SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended March 31, 2005
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
Commission file number 0-28538
Titanium Metals Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-5630895
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5600
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
Number of shares of common stock outstanding on May 9, 2005: 15,989,250
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in the Notes to Consolidated Financial Statements and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), are forward-looking statements that represent management's
beliefs and assumptions based on currently available information.
Forward-looking statements can generally be identified by the use of words such
as "believes," "intends," "may," "will," "looks," "should," "could,"
"anticipates," "expects" or comparable terminology or by discussions of
strategies or trends. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurance that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly affect expected results. Actual future results could differ
materially from those described in such forward-looking statements, and the
Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Among the factors that could cause actual results to differ
materially are the risks and uncertainties discussed in this Quarterly Report,
including risks and uncertainties in those portions referenced above and those
described from time to time in the Company's other filings with the Securities
and Exchange Commission ("SEC") which include, but are not limited to, the
cyclicality of the commercial aerospace industry, the performance of aerospace
manufacturers and the Company under their long-term agreements, the renewal of
certain long-term agreements, the difficulty in forecasting demand for titanium
products, global economic and political conditions, global productive capacity
for titanium, changes in product pricing and costs, the impact of long-term
contracts with vendors on the ability of the Company to reduce or increase
supply or achieve lower costs, the possibility of labor disruptions,
fluctuations in currency exchange rates, fluctuations in the market price of
marketable securities, control by certain stockholders and possible conflicts of
interest, uncertainties associated with new product development, the
availability of raw materials and services, changes in raw material prices 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 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.
TITANIUM METALS CORPORATION
INDEX
Page
Number
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - March 31, 2005 (unaudited)
and December 31, 2004 2
Consolidated Statements of Operations - Three months
ended March 31, 2005 and 2004 (unaudited) 4
Consolidated Statements of Comprehensive Income (Loss) -
Three months ended March 31, 2005 and 2004 (unaudited) 5
Consolidated Statements of Cash Flows - Three months ended
March 31, 2005 and 2004 (unaudited) 6
Consolidated Statement of Changes in Stockholders' Equity -
Three months ended March 31, 2005 (unaudited) 8
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 6. Exhibits 33
- 1 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
ASSETS 2005 2004
-------------------- --------------------
(unaudited) (as restated,
see Note 1)
Current assets:
Cash and cash equivalents $ 13,847 $ 7,194
Restricted cash and cash equivalents 146 721
Accounts and other receivables, less
allowance of $1,420 and $1,683, respectively 108,922 96,756
Inventories 279,889 258,324
Prepaid expenses and other 3,240 2,400
Deferred income taxes 6,000 4,974
-------------------- --------------------
Total current assets 412,044 370,369
Marketable securities 46,998 47,214
Investment in joint ventures 25,183 22,591
Investment in common securities of TIMET Capital Trust I 6,259 6,259
Property and equipment, net 231,912 228,173
Intangible assets, net 4,748 5,057
Deferred income taxes 25,431 1,053
Other 11,579 11,577
-------------------- --------------------
Total assets $ 764,154 $ 692,293
==================== ====================
See accompanying Notes to Consolidated Financial Statements
- 2 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
March 31, December 31,
LIABILITIES, MINORITY INTEREST AND 2005 2004
STOCKHOLDERS' EQUITY ------------------- --------------------
(unaudited) (as restated,
see Note 1)
Current liabilities:
Notes payable $ 41,001 $ 43,176
Accounts payable 51,328 44,164
Accrued liabilities 54,150 53,130
Deferred gain on sale of property 12,016 12,016
Customer advances 32,318 6,913
Income taxes payable 3,713 2,516
Other 580 257
------------------- --------------------
Total current liabilities 195,106 162,172
Accrued OPEB cost 14,630 14,470
Accrued pension cost 76,657 77,515
Accrued environmental cost 2,162 1,985
Deferred income taxes 58 60
Debt payable to TIMET Capital Trust I 12,010 12,010
Other 5,319 5,114
------------------- --------------------
Total liabilities 305,942 273,326
------------------- --------------------
Minority interest 12,908 12,539
------------------- --------------------
Stockholders' equity:
Series A Preferred Stock, $.01 par value; $195,455
liquidation preference; 4,025 shares authorized,
3,909 shares issued 173,650 173,650
Common stock, $.01 par value; 90,000 shares authorized,
16,034 and 15,963 shares issued, respectively 160 160
Additional paid-in capital 352,350 350,866
Accumulated deficit (38,937) (77,044)
Accumulated other comprehensive loss (40,711) (39,989)
Treasury stock, at cost (45 shares) (1,208) (1,208)
Deferred compensation - (7)
------------------- --------------------
Total stockholders' equity 445,304 406,428
------------------- --------------------
Total liabilities, minority interest and
stockholders' equity $ 764,154 $ 692,293
=================== ====================
Commitments and contingencies (Note 12)
See accompanying Notes to Consolidated Financial Statements
- 3 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Three months ended March 31,
------------------------------------------
2005 2004
-------------------- ------------------
(as restated,
see Note 1)
Net sales $ 155,235 $ 120,488
Cost of sales 126,280 107,703
-------------------- ------------------
Gross margin 28,955 12,785
Selling, general, administrative and development expense 12,360 9,517
Equity in earnings (losses) of joint ventures 801 (83)
Other income (expense), net 1,985 74
-------------------- ------------------
Operating income 19,381 3,259
Interest expense 674 4,309
Other non-operating income (expense), net 743 738
-------------------- ------------------
Income (loss) before income taxes and minority interest 19,450 (312)
Income tax (benefit) expense (22,879) 523
Minority interest, net of tax 924 390
-------------------- ------------------
Net income (loss) 41,405 (1,225)
Dividends on Series A Preferred Stock 3,298 -
-------------------- ------------------
Net income (loss) attributable to common stockholders $ 38,107 $ (1,225)
==================== ==================
Earnings (loss) per share attributable to common stockholders:
Basic $ 2.39 $ (0.08)
Diluted $ 1.83 $ (0.08)
Weighted average shares outstanding:
Basic 15,931 15,863
Diluted 22,655 15,863
See accompanying Notes to Consolidated Financial Statements
- 4 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In thousands)
Three months ended March 31,
------------------------------------------
2005 2004
-------------------- ------------------
(as restated,
see Note 1)
Net income (loss) $ 41,405 $ (1,225)
-------------------- ------------------
Other comprehensive income (loss):
Currency translation adjustment (1,297) 1,616
Unrealized (losses) gains on marketable securities, net of tax
benefit of $95 and $0, respectively (177) 4,450
TIMET's share of VALTIMET SAS's unrealized net
gains on derivative financial instruments qualifying as
cash flow hedges 752 250
-------------------- ------------------
Total other comprehensive (loss) income (722) 6,316
