SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-28538
Titanium Metals Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-5630895
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(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
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on Which Registered
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Common Stock New York Stock Exchange
($.01 par value per share)
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes __ No X
As of June 30, 2002, 3,186,634 shares of common stock were outstanding (adjusted
for a one-for-ten reverse stock split which became effective after the close of
trading on February 14, 2003). The aggregate market value of the 1,728,728
shares of voting stock held by nonaffiliates of Titanium Metals Corporation as
of such date approximated $60.5 million. No shares of non-voting stock were held
by nonaffiliates. As of February 26, 2003, 3,180,194 shares of common stock were
outstanding.
Documents incorporated by reference:
Certain of the information required by Part III is incorporated by reference
from the Registrant's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this report.
Forward-Looking Information
The statements contained in this Annual Report on Form 10-K ("Annual
Report") that are not historical facts, including, but not limited to,
statements found in the Notes to Consolidated Financial Statements and in Item 1
- Business, Item 2 - Properties, Item 3 - Legal Proceedings and Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), are forward-looking statements that represent management's
beliefs and assumptions based on currently available information.
Forward-looking statements can be identified by the use of words such as
"believes," "intends," "may," "will," "looks," "should," "could," "anticipates,"
"expects" or comparable terminology or by discussions of strategies or trends.
Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it cannot give any 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 Annual 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 ("SEC") which include, but
are not limited to, the cyclicality of the commercial aerospace industry, the
performance of aerospace manufacturers and the Company under their long-term
agreements, the renewal of certain long-term agreements, the difficulty in
forecasting demand for titanium products, global economic and political
conditions, global productive capacity for titanium, changes in product pricing
and costs, the impact of long-term contracts with vendors on the ability of the
Company to reduce or increase supply or achieve lower costs, the possibility of
labor disruptions, fluctuations in currency exchange rates, control by certain
stockholders and possible conflicts of interest, uncertainties associated with
new product development, the supply of raw materials and services, changes in
raw material and other operating costs (including energy costs), possible
disruption of business or increases in the cost of doing business resulting from
terrorist activities or global conflicts, the Company's ability to achieve
reductions in its cost structure 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.
PART I
ITEM 1: BUSINESS
General. Titanium Metals Corporation ("TIMET" or the "Company") was
originally formed in 1950 and was incorporated in Delaware in 1955. TIMET is one
of the world`s leading producers of titanium sponge and titanium melted and mill
products. The Company is the only producer with major titanium production
facilities in both the United States and Europe, the world's principal markets
for titanium. The Company estimates that in 2002 it accounted for approximately
20% of worldwide industry shipments of titanium mill products, down from 22% in
2001. This decrease is primarily attributable to the Company's significant
reliance on sales to the commercial aerospace market, a market that the Company
estimates to have decreased by over 40% from 2001. The Company also estimates it
accounted for approximately 11% of worldwide titanium sponge production in 2002.
Titanium was first manufactured for commercial use in the 1950s. Titanium's
unique combination of corrosion resistance, elevated-temperature performance and
high strength-to-weight ratio makes it particularly desirable for use in
commercial and military aerospace applications in which these qualities are
essential design requirements for certain critical parts such as wing supports
and jet engine components. While aerospace applications have historically
accounted for a substantial portion of the worldwide demand for titanium and
were approximately 41% of aggregate mill product shipments in 2002, the number
of non-aerospace end-use markets for titanium has expanded substantially. Today,
numerous industrial uses for titanium exist, including chemical and industrial
power plants, desalination plants and pollution control equipment. Demand for
titanium is also increasing in emerging markets with such diverse uses as
offshore oil and gas production installations, geothermal facilities, military
armor, automotive and architectural applications.
TIMET's products include titanium sponge, melted products and mill
products. The titanium industry is comprised of several manufacturers that, like
TIMET, produce a relatively complete range of titanium products and a
significant number of producers worldwide that manufacture a limited range of
titanium mill products. The Company is currently the only major U.S. titanium
sponge producer.
The Company's long-term strategy is to maximize the value of its core
aerospace business and develop new markets, applications and products to help
reduce its traditional dependence on the aerospace industry. In the near-term,
the Company is focused on reducing its cost structure, reducing inventories,
improving the quality of its products and processes and taking other actions to
generate positive cash flow and return to profitability.
Industry. The titanium industry historically has derived a substantial
portion of its business from the aerospace industry. Mill product shipments to
the aerospace industry in 2002 represented about 41% of total worldwide mill
product shipment volume. Aerospace demand for titanium products, which includes
both jet engine components (i.e. blades, discs, rings and engine cases) and air
frame components (i.e. bulkheads, tail sections, landing gear, wing supports and
fasteners) can be broken down into commercial and military sectors. The
commercial aerospace sector has a significant influence on titanium companies,
particularly mill product producers such as TIMET. In 2002, the commercial
aerospace sector accounted for mill product shipments of approximately 14,500
metric tons, which represent approximately 80% of aerospace mill product
shipments and 33% of aggregate mill product shipments. Mill product shipments to
military aerospace markets in 2002 were approximately 3,600 metric tons, a 3%
increase from 2001 military aerospace mill product shipments. Military aerospace
shipments approximated 8% of aggregate mill product shipments in 2002, up from
6% in 2001. Military aerospace shipments are largely driven by government
defense spending in North America and Europe. As discussed further below, new
aircraft programs generally are in development for several years, followed by
multi-year procurement contracts. The Company's business is more dependent on
aerospace demand than the overall titanium industry, as approximately 69% of the
Company's annual mill product shipment volume in 2002 was to the aerospace
sector (59% commercial aerospace and 10% military aerospace).
The cyclical nature of the aerospace industry has been the principal driver
of the historical fluctuations in the performance of titanium companies. Over
the past 20 years, the titanium industry had cyclical peaks in mill product
shipments in 1989, 1997 and 2001 and cyclical lows in 1983, 1991 and 1999.
Demand for titanium reached its highest peak in 1997 when industry mill product
shipments reached an estimated 60,000 metric tons. Industry mill product
shipments subsequently declined approximately 5% to an estimated 57,000 metric
tons in 1998. After falling 16% from 1998 levels to 48,000 metric tons in 1999
and 2000, industry shipments climbed to 55,000 metric tons in 2001. However,
primarily due to a decrease in demand for titanium from the commercial aerospace
sector, total industry mill product shipments fell approximately 20% to an
estimated 44,000 metric tons in 2002. The Company expects total industry mill
product shipments in 2003 will decrease slightly from 2002 levels.
The economic slowdown in the United States and other regions of the world
in the latter part of 2001 and the September 11, 2001 terrorist attacks combined
to negatively impact commercial air travel in the United States and abroad
throughout 2002. Although airline passenger traffic showed improvement in the
months immediately following the terrorist attacks, current data indicates that
traffic remains below pre-attack levels. As a result, the U.S. airline industry
is expected to record a second consecutive year of losses and two major U.S.
airlines were forced to seek bankruptcy protection from their creditors.
Airlines have announced a number of actions to reduce both costs and capacity
including, but not limited to, the early retirement of airplanes, the deferral
of scheduled deliveries of new aircraft and allowing purchase options to expire.
The Company expects the current slowdown in the commercial aerospace sector to
continue through 2005 before beginning a modest upturn in 2006.
2
The Company believes that industry mill product shipments to the commercial
aerospace sector could decline by up to 15% in 2003, primarily due to a
combination of reduced aircraft production rates and excess inventory
accumulated throughout the commercial aerospace supply chain since September 11,
2001. The commercial aerospace supply chain is fragmented and decentralized,
making it difficult to quantify excess inventories, and while the Company
estimates there was a significant reduction in excess inventory throughout the
supply chain during 2002, it still may take from one to two years for the
remainder of such excess inventory to be substantially absorbed, barring the
impact of terrorist activities or global conflicts.
