________________________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 29, 1997
-------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-1339
------
OREGON METALLURGICAL CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0448167
---------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
530 34th Avenue S.W. 97321
---------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 967-9000
--------------
NONE
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(Former name or address, if changed since last report)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of July 24, 1997
- ------------------------------------------- -------------------------------
Common stock, $1.00 par value 16,310,855
================================================================================
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
OREGON METALLURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Unaudited
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
------------- ------------ -------------- ------------
Net sales.......................................... $ 67,337 $ 58,760 $ 139,368 $ 110,069
Cost of sales...................................... 49,341 44,492 102,957 85,440
------------- ------------ -------------- ------------
GROSS PROFIT ..................................... 17,996 14,268 36,411 24,629
Research, technical and product
development expenses............................ 766 326 1,402 943
Selling, general and administrative
expenses........................................ 5,597 4,868 10,635 9,158
------------- ------------ -------------- ------------
INCOME FROM OPERATIONS............................ 11,633 9,074 24,374 14,528
Interest Income................................... 848 --- 1,593 ---
Interest expense.................................. (207) (701) (396) (1,335)
Minority interests................................ (239) (245) (495) (470)
------------- ------------ -------------- ------------
INCOME BEFORE INCOME TAXES........................ 12,035 8,128 25,076 12,723
Provision for income taxes........................ 4,503 2,942 9,833 4,192
------------- ------------ -------------- ------------
NET INCOME........................................ $ 7,532 $ 5,186 $ 15,243 $ 8,531
============= ============ ============== ============
Net income per share.............................. $ 0.46 $ 0.45 $ 0.93 $ 0.75
============= ============ ============== ============
Weighted average common shares
and equivalents outstanding .................. 16,510 11,553 16,453 11,418
============= ============ ============== ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
OREGON METALLURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
Unaudited
June 29, December 31,
1997 1996
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 461 $ 1,460
Short-term investments available-for-sale......................................... 53,575 63,353
Accounts receivable, less allowance for doubtful
accounts of $690 and $494...................................................... 49,302 37,300
Inventories....................................................................... 122,986 119,553
Other current assets.............................................................. 291 406
Deferred tax assets............................................................... 2,200 4,701
------------- ------------
Total current assets......................................................... 228,815 226,773
Property, plant and equipment, net.................................................. 37,559 34,890
Other assets, net................................................................... 1,241 1,382
------------- ------------
Total assets.................................................................. $ 267,615 $ 263,045
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................................. $ 2,491 $ 3,785
Accounts payable ................................................................. 12,371 19,915
Accrued payroll and employee benefits............................................. 9,475 10,650
Accrued loss on long-term agreements.............................................. 1,048 2,710
Other liabilities................................................................. 5,129 9,231
------------- ------------
Total current liabilities....................................................... 30,514 46,291
Long-term debt, less current portion................................................ 3,458 4,212
Deferred tax liabilities............................................................ 6,049 5,078
Accrued postretirement benefit...................................................... 1,669 1,621
Minority interests.................................................................. 2,491 1,990
------------- ------------
Total liabilities............................................................. 44,181 59,192
------------- ------------
Shareholders' equity:
Common stock, $1.00 par value;
80,000 shares authorized; shares issued:
1997, 16,311; 1996, 16,127...................................................... 16,311 16,127
Additional paid-in capital........................................................ 152,914 148,520
Retained earnings................................................................. 54,046 38,803
Cumulative foreign currency translation adjustment................................ 163 403
------------- ------------
Total shareholders' equity................................................... 223,434 203,853
------------- ------------
Total liabilities and shareholders' equity.......................................... $ 267,615 $ 263,045
============= ============
The accompanying notes are an integral part of these consolidated financial
statements.
