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 June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-28538
Titanium Metals Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-5630895
(State or other (IRS Employer
jurisdiction of Identification
incorporation or No.)
organization)
1999 Broadway, Suite 4300, Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
Number of shares of common stock outstanding on July 29, 1999: 31,370,905
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," "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 impact 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 in those portions referenced above and those described from time to
time in the Company's other filings with the Securities and Exchange Commission,
such as the cyclicality of the Company's business and its dependence on the
aerospace industry, the sensitivity of the Company's business to global industry
capacity, global economic conditions, changes in product pricing, the impact of
long term contracts with customers on the ability to raise prices, 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, potential
difficulties in integrating acquisitions, uncertainties associated with new
product development and the supply of raw materials and services and the
possibility of disruptions of normal business activities from "Year 2000"
("Y2K") issues. Should one or more of these risks materialize (or the
consequences of such a development worsen), or should one or more of 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, 1998 and
June 30, 1999 2-3
Consolidated Statements of Operations - Three months
and six months ended June 30, 1998 and 1999 4
Consolidated Statements of Comprehensive Income - Three
months and six months ended June 30, 1998 and 1999 5
Consolidated Statements of Cash Flows - Six months
ended June 30, 1998 and 1999 6-7
Consolidated Statement of Stockholders' Equity - Six
months ended June 30, 1999 8
Notes to Consolidated Financial Statements 9-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 14-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 18
Item 4. Submission of Matters to a Vote of Security Holders. 18
Item 6. Exhibits and Reports on Form 8-K. 18
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
December31, JUNE 30,
ASSETS 1998 1999
Current assets:
Cash and cash equivalents $ 15,464 $ 5,044
Accounts and other receivables, less
allowance of $1,932 and $2,060 126,988 107,974
Receivable from related parties 8,119 6,545
Refundable income taxes 6,819 5,327
Inventories 225,880 207,334
Prepaid expenses and other 10,650 8,235
Deferred income taxes 1,900 2,800
Total current assets 395,820 343,259
Other assets:
Investments in joint ventures 32,633 31,406
Preferred securities 80,000 80,000
Goodwill 59,547 56,332
Other intangible assets 19,894 17,572
Other 14,129 17,577
Total other assets 206,203 202,887
Property and equipment:
Land 5,974 6,097
Buildings 26,128 24,160
Information technology systems and 53,168 54,168
equipment
Manufacturing and other equipment 281,072 324,612
Construction in progress 52,651 11,778
418,993 420,815
Less accumulated depreciation 67,770 80,637
Net property and equipment 351,223 340,178
$ 953,246 $ 886,324
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES, MINORITY INTEREST AND December 31, JUNE 30,
STOCKHOLDERS' EQUITY 1998 1999
Current liabilities:
Notes payable $ 5,134 $ 8,781
Current maturities of long-term debt
and
capital lease obligations 771 639
Accounts payable 69,302 56,106
Accrued liabilities 50,628 33,773
Payable to related parties 3,223 1,960
Income taxes 5,391 7,018
Deferred income taxes 2,500 100
Total current liabilities 136,949 108,377
Noncurrent liabilities:
Long-term debt 99,950 78,033
Capital lease obligations 10,069 9,444
Payable to related parties 1,395 1,340
Accrued OPEB cost 24,065 23,389
Accrued pension cost and other 8,754 9,372
Deferred income taxes 14,200 15,200
Total noncurrent liabilities 158,433 136,778
Minority interest - Company-
obligated mandatorily
redeemable preferred securities of
subsidiary trust 201,250 201,250
holding solely subordinated debt
securities
("Convertible Preferred Securities")
Other minority interest 8,237 7,043
Stockholders' equity:
Preferred stock - -
Common stock 315 315
Additional paid-in capital 347,972 347,984
Retained earnings 99,981 91,083
Accumulated other comprehensive income 1,317 (5,298)
Treasury stock (1,208) (1,208)
Total stockholders' equity 448,377 432,876
$ 953,246 $ 886,324
[FN]Commitments and contingencies (Note 1)
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months Six months
ended ended
June 30, June 30,
1998 1999 1998 1999
Revenues and other income:
Net sales $190,821 $127,608 $377,878 $261,744
Equity in earnings
(losses) of joint 417 (632) 181 (1,080)
ventures
Other, net 1,774 975 2,751 1,780
193,012 127,951 380,810 262,444
Costs and expenses:
Cost of sales 147,111 113,504 287,943 235,774