According to The Airline Monitor, a leading aerospace publication, the
worldwide commercial airline industry reported an estimated operating loss of
approximately $8 billion in 2002, compared with an operating loss of $11 billion
in 2001 and operating income of $11 billion in 2000. The Airline Monitor
traditionally issues forecasts for commercial aircraft deliveries each January
and July. According to The Airline Monitor, large commercial aircraft deliveries
for the 1996 to 2002 period peaked in 1999 with 889 aircraft, including 254 wide
body aircraft that use substantially more titanium than their narrow body
counterparts. Large commercial aircraft deliveries totaled 673 (including 176
wide bodies) in 2002. The Airline Monitor's most recently issued forecast of
January 2003 calls for 580 deliveries in 2003, 570 deliveries in 2004 and 560
deliveries in 2005. Relative to 2002, these forecasted delivery rates represent
anticipated declines of about 14% in 2003, 15% in 2004 and 17% in 2005. After
2005, The Airline Monitor calls for a continued increase each year in large
commercial aircraft deliveries through 2010, with forecasted deliveries of 780
aircraft in 2009 exceeding 2002 levels. Deliveries of titanium generally precede
aircraft deliveries by about one year, although this varies considerably by
titanium product. This correlates to the Company's cycle, which historically
precedes the cycle of the aircraft industry and related deliveries. The Company
can give no assurance as to the extent or duration of the current commercial
aerospace cycle or the extent to which it will affect demand for the Company's
products.
The aforementioned bankruptcy filings, although harmful to the commercial
aerospace industry in the near term, could ultimately result in a more efficient
and profitable commercial airline industry. The renegotiation of union contracts
and changes to work rules to bring labor costs in line with the current revenue
environment, as well as simplifying fare structures in order to attract more
travelers, may promote greater profitability for the commercial airline
industry. Further, route restructuring, more point-to-point service and expanded
customer options could also contribute to increased demand for commercial air
travel. On the other hand, future terrorist activities or global conflicts could
result in a significant decrease in demand for commercial air travel and
increase the financial troubles of the airline industry.
Military aerospace programs were the first to utilize titanium's unique
properties on a large scale, beginning in the 1950s. Titanium shipments to
military aerospace markets reached a peak in the 1980s before falling to
historical lows in the early 1990s with the end of the cold war. However, the
importance of military markets to the titanium industry is expected to rise in
coming years as defense spending budgets increase in reaction to terrorist
activities or global conflicts. It is estimated that overall titanium
consumption will increase in this market segment in 2003 and beyond, but
consumption by military applications will offset only a relatively small part of
the decrease in the commercial aerospace sector.
3
Several of today's active U.S. military programs, including the C-17,
F/A-18, F-16 and F-15 began during the cold war and are forecast to continue at
healthy production levels for the foreseeable future. In addition to these
established programs, new programs in the United States offer growth
opportunities for increased titanium consumption. The F/A-22 Raptor is currently
in low-rate initial production, and U.S. Air Force officials have expressed a
need for a minimum of 339 airplanes, but cost overruns and development delays
may result in reduced procurement over the life of the program. In October 2001,
Lockheed-Martin was awarded what could eventually become the largest military
contract ever for the F-35 Joint Strike Fighter ("JSF"). The JSF is expected to
enter low-rate initial production in late 2006, and although no specific order
and delivery patterns have been established, procurement is expected to extend
over the next 30 to 40 years and include as many as 3,000 to 4,000 planes.
European military programs also have active aerospace programs offering the
possibility for increased titanium consumption. The Saab Gripen, Eurofighter
Typhoon, Dassault Rafale and Dassault Mirage 2000 all have forecast increased
production levels over the next decade.
Since titanium's initial applications in the aerospace sector, the number
of end-use markets for titanium has significantly expanded. Established
industrial uses for titanium include chemical plants, industrial power plants,
desalination plants and pollution control equipment. Titanium continues to gain
acceptance in many emerging market applications, including automotive, military
armor, energy, architecture and consumer products. Although titanium is
generally higher cost than other competing metals, in many cases customers find
the physical properties of titanium to be attractive from the standpoint of
weight, performance, design alternatives, life cycle value and other factors.
Although emerging market demand presently represents only about 15% of the total
industry demand for titanium mill products, the Company believes emerging market
demand, in the aggregate, could grow at healthy double-digit rates over the next
several years. The Company is actively pursuing these markets.
Although difficult to predict, the most attractive emerging segment appears
to be automotive, due to its potential for sustainable long-term growth. For
this reason, in 2002 TIMET established a new division, TiMET Automotive, focused
on the development of the automotive, truck and motorcycle markets. The division
is tasked with developing and marketing proprietary alloys and processes
specifically suited for automotive applications and supporting supply chain
activities for automotive manufacturers to most cost effectively engineer
titanium components. Titanium is now used in several consumer car applications
including the Corvette Z06, Toyota Alteeza, Infiniti Q45, Volkswagen Lupo FSI,
Honda S2000 and Mercedes S Class and in numerous motorcycles.
At the present time, titanium is primarily used for exhaust systems,
suspension springs and engine valves in consumer vehicles. In exhaust systems,
titanium provides for significant weight savings, while its corrosion resistance
provides life-of-vehicle durability. In suspension spring applications,
titanium's low modulus of elasticity allows the spring's height to be reduced by
20% to 40% compared to a steel spring, which, when combined with the titanium's
low density, permits 30% to 60% weight savings over steel spring suspension
systems. The lower spring height provides vehicle designers new styling
alternatives and improved performance opportunities. Titanium suspension springs
and exhaust applications are also attractive compared to alternative lightweight
technologies because the titanium component can often be formed and fabricated
on the same tooling used for the steel component it is typically replacing. This
is especially attractive for the rapidly growing niche vehicle market sectors
that often seek the performance attributes that titanium provides, but where
tooling costs prohibit alternative light-weighting or other improved performance
strategies.
4
Titanium is also making inroads into other automotive applications,
including turbo charger wheels, brake parts and connecting rods. Titanium engine
components provide mass-reduction benefits that directly improve vehicle
performance and fuel economy. In certain applications, titanium engine
components can provide a cost-effective alternative to engine balance shafts to
address noise, vibration and harshness while simultaneously improving
performance.
The decision to select titanium components for consumer car, truck and
motorcycle components remains highly cost sensitive; however, the Company
believes titanium's acceptance in consumer vehicles will expand as the
automotive industry continues to better understand the benefits it offers.
Products and operations. The Company is a vertically integrated titanium
manufacturer whose products include (i) titanium sponge, the basic form of
titanium metal used in processed titanium products, (ii) melted products (ingot
and slab), the result of melting sponge and titanium scrap, either alone or with
various other alloying elements and (iii) mill products that are forged and
rolled from ingot or slab, including long products (billet and bar), flat
products (plate, sheet and strip), pipe and pipe fittings. During the past three
years, all of TIMET's sales revenue was generated by the Company's integrated
titanium operations (its "Titanium melted and mill products" segment), its only
business segment. Business and geographic segment financial information is
included in Note 2 to the Consolidated Financial Statements.
Titanium sponge (so called because of its appearance) is the commercially
pure, elemental form of titanium metal. The first step in sponge production
involves the chlorination of titanium-containing rutile ores (derived from beach
sand) with chlorine and coke to produce titanium tetrachloride. Titanium
tetrachloride is purified and then reacted with magnesium in a closed system,
producing titanium sponge and magnesium chloride as co-products. The Company's
titanium sponge production facility in Henderson, Nevada incorporates vacuum
distillation process ("VDP") technology, which removes the magnesium and
magnesium chloride residues by applying heat to the sponge mass while
maintaining a vacuum in the chamber. The combination of heat and vacuum boils
the residues from the sponge mass, and then the mass is mechanically pushed out
of the condensing vessel, sheared and crushed, while the residual magnesium
chloride is electrolytically separated and recycled.
Titanium ingots and slabs are solid shapes (cylindrical and rectangular,
respectively) that weigh up to 8 metric tons in the case of ingots and up to 16
metric tons in the case of slabs. Each ingot or slab is formed by melting
titanium sponge, scrap or both, usually with various other alloying elements
such as vanadium, aluminum, molybdenum, tin and zirconium. Titanium scrap is a
by-product of the forging, rolling, milling and machining operations, and
significant quantities of scrap are generated in the production process for
finished titanium products and components. The melting process for ingots and
slabs is closely controlled and monitored utilizing computer control systems to
maintain product quality and consistency and to meet customer specifications. In
most cases, TIMET uses its ingots and slabs as the starting material for further
processing into mill products. However, it also sells ingots and slabs to third
parties.
5
Titanium mill products result from the forging, rolling, drawing, welding
and/or extrusion of titanium ingots or slabs into products of various sizes and
grades. These mill products include titanium billet, bar, rod, plate, sheet,
strip, pipe and pipe fittings. The Company sends certain products to outside
vendors for further processing before being shipped to customers or to the
Company's service centers. Many of the Company's customers process the Company's
products for their ultimate end-use or for sale to third parties.