3
OREGON METALLURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Unaudited
Cumulative
Foreign
Common Stock Additional Currency
------------ Paid-in Retained Translation
Shares Amount Capital Earnings Adjustment Total
------ ------ ---------- -------- ----------- -----
Balances, December 31, 1995 11,018 $ 11,018 $ 38,340 $ 16,545 $ (16) $ 65,887
Common stock offering,
net of related expenses 4,600 4,600 98,638 ---- ---- 103,238
Awards for stock compensation plans 429 429 9,671 ---- ---- 10,100
Exercise of stock purchase warrants 80 80 430 ---- ---- 510
Tax effect of issuance of common
stock for employee benefits ---- ---- 1,441 ---- ---- 1,441
Currency translation adjustment ---- ---- ---- ---- 419 419
Net income ---- ---- ---- 22,258 ---- 22,258
---------- --------- ----------- ---------- ---------- -----------
Balance, December 31, 1996 16,127 16,127 148,520 38,803 403 203,853
Awards for stock compensation
plans 184 184 4,828 ---- ---- 5,012
Tax effect of issuance of common
stock for employee benefits ---- ---- (434) ---- ---- (434)
Currency translation adjustment ---- ---- ---- ---- (240) (240)
Net Income ---- ---- ---- 15,243 ---- 15,243
---------- ---------- ----------- ---------- ---------- -----------
Balances, June 29, 1997 16,311 $ 16,311 $ 152,914 $ 54,046 $ 163 $ 223,434
========== ========== =========== ========== ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
OREGON METALLURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Six Months Ended
---------------------------------
June 29, June 30,
1997 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................................................................... $ 15,243 $ 8,531
Adjustments to reconcile net income
to cash used in operating activities:
Depreciation and amortization.................................................... 2,304 2,295
Deferred income tax expense...................................................... 3,472 990
Employee benefits paid or payable in common stock................................ 4,966 3,490
Provision for loss on long-term agreements....................................... (1,662) (577)
Minority interests............................................................... 495 470
------------- -------------
24,818 15,199
Changes in current assets and liabilities:
Accounts receivable............................................................ (12,002) (8,803)
Inventories.................................................................... (3,433) (15,287)
Other current assets........................................................... (4) 88
Accounts payable............................................................... (7,544) (144)
Accrued payroll and employee benefits.......................................... (1,048) 2,003
Other liabilities.............................................................. (4,637) 2,190
Other ........................................................................... (26) 8
-------------- -------------
Net cash used in operating activities ................................................ (3,876) (4,746)
-------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Short-term investments - matured.................................................... 12,324 ----
Short-term investments - purchased................................................ (2,546) ----
Additions to property, plant and equipment.......................................... (4,901) (1,535)
Other............................................................................... 141 (40)
------------- -------------
Net cash provided by (used in) investing activities................................... 5,018 (1,575)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit agreement............................................ ---- 103,865
Payments on revolving credit agreement.............................................. (1,337) (97,980)
Proceeds from long-term debt........................................................ ---- 177
Payments on long-term debt.......................................................... (711) (71)
Book overdraft...................................................................... ---- 317
Proceeds from exercise of stock purchase warrant.................................... ---- 510
------------- -------------
Net cash provided by (used in) financing activities................................... (2,048) 6,818
-------------- -------------
Effect of exchange rates on cash and
cash equivalents.................................................................... (93) 2
-------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.................................. (999) 499
CASH AND CASH EQUIVALENTS:
Beginning of period................................................................... 1,460 572
------------- -------------
End of period......................................................................... $ 461 $ 1,071
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 BASIS OF PRESENTATION
The interim consolidated financial statements have been prepared by Oregon
Metallurgical Corporation ("OREMET") and its subsidiaries (the "Company")
without audit. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's results
of operations and cash flow, for the three and six month periods ended June 29,
1997 and June 30, 1996; and its financial position as of June 29,1997, and
December 31, 1996. The balance sheet data as of December 31, 1996, was derived
from audited financial statements, but does not include all disclosures
contained in the Company's 1996 Annual Report to Shareholders. The interim
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto appearing in the Company's
Annual Report to Shareholders.
The results of operations of interim periods are not necessarily indicative of
the operating results of a full year or future years.
NOTE 2 ORGANIZATION AND OPERATIONS
The Company is one of two U.S. integrated producers and distributors of titanium
sponge, ingot, mill products and castings for use in the aerospace, industrial,
golf and military markets.
NOTE 3 BASIS OF CONSOLIDATION
Titanium Industries, Inc. ("TI") an eighty percent (80%) owned subsidiary
operates full-line titanium metal service centers in the United States, Canada,
United Kingdom and Germany and produces small diameter bar, weld wire and fine
wire. The consolidated financial statements of the Company include the accounts
of TI, and the Company's wholly-owned subsidiary, OREMET France S.a.r.l. TI's
accounts reflect the activities of its wholly-owned subsidiaries, Titanium
International, LTD., Titanium Wire Corporation and Titanium International GmbH.
All material intercompany accounts and transactions have been eliminated in
consolidation.
NOTE 4 CHANGE IN FISCAL YEAR
On April 24, 1997, OREMET's Board of Directors approved a change in OREMET's
fiscal year. Effective January 1, 1997, OREMET prospectively changed its
financial reporting year from a calendar year to a fiscal year consisting of 52
or 53 weeks ending on the Sunday closest to the end of the calendar year.
Consistent with the change in its fiscal year, OREMET has modified its quarterly
financial reporting from calendar quarters to fiscal quarters ending on the
Sunday closest to the end of the calendar quarter.
NOTE 5 RECLASSIFICATIONS
Certain amounts in the December 31, 1996, balance sheet have been reclassified
to conform to current period's presentation. The reclassifications do not affect
previously reported results of operations or cash flows.