-------------------- ------------------
Comprehensive income $ 40,683 $ 5,091
==================== ==================
See accompanying Notes to Consolidated Financial Statements
- 5 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three months ended March 31,
----------------------------------------
2005 2004
------------------- ------------------
(as restated,
see Note 1)
Cash flows from operating activities:
Net income (loss) $ 41,405 $ (1,225)
Depreciation and amortization 7,933 8,483
Noncash impairment of equipment 1,251 -
Equity in (earnings) losses of joint ventures, net
of distributions (801) 83
Equity in earnings of common securities of TIMET
Capital Trust I, net of distributions - (113)
Deferred income taxes (25,023) 13
Minority interest, net of tax 924 390
Other, net (369) (525)
Change in assets and liabilities:
Receivables (13,525) (12,275)
Inventories (23,557) (9,681)
Prepaid expenses and other (1,153) 94
Accounts payable and accrued liabilities 8,129 (4,427)
Customer advances 25,528 28,157
Income taxes 1,322 581
Accrued OPEB and pension costs 234 2,180
Accrued interest on debt payable to TIMET Capital Trust I - 3,751
Other, net 1,866 (1,309)
------------------- ------------------
Net cash provided by operating activities 24,164 14,177
------------------- ------------------
Cash flows from investing activities:
Capital expenditures (13,700) (3,280)
Purchase of marketable securities - (12,774)
Change in restricted cash, net 576 -
Other 49 -
------------------- ------------------
Net cash used by investing activities (13,075) (16,054)
------------------- ------------------
Cash flows from financing activities:
Indebtedness:
Borrowings 59,000 9,575
Repayments (61,175) (9,575)
Dividends paid on Series A Preferred Stock (3,298) -
Other, net 1,020 (403)
------------------- ------------------
Net cash used by financing activities (4,453) (403)
------------------- ------------------
Net cash provided (used) by operating,
investing and financing activities $ 6,636 $ (2,280)
=================== ==================
See accompanying Notes to Consolidated Financial Statements
- 6 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(In thousands)
Three months ended March 31,
----------------------------------------
2005 2004
------------------ ------------------
(as restated,
see Note 1)
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $ 6,636 $ (2,280)
Currency translation 17 19
------------------ ------------------
6,653 (2,261)
Cash and cash equivalents at beginning of period 7,194 35,040
------------------ ------------------
Cash and cash equivalents at end of period $ 13,847 $ 32,779
================== ==================
Supplemental disclosures:
Cash paid for:
Interest $ 478 $ 366
Income taxes, net $ 815 $ 39
See accompanying Notes to Consolidated Financial Statements
- 7 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Three months ended March 31, 2005
(In thousands)
Accumulated
Series A Additional Other
Common Common Preferred Paid-in Accumulated Comprehensive Treasury Deferred
Shares Stock Stock Capital Deficit Income (Loss) Stock Compensation Total
-------- ------ --------- --------- ---------- ----------- --------- -------- ---------
Balance at December 31, 2004 (as
restated, see Note 1) 15,918 $ 160 $173,650 $350,866 $ (77,044) $ (39,989) $ (1,208) $ (7) $406,428
Comprehensive income - - - - 41,405 (722) - 40,683
Issuance of common stock 71 - - 1,027 - - - 1,027
Tax benefit of stock options
exercised and restricted
stock vested - - - 457 - - - - 457
Dividends declared on Series A
Preferred Stock - - - - (3,298) - - - (3,298)
Amortization of deferred
compensation, net of effects of
stock award cancellations - - - - - - - 7 7
-------- ------ --------- --------- ---------- ----------- --------- -------- ---------
Balance at March 31, 2005 15,989 $ 160 $173,650 $352,350 $ (38,937) $ (40,711) $ (1,208) $ - $445,304
======== ====== ========= ========= ========== =========== ========= ======== =========
See accompanying Notes to Consolidated Financial Statements
- 8 -
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Organization and basis of presentation
Titanium Metals Corporation ("TIMET") is a vertically integrated producer
of titanium sponge, melted products and a variety of mill products for
aerospace, industrial and other applications. The accompanying Consolidated
Financial Statements include the accounts of TIMET and its majority owned
subsidiaries (collectively, the "Company"), except the TIMET Capital Trust I
(the "Capital Trust"). All material intercompany transactions and balances with
consolidated subsidiaries have been eliminated, and certain prior year amounts
have been reclassified to conform to the current year presentation. The
Consolidated Balance Sheet at March 31, 2005 and the Consolidated Statements of
Operations, Comprehensive Income (Loss), Changes in Stockholders' Equity and
Cash Flows for the interim periods ended March 31, 2005 and 2004, as applicable,
have been prepared by the Company without audit in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). In the
opinion of management, all adjustments necessary to present fairly the
consolidated financial position, results of operations and cash flows have been
made. The results of operations for interim periods are not necessarily
indicative of the operating results of a full year or of future operations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted. The
Company's first three fiscal quarters reported are the approximate 13-week
periods ending on the Saturday generally nearest to March 31, June 30 and
September 30. The Company's fourth fiscal quarter and fiscal year always end on
December 31. For presentation purposes, the Company's Consolidated Financial
Statements and notes thereto have been presented as ending on March 31, June 30,
September 30 and December 31, as applicable. The accompanying Consolidated
Financial Statements should be read in conjunction with the Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2004 (the "2004 Annual Report").
At March 31, 2005, Valhi, Inc. and subsidiaries ("Valhi") held 42.6% 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 March 31, 2005,
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 12.0% 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 March 31, 2005, Contran
Corporation ("Contran") held, directly or through subsidiaries, approximately
91% 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 March 31, 2005, 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.
- 9 -
Effective January 1, 2005, the Company changed its method for inventory
costing from the last-in, first-out ("LIFO") cost method to the specific
identification cost method for the approximate 40% of the Company's consolidated
inventories previously accounted for under the LIFO cost method. With the
significant volatility seen recently in raw material prices, the Company
believes this change in accounting method provides a better matching of revenues
and expenses. As required by GAAP, the Company has restated its financial
statements for prior periods. As a result, the Company's net inventory balance
as of December 31, 2004 increased by $26.7 million from the previously reported
amount, with a corresponding decrease to the Company's accumulated deficit.
There was no impact on the Company's cash flow from operations for the three
months ended March 31, 2004 related to this accounting change. The effect of the
accounting change on income for the three months ended March 31, 2005 was to
increase net income by $5.0 million and increase earnings per basic and diluted
share by $0.31 and $0.37, respectively. The effect of the accounting change on
previously reported amounts for the three months ended March 31, 2004 was to
increase net income by $0.4 million and increase earnings per basic and diluted
share each by $0.02. See Note 2.
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. All share and
per share disclosures for the 2004 period have been adjusted to give effect to
this stock split.
