the Company may recognize during 2005 if a reversal of a
portion of the Company's deferred tax asset valuation allowance with respect to
its U.S. and U.K. net operating loss carryforwards is determined to be
appropriate under the more-likely-than-not recognition criteria.
The Company currently expects to generate $50 million to $60 million in
cash flow from operations during 2005. Capital expenditures during 2005 are
expected to approximate $42 million. The increased spending over 2004 primarily
reflects the remaining $13 million related to construction of the wastewater
treatment facility, as well as additional capacity improvements as the Company
continues to prepare for increased demand by certain customers under long-term
agreements. Depreciation and amortization should approximate $32 million in
2005.
The Company currently expects to make contributions of approximately $8.2
million to its defined benefit pension plans during 2005, and expects pension
expense to approximate $8.1 million in 2005.
31
Non-GAAP financial measures. In an effort to provide investors with
information in addition to the Company's results as determined by accounting
principles generally accepted in the United States of America ("GAAP"), the
Company has provided the following non-GAAP financial disclosures that it
believes may provide useful information to investors:
o The Company discloses percentage changes in its mill and melted
product selling prices in U.S. dollars, which have been adjusted to
exclude the effects of changes in product mix. The Company believes
such disclosure provides useful information to investors by allowing
them to analyze such changes without the impact of changes in product
mix, thereby facilitating period-to-period comparisons of the relative
changes in average selling prices. Depending on the composition of
changes in product mix, the percentage change in selling prices
excluding the effect of changes in product mix can be higher or lower
than such percentage change would be using the actual product mix
prevailing during the respective periods;
o In addition to disclosing percentage changes in its mill product
selling prices adjusted to exclude the effects of changes in product
mix, the Company also discloses such percentage changes in billing
currencies, which also excludes the effects of changes in foreign
currency exchange rates. The Company believes such disclosure provides
useful information to investors by allowing them to analyze such
changes without the impact of changes in foreign currency exchange
rates, thereby facilitating period-to-period comparisons of the
relative changes in average selling prices in the various actual
billing currencies. Generally, when the U.S. dollar strengthens
(weakens) against other currencies, the percentage change in selling
prices in billing currencies will be higher (lower) than such
percentage changes would be using actual exchange rates prevailing
during the respective periods; and
o The Company discloses operating income and net income excluding the
impact of the Boeing take-or-pay income. The Company believes this
provides investors with useful information to better analyze the
Company's business and possible future earnings during periods after
December 31, 2007, at which time the Company will no longer receive
the positive effects of the take-or-pay income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows for each of the past three years are
presented below. The following should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto.
Year ended December 31,
------------------------------------------------------
2004 2003 2002
--------------- ---------------- ---------------
(In thousands)
Cash (used) provided by:
Operating activities $ (22,433) $ 65,821 $ (13,595)
Investing activities (44,528) (14,534) (7,467)
Financing activities 38,742 (22,068) 3,523
--------------- ---------------- ---------------
Net cash (used) provided by operating,
investing and financing activities $ (28,219) $ 29,219 $ (17,539)
=============== ================ ===============
32
Operating activities. The titanium industry historically has derived a
substantial portion of its business from the aerospace industry. The aerospace
industry is cyclical, and changes in economic conditions within the aerospace
industry significantly impact the Company's earnings and operating cash flows.
Cash flow from operations has been a primary source of the Company's liquidity.
Changes in titanium pricing, production volume and customer demand, among other
things, could significantly affect the Company's liquidity.
Certain items included in the determination of net loss have an impact on
cash flows from operating activities, but the impact of such items on cash may
differ from their impact on net loss. For example, pension expense and OPEB
expense will generally differ from the outflows of cash for payment of such
benefits. In addition, relative changes in assets and liabilities generally
result from the timing of production, sales and purchases. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period than that in which the underlying cash transaction occurs. For
example, raw materials may be purchased in one period, but the cash payment for
such raw materials may occur in a subsequent period. Similarly, inventory may be
sold in one period, but the cash collection of the receivable may occur in a
subsequent period.
The Company's bottom line increased from a net loss attributable to common
stockholders of $13.1 million for the year ended December 31, 2003 to net income
attributable to common stockholders of $35.5 million for the year ended December
31, 2004.
Accounts receivable increased during 2004 primarily due to increased sales,
as fourth quarter 2004 net sales, the primary source of the year end accounts
receivable balance, increased 36% over the year ago period. Accounts receivable
decreased during 2003 primarily due to improved collection efforts with the
Company's customers, partially offset by the weakening of the U.S. dollar
compared to the British pound sterling and the euro. Accounts receivable
decreased significantly during 2002 primarily as a result of reduced sales,
partially offset by an increase in aging of accounts as certain customers
extended their payment terms to the Company in response to unfavorable economic
conditions.
Inventories increased during 2004 as a result of increased run rates and
related inventory build in order to meet expected customer demand during 2005,
as well as the effects of increased raw material costs. These increases were
partially offset by a $7.8 million increase in the Company's LIFO reserve at
December 31, 2004. Inventories decreased during 2003 primarily due to the
Company's concentrated focus on inventory reduction during 2003, partially
offset by a decrease in the Company's LIFO inventory reserve of $11.4 million.
Inventories decreased during 2002 primarily as a result of reduced production in
the fourth quarter of 2002, a $9.3 million increase in the Company's LIFO
inventory reserve and an increase in the Company's reserves for excess
inventories, which the Company recorded in response to decreased demand for its
products and other changes in business conditions.
33
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. Accrued liabilities increased during 2004
primarily due to (i) a $12.0 million net increase in the Company's accrual for
incentive compensation for potential employee profit sharing payments to be made
in 2005 and (ii) a $1.1 million increase to the Company's accrual for costs
expected to be incurred for environmental remediation at the Company's
Henderson, Nevada facility. These increases were partially offset by (i) payment
of the $2.8 million final installment related to termination of the prior
Wyman-Gordon agreement, (ii) a $1.9 million reduction of the Company's vacation
accrual related to the Company's modification of its vacation policy for its U.S
salaried employees and (iii) a $3.5 million reclassification of the Company's
U.S. defined benefit pension liability from current to noncurrent, as the
Company's short-term cash contribution requirements decreased significantly.
Pursuant to an agreement between TIMET and Boeing, Boeing advances TIMET
$28.5 million annually less $3.80 per pound of titanium product purchased by
Boeing subcontractors during the preceding year. The Company received a $27.9
million advance for 2005 in January 2005, a $27.9 million advance for 2004 in
January 2004 and a $27.7 million advance for 2003 in January 2003. See Note 10
to the Consolidated Financial Statements.
During the first quarter of 2002, the Company recorded a $27.5 million
impairment charge to its investment in the preferred securities of SMC, which
reduced the carrying amount of such investment to zero. See "Results of
Operations - Non-operating income (expense)" for further discussion of the
Company's investment in SMC.
See "Results of Operations - Income taxes" for discussion of the Company's
income taxes.
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.
Investing activities. During 2004, the Company purchased 2,549,520 shares
of CompX International, Inc. ("CompX") Class A common stock for $32.0 million
and 222,100 shares of NL Industries, Inc. ("NL") common stock for $2.5 million.
See further discussion in Note 4 to the Consolidated Financial Statements.
The Company's capital expenditures were $23.6 million in 2004, $12.5
million in 2003 and $7.8 million in 2002, principally for replacement of
machinery and equipment and for capacity maintenance. Additionally, the 2004
amount includes $3.9 million related to construction in progress on the
wastewater treatment facility.
See "Results of Operations - Outlook" for discussion of the $12 million of
proceeds from sale of property in Henderson.
34
During the fourth quarter of 2003, the Company deposited funds into
certificates of deposit and other interest bearing accounts as collateral for
certain Company obligations in lieu of entering into letters of credit. These
deposits, which are restricted as to the Company's use, provide the Company with
interest income as opposed to interest expense incurred through the use of
letters of credit. During 2004, certain of these deposits were liquidated in
favor of entering into letters of credit.
Financing activities. Cash provided during 2004 related primarily to the
Company's net borrowings of $43.2 million, which the Company primarily used to
support the accumulation of inventory in order to meet expected customer demand
for 2005 and also support capital expenditures and the acquisition of marketable
securities. In addition, the Company paid dividends on its Series A Preferred
Stock of $3.3 million and TIMET Savoie made a $0.7 million dividend payment to
CEZUS during 2004. Cash used during 2003 related primarily to the Company's
$19.3 million of net repayments on its outstanding borrowings upon the Company's
receipt of a $27.7 million customer advance in January 2003. Additionally, TIMET
Savoie made a $1.9 million dividend payment to CEZUS during 2003. Cash provided
during 2002 related primarily to net borrowings of $6.3 million necessary to
fulfill the Company's working capital needs. Additionally, TIMET Savoie made a
$1.1 million dividend payment to CEZUS during 2002. The Company also incurred
approximately $1.1 million in financing costs in conjunction with the Company's
amendment of its U.S. revolving credit agreement in 2002. These costs were
deferred and are amortized over the life of the agreement, which matures in
February 2006. See further discussion below in "Liquidity and Capital Resources
- - Borrowing arrangements."
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 currently accrues at rates based on LIBOR
plus 2% and bank prime rate plus 0.5%. The weighted average interest rate on
borrowings outstanding as of December 31, 2004 was 4.3%. Borrowings are
collateralized by substantially all of the Company's U.S. assets.
The U.S. credit agreement prohibits the payment of distributions in respect
of the Capital Trust's BUCS and dividends on the Company's Series A Preferred
Stock if "excess availability" (defined as borrowing availability less
outstanding borrowings and certain contractual commitments such as letters of
credit) is less than $25 million. Further, the credit agreement 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, including a minimum net worth
covenant and a fixed charge ratio covenant, and contains other covenants
customary in lending transactions of this type. The Company was in compliance
with all covenants for all periods during the years ended December 31, 2004 and
2003. As of December 31, 2004, the Company had outstanding borrowings under the
U.S. credit agreement of $43.2 million, and excess availability was
approximately $48 million. Under this agreement, the Company is required to
maintain a lock box arrangement whereby daily net cash receipts are used to
reduce outstanding borrowings. Accordingly, any outstanding balances under the
U.S. credit agreement are classified as a current liability, regardless of the
maturity date of the agreement.
35
The Company's subsidiary, TIMET UK, has a credit agreement that provides
for borrowings limited to the lesser of (pound)22.5 million or a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and property, plant and equipment ("borrowing availability"). The
credit agreement includes revolving and term loan facilities and an overdraft
facility (the "U.K. Facilities") and matures in February 2006. Borrowings under
the U.K. Facilities can be in various currencies including U.S. dollars, British
pounds sterling and euros and are collateralized by substantially all of TIMET
UK's assets. Interest generally accrues at LIBOR plus 1.25% for U.S. dollar
borrowings and the bank's Base Rate plus 1.25% for British pound sterling
borrowings.
The U.K. Facilities require the maintenance of certain financial ratios and
amounts, including a consolidated net worth covenant and other covenants
customary in lending transactions of this type. TIMET UK was in compliance with
all covenants for all periods during the years ended December 31, 2004 and 2003.
The U.K. overdraft facility is subject to annual review in December of each year
and was renewed in December 2004. During the second quarter of 2003, TIMET UK
received an interest-bearing intercompany loan from a U.S. subsidiary of the
Company enabling TIMET UK to reduce its borrowings under the U.K. Facilities to
zero. This loan was repaid in full during the third quarter of 2004. As of
December 31, 2004, the Company had no borrowings under the U.K. Facilities, and
unused borrowing availability was approximately $43 million.
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. As of December 31, 2004, there were no
outstanding borrowings under these facilities, and unused borrowing availability
was approximately $18 million.
No dividends were paid by TIMET on its common stock during 2004, 2003 or
2002. During the year ended December 31, 2004, the Company paid dividends on its
Series A Preferred Stock in the amount of $3.3 million. In addition, subsequent
to December 31, 2004, the Company's board of directors declared a dividend of
$0.84375 per share, payable on March 15, 2005 to holders of record of Series A
Preferred Stock as of the close of trading on March 1, 2005.
36
Contractual commitments. As more fully described in Notes 11, 12, 18 and 19
to the Consolidated Financial Statements, the Company was a party to various
debt, lease and other agreements at December 31, 2004 that contractually commits
the Company to pay certain amounts in the future. The following table summarizes
such contractual commitments that are enforceable and legally binding on the
Company and that specify all significant terms, including pricing, quantity and
date of payment:
Payment Due Date
---------------------------------------------------------------------------
2006/ 2008/ 2010 &
2005 2007 2009 After Total
----------- ------------ ------------ ------------ ------------
Contractual Commitment (In thousands)
Capital leases (1) $ 33 $ 62 $ 62 $ 88 $ 245
Operating leases 2,672 4,855 4,405 22,605 34,537
Notes payable (2) 43,176 - - - 43,176
Debt payable to Capital Trust (and
accrued interest thereon at
December 31, 2004) 66 - - 12,010 12,076
Purchase obligations:
Raw materials (3) 82,119 40,897 - - 123,016
Other (4) 27,190 10,461 4,508 6,243 48,402
Other contractual obligations (5) 4,108 175 - - 4,283
----------- ------------ ------------ ------------ ------------
$ 159,364 $ 56,450 $ 8,975 $ 40,946 $ 265,735
=========== ============ ============ ============ ============
- -----------------------------------------------------------------------------------------------------------------------
(1) Includes interest payments due under the capital lease agreements.
(2) The Company's U.S. credit agreement matures in 2006. However, this
agreement requires the Company's daily net cash receipts to be used to
reduce outstanding borrowings and, therefore, the outstanding balance at
December 31, 2004 is classified as a current liability.
(3) These obligations generally relate to the purchase of titanium sponge
pursuant to an LTA that expires on December 31, 2007 (as described in Item
1: Business) and various other open orders for purchase of raw materials.
The LTA does not contain automatic renewal provisions; however, the Company
may enter into a new agreement to replace the current LTA in the future.
(4) These obligations generally relate to contractual operating fees paid to
CEZUS for use of a portion of its Ugine, France plant pursuant to an
agreement expiring in 2006 (as described in Item 2: Properties), energy
purchase obligations with BMI which expire in 2010 (as described in Note 18
to the Consolidated Financial Statements), contractual obligations related
to the construction of the wastewater treatment facility (as described in
"Results of Operation - Outlook"), an obligation to Contran under an
intercorporate services agreement ("ISA") for 2005 (as described in Note 18
to the Consolidated Financial Statements) and various other open orders for
purchase of energy and property and equipment. These obligations are
generally based on an average price and an assumed constant mix of products
purchased, as appropriate. The Company and CEZUS have reached an agreement
in principle to extend their operating agreement through 2011. The Company
expects to enter into an ISA annually with Contran subsequent to 2005. All
open orders are for delivery in 2005.
(5) These other obligations are recorded on the Company's balance sheet as of
December 31, 2004 and consist of current income taxes payable, a contract
for removal of environmental waste and obligations related to worker's
compensation bonds discussed in "Liquidity and Capital Resources -
Off-balance sheet arrangements."
The Company has excluded any potential commitment for funding of retirement
and postretirement benefit plans from this table. However, such potential future
contributions are discussed below, as appropriate, in "Liquidity and Capital
Resources - Defined benefit pension plans" and "Liquidity and Capital Resources
- - Postretirement benefit plans other than pensions."
37
Off-balance sheet arrangements. As more fully discussed in "Results of
Operations - Non-operating income (expense)," the Company is the primary obligor
on two $1.5 million workers' compensation bonds issued on behalf of Freedom
Forge. The Company has fully expensed the obligation under one of the bonds, but
based upon current claims analysis, the Company has expensed only $0.2 million
on the other bond, although it is potentially obligated for the remaining $1.3
million. Additionally, the Company has entered into letters of credit to
collateralize (i) potential workers' compensation claims in Ohio and Nevada and
(ii) future usage of electricity in Nevada. The Company's excess availability
under its U.S. credit agreement has been reduced by $2.3 million and $1.3
million, respectively, related to such letters of credit.
Defined benefit pension plans. As of December 31, 2004, the Company
maintains three defined benefit pension plans - one each in the U.S., the U.K.
and France. Prior to December 31, 2003, the U.S. maintained two plans, which
were merged as of that date. The majority of the discussion below relates to the
U.S. and U.K. plans, as the French plan is not material to the Company's
Consolidated Balance Sheets, Statements of Operations or Statements of Cash
Flows.
The Company recorded consolidated pension expense of $7.7 million, $8.9
million and $4.9 million for the years ended December 31, 2004, 2003 and 2002,
respectively. Pension expense for these periods was calculated based upon a
number of actuarial assumptions, most significant of which are the discount rate
and the expected long-term rate of return.
The discount rate the Company utilizes for determining pension expense and
pension obligations is based on a review of long-term bonds (10 to 15 year
maturities) that receive one of the two highest ratings given by recognized
rating agencies (generally Merrill Lynch, Moody's, Solomon Smith Barney and UBS
Warburg) as well as composite indices provided by the Company's actuaries.
Changes in the Company's discount rate over the past three years reflect the
decline in such bond rates during that period. The Company establishes a rate
that is used to determine obligations as of the year-end date and expense for
the subsequent year. The Company used the following discount rate assumptions
for its pension plans:
Discount rates used for:
------------------------------------------------------------------------------------------------
Obligation at Obligation at Obligation at
December 31, 2004 December 31, 2003 December 31, 2002
and expense in 2005 and expense in 2004 and expense in 2003
------------------------------ ------------------------------ ---------------------------
U.S. Plan(s) 5.65% 6.00% 6.25%
U.K. Plan 5.30% 5.50% 5.70%
In developing the Company's expected long-term rate of return assumptions,
the Company evaluates historical market rates of return and input from its
actuaries, including a review of asset class return expectations as well as
long-term inflation assumptions. Projected returns are based on broad equity
(large cap, small cap and international) and bond (corporate and government)
indices as well as anticipation that the plans' active investment managers will
generate premiums above the standard market projections. The Company used the
following long-term rate of return assumptions for its pension plans:
Long-term rates of return used for:
------------------------------------------------------------------------------------------------
Obligation at Obligation at Obligation at
December 31, 2004 December 31, 2003 December 31, 2002
and expense in 2005 and expense in 2004 and expense in 2003
------------------------------ ------------------------------ ---------------------------
U.S. Plan(s) 10.00% 10.00% 8.50%
U.K. Plan 7.10% 7.10% 6.70%
38
Lowering the expected long-term rate of return on the Company's U.S. plans'
assets by 0.5% (from 10.0% to 9.5%) would have increased 2004 pension expense by
approximately $0.3 million, and lowering the discount rate assumption by 0.25%
(from 6.0% to 5.75%) would have increased the Company's U.S. plans' 2004 pension
expense by approximately $0.1 million. Lowering the expected long-term rate of
return on the Company's U.K. plan's assets by 0.5% (from 7.1% to 6.6%) would
have increased 2004 pension expense by approximately $0.5 million, and lowering
the discount rate assumption by 0.25% (from 5.5% to 5.25%) would have increased
the Company's U.K. plan's 2004 pension expense by approximately $0.8 million.
During the second quarter of 2003, the Company transferred all of its U.S.
plans' assets into the Combined Master Retirement Trust ("CMRT"). The CMRT is a
collective investment trust established by Valhi to permit the collective
investment by certain master trusts which fund certain employee benefits plans
sponsored by Valhi and certain related companies. The CMRT held 12% of TIMET
common stock at December 31, 2004; however, the Company's plan assets are
invested only in a portion of the CMRT that does not hold TIMET common stock. At
December 31, 2004, Valhi and related entities or persons (excluding the CMRT)
held approximately 40.8% of TIMET's outstanding common stock and approximately
41.3% of the Company's Series A Preferred Stock. Harold C. Simmons, Chairman of
the Board of Directors of Valhi and Vice Chairman of the Board of Directors of
TIMET, is the sole trustee of the CMRT, a member of the trust investment
committee for the CMRT.
The CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indices) utilizing both third-party investment
managers as well as investments directed by Mr. Simmons. During the 17-year
history of the CMRT, the average annual rate of return earned by the CMRT, as
calculated based on the average percentage change in the CMRT's net asset value
per CMRT unit for each applicable year, was 12.7%. The CMRT earned an annual
return of 18.0% in 2004, and the CMRT's last 5-year and 10-year average annual
returns were 12.4% and 12.7%, respectively. The CMRT's annual rates of return
from inception through December 31, 2004 have varied from a high of a 42.2%
return (in 1998) to a low of a 20.7% loss (in 1990). During that same period,
the S&P 500's annual rates of return have varied from a high of a 34.1% return
(in 1995) to a low of a 23.4% loss (in 2002).
At December 31, 2004, the CMRT's asset mix (based on an aggregate asset
value of $539 million) was 77.1% U.S. equity securities, 7.2% foreign equity
securities, 14.1% debt securities and 1.6% cash and other. The CMRT`s trustee
and investment committee actively manage the investments within the CMRT. Such
parties have in the past, and may again in the future, periodically change the
relative asset mix based upon, among other things, advice they receive from
third-party advisors and their expectation as to what asset mix will generate
the greatest overall return. Based on the above, the Company increased its
long-term rate of return assumption to 10.0% for December 31, 2003 pension
obligations and for 2004 pension expense for its U.S. plan and maintained the
assumption for December 31, 2004 pension obligations and 2005 pension expense.
39
Because of market fluctuations and prior funding strategies, actual asset
allocation as of December 31, 2004 was 86.9% equity securities and 13.1% fixed
income securities for the U.K. plan. During 2003, the trustees for the U.K. plan
selected a new investment advisor (effective in 2004) for the U.K. plan and
modified its asset allocation goals. The Company's future expected long-term
rate of return on plan assets for its U.K. plan is based on an asset allocation
assumption of 80% equity securities and 20% fixed income securities by the end
of 2005 and 60% equity securities and 40% fixed income securities by the end of
2007, and all current contributions to the plan are invested wholly in fixed
income securities in order to gradually effect the shift. Based on various
factors, including improved economic and market conditions, gains on the plan
assets during 2003 and projected asset mix, the Company increased its assumed
long-term rate of return for December 31, 2003 pension obligations and for 2004
pension expense to 7.10% for its U.K. plan and maintained the assumption for
December 31, 2004 pension obligations and for 2005 pension expense.
Although the expected rate of return is a long-term measure, the Company
will continue to evaluate its expected rate of return, at least annually, and
will adjust it as considered necessary. The expected return on the fair value of
the plan assets, determined based on the expected long-term rate of return, is a
component of pension expense. This methodology further recognizes actual
investment gains or losses (i.e., the difference between the expected and actual
returns based on the market value of assets) in pension expense through
amortization in future periods based upon the expected average remaining service
life of the plan participants. Unrealized gains or losses may impact future
periods to the extent the accumulated gains or losses are outside the "corridor"
as defined by SFAS No. 87.
Based on an expected rate of return on plan assets of 10.0%, a discount
rate of 5.65% and various other assumptions, the Company estimates that its U.S.
plan will have pension expense of approximately $0.3 million in 2005 and
approximately $11,000 in 2006 and pension income of approximately $0.4 million
in 2007. A 0.25% increase (decrease) in the discount rate would decrease
(increase) projected pension expense by approximately $0.1 million in 2005 and
2006 and increase (decease) projected pension income by approximately $0.1
million in 2007. A 0.5% increase (decrease) in the long-term rate of return
would decrease (increase) projected pension expense by approximately $0.3
million in 2005 and approximately $0.4 million in 2006 and increase (decrease)
projected pension income by approximately $0.4 million in 2007.
Based on an expected rate of return on plan assets of 7.1%, a discount rate
of 5.3% and various other assumptions (including an exchange rate of
$1.90/(pound)1.00), the Company estimates that pension expense for its U.K. plan
will approximate $7.8 million in 2005, $7.0 million in 2006 and $6.3 million in
2007. A 0.25% increase (decrease) in the discount rate would decrease (increase)
projected pension expense by approximately $0.8 million in 2005, $0.7 million in
2006 and $0.7 million in 2007. A 0.5% increase (decrease) in the long-term rate
of return would decrease (increase) projected pension expense by approximately
$0.6 million in 2005, $0.7 million in 2006 and $0.9 million in 2007.
Actual future pension expense will depend on actual future investment
performance, changes in future discount rates and various other factors related
to the participants in the Company's pension plans.
40
The Company made cash contributions of approximately $1.8 million in 2004,
$4.4 million in 2003 and $1.2 million in 2002 to the U.S. plans and cash
contributions of approximately $8.2 million in 2004, $7.3 million in 2003 and
$6.1 million in 2002 to the U.K. plan. Based upon the current underfunded status
of the plans and the actuarial assumptions being used for 2005, the Company
believes that it will be required to make the following cash contributions
(exclusive of any required employee contributions) over the next five years:
Projected cash contributions
-----------------------------------------------------------
U.S. Plan U.K.Plan Total
---------------- ----------------- -----------------
(In millions, and using an exchange
rate of$1.90/(pound)1.00 for U.K. plan )
Year ending December 31,
2005 $ - $ 8.2 $ 8.2
2006 $ 0.2 $ 8.5 $ 8.7
2007 $ 0.3 $ 8.7 $ 9.0
2008 $ 3.1 $ 9.0 $ 12.1
2009 $ - $ 9.3 $ 9.3
The U.S. plan(s) paid benefits of approximately $5.7 million in 2004, $5.6
million in 2003 and $5.4 million in 2002, and the U.K. plan paid benefits of
approximately $4.7 million in 2004, $4.3 million in 2003 and $4.1 million in
2002. Based upon current projections, the Company believes the plans will be
required to pay the following benefits over the next ten years:
Projected retirement benefits
-----------------------------------------------------------
U.S. Plan U.K.Plan Total
---------------- ----------------- -----------------
(In millions, and using an exchange
rate of$1.90/(pound)1.00 for U.K. plan )
Year ending December 31,
2005 $ 5.8 $ 4.9 $ 10.7
2006 $ 5.9 $ 5.1 $ 11.0
2007 $ 5.9 $ 5.2 $ 11.1
2008 $ 5.9 $ 5.4 $ 11.3
2009 $ 5.9 $ 5.5 $ 11.4
2010 through 2014 $ 29.3 $ 29.9 $ 59.2
The value of the plans' assets has fluctuated dramatically over the past
three years based mainly on performance of the plans' equity securities. The
U.S. plans' assets were $67.2 million, $60.7 million and $48.2 million at
December 31, 2004, 2003 and 2002, respectively, and the U.K. plan's assets were
$121.0 million, $97.8 million and $69.8 million at December 31, 2004, 2003 and
2002, respectively.
41
The combination of actual investment returns, changing discount rates and
changes in other assumptions has a significant effect on the Company's funded
plan status (plan assets compared to projected benefit obligations). In 2004,
the effect of positive investment returns and cash contributions was more than
offset by the decline in the discount rate and certain changes in mortality and
other retirement assumptions, thereby increasing the under-funded status of the
U.S. plan by $1.3 million to $11.4 million at December 31, 2004. In 2004, the
effect of positive investment returns in the U.K. plan was also more than offset
by the decline in the discount rate and certain changes in mortality and
retirement assumptions, as well as the effect of the weakening dollar compared
to the British pound sterling, thereby increasing the underfunded status of the
U.K. plan by $8.4 million to $62.0 million at December 31, 2004. The U.S. and
U.K. plans were underfunded by $10.1 million and $53.6 million, respectively, at
December 31, 2003. Based upon the change in the funded status of the plans
during 2004, the Company was required to record a net additional minimum pension
liability charge (net of tax) to equity of $8.9 million, reflecting additional
comprehensive loss of $2.5 million for the U.S. plan and $6.4 million related to
the U.K. plan.
Postretirement benefit plans other than pensions. The Company provides
limited postretirement healthcare and life insurance ("OPEB") benefits to a
portion of its U.S. employees upon retirement. The Company funds such OPEB
benefits as they are incurred, net of any retiree contributions. The Company
paid OPEB benefits, net of retiree contributions, of $2.5 million in 2004, $3.1
million in 2003 and $4.6 million in 2002.
The Company recorded consolidated OPEB expense of $3.0 million in 2004,
$2.7 million in 2003 and $2.9 million in 2002. OPEB expense for these periods
was calculated based upon a number of actuarial assumptions, most significant of
which are the discount rate and the expected long-term health care trend rate.
The discount rate the Company utilizes for determining OPEB expense and
OPEB obligations is the same as that used for the Company's U.S. pension plans.
Lowering the discount rate assumption by 0.25% (from 6.0% to 5.75%) would have
increased the Company's 2004 OPEB expense by less than $0.1 million.
The Company estimates the expected long-term health care trend rate based
upon input from specialists in this area, as provided by the Company's
actuaries. In estimating the health care trend rate, the Company considers
industry trends, the Company's actual healthcare cost experience and the
Company's future benefit structure. For 2004, the Company used a beginning
health care trend rate of 10.35%, which is projected to reduce to an ultimate
rate of 4.0% in 2010. If the health care trend rate changed by 1.00% for each
year, OPEB expense would have increased/decreased by approximately $0.3 million
in 2004. For 2005, the Company is using a beginning health care trend rate of
9.29%, which is projected to reduce to an ultimate rate of 4.0% in 2010.
Based on a discount rate of 5.65%, a health care trend rate as discussed
above and various other assumptions, the Company estimates that OPEB expense
will approximate $3.4 million in 2005, $3.3 million in 2006 and $3.2 million in
2007. A 0.25% increase (decrease) in the discount rate would decrease (increase)
projected OPEB expense by less than $0.1 million in 2005, 2006 and 2007. A 1.0%
increase (decrease) in the health care trend rate for each year would increase
(decrease) the projected service and interest cost components of OPEB expense by
approximately $0.3 million in 2005, 2006 and 2007.
42
Based upon current projections, the Company will be required to pay the
following OPEB benefits, net of retiree contributions, over the next ten years:
Projected OPEB
payments
----------------------
(In millions)
Year ending December 31,
2005 $ 2.8
2006 $ 2.9
2007 $ 3.0
2008 $ 3.1
2009 $ 3.3
2010 through 2014 $ 18.1
Environmental matters. See "Business - Regulatory and environmental
matters" in Item 1 and Note 19 to the Consolidated Financial Statements for a
discussion of environmental matters.
Other. The Company periodically evaluates its liquidity requirements,
capital needs and availability of resources in view of, among other things, its
alternative uses of capital, debt service requirements, the cost of debt and
equity capital and estimated future operating cash flows. As a result of this
process, the Company has in the past, or in light of its current outlook, may in
the future, seek to raise additional capital, modify its common and preferred
dividend policies, restructure ownership interests, incur, refinance or
restructure indebtedness, repurchase shares of common stock, purchase 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 Mr.
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.
43
During the first nine months of 2004, the Company purchased 2,212,820
shares of CompX Class A common shares, representing approximately 14.6% of the
total number of shares of all classes of CompX common stock outstanding. As of
September 30, 2004, NL, a subsidiary of Valhi, held an additional 68.4% of
CompX. Effective on October 1, 2004, the Company and NL contributed 100% of
their respective holdings on that date of all classes of CompX common stock to
CompX Group, Inc. ("CGI") in return for a 17.6% and 82.4% ownership interest in
CGI, respectively, and CGI became the owner of the 83.0% of CompX that the
Company and NL had previously held in the aggregate. The CompX shares are the
sole assets of CGI. The Company's shares of CGI are redeemable at the option of
the Company based upon the market value of the underlying CompX stock held by
CGI. The fair value of the Company's investment in CGI is based on the market
value of the underlying CompX shares.
During the fourth quarter of 2004, the Company purchased an additional
336,700 shares of CompX and as of December 31, 2004, the Company held (directly
and through its investment in CGI) approximately 16.8% of the total number of
shares of all classes of CompX common stock outstanding. None of the shares
purchased subsequent to September 30, 2004 have been, or are expected to be,
contributed to CGI. Depending upon the Company's evaluation of the business and
prospects of CompX, and upon future developments (including, but not limited to,
performance of the Class A Shares in the market, availability of funds,
alternative uses of funds, and money, stock market and general economic
conditions), TIMET may from time to time purchase, dispose of, or cease buying
or selling Class A Shares.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the Company to
make estimates and judgments, and select from a range of possible estimates and
assumptions, that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reported
period.
On an on-going basis, the Company evaluates its estimates, including those
related to allowances for uncollectible accounts receivable, inventory
allowances, asset lives, impairments of investments in marketable securities and
investments accounted for by the equity method, the recoverability of other
long-lived assets, including property and equipment, goodwill and other
intangible assets, pension and other post-retirement benefit obligations and the
related underlying actuarial assumptions, the realization of deferred income tax
assets, and accruals for asset retirement obligations, environmental
remediation, litigation, income tax and other contingencies. The Company bases
its estimates and judgments, to varying degrees, on historical experience,
advice of external specialists and various other factors it believes to be
prudent under the circumstances. Actual results may differ from previously
estimated amounts and such estimates, assumptions and judgments are regularly
subject to revision.
The policies and estimates discussed below are considered by management to
be critical to an understanding of the Company's financial statements because
their application requires the most significant judgments from management in
estimating matters for financial reporting that are inherently uncertain. See
Notes to the Consolidated Financial Statements for additional information on
these policies and estimates, as well as discussion of additional accounting
policies and estimates.
44
Inventory allowances. The Company values approximately 40% of its inventory
using the LIFO method, with the remainder stated primarily using an average cost
method. The Company periodically reviews its inventory for estimated
obsolescence or unmarketable inventory and records any write-down equal to the
difference between the cost of inventory and its estimated net realizable value
based upon assumptions about alternative uses, market conditions and other
factors.
Impairment of long-lived assets. Generally, when events or changes in
circumstances indicate that the carrying amount of long-lived assets, including
property and equipment, goodwill and other intangible assets, may not be
recoverable, the Company undertakes an evaluation of the assets or asset group.
If this evaluation indicates that the carrying amount of the asset or asset
group is not recoverable, the amount of the impairment would typically be
calculated using discounted expected future cash flows or appraised values. All
relevant factors are considered in determining whether an impairment exists. In
2004, no such events or circumstances indicated the need to perform such
evaluation.
During the fourth quarter of 2002, the Company completed an entity-wide
impairment assessment in response to continued poor conditions in the commercial
aerospace market. In order to complete this assessment, the Company identified
its lowest level of identifiable cash flows, resulting in the identification of
four asset groups - U.S., U.K., France and Italy. Of these asset groups, Italy
is not reliant on sales into the commercial aerospace market and therefore an
analysis of the potential impairment of this asset group was not considered
necessary, so only the U.S., U.K. and France asset groups were evaluated. The
result of this assessment led the Company to conclude that there was no
impairment related to the long-lived assets in these three asset groups tested,
as the undiscounted cash flows exceeded the net carrying value of the applicable
net assets in each of the three asset groups. Although management utilizes
certain external information sources such as The Airline Monitor as the basis
for aerospace sales volume projections, significant management judgment is
required in estimating other factors that are material to future cash flows
including, but not limited to, customer demand, the Company's market position,
selling prices, competitive forces and manufacturing costs. Future cash flows
are inherently uncertain, and there can be no assurance that the Company will
achieve the future cash flows reflected in its projections.
The Company also completed an impairment assessment of its goodwill and
intangible assets upon its adoption of SFAS No. 142 in 2002, which resulted in a
non-cash goodwill impairment charge of $44.3 million. See "Results of Operations
- - Cumulative effect of change in accounting principle" and Note 7 to the
Consolidated Financial Statements for further discussion.
Valuation and impairment of securities. In accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the Company's
marketable securities acquired in 2004, including the shares of CompX
contributed by the Company and held by CGI (based upon the Company's redemption
option), are classified as available-for-sale securities and are carried at fair
value based upon quoted market prices, with unrealized gains and/or losses
included in stockholders' equity as a component of other comprehensive income.
The Company evaluates its investments in marketable securities whenever events
or conditions occur to indicate that the fair value of such investments has
declined below their carrying amounts. If the decline in fair value is judged to
be other than temporary, the carrying amount of the security is written down to
fair value. In 2004, no such events or circumstances indicated the need to
perform such evaluation. See Note 4 to the Consolidated Financial Statements for
further discussion.
45
In the fourth quarter of 2001 and the first quarter of 2002, the Company
undertook assessments of its investment in SMC. Those assessments indicated that
it was unlikely that the Company would recover its then existing carrying amount
of the SMC securities in accordance with the securities' contractual terms and
that an other-than-temporary decline in the fair value of its investment had
occurred. Accordingly, the Company recorded impairment charges of $61.5 million
in the fourth quarter of 2001 and $27.5 million in the first quarter of 2002.
The securities were not publicly traded and, accordingly, quoted market prices
were unavailable. The estimate of fair value required significant judgment and
considered a number of factors including, but not limited to, the financial
health and prospects of SMC and market yields of comparable securities.
Deferred income tax valuation allowances. Under SFAS No. 109, Accounting
for Income Taxes, and related guidance, the Company is required to record a
valuation allowance if realization of deferred tax assets is not
"more-likely-than-not." Substantial weight must be given to recent historical
results and near-term projections, and management must assess the availability
of tax planning strategies that might impact either the need for, or amount of,
any valuation allowance. See "Results of Operations - Income taxes" for
discussion of the Company's analysis of its deferred income tax valuation
allowances.
Pension and OPEB expenses and obligations. The Company's pension and OPEB
expenses and obligations are calculated based on several estimates, including
discount rates, expected rates of returns on plan assets and expected health
care trend rates. The Company reviews these rates annually with the assistance
of its actuaries. See further discussion of the factors considered and potential
effect of these estimates in "Liquidity and Capital Resources - Defined benefit
pension plans" and "Liquidity and Capital Resources - Postretirement benefit
plans other than pensions."
Revenue recognition. Sales revenue is generally recognized when the Company
has certified that its product meets the related customer specifications, the
product has been shipped, and title and substantially all the risks and rewards
of ownership have passed to the customer. Payments received from customers in
advance of these criteria being met are recorded as customer advances until
earned. Amounts charged to customers for shipping and handling are included in
net sales. Sales revenue is stated net of price and early payment discounts.
Other loss contingencies. Accruals for estimated loss contingencies,
including, but not limited to, product-related liabilities, environmental
remediation and litigation, are recorded when it is probable that a liability
has been incurred and the amount of the loss can be reasonably estimated.
Disclosure is made when there is a reasonable possibility that a loss may have
been incurred. Contingent liabilities are often resolved over long time periods.
Estimating probable losses often requires analysis of various projections that
are dependent upon the future outcome of multiple factors, including costs, the
findings of investigations and actions by the Company and third parties.
46
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rates. The Company is exposed to market risk from changes in
interest rates related to indebtedness. The Company typically does not enter
into interest rate swaps or other types of contracts in order to manage its
interest rate market risk. At December 31, 2004, all of the Company's bank
indebtedness was denominated in U.S. dollars and bore interest at variable
rates, generally related to spreads over bank prime rates and LIBOR. Because the
Company's bank indebtedness reprices with changes in market interest rates, the
carrying amount of such debt is believed to approximate fair value. At December
31, 2003, the Company had no bank indebtedness. The following table summarizes
the Company's bank variable rate indebtedness and related maturities as of
December 31, 2004:
Contractual maturity date Interest
---------------------------------------------------------------------
2005 2006 2007 2008 2009 rate (1)
----------- ---------- ----------- ---------- ----------- -----------
(In millions)
U. S. dollars $ 43.2 $ - $ - $ - $ - 4.3%
- ----------------------------------------------------------------------------------------------------------------------
(1) Weighted average.
The Subordinated Debentures held by the Capital Trust provide a fixed
6.625% coupon and are exposed to market risk from changing interest rates. The
BUCS issued by the Capital Trust are publicly traded and may provide the best
available proxy for the fair value of the underlying Subordinated Debentures.
Based upon the last traded value of the BUCS on or before December 31, 2004
($16.00 per BUCS), the fair value of the outstanding Subordinated Debentures
related to the 115,717 outstanding BUCS approximated $1.9 million at December
31, 2004.