Selling, general,
administrative and 14,233 12,606 28,417 25,367
development
Restructuring charge 6,000 - 6,000 -
Interest 533 1,691 949 2,986
167,877 127,801 323,309 264,127
Income (loss) before
income taxes
and minority interest 25,135 150 57,501 (1,683)
Income tax expense (benefit) 8,580 53 19,584 (589)
Minority interest -
Convertible 2,219 2,167 4,433 4,334
Preferred Securities
Other minority interest 516 423 1,378 961
Net income (loss) $ 13,820 $ (2,493) $32,106 $(6,389)
Diluted net income (loss) $ 16,039 $ (326) $36,539 $(2,055)
Earnings per share:
Basic $ .44 $ (.08) $ 1.02 $ (.20)
Diluted .44 * $ .99 *
Weighted average shares
outstanding:
Basic 31,459 31,370 31,459 31,370
Diluted 36,866 36,760 36,890 36,759
* Antidilutive
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months Six months
ended ended
June 30, June 30,
1998 1999 1998 1999
Net income (loss) $13,820 $(2,493) $32,106 $(6,389)
Other comprehensive income -
currency
translation adjustment (1,101) (1,106) (1,040) (6,615)
Comprehensive income $12,719 $(3,599) $31,066 $(13,004)
(loss)
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1998 and 1999
(In thousands)
1998 1999
Cash flows from operating activities:
Net income (loss) $ 32,106 $(6,389)
Depreciation and amortization 15,432 21,260
Equity in (earnings) losses of joint
ventures, net of dividends received (181) 1,580
Restructuring charge - noncash portion 4,104 -
Deferred income taxes 532 (1,300)
Other minority interest 1,378 961
Change in assets and liabilities, net of
acquisitions:
Receivables 12,802 18,570
Inventories (27,591) 18,546
Prepaid expenses and other 2,371 2,415
Accounts payable and accrued liabilities (4,366) (24,700)
Accrued restructuring charges 1,879 (5,351)
Income taxes 7,573 3,119
Accounts with related parties, net 7,031 256
Other, net (2,429) (5,015)
Net cash provided by operating 50,641 23,952
activities
Cash flows from investing activities:
Capital expenditures (47,328) (14,532)
Business acquisitions (19,277) -
Proceeds from sales of property and - 3,043
equipment
Other, net (700) 209
Net cash used by investing activities (67,305) (11,280)
Cash flows from financing activities:
Indebtedness:
Borrowings 45,000 12,398
Repayments (17,487) (32,161)
Dividends paid (1,259) (2,509)
Other, net 734 (284)
Net cash provided (used) by financing 26,988 (22,556)
activities
Net cash provided (used) by operating,
financing and investing activities $ 10,324 $(9,884)
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six months ended June 30, 1998 and 1999
(In thousands)
1998 1999
Net increase (decrease) in cash and
equivalents from:
Operating, investing and financing $ 10,324 $ (9,884)
activities
Cash acquired 1,187 -
Currency translation (142) (536)
11,369 (10,420)
Cash and cash equivalents at beginning of 68,957 15,464
period
Cash and cash equivalents at end of period $ 80,326 $ 5,044
Supplemental disclosures - cash paid for:
Interest, net of amounts capitalized $ 874 $ 2,769
Convertible Preferred Securities 6,666 6,666
dividends
Income taxes (refund), net 3,553 (5,709)
Business acquisitions:
Cash acquired $ 1,187 $ -
Receivables 6,574 -
Inventories 14,144 -
Property and equipment and other 6,656 -
Goodwill and other intangibles 8,566 -
Liabilities assumed (17,850) -
Cash paid $ 19,277 $ -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 1999
(In thousands)
Additional
Common Common Paid-In Retained
Shares Stock Capital Earnings
Balance at December 31,369 $ 315 $347,972 $99,981
31, 1998
Comprehensive - - - (6,389)
income
Dividends paid - - - (2,509)
($.08 per share)
Other 2 - 12 -
Balance at June 30, 31,371 $ 315 $347,984 $91,083
1999
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 1999
(In thousands)
Accumulated Other
Comprehensive Income
Currency Pension Treasury
Translation Liabilities Stock Total
Balance at December $ 5,600 $ (4,283) $(1,208) $448,377
31, 1998
Comprehensive (6,615) - - (13,004)
income
Dividends paid - - - (2,509)
($.08 per share)
Other - - - 12
Balance at June 30, $ (1,015) $ (4,283) $(1,208) $432,876
1999
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, 1998 has been
condensed from the Company's audited consolidated financial statements at that
date. The consolidated balance sheet at June 30, 1999 and the consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for the interim periods ended June 30, 1998 and 1999 have been prepared by
the Company without audit. In the opinion of management, all adjustments
necessary to present fairly the consolidated financial position, results of
operations and cash flows have been made. The results of operations for interim
periods are not necessarily indicative of the operating results of a full year
or of future operations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. The accompanying consolidated financial
statements should be read in conjunction with the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 (the "1998 Annual Report").