The Company currently follows the disclosure alternative prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, and has chosen to account for its
stock-based employee compensation related to stock options in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and its various interpretations. See Note 15. Under APB Opinion
No. 25, compensation cost is generally recognized for fixed stock options for
which the exercise price is less than the market price of the underlying stock
on the grant date. All of the Company's stock options have been granted with
exercise prices equal to or in excess of the market price on the date of grant,
and the Company recognized no compensation expense for stock options during the
three months ended March 31, 2005 and 2004. The following table illustrates the
effect on net income (loss) and earnings (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:
- 10 -
Three months ended March 31,
2005 2004
------------------ ------------------
(In thousands)
Net income (loss) attributable to common
stockholders, as reported $ 38,107 $ (1,225)
Less stock option related stock-based employee
compensation expense determined under
SFAS No. 123 (7) (28)
------------------ ------------------
Pro forma net income (loss) attributable
to common stockholders $ 38,100 $ (1,253)
================== ==================
Basic earnings (loss) per share attributable
to common stockholders:
As reported $ 2.39 $ (0.08)
================== ==================
Pro forma $ 2.39 $ (0.08)
================== ==================
Diluted earnings (loss) per share attributable
to common stockholders:
As reported $ 1.83 $ (0.08)
================== ==================
Pro forma $ 1.83 $ (0.08)
================== ==================
VALTIMET, the Company's 43.7% owned affiliate accounted for by the equity
method, has entered into certain derivative financial instruments that qualify
as cash flow hedges under GAAP. The Company's pro-rata share of VALTIMET's
unrealized net gains (losses) on such derivative financial instruments is
included as a component of other comprehensive income.
Note 2 - Inventories
March 31, December 31,
2005 2004
--------------------- -------------------
(In thousands)
Raw materials $ 82,462 $ 71,067
Work-in-process 109,083 97,848
Finished products 76,306 77,012
Supplies 12,038 12,397
--------------------- -------------------
$ 279,889 $ 258,324
===================== ===================
Effective January 1, 2005, the Company changed its method for inventory
costing from the LIFO cost method to the specific identification cost method, as
described in Note 1. As a result of this accounting change, the Company's net
inventory balance as of December 31, 2004 increased by $26.7 million from the
previously reported amount (representing the elimination of the Company's LIFO
reserve at such date).
- 11 -
Note 3 - Marketable securities
The following table summarizes the Company's marketable securities as of
March 31, 2005 and December 31, 2004:
March 31, 2005 December 31, 2004
----------------------------- --------------------------------
Market Market
Marketable security Shares value Shares value
- ------------------------------------------------ ------------ ------------- -------------- --------------
($ in thousands)
CompX International, Inc. ("CompX") 2,549,520 $ 41,837 2,549,520 $ 42,144
NL Industries, Inc. ("NL") 222,100 4,942 222,100 4,908
Kronos Worldwide, Inc. ("Kronos") 5,203 219 3,985 162
------------- --------------
$ 46,998 $ 47,214
============= ==============
During the first nine months of 2004, the Company purchased 2,212,820
shares of CompX Class A common shares and, on October 1, 2004, contributed such
shares to CompX Group, Inc. ("CGI") in return for a 17.6% ownership interest in
CGI (the remaining 82.4% interest is held by NL). As of March 31, 2005 and
December 31, 2004, the Company directly held 336,700 shares of CompX, which were
purchased during the fourth quarter of 2004. From April 1, 2005 through May 9,
2005, the Company purchased an additional 97,900 shares of CompX Class A common
stock for an aggregate of $1.5 million. The Company has not contributed any of
the 434,600 shares purchased subsequent to October 1, 2004, and currently does
not expect to contribute those shares or any other shares of CompX Class A
common stock that it may subsequently acquire, to CGI.
As of March 31, 2005, the Company's aggregate cost basis of its marketable
securities was $34.7 million and for the three months ended March 31, 2005, the
Company recognized $0.2 million (net of tax benefit) of unrealized losses in
stockholders' equity, as a component of other comprehensive income (loss). The
Company's unrealized gains on marketable securities for the three months ended
March 31, 2004 were $4.5 million.
During the first quarter of 2005, CompX paid cash dividends on its common
stock, NL paid dividends on its common stock in the form of shares of Kronos
common stock and Kronos paid cash dividends on its common stock.
Note 4 - Property and equipment
March 31, December 31,
2005 2004
-------------------- ------------------
(In thousands)
Land and improvements $ 8,689 $ 8,703
Buildings and improvements 32,062 31,780
Information technology systems 63,088 63,609
Manufacturing equipment and other 328,293 333,031
Construction in progress 24,598 14,819
-------------------- ------------------
456,730 451,942
Less accumulated depreciation 224,818 223,769
-------------------- ------------------
$ 231,912 $ 228,173
==================== ==================
- 12 -
During the first quarter of 2005, the Company determined that certain of
its manufacturing equipment would no longer be utilized in its operations, and,
accordingly, recognized a $1.2 million noncash abandonment charge to cost of
sales during the period.
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 to BMI, a 32%-owned indirect
subsidiary of Valhi. 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 water conservation 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 water conservation
facility and can cease use of the settling ponds, currently expected to occur in
the second quarter of 2005.
Note 5 - Other noncurrent assets
March 31, December 31,
2005 2004
--------------------- ------------------
(In thousands)
Prepaid pension cost $ 10,677 $ 10,531
Deferred financing costs 653 786
Notes receivable from officers 49 49
Other 200 211
--------------------- ------------------
$ 11,579 $ 11,577
===================== ==================
Note 6 - Accrued liabilities
March 31, December 31,
2005 2004
--------------------- ------------------
(In thousands)
OPEB cost $ 2,746 $ 2,777
Pension cost 5,210 5,285
Payroll and vacation 5,843 5,810
Incentive compensation 14,143 12,570
Other employee benefits 7,862 9,721
Deferred income 2,999 1,736
Environmental costs 2,413 2,530
Taxes, other than income 5,185 4,166
Other 7,749 8,535
--------------------- ------------------
$ 54,150 $ 53,130
===================== ==================
- 13 -
Note 7 - Customer advances
Under the terms of the Company's long-term agreement ("LTA") with The
Boeing Company ("Boeing"), 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 from TIMET during the preceding year. The advance
relates to Boeing's take-or-pay obligations under the LTA. Effectively, the
Company collects $3.80 less from Boeing than the LTA selling price for each
pound of titanium product sold directly to Boeing and reduces the related
customer advance recorded by the Company. For titanium products sold to Boeing
subcontractors, the Company collects the full LTA selling price, but gives
Boeing credit by reducing the next year's annual advance by $3.80 per pound of
titanium product sold to Boeing subcontractors. The Boeing customer advance is
also reduced as take-or-pay benefits are earned. As of March 31, 2005,
approximately $26.2 million of customer advances related to the Company's LTA
with Boeing.