NOTE 6 SHORT-TERM INVESTMENTS AVAILABLE-FOR-SALE
At June 29, 1997, all of the Company's short-term investments had maturities
of less than one year. The fair value of investments approximates amortized
cost.
6
NOTE 7 INVENTORIES
June 29, December 31,
1997 1996
------------ ------------
Finished goods................. $ 31,634 $ 33,739
Work-in-progress............... 37,549 34,897
Raw materials.................. 53,803 50,917
------------ ------------
Total....................... $ 122,986 $ 119,553
============ ============
NOTE 8 CONTINGENCIES
TUNGSTEN CONTAMINATION: In the fourth quarter of 1996, the Company discovered
that certain of its finished products contained tungsten particles. The tungsten
was introduced into the Company's manufacturing process through the use of
titanium recycle which contained tungsten welds. The Company has identified
products and customers who have been affected by this matter, and believes that
substantially all of the material in question will meet required specifications
for its intended end use. Some of the material has been converted into fastener
stock and fasteners for the commercial aerospace industry. Pursuant to studies
performed by the Company and others, some commercial aerospace manufacturers and
the U.S. Federal Aviation Administration have approved the fasteners for use.
The Company established a reserve of $750 in the fourth quarter of 1996 to cover
customer claims and internal costs. No claims have been paid as of June 29,
1997. The Company continues to believe that established reserves will be
adequate to cover claims associated with this matter.
ENVIRONMENTAL MATTERS: The Company is subject to Federal, state, and local
statutes and regulations concerning environmental matters and land use. Note 13
to the Company's 1996 Annual Report to Shareholders contains information
regarding the Company's environmental matters.
NOTE 9 ACQUISITION OF ROME METALS, INC.
On July 1, 1997, the Company acquired substantially all of the assets and
business of Rome Metals, Inc. ("Rome"), a privately owned corporation. Rome,
with operations in Western Pennsylvania is a leading provider of finishing
services to the titanium, zirconium and specialty metals flat products
industries.
NOTE 10 NEW ACCOUNTING PRONOUNCEMENT
CHANGES IN ACCOUNTING PRINCIPLES: In February 1997, The Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 128,
Earnings Per Share ("FAS 128"). FAS 128 specifies the computation, presentation,
and disclosure requirements for earnings per share. FAS 128 is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods. Earlier application of FAS 128 is not permitted. The
effect of implementing FAS 128 on the Company's earnings per share computations
is not expected to be significant.
7
PART 1: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S 1996
ANNUAL REPORT ON FORM 10-K AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
THERETO OF THE COMPANY. THE FOLLOWING INFORMATION CONTAINS FORWARD-LOOKING
STATEMENTS WHICH INVOLVE CERTAIN RISKS AND UNCERTAINTIES. ACTUAL RESULTS AND
EVENTS MAY DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT
LIMITED TO, DEPENDENCE ON AND CYCLICALITY OF AEROSPACE INDUSTRY, UNCERTAINTY OF
EMERGING GOLF MARKET, HIGHLY COMPETITIVE INDUSTRY, SUBSTANTIAL EXCESS PRODUCTION
CAPACITY, PLANNED SIGNIFICANT INVESTMENT IN ELECTRON BEAM FURNACE, DEPENDENCE ON
ESSENTIAL MACHINERY AND EQUIPMENT, DEPENDENCE ON RAW MATERIALS AND SERVICES,
ENVIRONMENTAL REGULATION, LABOR AGREEMENTS, AND CONTINGENCIES DESCRIBED IN THE
COMPANY'S FINANCIAL STATEMENTS.
OVERVIEW
Demand for the Company's products remained strong during the second quarter of
1997. The strength of the commercial aerospace industry was the dominant factor
behind the Company's second quarter results. The average price per pound for
ingot and mill products (the Company's largest two product lines) continued to
increase during the quarter. Gross profit margins increased to 26.7% for the
second quarter of 1997 compared to 25.6 % for the first quarter. An increase in
SG&A expenses relating to the Company's Stock Appreciation Rights (SAR's)
program held the Company's second quarter operating margins to 17.3%, compared
to 17.7% for the first quarter of 1997.
The U.S. Geological Survey (USGS) reported that U.S. industry shipments of
titanium mill products were approximately 15 million pounds for the first
quarter of 1997. The USGS reported domestic mill product shipments of 57 million
pounds in 1996 and 44 million pounds in 1995. The Company expects domestic
shipments of mill products for the full year will be comparable to or slightly
higher than those in 1996. The Company further expects that increased demand
from the commercial aerospace market, coupled with increases in demand from
other markets sectors, will result in record domestic mill product shipments in
1998.
Commercial aerospace related sales represented approximately 69% of the
Company's net sales for the second quarter of 1997, compared to approximately
40% for the second quarter of 1996. The commercial aerospace industry is
expected to remain the largest source of demand for titanium products for the
foreseeable future. International and export sales approximated $16 million, or
23% of net sales, for the second quarter of 1997. International and export sales
are principally to markets in Europe and Asia.
