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 quarter ended September 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-28538
Titanium Metals Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-5630895
(State or other (IRS Employer
jurisdiction of Identification
incorporation or No.)
organization)
1999 Broadway, Suite 4300, Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5600
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
Number of shares of common stock outstanding on October 31, 1998: 31,369,405
FORWARD - LOOKING INFORMATION
The statements contained in this 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 under the captions
"Results of Operations" and "Liquidity and Capital Resources" (both contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations), are forward-looking statements or discussions of trends which by
their nature involve substantial risks and uncertainties that could
significantly impact expected results. Actual 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 those
portions referenced above and those described from time to time in the Company's
other filings with the Securities and Exchange Commission, such as the
cyclicality of the Company's business and its dependence on the aerospace
industry, the sensitivity of the Company's business to global industry capacity,
global economic conditions, changes in product pricing, the possibility of labor
disruptions, control by certain stockholders and possible conflicts of interest,
potential difficulties in integrating acquisitions, uncertainties associated
with new product development, the supply of raw materials and services and the
possibility of disruptions of normal business activities from Year 2000 issues.
TITANIUM METALS CORPORATION
INDEX
Page
number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1997 and
September 30, 1998 2-3
Consolidated Statements of Income - Three months
and nine months ended September 30, 1997 and 1998 4
Consolidated Statements of Comprehensive Income - Three
months and nine months ended September 30, 1997 and 1998 5
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1997 and 1998 6-7
Consolidated Statement of Stockholders' Equity - Nine
months ended September 30, 1998 8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 17
Item 6. Exhibits and Reports on Form 8-K. 17
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
December SEPTEMBER
ASSETS 31, 30,
1997 1998
Current assets:
Cash and cash equivalents $ 68,957 $ 142,591
Receivables, net 155,678 149,640
Receivable from related parties 15,844 8,212
Inventories 153,818 212,059
Prepaid expenses and other 13,253 12,581
Deferred income taxes 6,219 3,112
Total current assets 413,769 528,195
Other assets:
Investments in joint ventures 23,270 32,891
Goodwill 59,771 61,027
Other intangible assets 17,889 19,708
Deferred income taxes 593 487
Other 15,341 15,315
Total other assets 116,864 129,428
Property and equipment:
Land 6,545 5,991
Buildings 26,823 25,742
Equipment 222,845 289,432
Construction in progress 58,740 76,025
314,953 397,190
Less accumulated depreciation 52,527 67,986
Net property and equipment 262,426 329,204
$ 793,059 $ 986,827
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES, MINORITY INTEREST AND December SEPTEMBER
STOCKHOLDERS' EQUITY 31, 30,
1997 1998
Current liabilities:
Notes payable $ 3,372 $ 5,524
Current maturities of long-term debt
and
capital lease obligations 1,354 1,823
Accounts payable 59,501 81,953
Accrued liabilities 46,809 50,501
Payable to related parties 1,298 2,952
Income taxes 11,482 14,721
Deferred income taxes - 95
Total current liabilities 123,816 157,569
Noncurrent liabilities:
Long-term debt 451 105,459
Capital lease obligations 10,996 10,286
Payable to related parties 847 1,395
Accrued OPEB cost 26,192 25,686
Deferred income taxes 11,620 18,791
Other 2,277 88
Total noncurrent liabilities 52,383 161,705
Minority interest - Company-
obligated mandatorily
redeemable preferred securities of
subsidiary trust 201,250 201,250
holding solely subordinated debt
securities
("Convertible Preferred Securities")
Other minority interest 6,663 7,871
Stockholders' equity:
Preferred stock - -
Common stock 315 315
Additional paid-in capital 346,723 347,972
Retained earnings 58,001 103,731