Acquisitions in 1998 consist of the previously-reported acquisition of
Loterios S.p.A. in April 1998.
For information concerning certain legal proceedings and certain
contingencies related to the Company, see (i) Part I, Item 2 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
("MD&A"), (ii) Part II, Item 1 -- "Legal Proceedings," and (iii) the 1998 Annual
Report.
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, the United Kingdom and France, and its
products are sold throughout the world. These worldwide integrated activities
compose the Company's principal segment, "Titanium melted and mill products."
The "Other" segment includes the Company's titanium castings operations,
which were combined in a joint venture in August 1998, and other nonintegrated
joint ventures.
Operating income, inventory and receivables are the key management measures
used to evaluate segment performance. Substantially all inventories and
receivables at December 31, 1998 and June 30, 1999, along with substantially all
depreciation and amortization and capital expenditures for the interim periods
ended June 30, 1998 and 1999, relate to the "Titanium melted and mill products"
segment.
Three months ended Six months ended
June 30, June 30,
1998 1999 1998 1999
(In thousands) (In thousands)
Net sales:
Titanium melted & mill $181,913 $127,161 $359,985 $261,240
products
Other 10,077 885 19,740 1,337
Eliminations (1,169) (438) (1,847) (833)
$190,821 $127,608 $377,878 $261,744
Mill products shipments:
Volume (metric tons) 3,900 2,800 7,800 5,800
Average price ($ per $34.50 $35.00 $34.50 $34.75
kilogram)
Equity in earnings
(losses) of
joint ventures:
Titanium melted & mill $ 713 $ (124) $ 741 $ (18)
products
Other (296) (508) (560) (1,062)
$ 417 $ (632) $ 181 $(1,080)
Operating income (loss):
Titanium melted & mill $29,358 $ 1,531 $ 60,365 $ 634
products
Other (5,464) (476) (4,842) (1,008)
23,894 1,055 55,523 (374)
General corporate income, 1,774 786 2,927 1,677
net
Interest expense (533) (1,691) (949) (2,986)
Income (loss) before
income taxes
and minority interest $25,135 $ 150 $ 57,501 $(1,683)
Operating income in the 1998 periods includes a $6 million restructuring
charge. Additional restructuring charges of $18 million were recorded in the
fourth quarter of 1998. See Note 4.
December 31, JUNE 30,
1998 1999
(In thousands)
Investment in joint
ventures:
Titanium melted & mill $ 22,044 $21,525
products
Other 10,589 9,881
$ 32,633 $31,406
Note 3 - Inventories:
December 31, JUNE 30,
1998 1999
(In thousands)
Raw materials $ 56,109 $ 39,882
Work-in-process 97,947 93,481
Finished products 61,213 59,416
Supplies 10,611 14,555
$ 225,880 $ 207,334
The average cost of LIFO inventories exceeded the net carrying amount of
such inventories by approximately $28 million at each of December 31, 1998 and
June 30, 1999.