Foreign currency exchange rates. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of its
international operations. The Company does not enter into currency forward
contracts to manage its foreign exchange market risk associated with
receivables, payables or indebtedness denominated in a currency other than the
functional currency of the particular entity. See "Results of Operations -
European operations" in Item 7 - MD&A for further discussion.
Commodity prices. The Company is exposed to market risk arising from
changes in commodity prices as a result of its long-term purchase and supply
agreements with certain suppliers and customers. These agreements, which offer
various fixed or formula-determined pricing arrangements, effectively obligate
the Company to bear (i) the risk of increased raw material and other costs to
the Company that cannot be passed on to the Company's customers through
increased titanium product prices (in whole or in part) or (ii) the risk of
decreasing raw material costs to the Company's suppliers that are not passed on
to the Company in the form of lower raw material prices.
Securities prices. During the year ended December 31, 2004, the Company
acquired certain publicly traded 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 aggregate market value of these equity securities at
December 31, 2004 was $47.2 million, as compared to a cost basis of $34.6
million. The potential change in the aggregate market value of these securities,
assuming a 10% change in prices, would be $4.7 million at December 31, 2004. See
also Note 4 to the Consolidated Financial Statements.
47
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in a separate section of
this Annual Report. See Index of Financial Statements and Schedules on page F.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A: CONTROLS AND PROCEDURES
Evaluation of disclosure 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 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 to be made regarding required disclosure. Each of J.
Landis Martin, the Company's Chief Executive Officer, and Bruce P. Inglis, the
Company's Vice President - Finance, Corporate Controller and Treasurer, have
evaluated the Company's disclosure controls and procedures as of December 31,
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.
Scope of management's report on internal control over financial reporting.
The Company also maintains internal control 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.
48
Section 404 of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act")
requires the Company to include annually a management report on internal control
over financial reporting starting in the Company's Annual Report on Form 10-K
for the year ended December 31, 2004, and such report is included below. The
Company's independent registered public accounting firm is also required to
annually attest to the Company's internal control over financial reporting.
As permitted by the SEC, the Company's assessment of internal control over
financial reporting excludes (i) internal control over financial reporting of
its equity method investees and (ii) internal control over the preparation of
the Company's financial statement schedules required by Article 12 of Regulation
S-X. See Note 5 to the Consolidated Financial Statements and the index of
financial statements and schedules on page F-1 of this Annual Report. However,
the Company's assessment of internal control over financial reporting with
respect to the Company's equity method investees did include its controls over
the recording of amounts related to the Company's investments that are recorded
in its Consolidated Financial Statements, including controls over the selection
of accounting methods for the Company's investments, the recognition of equity
method earnings and losses and the determination, valuation and recording of the
Company's investment account balances.
Changes in internal control over financial reporting. There has been no
change to the Company's internal control over financial reporting during the
quarter ended December 31, 2004 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Management's report on internal control over financial reporting. The
Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting. The Company's evaluation of the
effectiveness of its internal control over financial reporting is based upon the
framework of the Committee of Sponsoring Organizations of the Treadway
Commission (commonly referred to as the "COSO" framework). Based on the
Company's evaluation under that framework, management of the Company has
concluded that the Company's internal control over financial reporting was
effective as of December 31, 2004. See Scope of Management's Report on Internal
Control Over Financial Reporting above.
PricewaterhouseCoopers LLP, the independent registered public accounting
firm that has audited the Company's Consolidated Financial Statements included
in this Annual Report, has audited management's assessment of the effectiveness
of the Company's internal control over financial reporting as of December 31,
2004, as stated in their report which is included in this Annual Report on Form
10-K.
49
Certifications. The Company's chief executive officer is required to
annually file a certification with the New York Stock Exchange ("NYSE"),
certifying the Company's compliance with the corporate governance listing
standards of the NYSE. During 2004, the Company's chief executive officer filed
such annual certification with the NYSE, which was not qualified in any respect,
indicating that he was not aware of any violations by the Company of the NYSE
corporate governance listing standards. The Company's principal executive
officer and principal financial officer are also required to, among other
things, quarterly file certifications with the SEC regarding the quality of the
Company's public disclosures, as required by Section 302 of the Sarbanes-Oxley
Act. Such certifications for the year ended December 31, 2004 have been filed as
exhibits 31.1 and 31.2 to this Annual Report on Form 10-K and such
certifications for the year ended December 31, 2003 were also filed as exhibits
31.1 and 31.2 to the Annual Report on Form 10-K for the year ended December 31,
2003.
ITEM 9B: OTHER INFORMATION
Not applicable.
50
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
TIMET's definitive proxy statement to be filed with the SEC pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
Annual Report (the "TIMET Proxy Statement").
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement. See also Note 18 to the Consolidated Financial
Statements.
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement.
51
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (c) Financial Statements and Schedules
The Consolidated Financial Statements and schedules listed by the
Registrant on the accompanying Index of Financial Statements and Schedules (see
page F) are filed as part of this Annual Report.
(b) Exhibits
The Exhibit Index lists all items included as exhibits to this Annual
Report. TIMET will furnish a copy of any of the exhibits listed below upon
payment of $4.00 per exhibit to cover the costs to TIMET of furnishing the
exhibits. Instruments defining the rights of holders of long-term debt issues
which do not exceed 10% of consolidated total assets will be furnished to the
SEC upon request.
Item No. Exhibit Index
- --------------------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of Titanium Metals
Corporation, as amended effective February 14, 2003, incorporated by
reference to Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2003.
3.2 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of Titanium Metals Corporation, effective August 5, 2004,
incorporated by reference to Exhibit 3.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004.
3.3 Bylaws of Titanium Metals Corporation as Amended and Restated, dated August
31, 2004, incorporated by reference to Exhibit 99.2 to the Registrant's
Current Report on Form 8-K filed with the SEC on September 2, 2004.
4.1 Certificate of Trust of TIMET Capital Trust I, dated November 13, 1996,
incorporated by reference to Exhibit 4.1 to the Registrant's Current Report
on Form 8-K filed with the SEC on December 5, 1996.
4.2 Amended and Restated Declaration of Trust of TIMET Capital Trust I, dated
as of November 20, 1996, among Titanium Metals Corporation, as Sponsor, the
Chase Manhattan Bank, as Property Trustee, Chase Manhattan Bank (Delaware),
as Delaware Trustee and Joseph S. Compofelice, Robert E. Musgraves and Mark
A. Wallace, as Regular Trustees, incorporated by reference to Exhibit 4.2
to the Registrant's Current Report on Form 8-K filed with the SEC on
December 5, 1996.
4.3 Indenture for the 6 5/8% Convertible Junior Subordinated Debentures, dated
as of November 20, 1996, among Titanium Metals Corporation and The Chase
Manhattan Bank, as Trustee, incorporated by reference to Exhibit 4.3 to the
Registrant's Current Report on Form 8-K filed with the SEC on December 5,
1996.
52
Item No. Exhibit Index
- --------------------------------------------------------------------------------
4.4 Form of 6 5/8% Convertible Preferred Securities (included in Exhibit 4.2
above), incorporated by reference to Exhibit 4.4 to the Registrant's
Current Report on Form 8-K filed with the SEC on December 5, 1996.
4.5 Form of 6 5/8% Convertible Junior Subordinated Debentures (included in
Exhibit 4.3 above), incorporated by reference to Exhibit 4.6 to the
Registrant's Current Report on Form 8-K filed with the SEC on December 5,
1996.
4.6 Form of 6 5/8% Trust Common Securities (included in Exhibit 4.2 above),
incorporated by reference to Exhibit 4.5 to the Registrant's Current Report
on Form 8-K filed with the SEC on December 5, 1996.
4.7 Convertible Preferred Securities Guarantee, dated as of November 20, 1996,
between Titanium Metals Corporation, as Guarantor, and The Chase Manhattan
Bank, as Guarantee Trustee, incorporated by reference to Exhibit 4.7 to the
Registrant's Current Report on Form 8-K filed with the SEC on December 5,
1996.
4.8 Purchase Agreement, dated November 20, 1996, between Titanium Metals
Corporation, TIMET Capital Trust I, Salomon Brothers Inc, Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated,
as Initial Purchasers, incorporated by reference to Exhibit 99.1 to the
Registrant's Current Report on Form 8-K filed with the SEC on December 5,
1996.
4.9 Registration Agreement, dated November 20, 1996, between TIMET Capital
Trust I and Salomon Brothers Inc, as Representative of the Initial
Purchasers, incorporated by reference to Exhibit 99.2 to the Registrant's
Current Report on Form 8-K filed with the SEC on December 5, 1996.
4.10 Form of Certificate of Designations, Rights and Preferences of 6 3/4 %
Series A Convertible Preferred Stock, incorporated by reference to Exhibit
4.1 to the Registrant's Pre-effective Amendment No. 1 to Registration
Statement on Form S-4 (File No. 333-114218).
9.1 Shareholders' Agreement, dated February 15, 1996, among Titanium Metals
Corporation, Tremont Corporation, IMI plc, IMI Kynoch Ltd., and IMI
Americas, Inc., incorporated by reference to Exhibit 2.2 to Tremont
Corporation's Current Report on Form 8-K filed with the SEC on March 1,
1996.
9.2 Amendment to Shareholders' Agreement, dated March 29, 1996, among Titanium
Metals Corporation, Tremont Corporation, IMI plc, IMI Kynoch Ltd., and IMI
Americas, Inc., incorporated by reference to Exhibit 10.30 to Tremont
Corporation's Annual Report on Form 10-K for the year ended December 31,
1995.
9.3 Voting Agreement executed October 5, 2004 but effective as of October 1,
2004 among NL Industries, Inc., TIMET Finance Management Company and CompX
Group, Inc., incorporated by reference to Exhibit 99.2 to the Current
Report on Form 8-K of NL Industries, Inc. filed with the SEC on October 8,
2004.
53
Item No. Exhibit Index
- --------------------------------------------------------------------------------
10.1 Form of Lease Agreement, dated November 12, 2004, between The Prudential
Assurance Company Limited. and TIMET UK Ltd. related to the premises known
as TIMET Number 2 Plant, The Hub, Birmingham, England, incorporated by
reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K
filed with the SEC on November 17, 2004
10.2 Loan and Security Agreement by and among Congress Financial Corporation
(Southwest) as Lender and Titanium Metals Corporation and Titanium Hearth
Technologies, Inc. as borrowers, dated February 25, 2000, incorporated by
reference to Exhibit 10.12 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1999.
10.3 Amendment No. 1 to Loan and Security Agreement by and among Congress
Financial Corporation (Southwest) as Lender and Titanium Metals Corporation
and Titanium Hearth Technologies, Inc. as borrowers, dated September 7,
2001, incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
10.4 Amendment No. 2 to Loan and Security Agreement by and among Congress
Financial Corporation (Southwest) as Lender and Titanium Metals Corporation
and Titanium Hearth Technologies, Inc. as borrowers, dated October 23,
2002, incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.
10.5 Amendment No. 3 to Loan and Security Agreement by and among Congress
Financial Corporation (Southwest) as Lender and Titanium Metals Corporation
and Titanium Hearth Technologies, Inc. as borrowers, dated March 18, 2004,
and effective February 12, 2004, incorporated by reference to Exhibit 6 to
Amendment No. 4 to the statement on Schedule 13D for CompX International,
Inc. filed by Valhi, Inc. (along with other reporting persons) on March 23,
2004 (File No. 005-54653).
10.6 Amendment No. 4 to Loan and Security Agreement by and among Congress
Financial Corporation (Southwest) as Lender and Titanium Metals Corporation
and Titanium Hearth Technologies, Inc. as borrowers, dated June 2, 2004,
incorporated by reference to Exhibit 10.1 to the Registrant's Pre-effective
Amendment No.1 to Registration Statement on Form S-4 (File No. 333-114218).
10.7 Loan and Overdraft Facilities between Lloyds TSB Bank plc and TIMET UK
Limited dated December 20, 2002, incorporated by reference to Exhibit 10.23
to the Registrant's Annual Report on Form 10-K for the year ended December
31, 2002.
10.8 Letter dated December 19, 2003 to extend Loan and Overdraft Facilities
between Lloyds TSB Bank plc and TIMET UK Limited dated December 20, 2002.
10.9 Letter dated November 22, 2004 to extend Loan and Overdraft Facilities
between Lloyds TSB Bank plc and TIMET UK Limited dated December 20, 2002.
10.10January 19, 2005 Variation Letter to Loan and Overdraft Facilities between
Lloyds TSB Bank plc and TIMET UK Limited dated December 20, 2002.
54
Item No. Exhibit Index
- --------------------------------------------------------------------------------
10.11* 1996 Long Term Performance Incentive Plan of Titanium Metals Corporation,
incorporated by reference to Exhibit 10.19 to the Registrant's Amendment
No. 1 to Registration Statement on Form S-1 (File No. 333-18829).
10.12* 2004 Senior Executive Cash Incentive Plan, effective January 1, 2004,
incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2004.
10.13* 2005 Titanium Metals Corporation Profit Sharing Plan, incorporated by
reference to Exhibit 99.1 to the Registrant's Current Report on Form 8-K
filed with the SEC on February 28, 2005.
10.14* Executive Severance Policy, as amended and restated effective May 17,
2000, incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
10.15* Titanium Metals Corporation Executive Stock Ownership Loan Plan, as
amended and restated effective February 28, 2001, incorporated by reference
to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2000.
10.16* Form of Loan and Pledge Agreement by and between Titanium Metals
Corporation and individual TIMET executives under the Corporation's
Executive Stock Ownership Loan Program, incorporated by reference to
Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 2000.
10.17* Titanium Metals Corporation Amended and Restated 1996 Non-Employee
Director Compensation Plan, as amended and restated effective October 1,
2004, incorporated by reference to Exhibit 99.2 to the Registrant's Current
Report on Form 8-K filed with the SEC on February 28, 2005.
10.18* Amendment to Employment Contract between TIMET Savoie, S.A., Christian
Leonhard and Titanium Metals Corporation, executed as of November 25, 2003,
incorporated by reference to Exhibit 10.12 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003.
10.19* 2005 Amendment to Employment Contract between TIMET Savoie, S.A.,
Christian J.M. Leonhard and Titanium Metals Corporation, executed as of
November 25, 2003.
10.20Settlement Agreement and Release of Claims dated April 19, 2001 between
Titanium Metals Corporation and The Boeing Company, incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001.
10.21Intercorporate Services Agreement among Contran Corporation, Tremont LLC
and Titanium Metals Corporation, effective as of January 1, 2004,
incorporated by reference to Exhibit 10.17 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2003.
55
Item No. Exhibit Index
- --------------------------------------------------------------------------------
10.22** Purchase and Sale Agreement (For Titanium Products) between The Boeing
Company, acting through its division, Boeing Commercial Airplanes, and
Titanium Metals Corporation (as amended and restated effective April 19,
2001), incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
10.23** Purchase and Sale Agreement between Rolls-Royce plc and Titanium Metals
Corporation dated December 22, 1998, incorporated by reference to Exhibit
10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002.
10.24** First Amendment to Purchase and Sale Agreement between Rolls-Royce plc
and Titanium Metals Corporation, incorporated by reference to Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004.
10.25** Second Amendment to Purchase and Sale Agreement between Rolls-Royce plc
and Titanium Metals Corporation, incorporated by reference to Exhibit 10.2
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004.
10.26** Termination Agreement by and between Wyman-Gordon Company and Titanium
Metals Corporation effective as of September 28, 2003, incorporated by
reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004.
10.27Agreement Regarding Shared Insurance by and between CompX International
Inc., Contran Corporation, Keystone Consolidated Industries, Inc., Kronos
Worldwide, Inc., NL Industries, Inc., Titanium Metals Corporation and
Valhi, Inc. dated October 30, 2003, incorporated by reference to Exhibit
10.20 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
10.28Subscription Agreement executed October 5, 2004 but effective as of October
1, 2004 among NL Industries, Inc., TIMET Finance Management Company and
CompX Group, Inc., incorporated by reference to Exhibit 99.1 to the Current
Report on Form 8-K of NL Industries, Inc. filed with the SEC on October 8,
2004.
10.29Certificate of Incorporation of CompX Group, Inc., incorporated by
reference to Exhibit 99.3 to the Current Report on Form 8-K of NL
Industries, Inc. filed with the SEC on October 8, 2004.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Management contract, compensatory plan or arrangement.
** Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TITANIUM METALS CORPORATION
(Registrant)
By /s/ J. Landis Martin
--------------------------------
J. Landis Martin, March 16, 2005
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/s/ J. Landis Martin /s/ Glenn R. Simmons
- ------------------------------------ -----------------------------------
J. Landis Martin, March 16, 2005 Glenn R. Simmons, March 16, 2005
Chairman of the Board, President Director
and Chief Executive Officer
/s/ Harold C. Simmons /s/ Steven L. Watson
- ------------------------------------ -----------------------------------
Harold C. Simmons, March 16, 2005 Steven L. Watson, March 16, 2005
Vice Chairman of the Board Director
/s/ Norman N. Green /s/ Paul J. Zucconi
- ------------------------------------ -----------------------------------
Norman N. Green, March 16, 2005 Paul J. Zucconi, March 16, 2005
Director Director
/s/ Gary C. Hutchison /s/ Bruce P. Inglis
- ------------------------------------ -----------------------------------
Gary C. Hutchison, March 16, 2005 Bruce P. Inglis, March 16, 2005
Director Vice President - Finance, Corporate
Controller and Treasurer
Principal Financial Officer
Principal Accounting Officer
/s/ Albert W. Niemi, Jr.
- ------------------------------------
Albert W. Niemi, Jr., March 16, 2005
Director
57
TITANIUM METALS CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 15(a) and 15(c)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
Page
Financial Statements ----
Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets - December 31, 2004 and 2003 F-3
Consolidated Statements of Operations -
Years ended December 31, 2004, 2003 and 2002 F-5
Consolidated Statements of Comprehensive Income (Loss) -
Years ended December 31, 2004, 2003 and 2002 F-7
Consolidated Statements of Cash Flows -
Years ended December 31, 2004, 2003 and 2002 F-8
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 2004, 2003 and 2002 F-10
Notes to Consolidated Financial Statements F-11
Financial Statement Schedules
Report of Independent Registered Public Accounting Firm
on Financial Statement Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
Schedules I, III and IV are omitted because they are not applicable.
F
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Titanium Metals Corporation:
We have completed an integrated audit of Titanium Metals Corporation's 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statement of operations, of comprehensive income (loss), of
changes in stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Titanium Metals Corporation and its
subsidiaries at December 31, 2004 and 2003, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2004 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Effective January 1, 2003, the Company changed its method of accounting for
asset retirement obligations. See Note 2 to the consolidated financial
statements. Effective January 1, 2002, the Company changed its method of
accounting for goodwill and other intangible assets. See Note 7 to the
consolidated financial statements.