Accumulated other comprehensive income
- - currency 3,908 7,622
translation adjustment
Treasury stock - (1,208)
Total stockholders' equity 408,947 458,432
$793,059 $ 986,827
[FN]Commitments and contingencies (Note 1)
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months Nine months
ended ended
September 30, September 30,
1997 1998 1997 1998
Revenues and other income:
Net sales $177,177 $173,512 $525,606 $551,390
Other, net 457 2,864 3,025 5,796
177,634 176,376 528,631 557,186
Costs and expenses:
Cost of sales 132,747 130,494 401,153 418,437
Selling, general,
administrative and 10,076 16,414 30,904 44,832
development
Restructuring charge - - - 6,000
Interest 870 1,376 1,955 2,325
143,693 148,284 434,012 471,594
Income before income taxes
and minority interest 33,941 28,092 94,619 85,592
Income tax expense 9,880 9,551 28,846 29,134
Minority interest -
Convertible 2,214 2,133 6,627 6,566
Preferred Securities
Other minority interest 511 267 1,724 1,645
Net income $ 21,336 $ 16,141 $57,422 $48,247
Diluted net income $ 23,550 $ 18,274 $64,049 $54,813
Earnings per share:
Basic $ .68 $ .51 $ 1.83 $ 1.53
Diluted .64 .50 1.73 1.49
Weighted average shares
outstanding:
Basic 31,457 31,455 31,457 31,457
Diluted 37,078 36,844 36,988 36,875
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months Nine months
ended ended
September 30, September 30,
1997 1998 1997 1998
Net income $21,336 $16,141 $57,422 $48,247
Other comprehensive income -
currency
translation adjustment (2,712) 4,754 (4,684) 3,714
Comprehensive income $18,624 $20,895 $52,738 $51,961
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1997 and 1998
(In thousands)
1997 1998
Cash flows from operating activities:
Net income $ 57,422 $ 48,247
Depreciation and amortization 21,312 22,660
Restructuring charge - 6,000
Deferred income taxes 2,307 10,478
Other minority interest 1,724 1,645
Other, net 1,121 (964)
83,886 88,066
Change in assets and liabilities, net of
acquisitions:
Receivables (24,731) 12,612
Inventories (16,425) (49,169)
Prepaid expenses 2,605 608
Accounts payable and accrued liabilities (1,504) 10,852
Income taxes 10,376 3,239
Accounts with related parties (6,587) 9,286
Other, net (2,543) (786)
Net cash provided by operating 45,077 74,708
activities
Cash flows from investing activities:
Capital expenditures (40,859) (79,210)
Business acquisitions and joint ventures (12,159) (27,038)
Other, net 102 (67)
Net cash used by investing activities (52,916) (106,315)
Cash flows from financing activities:
Indebtedness:
Borrowings - 121,800
Repayments (2,653) (17,537)
Deferred financing costs (2,059) -
Related party debt repayments (929) -
Letters of credit refunded (4,753) 734
(collateralized)
Dividends paid - (2,517)
Treasury stock purchased - (1,208)
Other 150 (617)
Net cash provided (used) by financing (10,244) 100,655
activities
Net cash provided (used) by operating,
financing and investing activities $(18,083) $ 69,048
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 1997 and 1998
(In thousands)
1997 1998
Net increase (decrease) in cash and
equivalents from:
Operating, investing and financing $(18,083) $ 69,048
activities
Cash acquired - 1,187
Currency translation 346 3,399
(17,737) 73,634
Cash and cash equivalents at beginning of 86,526 68,957
period
Cash and cash equivalents at end of period $ 68,789 $ 142,591
Supplemental disclosures:
Cash paid for:
Interest, net of capitalized interest $ 1,570 $ 1,971
Convertible Preferred Securities 9,999 9,999
dividends
Income taxes 11,973 11,183
Business acquisitions and joint ventures:
Cash acquired $ - $ 1,187
Receivables 736 6,574
Inventories 769 15,352
Property, equipment and other 1,998 21,765
Investment in joint ventures 23,020 8,085
Goodwill and other intangibles 577 8,566
Liabilities assumed (3,604) (18,117)
23,496 43,412
Less noncash consideration, principally
property and (11,337) (16,374)
equipment
Cash paid $ 12,159 $ 27,038
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 1998
(In thousands)
Net Additioal
common shares Common paid-in
outstanding stock capital
Balance at December 31,458 $315 $346,723
31, 1997
Comprehensive - - -
income
Dividends paid - - -
($.08 per share)
Treasury stock (90) - -
purchases
Other, net 1 - 1,249
Balance at 31,369 $315 $347,972
September 30, 1998
*Currency translation adjustment.