During the production process and following the completion of
manufacturing, the Company performs extensive testing on its sponge, melted
products and mill products. Testing may involve chemical analysis, mechanical
testing, ultrasonic testing or x-ray testing. The inspection process is critical
to ensuring that the Company's products meet the high quality requirements of
its customers, particularly in aerospace components production. The Company
certifies its products meet customer specification at the time of shipment for
substantially all customer orders.
The Company is reliant on several outside processors to perform certain
rolling, finishing and other processing steps in the U.S., and certain melting,
forging and finishing steps in France. In the U.S., one of the processors that
performs these steps in relation to strip production and another as relates to
plate finishing are owned by a competitor. One of the processors as relates to
extrusion is operated by a customer. These processors are currently the primary
source for these services. Other processors used in the U.S. are not
competitors. In France, the processor is also a joint venture partner in the
Company's 70%-owned subsidiary, TIMET Savoie, S.A. ("TIMET Savoie"). Although
the Company believes that there are other metal producers with the capability to
perform these same processing functions, arranging for alternative processors,
or possibly acquiring or installing comparable capabilities, could take several
months or longer, and any interruption in these functions could have a material
and adverse effect on the Company's business, results of operations, financial
position and liquidity in the near term.
Distribution. The Company sells its products through its own sales force
based in the U.S. and Europe and through independent agents and distributors
worldwide. The Company's marketing and distribution system also includes eight
Company-owned service centers (five in the U.S. and three in Europe), which sell
the Company's products on a just-in-time basis. The service centers primarily
sell value-added and customized mill products including bar and flat-rolled
sheet and strip. The Company believes its service centers provide a competitive
advantage because of their ability to foster customer relationships, customize
products to suit specific customer requirements and respond quickly to customer
needs.
Raw materials. The principal raw materials used in the production of
titanium ingot, slab and mill products are titanium sponge, titanium scrap and
alloying elements. During 2002, approximately 36% of the Company's melted and
mill product raw material requirements were fulfilled with internally produced
sponge, 29% with purchased sponge, 29% with titanium scrap and 6% with alloying
elements.
6
The primary raw materials used in the production of titanium sponge are
titanium-containing rutile ore, chlorine, magnesium and petroleum coke. Rutile
ore is currently available from a limited number of suppliers around the world,
principally located in Australia, South Africa, India and the United States. A
majority of the Company's supply of rutile ore is currently purchased from
Australian suppliers. The Company believes the availability of rutile ore will
be adequate for the foreseeable future and does not anticipate any interruptions
of its rutile supplies, although political or economic instability in the
countries from which the Company purchases its rutile could materially and
adversely affect availability. Although the Company believes that the
availability of rutile ore is adequate in the near-term, there can be no
assurance that the Company will not experience interruptions.
Chlorine is currently obtained from a single supplier near the Company's
sponge plant. That supplier emerged from Chapter 11 bankruptcy reorganization in
2002. While the Company does not presently anticipate any chlorine supply
problems, there can be no assurances the chlorine supply will not be
interrupted. The Company has taken steps to mitigate this risk, including
establishing the feasibility of certain equipment modifications to enable it to
utilize material from alternative chlorine suppliers or to purchase and utilize
an intermediate product which will allow the Company to eliminate the purchase
of chlorine if needed. Magnesium and petroleum coke are generally available from
a number of suppliers.
While the Company was one of five major worldwide producers of titanium
sponge in 2002, it cannot supply all of its needs for all grades of titanium
sponge internally and is dependent, therefore, on third parties for a
substantial portion of its sponge requirements. Titanium mill and melted
products require varying grades of sponge and/or scrap depending on the
customers' specifications and expected end use. In 2001, Allegheny Technologies,
Inc. idled its titanium sponge production facility, leaving TIMET as the only
active major U.S. producer of titanium sponge and reducing the number of major
active worldwide producers to five. Presently, TIMET and certain suppliers in
Japan are the only producers of premium quality sponge required for more
demanding aerospace applications. However, two additional sponge suppliers are
presently undergoing qualification tests of their products for premium quality
applications and were qualified during 2002 by some engine manufacturers for
certain premium quality applications. This qualification process is likely to
continue for several years.
Historically, the Company has purchased sponge predominantly from producers
in Japan and Kazakhstan. Since 2000, the Company has also purchased sponge from
the U.S. Defense Logistics Agency ("DLA") stockpile. In September 2002, the
Company entered into a new sponge supply agreement, effective from January 1,
2002 through December 31, 2007. This new agreement replaced and superceded a
prior 1997 agreement. The new agreement requires minimum annual purchases by the
Company of approximately $10 million in 2002 through 2007. The Company has no
other long-term sponge supply agreements. In 2003, the Company expects to
continue to purchase sponge from a variety of sources.
Various alloying elements used in the production of titanium melted
products are also available from a number of suppliers.
7
Customer agreements. The Company has long-term agreements ("LTAs") with
certain major aerospace customers, including, but not limited to, The Boeing
Company ("Boeing"), Rolls-Royce plc ("Rolls-Royce"), United Technologies
Corporation (Pratt & Whitney and related companies) and Wyman-Gordon Company
("Wyman-Gordon," a unit of Precision Castparts Corporation ("PCC")). These
agreements initially became effective in 1998 and 1999 and expire in 2007
through 2008, subject to certain conditions. The LTAs generally provide for (i)
minimum market shares of the customers' titanium requirements or firm annual
volume commitments and (ii) fixed or formula-determined prices generally for at
least the first five years. Generally, the LTAs require the Company's service
and product performance to meet specified criteria and contain a number of other
terms and conditions customary in transactions of these types. In certain events
of nonperformance by the Company, the LTAs may be terminated early.
Additionally, under a group of related LTAs (which group represented
approximately 12% of the Company's 2002 sales revenue) which currently have
fixed prices that convert to formula-derived prices in 2004, the customer may
terminate the agreement as of the end of 2003 if the effect of the initiation of
formula-derived pricing would cause such customer "material harm." If any of
such agreements within the group were to be terminated by the customer on this
basis, it is possible that some portion of the business represented by that
group of related LTAs would continue on a non-LTA basis. However, the
termination of one or more of the LTAs, including any of those within the group
of related LTAs, could result in a material and adverse effect on the Company's
business, results of operations, financial position or liquidity. The LTAs were
designed to limit selling price volatility to the customer, while providing
TIMET with a committed base of volume throughout the aerospace business cycles.
They also, to varying degrees, effectively obligate TIMET to bear part of the
risks of increases in raw material and other costs, but allow TIMET to benefit
in part from decreases in such costs.
In April 2001, the Company reached a settlement of the litigation between
TIMET and Boeing related to the parties' LTA entered into in 1997. Pursuant to
the settlement, the Company received a cash payment of $82 million from Boeing.
Under the terms of the LTA, as amended, in years 2002 through 2007, Boeing
advances TIMET $28.5 million annually less $3.80 per pound of titanium product
purchased by Boeing subcontractors during the preceding year. Effectively, the
Company collects $3.80 less from Boeing than the LTA selling price for each
pound of titanium product sold directly to Boeing and reduces the related
customer advance recorded by the Company. For titanium products sold to Boeing
subcontractors, the Company collects the full LTA selling price, but gives
Boeing credit by reducing the next year's annual advance by $3.80 per pound of
titanium product sold to Boeing subcontractors. The Boeing customer advance is
also reduced as take-or-pay benefits are earned, as described in Note 10 to the
Consolidated Financial Statements. Under a separate agreement, TIMET must
establish and hold buffer stock for Boeing at TIMET's facilities, for which
Boeing will pay TIMET as such product is produced. See Item 7 (MD&A) for
additional information regarding the Boeing LTA.
The Company also has an LTA with VALTIMET SAS ("VALTIMET"), a manufacturer
of welded stainless steel and titanium tubing that is principally sold into the
industrial markets. VALTIMET is a 44%-owned affiliate of TIMET. The LTA was
entered into in 1997 and expires in 2007. Under the LTA, VALTIMET has agreed to
purchase a certain percentage of its titanium requirements from TIMET at
formula-determined selling prices, subject to certain conditions. Certain
provisions of this contract have been amended in the past and may be amended in
the future to meet changing business conditions.