Note 8 - Bank debt
During the first quarter of 2004, the Company amended its U.S. credit
facility to, among other things, allow the Company the flexibility to remove the
equipment component from the determination of the Company's borrowing
availability in order to avoid the costs of an appraisal. The Company took
advantage of this flexibility during the first quarter of 2004, effectively
reducing the Company's borrowing availability in the U.S. by $12 million.
However, the Company can regain this availability by completing an updated
equipment appraisal. As of March 31, 2005, the Company had outstanding
borrowings of $41.0 million under its U.S. credit agreement and no borrowings
under its European credit facilities. Aggregate unused borrowing availability
under the Company's U.S. and European credit facilities was approximately $110
million as of March 31, 2005.
Note 9 - Other income (expense)
Three months ended March 31,
2005 2004
------------------ ------------------
(In thousands)
Other operating income (expense):
Settlement of customer claim $ 1,800 $ -
Other, net 185 74
------------------ ------------------
$ 1,985 $ 74
================== ==================
Other non-operating income (expense):
Dividends and interest $ 487 $ 100
Equity in earnings of common
securities of the Capital Trust 103 113
Foreign exchange gain, net 260 472
Other, net (107) 53
------------------ ------------------
$ 743 $ 738
================== ==================
During the first quarter of 2005, the Company received $1.8 million related
to its settlement of a customer claim regarding prior order cancellations from
such customer. Additionally, the Company received dividends from its investments
in marketable securities, as discussed in Note 3.
- 14 -
Note 10 - Income taxes
Three months ended
March 31,
-----------------------------------------
2005 2004
------------------ -------------------
(In thousands)
Expected income tax expense (benefit), at 35% $ 6,808 $ (109)
Non-U.S. tax rates (315) (51)
U.S. state income taxes, net 315 (192)
Dividends received deduction (107) -
Nontaxable income (53) -
Adjustment of deferred income tax asset
valuation allowance (29,896) 835
Other, net 369 40
------------------ -------------------
$ (22,879) $ 523
================== ===================
The Company periodically reviews its deferred income tax assets to
determine if future realization is more likely than not. During the first
quarter of 2005, based on the Company's recent history of U.S. income, its near
term outlook and the effect of its change in method of inventory costing from
the LIFO cost method to the specific identification cost method for U.S. federal
income tax purposes (see Note 1), the Company changed its estimate of its
ability to utilize the tax benefits of its U.S. net operating loss ("NOL")
carryforwards, alternative minimum tax ("AMT") credit carryforwards and other
net deductible temporary differences (other than the Company's capital loss
carryforwards). Consequently, the Company determined that its net deferred
income tax asset related to such U.S. tax attributes and other net deductible
temporary differences now meets the "more-likely-than-not" recognition criteria.
Accordingly, the Company reversed $14.3 million of the valuation allowance
attributable to such deferred income tax asset in the first quarter of 2005. In
addition, the Company's deferred income tax asset valuation allowance related to
income from continuing operations decreased by $3.0 million during the first
quarter of 2005, primarily due to the utilization of the U.S. NOL carryforward.
The Company's remaining U.S. valuation allowance attributable to its U.S. net
deferred income tax asset (other than the Company's capital loss carryforward)
of $14.6 million will be reversed during the final three quarters of 2005 in
accordance with the GAAP requirements of accounting for income taxes at interim
dates.
During the first quarter of 2005, based on the Company's recent history of
U.K. income, its near term outlook and its historic U.K. profitability, the
Company also changed its estimate of its ability to utilize its net deductible
temporary differences and other tax attributes related to the U.K., primarily
comprised of (i) the future benefits associated with the reversal of its U.K.
minimum pension liability deferred income tax asset and (ii) the benefits of its
U.K. NOL carryforward. Consequently, the Company determined that its net
deferred income tax asset in the U.K. now meets the "more-likely-than-not"
recognition criteria. Accordingly, the Company reversed $11.5 million of the
valuation allowance attributable to such deferred income tax asset in the first
quarter of 2005. In addition, the Company's deferred income tax asset valuation
allowance related to income from continuing operations decreased by $1.1 million
during the first quarter of 2005, primarily due to the utilization of the U.K.
NOL carryforward. The Company's remaining U.K. valuation allowance of $0.8
million will be reversed during the final three quarters of 2005 in accordance
with the GAAP requirements of accounting for income taxes at interim dates.
- 15 -
At March 31, 2005, the Company had, for U.S. federal income tax purposes,
(i) NOL carryforwards of $89 million that expire in 2020 through 2023, (ii) a
capital loss carryforward of $74 million that expires in 2008 and (iii) AMT
credit carryforwards of $4 million, which can be utilized to offset regular
income taxes payable in future years, with an indefinite carryforward period. In
addition, at March 31, 2005, the Company had the equivalent of a $5 million NOL
carryforward in the U.K. and a $1 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 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. The Company is currently
monitoring its 2005 year-to-date taxable income to determine the level of
benefit, if any, the Company will derive from the special dividend received
deduction.
The new law also provides for a special deduction from U.S. taxable income
equal to a specified 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.
Note 11 - Employee benefits
Defined benefit pension plans. The components of the net periodic pension
expense are set forth below:
Three months ended
March 31,
-----------------------------------------
2005 2004
------------------ -------------------
(In thousands)
Service cost $ 957 $ 885
Interest cost 3,490 3,151
Expected return on plan assets (3,791) (3,269)
Amortization of net losses 1,225 1,093
Amortization of unrecognized prior service cost 139 122
------------------ -------------------
Net periodic pension expense $ 2,020 $ 1,982
================== ===================
Through March 31, 2005, the Company has made $2.2 million of cash
contributions to its defined benefit pension plans in 2005, and the Company
currently expects to make additional cash contributions of approximately $6.7
million to its defined benefit pension plans during the remainder of 2005. All
of the contributions relate to the Company's U.K. plan.
- 16 -
Postretirement benefits other than pensions. The components of net periodic
OPEB expense are set forth below:
Three months ended
March 31,
-----------------------------------------
2005 2004
------------------ -------------------
(In thousands)
Service cost $ 171 $ 127
Interest cost 467 403
Amortization of unrecognized prior service cost (116) (116)
Amortization of net losses 324 227
------------------ -------------------
Net periodic OPEB expense $ 846 $ 641
================== ===================
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the "Medicare Act of 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. In May 2004, the Financial Accounting Standards
Board ("FASB") issued FSP No. 106-2, which superceded FSP No. 106-1 and is
currently applicable to the Company. 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.
During 2005, the Company determined that the benefits provided by its U.S.
health and welfare plan are actuarially equivalent to the Medicare Part D
benefit and therefore the Company is eligible for the federal subsidy provided
for by the Medicare 2003 Act. The effect of such subsidy, which is accounted for
prospectively from the date actuarial equivalence was determined as permitted
and in accordance with FASB Staff Position No. 106-2, results in a reduction in
the Company's accumulated postretirement benefit obligation of approximately $5
million and a reduction in net periodic OPEB cost of approximately $0.6 million.