Sales for the quarter to the golf club industry totaled $1.9 million, or 3% of
sales, compared to $6.9 million, or 10% of sales in the first quarter of 1997.
The reduction in sales is due to a combination of inventory accumulation by the
golf clubhead producers, their increased efficiency in recycling internal scrap
and competition from titanium producers located in the Former Soviet Union. The
Company's net sales to golf clubhead producers approximated $40 million in 1996.
The Company believes its sales to this industry will approximate $15 million in
1997. Consumer demand for titanium golf clubs remains strong.
The Company continues to offset golf club orders with orders from commercial
aerospace customers and other markets. Titanium products destined for the
commercial aerospace market typically require longer lead times than products
for non-aerospace applications. The Company estimates that the strong demand
from the commercial aerospace market, together with the corrosion protection and
military markets, will offset the 5 million pound decline in industry shipments
to the golf clubhead market in 1997.
The military continues to explore using titanium for armor applications. The
Company has developed alloy plate and billet products that have excellent
ballistic characteristics, and these products have been selected for programs in
the U.S. and Europe. Market development for armor applications is a high
priority as the Company believes that titanium usage on tanks and various types
of personnel carriers will increase.
The Company's twelve-month sales order backlog was $128 million at June 29,
1997, compared to $152 million and $141 million at March 30, 1997 and June 30,
1996, respectively. Substantially all of the backlog at June 29, 1997 is for
product scheduled to ship in the second half of this year. The decline in the
backlog is due to the Company's delaying the opening of the 1998 order book. The
Company started to accept orders for 1998 the middle of June 1997. Management
anticipates that the sales order backlog will increase during the third and
fourth quarters. The Company's backlog is based on firm purchase orders with a
scheduled delivery date. Customer orders may be subject to cancellation by the
customer upon payment of specified charges.
8
RESULTS OF OPERATIONS
The following table sets forth certain operating items of the Company's
consolidated results of operations as a percentage of net sales for each of the
years in the five-year period ended December 31, 1996, and for the six months
ended June 29, 1997 and June 30, 1996.
Three Months Ended
---------------------- Year Ended
June 29, June 30, December 31,
-------- -------- -----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited)
Net sales...................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit (loss)............ 26.7 24.3 24.4 10.8 9.3 4.9 (1.0)
Income (loss) from
operations (1).............. 17.3 15.4 14.8 (0.2) (3.5) (11.2) (10.4)
Net income (loss).............. 11.2% 8.8% 9.4% (1.6)% (2.8)% (7.4)% (7.4)%
<FN>
<F1> A provision for a loss on long-term agreements ("LTA's") of $5.7 million
was recorded in 1995. Gross profit and income from operations, exclusive
of this provision, as a percentage of net sales would have been 13.8% and
2.8% in 1995, respectively.
</FN>
QUARTERLY RESULTS OF OPERATIONS
- -------------------------------
The following table presents the Company's unaudited consolidated quarterly
financial data for fiscal years 1995 and 1996, and the first and second quarters
of 1997. Although the Company's business is not seasonal, growth rates of sales
have varied from quarter to quarter as a result of the timing of new products,
industry cyclicality and general U.S. and international economic conditions.
(In millions)
1997 Quarter 1996 Quarters 1995 Quarters
--------------- -------------------------------- ---------------------------------
Second First Fourth Third Second First Fourth(1) Third Second(1) First
------ ----- ------ ----- ------ ----- --------- ----- --------- -----
Net sales $67.3 $ 72.0 $62.1 $64.7 $58.8 $51.3 $39.7 $41.2 $35.2 $ 30.8
Gross profit 18.0 18.4 16.9 16.2 14.2 10.4 1.2 4.1 5.3 5.3
Income (loss)
from operations 11.6 12.7 10.7 9.8 9.0 5.5 (3.4) 0.1 1.4 1.6
Net income (loss) $ 7.5 $ 7.7 $ 7.3 $ 6.4 $ 5.2 $ 3.3 $(3.0) $(0.4) $ 0.5 $ 0.5
- -------------
<FN>
<F1>During the second quarter of 1995, the Company reported a pre-tax charge to
income of $1.3 million to reflect the impact of projected conversion costs
on LTA's which were in excess of selling price. During the fourth quarter of
1995, the Company reported a pre-tax charge to income of $4.4 million to
reflect the impact of increased raw material costs on long-term agreements.
</FN>
COMPARISON OF SECOND QUARTER OF 1997 TO SECOND QUARTER OF 1996
- --------------------------------------------------------------
NET SALES. Net sales increased $8.6 million, or 15% to $67.3 million in the
second quarter of 1997, compared to $58.8 million in 1996. The increase in sales
was primarily driven by increased demand and higher prices for both the
Company's manufactured and service center products. Of the $8.6 million sales
increase, $3.8 million was the result of volume increases and $4.8 million from
higher average selling prices.