8
Markets and customer base. Approximately 53% of the Company's 2002 sales
revenue was generated by sales to customers within North America, as compared to
about 51% and 55% in 2001 and 2000, respectively. Approximately 40% of the
Company's 2002 sales revenue was generated by sales to European customers, as
compared to about 39% and 38% in 2001 and 2000, respectively. The balance of the
Company's sales was to other regions throughout the world. Further information
regarding the Company's external sales, net income, long-lived assets and total
assets by segment can be found in the Company's Consolidated Balance Sheets,
Consolidated Statements of Operations and Note 2 to the Consolidated Financial
Statements.
Over 67% of the Company's sales revenue was generated by sales to the
aerospace industry in 2002, as compared to 70% in each of 2001 and 2000. Sales
under the Company's LTAs accounted for over 37% of its sales revenue in 2002.
Sales to PCC and its related entities approximated 9% of the Company's sales
revenue in 2002. Sales to Rolls-Royce and other Rolls-Royce suppliers under the
Rolls-Royce LTAs (including sales to certain of the PCC-related entities)
represented approximately 12% of the Company's sales revenue in 2002. The
Company expects that while a majority of its 2003 sales revenue will be to the
aerospace industry, other markets will continue to represent a significant
portion of sales.
The primary market for titanium products in the commercial aerospace
industry consists of two major manufacturers of large (over 100 seats)
commercial airframes - Boeing Commercial Airplanes Group of the United States
and Airbus Integrated Company (80% owned by European Aeronautic Defence and
Space Company and 20% owned by BAE Systems) of Europe ("Airbus"). In addition to
the airframe manufacturers, the following four manufacturers of large civil
aircraft engines are also significant titanium users - Rolls-Royce, Pratt &
Whitney (a unit of United Technologies Corporation), General Electric Aircraft
Engines and Societe Nationale d'Etude et de Construction de Moteurs d'Aviation
("Snecma"). The Company's sales are made both directly to these major
manufacturers and to companies (including forgers such as Wyman-Gordon) that use
the Company's titanium to produce parts and other materials for such
manufacturers. If any of the major aerospace manufacturers were to significantly
reduce aircraft and/or jet engine build rates from those currently expected,
there could be a material adverse effect, both directly and indirectly, on the
Company.
As of December 31, 2002, the estimated firm order backlog for Boeing and
Airbus, as reported by The Airline Monitor, was 2,649 planes, versus 2,919
planes at the end of 2001 and 3,224 planes at the end of 2000. The backlogs for
Boeing and Airbus reflect orders for aircraft to be delivered over several
years. For example, the first deliveries of the Airbus A380 are anticipated to
begin in 2006. Additionally, changes in the economic environment and the
financial condition of airlines can result in rescheduling or cancellation of
contractual orders. Accordingly, aircraft manufacturer backlogs are not
necessarily a reliable indicator of near-term business activity, but may be
indicative of potential business levels over a longer-term horizon.
9
The newer wide body planes, such as the Boeing 777 and the Airbus A330,
A340 and A380, tend to use a higher percentage of titanium in their frames,
engines and parts (as measured by total flyweight) than narrow body planes
("flyweight" is the empty weight of a finished aircraft with engines but without
fuel or passengers). Titanium represents approximately 9% of the total flyweight
of a Boeing 777 for example, compared to between 2% to 3% on the older 737, 747
and 767 models. The estimated firm order backlog for wide body planes at
year-end 2002 was 709 (27% of total backlog) compared to 801 (27% of total
backlog) at the end of 2001. At year-end 2002, a total of 95 firm orders had
been placed for the Airbus A380 superjumbo jet, which program was officially
launched in December 2000 with anticipated first deliveries in 2006. The Company
estimates that approximately 77 metric tons of titanium will be purchased for
each A380 manufactured, the most of any commercial aircraft.
Outside of aerospace markets, the Company manufactures a wide range of
industrial products, including sheet, plate, tube, bar, billet and skelp, for
customers in the chemical process, oil and gas, consumer, sporting goods,
automotive, power generation and armor/armament industries. Approximately 18% of
the Company's sales revenue in 2002, 2001 and 2000 was generated by sales into
the industrial and emerging markets, including sales to VALTIMET for the
production of condenser tubing. For the oil and gas industries, the Company
provides seamless pipe for downhole casing, risers, tapered stress joints and
other offshore oil production equipment, including fabrication of sub-sea
manifolds. In armor and armament, the Company sells plate products for
fabrication into door hatches on fighting vehicles, as well as tank/turret
protection.
In addition to mill and melted products, which are sold into the aerospace,
industrial and emerging markets, the Company sells certain other products such
as sponge, titanium tetrachloride and fabricated titanium assemblies. Sales of
these other products represented 15% of the Company's sales revenue in 2002 and
12% in each of 2001 and 2000.
The Company's backlog of unfilled orders was approximately $165 million at
December 31, 2002, compared to $225 million at December 31, 2001 and $245
million at December 31, 2000. Substantially all the 2002 year-end backlog is
scheduled for shipment during 2003. However, the Company's order backlog may not
be a reliable indicator of future business activity. Since September 11, 2001,
the Company has received a number of deferrals and cancellations of previously
scheduled orders and believes such requests will continue into 2003.
Through various strategic relationships, the Company seeks to gain access
to unique process technologies for the manufacture of its products and to expand
existing markets and create and develop new markets for titanium. The Company
has explored and will continue to explore strategic arrangements in the areas of
product development, production and distribution. The Company also will continue
to work with existing and potential customers to identify and develop new or
improved applications for titanium that take advantage of its unique qualities.
Competition. The titanium metals industry is highly competitive on a
worldwide basis. Producers of melted and mill products are located primarily in
the United States, Japan, France, Germany, Italy, Russia, China and the United
Kingdom. There are currently five major producers of titanium sponge in the
world. TIMET is currently the only active major U.S. sponge producer.
10
The Company's principal competitors in the aerospace market are Allegheny
Technologies Inc. and RTI International Metals, Inc., both based in the United
States, and Verkhnaya Salda Metallurgical Production Organization ("VSMPO"),
based in Russia. These companies, along with the Japanese producers and other
companies, are also principal competitors in industrial markets. The Company
competes primarily on the basis of price, quality of products, technical support
and the availability of products to meet customers' delivery schedules.
In the U.S. market, the increasing presence of non-U.S. participants has
become a significant competitive factor. Until 1993, imports of foreign titanium
products into the U.S. had not been significant. This was primarily attributable
to relative currency exchange rates and, with respect to Japan, Russia,
Kazakhstan and Ukraine, import duties (including antidumping duties). However,
since 1993, imports of titanium sponge, ingot and mill products, principally
from Russia and Kazakhstan, have increased and have had a significant
competitive impact on the U.S. titanium industry. To the extent the Company has
been able to take advantage of this situation by purchasing sponge, ingot or
intermediate and finished mill products from such countries for use in its own
operations, the negative effect of these imports on the Company has been
somewhat mitigated.
Generally, imports of titanium products into the U.S. are subject to a 15%
"normal trade relations" tariff. For tariff purposes, titanium products are
broadly classified as either wrought (bar, sheet, strip, plate and tubing) or
unwrought (sponge, ingot, slab and billet). Prior antidumping orders on imports
of titanium sponge from Japan and countries of the former Soviet Union were
revoked in 1998.
The U.S. maintains a trade program referred to as the "generalized system
of preferences" or "GSP program" designed to promote the economies of a number
of lesser- developed countries (referred to as "beneficiary developing
countries") by eliminating duties on a specific list of products imported from
any of these beneficiary developing countries. Of the key titanium producing
countries outside the U.S., Russia and Kazakhstan are currently regarded as
beneficiary developing countries under the GSP program.
For most periods since 1993, imports of titanium wrought products from any
beneficiary developing country (notably Russia, as a producer of wrought
products) were exempted from U.S. import duties under the GSP program.
Kazakhstan has filed a petition with the Office of the U.S. Trade Representative
seeking GSP status on imports of titanium sponge, which, if granted, would
eliminate the 15% tariff currently imposed on titanium sponge imported into the
U.S. from any beneficiary developing country (notably Russia and Kazakhstan, as
producers of titanium sponge).