Note 4 - Accrued liabilities:
December 31, JUNE 30,
1998 1999
(In thousands)
OPEB cost $ 2,371 $ 2,301
Pension cost 1,482 1,406
Other employee benefits 20,881 13,433
Environmental costs 2,273 927
Restructuring costs 6,727 1,743
Taxes, other than income 1,292 1,825
Convertible Preferred Securities - accrued 1,111 1,111
dividends
Other 14,491 11,027
$ 50,628 $ 33,773
Payments for restructuring costs during the six months ended June 30, 1999
related to the Company's previously-reported restructuring plan implemented
beginning in 1998 (aggregate charge in 1998 of $24 million). The remaining
accrued restructuring costs at June 30, 1999 of $1.7 million consist primarily
of unpaid personnel severance and benefits. Certain terminated employees are
being paid in installments and payments for items such as benefit continuation
for terminated employees continue for specified periods of time. Substantially
all such payments will be made by the end of 1999 although a nominal amount will
be paid in 2000. See also MD&A.
Note 5 - Notes payable, long-term debt and capital lease obligations:
Notes payable at December 31, 1998 and June 30, 1999 consist of borrowings
under the Company's short-term European bank credit agreements.
Long-term debt at June 30, 1999 consists of $74 million of borrowings under
the Company's U.S. bank credit agreement (December 31, 1998 - $80 million), $3
million of borrowings under its U.K. bank credit agreement (December 31, 1998 -
$19 million) and approximately $1 million of other European debt. At June 30,
1999, the Company had approximately $135 million of unused borrowing
availability under its U.S. and European bank credit agreements. Available
borrowings in the future could be further reduced due to the leverage and
interest coverage ratios contained in the Company's U.S. credit agreement, as
amended.
Capital lease obligations relate principally to U.K. production facilities
held under long-term leases with IMI plc.
Note 6 - Income taxes:
The difference between the Company's provision for income tax expense
(benefit) attributable to pretax income (loss) and the amounts that would be
expected using the U.S. federal statutory income tax rate of 35% is summarized
below.
Six months ended
June 30,
1998 1999
(In thousands)
Expected income tax expense (benefit) $20,125 $ (589)
Foreign tax rates (500) 357
Foreign sales corporation benefit (166) (53)
U.S. state income taxes, net 400 (196)
Other, net (275) (108)
$19,584 $ (589)
Minority interest - Convertible Preferred Securities is stated net of
income tax benefits of $2.3 million in both the 1998 and 1999 six-month periods.
Note 7 - Environmental matters:
In the early 1990s, TIMET and certain other companies (the "Steering
Committee Companies") that currently have or formerly had operations within a
Henderson, Nevada industrial complex (the "BMI Complex") began environmental
assessments of the BMI Complex and each of the individual company sites located
within the BMI Complex pursuant to a series of consent agreements entered into
with the Nevada Division of Environmental Protection ("NDEP"). Most of this
assessment work has now been completed, although some of the assessment work
with respect to TIMET's property is continuing.
In June 1999, TIMET entered into a series of agreements with Basic
Management, Inc. (together with its subsidiaries, "BMI") and, in certain cases,
other Steering Committee Companies, pursuant to which, among other things:
. BMI, TIMET and the other Steering Committee Companies each agreed to
contribute to the cost of remediating any soils contamination within the
BMI Complex (excluding the individual active plant sites), certain lands
surrounding the BMI Complex, and certain lands owned by the Company
adjacent to its plant site (the "TIMET Pond Property"); the Company
contributed $2.8 million to the cost of this remediation (which payment was
charged against accrued liabilities);
. BMI assumed responsibility for the conduct of soils remediation activities
on the properties described, including, subject to final NDEP approval, the
responsibility to complete all outstanding requirements under the consent
agreements with NDEP insofar as they relate to the investigation and
remediation of soils conditions on such properties;
. BMI indemnified TIMET and the other Steering Committee Companies against
certain future liabilities associated with any soils contamination on such
properties; and
. The Company agreed to convey to BMI, at no additional cost, the TIMET Pond
Property upon payment by BMI of the cost to design, purchase, and install
the technology and equipment necessary to allow the Company to stop
discharging liquid and solid effluents and co-products onto the TIMET Pond
Property (BMI will pay 100% of the first $15.9 million cost for this
project, and TIMET will contribute 50% of the cost in excess of $15.9
million, up to a maximum payment by TIMET of $2 million; the Company does
not currently expect to incur any cost in connection with this project).
The Company, BMI and the other Steering Committee Companies are continuing
investigation with respect to certain issues associated with the
properties described above. In addition, the Company is continuing assessment
work with respect to its own active plant site.
