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, 2000
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 jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
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, 2000: 31,841,405.
-----------
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 that represent
management's beliefs and assumptions based on currently available information.
Forward-looking statements can be identified by the use of words such as
"believes," "intends," "may," "will," "looks," "should," "anticipates,"
"expected" or comparable terminology or by discussions of strategies or trends.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it cannot give any assurances that
these expectations will prove to be correct. Such statements by their nature
involve substantial risks and uncertainties that could significantly affect
expected results. Actual future results could differ materially from those
described in such forward-looking statements, and the Company disclaims any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. Among the
factors that could cause actual results to differ materially are the risks and
uncertainties discussed in this 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 which include, but are not
limited to, the cyclicality of the commercial aerospace industry, the
performance of The Boeing Company and other aerospace manufacturers under their
long-term purchase agreements with the Company, global economic conditions,
global productive capacity for titanium, changes in product pricing, 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,
control by certain stockholders and possible conflicts of interest,
uncertainties associated with new product development and the supply of raw
materials and services 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
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1999 and
September 30, 2000 2-3
Consolidated Statements of Operations - Three months and
nine months ended September 30, 1999 and 2000 4
Consolidated Statements of Comprehensive Loss - Three
months and nine months ended September 30, 1999 and 2000 5
Consolidated Statements of Cash Flows - Nine
months ended September 30, 1999 and 2000 6-7
Consolidated Statement of Stockholders' Equity - Nine
months ended September 30, 2000 8
Notes to Consolidated Financial Statements 9-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 15-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 21
Item 6. Exhibits and Reports on Form 8-K. 21
-1-
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, September 30,
ASSETS 1999 2000
-------------------- --------------------
Current assets:
Cash and cash equivalents $ 20,671 $ 5,513
Accounts and other receivables, less
allowance of $3,330 and $3,128 106,204 78,678
Receivable from related parties 4,071 3,943
Refundable income taxes 10,651 3,068
Inventories 191,535 145,985
Prepaid expenses and other 7,177 7,181
Deferred income taxes 2,250 2,220
-------------------- --------------------
Total current assets 342,559 246,588
-------------------- --------------------
Other assets:
Investments in joint ventures 26,938 19,785
Preferred securities 80,000 80,000
Accrued dividends on preferred securities 6,530 8,083
Goodwill 54,789 50,311
Other intangible assets 16,326 14,158
Deferred income taxes 9,600 24,926
Other 12,979 11,259
-------------------- --------------------
Total other assets 207,162 208,522
-------------------- --------------------
Property and equipment:
Land 6,230 6,144
Buildings 24,647 25,699
Information technology systems 55,226 53,565
Manufacturing and other 331,591 316,021
Construction in progress 8,122 6,413
-------------------- --------------------
425,816 407,842
Less accumulated depreciation 92,432 103,594
-------------------- --------------------
Net property and equipment 333,384 304,248
-------------------- --------------------
$ 883,105 $ 759,358
==================== ====================
-2-
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY December 31, September 30,
1999 2000
------------------- ---------------------
Current liabilities:
Notes payable $ 9,635 $ 33,965
Current maturities of long-term debt and
capital lease obligations 85,679 1,968
Accounts payable 48,679 35,872
Accrued liabilities 42,879 32,807
Payable to related parties 1,984 1,556
Income taxes 516 1,023
Deferred income taxes 5,049 2,948
------------------- ---------------------
Total current liabilities 194,421 110,139
------------------- ---------------------
Noncurrent liabilities:
Long-term debt 22,425 22,102
Capital lease obligations 9,776 8,524
Payable to related parties 1,332 1,332
Accrued OPEB cost 19,961 19,031
Accrued pension cost 5,634 2,586
Accrued environmental cost - 3,262
Deferred income taxes 12,950 11,529
Accrued dividends and other - 7,834
------------------- ---------------------
Total noncurrent liabilities 72,078 76,200
------------------- ---------------------
Minority interest - Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely subordinated debt securities
("Convertible Preferred Securities") 201,250 201,250
Other minority interest 7,275 7,895
Stockholders' equity:
Preferred stock - -
Common stock 315 319
Additional paid-in capital 347,984 350,035
Retained earnings 64,827 32,279
Accumulated other comprehensive loss (3,837) (16,061)
Treasury stock (1,208) (1,208)
Deferred compensation - (1,490)
------------------- ---------------------
Total stockholders' equity 408,081 363,874
------------------- ---------------------
$ 883,105 $ 759,358
=================== =====================
Commitments and contingencies (Note 10)
See accompanying notes to consolidated financial statements.