TITANIUM SPONGE. During the second quarter of 1997, the Company's integrated
sponge facility operated at near capacity, primarily supplying the Company's
internal demand for titanium sponge as well as sales to RMI Titanium Company
("RMI") under a long-term titanium sponge conversion agreement. Sales of
titanium sponge and sponge conversion services decreased 20% to $3.7 million
from $4.6 million for the second quarter of 1997 compared to the second quarter
of 1996. Sponge shipments decreased 3% and the average sponge price per pound
decreased 18%. The decrease in the average price per pound is related to a
decrease in sales of high purity sponge, which the Company started selling in
1996 to the electronics industry. The Company expects to continue to operate its
9
sponge facility at near capacity with substantially all production being
utilized for internal consumption or for supply to RMI (approximately 45% of
capacity in 1996). The Company is presently supplementing its sponge production
with purchases from foreign producers, and is not marketing its internally
produced sponge. The Company is in the process of expanding its sponge
production facility, and estimates that output may increase by approximately 10%
in 1998.
INGOT. Sales of ingot increased 80% to $22.5 million for the second quarter of
1997 compared to $12.5 million for the second quarter of 1996. Ingot shipments
increased 19% and the average ingot price per pound increased 51%. The Company
operated its melt facilities at near capacity during the second quarter of 1997
and expects to continue to do so for the remainder of 1997. The Company produces
ingot for both internal use in its mill products division and for sale primarily
to aerospace customers.
MILL PRODUCTS. The Company produces or contracts for outside production a
variety of mill products including: billet, bar, plate, sheet and engineered
parts. Mill product sales decreased 7% to $18.4 million for the second quarter
of 1997 compared to $19.7 million for the second quarter of 1996. Shipments of
mill products decreased 22%, and the average price per pound increased 20%.
Sales to producers of golf clubheads decreased $7.2 million during the second
quarter of 1997 compared to the comparable period of 1996. Sales to producers of
aerospace components are responsible for a substantial portion of mill product
sales.
A decrease in shipments to golf clubhead producers accounted for the majority of
the decrease in mill product sales. The Company continues to replace golf orders
with new orders from commercial aerospace customers and other markets.
Approximately $2.5 million of mill product shipments scheduled for release in
the second quarter were delayed as a result of the failure of the Company's
forge press in June. The forge press was repaired and operations restarted prior
to the beginning of the third quarter.
DISTRIBUTION. The Company's service centers market a wide variety of mill
products including engineered parts that are manufactured by various producers.
During the second quarter of 1997, sales of service center products decreased 2%
to $17.6 million compared to $18.0 million for the second quarter of 1996.
Distribution sales remained relatively flat between the two quarters. Sales to
the industrial markets have moderated, while the demand for commercial aerospace
products has increased. Due to high demand, the Company's service centers have
had difficulty obtaining certain commercial aerospace products from vendors.
CASTINGS. Sales of castings increased 12% to $2.8 million for the second
quarter of 1997 compared to $2.5 million for the second quarter of 1996. The
Company is expanding its casting facilities.
COST OF SALES AND GROSS PROFIT. Cost of sales for the second quarter of 1997
increased 11% to $49.3 million, compared to $44.5 million in the second quarter
of 1996. The primary reasons for the increase in cost of sales were increased
shipments, higher material costs for the distribution business, and a shift in
mix to more costly aerospace products. The Company's gross profit margin
increased to 26.7% for the second quarter of 1997 from 24.3% for the second
quarter of 1996, as a result of higher prices and improved production
efficiencies.
RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT EXPENSES ("RT&D"). RT&D expenses
increased $0.4 million during the second quarter of 1997 to $0.8 million
compared to the second quarter of 1996. The increase relates to the ongoing
development of enhanced manufacturing processes and product development. The
main focus of RT&D is to develop enhanced production procedures, provide
customers with required technical support and develop new products and markets.
RT&D works jointly on projects with customers, research agencies and
universities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A"). SG&A increased $0.7
million, or 15%, for the second quarter of 1997 to $5.6 million from $4.9
million compared to the second quarter of 1996. The increase is primarily a
result of additional employees hired to support the increase in operating
activity. As a percentage of sales, SG&A remained constant. Fluctuations in the
market price of the Company's common stock affect the amount of expenses
incurred under the Company's Stock Appreciation Rights ("SAR's") Plan. During
the first quarter of 1997, SG&A expense was reduced by $0.6 million as a result
of the affect of a decrease in the price of the Company's common stock on the
SAR's Plan. During the second quarter of 1997, expenses under the Company's
SAR's Plan were $0.6 million.