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 1998
(In thousands)
Accumulated
Retained other Treasury
earnings comprehensive stock Total
income*
Balance at December $ 58,001 $ 3,908 $ - $408,947
31, 1997
Comprehensive 48,247 3,714 - 51,961
income
Dividends paid (2,517) - - (2,517)
($.08 per share)
Treasury stock - - (1,208) (1,208)
purchases
Other, net - - - 1,249
Balance at $103,731 $ 7,622 $(1,208) $458,432
September 30, 1998
*Currency translation adjustment.
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation:
The consolidated balance sheet of Titanium Metals Corporation ("TIMET") and
subsidiaries (collectively, the "Company") at December 31, 1997 has been
condensed from the Company's audited consolidated financial statements at that
date. The consolidated balance sheet at September 30, 1998 and the consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for the interim periods ended September 30, 1997 and 1998 have been
prepared by the Company without audit. 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 generally accepted accounting principles
have been condensed or omitted. 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/A for the year
ended December 31, 1997 (the "1997 Annual Report").
For information concerning certain legal proceedings and certain
contingencies related to the Company, see (i) Part I, Item 2 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations," (ii)
Part II, Item 1 -- "Legal Proceedings," and (iii) the 1997 Annual Report.
Note 2 - Operating segment information:
The Company is a vertically integrated producer of titanium sponge, ingot,
slab and mill products for aerospace, industrial and other applications. The
Company's production facilities are located principally in the United States,
United Kingdom and France and the Company's products are sold throughout the
world.
Three months ended Nine months ended
September 30, September 30,
1997 1998 1997 1998
(In thousands) (In thousands)
Net sales $177,177 $173,512 $525,606 $551,390
Operating income $33,310 $27,342 $92,688 $ 82,865
General corporate 1,501 2,126 3,886 5,052
income, net
Interest expense (870) (1,376) (1,955) (2,325)
Income before income
taxes
and minority $ 33,941 $ 28,092 $ 94,619 $ 85,592
interest
Mill product shipments:
Volume (metric 3,700 3,500 10,700 11,400
tons)
Average price $ 34.00 $ 35.50 $ 35.00 $ 34.75
($ per kilogram)
Operating income in the 1998 nine-month period includes a $6 million
restructuring charge. See Note 3.
Note 3 - Acquisitions and dispositions:
~Loterios~acquisition.~In April 1998, the Company completed the acquisition
of Loterios S.p.A., a producer and distributor of titanium pipe and fittings to
the offshore oil and gas drilling and production markets, based in Italy. The
cost of the Loterios acquisition, accounted for by the purchase method, was
approximately $19 million in cash. Additional consideration of up to
approximately $7 million is contingent upon Loterios achieving certain operating
targets. The results of Loterios' operations have been reflected in the
consolidated financial statements from the date of acquisition; net sales in the
1998 year-to-date period approximated $17 million.
~Wyman-Gordon~transaction.~In July 1998, the Company completed a series of
strategic transactions with Wyman-Gordon Company. The principal components
were: (i) the Company exchanged certain of its titanium castings assets and $5
million in cash for Wyman-Gordon's Millbury, MA vacuum arc remelting facility
which produces titanium ingot; (ii) Wyman-Gordon and the Company combined their
respective titanium castings businesses into a new joint venture 80% owned by
Wyman-Gordon and 20% by the Company; and (iii) the Company and Wyman-Gordon
entered into a contract pursuant to which the Company will be the principal
supplier of titanium material to Wyman-Gordon until 2008. The Company accounts
for its interest in the castings joint venture by the equity method. Net sales
of the Company's casting business approximated $22 million through July 1998 and
approximated $23 million in the 1997 year-to-date period.