TIMET has successfully resisted, and will continue to resist, efforts to
date to expand the scope of the GSP program to eliminate duties on sponge and
other unwrought titanium products, although no assurances can be made that the
Company will continue to be successful in these activities. No formal decision
on the treatment of the GSP petition on titanium sponge has been announced by
the U.S. Trade Representative, although the Company expects that action on the
petition will be taken in 2003. Antidumping orders permitting duties on imports
of titanium sponge from Japan and the former Soviet Union were revoked in 1998.
11
Further reductions in, or the complete elimination of, any or all of these
tariffs, including expansion of the GSP program to unwrought titanium products,
could lead to increased imports of foreign sponge, ingot and mill products into
the U.S. and an increase in the amount of such products on the market generally,
which could adversely affect pricing for titanium sponge and mill products and
thus the Company's business, results of operations, financial position or
liquidity. However, since 1993 the Company has been a large importer of foreign
titanium sponge, particularly from Kazakhstan, into the U.S. To the extent the
Company remains a substantial purchaser of foreign sponge, any adverse effects
on product pricing as a result of any reduction in, or elimination of, any of
these tariffs would be partially ameliorated by the decreased cost to the
Company for foreign sponge to the extent it currently bears the cost of the
import duties.
Producers of other metal products, such as steel and aluminum, maintain
forging, rolling and finishing facilities that could be used or modified without
substantial expenditures to process titanium products. The Company believes,
however, that entry as a producer of titanium sponge would require a significant
capital investment and substantial technical expertise. Titanium mill products
also compete with stainless steels, nickel alloys, steel, plastics, aluminum and
composites in many applications.
Research and development. The Company's research and development activities
are directed toward expanding the use of titanium and titanium alloys in all
market sectors. Key research activities include the development of new alloys,
development of technology required to enhance the performance of TIMET's
products in the traditional industrial and aerospace markets and applications
development in the automotive division and other emerging markets. The Company
conducts the majority of its research and development activities at its
Henderson Technical Laboratory in Henderson, Nevada, with additional activities
at its Witton, England facility. The Company incurred research and development
costs of $3.3 million in 2002 and $2.6 million in both 2001 and 2000.
Patents and trademarks. The Company holds U.S. and non-U.S. patents
applicable to certain of its titanium alloys and manufacturing technology. The
Company continually seeks patent protection with respect to its technical base
and has occasionally entered into cross-licensing arrangements with third
parties. The Company believes the trademarks TIMET(R) and TIMETAL(R), which are
protected by registration in the U.S. and other countries, are important to its
business. Further, TIMET feels its proprietary TIMETAL Exhaust Grade, patented
TIMETAL 62S connecting rod alloy, patented TIMETAL LCB spring alloy and patented
TIMETAL Ti-1100 engine valve alloy give it competitive advantages in the
automotive market. However, most of the titanium alloys and manufacturing
technology used by the Company do not benefit from patent or other intellectual
property protection.
12
Employees. The cyclical nature of the aerospace industry and its impact on
the Company's business is the principal reason the Company periodically
implements cost reduction restructurings, reorganizations and other changes that
impact the Company's employment levels. The following table shows the
fluctuation in the number of employees over the past 3 years. The 19% decrease
in employees from 2001 to 2002 and the 9% increase in employees from 2000 to
2001 were principally in response to changes in market demand for the Company's
products. The decrease in 2002 met the Company's targeted reductions announced
during the third quarter of 2002. During 2003, the Company expects to continue
efforts to reduce employment in response to anticipated reduced demand for
titanium products.
Employees at December 31,
-----------------------------------------------------------
2002 2001 2000
------------------ ---------------- -----------------
U.S. 1,184 1,462 1,333
Europe 772 948 887
------------------ ---------------- -----------------
Total 1,956 2,410 2,220
================== ================ =================
The Company's production, maintenance, clerical and technical workers in
Toronto, Ohio, and its production and maintenance workers in Henderson, Nevada
are represented by the United Steelworkers of America ("USWA") under contracts
expiring in June 2005 and October 2004, respectively. Employees at the Company's
other U.S. facilities are not covered by collective bargaining agreements.
Approximately 60% of the salaried and hourly employees at the Company's European
facilities are represented by various European labor unions, generally under
annual agreements. Such agreements are currently being negotiated for 2003.
While the Company currently considers its employee relations to be
satisfactory, it is possible that there could be future work stoppages or other
labor disruptions that could materially and adversely affect the Company's
business, results of operations, financial position or liquidity.
Regulatory and environmental matters. The Company's operations are governed
by various Federal, state, local and foreign environmental and worker safety
laws and regulations. In the U.S., such laws include the Occupational, Safety
and Health Act, the Clean Air Act, the Clean Water Act and the Resource
Conservation and Recovery Act. The Company uses and manufactures substantial
quantities of substances that are considered hazardous, extremely hazardous or
toxic under environmental and worker safety and health laws and regulations. The
Company has used and manufactured such substances throughout the history of its
operations. As a result, risk of environmental damage is inherent in the
Company's operations. The Company's operations pose a continuing risk of
accidental releases of, and worker exposure to, hazardous or toxic substances.
There is also a risk that government environmental requirements, or enforcement
thereof, may become more stringent in the future. There can be no assurances
that some, or all, of the risks discussed under this heading will not result in
liabilities that would be material to the Company's business, results of
operations, financial position or liquidity.
The Company's operations in Europe are similarly subject to foreign laws
and regulations respecting environmental and worker safety matters, which laws
have not had, and are not presently expected to have, a material adverse effect
on the Company's business, results of operations, financial position or
liquidity.
13
The Company believes that its operations are in compliance in all material
respects with applicable requirements of environmental and worker health and
safety laws. The Company's policy is to continually strive to improve
environmental, health and safety performance. From time to time, the Company may
be subject to health, safety or environmental regulatory enforcement under
various statutes, resolution of which typically involves the establishment of
compliance programs. Occasionally, resolution of these matters may result in the
payment of penalties. The Company incurred capital expenditures for health,
safety and environmental compliance matters of approximately $1.4 million in
2002, $2.4 million in 2001 and $2.6 million in 2000. The Company's capital
budget provides for approximately $1.9 million of such expenditures in 2003.
However, the imposition of more strict standards or requirements under
environmental, health or safety laws and regulations could result in
expenditures in excess of amounts currently estimated to be required for such
matters. See Note 19 to the Consolidated Financial Statements.
Acquisitions and capital transactions during the past five years. In 1998,
TIMET (i) acquired Loterios S.p.A. ("Loterios") to increase its market share in
industrial markets and provide increased geographic sales coverage in Europe,
(ii) purchased for cash $80 million of non-voting convertible preferred
securities of Special Metals Corporation ("SMC"), a U.S. manufacturer of wrought
nickel-based superalloys and special alloy long products and (iii) entered into
a castings joint venture with Wyman-Gordon. In January 2000, the Company sold
its interest in the castings joint venture for $7 million and realized a gain of
$1.2 million on the sale. In December 2001 and March 2002, the Company
determined there had been an other than temporary decline in the fair value of
its investment in SMC and reduced the carrying amount of these securities and
related dividends and interest to an estimated fair value of $27.5 million and
zero, respectively. See Notes 1, 4 and 5 to the Consolidated Financial
Statements.
Related parties. At December 31, 2002, Tremont Corporation and other
entities related to Harold C. Simmons held approximately 48.4% of TIMET's
outstanding common stock. See Note 18 to the Consolidated Financial Statements.
Available information. The Company maintains an Internet website at
www.timet.com. The Company's Annual Reports for the years ended December 31,
2002, 2001 and 2000, the Company's Quarterly Reports on Form 10-Q for 2003, 2002
and 2001, any Current Reports on Form 8-K for 2003 and 2002, and any amendments
thereto, are or will be available free of charge at such website as soon as
reasonably practicable after they are filed or furnished, as applicable, with
the SEC.
The general public may read and copy any materials the Company files with
the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington,
DC 20549, and may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer,
and the SEC maintains an Internet website at www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers that
file electronically with the SEC.
14
ITEM 2: PROPERTIES
Set forth below is a listing of the Company's major production facilities.
In addition to its U.S. sponge capacity discussed below, the Company's worldwide
melting capacity presently aggregates approximately 45,000 metric tons
(estimated 29% of world capacity), and its mill product capacity aggregates
approximately 20,000 metric tons (estimated 16% of world capacity).