F-1
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that the Company maintained effective internal control over financial reporting
as of December 31, 2004 based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission ("COSO"), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control-Integrated
Framework issued by the COSO. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) 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 financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Denver, Colorado
March 16, 2005
F-2
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
-----------------------------------
ASSETS 2004 2003
---------------- ----------------
Current assets:
Cash and cash equivalents $ 7,194 $ 35,040
Restricted cash and cash equivalents 721 2,248
Accounts and other receivables, less
allowance of $1,683 and $1,906 96,756 67,432
Refundable income taxes - 2,155
Inventories 231,580 165,721
Prepaid expenses and other 2,400 2,604
Deferred income taxes 4,975 778
---------------- ----------------
Total current assets 343,626 275,978
Marketable securities 47,214 -
Investment in joint ventures 22,591 22,469
Investment in common securities of TIMET Capital Trust I 6,259 6,794
Property and equipment, net 228,173 239,182
Intangible assets, net 5,057 6,294
Deferred income taxes 1,053 -
Other 11,576 16,692
---------------- ----------------
Total assets $ 665,549 $ 567,409
================ ================
F-3
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
December 31,
-----------------------------------
LIABILITIES, MINORITY INTEREST AND 2004 2003
---------------- ----------------
STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 43,176 $ -
Accounts payable 44,164 29,200
Accrued liabilities 53,130 44,471
Deferred gain on sale of property 12,016 -
Customer advances 6,913 3,356
Income taxes payable 2,516 11
Other 257 775
---------------- ----------------
Total current liabilities 162,172 77,813
Capital lease obligations 175 9,766
Accrued OPEB cost 14,470 13,661
Accrued pension cost 77,515 62,366
Accrued environmental cost 1,985 3,930
Deferred income taxes 60 637
Accrued interest on debt payable to TIMET Capital Trust I - 19,003
Debt payable to TIMET Capital Trust I 12,010 207,465
Other 4,939 2,880
---------------- ----------------
Total liabilities 273,326 397,521
---------------- ----------------
Minority interest 12,539 11,131
---------------- ----------------
Stockholders' equity:
Series A Preferred Stock, $.01 par value; $195,455 liquidation
preference; 4,025 shares authorized, 3,909 and 0 shares
issued, respectively 173,650 -
Common stock, $.01 par value; 90,000 shares authorized,
15,963 and 15,950 shares issued, respectively 160 160
Additional paid-in capital 350,866 350,515
Accumulated deficit (103,788) (140,428)
Accumulated other comprehensive loss (39,989) (50,226)
Treasury stock, at cost (45 shares) (1,208) (1,208)
Deferred compensation (7) (56)
---------------- ----------------
Total stockholders' equity 379,684 158,757
---------------- ----------------
Total liabilities, minority interest and stockholders' equity $ 665,549 $ 567,409
================ ================
Commitments and contingencies (Note 19)
See accompanying notes to consolidated financial statements.
F-4
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year ended December 31,
---------------------------------------------------
2004 2003 2002
---------------- -------------- -------------
Net sales $ 501,828 $ 385,304 $ 366,501
Cost of sales 445,910 368,274 369,624
---------------- -------------- -------------
Gross margin 55,918 17,030 (3,123)
Selling, general, administrative and
development expense 44,908 36,438 42,998
Equity in earnings of joint ventures 1,278 451 1,990
Other income (expense), net 22,989 24,389 23,282
---------------- -------------- -------------
Operating income (loss) 35,277 5,432 (20,849)
Interest expense 12,451 16,419 17,144
Other non-operating income (expense), net 16,199 (294) (29,893)
---------------- -------------- -------------
Income (loss) before income taxes, minority
interest and cumulative effect of change in
accounting principle 39,025 (11,281) (67,886)
Income tax (benefit) expense (2,132) 1,207 (1,952)
Minority interest, net of tax 1,219 378 1,286
---------------- -------------- -------------
Income (loss) before cumulative effect of change
in accounting principle 39,938 (12,866) (67,220)
Cumulative effect of change in accounting principle - (191) (44,310)
---------------- -------------- -------------
Net income (loss) 39,938 (13,057) (111,530)
Dividends on Series A Preferred Stock 4,398 - -
---------------- -------------- -------------
Net income (loss) attributable to
common stockholders $ 35,540 $ (13,057) $ (111,530)
================ ============== =============
F-5
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(In thousands, except per share data)
Year ended December 31,
------------------------------------------------------
2004 2003 2002
--------------- ---------------- ---------------
Basic earnings (loss) per share attributable to
common stockholders:
Before cumulative effect of change
in accounting principle $ 2.24 $ (0.81) $ (4.26)
Cumulative effect of change in accounting
principle - (0.01) (2.80)
--------------- ---------------- ---------------
Basic earnings (loss) per share attributable to
common stockholders $ 2.24 $ (0.82) $ (7.06)
=============== ================ ===============
Diluted earnings (loss) per share attributable to
common stockholders:
Before cumulative effect of change
in accounting principle $ 2.20 $ (0.81) $ (4.26)
Cumulative effect of change in accounting
principle - (0.01) (2.80)
--------------- ---------------- ---------------
Diluted earnings (loss) per share attributable to
common stockholders $ 2.20 $ (0.82) $ (7.06)
=============== ================ ===============
Weighted average shares outstanding:
Basic 15,881 15,844 15,803
=============== ================ ===============
Diluted 18,125 15,844 15,803
=============== ================ ===============
Pro forma amounts assuming Statement of
Financial Accounting Standards No. 143
was applied as of January 1, 2002 (Note 2):
Net income (loss) attributable to common
stockholders $ 35,540 $ (12,866) $ (111,556)
=============== ================ ===============
Basic earnings (loss) per share attributable to
common stockholders $ 2.24 $ (0.81) $ (7.06)
=============== ================ ===============
Diluted earnings (loss) per share attributable to
common stockholders $ 2.20 $ (0.81) $ (7.06)
=============== ================ ===============
See accompanying notes to consolidated financial statements.
F-6
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year ended December 31,
----------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
Net income (loss) $ 39,938 $ (13,057) $ (111,530)
Other comprehensive income (loss):
Currency translation adjustment 6,435 11,443 13,359
Unrealized gains on marketable securities 12,597 - -
TIMET's share of VALTIMET SAS's unrealized net
gains on derivative financial instruments
qualifying as cash flow hedges 97 - -
Pension liabilities adjustment (net of tax
benefit of $1,588 in 2002) (8,892) 1,068 (40,822)
--------------- --------------- ---------------
Total other comprehensive income (loss) 10,237 12,511 (27,463)
--------------- --------------- ---------------
Comprehensive income (loss) $ 50,175 $ (546) $ (138,993)
=============== =============== ===============
Currency translation adjustment:
Beginning of year $ 10,407 $ (1,036) $ (14,395)
Change during year 6,435 11,443 13,359
--------------- --------------- ---------------
End of year $ 16,842 $ 10,407 $ (1,036)
=============== =============== ===============
Unrealized gains on marketable securities:
Beginning of year $ - $ - $ -
Change during year 12,597 - -
--------------- --------------- ---------------
End of year $ 12,597 $ - $ -
=============== =============== ===============
TIMET's share of VALTIMET SAS's unrealized net
gains on derivative financial instruments
qualifying as cash flow hedges:
Beginning of year $ - $ - $ -
Change during year 97 - -
--------------- --------------- ---------------
End of year $ 97 $ - $ -
=============== =============== ===============
Pension liabilities adjustment:
Beginning of year $ (60,633) $ (61,701) $ (20,879)
Change during year (8,892) 1,068 (40,822)
--------------- --------------- ---------------
End of year $ (69,525) $ (60,663) $ (61,701)
=============== =============== ===============
See accompanying notes to consolidated financial statements.
F-7
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
--------------------------------------------------
2004 2003 2002
--------------- -------------- --------------
Cash flows from operating activities:
Net income (loss) $ 39,938 $ (13,057) $ (111,530)
Depreciation and amortization 32,828 36,572 37,098
Gain on exchange of BUCS (15,465) - -
Cumulative effect of change in accounting principle - 191 44,310
Noncash impairment of preferred securities - - 27,500
Equity in earnings of joint ventures,
net of distributions 527 796 (961)
Equity in earnings of common securities of
TIMET Capital Trust I, net of distributions 536 (432) (104)
Deferred income taxes (5,711) (259) (3,694)
Minority interest, net of tax 1,219 378 1,286
Other, net (73) 616 1,891
Change in assets and liabilities:
Receivables (25,587) 4,798 24,088
Inventories (60,858) 24,462 10,756
Prepaid expenses and other (77) 461 6,072
Accounts payable and accrued liabilities 20,037 (1,029) (15,806)
Customer advances 3,316 (207) (26,386)
Income taxes 4,417 (256) (1,863)
Accrued OPEB and pension costs 2,927 (2,007) (6,998)
Accrued interest on debt payable to
TIMET Capital Trust I (18,936) 14,403 3,455
Other, net (1,471) 391 (2,709)
--------------- -------------- --------------
Net cash (used) provided by operating activities (22,433) 65,821 (13,595)
--------------- -------------- --------------
Cash flows from investing activities:
Purchase of marketable securities (34,472) - -
Capital expenditures (23,556) (12,467) (7,767)
Proceeds from sale of property, net 11,973 - -
Change in restricted cash, net 1,527 (2,102) -
Other, net - 35 300
--------------- -------------- --------------
Net cash used by investing activities (44,528) (14,534) (7,467)
--------------- -------------- --------------
Cash flows from financing activities:
Indebtedness:
Borrowings 160,195 127,253 169,933
Repayments (117,019) (146,322) (162,396)
Dividends paid to minority interest (691) (1,892) (1,115)
Dividends paid on Series A Preferred Stock (3,298) - -
Other, net (445) (1,107) (2,899)
--------------- -------------- --------------
Net cash provided (used) by financing activities 38,742 (22,068) 3,523
--------------- -------------- --------------
Net cash (used) provided by operating, investing
and financing activities $ (28,219) $ 29,219 $ (17,539)
=============== ============== ==============
F-8
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Year ended December 31,
-------------------------------------------------
2004 2003 2002
-------------- -------------- --------------
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $ (28,219) $ 29,219 $ (17,539)
Effect of exchange rate changes on cash 373 (393) (747)
-------------- -------------- --------------
(27,846) 28,826 (18,286)
Cash and cash equivalents at beginning of year 35,040 6,214 24,500
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 7,194 $ 35,040 $ 6,214
============== ============== ==============
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 30,624 $ 1,325 $ 12,352
Income taxes, net $ - $ 1,561 $ 3,605
Noncash investing and financing activities:
Capital lease obligations incurred when
the Company entered into certain leases
for equipment $ - $ - $ 969
See accompanying notes to consolidated financial statements.
F-9
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2004, 2003 and 2002
(In thousands)
Accumulated
Series A Additional Retained Other
Common Common Preferred Paid-in Earnings Comprehensive Treasury Deferred
Shares Stock Stock Capital (Deficit)Income (Loss) Stock Compensation Total
------- ------ --------- --------- ---------- --------- -------- ------- ---------
Balance at December 31, 2001 15,928 $ 160 $ - $350,673 $ (15,841) $(35,274) $(1,208) $ (396) $298,114
Comprehensive loss - - - - (111,530) (27,463) - - 138,993)
Issuance of common stock - - - 21 - - - - 21
Stock award cancellations (2) - - (66) - - - 66 -
Amortization of deferred
compensation, net of effects of
stock award cancellations - - - - - - - 208 208
Other - - - 133 - - - (133) -
------- ------ --------- --------- ---------- --------- -------- ------- ---------
Balance at December 31, 2002 15,926 160 - 350,761 (127,371) (62,737) (1,208) (255) 159,350
Comprehensive income (loss) - - - - (13,057) 12,511 - - (546)
Issuance of common stock 15 - - 72 - - - - 72
Stock award cancellations (36) - - (318) - - - 318 -
Amortization of deferred
compensation, net of effects of
stock award cancellations - - - - - - - (119) (119)
------- ------ --------- --------- ---------- --------- -------- ------- ---------
Balance at December 31, 2003 15,905 160 - 350,515 (140,428) (50,226) (1,208) (56) 158,757
Comprehensive income - - - - 39,938 10,237 - - 50,175
Issuance of Series A
Preferred Stock - - 173,650 - - - 173,650
Dividends declared on Series A
Preferred Stock - - - - (3,298) (3,298)
Issuance of common stock 23 - - 422 - - - - 422
Stock award cancellations (10) - - (71) - - - 71 -
Amortization of deferred
compensation, net of effects of
stock award cancellations - - - - - - - (22) (22)
------- ------ --------- --------- ---------- --------- -------- ------- ---------
Balance at December 31, 2004 15,918 $ 160 $173,650 $350,866 $(103,788) $(39,989) $(1,208) $ (7) $379,684
======= ====== ========= ========= ========== ========= ======== ======= =========
See accompanying notes to consolidated financial statements.
F-10
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and basis of presentation
Titanium Metals Corporation ("TIMET") is a vertically integrated producer
of titanium sponge, melted products and a variety of mill products for
aerospace, industrial and other applications. The accompanying Consolidated
Financial Statements include the accounts of TIMET and all of its majority-owned
subsidiaries (collectively, the "Company") except the TIMET Capital Trust I (the
"Capital Trust"), a wholly-owned finance subsidiary which was deconsolidated at
December 31, 2003 and for which all prior periods were retroactively restated.
Such retroactive restatement did not impact net loss, stockholders' equity or
cash flow from operations for any prior periods. See further discussion in Note
12. All material intercompany transactions and balances with consolidated
subsidiaries have been eliminated, and certain prior year amounts have been
reclassified to conform to the current year presentation.
At December 31, 2004, Valhi, Inc. and subsidiaries ("Valhi") held 40.8% of
TIMET's outstanding common stock and 0.4% of the Company's 6.75% Series A
Convertible Preferred Stock (the "Series A Preferred Stock"). At December 31,
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
12.1% of the Company's common stock. TIMET's U.S. pension plans invest in a
portion of the CMRT that does not hold TIMET common stock. At December 31, 2004,
Contran Corporation ("Contran") held, directly or through subsidiaries, 90.5% 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 December 31, 2004, Mr. Simmons' spouse
owned 40.9% of the outstanding Series A Preferred Stock. Mr. Simmons may be
deemed to control each of Contran, Valhi and TIMET.
The Company completed a five-for-one stock split of its common stock, which
was effected in the form of a stock dividend (whereby an additional four shares
of post-split stock were distributed for each one share of pre-split stock) and
became effective after the close of trading on August 27, 2004. The Company
completed a one-for-ten reverse stock split, which became effective after the
close of trading on February 14, 2003. All share and per share disclosures for
all periods presented have been adjusted to give effect to these stock splits.
F-11
Note 2 - Summary of significant accounting policies
Use of estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amount of
revenues and expenses during the reporting period. Estimates are used in
accounting for, among other things, allowances for uncollectible accounts,
inventory allowances, environmental accruals, self insurance accruals, deferred
tax valuation allowances, loss contingencies, fair values of financial
instruments, the determination of discount and other rate assumptions for
pension and postretirement employee benefit costs, asset impairments, useful
lives of property and equipment, asset retirement obligations, restructuring
accruals and other special items. Actual results may, in some instances, differ
from previously estimated amounts. Estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected in the period they are
determined to be necessary.
Cash and cash equivalents. Cash equivalents include highly liquid
investments with original maturities of three months or less.
Restricted cash and cash equivalents. Restricted cash and cash equivalents
generally consist of certificates of deposit and other interest bearing accounts
collateralizing certain Company obligations. Such restricted amounts are
generally classified as either a current or noncurrent asset depending on the
classification of the obligation to which the restricted amount relates. All
restricted amounts are classified as current at December 31, 2004 and 2003.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses arising from sales to
customers based on a periodic review of these accounts.
Inventories and cost of sales. Inventories include material, labor and
overhead and are stated at the lower of cost or market, net of an allowance for
slow-moving inventories. Approximately 40% of inventories are costed using the
last-in, first-out ("LIFO") method with the balance stated primarily using an
average cost method. Cost of sales includes costs for materials, packing and
finishing, utilities, maintenance and depreciation, shipping and handling, and
salaries and benefits.
Investments. The Company's marketable securities acquired in 2004,
including the shares of CompX International, Inc. ("CompX") contributed by the
Company and held by CompX Group, Inc. ("CGI") (based upon the Company's
redemption option), are classified as available-for-sale securities and are
carried at fair value based upon quoted market prices, with unrealized gains
and/or losses included in stockholders' equity as a component of other
comprehensive income. The Company evaluates its investments in marketable
securities whenever events or conditions occur to indicate that the fair value
of such investments has declined below their carrying amounts. If the decline in
fair value is judged to be other than temporary, the carrying amount of the
security is written down to fair value. See further discussion in Note 4.
F-12
Investments in 20% to 50% owned joint ventures are accounted for by the
equity method. Additionally, TIMET's 100% owned investment in the Capital Trust
is accounted for by the equity method, as further discussed in Note 12.
Differences between the Company's investment in joint ventures and its
proportionate share of the joint ventures' reported equity are amortized based
upon the respective useful lives of the assets to which the differences relate,
which is generally over not more than 15 years.
Property, equipment and depreciation. Property and equipment are recorded
at cost and depreciated principally on the straight-line method over the
estimated useful lives of 15 to 40 years for buildings and three to 25 years for
machinery and equipment. Capitalized software costs are amortized over the
software's estimated useful life, generally three to five years. Maintenance
(including planned major maintenance), repairs and minor renewals are expensed
as incurred and included in cost of sales. Major improvements are capitalized
and depreciated over the estimated period to be benefited. During 2004,
approximately $28,000 of interest was capitalized. No interest was capitalized
during 2003 or 2002.
Generally, when events or changes in circumstances indicate the carrying
amount of long-lived assets, including property and equipment, may not be
recoverable, the Company prepares an evaluation comparing the carrying amount of
the assets to the undiscounted expected future cash flows of the assets or asset
group. If this comparison indicates the carrying amount is not recoverable, the
amount of the impairment would typically be calculated using discounted expected
future cash flows or appraised values. All relevant factors are considered in
determining whether an impairment exists.
Intangible assets and amortization. Goodwill, representing the excess of
cost over the fair value of individual net assets acquired in business
combinations accounted for by the purchase method, was amortized using the
straight-line method over 15 years and was stated net of accumulated
amortization through December 31, 2001. On January 1, 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets, and recorded an impairment charge for its remaining goodwill
balance. See Note 7. Patents and other intangible assets, except intangible
pension assets, are recorded at cost and amortized using the straight-line
method over the estimated period of benefit, generally seven to nine years. The
Company assesses the amortization period and recoverability of the carrying
amount of patents and other intangible assets at least annually or when events
or circumstances require, and the effects of revisions are reflected in the
period they are determined to be necessary.
Asset retirement obligations. The Company adopted SFAS No. 143, Accounting
for Asset Retirement Obligations, on January 1, 2003. Under SFAS No. 143, the
fair value of a liability for an asset retirement obligation covered under the
scope of SFAS No. 143 is recognized in the period in which the liability is
incurred, with an offsetting increase in the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its future value, and
the capitalized cost is depreciated over the useful life of the related asset.
Upon settlement of the liability, an entity either settles the obligation for
its recorded amount or incurs a gain or loss upon settlement.
F-13
Under the transition provisions of SFAS No. 143, the Company recognized (i)
an asset retirement cost capitalized as an increase to the carrying value of its
property, plant and equipment of approximately $0.2 million, (ii) accumulated
depreciation on such capitalized cost of approximately $0.1 million and (iii) an
other noncurrent liability for the asset retirement obligation of approximately
$0.3 million. Amounts resulting from the initial application of SFAS No. 143
were measured using information, assumptions and interest rates all as of
January 1, 2003. The amount recognized as the asset retirement cost was measured
as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement obligation and accumulated depreciation on the
asset retirement cost were recognized for the time period from the date the
asset retirement cost and liability would have been recognized had the
provisions of SFAS No. 143 been in effect at the date the liability was
incurred, through January 1, 2003.
The difference between the amounts to be recognized as previously described
and any associated amounts recognized in the Company's balance sheet as of
December 31, 2002 was recognized as a cumulative effect of a change in
accounting principle as of January 1, 2003. The asset retirement obligation
recognized as a result of adopting SFAS No. 143 relates primarily to landfill
closure and leasehold restoration costs.
The following table shows pro forma amounts relating to the Company's asset
retirement obligations as if SFAS No. 143 were applied on January 1, 2002, as
well as a roll forward of the asset retirement obligation through December 31,
2004:
Amount
--------------------
(In thousands)
Asset retirement obligation, 1/1/2002 $ 312
Accretion expense 15
--------------------
Asset retirement obligation, 12/31/2002 327
New obligations 160
Revisions to cash flow estimates (48)
Accretion expense (1) 14
Currency translation adjustment 34
--------------------
Asset retirement obligation, 12/31/2003 487
Accretion expense (1) 23
Currency translation adjustment 20
--------------------
Asset retirement obligation, 12/31/2004 $ 530
====================
- --------------------------------------------------------------------------------------------------------------------
(1) Reported as a component of other operating expense.