~Proforma~information.~The proforma effect of the Loterios acquisition and
the Wyman-Gordon castings business/melting facility exchange, assuming such
transactions had occurred at the beginning of the year, is not material.
~Restructuring~charge.~As previously reported, the Company decided to close
its Pomona, CA castings and vacuum arc remelting facility, and recorded a
restructuring charge of $6 million in the second quarter of 1998. The
restructuring charge consists of approximately $5 million to write down
property, equipment and intangibles to estimated net realizable value and
approximately $1 million of other exit costs, principally severance (all jobs
being eliminated) and facilities carrying costs. At September 30, 1998, the
remaining accrual for other exit costs approximated $.5 million.
The Company currently expects to take an additional charge of approximately
$10 million in the fourth quarter of 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Note 4 - Earnings per share:
Earnings per diluted share reflects an immaterial number of dilutive common
stock options and the assumed conversion of the Convertible Preferred Securities
into 5.4 million shares of common stock. Diluted net income is net income plus
minority interest - Convertible Preferred Securities.
Note 5 - Inventories:
December SEPTEMBER
31, 30,
1997 1998
(In thousands)
Raw materials $ 23,925 $ 34,395
Work-in-process 91,884 107,688
Finished products 31,230 62,387
Supplies 6,779 7,589
$ 153,818 $ 212,059
The average cost of LIFO inventories exceeded the net carrying amount of
such inventories by approximately $32 million at December 31, 1997 and $30
million at September 30, 1998.
Note 6 - Accrued liabilities:
December 31, SEPTEMBER 30,
1997 1998
(In thousands)
Pension and OPEB costs $ 3,174 $ 4,070
Other employee benefits 25,869 22,487
Environmental costs 1,762 1,762
Taxes, other than income 3,062 4,144
Convertible Preferred Securities - 1,103 1,103
accrued dividends
Other 11,839 16,935
$ 46,809 $ 50,501
Note 7 - Notes payable, long-term debt and capital lease obligations:
Notes payable at December 31, 1997 and September 30, 1998 consist of
borrowings under the Company's short-term European bank credit agreements.
Long-term debt at September 30, 1998 consists principally of $80 million of
borrowings under the Company's U.S. bank credit agreement and $24 million under
its U.K. bank credit agreement. As of September 30, 1998, the Company had
approximately $125 million of unused borrowing availability under its U.S. and
European bank credit agreements. Available borrowings in the future could
potentially be reduced due to the leverage and interest coverage ratios
contained in the Company's U.S. credit agreement.
Capital lease obligations relate principally to U.K. production facilities
held under long-term leases with IMI plc.
Note 8 - Income taxes:
The difference between the Company's provision for income tax expense
attributable to pretax income and the amounts that would be expected using the
U.S. federal statutory income tax rate of 35% is summarized below.
Nine months ended
September 30,
1997 1998
(In thousands)
Expected income tax expense $33,117 $29,957
Change in foreign statutory rate (365) -
Other foreign tax rates (414) (152)
Foreign sales corporation benefit (350) (1,134)
U.S. state income taxes, net 598 495
Adjustment of deferred tax valuation allowance
related to current year results (2,779) -
Other, net (961) (32)
$28,846 $29,134
Minority interest - Convertible Preferred Securities is stated net of
income tax benefits of $3.5 million in both the 1997 and 1998 nine-month
periods.
Note 9 - Ownership structure:
Tremont Corporation holds approximately 33% of TIMET's outstanding common
stock. Tremont also holds an option, acquired from IMI in 1996 and expiring in
February 1999, to purchase an additional 5% of TIMET's common stock. Valhi,
Inc. and other entities related to Harold C. Simmons hold an aggregate of
approximately 53% of Tremont's outstanding common stock. Mr. Simmons may be
deemed to control each of Valhi, Tremont and TIMET.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Due to reduced demand for the Company's aerospace and industrial products,
earnings for the quarter ended September 30, 1998 were below expectations. The
Company believes that the reduction in demand for aerospace products is
attributable in large part to inventory reductions by its major customers and a
decline in the number of aircraft forecast to be produced. The major reason for
the falloff in demand for industrial products is the deterioration in Asian
economies, including the strength of the U.S. dollar versus the Japanese yen.