Note 8 - Ownership structure:
At June 30, 1999, Tremont Corporation held approximately 39% of TIMET's
outstanding common stock. Valhi, Inc. and other entities related to Harold C.
Simmons hold an aggregate of approximately 55% of Tremont's outstanding common
stock. Mr. Simmons may be deemed to control each of Valhi, Tremont and TIMET.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
~Sales~and~Operating~Income.~~~The Company's 1999 results were below those
of the same periods in 1998 principally due to a 26% decline in year-to-date
mill products volume caused by lower demand in both aerospace and industrial
markets, as reported in earlier periods.
Sales of $128 million in the second quarter of 1999 were 5% lower than the
first quarter of this year principally due to lower volume. The average mill
product selling price increased largely due to mix, as over 60% of the decline
in mill products volume from the first quarter level was in TIMET's lowest
priced industrial market product line.
Total cost of sales was 89% of sales in the second quarter of 1999 compared
to 91% in the first quarter of this year. TIMET's previously-reported cost
reduction efforts and the changes in product mix both contributed to the
improvement in second quarter gross profit margins over first quarter levels.
The Company is focusing on improving its margins through cost reductions,
including shifting production to its more cost effective equipment acquired or
refurbished as part of its recently completed major capital expenditure program,
and through increased utilization of its business-enterprise system to help
improve business processes.
Selling, general and administrative and development expenses in 1999 are
lower than in 1998 but are higher as a percentage of sales as not all such costs
are variable, particularly in the short term. Losses related to ValTimet, the
Company's tube products joint venture, were the principle reason for the decline
in equity in joint ventures of the "Titanium melted & mill products" segment.
Net sales of the "Other" segment in 1999 were lower than last year
primarily as a result of the Company's ceasing to consolidate its castings
business after July 1998. See Note 2 to the Consolidated Financial Statements.
Equity losses of joint ventures in the "Other" segment are the result of the
losses of the castings joint venture and higher losses of other ventures.
TIMET believes that demand for titanium aerospace products continues to be
impacted by customer inventory levels as well as forecasted commercial aircraft
build rates. The time required for customers to consume excess inventories has
been longer than the Company previously anticipated. TIMET also intends to
increasingly compete on price, particularly in industrial markets. The Company
currently expects volumes during the last half of 1999 to be higher than in the
first half of the year, and expects overall average mill product selling prices
to be lower, in part due to mix changes. Assuming demand remains at currently
expected levels during the remainder of 1999, the Company currently expects to
return to modest profitability in the second half of 1999.
~ European~Operations.~~~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 the
same.
Approximately one-half of the Company's European sales are denominated in
currencies other than the U.S. dollar, principally major European currencies.
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 respective functional
currency, including sales and costs denominated in U.S. dollars, are subject to
exchange rate fluctuations which 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 United States 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/translation losses (included in Other income) were $1.5
million during the six months ended June 30, 1999. Foreign currency gains were
$0.1 million during the 1998 six month period. At June 30, 1999, consolidated
assets and liabilities denominated in currencies other than functional
currencies were approximately $30 million and $27 million, respectively,
consisting primarily of U.S. dollar cash, accounts receivable, accounts payable
and borrowings. Exchange rates among 11 European currencies (including the
French franc, Italian lira and German mark but excluding the UK pound sterling)
became fixed relative to each other as a result of the new European currency
unit ("euro") effective in 1999. Costs associated with modifications of systems
to handle euro-denominated transactions have not been significant.
~General~Corporate~Income.~General corporate income, net (which accounts
for substantially all of the Consolidated Statement of Operations caption "Other
income") includes earnings on corporate cash equivalents, which vary with cash
levels and interest rates, and accrued dividends on preferred securities.
~Interest~Expense.~~~Interest expense in the 1999 periods is higher than in
the comparable 1998 periods, reflecting both higher average borrowing levels and
lower levels of interest capitalization on capital projects in process.
~Minority~Interest.~Dividend expense related to the Company's 6.625%
Convertible Preferred Securities approximated $3.3 million in the second
quarters of both 1999 and 1998 and is reported as minority interest, net of
allocable income taxes.