Approximately 35% of TIMET's worldwide melting capacity is represented by
electron beam cold hearth melting ("EB") furnaces, 63% by vacuum arc remelting
("VAR") furnaces and 2% by a vacuum induction melting ("VIM") furnace.
Annual Practical
Capacities (3)
--------------------------------
Melted Mill
Manufacturing Location Products Manufactured Products Products
------------------------------------------ ------------------------------------ -------------- -------------
(metric tons)
Henderson, Nevada (1) Sponge, Ingot 12,250 -
Morgantown, Pennsylvania (1) Slab, Ingot, Raw materials
processing 20,000 -
Toronto, Ohio (1) Billet, Bar, Plate, Sheet, Strip - 9,900
Vallejo, California (2) Ingot (including non-titanium
superalloys) 1,600 -
Ugine, France (2) Ingot, Billet, Bar, Extrusions 2,450 2,000
Waunarlwydd (Swansea), Wales(1) Bar, Plate, Sheet - 3,900
Witton, England (2) Ingot, Billet, Bar 8,700 8,000
----------------------------------------------------------------------------------------------------------------------
(1) Owned facilities.
(2) Leased facilities.
(3) Practical capacities are variable based on production mix and are not additive.
The Company has operated its major production facilities at varying levels
of practical capacity during the past three years. In 2002, the plants operated
at approximately 55% of practical capacity, as compared to 75% in 2001 and 60%
in 2000. In 2003, the Company's plants are expected to operate at approximately
50% of practical capacity. However, practical capacity and utilization measures
can vary significantly based upon the mix of products produced.
United States production. The Company's VDP sponge facility is expected to
operate at approximately 67% of its annual practical capacity of 8,600 metric
tons during 2003, down from approximately 87% in 2002. VDP sponge is used
principally as a raw material for the Company's melting facilities in the U.S.
and Europe. Approximately 1,400 metric tons of VDP production from the Company's
Henderson, Nevada facility were used in Europe during 2002, which represented
approximately 32% of the sponge consumed in the Company's European operations.
The Company expects the consumption of VDP sponge in its European operations to
be approximately 40% of their sponge requirements in 2003. The raw materials
processing facilities in Morgantown, Pennsylvania primarily process scrap used
as melting feedstock, either in combination with sponge or separately.
Sponge for melting requirements in the U.S. that is not supplied by the
Company's Henderson, Nevada plant is purchased principally from suppliers in
Japan and Kazakhstan and from the DLA stockpile.
15
The Company's U.S. melting facilities in Henderson, Nevada and Morgantown,
Pennsylvania produce ingots and slabs, which are either sold to third parties or
used as feedstock for the Company's mill products operations. These melting
facilities are expected to operate at approximately 50% of aggregate annual
practical capacity in 2003.
Titanium mill products are produced by TIMET in the U.S. at its forging and
rolling facility in Toronto, Ohio, which receives ingots or slabs principally
from the Company's U.S. melting facilities. The Company's U.S. forging and
rolling facility is expected to operate at approximately 50% of annual practical
capacity in 2003. Capacity utilization across the Company's individual mill
product lines varies.
European production. The Company conducts its operations in Europe
primarily through its wholly-owned subsidiaries TIMET UK, Ltd. ("TIMET UK") and
Loterios and its 70%-owned subsidiary TIMET Savoie. TIMET UK's Witton, England
facilities are leased pursuant to long-term capital leases expiring in 2026.
TIMET Savoie has the right to utilize portions of the Ugine, France plant of
Compagnie Europeene du Zirconium-CEZUS, S.A. ("CEZUS"), the 30% minority partner
in TIMET Savoie, pursuant to an agreement expiring in 2006.
TIMET UK's melting facility in Witton, England produces VAR ingots used
primarily as feedstock for its forging operations, also in Witton. The forging
operations process the ingots principally into billet product for sale to third
parties or into an intermediate product for further processing into bar or plate
at its facility in Waunarlwydd, Wales. TIMET UK's melting and mill products
production in 2003 is expected to operate at approximately 55% and 45% of annual
practical capacity, respectively.
The capacity of TIMET Savoie in Ugine, France is to a certain extent
dependent upon the level of activity in CEZUS' zirconium business, which may
from time to time provide TIMET Savoie with capacity in excess of that
contractually required to be provided by CEZUS. During 2003, TIMET Savoie
expects to operate at approximately 55% of the maximum annual capacity required
to be provided by CEZUS.
Sponge for melting requirements at both TIMET UK and TIMET Savoie that is
not supplied by the Company's Henderson, Nevada plant is purchased principally
from suppliers in Japan and Kazakhstan.
ITEM 3: LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. See Note 19 to
the Consolidated Financial Statements.
16
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the quarter ended December 31, 2002.
The Company held a Special Meeting of Stockholders on February 4, 2003 for
the purpose of voting on an amendment to the Company's Certificate of
Incorporation to (i) effect a reverse stock split of the Company's common stock
at a ratio of one share of post-split common stock for each currently
outstanding eight, nine or ten shares of pre-split common stock, with the final
exchange ratio to be selected by the Board of Directors and (ii) reduce the
number of authorized shares of common stock and preferred stock of the company
from 99,000,000 shares and 1,000,000 shares, respectively, to 9,900,000 and
100,000 shares, respectively. The amendment passed based on the following
results:
Votes for: 26,303,935
Votes against: 934,703
Votes abstained: 33,631
Subsequently on February 4, 2003, the Board of Directors unanimously
approved the reverse stock split on the basis of one share of post-split common
stock for each outstanding ten shares of pre-split common stock. The reverse
stock split became effective after the close of trading on February 14, 2003,
and the Company's common stock began trading on a post-split basis on February
18, 2003.
17
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
TIMET's common stock is traded on the New York Stock Exchange (symbol:
"TIE"). On February 26, 2003, the closing price of TIMET common stock was $19.66
per share. The high and low sales prices for the Company's common stock are set
forth below. All prices have been adjusted to reflect the one-for-ten reverse
stock split which became effective after the close of trading on February 14,
2003.
High Low
Year ended December 31, 2002: ----------------- -----------------
First quarter $ 54.00 $ 32.50
Second quarter 53.00 35.00
Third quarter 40.20 16.50
Fourth quarter 22.90 9.10
Year ended December 31, 2001:
First quarter $ 106.20 $ 66.90
Second quarter 144.00 67.50
Third quarter 119.00 23.50
Fourth quarter 47.00 27.50
As of February 24, 2003, there were 306 common shareholders of record,
which the Company estimates represent approximately 6,700 actual shareholders.
In the third quarter of 1999, the Company suspended payment of quarterly
common stock dividends. The Company's U.S. credit agreement, entered into in
early 2000 and as amended in 2002, prohibits the payment of dividends on the
Company's common stock and the repurchase of common shares, except under
specified conditions. In October 2002, the Company exercised its right to defer
future dividend payments on its Convertible Preferred Securities for a period of
up to 20 consecutive quarters. This deferral was effective beginning with the
Company's December 1, 2002 scheduled dividend payment. The Company will consider
resuming payment of dividends on the Convertible Preferred Securities once the
outlook for the Company's business improves substantially. Since the Company
exercised its right to defer dividend payments on the Convertible Preferred
Securities, it is unable under the terms of these securities to, among other
things, pay dividends on or reacquire its capital stock during the deferral
period. However, the Company is permitted to reacquire the Convertible Preferred
Securities during the deferral period, subject to certain U.S. credit facility
limitations. See Note 12 to the Consolidated Financial Statements.
18
ITEM 6: SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with the Company's Consolidated Financial Statements and Item 7 - MD&A.