-3-
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
-------------------------------- --------------------------------
1999 2000 1999 2000
--------------- ------------- -------------- --------------
Revenues and other income:
Net sales $112,706 $106,730 $374,451 $320,279
Equity in losses of joint ventures (409) (232) (1,489) (957)
Other, net 1,768 1,432 3,547 5,191
--------------- ------------- -------------- --------------
114,065 107,930 376,509 324,513
--------------- ------------- -------------- --------------
Costs and expenses:
Cost of sales 108,722 103,072 344,495 318,626
Selling, general, administrative and
development 11,286 11,202 36,653 33,833
Restructuring charge - - - 2,805
Interest 2,049 1,898 5,035 6,022
--------------- ------------- -------------- --------------
122,057 116,172 386,183 361,286
--------------- ------------- -------------- --------------
Loss before income taxes,
minority interest and extraordinary item (7,992) (8,242) (9,674) (36,773)
Income tax benefit (2,796) (2,834) (3,384) (12,871)
Minority interest - Convertible Preferred
Securities 2,166 2,166 6,500 6,524
Other minority interest 107 335 1,068 1,249
--------------- ------------- -------------- --------------
Loss before extraordinary item (7,469) (7,909) (13,858) (31,675)
Extraordinary item, early extinguishment of
debt, net of tax - - - (873)
--------------- ------------- -------------- --------------
Net loss $ (7,469) $ (7,909) $(13,858) $(32,548)
=============== ============= ============== ==============
Basic and diluted loss per share:
Before extraordinary item $ (.24) $ (.25) $ (.44) $ (1.01)
Extraordinary item - - - (.03)
--------------- ------------- -------------- --------------
$ (.24) $ (.25) $ (.44) $ (1.04)
=============== ============= ============== ==============
Basic and diluted weighted
average shares outstanding 31,369 31,374 31,371 31,373
=============== ============= ============== ==============
See accompanying notes to consolidated financial statements.
-4-
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Three months ended Nine months ended
September 30, September 30,
-------------------------------- --------------------------------
1999 2000 1999 2000
--------------- ------------- -------------- --------------
Net loss $ (7,469) $ (7,909) $(13,858) $ (32,548)
Other comprehensive income (loss) -
currency translation adjustment 4,109 (4,447) (2,506) (12,224)
--------------- ------------- -------------- --------------
Comprehensive loss $ (3,360) $ (12,356) $(16,364) $ (44,772)
=============== ============= ============== ==============
See accompanying notes to consolidated financial statements.
-5-
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1999 and 2000
(In thousands)
1999 2000
--------------- ---------------
Cash flows from operating activities:
Net loss $ (13,858) $ (32,548)
Depreciation and amortization 31,943 31,765
Non cash restructuring charge - 2,405
Non cash special charges - 6,729
Gain on sale of castings joint venture - (1,205)
Extraordinary loss on early extinguishment of debt, net - 873
Equity in losses of joint ventures, net of dividends received 2,660 1,357
Deferred income taxes (2,426) (15,461)
Other minority interest 1,068 1,249
Other, net - 293
Change in assets and liabilities:
Receivables 26,307 21,323
Inventories 20,492 37,840
Prepaid expenses and other 1,477 (382)
Accounts payable and accrued liabilities (31,502) (18,821)
Accrued restructuring charges (5,683) (2,580)
Income taxes 1,151 9,005
Accounts with related parties, net 797 33
Accrued dividends on preferred securities (4,115) (1,553)
Accrued dividends on Convertible Preferred Securities - 6,691
Other, net (7,310) (5,735)
--------------- ---------------
Net cash provided by operating activities 21,001 41,278
--------------- ---------------
Cash flows from investing activities:
Capital expenditures (18,672) (6,652)
Proceeds from sale of castings joint venture - 7,000
Proceeds from sales of property and equipment 3,043 38
Other, net 209 (74)
--------------- ---------------
Net cash provided (used) by investing activities (15,420) 312
--------------- ---------------
Cash flows from financing activities:
Indebtedness:
Borrowings 57,731 273,830
Repayments (66,944) (330,677)
Dividends paid (3,764) -
Other, net (289) (171)
--------------- ---------------
Net cash used by financing activities (13,266) (57,018)
--------------- ---------------
Net cash used by operating,
investing and financing activities $ (7,685) $ (15,428)
=============== ===============
-6-
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 1999 and 2000
(In thousands)
1999 2000
-------------- -----------------
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $ (7,685) $ (15,428)
Currency translation (987) 270
-------------- -----------------
(8,672) (15,158)
Balance at beginning of period 15,464 20,671
-------------- -----------------
Balance at end of period $ 6,792 $ 5,513
============== =================
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 4,650 $ 5,319
Convertible Preferred Securities dividends 9,999 3,333
Income taxes (refund), net (5,239) (6,394)
See accompanying notes to consolidated financial statements.