Mill product shipments in the third quarter were approximately 3,500 metric
tons, below both second quarter 1998 (3,900 tons) and third quarter 1997 (3,700
tons) levels. Ingot and sponge shipments were also lower than expected.
Selling prices were relatively flat compared to second quarter levels. The
Company's overall average mill product selling price in the third quarter of
1998 improved over second quarter levels due to mix changes, as aerospace
products accounted for a higher percentage of mill product shipments. As
previously reported, the Company anticipates that fourth quarter 1998 shipments
and earnings will be lower than third quarter levels.
General and administrative expenses in 1998 continue to be higher than in
1997 in large part due to information technology costs, including implementation
of the Company's enterprise-wide SAP system and addressing "Year 2000" issues.
Expenses related to implementing and maintaining the Company's SAP system and to
addressing "Year 2000" issues are expected to remain high in 1999.
The Company's firm order backlog at the end of September was approximately
$350 million. Comparable backlog at the end of September 1997 was approximately
$500 million. The titanium industry is experiencing reduced demand for
aerospace and industrial products due to high levels of inventories reported to
be held by customers, actual and anticipated declines in number of aircraft
forecast to be produced, expecially wide-bodied aircraft, and continuing
weakness of Asian and other economies. As a result, the Company's 1999
shipments ar anticipated to be below 1998 levels, particularly in the first
half of the year, and 1999 results are expected to be below current
expectations. As previously reported, average selling prices for 1999 are
expected to be lower than 1998 prices by 5% to 10%.
In order to minimize the impact of the factors described above on its
results of operations and cash flows, the Company may implement additional
temporary or permanent facility closures, layoffs and other measures. The
Company currently expects a special charge in the fourth quarter of
approximately $10 million related to the announced closing of the Company's
leased melting facility in Verdi, NV and to other actions of the type described
above.
The Company has substantial operations and assets located in Europe,
principally in the United Kingdom. Approximately one-half of the Company's
European sales are denominated in currencies other than the U.S. dollar,
principally the U.K. pound sterling along with other major European currencies.
The U.S. dollar value of the Company's foreign sales and operating costs are
subject to currency exchange rate fluctuations that can impact reported earnings
and may affect the comparability of period-to-period operating results. Certain
purchases of raw materials for the Company's European operations, principally
titanium sponge, are denominated in U.S. dollars, while labor and other
production costs are primarily denominated in local currencies. The U.K. is not
adopting the new European currency unit ("Euro") although certain transactions
currently denominated in various other European currencies are expected to be
denominated in the Euro beginning in 1999. Modifications of certain systems to
handle Euro-denominated transactions will be required, although such
modifications are not expected to be extensive, and the Company does not expect
that the impact of conversion to the Euro will be material.
Interest expense in the 1998 periods is only slightly higher than in the
comparable 1997 periods. Substantially all of the additional interest related
to higher borrowing levels in 1998 was capitalized as part of major capital
projects. Dividends on the Convertible Preferred Securities are reported, net
of tax benefit, as minority interest.
The Company operates in several tax jurisdictions and is subject to various
income tax rates. As a result, the geographical mix of pretax income can impact
the Company's effective tax rate. For financial reporting purposes, the Company
has previously recognized substantially all of its net operating loss
carryforwards, resulting in a higher effective tax rate in 1998 than in 1997.
See Note 8 to the Consolidated Financial Statements.