Year ended December 31,
--------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- ----------- ----------- ------------ -----------
($ in millions, except per share and selling price data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 366.5 $ 486.9 $ 426.8 $ 480.0 $ 707.7
Gross margin (3.1) 39.9 3.9 25.5 165.4
Operating income (loss) (1) (20.8) 64.5 (41.7) (31.4) 82.7
Interest expense 3.4 4.1 7.7 7.1 2.9
Net income (loss) (1) $ (111.5) $ (41.8) $ (38.9) $ (31.4) $ 45.8
Earnings (loss) per share (1)(7):
Basic and diluted (2) $ (35.29) $ (13.26) $ (12.40) $ (10.01) $ 14.55
Cash dividends per share (7) $ - $ - $ - $ 1.20 $ 1.20
BALANCE SHEET DATA:
Cash and cash equivalents $ 6.2 $ 24.5 $ 9.8 $ 20.7 $ 15.5
Total assets (1) 563.8 699.4 759.1 883.1 953.2
Indebtedness (3) 19.4 12.4 44.9 117.4 105.6
Net cash (debt) (4) (13.2) 12.1 (35.1) (96.7) (90.1)
Capital lease obligations 10.2 8.9 8.8 10.1 10.3
Minority interest - Convertible
Preferred Securities 201.2 201.2 201.2 201.2 201.2
Stockholders' equity $ 159.4 $ 298.1 $ 357.5 $ 408.1 $ 448.4
OTHER OPERATING DATA:
Cash flows provided (used):
Operating activities $ (13.6) $ 62.6 $ 65.4 $ 19.5 $ 76.1
Investing activities (7.5) (16.1) (4.2) (21.7) (223.2)
Financing activities 3.6 (31.4) (72.8) 8.6 92.2
------------- ----------- ----------- ------------ -----------
Net provided (used) $ (17.5) $ 15.1 $ (11.6) $ 6.4 $ (54.9)
Mill product shipments (5) 8.9 12.2 11.4 11.4 14.8
Average mill product prices (5) $ 31.40 $ 29.80 $ 28.70 $ 33.00 $ 35.25
Melted product shipments (5) 2.4 4.4 3.5 2.5 3.6
Average melted product prices (5) $ 14.50 $ 14.50 $ 13.65 $ 14.20 $ 18.50
Active employees at December 31 1,956 2,410 2,220 2,350 2,740
Order backlog at December 31(6) $ 165.0 $ 225.0 $ 245.0 $ 195.0 $ 350.0
Capital expenditures $ 7.8 $ 16.1 $ 11.2 $ 24.8 $ 115.2
(1) See the notes to the Consolidated Financial Statements and MD&A for items
that materially affect the 2002, 2001 and 2000 periods. The Company
recorded $4.5 million and $24.0 million pre-tax restructuring charges in
1999 and 1998, respectively.
(2) Antidilutive in all periods.
(3) Indebtedness represents notes payable and current and noncurrent debt, and
excludes capital lease obligations and Minority interest - Convertible
Preferred Securities (and accrued dividends thereon).
(4) Net cash (debt) represents cash and cash equivalents less indebtedness.
(5) Shipments in thousands of metric tons; average selling prices stated per
kilogram and mix adjusted.
(6) Order backlog is defined as unfilled purchase orders, which are generally
subject to deferral or cancellation by the customer under certain
conditions.
(7) Amounts have been adjusted to reflect the Company's one-for-ten reverse
stock split which became effective after the close of trading on February
14, 2003.
19
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview. The titanium industry derives a substantial portion of its demand
from the highly cyclical commercial aerospace industry. The Company estimates
that aggregate industry shipment volume for titanium mill products in 2002 was
derived from the following markets: 41% from aerospace; 44% from industrial; and
15% from emerging markets. The commercial aerospace sector is the principal
driver of titanium consumed in the aerospace markets, accounting for shipments
of approximately 14,500 metric tons in 2002, which represent about 80% of mill
product aerospace shipments and about 33% of aggregate mill product industry
shipments. Mill product shipments to military aerospace markets in 2002 were
approximately 3,600 metric tons, which represent about 8% of aggregate mill
product shipments. The Company's business is more dependent on commercial
aerospace demand than the overall titanium industry, as approximately 59% of its
mill product sales volume in 2002 was represented by sales to this sector.
The economic slowdown in the United States and other regions of the world
in the latter part of 2001 and the September 11, 2001 terrorist attacks combined
to negatively impact commercial air travel in the United States and abroad
throughout 2002. Although airline passenger traffic showed improvement in the
months immediately following the terrorist attacks, current data indicates that
traffic remains below pre-attack levels. As a result, the U.S. airline industry
is expected to record a second consecutive year of losses and two major U.S.
airlines were forced to seek bankruptcy protection from their creditors.
Airlines have announced a number of actions to reduce both costs and capacity
including, but not limited to, the early retirement of airplanes, the deferral
of scheduled deliveries of new aircraft and allowing purchase options to expire.
The Company's order backlog at the end of December 2002 was approximately $165
million, unchanged from the end of September 2002. The Company's order backlog
was $225 million at the end of December 2001. Substantially all the 2002
year-end backlog is scheduled for shipment during 2003. However, the Company's
order backlog may not be a reliable indicator of future business activity. Since
September 11, 2001, the Company has received a number of deferrals and
cancellations of previously scheduled orders and believes such requests will
continue into 2003. The Company expects the current slowdown in the commercial
aerospace sector to continue through 2005 before beginning a modest upturn in
2006. See "Outlook" for further discussion of the Company's business
expectations for 2003.
The table on the following page summarizes certain information regarding
the Company's results of operations for the past three years. Average selling
prices, as reported by the Company, are a reflection not just of actual selling
prices received by the Company, but other related factors such as currency
exchange rates and customer and product mix in a given period. Consequently,
changes in average selling prices from period to period will be impacted by
changes occurring not just in actual prices, but by these other factors as well.
In the following discussion, the Company has attempted to adjust for the effects
of changes in currency and mix when referring to the percentage change in
selling prices from period to period.
20
Year ended December 31,
------------------------------------------------------
2002 2001 2000
--------------- ---------------- ---------------
($ in thousands)
Net sales $ 366,501 $ 486,935 $ 426,798
Gross margin (3,123) 39,893 3,881
Operating (loss) income (20,849) 64,480 (41,650)
Gross margin percent of net sales -1% 8% 1%
Percent change in:
Mill product sales volume -27 +7 -1
Mill product average selling prices (1) +3 +2 -7
Melted product sales volume -46 +27 +39
Melted product average selling prices (1) -1 +8 -10
(1) Change expressed in billing currencies and adjusted for product mix.
2002 operations. The Company's sales of mill products in 2002 decreased 23%
from $363.3 million in 2001 to $278.2 million in 2002. This decrease was
principally due to a 27% decrease in mill product sales volume and changes in
customer and product mix. The Company's estimated sales volume to the commercial
aerospace sector declined approximately 37% during 2002 compared to 2001. Mill
product average selling prices (expressed in U.S. dollars using actual foreign
currency exchange rates prevailing during the respective periods) during 2002
increased 4% compared to 2001 selling prices. In billing currencies (which
exclude the effects of foreign currency translation), mill product average
selling prices increased 3% over 2001 levels. Melted product sales decreased 46%
from $64.1 million in 2001 to $34.8 million in 2002 primarily due to a 46%
decrease in melted product sales volume and changes in customer and product mix.
Melted product average selling prices decreased 1% from 2001 melted product
prices.
Gross margin (net sales less cost of sales) was negative 1% of sales in
2002, compared to 8% in the prior year. Gross margin in 2002 was most adversely
impacted by the decline in production volume and the related impact on
manufacturing overhead costs. As the Company reduces production volume in
response to reduced requirements, certain manufacturing overhead costs decrease
at a slower rate and to a lesser extent than production volume changes,
generally resulting in higher costs relative to production levels. Average plant
operating rates declined from approximately 75% of capacity in 2001 to
approximately 55% in 2002. In addition, the Company recorded certain provisions
for excess and slow moving inventories during 2002 that, due to business
conditions existing during 2002, including a number of customer order
cancellations, were approximately $5.3 million greater than in 2001. The Company
also incurred severance costs of approximately $1.7 million related to global
manufacturing workforce reductions undertaken throughout 2002. Gross margin
during 2001 was adversely impacted by $3.3 million of estimated costs related to
the tungsten matter described below and $10.8 million of equipment impairment
charges described in "2001 operations." Gross margin during 2001 was also
adversely impacted by goodwill amortization of $4.6 million, as effective
January 1, 2002 the Company no longer amortized its goodwill on a periodic
basis. See Note 7 to the Consolidated Financial Statements.