-7-
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 2000
(In thousands)
Accumulated Other
Comprehensive Loss
Additional --------------------------
Common Common Paid-In Retained Currency Pension Treasury Deferred
Shares Stock Capital Earnings Translation Liabilities tock Compensation Total
-------- -------- ----------- --------- ------------- ------------ ---------- ------------ ---------
Balance at December 31, 1999 31,371 $ 315 $ 347,984 $ 64,827 $ (37) $ (3,800) $ (1,208) $ - $408,081
Comprehensive loss - - - (32,548) (12,224) - - - (44,772)
Long-term incentive plan
awards for 467,500 shares 468 4 2,041 - - - - (2,045) -
Amortization of deferred
compensation - - - - - - - 555 555
Other 2 - 10 - - - - - 10
-------- -------- ----------- --------- ------------- ------------ ---------- ------------ ---------
Balance at September 30, 2000 31,841 $ 319 $ 350,035 $ 32,279 $ (12,261) $ (3,800) $ (1,208) $ (1,490) $363,874
======== ======== =========== ========= ============= ============ ========== ============ =========
See accompanying notes to consolidated financial statements.
-8-
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, 1999 has been
condensed from the Company's audited consolidated financial statements at that
date. The consolidated balance sheet at September 30, 2000 and the consolidated
statements of operations, comprehensive loss, stockholders' equity and cash
flows for the interim periods ended September 30, 1999 and 2000 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 prior year amounts have been
reclassified to conform to the current year presentation.
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 for
the year ended December 31, 1999 (the "1999 Annual Report").
The Company will adopt Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended, no later than the first quarter of 2001. SFAS No. 133
establishes accounting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Under SFAS No. 133, all derivatives will be recognized as either assets or
liabilities and measured at fair value. The accounting for changes in fair value
of derivatives will depend upon the intended use of the derivative. The Company
is currently studying this new accounting rule, and the impact of adopting SFAS
No. 133, if any, will be dependent upon the extent to which the Company is then
a party to derivative contracts or engaged in hedging activities. As permitted
by the transition requirements of SFAS No. 133, as amended, the Company will
exempt from the scope of SFAS No. 133 all host contracts containing embedded
derivatives which were issued or acquired prior to January 1, 1999.
The Company will adopt the Securities and Exchange Commission's ("SEC")
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition", as amended, in
the fourth quarter of 2000. SAB No. 101 provides guidance on the recognition,
presentation and disclosure of revenue, including specifying basic criteria that
must be met before revenue can be recognized. The Company expects that the
adoption of SAB No. 101 will not have a material impact on its consolidated
financial position, liquidity or results of operations.
Basic earnings per share is based on the weighted average number of
unrestricted common shares outstanding during each period (See Note 7). Diluted
earnings per share reflects the dilutive effect of common stock options,
restricted stock and, if applicable, of the assumed conversion of the
Convertible Preferred Securities. The assumed conversion of the Convertible
Preferred Securities was omitted from the diluted earnings per share calculation
for the interim periods ended September 30, 1999 and 2000 because the effect was
antidilutive. The effect of the conversion on diluted earnings per share for
both the 1999 and 2000 nine-month periods would have been to decrease net losses
by $6.5 million and increase average shares outstanding by 5.4 million shares.
Stock options and restricted shares omitted from diluted shares because they
were antidilutive were 1.9 million and 2.2 million in the quarters
-9-
ended September 30, 1999 and 2000, respectively, and were 1.7 million and 2.0
million in the 1999 and 2000 nine-month periods, respectively.
Note 2 - Segment information:
The Company is a vertically integrated producer of titanium sponge,
melted products (ingot and slab) and a variety of 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 its
products are sold throughout the world. These worldwide integrated activities
compose the Company's segment, "Titanium melted and mill products."
The "Other" segment consisted of the Company's nonintegrated joint
ventures, which investments have been either sold or charged off due to an asset
impairment.
Operating income (loss), inventory and receivables are the key
management measures used to evaluate segment performance. Operating loss of the
"Titanium melted and mill products" segment for the nine months ended September
30, 2000 includes special items recorded in the first quarter of 2000 of $10.4
million, consisting of $3.7 million of restructuring charges, $3.4 million of
equipment-related impairment charges and $3.3 million of environmental
remediation charges. The restructuring accrual was revised and a credit of $.9
million was recorded in the second quarter of 2000 (See Note 4). Substantially
all inventories and receivables at December 31, 1999 and September 30, 2000,
along with substantially all depreciation and amortization and capital
expenditures for the interim periods ended September 30, 1999 and 2000, relate
to the "Titanium melted and mill products" segment.