Year 2000 issues exist because many computer systems and applications
curently use two-digit fields to designate a year. Date-sensitive systems may
recognize the Year 2000 as 1900, or not at all. This inability to treat the
Year 2000 properly could cause systems to process critical financial,
manufacturing and operational information incorrectly. Many of the Company's
information systems have been or are being replaced in connection with the
implementation of SAP. The Company, with the help of outside specialists and
consultants, (i) has substantially completed an initial assessment of potential
Year 2000 issues in its manufacturing and communications systems, as well as in
those information systems that will not be replaced by SAP, (ii) is in process
of determining and implementing remedial actions and (iii) will develop a
contingency plan in the event internal or external Year 2000 issues are not
resolved. Excluding costs related to SAP, the Company expended approximately $1
million on Year 2000 issues through September 1998, and currently expects to
incur an additional $5 million to $6 million through 1999, principally related
to embedded system technology. The Company has also begun an evaluation of
potential Year 2000 exposures relating to key suppliers and customers.
Although the Company believes its key information systems will be Year 2000
compliant before the end of 1999, it cannot yet predict the outcome or success
of the Year 2000 compliance programs related to its embedded manufacturing
systems or those systems of its suppliers and customers. The Company also
cannot predict whether it will find additional problems that would result in
unplanned upgrades of applications after December 31, 1999. As a result of
these uncertainties, the Company cannot predict the impact on its financial
condition, results of operations or cash flows, of noncompliant Year 2000
systems that the Company directly or indirectly relies upon. Should the
Company's Year 2000 compliance plan not be successful or be delayed beyond
January 2000, the consequences to the Company could be far-reaching and
material, including an inability to produce titanium metal products at its
manufacturing facilities, which could lead to an indeterminate amount of lost
revenue. Other potential negative consequences could include impeded
communications or power supplies, or slower transaction processing and financial
reporting.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had net cash of approximately $30
million ($143 million of cash and equivalents and $113 million of notes payable
and long-term debt). The Company also had $125 million of borrowing
availability under its U.S. and European credit lines. See Note 7 to the
Consolidated Financial Statements.
~Operating~activities~. Cash provided by operating activities (before
changes in assets and liabilities) of $88 million for the nine months ended
September 30, 1998 was higher than the $84 million provided during the same
period in 1997 as higher deferred income taxes and a principally noncash
restructuring charge offset the effect of lower operating results. Changes in
assets and liabilities reflect the timing of purchases, production and sales.
Increases in inventories used cash in 1998, reflecting material purchases and
build rates that were based on expected sales levels higher than actual sales
levels. Changes in receivables, including those from related parties, generated
cash in 1998, principally due to net collections resulting from lower sales
levels compared with the record levels of late 1997.
The Company estimates capital expenditures for all of 1998 to approximate
$120 million, up from $66 million in calendar 1997. About one-half of capital
expenditures during the two-year 1997-1998 period related to capacity expansion
projects associated with long-term customer agreements, which projects are also
expected to improve cycle times and yields and to increase efficiency. The
majority of these significant projects in both the U.S. and Europe have or will
begin to come on line by the end of 1998.
Approximately one-fourth of the two-year capital spending total relates to
the major SAP information systems and information technology project being
implemented throughout the Company. The SAP system is being implemented in
stages, with the roll-outs accomplished in May 1998 (U.S. Service Centers and
Corporate Headquarters), July 1998 (Henderson, NV plant) and October 1998
(Toronto, OH plant). Roll out of SAP in the U.K. is currently scheduled for the
first quarter of 1999. Certain costs associated with the SAP business process
and information systems project, including training and reengineering, are
expensed as incurred.
Capital spending for 1999 is currently expected to approximate $40 million.
~Investing~activities~. Cash used for business acquisitions and joint
ventures in the first nine months of 1998 relates primarily to the Loterios and
Wyman-Gordon transactions. As previously reported, in October 1998, the Company
purchased $80 million of Special Metals Corporation ("SMC") 6.625% convertible
preferred stock (the "SMC Preferred Stock") in connection with SMC's acquisition
of the Inco Alloys International high performance nickel alloys business unit of
Inco Limited. The Company will account for its investment in the SMC Preferred
stock by the cost method. TIMET also has entered into an agreement in principle
with SMC to form a strategic alliance to pursue certain manufacturing and joint
product development and marketing arrangements. The SMC Preferred Stock is
convertible into SMC common stock at $16.50 per share and is subject to
mandatory redemption in 2006. The Company funded the SMC investment in October
1998 using cash and equivalents on hand.