Note 12 - Commitments and contingencies
Environmental matters. In November 2004, the Company and BMI entered into
several agreements pursuant to which the Company conveyed certain land owned by
the Company adjacent to its Henderson, Nevada plant site on which the Company
operated settling ponds (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 water conservation facility is operational, currently expected to be in the
second quarter of 2005. See Note 4.
The Company is also continuing assessment work with respect to its own
active plant site in Henderson, Nevada. The Company currently has $3.7 million
accrued based on the undiscounted cost estimates of the probable costs for
remediation of this site 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.
- 17 -
At March 31, 2005, the Company had accrued an aggregate of approximately
$4.6 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 million. The Company records liabilities related to
environmental remediation obligations when estimated future costs are probable
and reasonably estimable. Such accruals are adjusted as further information
becomes available or circumstances change. Estimated future costs are not
discounted to their present value. It is not possible to estimate the range of
costs for certain sites. The imposition of more stringent standards or
requirements under environmental laws or regulations, the results of future
testing and analysis undertaken by the Company at its operating facilities, or a
determination that the Company is potentially responsible for the release of
hazardous substances at other sites, could result in costs in excess of amounts
currently estimated to be required for such matters. No assurance can be given
that actual costs will not exceed accrued amounts or that costs will not be
incurred with respect to sites as to which no problem is currently known or
where no estimate can presently be made. Further, there can be no assurance that
additional environmental matters will not arise in the future.
Legal proceedings. The Company records liabilities related to legal
proceedings when estimated costs are probable and reasonably estimable. Such
accruals are adjusted as further information becomes available or circumstances
change. Estimated future costs are not discounted to their present value. It is
not possible to estimate the range of costs for certain matters. No assurance
can be given that actual costs will not exceed accrued amounts or that costs
will not be incurred with respect to matters as to which no problem is currently
known or where no estimate can presently be made. Further, there can be no
assurance that additional legal proceedings will not arise in the future.
Other. 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 March 31, 2005, the outstanding amounts for such
letters of credit, which reduce the Company's excess availability under its U.S.
credit agreement, were $2.3 million and $1.3 million, respectively.
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.
See the 2004 Annual Report for additional information concerning certain
legal and environmental matters, commitments and contingencies.
Note 13 - 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 Company's 6.625% mandatorily redeemable convertible preferred securities,
beneficial unsecured convertible securities ("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.
- 18 -
Three months ended March 31,
-------------------------------------------
2005 2004
------------------- --------------------
Numerator:
Net income (loss) attributable to
common stockholders $ 38,107 $ (1,225)
Interest on BUCS 97 -
Dividends on Series A Preferred Stock 3,298 -
------------------- --------------------
Diluted net income (loss) attributable
to common stockholders $ 41,502 $ (1,225)
=================== ====================
Denominator:
Average common shares outstanding 15,931 15,863
Average dilutive stock options and restricted stock 132 -
BUCS 77 -
Series A Preferred Stock 6,515 -
------------------- --------------------
Diluted shares 22,655 15,863
=================== ====================
For the three months ended March 31, 2004, conversion of the BUCS was
antidilutive. Stock options to purchase 253,040 shares of common stock during
the three months ended March 31, 2005 and 481,150 shares during the three months
ended March 31, 2004 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 23,255 incremental
stock options and restricted shares were excluded from the 2004 calculation
because they were antidilutive due to the loss in that period. As of March 31,
2005, net income attributable to common stockholders included $1.1 million
($0.28 per outstanding share) of undeclared dividends on its Series A Preferred
Stock.
Note 14 - Business segment information
The Company's production facilities are located in the U.S., U.K., France
and Italy, and its products are sold throughout the world. The Company's Chief
Executive Officer is the Company's chief operating decision maker ("CODM") as
that term is defined in SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The CODM receives financial information
about TIMET from which he makes decisions concerning resource utilization and
performance analysis only on a global, consolidated basis. Based upon this level
of decision-making, the Company currently has one segment, its worldwide
"Titanium melted and mill products" segment. Sales, gross margin, operating
income, inventory and receivables are the key management measures used to
evaluate segment performance. The following table provides segment information
supplemental to the Company's Consolidated Financial Statements:
- 19 -
Three months ended March 31,
-------------------------------------------
2005 2004
------------------- --------------------
($ in thousands, except product
shipment data)
Titanium melted and mill products:
Melted product net sales $ 22,237 $ 17,395
Mill product net sales 113,925 90,675
Other product sales 19,073 12,418
------------------- --------------------
$ 155,235 $ 120,488
=================== ====================
Melted product shipments:
Volume (metric tons) 1,415 1,420
Average selling price ($ per kilogram) $ 15.60 12.25
Mill product shipments:
Volume (metric tons) 3,100 2,925
Average selling price ($ per kilogram) $ 36.75 31.00
Note 15 - Accounting principles not yet adopted
In November 2004, the 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. As permitted by SEC
regulations, the Company will adopt SFAS No. 123R as of January 1, 2006 and does
not believe the adoption of SFAS No. 123R will have any 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.
- 20 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Summarized financial information. The following table summarizes certain
information regarding the Company's results of operations for the three months
ended March 31, 2005 and 2004. Average selling prices, as reported by the
Company, are a reflection of not just actual selling prices received by the
Company, but also include other related factors such as currency exchange rates
and customer and product mix during a given period. Consequently, changes in
average selling prices from period to period will be impacted by changes
occurring not just in actual prices, but by these other factors as well. The
percentage change information presented below represents changes from the
respective prior year. See "Results of Operations - Outlook" for further
discussion of the Company's business expectations for the remainder of 2005.
Three months ended March 31,
------------------------------------------
2005 2004
-------------------- ------------------
($ in thousands, except product
shipment data)
Net sales:
Melted products $ 22,237 $ 17,395
Mill products 113,925 90,675
Other products 19,073 12,418
-------------------- ------------------
Net sales $ 155,235 $ 120,488
Gross margin $ 28,955 $ 12,785
Gross margin percent of net sales 19% 11%
Melted product shipments:
Volume (metric tons) 1,420 1,415
Average selling price ($ per kilogram) $ 15.60 $ 12.25
Mill product shipments:
Volume (metric tons) 3,100 2,925
Average selling price ($ per kilogram) $ 36.75 $ 31.00
Percentage change in:
Sales volume:
Melted products - +44
Mill products +6 +26
Average selling prices:
Melted products +27 -6
Mill products +19 -3
Selling prices - excludes changes in product mix:
Melted products +17 -4
Mill products in U.S. dollars +15 +2
Mill products in billing currencies (1) +13 -3
- ------------------------------------------------------------------------------------------------------------------
(1) Excludes the effect of changes in foreign currencies.