-10-
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
1999 2000 1999 2000
------------- -------------- ------------- --------------
(In thousands) (In thousands)
Net sales:
Titanium mill & melted products $ 112,835 $ 106,730 $ 374,076 $ 320,279
Other 294 - 1,631 -
Eliminations (423) - (1,256) -
------------- -------------- ------------- --------------
$ 112,706 $ 106,730 $ 374,451 $ 320,279
============= ============== ============= ==============
Mill products shipments:
Volume (metric tons) 2,800 2,840 8,600 8,430
Average price ($ per kilogram) $ 31.75 $ 28.20 $ 33.75 $ 29.20
Operating (loss):
Titanium mill & melted products $ (7,298) $ (7,669) $ (6,664) $ (35,513)
Other (543) - (1,551) -
------------- -------------- ------------- --------------
(7,841) (7,669) (8,215) (35,513)
Dividends and interest income 1,359 1,542 4,422 4,592
General corporate income
(expense), net 539 (217) (846) 170
Interest expense (2,049) (1,898) (5,035) (6,022)
------------- -------------- ------------- --------------
Loss before income
taxes, minority interest and
extraordinary item $ (7,992) $ (8,242) $ (9,674) $ (36,773)
============= ============== ============= ==============
Equity in income (loss) of joint ventures:
Titanium mill & melted products $ 137 $ (232) $ 119 $ (957)
Other (546) - (1,608) -
------------- -------------- ------------- --------------
$ (409) $ (232) $ (1,489) $ (957)
============= ============== ============= ==============
December 31, September 30,
1999 2000
-------------------- ----------------------
(In thousands)
Investment in joint ventures:
Titanium mill and melted products $ 21,143 $ 19,785
Other 5,795 -
-------------------- ----------------------
$ 26,938 $ 19,785
==================== ======================
-11-
Note 3 - Inventories:
December 31, September 30,
1999 2000
------------------- ---------------------
(In thousands)
Raw materials $ 45,004 $ 27,804
Work-in-process 69,809 81,026
Finished products 83,893 46,739
Supplies 18,329 15,916
------------------- ---------------------
217,035 171,485
Less adjustment of certain
inventories to LIFO basis 25,500 25,500
------------------- ---------------------
$ 191,535 $ 145,985
=================== =====================
Note 4 - Accrued liabilities:
December 31, September 30,
1999 2000
--------------------- --------------------
(In thousands)
OPEB cost $ 3,269 $ 2,848
Pension cost 1,287 951
Other employee benefits 14,375 14,177
Deferred income 9,295 3,318
Environmental costs 1,238 764
Restructuring costs 1,490 1,567
Taxes, other than income 1,209 1,712
Accrued dividends - Convertible Preferred Securities 1,111 -
Other 9,605 7,470
--------------------- --------------------
$ 42,879 $ 32,807
===================== ====================
Accrued restructuring costs at September 30, 2000 consist of unpaid
personnel severance and benefits and other exit costs, primarily carrying costs
on closed leased facilities, relating to the Company's restructuring plans
implemented during the last three years. During the nine months ended September
30, 2000, payments of $.2 million, $.6 million and $2.2 million were applied
against the accrued costs related to the 1998, 1999 and 2000 plans,
respectively. In the second quarter of 2000, the restructuring accrual was
reduced by $.9 million primarily related to a reduction in the
previously-reported number of employee terminations from 250 to 200 people due
to production levels that are now expected to be somewhat higher than previously
anticipated. As of September 30, 2000, the nominal amount of remaining accrued
costs related to the 1998 restructuring plan is expected to be paid by year end.
Most of the remaining accrued costs related to the 1999 plan are expected to be
paid by year end, although certain payments, for items such as benefit
continuation for terminated employees, are expected to be paid later.
Substantially all of the accrued costs related to the 2000 plan are expected to
be paid by mid-2001. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
-12-
Note 5 - Notes payable, long-term debt and capital lease obligations:
December 31, September 30,
1999 2000
------------------- -------------------
(In thousands)
Notes payable:
U.S. credit agreement $ - $ 28,555
European credit agreements 9,635 5,410
------------------- -------------------
$ 9,635 $ 33,965
=================== ===================
Long-term debt:
Bank credit agreement - U.S. $ 85,000 $ -
Bank credit agreement - U.K. 21,867 23,236
Other 922 650
------------------- -------------------
107,789 23,886
Less current maturities 85,364 1,784
------------------- -------------------
$ 22,425 $ 22,102
=================== ===================
Capital lease obligations $ 10,091 $ 8,708
Less current maturities 315 184
------------------- -------------------
$ 9,776 $ 8,524
=================== ===================
The weighted average interest rate on borrowings outstanding under the
U.S. and U.K. credit agreements at September 30, 2000 was 8.9% and 7.5%,
respectively. As of September 30, 2000, the Company had approximately $106
million of unused borrowing availability under its U.S. and European credit
agreements.