~Financing~activities~. Net borrowings in 1998 included $104 million on
the Company's principal U.S. and U.K. bank credit facilities, primarily to fund
capital expenditures and the Loterios acquisition.
The Company's Convertible Preferred Securities do not require principal
amortization, and TIMET has the right to defer dividend payments for one or more
periods of up to 20 consecutive quarters each. The Company's current regular
quarterly dividend on its common stock is four cents per share.
In September 1998, the Board of Directors authorized the repurchase of up
to four million shares of TIMET common stock in open market or privately-
negotiated transactions. During September 1998, TIMET repurchased 90,000 shares
for approximately $1.2 million.
The Company periodically evaluates its liquidity requirements, capital
needs and availability of resources in view of, among other things, its
alternative uses of capital, its debt service requirements, the cost of debt and
equity capital, and estimated future operating cash flows. As a result of this
process, the Company has in the past, and, in light of its current outlook, may
in the future, seek to raise additional capital, modify its dividend policy,
restructure ownership interests, incur, refinance or restructure indebtedness,
repurchase shares of capital stock, sell assets, or take a combination of such
steps or other steps to increase or manage its liquidity and capital resources.
In the normal course of business, the Company investigates, evaluates and
discusses acquisition, joint venture, strategic relationship and other business
combination opportunities in the titanium, specialty metal and related
industries. In the event of any future acquisition or joint venture
opportunities, the Company may consider using then available liquidity, issuing
additional equity securities or incurring additional indebtedness.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Reference is made to the Company's 1997 Annual Report and subsequent
Quarterly Reports on Form 10-Q for descriptions of certain previously-reported
legal proceedings.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Intercorporate Services Agreement between Titanium Metals
Corporation and Tremont Corporation effective as of January 1,
1998.
10.2 Intercorporate Services Agreement between Titanium Metals
Corporation and NL Industries, Inc. effective as of January 1,
1998.
10.3* 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.
10.4 Amendment to Investment Agreement, dated October 28, 1998,
among Titanium Metals Corporation, TIMET Finance Management
Company and Special Metals Corporation.
10.5 Registration Rights Agreements, dated October 28, 1998, between
TIMET Finance Management Company and Special Metals
Corporation.
10.6 Certificate of Designations for the Special Metals Corporation
Series A Preferred Stock, filed on October 28, 1998, with
the Secretary of State of Delaware incorporated by reference
to Exhibit 4.5 of a Current Report of Form 8-K dated October
28, 1998 filed by Special Metals Corporation (File No.
(000-22029).
27.1 Financial Data Schedule for the quarter ended September 30,
1998.
*Management contract, compensatory plan or arrangement.
(b) Reports on Form 8-K:
Reports on Form 8-K filed by the Registrant for the quarter ended
September 30, 1998 and the month of October, 1998:
July 9, 1998 - Reported Items 2 and 7
July 23, 1998 - Reported Items 5 and 7
August 3, 1998 - Reported Items 5 and 7
August 4, 1998 - Reported Items 5 and 7
September 2, 1998 - Reported Items 5 and 7
October 5, 1998 - Reported Items 5 and 7
October 5, 1998 - Reported Items 5 and 7
October 8, 1998 - Reported Items 5 and 7
October 20, 1998 - Reported Items 5 and 7
October 28, 1998 - Reported Items 5 and 7
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
(Registrant)
Date: November 12, By /s/ J. Thomas Montgomery, Jr.
1998
J. Thomas Montgomery, Jr.
Vice President - Finance and
Treasurer
(Principal Finance and Accounting
Officer)