F-14
Fair value of financial instruments. Carrying amounts of certain of the
Company's financial instruments including, among others, cash and cash
equivalents and accounts receivable approximate fair value because of their
short maturities. The Company's bank debt reprices with changes in market
interest rates and, accordingly, the carrying amount of such debt is believed to
approximate market value. The Company's 6.625% convertible junior subordinated
debentures due 2026 (the "Subordinated Debentures") held by the Capital Trust
were issued at a fixed rate; however, the 6.625% mandatorily redeemable
convertible preferred securities, beneficial unsecured convertible securities
("BUCS") issued by the Capital Trust are a publicly traded security (ticker
symbol "TMCXP.PK"), and may provide the best available proxy for the fair value
of the underlying Subordinated Debentures. Based upon the last traded value of
the BUCS on or before December 31, 2004 and 2003, the aggregate fair value of
the outstanding Subordinated Debentures, including any accrued and unpaid
interest, related to the 115,717 outstanding BUCS approximated $1.9 million and
$137 million at December 31, 2004 and 2003, respectively. The Company's Series A
Preferred Stock is also a publicly traded security (ticker symbol "TIELP.PK").
Based upon the last traded value of the Series A Preferred Stock ($55.76 per
share) on or before December 31, 2004, the market value of such securities,
which the Company believes provides a reasonable estimate of fair value, was
$218.0 million as of December 31, 2004.
Translation of foreign currencies. Assets and liabilities of subsidiaries
whose functional currency is deemed to be other than the U.S. dollar are
translated at year-end rates of exchange, and revenues and expenses are
translated at average exchange rates prevailing during the year. Resulting
translation adjustments are accumulated in the currency translation adjustments
component of other comprehensive income (loss). Currency transaction gains and
losses are recognized in income currently. The Company recognized net currency
transaction losses of $0.5 million in 2004, $0.2 million in 2003 and $0.6
million in 2002.
Stock-based compensation. The Company currently follows the disclosure
alternative prescribed by SFAS No. 123, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure, and has chosen to account for its stock-based employee
compensation related to stock options in accordance with Accounting Principles
Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and its
various interpretations. Under APB No. 25, compensation expense is generally
recognized for fixed stock options for which the exercise price is less than the
market price of the underlying stock on the grant date. All of the Company's
stock options have been granted with exercise prices equal to or in excess of
the market price on the date of grant, and the Company recognized no
compensation expense for stock options in 2004, 2003 or 2002. The following
table illustrates the effect on net income (loss) and income (loss) per share
attributable to common stockholders if the Company had applied the fair value
recognition provisions of SFAS No. 123 to all options granted since January 1,
1995:
F-15
Year ended December 31,
-------------------------------------------------------
2004 2003 2002
---------------- ---------------- ----------------
(In thousands)
Net income (loss) attributable to
common stockholders, as reported $ 35,540 $ (13,057) $ (111,530)
Less stock option related stock-based
employee compensation expense
determined under SFAS No. 123 (65) (215) (598)
---------------- ---------------- ----------------
Pro forma net income (loss) attributable
to common stockholders $ 35,475 $ (13,272) $ (112,128)
================ ================ ================
Basic earnings (loss) per share attributable
to common stockholders:
As reported $ 2.24 $ (0.82) $ (7.06)
================ ================ ================
Pro forma $ 2.23 $ (0.84) $ (7.10)
================ ================ ================
Diluted earnings (loss) per share attributable
to common stockholders:
As reported $ 2.20 $ (0.82) $ (7.06)
================ ================ ================
Pro forma $ 2.20 $ (0.84) $ (7.10)
================ ================ ================
Employee benefit plans. Accounting and funding policies for retirement
plans and postretirement benefits other than pensions ("OPEB") are described in
Note 17.
Revenue recognition. Sales revenue is generally recognized when the Company
has certified that its product meets the related customer specifications, the
product has been shipped, and title and substantially all the risks and rewards
of ownership have passed to the customer. Payments received from customers in
advance of these criteria being met are recorded as customer advances until
earned. Amounts charged to customers for shipping and handling are included in
net sales. Sales revenue is stated net of price and early payment discounts.
Research and development. Research and development expense, which includes
activities directed toward expanding the use of titanium and titanium alloys in
all market sectors, is recorded as selling, general, administrative and
development expense and totaled $2.9 million in 2004, $2.8 million in 2003 and
$3.3 million in 2002. Related engineering and experimentation costs associated
with ongoing commercial production are recorded in cost of sales.
Advertising costs. Advertising costs, which are not significant, are
expensed as incurred.
F-16
Self-insurance. The Company is self insured for certain exposures relating
to employee and retiree medical benefits and workers' compensation claims. The
Company purchases insurance from third-party providers, which limits its maximum
exposure to $150,000 per occurrence for employee medical benefits and $500,000
per occurrence for workers' compensation claims. The Company paid $17.1 million
during 2004, $14.0 million during 2003 and $18.0 million during 2002 related to
employee medical benefits and $170,000 during 2004, $42,000 during 2003 and
$408,000 during 2002 related to workers compensation claims. The Company also
maintains insurance from third-party providers for automobile, property,
product, fiduciary and other liabilities, which are subject to various
deductibles and policy limits typical to these types of insurance policies. See
Note 18 for discussion of policies provided by related parties.
Income taxes. Deferred income tax assets and liabilities are recognized
based on the expected future tax consequences of temporary differences between
the income tax and financial reporting carrying amounts of assets and
liabilities, including investments in subsidiaries not included in TIMET's
consolidated U.S. tax group. The Company periodically reviews its deferred tax
assets to determine if future realization is "more-likely-than-not," and a
change in the valuation allowance is recorded in the period it is determined to
be necessary. See Note 16.
Accounting principles not yet adopted. In November 2004, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4 ("SFAS No. 151"), which clarifies the types
of costs that should be expensed rather than capitalized as inventory. This
statement also clarifies the circumstances under which fixed overhead costs
associated with operating facilities involved in inventory processing should be
capitalized. The guidance is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005, and the Company will adopt SFAS No.
151 no later than January 1, 2006. The Company has not yet determined the
impact, if any, that this statement will have on its consolidated financial
position or results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment ("SFAS No. 123R"), which replaces SFAS No. 123 and supersedes APB No.
25. SFAS No. 123R requires the measurement of all employee share-based payments
to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values. Under SFAS No. 123R, the
pro forma disclosures previously permitted under SFAS No. 123 will no longer be
an alternative to financial statement recognition. The Company will adopt SFAS
No. 123R as of July 1, 2005 and does not believe the adoption of SFAS No. 123R
will have a material effect on the Company's financial position or results of
operations, as all of TIMET's outstanding options will be fully vested as of the
adoption date.
See also Note 17.
F-17
Note 3 - Inventories
December 31,
--------------------------------------
2004 2003
----------------- -----------------
(In thousands)
Raw materials $ 71,067 $ 33,198
Work-in-process 97,848 76,573
Finished products 77,012 62,687
Supplies 12,397 12,248
----------------- -----------------
258,324 184,706
Less adjustment of certain inventories to LIFO basis 26,744 18,985
----------------- -----------------
$ 231,580 $ 165,721
================= =================
Note 4 - Marketable securities
The following table summarizes the Company's marketable securities as of
December 31, 2004, which were acquired during the year then ended:
Unrealized
Marketable security Shares Market value Cost basis gains
- ------------------------------------------ ------------ ------------------ --------------- ---------------
($ in thousands)
CompX (1) 2,549,520 $ 42,144 $ 32,011 $ 10,133
NL Industries, Inc. ("NL") 222,100 4,908 2,461 2,447
Kronos Worldwide, Inc. ("Kronos") 3,985 162 145 17
------------------ --------------- ---------------
$ 47,214 $ 34,617 $ 12,597
================== =============== ===============
- -----------------------------------------------------------------------------------------------------------------------
(1) The Company directly holds 336,700 shares of CompX. CGI holds the remaining
2,212,820 shares. See further discussion below.
During the first nine months of 2004, the Company purchased 2,212,820
shares of CompX Class A common shares, representing approximately 14.6% of the
total number of shares of all classes of CompX common stock outstanding at that
date. At September 30, 2004, NL, a subsidiary of Valhi, held an additional 68.4%
of CompX. Effective on October 1, 2004, the Company and NL contributed 100% of
their respective holdings on that date of all classes of CompX common stock to
CGI in return for a 17.6% and 82.4% ownership interest in CGI, respectively, and
CGI became the holder of the 83.0% of CompX that the Company and NL had
previously held in the aggregate. The CompX shares are the sole assets of CGI.
The Company's shares of CGI are redeemable at the option of the Company based
upon the market value of the underlying CompX stock held by CGI, and the Company
accounts for its investment in CGI as an available-for-sale marketable security
carried at fair value based on the fair value of the underlying CompX shares
held by CGI.
During the fourth quarter of 2004, the Company purchased an additional
336,700 shares of CompX, and as of December 31, 2004 the Company held (directly
and through its investment in CGI) approximately 16.8% of the total number of
shares of all classes of CompX common stock outstanding. None of the shares
purchased subsequent to September 30, 2004 have been, nor are expected to be,
contributed to CGI.
F-18
At December 31, 2004, the Company held approximately 0.5% of NL's
outstanding common stock, and Valhi and a wholly owned subsidiary of Valhi held
an additional 83.3% in the aggregate.
During the year ended December 31, 2004, NL paid dividends on its common
stock in the form of shares of Kronos common stock. At December 31, 2004, the
Company held less than 0.1% of Kronos' outstanding common stock and Valhi, a
wholly owned subsidiary of Valhi and NL hold an additional 94% in the aggregate.
Note 5 - Investment in joint ventures
December 31,
--------------------------------------
2004 2003
----------------- -----------------
(In thousands)
Joint ventures:
VALTIMET SAS ("VALTIMET") $ 22,466 $ 22,252
MZI, LLC ("MZI") 125 217
----------------- -----------------
$ 22,591 $ 22,469
================= =================
VALTIMET is a manufacturer of welded stainless steel and titanium tubing
with operations in the United States, France, South Korea and China. At December
31, 2004, VALTIMET was owned 43.7% by TIMET, 51.3% by Valinox Welded, a French
manufacturer of welded tubing, and 5.0% by Sumitomo Metals Industries, Ltd., a
Japanese manufacturer of steel products.
At December 31, 2004, the unamortized net difference between the Company's
carrying amount of its investment in VALTIMET and its proportionate share of
VALTIMET's net assets was $3.8 million, and is principally attributable to the
difference between the carrying amount and fair value of fixed assets initially
contributed by TIMET. This difference is being amortized over 15 years and
reduces the amount of equity in earnings or increases the amount of equity in
losses that the Company reports related to its investment in VALTIMET.
MZI provides certain testing services and is 33.3% owned by TIMET with the
remainder owned by another titanium manufacturer. VALTIMET and MZI are exempted
from the scope of FASB Interpretation No. 46 ("FIN 46R"), Consolidation of
Variable Interest Entities (an interpretation of Accounting Research Bulletin
No. 51). Therefore, the current SFAS No. 94 model, under which consolidation is
based upon control (generally defined as ownership of more than 50% of an
entity), continues to apply to these entities.
F-19
Note 6 - Property and equipment
December 31,
---------------------------------------
2004 2003
------------------ -----------------
(In thousands)
Land and improvements $ 8,703 $ 8,634
Buildings and improvements 31,780 41,700
Information technology systems 63,609 59,782
Manufacturing equipment and other 333,031 316,088
Construction in progress 14,819 6,754
------------------ -----------------
451,942 432,958
Less accumulated depreciation 223,769 193,776
------------------ -----------------
$ 228,173 $ 239,182
================== =================
See Note 11 with respect to the Company's property and equipment held under
capital leases.
In November 2004, pursuant to an agreement with Basic Management, Inc. and
certain of its affiliates ("BMI"), the Company sold certain property located
adjacent to its Henderson, Nevada plant site. However, BMI has leased back to
the Company the use of certain settling ponds located on the property until the
Company completes construction of a wastewater treatment facility on its
Henderson plant site. The Company has recorded a $12 million deferred gain on
its Consolidated Balance Sheet related to cash proceeds received on this sale.
This deferred gain will be recognized when the Company completes construction of
the wastewater treatment facility and can cease use of the settling ponds. The
Company currently expects the wastewater treatment facility to be completed and
operational in the second quarter of 2005. See "Environmental matters" in Note
19 for further discussion of this transaction, including BMI's assumption of
certain environmental obligations related to the property, which will directly
affect the gain recognized during 2005.
Note 7 - Intangible assets
On January 1, 2002, the Company adopted SFAS No. 142, under which goodwill
is no longer amortized on a periodic basis, but instead is subject to a two-step
impairment test to be performed on at least an annual basis. During the
Company's 2002 impairment assessment, management judgment was used to identify
the Company's reporting units, determine the carrying amount of each reporting
unit by assigning its assets and liabilities, including existing goodwill and
intangible assets, to those reporting units as of January 1, 2002, and determine
the implied fair value of its goodwill. This evaluation considered, among other
things, a combination of fair value indicators including quoted market prices,
prices of comparable businesses and discounted projected cash flows based upon
Company forecasts, which considered information obtained from review of The
Airline Monitor and from discussions with the Company's customers throughout the
first half of 2002, both of which assisted the Company in better estimating the
impact of the September 11, 2001 terrorist attacks on its business.
F-20
As a result of this information, step one of the impairment evaluation
completed in the second quarter of 2002 indicated that the Company's recorded
goodwill might be impaired, which obligated the Company to complete the second
step of the impairment test. Based on the results of the second step of the
impairment test completed during the third quarter of 2002, which indicated the
Company's goodwill was impaired, the Company recorded a non-cash goodwill
impairment charge of $44.3 million, representing the entire balance of the
Company's recorded goodwill at January 1, 2002. Pursuant to the transition
requirements of SFAS No. 142, this charge has been reported in the Company's
Consolidated Statements of Operations as a cumulative effect of a change in
accounting principle as of January 1, 2002.
As of December 31, 2004 and 2003, the Company's intangible assets with
definite lives are solely comprised of patents. In accordance with SFAS No. 142,
the Company has evaluated the remaining useful lives of its patents and will
continue to amortize such patents over their weighted average remaining
amortization periods of 1.1 years as of December 31, 2004. The carrying amount
and accumulated amortization of the Company's intangible assets are as follows:
December 31, 2004 December 31, 2003
---------------------------------- --------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
-------------- --------------- -------------- --------------
(In thousands)
Intangible assets:
Definite lives, subject to amortization:
Patents $ 14,874 $ 13,224 $ 14,475 $ 11,322
Other intangible asset - pension asset (1) 3,407 - 3,141 -
-------------- --------------- -------------- --------------
$ 18,281 $ 13,224 $ 17,616 $ 11,322
============== =============== ============== ==============
- -----------------------------------------------------------------------------------------------------------------------
(1) Not covered by the scope of SFAS No. 142.
The Company's amortization expense relating to its intangible assets was
$1.5 million in 2004, $1.7 million in 2003 and $2.1 million in 2002. The
Company's patents will become fully amortized in 2006, with aggregate annual
amortization expense expected to be $1.0 million during 2005 and $0.7 million
during 2006.
Note 8 - Other noncurrent assets
December 31,
---------------------------------------
2004 2003
------------------ -----------------
(In thousands)
Deferred financing costs $ 786 $ 7,563
Prepaid pension cost 10,531 8,981
Notes receivable from officers 49 145
Other 210 3
------------------ -----------------
$ 11,576 $ 16,692
================== =================
The Company's deferred financing costs relate to the Company's U.S. credit
facility and the issuance of the BUCS and are amortized on a straight-line basis
through 2006 and 2026, respectively. See Note 12 for further discussion of the
BUCS deferred financing costs.
F-21
Note 9 - Accrued liabilities
December 31,
--------------------------------------
2004 2003
----------------- -----------------
(In thousands)
OPEB cost $ 2,777 $ 3,135
Pension cost 5,285 8,466
Payroll and vacation 5,810 6,891
Incentive compensation 12,570 579
Other employee benefits 9,721 9,731
Deferred income 1,736 1,663
Environmental costs 2,530 301
Taxes, other than income 4,166 4,408
Wyman-Gordon Company ("Wyman-Gordon") installment - 2,800
Other 8,535 6,497
----------------- -----------------
$ 53,130 $ 44,471
================= =================
See Note 19 with regard to environmental costs.
Effective January 1, 2004, the Company modified the 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 accrue the current year's
vacation entitlement over the course of the year. As a result, in January 2004
the Company reduced its $1.9 million vacation accrual as of December 31, 2003
for these employees to zero.
During the third quarter of 2003, the Company and Wyman-Gordon agreed to
terminate the 1998 purchase and sale agreement associated with the formation of
the titanium castings joint venture previously owned by the two parties. The
Company agreed to pay Wyman-Gordon a total of $6.8 million in three quarterly
installments in connection with this termination, which included the termination
of certain favorable purchase terms. The Company recorded a one-time charge for
the entire $6.8 million as a reduction to sales in the third quarter of 2003.
The Company paid the first two installments aggregating $4.0 million to
Wyman-Gordon during 2003 and paid the remaining $2.8 million during the first
quarter of 2004.
Under the terms of the Company's long-term agreement ("LTA") with The
Boeing Company ("Boeing"), Boeing is required to purchase from the Company a
buffer inventory of titanium products for use by the Company in the production
of titanium products ordered by Boeing in the future. As the buffer inventory is
completed, Boeing is billed and takes title to the inventory, although the
Company may retain an obligation to further process the material as directed by
Boeing. Accordingly, the revenue and costs of sales on the buffer inventory is
deferred and subsequently recognized at the time the final mill product is
delivered to Boeing. As of December 31, 2004 and 2003, $1.6 million of the
Company's deferred income related to the buffer inventory.
F-22
Note 10 - Customer advances
Under the terms of the Boeing LTA, in 2002 through 2007, Boeing is required
to advance TIMET $28.5 million annually less $3.80 per pound of titanium product
purchased by Boeing subcontractors during the preceding year. The advance
relates to Boeing's take-or-pay obligations under the LTA. Effectively, the
Company collects $3.80 less from Boeing than the LTA selling price for each
pound of titanium product sold directly to Boeing and reduces the related
customer advance recorded by the Company. For titanium products sold to Boeing
subcontractors, the Company collects the full LTA selling price, but gives
Boeing credit by reducing the next year's annual advance by $3.80 per pound of
titanium product sold to Boeing subcontractors. The Boeing customer advance is
also reduced as take-or-pay benefits are earned, as described in Note 15. As of
December 31, 2004, $0.7 million of customer advances related to the Company's
LTA with Boeing and represented amounts to be credited against the 2005 advance
for 2004 subcontractor purchases.
Note 11 - Bank debt and capital lease obligations
December 31,
---------------------------------------
2004 2003
------------------ -----------------
(In thousands)
Notes payable - U.S. credit agreement $ 43,176 $ -
================== =================
Capital lease obligations $ 197 $ 10,290
Less current maturities 22 524
------------------ -----------------
$ 175 $ 9,766
================== =================
Long-term bank credit agreements. 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 currently
accrues at rates based on LIBOR plus 2% and bank prime rate plus 0.5%. The
weighted average interest rate on borrowings outstanding as of December 31, 2004
was 4.3%. Borrowings are collateralized by substantially all of the Company's
U.S. assets.
F-23
The U.S. credit agreement prohibits the payment of distributions in respect
of the Capital Trust's BUCS and dividends on the Company's Series A Preferred
Stock if "excess availability" (defined as borrowing availability less
outstanding borrowings and certain contractual commitments such as letters of
credit) is less than $25 million, prohibits the payment of dividends on the
Company's common stock if excess availability is less than $40 million, limits
additional indebtedness, requires compliance with certain financial covenants,
including a minimum net worth covenant and a fixed charge ratio covenant, and
contains other covenants customary in lending transactions of this type. The
Company was in compliance with all covenants for all periods during the years
ended December 31, 2004 and 2003. As of December 31, 2004, the Company had
outstanding borrowings under the U.S. credit agreement of $43.2 million, and
excess availability was approximately $48 million. Under this agreement, the
Company is required to maintain a lock box arrangement whereby daily net cash
receipts are used to reduce outstanding borrowings. Accordingly, any outstanding
balances under the U.S. credit agreement are classified as a current liability,
regardless of the maturity date of the 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 revolving and term loan facilities and an overdraft
facility (the "U.K. Facilities") and matures in February 2006. Borrowings under
the U.K. Facilities can be in various currencies including U.S. dollars, British
pounds sterling and euros and are collateralized by substantially all of TIMET
UK's assets. Interest generally accrues at LIBOR plus 1.25% for U.S. dollar
borrowings and the bank's Base Rate plus 1.25% for British pound sterling
borrowings.