Note 6 - Accrued dividends and other:
Accrued dividends and other consists primarily of principal and
interest on the Company's Convertible Preferred Securities. The Company
exercised its right under the terms of the Convertible Preferred Securities to
defer future dividend payments on these securities beginning with the dividend
payment due June 1, 2000. The securities permit deferral of dividend payments
for up to 20 consecutive quarters, although interest will continue to accrue at
the coupon rate on the principal and unpaid dividends. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Note 7 - Stockholders' equity:
During the second quarter of 2000, the Company awarded 467,500 shares
of TIMET restricted common stock, under its Long-Term Performance Incentive
Plan, to certain of its officers and employees. The restrictions on the stock
grants lapse ratably on an annual basis over a five-year period. Since holders
of restricted stock have all the rights of other common stockholders, subject to
forfeiture unless certain periods of employment are completed, all of such
shares of restricted stock are considered to be currently issued and
outstanding. The market value of the restricted stock awards was approximately
$2 million on the date of grant ($4.375 per share), and this amount has been
recorded as deferred compensation, a separate component of stockholders' equity.
The Company amortizes deferred compensation to expense on a straight-line basis
for each tranche of the award over the period during which the restrictions
lapse.
-13-
Note 8 - Income taxes:
The difference between the Company's income tax benefit attributable to
pretax loss 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,
-------------------------------
1999 2000
------------- -------------
(In thousands)
Expected income tax benefit, at 35% $ (3,386) $(12,871)
Non-U.S. tax rates 624 873
U.S. state income taxes, net (521) 127
Dividends received deduction (1,036) (1,030)
Valuation allowance - 59
Other, net 935 (29)
------------- -------------
$ (3,384) $(12,871)
============= =============
Minority interest - Convertible Preferred Securities is stated net of
income tax benefits of $3.5 million in both the 1999 and 2000 nine-month
periods. The extraordinary loss for the 2000 nine-month period is stated net of
income tax benefits of $.4 million.
Note 9 - Ownership structure:
At September 30, 2000, Tremont Corporation held approximately 39% of
TIMET's outstanding common stock. The Combined Master Retirement Trust, a trust
formed by Valhi, Inc. to permit the collective investment by trusts that
maintain the assets of certain employee benefit plans adopted by Valhi and
related companies, held an additional 8% of TIMET's common stock. Valhi, Inc.
and other entities related to Harold C. Simmons held an aggregate of
approximately 79% of Tremont's outstanding common stock at September 30, 2000.
Mr. Simmons may be deemed to control each of Valhi, Tremont and TIMET.
Note 10 - Commitments and contingencies:
Long-term Agreements. In March 2000, the Company filed a lawsuit
against The Boeing Company seeking damages estimated in excess of $600 million
in connection with the Company's long-term sales agreement with Boeing. In June
2000, Boeing filed its answer to TIMET's complaint denying substantially all of
TIMET's allegations and making certain counterclaims against TIMET. TIMET
believes such counterclaims are without merit and intends to vigorously defend
against such claims. The litigation is progressing in the discovery phase and a
court date has been set for the end of January 2002. Since April 2000, the
Company and Boeing have been in discussions to determine if a settlement can be
reached. Those discussions are on going; however, no assurance can be given that
a settlement will be achieved.
For additional 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 1999
Annual Report.
-14-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Sales and Operating Loss
Three months ended Nine months ended
September 30, September 30,
--------------------------- --------------------------
1999 2000 1999 2000
----------- ------------ ----------- -----------
(In millions) (In millions)
Net sales $ 112.7 $106.7 $374.5 $ 320.3
Operating loss $ (7.8) $ (7.7) $ (8.2) $ (35.5)
Percent change in:
Mill product sales volume +1% -2%
Mill product average selling prices -6% -7%
Ingot and slab sales volume +71% +18%
Ingot and slab average selling prices 0% -3%
The Company's results of operations before previously reported special
items for the nine months ended September 30, 2000 decreased from the comparable
period in 1999 due primarily to a 7% decline in average mill product selling
prices caused by lower demand in the aerospace market and competitive pricing
pressures in certain product lines. Mill product sales volume for the first nine
months of 2000 decreased 2% from the comparable period in 1999. Ingot and slab
sales volume, which represents about 11% of the Company's net sales, increased
18% for the first nine months of 2000 as compared to year-ago levels, while
average selling prices declined 3%. Net sales of $106.7 million in the third
quarter of 2000 were 5% lower than the year-ago period resulting principally
from a 6% decline in average mill product selling prices offset by a 1% increase
in sales volume. Ingot and slab volume for the third quarter of 2000 increased
71% from year-ago levels, while average selling prices were unchanged.