- 21 -
First quarter of 2005 compared to first quarter of 2004. Melted product
sales increased 28% and mill product sales increased 26% during the first
quarter of 2005 compared to the year ago period, primarily due to significant
increases in average selling prices for both melted and mill products. 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. Average selling prices for both melted
and mill products were positively affected by current market conditions and
changes in customer and product mix. Mill product average selling prices were
also positively affected by the weakening of the U.S. dollar compared to both
the British pound sterling and the euro.
In addition to average selling price increases, the first quarter of 2005
was positively impacted by a 6% increase in mill product sales volume, primarily
driven by increased demand from the commercial aerospace market. Melted product
sales volume remained flat during the first quarter of 2005 as compared to the
year-ago period.
Effective January 1, 2005, the Company changed its method for inventory
costing from the LIFO cost method to the specific identification cost method for
the approximate 40% of the Company's consolidated inventories previously
accounted for under the LIFO cost method. With the significant volatility seen
recently in raw material prices, the Company believes this change in accounting
method provides a better matching of revenues and expenses. As required by GAAP,
the Company has restated its financial statements for prior periods. As a result
of this change, the Company's cost of sales for the three months ended March 31,
2004 was restated to $107.7 million, a decrease of $0.4 million from the
previously reported amount. See Notes 1 and 2 to the Consolidated Financial
Statements.
Gross margin (net sales less cost of sales) increased during the first
quarter of 2005 compared to the year ago period primarily due to improved plant
operating rates (from 73% in the first quarter of 2004 to 80% in the first
quarter of 2005) and increased selling prices. These positive effects were
offset by charges to cost of sales during the 2005 period for:
o $1.3 million of additional costs during the 2005 period related to the
accrual of certain employee incentive compensation payments, as
compared to the first quarter of 2004; and
o A $1.2 million noncash impairment charge during the 2005 period
related to the Company's abandonment of certain manufacturing
equipment.
In addition, gross margin during the 2004 period was positively affected by
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.
Selling, general, administrative and development expenses increased 30%
from $9.5 million during the first quarter of 2004 to $12.4 million during the
first quarter of 2005, principally as a result of (i) $1.0 million of auditing
and consulting costs relative to the Company's compliance with the
Sarbanes-Oxley Act's internal control requirements, (ii) $0.3 million additional
costs related to the accrual of certain employee incentive compensation payments
and (iii) a $0.3 million reduction in the first quarter of 2004 related to the
previously discussed change in the Company's vacation policy.
- 22 -
The Company recognized equity in earnings of joint ventures of $0.8 million
during the first quarter of 2005, compared to equity in losses of $0.1 million
during the first quarter of 2004. This change was principally due to an increase
in the operating results of VALTIMET, the Company's minority-owned welded tube
joint venture.
Net other income (expense) increased during the first quarter primarily
related to the Company's receipt of $1.8 million from settlement of a customer
claim during the first quarter of 2005 regarding prior order cancellations from
such customer.
Non-operating income (expense).
Three months ended March 31,
------------------------------------------
2005 2004
-------------------- ------------------
($ in thousands)
Interest expense on debt payable to the Capital Trust $ (199) $ (3,751)
Interest expense on bank debt and capital leases (475) (558)
-------------------- ------------------
$ (674) $ (4,309)
==================== ==================
Dividend and interest income $ 487 $ 100
Equity in earnings of common
securities of the Capital Trust 103 113
Foreign exchange gains 260 472
Other, net (107) 53
-------------------- ------------------
$ 743 $ 738
==================== ==================
Prior to September 1, 2004, quarterly interest expense on the Company's
debt payable to the Capital Trust approximated $3.4 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 6.75% Series A
Convertible Preferred Stock (the "Series A Preferred Stock"). Interest expense
related to the remaining debt payable to the Capital Trust is approximately $0.2
million per quarter, partially offset by $0.1 million of equity in earnings
related to the Company's holdings of the common securities of the Capital Trust.
Dividends and interest income during the first quarter of 2005 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 the first quarter of 2004 consisted solely of interest income
earned on cash and cash equivalents.
Income taxes. The Company operates in several tax jurisdictions and is
subject to varying income tax rates. As a result, the geographic mix of pretax
income or loss can impact the Company's overall effective tax rate. For the
three months ended March 31, 2005 and 2004, 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. See Note 10 to
the Consolidated Financial Statements. The Company's current income tax expense
during the three months ended March 31, 2004 relates primarily to its operations
in France.
- 23 -
The Company periodically reviews its deferred income tax assets to
determine if future realization is more likely than not. During the first
quarter of 2005, based on the Company's recent history of U.S. income, its near
term outlook and the effect of its change in method of inventory costing from
the LIFO cost method to the specific identification cost method for U.S. federal
income tax purposes (see Note 1 to the Consolidated Financial Statements), the
Company changed its estimate of its ability to utilize the tax benefits of its
U.S. NOL carryforwards, AMT credit carryforwards and other net deductible
temporary differences (other than the Company's capital loss carryforwards).
Consequently, the Company determined that its net deferred income tax asset
related to such U.S. tax attributes and other net deductible temporary
differences now meets the "more-likely-than-not" recognition criteria.
Accordingly, the Company reversed $14.3 million of the valuation allowance
attributable to such deferred income tax asset in the first quarter of 2005. In
addition, the Company's deferred income tax asset valuation allowance related to
income from continuing operations decreased by $3.0 million during the first
quarter of 2005, primarily due to the utilization of the U.S. NOL carryforward.
The Company's remaining U.S. valuation allowance attributable to its U.S. net
deferred income tax asset (other than the Company's capital loss carryforward)
of $14.6 million will be reversed during the final three quarters of 2005 in
accordance with the GAAP requirements of accounting for income taxes at interim
dates.
During the first quarter of 2005, based on the Company's recent history of
U.K. income, its near term outlook and its historic U.K. profitability, the
Company also changed its estimate of its ability to utilize its net deductible
temporary differences and other tax attributes related to the U.K., primarily
comprised of (i) the future benefits associated with the reversal of its U.K.
minimum pension liability deferred income tax asset and (ii) the benefits of its
U.K. NOL carryforward. Consequently, the Company determined that its net
deferred income tax asset in the U.K. now meets the "more-likely-than-not"
recognition criteria. Accordingly, the Company reversed $11.5 million of the
valuation allowance attributable to such deferred income tax asset in the first
quarter of 2005. In addition, the Company's deferred income tax asset valuation
allowance related to income from continuing operations decreased by $1.1 million
during the first quarter of 2005, primarily due to the utilization of the U.K.
NOL carryforward. The Company's remaining U.K. valuation allowance of $0.8
million will be reversed during the final three quarters of 2005 in accordance
with the GAAP requirements of accounting for income taxes at interim dates.
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 under certain
circumstances. 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 the
three months ended March 31, 2005.