The U.K. Facilities require the maintenance of certain financial ratios and
amounts, including a minimum net worth covenant and other covenants customary in
lending transactions of this type. TIMET UK was in compliance with all covenants
for all periods during the years ended December 31, 2004 and 2003. The U.K.
overdraft facility is subject to annual review in December of each year and was
renewed in December 2004. During the second quarter of 2003, TIMET UK received
an interest-bearing intercompany loan from a U.S. subsidiary of the Company
enabling TIMET UK to reduce its long-term borrowings under the U.K. Facilities
to zero. This loan was repaid in full during the third quarter of 2004. As of
December 31, 2004, the Company had no borrowings under the U.K. Facilities, and
unused borrowing availability was approximately $43 million.
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. As of December 31, 2004, there were no
outstanding borrowings under these facilities, and unused borrowing availability
was approximately $18 million.
Capital lease obligations. At December 31, 2003, certain of the Company's
U.S. equipment were held under three year leases expiring at various times
during 2004 and 2005. In January 2004, the Company purchased substantially all
of the U.S. equipment held under these capital leases for $0.7 million.
F-24
At December 31, 2003, certain of the Company's U.K. production facilities
were under three thirty-year leases expiring in 2026. During the fourth quarter
of 2004, the Company and the lessor amended these lease agreements such that
they no longer meet the criteria for capital lease treatment under SFAS No. 13,
Accounting for Leases, and are now accounted for as operating leases.
Accordingly, the Company reduced its capital lease obligations and related net
property and equipment by $10.3 million and $7.8 million, respectively,
resulting in a $2.5 million deferred gain that the Company will recognize on a
straight-line basis over the term of the amended lease agreements, one of which
expires in 2014 and two of which expire in 2024. The Company's first rent
payment under the amended lease agreements is not due until October 2006, and
the Company is recognizing rent expense with respect to the amended lease
agreements based on the aggregate contractual rent payments allocated on a
straight-line basis over the terms of the amended lease agreements.
As of December 31, 2003, assets held under capital leases included in
buildings were $10.4 million. There were no assets held under capital leases
included in buildings as of December 31, 2004. Assets included in equipment were
$0.3 million and $1.5 million at December 31, 2004 and 2003, respectively. The
related aggregate accumulated depreciation for both buildings and equipment was
$0.1 million and $3.7 million at December 31, 2004 and 2003, respectively.
Aggregate maturities of capital lease obligations as of December 31, 2004
are reflected in the following table:
Amount
----------------------
(In thousands)
Year ending December 31,
2005 $ 33
2006 31
2007 31
2008 31
2009 and thereafter 119
----------------------
245
Less amounts representing interest 48
----------------------
$ 197
======================
Note 12 - Capital Trust
In November 1996, the Capital Trust issued $201.3 million BUCS and $6.2
million 6.625% common securities. TIMET owns all of the outstanding common
securities of the Capital Trust, and the Capital Trust is a wholly owned finance
subsidiary of TIMET. The Capital Trust used the proceeds from such issuance to
purchase from the Company $207.5 million principal amount of the Subordinated
Debentures. The Subordinated Debentures and accrued interest receivable are the
sole assets of the Capital Trust at December 31, 2004.
F-25
Prior to December 31, 2003, the Company consolidated the Capital Trust.
Based upon guidance in FIN 46R, the Company concluded that the Capital Trust is
considered to be both a special purpose entity and a variable interest entity.
TIMET has concluded it is not the primary beneficiary of the Capital Trust, and
therefore TIMET was required to deconsolidate the Capital Trust as of December
31, 2003. Upon deconsolidation, the Company now reflects its investment in the
common securities issued by the Capital Trust as an asset accounted for by the
equity method and the Subordinated Debentures held by the Capital Trust as
long-term debt. Additionally, interest expense incurred on the Subordinated
Debentures is reported as interest expense, while dividends earned on the common
securities are reported through equity in earnings of the unconsolidated Capital
Trust. Previously, the Company reflected a minority interest related to the BUCS
on its Consolidated Balance Sheets and minority interest dividend expense in its
Consolidated Statements of Operations. All periods presented in this Annual
Report have been retroactively restated, as permitted by FIN 46R, where
applicable. Such retroactive restatement did not impact net loss, stockholders'
equity or cash flow from operations for any prior periods. Additionally, all
disclosures have been updated to reflect this presentation.
In August 2004, the Company completed an exchange offer, pursuant to which
the Company had offered to exchange all of the 4,024,820 outstanding BUCS issued
by the Capital Trust for shares of the Company's Series A Preferred Stock at the
exchange rate of one share of Series A Preferred Stock for each BUCS. On August
31, 2004, the Company issued 3,909,103 shares of Series A Preferred Stock in
exchange for the BUCS tendered. During the third quarter of 2004, the Company
recognized a $15.5 million non-cash non-operating gain related to the BUCS
exchange, reflecting the difference between the carrying value of the related
Subordinated Debentures ($195.5 million) and the fair value of the Series A
Preferred Stock issued ($173.7 million, based on the closing price of the BUCS
on August 31, 2004 according to NASDAQ's website of $45.25 per share, less $3.2
million attributable to accrued and unpaid dividends), less $6.3 million of
unamortized deferred financing costs related to the exchanged BUCS. See Note 14.
The BUCS, which mature December 2026, do not require principal amortization
and are redeemable at the Company's option. The redemption price approximates
101% of the principal amount as of December 1, 2004 and declines annually to
100% on December 1, 2006. The Company's U.S. credit agreement prohibits the
payment of distributions on the BUCS if excess availability, as determined under
the agreement, is less than $25 million. The Subordinated Debentures allow the
Company the right to defer interest payments for a period of up to 20
consecutive quarters, although interest continues to accrue at the coupon rate
on the principal and unpaid interest. Similarly, the Capital Trust is permitted
by the terms of the BUCS to defer its quarterly dividend payments on the BUCS
when TIMET defers interest payment on the Subordinated Debentures. During 2002,
the Company exercised its right to defer interest payments on the Subordinated
Debentures, effective for the December 1, 2002 scheduled interest payment.
Interest continued to accrue at the 6.625% coupon rate on the principal and
unpaid interest until 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.
F-26
TIMET's guarantee of payment of the remaining outstanding BUCS (in
accordance with the terms thereof) and its obligations under the Capital Trust
documents constitute, in the aggregate, a full and unconditional guarantee by
the Company of the Capital Trust's obligations under the BUCS. The BUCS
represent undivided beneficial ownership interests in the Capital Trust, are
entitled to cumulative preferred distributions from the Capital Trust of 6.625%
per annum, compounded quarterly, and are convertible, at the option of the
holder, into TIMET common stock at the rate of 0.6695 shares of common stock per
BUCS (an equivalent price of $74.68 per share), for an aggregate of less than
0.1 million common shares if the 115,717 remaining BUCS are fully converted.
Note 13 - Minority interest
Minority interest relates principally to the Company's 70%-owned French
subsidiary, TIMET Savoie, S.A. ("TIMET Savoie"). The Company has the right to
purchase from Compagnie Europeenne du Zirconium-CEZUS, S.A. ("CEZUS"), the
holder of the remaining 30% interest, CEZUS' interest in TIMET Savoie for 30% of
TIMET Savoie's equity determined under French accounting principles, or $12.4
million as of December 31, 2004. CEZUS has the right to require the Company to
purchase its interest in TIMET Savoie for 30% of TIMET Savoie's registered
capital, or $3.4 million as of December 31, 2004. TIMET Savoie made dividend
payments to CEZUS of $0.7 million in 2004 and $1.9 million in 2003.
Note 14 - Stockholders' equity
Preferred stock. At December 31, 2004, the Company was authorized to issue
10 million shares of preferred stock. The Board of Directors determines the
rights of preferred stock as to, among other things, dividends, liquidation,
redemption, conversions and voting rights.
Upon completion of the BUCS exchange offer discussed in Note 12, the
Company issued 3,909,103 shares of Series A Preferred Stock. Each share of the
Series A Preferred Stock is convertible, at any time, at the option of the
holder thereof, at a conversion price of $30.00 per share of the Company's
common stock (equivalent to a conversion rate of one and two-thirds shares of
common stock for each share of Series A Preferred Stock), with any partial
shares paid in cash. The conversion rate is subject to adjustment if certain
events occur, including, but not limited to, a stock dividend on the Company's
common stock, subdivisions or certain reclassifications of the Company's common
stock or the issuance of warrants to holders of the Company's common stock.
The Series A Preferred Stock is not mandatorily redeemable, but is
redeemable at the option of the Company at any time after the third anniversary
of the date of issuance if, prior to the notice of such redemption, the closing
price of the Company's common stock exceeds the conversion price for 30
consecutive days. Holders of the Series A Preferred Stock are entitled to
receive cumulative cash dividends at the rate of 6.75% of the $50 per share
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. The
Company paid $3.3 million of such dividends in 2004. Whether or not declared,
cumulative dividends on Series A Preferred Stock are deducted from net income to
arrive at net income attributable to common stockholders. As of December 31,
2004, net income attributable to common stockholders included $1.1 million
($0.28 per outstanding share) of undeclared dividends. Subsequent to December
31, 2004, the Company's board of directors declared a dividend of $0.84375 per
share, payable on March 15, 2005 to holders of record of Series A Preferred
Stock as of the close of trading on March 1, 2005.
F-27
Common stock. At December 31, 2004, the Company was authorized to issue 90
million shares of common stock. The Company's U.S. credit agreement, as amended,
and the Indenture pursuant to which the Subordinated Debentures were issued,
limit the payment of common stock dividends under certain circumstances. See
also Notes 11 and 12.
Restricted stock and common stock options. The Company's 1996 Long-Term
Performance Incentive Plan (the "Incentive Plan") provides for the discretionary
grant of restricted common stock, stock options, stock appreciation rights and
other incentive compensation to officers and other key employees of the Company.
Options generally vest over five years and expire ten years from date of grant.
No restricted stock or options have been issued since 2000 under the Incentive
Plan.
Eligible non-employee directors are covered by a plan that includes
stock-based grants as an element of director compensation (the "Director Plan").
In 2004 and 2003, the Director Plan provided for annual grants to each
non-employee director of between 500 and 2,000 shares of the Company's common
stock (dependent upon the closing price per share of the common stock on the
date of the grant) as partial payment of director fees. In 2002, the Director
Plan provided for (i) annual grants of options to purchase 2,500 shares of the
Company's common stock at a price equal to the market price on the date of grant
and (ii) annual grants of 500 shares of common stock as partial payment of
director fees. Options granted to eligible directors vest in one year and expire
ten years from date of grant (five year expiration for grants prior to 1998).
The weighted average fair value at grant date of the 3,500, 3,000 and 5,000
total shares issued to non-employee directors in 2004, 2003 and 2002,
respectively, was $68,835 in 2004, $14,340 in 2003 and $38,600 in 2002.
The weighted average remaining life of options outstanding under the
Incentive Plan and the Director Plan was 3.6 years at December 31, 2004 and 4.5
years at December 31, 2003. At December 31, 2004, 2003 and 2002, options to
purchase 509,040, 473,370 and 450,610 shares, respectively, were exercisable at
average exercise prices of $36.75, $38.84 and $42.42, respectively. Options to
purchase 25,000 shares become exercisable in 2005 based on the options
outstanding at December 31, 2004. At December 31, 2004, 878,270 shares and
45,430 shares, respectively, were available for future grant under the Incentive
Plan and the Director Plan.
The following table summarizes information about the Company's stock
options:
Amount Weighted Weighted
Exercise payable average average fair
price per upon exercise exercise value at
Options option (in thousands) price grant date
----------- ------------- -------------- ----------- ------------
Outstanding at December 31, 2001 643,660 $ 7.20-70.63 $ 23,985 $ 37.26
Granted - at market 15,000 $ 3.32-7.72 105 $ 6.99 $ 4.60
Canceled (42,810) $ 15.94-70.63 (1,489) $ 34.76
----------- --------------
Outstanding at December 31, 2002 615,850 $ 3.32-70.63 22,601 $ 36.70
Canceled (65,100) $ 7.72-70.63 (2,886) $ 44.33
----------- --------------
Outstanding at December 31, 2003 550,750 $ 3.32-70.63 19,715 $ 35.80
Exercised (5,050) $ 15.94 (80) $ 15.94
Canceled (11,660) $ 15.94-58.63 (496) $ 42.49
----------- --------------
Outstanding at December 31, 2004 534,040 $ 3.32-70.63 $ 19,139 $ 35.84
=========== ==============
F-28
The following table summarizes the Company's options outstanding and
exercisable as of December 31, 2004 by price range:
Options Outstanding Options Exercisable
---------------------------------------------------------- -----------------------------------
Weighted
average
remaining Weighted Weighted
Range of Outstanding at contractual average Exercisable average
exercise prices 12/31/04 life (in years) exercise price at 12/31/04 exercise price
- -------------------- ----------------- -------------------- ---------------- ----------------- ---------------
$ 3.32-7.06 2,500 8.0 $ 3.32 2,500 $ 3.32
$ 7.07-14.12 65,000 5.6 $ 12.54 55,000 $ 12.27
$ 14.13-21.19 185,140 4.4 $ 17.29 175,140 $ 17.25
$ 21.20-28.25 25,000 5.1 $ 22.00 20,000 $ 22.00
$ 28.26-35.31 5,000 6.4 $ 28.42 5,000 $ 28.42
$ 42.39-49.44 43,900 1.4 $ 46.00 43,900 $ 46.00
$ 49.44-56.50 55,560 1.9 $ 54.92 55,560 $ 54.92
$ 56.51-63.56 104,940 2.5 $ 58.77 104,940 $ 58.77
$ 63.57-70.63 47,000 2.8 $ 67.74 47,000 $ 67.74
----------------- -----------------
534,040 3.6 $ 35.84 509,040 $ 36.75
================= =================
Weighted average fair values of options at grant date for options issued in
2002 under the Director Plan were estimated using the Black-Scholes model based
on assumptions listed below:
Assumptions at date of grant:
Expected life (years) 6
Risk-free interest rate 2.01%
Volatility 74%
Dividend yield 0%
During 2000, the Company awarded 233,750 shares of TIMET restricted common
stock under the Incentive Plan to certain officers and employees. The stock
grant restrictions lapse ratably on an annual basis over a five-year period.
Since holders of restricted stock have all of the rights of other common
stockholders, subject to forfeiture unless certain periods of employment are
completed, all such shares of restricted stock are considered to be currently
issued and outstanding. During 2004, 2003 and 2002, respectively, 2,650, 17,900
and 32,800 shares of restricted stock were forfeited. The market value of the
restricted stock awards was approximately $2.0 million ($8.75 per share) on the
date of grant, and this amount has been recorded as deferred compensation, a
separate component of stockholders' equity. The Company amortizes deferred
compensation to expense on a straight-line basis for each tranche of the award
over the period during which the restrictions lapse.
F-29
Note 15 - Other income (expense)
Year ended December 31,
----------------------------------------------------
2004 2003 2002
-------------- -------------- ---------------
(In thousands)
Other operating income (expense):
Boeing take-or-pay $ 22,093 $ 23,083 $ 23,408
Litigation settlements - 1,113 -
Insurance claim settlement 648 - -
Other, net 248 193 (126)
-------------- -------------- ---------------
$ 22,989 $ 24,389 $ 23,282
============== ============== ===============
Other non-operating income (expense):
Dividends and interest $ 687 $ 383 $ 118
Equity in earnings of common securities
of the Capital Trust 424 432 413
Surety bond guarantee credit (expense) 221 (449) (1,575)
Foreign exchange loss, net (477) (189) (587)
Gain on BUCS exchange, net (Note 12) 15,465 - -
Impairment of investment in SMC
preferred securities - - (27,500)
Other, net (121) (471) (762)
-------------- -------------- ---------------
$ 16,199 $ (294) $ (29,893)
============== ============== ===============
The terms of the Boeing LTA allow Boeing to purchase up to 7.5 million
pounds of titanium product annually from TIMET through 2007, but limit TIMET's
maximum quarterly volume obligation to 3.0 million pounds, only 40% of which may
be ingot. The LTA is structured as a take-or-pay agreement such that, beginning
in calendar year 2002, Boeing forfeits $3.80 per pound of its advance payment in
the event that its orders for delivery are less than 7.5 million pounds in any
given calendar year. The Company recognizes income to the extent Boeing's
year-to-date orders for delivery plus TIMET's maximum quarterly volume
obligations for the remainder of the year total less than 7.5 million pounds.
This income is recognized as other operating income and is not included in sales
revenue, sales volume or gross margin. Based on actual purchases of
approximately 1.7 million pounds during 2004, the Company recognized $22.1
million of income for the year ended December 31, 2004. The Company recognized
$23.1 million and $23.4 million of such income during 2003 and 2002,
respectively. Recognition of the take-or-pay income reduces the Boeing customer
advance as described in Note 10.
F-30
In 1998, the Company purchased $80 million in non-voting convertible
preferred securities of Special Metals Corporation ("SMC"), a U.S. manufacturer
of wrought nickel-based superalloys and special alloy long products. As
previously reported, the Company assessed its investment in the SMC securities
during the fourth quarter of 2001 and recorded a $61.5 million impairment charge
to reduce the carrying amount of this investment, including accrued dividends
and interest, to an estimated fair value of $27.5 million as of December 31,
2001. In March 2002, SMC and its U.S. subsidiaries filed a voluntary petition
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result,
the Company undertook a further assessment of its investment in SMC and
subsequently recorded a $27.5 million impairment charge during the first quarter
of 2002, which reduced the Company's carrying amount of its investment in the
SMC securities to zero. Both of these charges were classified as other
non-operating expenses. Under the terms of SMC's Second Amended Joint Plan of
Reorganization, approved by the Bankruptcy Court in 2003, the convertible
preferred securities were cancelled. Although the Company does have certain
rights as an unsecured creditor under the SMC Plan of Reorganization related to
the unpaid dividends, the Company does not believe that it will recover any
material amount from this investment.