As compared to the second quarter of 2000, mill product sales volume in
the third quarter of 2000 decreased 2%, while average selling prices were
unchanged. Ingot and slab sales volume in the third quarter of 2000 increased 5%
compared to the second quarter of 2000, while average selling prices increased
2%.
Cost of sales (excluding special charges of $6.7 million in the first
quarter of 2000) as a percentage of net sales in the third quarter and for the
first nine months of 2000 (97% and 97%, respectively) increased from the
comparable periods in 1999 (96% and 92%, respectively) primarily due to the
reduction in selling prices more than offsetting the benefits received from
various cost reduction programs.
As previously reported, the Company implemented a plan to address
then-current market and operating conditions, which resulted in the recognition
of a $3.7 million restructuring charge in the first quarter of 2000. During the
second quarter of 2000, the restructuring accrual was reduced by $.9 million
primarily related to a reduction in the previously-reported number of employee
terminations from 250 to 200 people due to production levels that are expected
to be somewhat higher than previously anticipated. The $2.8 million net
restructuring charge is included in the operating loss of the "Titanium melted
and mill products" segment in 2000 and is principally related to personnel
severance and benefits for the approximately 200 employees terminated.
-15-
In September 2000, the Company entered into a new, four year collective
bargaining agreement with the union representing approximately 250 hourly
production and maintenance workers at its Henderson, Nevada facility. The new
agreement, which expires in October 2004, provides for modest increases in wages
and pensions over its term.
Net sales of the "Other" segment consisted of the Company's
nonintegrated joint ventures, which investments have been either sold or charged
off due to an asset impairment. Equity losses in the "Other" segment were nil in
the 2000 periods principally as a result of the Company's no longer recognizing
its share of losses associated with nonintegrated joint ventures that were
charged off in the fourth quarter of 1999.
The Company's firm order backlog at the end of September 2000 was
approximately $200 million. Comparable backlogs at the end of June 2000 and
September 1999 were approximately $160 million and $260 million, respectively.
The Company believes the increase in backlog primarily reflects the normal
seasonal order cycle of the Company's customer base.
During the third quarter the Company announced selling price increases
on certain products. The price increases did not apply to existing backlog, to
orders under existing long-term agreements containing specific provisions
governing selling prices, or to orders for industrial products. Accordingly,
only about 35% of the Company's sales volume is expected to be eligible for such
price increases. The average prices on eligible new orders have thus far been
substantially in line with the new price list. However, the volume of
transactions to which such price increases are applicable has been relatively
low given the short time period since the announcement, and the Company expects
the price increases will not have any significant effect on TIMET's results of
operations in the fourth quarter of 2000. The Company is also currently in
negotiations with several customers regarding product requirements and pricing
for 2001. Until such negotiations are concluded the Company cannot determine
what sales volume or selling prices will actually be realized with such
customers.
The Company believes the excess amount of titanium that has been
present in the supply chain this year will have been significantly reduced by
year end and is expected to have less of an impact on the Company's results of
operations in 2001. Current indications are that sales and operating results in
the fourth quarter of 2000 will be similar to those in the third quarter of
2000.
The Company believes worldwide industry mill product shipments will
aggregate approximately 48,000 metric tons in 2000. The Company currently
projects that worldwide industry mill product shipments will increase in 2001 by
approximately 10% to 53,000 metric tons. The expected increase is primarily
attributable to an anticipated increase in demand for aerospace products
resulting from an increase in the number of aircraft forecasted to be produced
and a decrease in the amount of excess titanium in the supply chain as mentioned
above. According to the Airline Monitor, a leading aerospace publication, large
commercial aircraft build rates at Boeing and Airbus combined are expected to
increase from 786 planes in 2000 to 866 planes in 2001 and 918 planes in 2002.
Principally as a result of the anticipated increase in demand for
titanium aerospace products, TIMET currently expects its sales volume in 2001 to
increase by up to 15% from 2000 levels. Sales revenue is expected to be between
$450 million and $500 million in 2001, reflecting the anticipated additional
sales volume, certain price increases, and anticipated changes in product mix.
TIMET presently expects to report operating and net losses in 2001; however, the
Company believes the losses in 2001 will be substantially reduced from 2000
levels.
-16-
The Company has substantial operations and assets located in Europe,
principally the United Kingdom, with smaller operations in France, Italy and
Germany. Titanium is a worldwide market and the factors influencing the
Company's U.S. and European operations are substantially similar.