- 24 -
European operations. The Company has substantial operations located in
Europe, principally the U.K., France and Italy. Approximately 42% of the
Company's sales originated in Europe for the three months ended March 31, 2005,
of which approximately 63% were denominated in the British pound sterling or the
euro. Certain purchases of raw materials, principally titanium sponge and
alloys, for the Company's European operations are denominated in U.S. dollars,
while labor and other production costs are primarily denominated in local
currencies. The functional currencies of the Company's European subsidiaries are
those of their respective countries, and the European subsidiaries are subject
to exchange rate fluctuations that may impact reported earnings and may affect
the comparability of period-to-period operating results. Borrowings of the
Company's European operations may be in U.S. dollars or in functional
currencies. The Company's export sales from the U.S. are denominated in U.S.
dollars and are not subject to currency exchange rate fluctuations.
The Company does not use currency contracts to hedge its currency
exposures. Net currency transaction gains/losses included in the Company's
results of operations were gains of $0.3 million during the three months ended
March 31, 2005 and $0.5 million during the three months ended March 31, 2004. At
March 31, 2005, consolidated assets and liabilities denominated in currencies
other than functional currencies were approximately $41.8 million and $32.6
million, respectively, consisting primarily of U.S. dollar cash, accounts
receivable and accounts payable.
VALTIMET has entered into certain derivative financial instruments that
qualify as cash flow hedges under GAAP. The Company's pro-rata share of
VALTIMET's unrealized net gains on such derivative financial instruments is
included as a component of other comprehensive income.
Outlook. The "Outlook" section contains a number of forward-looking
statements, all of which are based, unless otherwise noted, on current
expectations and exclude the effect of potential future charges related to
restructurings, asset impairments, valuation allowances, changes in accounting
principles and similar items. Undue reliance should not be placed on these
statements, as more fully discussed in the "Forward-Looking Information"
statement of this Quarterly Report. Actual results may differ materially. See
also Notes to the Consolidated Financial Statements regarding commitments,
contingencies, legal matters, environmental matters and other matters, including
new accounting principles, which could materially affect the Company's future
business, results of operations, financial position and liquidity.
Over the past several quarters, the Company has seen the availability of
raw materials tighten, and, consequently, the prices for such raw material
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, the Company has certain long-term agreements that limit the
Company's ability to pass on all of its increased raw material costs to its
customers.
During the third quarter of 2004, the Company modified its method of
calculating its backlog to include purchase orders 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 at the end of March 2005 was
$490 million, a $40 million (9%) increase over the $450 million backlog at the
end of December 2004 and a $230 million (88%) increase over the $260 million
backlog at the end of March 2004.
- 25 -
The Company currently expects its full year 2005 sales revenue to range
from $700 million to $730 million, which is a $50 million increase from previous
guidance, primarily due to higher average selling prices. Full year 2005
expected product volume shipments for both melted products and mill products
remain unchanged from previous guidance. The Company currently expects average
selling prices to increase over previous guidance by 10% to 15% for melted
products and 5% to 10% for mill products.
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, significant raw material cost increases
are expected to continue during the remainder of 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.
The Company currently expects production volumes to continue to increase in
2005, with overall capacity utilization expected to approximate 80% in 2005 (as
compared to 75% in 2004). However, practical capacity utilization measures can
vary significantly based on product mix.
Selling, general, administrative and development expenses for 2005 should
approximate $51 million, or 7.0% to 7.3% of net sales, which is a slight
increase from previous guidance primarily related to increases in the Company's
expected information technology costs.
The Company currently anticipates that it will receive orders from Boeing
for about 3.0 million pounds of product during 2005. At this projected order
level, the Company expects to recognize about $17 million of income in 2005
under the Boeing LTA's take-or-pay provisions.
The Company now expects operating income for 2005 to increase $20 million
from previous guidance to between $70 million and $85 million, as a significant
portion of the effect of increased average selling prices will be offset by
higher raw material costs. Additionally, the Company's previous 2005 operating
income guidance assumed an increase in our LIFO inventory reserve (and a
corresponding charge to operating income) of $10 million, which the Company will
no longer incur.
Dividends on the Company's Series A Preferred Stock should approximate
$13.2 million in 2005. The Company now expects full year 2005 net income
attributable to common stockholders to range from $80 million to $95 million, an
increase of $45 million from our previous guidance primarily due to (i) higher
operating income as previously discussed and (ii) the $25.9 million income tax
benefit the Company recognized during the first quarter related to the reversal
of the Company's valuation allowance attributable to its deferred income tax
assets in the U.S. and the U.K.
Consistent with prior guidance, 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 BMI, a 32%-owned indirect
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 water conservation facility on its
Henderson plant site and can cease use of certain settling ponds located on the
property sold to BMI, currently expected to be in the second quarter of 2005.
- 26 -
The Company currently expects to generate $5 million to $15 million in cash
flow from operations during 2005, which is a $45 million decrease from previous
guidance primarily due to a higher projected year end inventory balance as a
result of increased raw material costs. Depreciation and amortization should
approximate $32 million in 2005. In May 2005, the Company announced its plans to
expand its existing titanium sponge facility in Henderson, Nevada. This
expansion, which the Company currently expects to complete by the first quarter
of 2007, will provide the capacity to produce an additional 4,000 metric tons of
sponge annually, an increase of approximately 42% over current Henderson sponge
production capacity levels. The Company currently estimates the capital cost for
the project will approximate $38 million. Capital expenditures during 2005 are
now expected to approximate $68 million, which includes $25 million related to
the sponge facility expansion.
The Company currently expects to make contributions of approximately $9
million to its defined benefit pension plans during 2005, and expects pension
expense to approximate $8 million in 2005.
Non-GAAP financial measures. In an effort to provide investors with
information in addition to the Company's results as determined by GAAP, the
Company has provided the following non-GAAP financial disclosures that it
believes may provide useful information to investors:
o The Company discloses percentage changes in its melted and mill
product selling prices in U.S. dollars, which have been adjusted to
exclude the effects of changes in product mix. The Company believes
such disclosure provides useful information to investors by allowing
them to analyze such changes without the impact of changes in product
mix, thereby facilitating period-to-period comparisons of the relative
changes in average selling prices. Depending on the composition of
changes in product mix, the percentage change in selling prices
excluding the effect of changes in product mix can be higher or lower
than such percentage change would be using the actual product mix
prevailing during the respective periods; and
o In addition to disclosing percentage changes in its mill product
selling prices adjusted to exclude the effects of changes in product
mix, the Company also discloses such percentage changes in billing
currencies, which have been further adjusted to exclude the effects of
changes in foreign currency exchange rates. The Company believes such
disclosure provides useful information to investors by allowing them
to analyze such changes without the impact of changes in foreign
currency exchange rates, thereby facilitating period-to-period
comparisons of the relative changes in average selling prices in the
various actual billing currencies. Generally, when the U.S. dollar
strengthens (weakens) against other currencies, the percentage change
in selling prices in billing currencies will be higher (lower) than
such percentage changes would be using actual exchange rates
prevailing during the respective periods.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows for the three months ended March 31,
2005 and 2004 are presented below. The following discussion should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto.