10
INTEREST INCOME. Net proceeds from the Offering (See Offering under Liquidity
and Capital Resources) have been invested in short-term marketable securities,
which is the primary factor giving rise to the increase in interest income.
INTEREST EXPENSE. Interest expense decreased $0.5 million to $0.2 million in the
second quarter of 1997 compared to the second quarter of 1996, resulting from a
decrease in average borrowings. In August 1996, the Company paid down its U.S.
revolving credit agreement with funds received from the Offering.
PROVISION FOR INCOME TAXES. The Company reported a provision for income taxes of
$4.5 million, or an effective tax rate of 37% (on income before income taxes and
minority interests) for the second quarter of 1997 compared to $2.9 million, or
an effective tax rate of 35% for the comparable period in 1996. The difference
between the federal and state combined statutory tax rate of 40% and the 1997
effective tax rate of 37% was due to favorable amendments of the Company's prior
year's tax returns. The difference between the federal and state combined
statutory tax rate and the effective tax rate of 35% for the second quarter of
1996 is primarily due to a change in the Company's deferred tax asset valuation
allowances, reflecting the belief that it is more likely than not that the
deferred tax assets will be realized by the Company.
NET INCOME. The Company reported net income of $7.5 million, $0.46 per share,
for the second quarter of 1997 compared to net income of $5.2 million, $0.45 per
share, for the comparable period in 1996.
COMPARISON OF FIRST SIX MONTHS OF 1997 TO FIRST SIX MONTHS OF 1996
- ------------------------------------------------------------------
NET SALES. Net sales increased $29.3 million, or 27% to $139.4 million in the
first six months of 1997, compared to $110.1 million in 1996. The increase in
sales was primarily driven by increased demand and higher prices for both the
Company's manufactured and service center products. Of the $29.3 million sales
increase, $14.3 million was the result of volume increases and $15.0 million
from higher average selling prices.
TITANIUM SPONGE. During the first six months of 1997, the Company's integrated
sponge facility operated at near capacity, primarily supplying the Company's
internal demand for titanium sponge as well as sales to RMI under a long-term
titanium sponge conversion agreement. Sales of titanium sponge and sponge
conversion services decreased 4% to $7.5 million from $7.8 million for the first
six months of 1997 compared to the first six months of 1996. Sponge shipments
increased 18% and the average sponge price per pound decreased 19%. The decrease
in the average price per pound is related to a decrease in sales of high purity
sponge to the electronics industry, to which the Company started selling in
1996. The Company projects that it will continue to operate its sponge facility
at near capacity with substantially all production being utilized for internal
consumption or for supply to RMI.
INGOT. Sales of ingot increased 92% to $41.7 million for the first six months of
1997 compared to $21.7 million for the first six months of 1996. Ingot shipments
increased 27% and the average ingot price per pound increased 51%. The Company
operated its melt facilities at near capacity during the first six months of
1997 and expects to continue to do so for the remainder of 1997. The Company
produces ingot for both internal use in its mill products division and for sale
primarily to aerospace customers.
MILL PRODUCTS. The Company produces or contracts for outside production a
variety of mill products including, billet, bar, plate, sheet and engineered
parts. Mill product sales increased 15% to $43.3 million for the first six
months of 1997 compared to $37.6 million for the first six months of 1996.
Shipments of mill products decreased 11% and the average price per pound
increased 29%. Sales to producers of golf clubheads decreased $8.2 million
during the first six months of 1997, compared to the comparable period of 1996.
Sales to producers of aerospace components are responsible for a substantial
portion of the growth in mill product sales.
DISTRIBUTION. The Company's service centers market a wide variety of mill
products including engineered parts that are manufactured by various producers.
During the first six months of 1997, sales of service center products increased
6% to $36.7 million compared to $34.7 million for the first six months of 1996.
The increase in sales was due to increased shipments and favorable pricing and
product mix.
CASTINGS. Sales of castings increased 19% to $5.6 million for the first six
months of 1997 compared to $4.7 million for the first six months of 1996. The
Company is operating at a higher production rate in 1997 and is expanding its
casting facilities.
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COST OF SALES AND GROSS PROFIT. Cost of sales for the first six months of 1997
increased 21% to $103.0 million, compared to $85.4 million in the first six
months of 1996. The primary reason for the increase in cost of sales was
increased shipments. The Company's gross profit margin increased to 26.1% for
the first six months of 1997 from 22.4% for the first six months of 1996, as a
result of higher prices and improved production efficiencies.
RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT EXPENSES. RT&D increased by $0.5
million for the first six months of 1997 to $1.4 million from the comparable six
month period of 1996. The increase relates to the development of enhanced
manufacturing processes and alloy development. The main focus of RT&D is to
develop enhanced production procedures, provide customers with required
technical support and develop new products and markets. RT&D works jointly on
projects with customers, research agencies and universities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. SG&A increased $1.5 million, or
16%, for the first six months of 1997 to $10.6 million from $9.2 million in the
comparable six month period of 1996. The increase is primarily a result of
additional employees hired to support the increase in operating activity. As a
percentage of sales, SG&A decreased to 7.6% in the first six months of 1997 from
8.3% in the first six months of 1996.
INTEREST INCOME. Net proceeds from the Offering have been invested in short-term
marketable securities, which is the primary factor giving rise to the increase
in Interest Income.
INTEREST EXPENSE. Interest expense decreased $0.9 million to $0.4 million in the
first six months of 1997 compared to the first six months of 1996, resulting
from a decrease in borrowings. In August 1996, the Company paid down its U.S.
revolving credit agreement with funds received from the Offering.
PROVISION FOR INCOME TAXES. The Company reported a provision for income taxes of
$9.8 million, or an effective tax rate of 38% (on income before income taxes and
minority interests) for the first six months of 1997 compared to $4.2 million,
or an effective tax rate of 32% for the comparable period in 1996. The
difference between the federal and state combined statutory tax rate of 40% and
the effective tax rate of 38% for the first six months of 1997 is related to
favorable amendments of the Company's prior year's tax returns. The difference
between the federal and state combined statutory tax rate and the effective tax
rate of 32% for the first six months of 1996 is primarily due to a change in the
Company's deferred tax asset valuation allowance, reflecting the belief that it
is more likely than not that the deferred tax assets will be realized by the
Company.
NET INCOME. The Company reported net income of $15.2 million, $0.93 per share,
for the first six months of 1997 compared to net income of $8.5 million, $0.75
per share, for the comparable period in 1996.
12
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
- --------
Net cash used in operating activities totaled $3.9 million for the first six
months of 1997, compared to $4.7 million for the comparable period of 1996. For
the first six months of 1997, the Company reported net income of $15.2 million,
compared to $8.5 million for the comparable period of 1996. Increases in sales
accounted for the increased levels of accounts receivable, which represented the
primary use of cash for the six month period ended June 29, 1997. The increase
in the amount of working capital used in operating activities is a trend which
began in the second quarter of 1994, consistent with the Company's experience of
increasing sales, sales order backlog and production.
During the first six months of 1997 and 1996, the Company incurred $5.0 million
and $3.5 million, respectively, in expenses relating to its Stock Compensation
Plans and Savings Plan. Increases in the average market value of the Company's
common stock and in the number of eligible employees are the primary factors for
the 1997 increase.
Net cash provided by investing activities totaled $5.0 million for the first six
months of 1997 compared to net cash used in investing activities of $1.6 million
for the comparable period of 1996. During the first six months of 1997, the
Company utilized $9.8 in short-term investments primarily to fund working
capital requirements and capital additions. The Company's additions to property,
plant and equipment totaled $4.9 million and $1.5 million in the first six
months of 1997 and 1996, respectively.
Net cash used in financing activities totaled $2.0 million for the first six
months of 1997, compared to net cash provided by financing activities of $6.8
million for the comparable period of 1996
REVIEW OF SIGNIFICANT WORKING CAPITAL ACCOUNTS
- ----------------------------------------------
SHORT-TERM INVESTMENTS. Proceeds from the Offering have been invested in a
portfolio of highly-liquid debt securities. The Company reported $53.6 million
in short-term investments as of June 29, 1997. The Company had no short-term
investments as of June 30, 1996.
INVENTORIES. Inventories increased by $3.4 million, or 3% during the first six
months of 1997, to $123.0 million, while they increased $15.3 million, or 23%,
to $81.3 million during the comparable period of 1996. During 1996, the Company
increased its level of inventories in response to a growing sales backlog and
increased production levels. While sales increased during the first six months
of 1997, inventory levels remained relatively unchanged. The Company's
manufacturing facilities are presently operating at near capacity.
ACCOUNTS RECEIVABLE. Accounts receivable increased by $12.0 million, or 32%,
during the second quarter of 1997 to $49.3 million, while receivables increased
by $8.8 million, or 34% to $34.7 million during the comparable period of 1996.
The increase in accounts receivable is primarily the result of an increase in
sales volume.
ACCOUNTS PAYABLE. Accounts payable decreased $7.5 million, or 38%, during the
first six months of 1997 to $12.4 million. The decrease in accounts payable
during the first six months of 1997 reflects a decrease in the level of raw
material purchases. Accounts payable at June 30, 1996, was $16.8 million, and
remained substantially unchanged compared to the balance at December 31, 1995.