Approximately one-half of the Company's European sales are denominated
in currencies other than the U.S. dollar, principally the British pound and
European currencies tied to 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; thus,
the U.S. dollar value of these subsidiaries' sales and costs denominated in
currencies other than their functional currency, including sales and costs
denominated in U.S. dollars, is subject to exchange rate fluctuations that may
impact reported earnings and may affect the comparability of period-to-period
operating results. Borrowings of the Company's European operations may be in
U.S. dollars or in functional currencies. The Company's export sales from the
U.S. are denominated in U.S. dollars and as such are not subject to currency
exchange rate fluctuations.
The U.S. dollar sales and purchases of the Company's European
operations described above provide some natural hedge of non-functional
currencies, and the Company does not use currency contracts to hedge its
currency exposures. Net currency transaction losses were $1.0 million during the
nine months ended September 30, 2000 and during the same period in 1999. At
September 30, 2000, consolidated assets and liabilities denominated in
currencies other than functional currencies were approximately $20 million and
$15 million, respectively, consisting primarily of U.S. dollar cash, accounts
receivable, accounts payable and borrowings.
Dividends and Interest Income. Dividends and interest income consists
principally of dividends on $80 million of non-voting preferred securities of
Special Metals Corporation which accrue at an annual rate of 6.625%.
General Corporate Income (Expense), Net. General corporate income
(expense), net includes currency transaction losses described above. The
reduction in general corporate income in the third quarter of 2000 as compared
to the year-ago period is primarily due to increased currency transaction
losses. The decrease in general corporate expense for the nine months ended
September 30, 2000 is due to a $1.2 million gain on the sale of the Company's
interest in its castings joint venture in the first quarter of 2000.
Interest Expense. Interest expense in the third quarter of 2000
decreased $.2 million from the comparable period in 1999 due to the net effects
of lower average outstanding borrowings and a lower level of interest
capitalized in the 2000 period. Interest expense for the nine months ended
September 30, 2000 increased $1.0 million from the comparable 1999 period due to
the net effects of increased interest rates related to the Company's credit
facilities completed in February 2000, lower average outstanding borrowings and
a lower level of interest capitalized in the 2000 period.
Income Taxes. The Company operates in several tax jurisdictions and is
subject to various income tax rates. As a result, the geographical mix of pretax
income (loss) can impact the Company's effective tax rate. See Note 8 to the
Consolidated Financial Statements.
Minority Interest. Dividends related to the Company's 6.625%
Convertible Preferred Securities approximated $10 million in both the 1999 and
2000 nine month periods, and are reported as minority interest, net of allocable
income taxes.
-17-
New Accounting Principles Not Yet Adopted. The Company will adopt SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, no later than the first quarter of 2001. SFAS No. 133 establishes
accounting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Under SFAS
No. 133, all derivatives will be recognized as either assets or liabilities and
measured at fair value. The accounting for changes in fair value of derivatives
will depend upon the intended use of the derivative. The Company is currently
studying this new accounting rule, and the impact of adopting SFAS No. 133, if
any, will be dependent upon the extent to which the Company is then a party to
derivative contracts or engaged in hedging activities. As permitted by the
transition requirements of SFAS No. 133, as amended, the Company will exempt
from the scope of SFAS No. 133 all host contracts containing embedded
derivatives which were issued or acquired prior to January 1, 1999.
The Company will adopt the SEC's Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition," as amended, in the fourth quarter of 2000. SAB No.
101 provides guidance on the recognition, presentation and disclosure of
revenue, including specifying basic criteria that must be met before revenue can
be recognized. The Company expects that the adoption of SAB No. 101 will not
have a material impact on its consolidated financial position, liquidity or
results of operations.
-18-
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had net debt of $52 million ($58
million of notes payable and long-term debt and $6 million of cash and
equivalents). The Company also had approximately $106 million of borrowing
availability under its U.S. and European credit lines. The Company believes its
U.S. and European credit lines will provide it with the liquidity necessary for
current market and operating conditions. See Note 5 to the Consolidated
Financial Statements.
Operating Activities. Cash provided by operating activities was $41
million for the nine-month period ended September 30, 2000, up from $21 million
for the same period in 1999, as summarized below.
Nine months ended
September 30,
--------------------------------
1999 2000
------------- ---------------
(In millions)
Cash provided (used) by:
Operating activities:
Excluding changes in assets and liabilities $ 19.4 $ (4.5)
Changes in assets and liabilities 1.6 45.8
------------- ---------------
21.0 41.3
Investing activities (15.4) .3
Financing activities (13.3) (57.0)
------------- ---------------
Net cash used by operating, investing
and financing activities $ (7.7) $ (15.4)
============= ===============
Cash from operating activities, excluding changes in assets and
liabilities, generally followed the trend in operating results as operating
losses increased to $35.5 million for the first nine months of 2000 as compared
to $8.2 million for the comparable 1999 period. Results of operations in 2000
included non-cash special charges of $6.7 million.