Three months ended March 31,
--------------------------------------------
2005 2004
-------------------- --------------------
(In thousands)
Cash (used) provided by:
Operating activities $ 24,164 $ 14,177
Investing activities (13,075) (16,054)
Financing activities (4,453) (403)
-------------------- --------------------
Net cash (used) provided by operating,
investing and financing activities $ 6,636 $ (2,280)
==================== ====================
Operating activities. The titanium industry historically has derived a
substantial portion of its business from the aerospace industry. The aerospace
industry is cyclical, and changes in economic conditions within the aerospace
industry significantly impact the Company's earnings and operating cash flows.
Cash flow from operations is considered a primary source of the Company's
liquidity. Changes in titanium pricing, production volume and customer demand,
among other things, could significantly affect the Company's liquidity.
Certain items included in the determination of net income (loss) have an
impact on cash flows from operating activities, but the impact of such items on
cash may differ from their impact on net income. For example, pension expense
and OPEB expense will generally differ from the outflows of cash for payment of
such benefits. In addition, relative changes in assets and liabilities generally
result from the timing of production, sales and purchases. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period than that in which the underlying cash transaction occurs. For
example, raw materials may be purchased in one period, but the cash payment for
such raw materials may occur in a subsequent period. Similarly, inventory may be
sold in one period, but the cash collection of the receivable may occur in a
subsequent period.
Net income attributable to common stockholders was $38.1 million for the
three months ended March 31, 2005, compared to a net loss attributable to common
stockholders of $1.2 million for the three months ended March 31, 2004.
Accounts receivable increased during the first three months of 2005 and
2004 primarily as a result of increased sales. Inventories increased during the
first three months of 2005 and 2004 as a result of increased run rates and
related inventory build in order to meet expected customer demand, as well as
the effects of increased raw material costs.
- 28 -
Changes in accounts payable and accrued liabilities reflect, among other
things, the timing of payments to suppliers of titanium sponge, titanium scrap
and other raw material purchases. Additionally, accrued liabilities increased in
part due to a $1.6 million increase in the Company's accrual for certain
employee incentive compensation payments expected to be made for 2005. Accrued
liabilities decreased during the first three months of 2004 primarily due to (i)
payment of the $2.8 million final installment related to termination of the
Company's prior agreement with Wyman-Gordon Company, (ii) a $1.6 million
reduction in the Company's accrued vacation related to the Company's
modification of its vacation policy for its U.S. salaried employees and (iii) a
$2.1 million reclassification of the Company's defined benefit pension liability
from current to noncurrent, as the current cash contribution requirements were
reduced significantly based on the Pension Funding Equity Act of 2004.
In April 2005, the Company made approximately $8 million of previously
accrued incentive compensation payments to its employees related to services
performed during 2004.
The increase in customer advances during the first three months of 2005 and
2004 primarily reflects the Company's receipt of a $27.9 million advance from
Boeing in each of January 2005 and 2004, partially offset by the application of
customer purchases. Under the terms of the Boeing LTA, in years 2002 through
2007, Boeing advances TIMET $28.5 million annually, less $3.80 per pound of
titanium product purchased from TIMET by Boeing subcontractors during the
preceding year.
Investing activities. The Company's capital expenditures were $13.7 million
for the three months ended March 31, 2005, compared to $3.3 million for the
comparable period in 2004, principally for replacement of machinery and
equipment and for capacity maintenance. The 2005 amount also includes $6.6
million related to construction in progress on the water conservation facility.
During the first quarter of 2004, the Company purchased 1,277,710 shares of
CompX Class A common stock for $12.8 million. See Note 3 to the Consolidated
Financial Statements.
Financing activities. Cash used during the three months ended March 31,
2005 related primarily to the Company's net debt repayments of $2.2 million and
the payment of $3.3 million of dividends on the Company's Series A Preferred
Stock. Additionally, the Company received $1.0 million of cash from the issuance
of common stock related to the exercise of certain employee stock options during
the 2005 period. The Company had zero net borrowings during the three months
ended March 31, 2004.
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%. Borrowings are collateralized by
substantially all of the Company's U.S. assets.
- 29 -
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 and 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 arrangements of this type. The Company was in compliance
with all covenants for all periods during the three months ended March 31, 2005
and 2004. As of March 31, 2005, the Company had outstanding borrowings under the
U.S. credit agreement of $41.0 million, and excess availability was
approximately $51 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 May 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 covenants, including a consolidated net worth covenant. TIMET UK was
in compliance with all covenants for all periods during the three months ended
March 31, 2005 and 2004. As of March 31, 2005, the Company had no borrowings
under the U.K. Facilities, and unused borrowing availability was approximately
$43 million.
TIMET UK is currently finalizing a new three-year working capital facility
that will provide for borrowings of up to (pound)22.5 million and is expected to
require the maintenance of certain financial ratios and covenants, including a
consolidated net worth covenant. This agreement will replace the current U.K.
credit agreement.
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 March 31, 2005, there were no outstanding
borrowings under these facilities, and unused borrowing availability was
approximately $16 million.
No dividends were paid by TIMET on its common stock during the three months
ended March 31, 2005 or 2004. During the quarter ended March 31, 2005, the TIMET
paid $3.3 million in dividends on its Series A Preferred Stock.
Legal and environmental matters. See Note 12 to the Consolidated Financial
Statements for discussion of legal and environmental matters, commitments and
contingencies.
- 30 -
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.
Item 4. 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 Chairman of the Board, President and 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 March 31, 2005. 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.
- 31 -
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.
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. 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 March 31, 2005 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
- 32 -
PART II. - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Note 12 of the Consolidated Financial Statements,
which information is incorporated herein by reference, and to the Company's 2004
Annual Report for descriptions of certain previously reported legal proceedings.
Item 6. EXHIBITS
10.1 Letter dated March 2, 2005 to amend Loan and Overdraft Facilities
between Lloyds TSB Bank plc and TIMET UK Limited dated December 20,
2002
18.1 Letter from PricewaterhouseCoopers LLP regarding the preferable change
in the Company's accounting for inventory effective January 1, 2005
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
Note:The Company has retained a signed original of any exhibit listed
above that contains signatures, and the Company will provide any such
exhibit to the SEC or its staff upon request. Such request should be
directed to the attention of the Company's Corporate Secretary at the
Company's corporate offices located at 1999 Broadway, Suite 4300,
Denver, Colorado 80202.
- 33 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TITANIUM METALS CORPORATION
---------------------------------------
Date: May 10, 2005 By /s/ J. Landis Martin
---------------------------------------
J. Landis Martin
Chairman of the Board, President and
Chief Executive Officer
Date: May 10, 2005 By /s/ Bruce P. Inglis
---------------------------------------
Bruce P. Inglis
Vice President - Finance, Corporate
Controller and Treasurer
- 34 -