~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 can impact the Company's effective tax rate. See Note 6 to the
Consolidated Financial Statements.
~Year~2000.~~~Y2K issues exist because many computer systems and
applications currently use two-digit fields to designate a year. Date-sensitive
systems may recognize the year 2000 as 1900, or not at all. This inability to
treat the year 2000 properly could cause systems to process critical financial,
manufacturing and operational information incorrectly. The Company has been
actively involved in addressing Y2K issues because of the need to ensure, to the
greatest extent possible, that its business operations continue without
significant disruption after the millennium. Most of the Company's information
systems have been or are being replaced in connection with the implementation of
the Company's business-enterprise system, the initial implementation of which
was substantially completed with the roll-out of the system to the Company's
U.K. subsidiary in February 1999. The cost of the new system, including related
equipment and networks, aggregated approximately $50 million ($41 million
capital and $9 million expense).
The Company, with the help of outside specialists and consultants (i) has
completed its assessment of potential Y2K issues in its non-information systems
(e.g., its manufacturing and communications systems), as well as in those
information systems that were not replaced by the new enterprise-wide system,
and (ii) has substantially completed the remediation and testing of all systems.
The Company's Y2K readiness varies by location. Some locations had completed
their internal Y2K readiness plans by the Company's June 1999 target date.
Certain other locations were delayed in completing their readiness plans in part
due to vendor release schedules. The Company has contingency plans for certain
applications in the event Y2K readiness is delayed, and is currently developing
contingency plans for certain other applications. The Company also intends to
continue testing and retesting during the remainder of 1999. The Company has
expended approximately $4 million through June 1999 ($2 million in the first
half of 1999) on these specific non-information system issues, principally
embedded system technology, and expects to incur approximately an additional
$1 million on such issues in the remainder of 1999. The Company's evaluation of
potential Y2K exposure related to key suppliers and customers is also in process
and will continue throughout 1999. In this regard, the Company is considering
the temporary shutdown of certain sensitive production operations for a few days
around the turn of the millennium as an additional safeguard against the
unexpected loss of utilities service. The Company expects to schedule
production to provide for such temporary shutdowns.
Although the Company believes its key information and non-information
systems will be Y2K ready before the end of 1999, it cannot predict whether it
will find additional problems that would result in unplanned upgrades of
applications during the rest of 1999 or even after December 1999. As a result
of these uncertainties, the Company cannot predict the impact on its financial
condition, results of operations or cash flows resulting from Y2K failures in
systems that the Company directly or indirectly relies upon. Should the
Company's Y2K readiness plans not be successful or be delayed beyond December
1999, the consequences to the Company could be far-reaching and material,
including an inability to produce titanium metal products at its manufacturing
facilities, which could lead to an indeterminate amount of lost revenue. Other
potential negative consequences could include impeded communications or power
supplies, slower transaction processing and financial reporting, and potential
liability to third parties. Although not anticipated, the most reasonably
likely worst-case scenario of failure by the Company or its key suppliers or
customers to become Y2K ready would be a short-term slowdown or cessation of
manufacturing operations at one or more of the Company's facilities and a short-
term inability on the part of the Company to process orders and billings in a
timely manner, and to deliver products to customers.
~Environmental~Matters.~Note 7 to the Consolidated Financial Statements is
incorporated herein by reference.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had net debt of approximately $82 million
($87 million of notes payable and long-term debt and $5 million of cash and
equivalents). The Company also had $135 million of unused borrowing
availability under its U.S. and European credit lines. See Note 5 to the
Consolidated Financial Statements.
~Operating~Activities~. Cash provided by operating activities was
approximately $24 million for the six-month period ended June 30, 1999, down
from $51 million for the same period in 1998, as summarized below.
Six months ended
June 30,
1998 1999
(in thousands)
Cash provided by operating activities:
Excluding changes in assets and liabilities $ 53,371 $ 16,112
Changes in assets and liabilities (2,730) 7,840
$ 50,641 $ 23,952
Cash provided by operating activities, excluding changes in assets and
liabilities generally followed the trend in operating results. Depreciation in
1999 is higher than in 1998 resulting from the Company's major 1997-1998 capital
program, including the business-enterprise system. Results of operations in 1998
included a second quarter restructuring charge which was principally noncash.