Note 16 - Income taxes
Summarized in the following table are (i) the components of income (loss)
before income taxes and minority interest ("pre-tax income (loss)"), (ii) the
difference between the income tax expense (benefit) attributable to pre-tax
income (loss) and the amounts that would be expected using the U.S. federal
statutory income tax rate of 35%, (iii) the components of the income tax expense
(benefit) attributable to pre-tax income (loss) and (iv) the components of the
comprehensive tax provision (benefit):
Year ended December 31,
-----------------------------------------------------
2004 2003 2002
--------------- --------------- ----------------
(In thousands)
Pre-tax income (loss):
U.S. $ 21,876 $ (3,431) $ (64,705)
Non-U.S. 17,149 (7,850) (3,181)
--------------- --------------- ----------------
$ 39,025 $ (11,281) $ (67,886)
=============== =============== ================
Expected income tax expense (benefit), at 35% $ 13,659 $ (3,948) $ (23,760)
Non-U.S. tax rates (451) 535 591
Incremental tax on earnings of non-U.S. group affiliates 106 131 49
U.S. state income taxes, net 297 (1,050) (1,650)
Dividends received deduction (93) (312) (241)
Nontaxable income (98) (123) (373)
Revision of estimated tax liability (551) (241) (194)
Change in valuation allowance:
Effect of change in tax law - - (1,797)
Adjustment of deferred income tax asset
valuation allowance (14,433) 6,196 25,470
Other, net (568) 19 (47)
--------------- --------------- ----------------
$ (2,132) $ 1,207 $ (1,952)
=============== =============== ================
F-31
Year ended December 31,
-----------------------------------------------------
2004 2003 2002
--------------- --------------- ----------------
(In thousands)
Income tax expense (benefit):
Current income taxes (benefit):
U.S. $ 648 $ 30 $ (1,688)
Non-U.S. 2,931 1,436 3,430
--------------- --------------- ----------------
3,579 1,466 1,742
--------------- --------------- ----------------
Deferred income taxes (benefit):
U.S. (4,202) - -
Non-U.S. (1,509) (259) (3,694)
--------------- --------------- ----------------
(5,711) (259) (3,694)
--------------- --------------- ----------------
$ (2,132) $ 1,207 $ (1,952)
=============== =============== ================
Comprehensive tax provision (benefit) allocable to:
Pre-tax income (loss) $ (2,132) $ 1,207 $ (1,952)
Stockholders' equity, including amounts allocated
to other comprehensive income - - (1,588)
--------------- --------------- ----------------
$ (2,132) $ 1,207 $ (3,540)
=============== =============== ================
The following table summarizes the Company's deferred tax assets and
deferred tax liabilities as of December 31, 2004 and 2003:
December 31,
-----------------------------------------------------------
2004 2003
---------------------------- ---------------------------
Assets Liabilities Assets Liabilities
------------ ------------ ----------- ------------
(In millions)
Temporary differences relating to net assets:
Inventories $ - $ (3.8) $ 1.4 $ -
Property and equipment, including software - (29.9) - (36.7)
Goodwill 7.7 - 8.8 -
Accrued pension cost 21.1 20.6
Accrued OPEB cost 6.2 - 6.1 -
Accrued liabilities and other deductible differences 22.6 - 16.0 -
Other taxable differences - (7.3) - (9.9)
Tax loss and credit carryforwards 70.9 - 85.5 -
Valuation allowance (81.5) - (91.6) -
------------ ------------ ----------- ------------
Gross deferred tax assets (liabilities) 47.0 (41.0) 46.8 (46.6)
Netting (41.0) 41.0 (46.0) 46.0
------------ ------------ ----------- ------------
Total deferred taxes 6.0 - 0.8 (0.6)
Less current deferred taxes 5.0 - 0.8 -
------------ ------------ ----------- ------------
Net noncurrent deferred taxes $ 1.0 $ - $ - $ (0.6)
============ ============ =========== ============
F-32
The Company periodically reviews its deferred income tax assets to
determine if future realization is more likely than not. During the third
quarter of 2004, due to a change in estimate of the Company's ability to utilize
the benefits of its net operating loss ("NOL") carryforwards in Germany, the
Company determined that its deferred income tax asset in Germany met the
"more-likely-than-not" recognition criteria. Accordingly, the Company reversed
the $0.7 million valuation allowance attributable to such deferred income tax
asset. In addition, the Company's deferred income tax asset valuation allowance
related to income from continuing operations decreased by $13.7 million during
2004, primarily due to the utilization of the U.S. and U.K. NOL carryforwards,
the benefit of which had previously not met the "more-likely-than-not"
recognition criteria.
During the fourth quarter of 2004, the Company recognized a deferred income
tax benefit related to a $4.2 million decrease in the Company's U.S. deferred
income tax asset valuation allowance attributable to the Company's recognition,
for U.S. income tax purposes only, of a capital gain on the fourth quarter sale
of certain property located at the Company's Henderson, Nevada facility (see
Note 6). The Company expects to recognize a corresponding deferred income tax
expense in 2005, when the gain is recognized under accounting principles
generally accepted in the United States of America.
The following table summarizes the components of the change in the
Company's deferred tax asset valuation allowance in 2004, 2003 and 2002:
Year ended December 31,
------------------------------------------------------
2004 2003 2002
---------------- --------------- ----------------
(In thousands)
Effect of:
(Income) loss before income taxes $ (14,433) $ 6,196 $ 23,673
Cumulative effect of change in accounting principle - 60 11,761
Accumulated other comprehensive (income) loss (1,582) (533) 11,966
Offset to the change in net deferred income tax
assets due principally to revision of estimated
tax liability 5,077 - -
Currency translation adjustment 787 1,122 -
---------------- --------------- ----------------
$ (10,151) $ 6,845 $ 47,400
================ =============== ================
At December 31, 2004, the Company had, for U.S. federal income tax
purposes, (i) NOL carryforwards of $101 million that expire in 2020 through
2023, (ii) a capital loss carryforward of $74 million that expires in 2008 and
(iii) alternative minimum tax ("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 December 31, 2004, the Company
had the equivalent of an $11 million NOL carryforward in the U.K. and a $2
million NOL carryforward in Germany, both of which have indefinite carryforward
periods.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law provides for a special 85% deduction for certain dividends
received in 2005 from controlled foreign corporations. Because certain details
in the new law lack clarification, and the impact of the special dividend
received deduction to the Company is dependent, in part, on the Company's 2005
foreign and domestic taxable income, the Company has not yet determined whether
it will benefit from the new law. In 2005, the Company plans to evaluate both
clarifying guidance on the new law from the Internal Revenue Service and its
year-to-date taxable income activity to determine the level of benefit, if any,
the Company will derive from the special dividend received deduction.
F-33
Beginning in 2005, the new law also provides for a special deduction from
U.S. taxable income equal to a stipulated percentage of a U.S. company's
qualified income from domestic manufacturing activities (as defined). Although
the Company believes that the majority of its operations meet the definition of
qualified domestic manufacturing activities, the Company does not expect to
benefit from the special manufacturing deduction in 2005, primarily because the
Company projects its U.S. taxable income in 2005 will be fully offset by its
existing U.S. NOL carryforwards.
During the first quarter of 2002, the Job Creation and Worker Assistance
Act of 2002 (the "JCWA Act") was signed into law. The Company benefited from
provisions of the JCWA Act, which liberalized certain NOL and AMT restrictions.
As a result, the Company recognized $1.8 million of refundable U.S. income taxes
during the first quarter of 2002. The Company received $0.8 million of this
refund in the fourth quarter of 2002 and the remaining $1.0 million in the third
quarter of 2003.
Note 17 - Employee benefit plans
Variable compensation plans. The majority of the Company's worldwide
employees participate in compensation programs providing for variable
compensation based primarily on the financial performance of the Company. The
cost of these plans was approximately $12.1 million in 2004, $0.4 million in
2003 and $1.3 million in 2002.
Defined contribution plans. Approximately 66% of the Company's worldwide
employees at December 31, 2004 participate in defined contribution pension plans
with employer contributions based upon a fixed percentage of the employee's
eligible earnings. All of the Company's U.S. employees (62% of worldwide
employees at December 31, 2004) are also eligible to participate in contributory
savings plans with partial matching employer contributions, although the Company
suspended making such partial matching contributions for certain employees from
April 1, 2003 through April 3, 2004. The cost of these pension and savings plans
approximated $3.3 million in 2004, $1.9 million in 2003 and $2.4 million in
2002.
Defined benefit pension plans. The Company maintains contributory defined
benefit pension plans covering a majority of its European employees and a
noncontributory defined benefit pension plan covering a minority of its U.S.
employees. The Company's funding policy is to annually contribute, at a minimum,
amounts satisfying the applicable statutory funding requirements. Between 1989
and 1995, the U.S. defined benefit pension plans were closed to new participants
and have remained closed. Additionally, in some cases, benefit levels have been
frozen. As of December 31, 2003, the U.S. plans were merged into one plan. The
U.K. defined benefit plan was closed to new participants in 1996; however,
employees participating in the plan continue to accrue additional benefits based
on increases in compensation and service.
F-34
Information concerning the Company's defined benefit pension plans, based
on a December 31 measurement date, is set forth in the following tables:
Year ended December 31,
---------------------------------------
2004 2003
------------------ -----------------
(In thousands)
Change in projected benefit obligations:
Balance at beginning of year $ 223,091 $ 186,609
Service cost 4,439 3,855
Interest cost 12,646 11,087
Plan amendments 756 -
Actuarial loss 20,238 16,314
Benefits paid (10,413) (9,922)
Change in currency exchange rates 11,723 15,148
------------------ -----------------
Balance at end of year $ 262,480 $ 223,091
================== =================
Change in plan assets:
Fair value at beginning of year $ 158,923 $ 118,280
Actual return on plan assets 21,291 28,053
Employer contributions 10,027 11,817
Participants' contributions 1,132 997
Benefits paid (10,413) (9,922)
Change in currency exchange rates 7,699 9,698
------------------ -----------------
Fair value at end of year $ 188,659 $ 158,923
================== =================
Funded status:
Plan assets under projected benefit obligations $ (73,821) $ (64,168)
Unrecognized:
Actuarial loss 91,682 79,347
Prior service cost 3,407 3,141
------------------ -----------------
Total prepaid pension cost $ 21,268 $ 18,320
================== =================
Amounts recognized in balance sheets:
Intangible pension asset $ 3,407 $ 3,141
Noncurrent prepaid pension cost 10,531 8,981
Current pension liability (5,285) (8,466)
Noncurrent pension liability (77,515) (62,366)
Accumulated other comprehensive loss 90,130 77,030
------------------ -----------------
$ 21,268 $ 18,320
================== =================
As of December 31, 2004 and 2003, all of the Company's defined benefit
pension plans have accumulated benefit obligations in excess of fair value of
plan assets. The accumulated benefit obligation was $260.3 million at December
31, 2004 and $220.1 million at December 31, 2003.
F-35
The components of the net periodic pension expense are set forth below:
Year ended December 31,
-------------------------------------------------------
2004 2003 2002
---------------- ---------------- ----------------
(In thousands)
Service cost $ 3,308 $ 2,858 $ 3,410
Interest cost 12,646 11,087 10,410
Expected return on plan assets (13,098) (9,504) (11,035)
Amortization of unrecognized prior service cost 489 576 479
Amortization of net losses 4,357 3,875 1,598
---------------- ---------------- ----------------
Net pension expense $ 7,702 $ 8,892 $ 4,862
================ ================ ================
The Company used the following discount rate, long-term rate of return
("LTRR") and salary rate increase weighted-average assumptions to arrive at the
aforementioned benefit obligations and net periodic expense:
Significant assumptions used to calculate projected and accumulated
benefit obligations at December 31,
-------------------------------------------------------------------------------------------
2004 2003
--------------------------------------------- ------------------------------------------
Discount Salary Discount Salary
rate LTRR increase rate LTRR increase
-------------- ------------- ---------------- ------------- -------------- -------------
U.S. plans 5.65% 10.00% 3.00% 6.00% 10.00% 2.00%
U.K. plan 5.30% 7.10% 3.25% 5.50% 7.10% 3.25%
Savoie plan 5.30% 5.25% 2.50% 5.50% 5.25% 2.50%
Significant assumptions used to calculate net periodic pension expense
for the year ended December 31,
-------------------------------------------------------------------------------------------
2004 2003 2002
---------------------------- --------------------------- ----------------------------
Discount Discount Discount
rate LTRR rate LTRR rate LTRR
-------------- ------------- -------------- ------------ -------------- -------------
U.S. plans 6.00% 10.00% 6.25% 8.50% 7.00% 9.00%
U.K. plan 5.50% 7.10% 5.70% 6.70% 6.00% 7.50%
Savoie plan 5.50% 5.25% 5.70% 6.00% 6.00% 6.00%
The Company currently expects to make cash contributions of approximately
$8.2 million to its defined benefit pension plans during 2005, all of which
related to the U.K. plan.
The U.S. plan(s) paid benefits of approximately $5.7 million in 2004, $5.6
million in 2003 and $5.4 million in 2002, and the U.K. plan paid benefits of
approximately $4.7 million in 2004, $4.3 million in 2003 and $4.1 million in
2002. Benefits paid under the Savoie plan were less than $0.1 million for each
of 2004, 2003 and 2002. Based upon current projections, the Company believes the
plans will be required to pay the following benefits over the next ten years:
F-36
Projected retirement benefits
-----------------------------------------------------------
U.S. Plan U.K.Plan Total
---------------- ----------------- -----------------
(In thousands)
Year ending December 31,
2005 $ 5,818 $ 4,940 $ 10,758
2006 $ 5,852 $ 5,077 $ 10,929
2007 $ 5,876 $ 5,216 $ 11,092
2008 $ 5,884 $ 5,358 $ 11,242
2009 $ 5,876 $ 5,506 $ 11,382
2010 through 2014 $ 29,265 $ 29,889 $ 59,154
The assets of the defined benefit pension plans are invested as follows:
December 31,
---------------------------------------
2004 2003
------------------ -----------------
US plan(s):
Equity securities 84.3% 69.4%
Debt securities 14.1% 23.6%
Cash and other 1.6% 7.0%
------------------ -----------------
100.0% 100.0%
================== =================
European plans:
Equity securities 86.9% 91.9%
Debt securities 13.1% 7.3%
Cash and other - 0.8%
------------------ -----------------
100.0% 100.0%
================== =================
During the second quarter of 2003, the Company transferred all of its U.S.
plans' assets into the CMRT; however, the Company's plan assets are invested
only in a portion of the CMRT that does not hold TIMET common stock. The CMRT's
long-term investment objective is to provide a rate of return exceeding a
composite of broad market equity and fixed income indices (including the S&P 500
and certain Russell indices) utilizing both third-party investment managers as
well as investments directed by Mr. Simmons. During the 17-year history of the
CMRT, the average annual rate of return earned by the CMRT, as calculated based
on the average percentage change in the CMRT's net asset value per CMRT unit for
each applicable year, was 12.7%. The CMRT earned an annual return of 18.0% in
2004, and the CMRT's last 5-year and 10-year average annual returns were 12.4%
and 12.7%, respectively. The CMRT`s trustee and investment committee actively
manage the investments within the CMRT. Such parties have in the past, and may
again in the future, periodically change the relative asset mix based upon,
among other things, advice they receive from third-party advisors and their
expectation as to what asset mix will generate the greatest overall return.
Based on the above, the Company increased its long-term rate of return
assumption to 10.0% for December 31, 2003 pension obligations and for 2004
pension expense for its U.S. plan and maintained the assumption for December 31,
2004 pension obligations and 2005 pension expense.
F-37
During 2003, the trustees for the U.K. plan selected a new investment
advisor (effective in 2004) for the U.K. plan and modified its asset allocation
goals. As such, the Company's future expected long-term rate of return on plan
assets for its U.K. plan is based on an asset allocation assumption of 80%
equity securities and 20% fixed income securities by the end of 2005 and 60%
equity securities and 40% fixed income securities by the end of 2007, and all
current contributions to the plan are invested wholly in fixed income securities
in order to gradually effect the shift. Based on various factors, including
improved economic and market conditions and gains on the plan assets during
2003, the Company increased its assumed long-term rate of return for December
31, 2003 pension obligations and for 2004 pension expense to 7.10% for its U.K.
plan and maintained the assumption for December 31, 2004 pension obligations and
for 2005 pension expense.
Postretirement benefits other than pensions. The Company provides certain
health care and life insurance benefits on a cost-sharing basis to certain of
its U.S. retirees and certain of its active U.S. employees upon retirement, for
whom health care coverage generally terminates once the retiree (or eligible
dependent) becomes Medicare-eligible or reaches age 65, effectively limiting
coverage for these participants to less than ten years based on TIMET's minimum
retirement age. The Company also provides certain postretirement health care and
life insurance benefits on a cost sharing basis to closed groups of certain of
its U.S. retirees, for whom health care coverage generally reduces once the
retiree (or eligible dependent) becomes Medicare-eligible, but whose coverage
continues until death. The Company funds such benefits as they are incurred, net
of any contributions by the retirees.
The plan under which these benefits are provided is unfunded, and
contributions to the plan during the year equal benefits paid. The components of
accumulated OPEB obligations and periodic OPEB cost, based on a December 31
measurement date, are set forth in the following tables:
December 31,
---------------------------------------
2004 2003
------------------ -----------------
(In thousands)
Actuarial present value of accumulated OPEB obligations:
Balance at beginning of year $ 28,584 $ 27,116
Service cost 540 487
Interest cost 1,780 1,722
Amendments - (2,940)
Actuarial loss 6,062 5,339
Benefits paid, net of participant contributions (2,525) (3,140)
------------------ -----------------
Balance at end of year 34,441 28,584
Unrecognized net actuarial loss (19,621) (14,679)
Unrecognized prior service cost 2,427 2,891
------------------ -----------------
Total accrued OPEB cost 17,247 16,796
Less current portion 2,777 3,135
------------------ -----------------
Noncurrent accrued OPEB cost $ 14,470 $ 13,661
================== =================
F-38
Year ended December 31,
-------------------------------------------------
2004 2003 2002
-------------- -------------- -------------
(In thousands)
Service cost $ 540 $ 487 $ 565
Interest cost 1,780 1,722 1,799
Amortization of unrecognized prior service cost (464) (464) (376)
Amortization of net losses 1,120 956 905
-------------- -------------- -------------
Net OPEB expense $ 2,976 $ 2,701 $ 2,893
============== ============== =============
The Company used the following weighted-average discount rate and health
care cost trend rate ("HCCTR") assumptions to arrive at the aforementioned
benefit obligations and net periodic expense:
Significant assumptions used to calculate
accumulated OPEB obligation at December 31,
----------------------------------------------------------------
2004 2003
---------------------------- -----------------------------
Discount rate 5.65% 6.00%
Beginning HCCTR 9.29% 10.35%
Ultimate HCCTR 4.00% 4.00%
Ultimate year 2010 2010
Significant assumptions used to calculate net periodic
OPEB expense for the year ended December 31,
------------------------------------------------------------------------------
2004 2003 2002
----------------------- ----------------------- ----------------------
Discount rate 6.00% 6.25% 7.00%
Beginning HCCTR 10.35% 11.35% 11.15%
Ultimate HCCTR 4.00% 4.25% 5.00%
Ultimate year 2010 2010 2010
If the health care cost trend rate were increased by one percentage point
for each year, the aggregate of the service and interest cost components of OPEB
expense would have increased approximately $0.3 million in 2004, and the
actuarial present value of accumulated OPEB obligations at December 31, 2004
would have increased approximately $3.7 million. If the health care cost trend
rate were decreased by one percentage point for each year, the aggregate of the
service and interest cost components of OPEB expense would have decreased
approximately $0.3 million in 2004, and the actuarial present value of
accumulated OPEB obligations at December 31, 2004 would have decreased
approximately $4.1 million.
F-39
Based upon current projections, the Company will be required to pay the
following OPEB benefits, net of retiree contributions, over the next ten years:
Projected OPEB
payments
----------------------
(In thousands)
Year ending December 31,
2005 $ 2,777
2006 $ 2,856
2007 $ 2,970
2008 $ 3,113
2009 $ 3,250
2010 through 2014 $ 18,072
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.
In May 2004, the FASB issued FSP No. 106-2, which superceded FSP No. 106-1
and 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. Actuarial equivalence will be determined
under regulations issued by the Centers for Medicare and Medicaid Services
("CMMS"). Based on CMMS guidance issued to date and the Company's understanding
of the Medicare Act of 2003, the Company is currently in the process of
determining whether the benefits provided by its plans are actuarially
equivalent. 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. The Company expects to be able to determine actuarial equivalency no
later than during the quarter ending June 30, 2005, at which time the Company
will prospectively account for the effect of the federal subsidy, if any, as
permitted by and in accordance with FSP No. 106-2.
F-40
Note 18 - Related party transactions
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (i) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties, and (ii) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. The Company
continuously considers, reviews and evaluates such transactions, and understands
that Contran, Valhi and related entities consider, review and evaluate such
transactions. Depending upon the business, tax and other objectives then
relevant, it is possible that the Company might be a party to one or more such
transactions in the future.
Under the terms of various intercorporate services agreements ("ISAs") that
the Company has historically entered into with various related parties,
employees of one company provide certain management, tax planning, financial,
risk management, environmental, administrative, facility or other services to
the other company on a fee basis. Such charges are based upon estimates of the
time devoted by the employees of the provider of the services to the affairs of
the recipient and the compensation of such persons, or the cost of facilities,
equipment or supplies provided. These ISAs are reviewed and approved by the
independent directors of the companies that are parties to the agreements.