ACCRUED PAYROLL AND RELATED LIABILITIES. Accrued payroll and employee benefits
decreased by $1.2 million, or 11% during the second quarter of 1997 to $9.5
million, while they increased by $2.4 million, or 35% to $9.0 million during the
comparable period of 1996. The decrease during the first six months of 1997 is
attributable to payments of year-end bonuses. For the first six months of 1996,
accruals related to the Company's Stock Compensation Plan and Savings Plans
accounted for a substantial portion of the increase.
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OFFERING
- --------
On August 26, 1996, the Company completed an Offering ("Offering") of 4.6
million shares of its common stock for a price of $23.75 per share. Proceeds
from the Offering, net of underwriting fees and expenses, totaled $103 million.
The Company has used approximately $18 million of the proceeds to pay down its
U.S. revolving credit agreement. The balance of the proceeds will be used to
construct a new electron beam furnace ("EB furnace"), expand the Company's
distribution business, and for working capital and other general corporate
purposes.
CREDIT AGREEMENTS
- -----------------
The Company may borrow up to $10 million under the terms of a U.S. revolving
credit agreement with BankAmerica Business Credit, Inc. ("BABC"). The U.S.
credit agreement expires in September 1997. There was no balance outstanding
under the credit agreement as of June 29, 1997. As of June 29, 1997, interest
charged under the credit agreement was calculated based on BABC's reference rate
plus 1.0% or a borrowing option based on LIBOR plus 2.5%. The Company is in the
process of negotiating a new $60 million credit agreement.
Titanium International Limited, a subsidiary of TI, has a short-term credit
facility with Midland Bank plc, in the U.K., permitting borrowings of
approximately $3.5 million. The U.K. credit agreement is subject to renewal in
May 1998. The balance outstanding under the U.K. credit agreement as of June 29,
1997 was $1.0 million.
CAPITAL EXPENDITURES
- --------------------
The Company intends to use approximately $38.5 million of the net proceeds from
the Offering for the construction, start-up, and product qualification costs for
a new EB furnace and related raw material processing facilities. The
construction and production ramp-up periods are expected to take approximately
18 months with approximately $9 million expended in 1997 (design and procurement
and construction phases), and approximately $29.5 million in 1998 (construction
and testing phases).
The Company also intends to use approximately $15 million of the net proceeds
from the Offering to establish or purchase additional service centers.
The Company anticipates that capital expenditures during 1997, excluding the EB
furnace, will approximate $10 million, which will be provided by both presently
available and internally generated funds or credit facilities. Capital
expenditures required to maintain compliance with applicable environmental
regulations are included in the Company's capital expenditure plan to the extent
that they can be determined. Except for certain items relating to the
construction of the EB furnace, the Company has no material open commitments
that obligate it to make future capital expenditures.
INCOME TAXES
- ------------
The Company anticipates that in 1997 it will fully utilize its federal
alternative minimum tax (AMT) credit carryforwards of $0.7 million and its
remaining State of Oregon net operating loss carryforwards of $10.5 million. In
addition to federal and State of Oregon income taxes, the Company pays income
and franchise taxes in various foreign jurisdictions and states. The Company
amended certain of its prior years federal tax returns, reducing its second
quarter 1997 provision for income taxes by $0.4 million.
ADEQUACY OF LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------------------
The Company's access to borrowing facilities, public markets, and internally
generated cash are expected to be sufficient to support the Company's operating
needs and to finance its continued growth, acquisitions, capital expenditures
and repayment of long-term debt obligations.
14
NON-U.S. OPERATIONS AND MONETARY ASSETS
- ---------------------------------------
Approximately 7% of the Company's net sales for the second quarter of 1997 were
derived from its service centers in the U.K., Germany and France. Changes in
the value of non-U.S. currencies relative to the U.S. dollar cause fluctuations
in U.S. dollar financial position and operating results. The impact of currency
fluctuations on the Company was not significant in the second quarter of 1997.
ACQUISITIONS
- ------------
The Company acquired the assets of Rome Metals, Inc., on July 1, 1997. See Note
9 to the Financial Statements. The Company paid a portion of the purchase price
in cash, and financed the balance of the purchase with a five-year mortgage and
one-year notes secured by letters of credit. The Company has adequate liquidity
to meet its obligations to the seller upon maturity of the notes in June 1998.
15
PART 2: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
10.1 Form of Indemnification Agreement
11.1 Earnings Per Share Computation
27.1 Financial Data Schedule
B. Forms 8-K
The Company filed a current report on Form 8-K on April 25,
1997. Effective January 1, 1997, the Company changed its
calendar year to a 52-53 week fiscal year with reporting periods
ending on the Sunday closest to the end of the calendar quarter
or year.
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.
OREGON METALLURGICAL CORPORATION
Registrant
Date: July 30, 1997 /s/ Dennis P. Kelly
---------------------------------------
Dennis P. Kelly
Vice President, Finance and
Chief Financial Officer
Signing on behalf of the Registrant and as
Chief Accounting Officer
16