See also Note 4 to the Consolidated Financial Statements.
Changes in assets and liabilities reflect primarily the timing of
purchases, production and sales. The Company's plan of action to address
current market conditions includes reductions in working capital, particularly
inventories and receivables, both of which were reduced in the six-month period
ended June 30, 1999. Changes in accounts payable and accrued liabilities in
1999 include the effect of payments to suppliers of titanium sponge and other
raw materials for purchases made in late 1998 being higher than payables at the
end of June for 1999 purchases, as well as the effect of lower purchase and
headcount levels on accounts payable and accrued liabilities.
Dividends on the $80 million of Special Metals Corporation 6.675%
convertible preferred stock held by the Company have been deferred by SMC for
1999 due to limitations imposed by SMC's bank credit agreements. Management of
SMC has advised the Company they currently expect SMC to meet the 1999 covenants
that would allow SMC to pay its 1999 dividends in arrears by the end of the
first quarter of 2000.
~Investing~Activities.~The Company's major capital expenditure program,
which aggregated $180 million in 1997 and 1998, is completed and the Company
estimates that capital expenditures for all of 1999 will approximate
$35 million. Business acquisitions consist of the purchase of Loterios S.p.A.
in April 1998. Proceeds from the sale of property and equipment in 1999 include
assets sold as part of the Company's restructuring activities.
~Financing~Activities~. Net borrowings in the 1998 period included amounts
used to fund the acquisition of Loterios. Net repayments in 1999 reflect
reductions of outstanding borrowings in both the U.S. and U.K.
The Company's Convertible Preferred Securities do not require principal
amortization, and TIMET has the right to defer dividend payments for one or more
periods of up to 20 consecutive quarters each.
The Company periodically evaluates its liquidity requirements, capital
needs and availability of resources in view of, among other things, its
alternative uses of capital, its debt service requirements, the cost of debt and
equity capital, and estimated future operating cash flows. As a result of this
process, the Company has in the past and, in the light of its current outlook,
may in the future seek to raise additional capital, modify its dividend policy,
restructure ownership interests, incur, refinance or restructure indebtedness,
repurchase shares of capital stock, sell assets, or take a combination of such
steps or other steps to increase or manage its liquidity and capital resources.
In the normal course of business, the Company investigates, evaluates,
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.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Reference is made to the Company's 1998 Annual Report for descriptions of
certain previously-reported legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on May 12, 1999, and
the only matter voted upon was the election of directors. All nominees for
director were elected. All directors are elected annually for one-year terms.
The vote with respect to each of the Company's directors was as follows:
Director Votes For Votes Withheld
Joseph S. Compofelice 29,676,871 381,099
Andrew R. Dixey 29,677,116 380,854
Edward C. Hutcheson, Jr. 29,676,041 381,929
J. Landis Martin 29,676,316 381,654
Glenn R. Simmons 29,667,091 390,879
Gen. Thomas P. Stafford 29,673,516 384,454
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Intercorporate Services Agreement by and between NL Industries
Inc and the Registrant effective as of January 1, 1999,
incorporated by reference to Exhibit 10.3 to a Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999 filed by NL
Industries, Inc. (File No. 1-640).
10.2 Intercorporate Services Agreement by and between Tremont
Corporation and the Registrant effective as of January 1, 1999,
incorporated by reference to Exhibit 10.6 to a Quarterly Report
on Form 10-Q for the quarter ended March 31, 1999 filed by
Tremont Corporation (File No. 1-10126).
10.3 Second Amendment to Credit Agreement among Titanium Metals
Corporation and various lending institutions dated as of June 30,
1999.
27.1 Financial Data Schedule for the quarter ended June 30, 1999.
(b) Reports on Form 8-K:
Reports on Form 8-K filed by the Registrant for the quarter ended June
30, 1999 and through July 28, 1999:
Filing Date Items Reported
May 3, 1999 5 and 7
May 14, 1999 5 and 7
July 26, 1999 5 and 7
July 26, 1999 5 and 7
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TITANIUM METALS CORPORATION
(Registrant)
Date: July 29, 1999 By /s/ J. Thomas Montgomery, Jr.
----------------------------------------
J. Thomas Montgomery, Jr.
Vice President - Finance and Treasurer
(Principal Finance and Accounting Officer)