In 2004, the Company, Tremont LLC (a wholly-owned subsidiary of Valhi) and
Contran agreed to enter into a single, combined ISA covering the provision of
services by Contran to TIMET and the provision of services by TIMET to Tremont
LLC and NL. Under the 2004 combined ISA, TIMET paid Contran $1.3 million, and
Tremont and NL paid TIMET $0.1 million in the aggregate. The Company has
extended this agreement through 2005 and expects to pay Contran $1.5 million and
receive a combined $0.1 million from Tremont and NL under this agreement during
2005.
In 2003, the Company had an ISA with Tremont LLC to provide certain
management, financial, environmental, human resources and other services to
Tremont LLC, under which Tremont LLC paid the Company approximately $0.2
million. The Company had a similar ISA with Tremont Corporation, Tremont LLC's
predecessor, in 2002 pursuant to which Tremont Corporation paid the Company
approximately $0.4 million.
The Company had an ISA with NL, a majority-owned subsidiary of Valhi,
whereby NL provided certain financial and other services to TIMET at a cost to
TIMET of approximately $0.3 million in 2002. The Company renewed this agreement
for 2003 at a substantially reduced fee, as the Company now performs a majority
of these services internally. During 2003, TIMET paid NL approximately $15,000
related to this agreement. In 2004, the ISA with NL was combined with the ISA
with Contran.
In 2003, the Company entered into an ISA with Contran whereby Contran
provided certain business, financial and other services to TIMET. During 2003,
TIMET paid Contran approximately $0.3 million related to this agreement.
F-41
The Company previously extended market-rate loans to certain officers
pursuant to a Board-approved program to facilitate the officers' purchase of
Company stock and BUCS and to pay applicable taxes on shares of restricted
Company stock as such shares vested. The Company terminated this program
effective July 30, 2002, subject to continuing only those loans outstanding at
that time in accordance with their then-current terms. The loans were generally
payable in five annual installments beginning six years from date of loan and
bore interest at a rate tied to the Company's borrowing rate, payable quarterly.
At December 31, 2004, the Company has a note receivable from one officer with an
outstanding balance of less than $50,000.
Tall Pines Insurance Company ("Tall Pines") (including a predecessor
company, Valmont Insurance Company) and EWI RE, Inc. ("EWI") provide for or
broker insurance policies for Contran and certain of its subsidiaries and
affiliates, including the Company. Tall Pines is a wholly owned subsidiary of
Valhi, and EWI is a wholly owned subsidiary of NL. Consistent with insurance
industry practices, Tall Pines and EWI receive commissions from the insurance
and reinsurance underwriters for the policies that they provide or broker. The
Company's aggregate premiums for such policies were approximately $2.3 million
in 2004 and 2003 and $2.4 million in 2002. The Company expects that these
relationships with Tall Pines and EWI will continue in 2005.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and affiliates, including the Company, have entered
into a loss sharing agreement under which any uninsured loss is shared by those
entities that have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justify the risk associated
with the potential for any uninsured loss.
TIMET supplies titanium strip to VALTIMET under a long-term contract. The
LTA was entered into in 1997 and expires in 2007. Under the LTA, TIMET has
agreed to provide a certain percentage of VALTIMET's titanium requirements at
formula-determined selling prices, subject to certain conditions. Certain
provisions of this contract have been amended in the past and may be amended in
the future to meet changing business conditions. Sales to VALTIMET were $21
million in 2004, $9 million in 2003 and $20 million in 2002. Additionally,
VALTIMET converts TIMET-owned material into welded tube for TIMET on a purchase
order basis. Payments by TIMET to VALTIMET for such services totaled $1.7
million in 2004, $2.1 million in 2003 and $2.3 million in 2002.
Tremont LLC owns 32% of BMI. Among other things, BMI provides utility
services (primarily water distribution, maintenance of a common electrical
facility and sewage disposal monitoring) to the Company and other manufacturers
within an industrial complex located in Henderson, Nevada. Power transmission
and sewer services are provided on a cost reimbursement basis, similar to a
cooperative, while water delivery is currently provided at the same rates as are
charged by BMI to an unrelated third party. Amounts paid by the Company to BMI
for these utility services were $1.3 million during 2004, $1.2 million during
2003 and $1.0 million during 2002. The Company also paid BMI an electrical
facilities upgrade fee of $1.3 million in each of 2004, 2003 and 2002. This fee
declines to $0.8 million annually for 2005 through 2009 and terminates
completely after January 2010.
F-42
Based on the previous agreements and relationships, receivables from and
payables to related parties included in the Company's Consolidated Balance
Sheets are summarized in the following table:
December 31,
--------------------------------------
2004 2003
----------------- -----------------
(In thousands)
Receivables from related parties:
VALTIMET $ 2,264 $ 891
Notes receivable from officers 49 163
----------------- -----------------
$ 2,313 $ 1,054
================= =================
Payables to related parties:
VALTIMET $ 863 $ 819
Kronos 15 -
Contran - 24
NL - 50
----------------- -----------------
$ 878 $ 893
================= =================
Note 19 - Commitments and contingencies
Long-term agreements. The Company has LTAs with certain major aerospace
customers, including, among others, Boeing, Rolls-Royce plc and its German and
U.S. affiliates ("Rolls-Royce"), United Technologies Corporation ("UTC", Pratt &
Whitney and related companies) and Wyman-Gordon (a unit of Precision Castparts
Corporation ("PCC")). These agreements expire from 2005 through 2008, subject to
certain conditions, and generally provide for (i) minimum market shares of the
customers' titanium requirements or firm annual volume commitments and (ii)
fixed or formula-determined prices (although some contain elements based on
market pricing). Generally, the LTAs require the Company's service and product
performance to meet specified criteria and contain a number of other terms and
conditions customary in transactions of these types. In certain events of
nonperformance by the Company or the customer, the LTAs may be terminated early.
Although it is possible that some portion of the business would continue on a
non-LTA basis, the termination of one or more of the LTAs could result in a
material effect on the Company's business, results of operations, financial
position or liquidity. The LTAs were designed to limit selling price volatility
to the customer, while providing TIMET with a committed base of volume
throughout the aerospace business cycles. To varying degrees, these LTAs
effectively obligate TIMET to bear the majority of the risks of increases in raw
material and other costs, but also allow TIMET to benefit from decreases in such
costs.
During 2001, the Company recorded a charge of $3.0 million relating to a
titanium sponge supplier's agreement to renegotiate certain components of an
agreement entered into in 1997, including minimum purchase commitments for 1999
through 2001. As of December 31, 2004 and 2003, $0.6 million and $1.1 million,
respectively, of this amount remained accrued and unpaid. In September 2002, the
Company entered into a new agreement with this supplier, effective from January
1, 2002 through December 31, 2007. This new agreement replaced the 1997
agreement. The new agreement requires minimum annual purchases by the Company of
approximately $24 million in 2005, $28 million in 2006 and $13 million in 2007.
TIMET supplies titanium strip to VALTIMET under a long-term agreement. See
Note 18.
F-43
Concentration of credit and other risks. Substantially all of the Company's
sales and operating income (loss) are derived from operations based in the U.S.,
the U.K., France and Italy. As shown in the below table, the Company generates
over two-thirds of its sales revenue from sales to the aerospace industry. As
described previously, the Company has LTAs with certain major aerospace
customers, including Boeing, Rolls-Royce, UTC and Wyman-Gordon. This
concentration of customers may impact the Company's overall exposure to credit
and other risks, either positively or negatively, in that all of these customers
may be similarly affected by the same economic or other conditions. The
following table provides supplemental sales revenue information regarding the
Company's dependence on certain industries and customer relationships:
Year ended December 31,
--------------------------------------------------
2004 2003 2002
--------------- -------------- -------------
(Percentage of total sales revenue)
Sales revenue to:
Aerospace industry:
Commercial aerospace sector 57% 57% 56%
Military aerospace sector 13% 11% 11%
--------------- ------------- --------------
Total aerospace industry 70% 68% 67%
=============== ============= ==============
Customers under LTAs 44% 41% 37%
=============== ============= ==============
Significant customers under LTAs (1):
Rolls-Royce and other Rolls-Royce suppliers (2) 15% 15% 12%
=============== ============= ==============
Ten largest customers 48% 44% 43%
=============== ============= ==============
Significant customers (1):
PCC and related entities 13% 13% 9%
=============== ============= ==============
- --------------------------------------------------------------------------------------------------------------------
(1) Greater than 10% of net sales.
(2) Includes direct sales to certain of the PCC-related entities under the
terms of the Rolls-Royce LTAs.
The availability of certain of the Company's raw materials (titanium sponge
and titanium scrap) has tightened during the past several quarters, and,
consequently, the prices for such raw materials have increased. To the extent
that this trend continues, the Company could be limited in its ability to
produce enough titanium products to fully meet customer demand. In addition, the
Company's LTAs limit the Company's ability to pass on all of its increased raw
material costs.
Operating leases. The Company leases certain manufacturing and office
facilities and various equipment. Most of the leases contain purchase and/or
various term renewal options at fair market and fair rental values,
respectively. In most cases management expects that leases will be renewed or
replaced by other leases in the normal course of business. Net rent expense was
$3.9 million in 2004, $4.0 million in 2003 and $5.0 million in 2002.
F-44
At December 31, 2004, future minimum payments under noncancellable
operating leases having an initial or remaining term in excess of one year were
as follows:
Amount
--------------------
(In thousands)
Year ending December 31,
2005 $ 2,672
2006 2,264
2007 2,591
2008 2,325
2009 2,080
2010 and thereafter 22,604
--------------------
$ 34,536
====================
Environmental matters. TIMET and BMI entered into an agreement in 1999
which provided 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. In November 2004, the Company and BMI
entered into several agreements that superceded the 1999 agreement. Under these
new agreements, the Company conveyed the TIMET Pond Property to BMI in exchange
for (i) $12 million cash, (ii) BMI's assumption of the liability for certain
environmental issues associated with the TIMET Pond Property, including certain
possible groundwater issues for which the Company currently has $0.6 million
accrued, and (iii) other consideration. TIMET will continue to use certain of
the settling ponds located on the TIMET Pond Property pursuant to a lease until
a wastewater treatment facility is operational. Construction is currently
expected to be completed during the second quarter of 2005.
The Company is also continuing assessment work with respect to its own
active plant site in Henderson, Nevada. The Company currently has $4.3 million
accrued based on the undiscounted cost estimates of the probable costs for
remediation of these sites, which includes an increase in the accrual of $1.1
million during 2004 (charged to cost of sales) related to specific future
remediation costs which the Company now considers probable. The Company expects
these accrued expenses to be paid over a period of up to thirty years.
At December 31, 2004, the Company had accrued an aggregate of approximately
$4.5 million for environmental matters, including those discussed above. The
upper end of the range of reasonably possible costs to remediate these matters
is approximately $7.0 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.
F-45
Legal proceedings. At December 31, 2004, the Company had accrued an
aggregate of $0.5 million for expected settlement costs related to various legal
proceedings. The Company records liabilities related to legal proceedings when
estimated costs are probable and reasonably estimable. Such accruals are
adjusted as further information becomes available or circumstances change.
Estimated future costs are not discounted to their present value. It is not
possible to estimate the range of costs for certain matters. No assurance can be
given that actual costs will not exceed accrued amounts or that costs will not
be incurred with respect to matters as to which no problem is currently known or
where no estimate can presently be made. Further, there can be no assurance that
additional legal proceedings will not arise in the future.
Other. The Company has entered into letters of credit to collateralize (i)
potential workers' compensation claims in Ohio and Nevada and (ii) future usage
of electricity in Nevada. As of December 31, 2004, the outstanding amounts for
such letters of credit, which reduce the Company' excess availability under its
U.S. credit agreement, were $2.3 million and $1.3 million, respectively.
TIMET is the primary obligor on two $1.5 million workers' compensation
bonds issued on behalf of a former subsidiary, Freedom Forge Corporation
("Freedom Forge"), which TIMET sold in 1989. Freedom Forge filed for Chapter 11
bankruptcy protection on July 13, 2001, and discontinued payment on the
underlying workers' compensation claims in November 2001. During 2002, TIMET
received notices that the issuers of the bonds were required to make payments on
the first bond with respect to certain of these claims and were requesting
reimbursement from TIMET. As of December 31, 2004, the Company has made
aggregate payments under the two bonds of $1.1 million, and $0.6 million remains
accrued for future payments. TIMET may revise its estimated liability under
these bonds in the future as additional facts become known or claims develop.
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 with respect to
several of these matters in a given period, it is possible that it could have a
material adverse impact on the results of operations or cash flows in that
particular period.
F-46
Note 20 - 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 attributable to common stockholders reflects the dilutive
effect of common stock options, restricted stock and the assumed conversion of
the BUCS and the Series A Preferred Stock, if applicable. A reconciliation of
the numerator and denominator used in the calculation of basic and diluted
earnings (loss) per share is presented below.
Year ended December 31,
-----------------------------------------------------
2004 2003 2002
-------------- -------------- ----------------
(In thousands)
Numerator:
Net income (loss) attributable to
common stockholders $ 35,540 $ (13,057) $ (111,530)
Dividends on Series A Preferred Stock 4,398 - -
-------------- -------------- ----------------
Diluted net income (loss) attributable
to common stockholders $ 39,938 $ (13,057) $ (111,530)
============== ============== ================
Denominator:
Average common shares outstanding 15,881 15,854 15,803
Average dilutive stock options and
restricted stock 66 - -
Series A Preferred Stock 2,178 - -
-------------- -------------- ----------------
Diluted shares 18,125 15,854 15,803
============== ============== ================
For the years ended December 31, 2004, 2003 and 2002, the conversion of the
BUCS was antidilutive. Stock options to purchase 313,100 shares of common stock
during 2004, 548,250 shares during 2003 and 615,890 shares during 2002 were
excluded from the calculation of diluted earnings (loss) per share because the
exercise price for such options was greater than the average market price of the
common shares and such options were therefore antidilutive during the respective
period. An additional 45,935 incremental stock options and restricted shares
were excluded from the 2003 calculation, and an additional 88,099 incremental
stock options and restricted shares were excluded from the 2002 calculation,
because they were antidilutive due to the losses in those respective years.
Note 21 - 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:
F-47
Year ended December 31,
-----------------------------------------------------------
2004 2003 2002
----------------- ----------------- ----------------
(In thousands, except product shipment data)
Titanium melted and mill products:
Melted product net sales $ 72,092 $ 57,409 $ 34,800
Mill product net sales 364,248 279,563 278,204
Other product sales 65,488 55,132 53,497
Other (1) - (6,800) -
----------------- ----------------- ----------------
$ 501,828 $ 385,304 $ 366,501
================= ================= ================
Melted product shipments:
Volume (metric tons) 5,360 4,725 2,400
Average price ($ per kilogram) $ 13.45 $ 12.15 $ 14.50
Mill product shipments:
Volume (metric tons) 11,365 8,875 8,860
Average price ($ per kilogram) $ 32.05 $ 31.50 $ 31.40
Geographic segments:
Net sales - point of origin:
United States $ 373,100 $ 340,616 $ 311,194
United Kingdom 154,535 111,313 91,467
Other Europe 87,686 75,443 68,487
Other (1) - (6,800) -
Eliminations (113,493) (135,268) (104,647)
----------------- ----------------- ---------------
$ 501,828 $ 385,304 $ 366,501
================= ================= ===============
Net sales - point of destination:
United States $ 277,317 $ 217,653 $ 193,740
Europe 200,453 149,424 145,118
Other locations 24,058 25,027 27,643
Other (1) - (6,800) -
----------------- ----------------- ---------------
$ 501,828 $ 385,304 $ 366,501
================= ================= ===============
Long-lived assets - property and
equipment, net:
United States $ 165,661 $ 170,400 $ 186,777
United Kingdom 56,255 62,287 62,369
Other Europe 6,257 6,495 5,526
----------------- ----------------- ---------------
$ 228,173 $ 239,182 $ 254,672
================= ================= ===============
- -------------------------------------------------------------------------------------------------------------------
(1) Represents the effect of a $6.8 million reduction to sales during 2003
related to termination of a purchase and sale agreement with Wyman-Gordon.
See further discussion in Note 9.
Export sales from U.S.-based operations approximated $16 million in 2004
and 2003 and $18 million in 2002.
F-48
Note 22 - Quarterly results of operations (unaudited)
For the quarter ended
----------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------------- -------------- ------------- -------------
(In millions, except per share data)
Year ended December 31, 2004:
Net sales $ 120.5 $ 124.1 $ 120.2 $ 137.0
Gross margin 12.4 15.5 13.7 14.4
Operating income (loss) 2.8 7.0 12.4 13.1
Net (loss) income attributable to
common stockholders $ (1.7) $ 1.9 $ 25.2 $ 11.2
Basic (loss) earnings per share attributable to
common stockholders $ (0.10) $ 0.12 $ 1.52 $ 0.70
Diluted (loss) earning per share attributable to
common stockholders $ (0.10) $ 0.12 $ 1.37 $ 0.64
Year ended December 31, 2003:
Net sales $ 99.3 $ 101.8 $ 83.6 $ 100.6
Gross margin 1.0 4.4 - 11.7
Operating (loss) income (8.1) (2.1) 1.3 14.3
Income (loss) before cumulative effect of
change in accounting principle (13.4) (6.4) (3.0) 9.9
Net (loss) income attributable to
common stockholders $ (13.6) $ (6.4) $ (3.0) $ 9.9
Basic and diluted (loss) earnings per share
attributable to common stockholders:
Before cumulative effect of change in
accounting principle $ (0.85) $ (0.40) $ (0.19) $ 0.62
Basic and diluted (loss) earnings per share
attributable to common stockholders $ (0.86) $ (0.40) $ (0.19) $ 0.62
- ----------------------------------------------------------------------------------------------------------------------
Note - The sum of quarterly amounts may not agree to the full year results due
to rounding.
F-49
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Titanium Metals Corporation:
Our audits of the consolidated financial statements, of management's
assessment of the effectiveness of internal control over financial reporting and
of the effectiveness of internal control over financial reporting referred to in
our report dated March 16, 2005 appearing in this Annual Report on Form 10-K
also included an audit of the financial statement schedule listed in the index
on page F of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Denver, Colorado
March 16, 2005
S-1
TITANIUM METALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
-----------------------------
Balance Charged
at to Charged Balance
beginning costs and to other at end
Description of year expenses accounts Deductions of year
- ------------------------------------- ------------ ------------- ------------ ------------- ------------
Year ended December 31, 2004:
Allowance for doubtful accounts $ 1,906 $ 250 $ 65 (1) $ (538)(2) $ 1,683
============ ============= ============ ============= ============
Allowance for excess and
slow moving inventories $ 16,723 $ 1,079 $ 807 (1) $ (1,980) $ 16,629
============ ============= ============ ============= ============
Year ended December 31, 2003:
Allowance for doubtful accounts $ 2,386 $ 623 $ 144 (1) $ (1,247)(2) $ 1,906
============ ============= ============ ============= ============
Allowance for excess and
slow moving inventories $ 15,090 $ 2,324 $ 1,125 (1) $ (1,816) $ 16,723
============ ============= ============ ============= ============
Reserve for restructuring $ 80 $ - $ - $ (80)(3) $ -
============ ============= ============ ============= ============
Year ended December 31, 2002:
Allowance for doubtful accounts $ 2,388 $ 878 $ 152 (1) $ (1,032)(2) $ 2,386
============ ============= ============ ============= ============
Allowance for excess and
slow moving inventories $ 13,621 $ 3,757 $ 901 (1) $ (3,189) $ 15,090
============ ============= ============ ============= ============
Reserve for restructuring $ 198 $ - $ - $ (118)(3) $ 80
============ ============= ============ ============= ============
- ----------------------------------------------------------------------------------------------------------------------
(1) Amounts represent foreign currency translation adjustments for the related
account.
(2) Amounts written off and reductions in reserve, less recoveries.
(3) Amounts represent cash payments for restructuring severance obligations and
credits to reduce the initial restructuring charge.
S-2