Changes in assets and liabilities reflect primarily the timing of
purchases, production and sales and can vary significantly from period to
period. The Company's plan to address current market conditions includes
effective working capital management, particularly inventories and receivables,
both of which were reduced in the first nine months of 2000. The significant
reduction in receivables in the first nine months of 2000 was also attributable
to $16 million of customer payments received in the first quarter of 2000
related to a bill-and-hold shipment from 1999. The Company received tax refunds
of $7.4 million during the first nine months of 2000.
Dividends on the $80 million of Special Metals Corporation ("SMC")
6.625% convertible preferred securities held by the Company had previously been
deferred by SMC due to limitations imposed by SMC's bank credit agreements.
However, the Company received two quarterly dividends of $1.3 million per
quarter during the first nine months of 2000. In October 2000, the Company
received an additional quarterly dividend of $1.3 million. There can be no
assurances that TIMET will continue to receive regular quarterly dividends
during 2001.
-19-
Investing Activities. The Company's capital expenditures were $6.7
million for the nine months ended September 30, 2000 compared to $18.7 million
for the same period in 1999. Capital expenditures for 2000 are expected to
approximate $10 million and are planned to include those principally intended
for capital maintenance and environmental, health and safety purposes. Proceeds
from the sale of property and equipment in 1999 included the sale of an interest
in a corporate aircraft and assets sold as part of the Company's restructuring
activities.
In the first quarter of 2000, the Company sold its interest in the
castings joint venture to Wyman-Gordon for $7 million and recorded a pretax gain
of $1.2 million.
Financing Activities. Net repayments in the 2000 period reflect
reductions of outstanding borrowings principally in the U.S. resulting from
collection of receivables, reduction in inventories and the sale of the
castings joint venture. Net repayments in 1999 reflect reductions of outstanding
borrowings in both the U.S. and U.K.
In November 1999, TIMET's Board of Directors voted to suspend the
regular quarterly dividend on the Company's common stock in view of, among other
things, the continuing weakness in overall market demand for titanium metal
products. The Company's U.S. credit agreement now prohibits the payment of
dividends on the Company's common stock.
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 for each period. As previously
reported, the Company has exercised its right to defer future dividend payments
on these securities for a period of 10 quarters (subject to possible further
extension for up to an additional 10 quarters), although interest will continue
to accrue at the coupon rate on the principal and unpaid dividends. The
Company's goal is to resume dividends on the Convertible Preferred Securities
when the outlook for TIMET's results from operations improves substantially. As
of September 30, 2000, accrued dividends on the Company's Convertible Securities
are reflected as noncurrent liabilities in the consolidated balance sheet.
Environmental and Legal Matters. See Note 10 to the Consolidated
Financial Statements for a discussion of environmental and legal matters.
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 in the past has sought, and in the future may seek, to
raise additional capital, modify its common and preferred dividend policies,
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,
discusses and engages in 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
equity securities or incurring additional indebtedness.
-20-
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Reference is made to Note 10 of the Consolidated Financial Statements
and to the Company's 1999 Annual Report for descriptions of certain previously
reported legal proceedings.
In September 2000, the Company was named in an action filed by the U.S.
Equal Employment Opportunity Commission in federal district court in Las Vegas,
Nevada (U.S. Equal Employment Opportunity Commission v. Titanium Metals
Corporation, CV-S-00-1172DWH-RJJ). The complaint alleges that several female
employees at the Company's Henderson, Nevada plant were the subject of sexual
harassment. The Company intends to vigorously defend this action, but in any
event does not presently anticipate that any adverse outcome in this case would
be material to TIMET's consolidated financial position, results of operations or
liquidity.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.1 Financial Data Schedule for the quarter ended September 30, 2000.
(b) Reports on Form 8-K:
Reports on Form 8-K filed by the Registrant for the
quarter ended September 30, 2000 and the month of October, 2000:
Date of Report Items Reported
---------------------------------- ----------------------------
August 4, 2000 5 and 7
August 14, 2000 5 and 7
October 2, 2000 5 and 7
October 19, 2000 5 and 7
-21-
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 13, 2000 By /s/ Mark A. Wallace
- ------------------------ ---------------------------------------------
Mark A. Wallace
(Executive Vice President and
Chief Financial Officer)
Date: November 13, 2000 By /s/ JoAnne A. Nadalin
- ------------------------ ---------------------------------------------
JoAnne A. Nadalin
(Principal Accounting Officer)
-22-