21
In March 2001, the Company was notified by one of its customers that a
product the customer manufactured from standard grade titanium produced by the
Company contained what has been confirmed to be a tungsten inclusion. The
Company believes that the source of this tungsten was contaminated silicon,
which is used as an alloying addition to titanium at the melting stage,
purchased from an outside vendor in 1998. At the present time, the Company is
aware of six standard grade ingots that have been demonstrated to contain
tungsten inclusions. Based upon the Company's assessment of possible losses,
TIMET recorded an aggregate charge to cost of sales for this matter of $3.3
million during 2001. During 2001, the Company charged $0.3 million against this
accrual to write down its remaining on-hand inventory and made $0.3 million in
settlement payments, resulting in a $2.7 million accrual as of December 31, 2001
for potential future claims. During 2002, the Company made settlement payments
aggregating $0.3 million and has also revised its estimate of the most likely
amount of loss to be incurred, resulting in a credit of $0.2 million to cost of
sales during 2002. As of December 31, 2002, $2.2 million is accrued for pending
and potential future claims. This amount represents the Company's best estimate
of the most likely amount of loss yet to be incurred. This amount does not
represent the maximum possible loss, which is not possible for the Company to
estimate at this time, and may be periodically revised in the future as more
facts become known. As of December 31, 2002 the Company has received claims
aggregating approximately $5 million and has made settlement payments
aggregating $0.6 million. Pending claims are being investigated and negotiated.
The Company believes that certain claims are without merit or can be settled for
less than the amount of the original claim. There is no assurance that all
potential claims have yet been submitted to the Company. The Company has filed
suit seeking full recovery from its silicon supplier for any liability the
Company might incur, although no assurances can be given that the Company will
ultimately be able to recover all or any portion of such amounts. The Company
has not recorded any recoveries related to this matter as of December 31, 2002.
Selling, general, administrative and development expenses decreased 17% in
2002 compared to 2001, principally due to the inclusion of $6.2 million of
incentive compensation related to the Boeing settlement in 2001 (discussed in
"2001 operations") and lower personnel related costs in 2002, partially offset
by higher selling and marketing costs.
Equity in earnings (losses) of joint ventures in 2002 decreased 21% from
2001 principally due to a decrease in earnings of VALTIMET, the Company's
44%-owned welded tube joint venture.
The Company recognized $23.4 million of income for the year ended December
31, 2002 related to the take-or-pay provisions of the Boeing LTA, as amended.
The terms of the amended Boeing LTA allow Boeing to purchase up to 7.5 million
pounds of titanium product annually from TIMET through 2007, but limit TIMET's
maximum quarterly volume obligation to 3.0 million pounds. The LTA is structured
as a take-or-pay agreement such that, beginning in calendar year 2002, Boeing
forfeits $3.80 per pound of its advance payment in the event that its orders for
delivery are less than 7.5 million pounds in any given calendar year. The
Company recognizes income to the extent Boeing's year-to-date orders for
delivery plus TIMET's maximum quarterly volume obligations for the remainder of
the year total less than 7.5 million pounds. This income is recognized as other
operating income and is not included in sales revenue, sales volume or gross
margin. Based on actual purchases of approximately 1.3 million pounds during
2002, the Company recognized other income for 6.2 million pounds that Boeing did
not purchase under the LTA during 2002.
22
2001 operations. Sales of mill products in 2001 increased 11% from $326.3
million in 2000 to $363.3 million in 2001. This increase was principally due to
a 7% increase in mill product sales volume and changes in customer and product
mix. The Company's estimated shipment volume to the commercial aerospace sector
increased approximately 14% during 2001 compared to 2000. Mill product average
selling prices (expressed in U.S. dollars using actual foreign currency exchange
rates prevailing during the respective periods) during 2001 approximated 2000
selling prices. In billing currencies (which exclude the effects of foreign
currency translation), mill product average selling prices increased 2% over
2000 levels. Melted product sales increased 35% from $47.4 million in 2000 to
$64.1 million in 2001 due to the net effects of a 27% increase in melted product
sales volume, an 8% increase in melted product average selling prices and
changes in customer and product mix.
Gross margin was 8% of sales in 2001, compared to 1% in the prior year,
primarily reflecting the net effects of higher selling prices, higher operating
rates at certain plants, lower sponge costs and changes in customer and product
mix. Gross margin for 2001 was adversely impacted by higher scrap costs, higher
energy costs, $10.8 million of equipment impairment charges discussed below and
$3.3 million of estimated costs related to the tungsten inclusion matter. In
comparison, gross margin in 2000 was adversely impacted by a $3.5 million
equipment impairment charge and a $3.3 million charge for anticipated
environmental remediation costs.
During the second quarter of 2001, the Company determined that an
impairment of the carrying amount of certain long-lived assets located at its
Millbury, Massachusetts facility had occurred, as the assets' undiscounted
future cash flows could no longer support their carrying amount. This
determination was made after the Company completed studies of the potential uses
of these assets in the foreseeable future as well as the economic viability of
those alternatives. As a result, the Company recorded a $10.8 million pre-tax
impairment charge to cost of sales in 2001, representing the difference between
the assets' previous carrying amounts and their estimated fair values, based on
a third-party appraisal.
In April 2001, the Company reached a settlement of the litigation between
TIMET and Boeing related to the parties' 1997 LTA. Pursuant to the settlement,
the Company received a cash payment of $82 million and recorded approximately
$73 million (cash settlement less legal fees) as other operating income, with
partially offsetting operating expenses of approximately $6.2 million for
employee incentive compensation and other costs reported as a component of
selling, general, administrative and development expense, resulting in a net
pre-tax income effect of $66.8 million in 2001.
Selling, general, administrative and development expenses increased 18% in
2001 compared to 2000 principally due to the approximate $6.2 million of
employee incentive compensation discussed above.
Equity in earnings (losses) of joint ventures in 2001 increased by $3.4
million from 2000 principally due to the increase in earnings of VALTIMET, the
Company's 44%-owned welded tube joint venture.
Other operating income (expense), net in 2000 reflected a $2.0 million gain
related to the termination of the Company's 1990 agreement to sell titanium
sponge to Union Titanium Sponge Corporation, which was offset by a $2.8 million
restructuring charge related to the Company's plan to address then-current
market and operating conditions.
23
Non-operating income (expense), net.
Year ended December 31,
------------------------------------------------------
2002 2001 2000
--------------- ---------------- ---------------
(In thousands)
Dividends and interest income $ 118 $ 5,460 $ 6,154
SMC impairment charge (27,500) (61,519) -
Surety bond guarantee (1,575) - -
Gain on sale of castings joint venture - - 1,205
Loss on early extinguishment of debt - - (1,343)
Foreign exchange gain (loss) (587) 92 (1,085)
Interest expense (3,381) (4,060) (7,704)
Other income (expense) (761) 18 (53)
--------------- ---------------- ---------------
$ (33,686) $ (60,009) $ (2,826)
=============== ================ ===============
Dividends and interest income during 2000 and 2001 consisted principally of
dividends on the Company's investment in the $80 million non-voting convertible
preferred securities of SMC. Because of various factors affecting SMC subsequent
to the terrorist attacks of September 11, 2001, the Company undertook an
assessment of its investment in the SMC securities in the fourth quarter of 2001
with the assistance of an external valuation specialist. The SMC convertible
preferred securities are not publicly traded and, accordingly, quoted market
prices are unavailable. As such, the assessment of fair value of these
securities required significant judgment and considered a number of factors,
including, but not limited to, the financial health and prospects of SMC and
market yields of comparable securities. The assessment indicated that it was
unlikely the Company would recover its then existing carrying amount, including
accrued dividends and interest, of the securities in accordance with the
securities' contractual terms and that an other than temporary decline in the
fair value of its investment had occurred. The Company recorded a $61.5 million
pre-tax impairment charge in the fourth quarter of 2001 to reduce the carrying
amount of this investment, including accrued dividends and interest, to an
estimated fair value of $27.5 million. At that time the Company also ceased
accruing dividend income on these securities. Subsequently, on March 27, 2002,
SMC and its U.S. subsidiaries filed a voluntary petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. As a result, the Company undertook
a further assessment of its investment in SMC, again with the assistance of the
same external valuation specialist, and recorded an additional $27.5 million
impairment charge during the first quarter of 2002 for an other than temporary
decline in the estimated fair value of its investment in SMC. This charge
reduced the Company's carrying amount of its investment in SMC to zero. See Note
5 to the Consolidated Financial Statements.
24
TIMET is the primary obligor on two workers' compensation bonds issued on
behalf of a former subsidiary, Freedom Forge Corporation ("Freedom Forge"),
which TIMET sold in 1989. The bonds were provided as part of the conditions
imposed on Freedom Forge in order to self-insure its workers' compensation
obligations. Each of the bonds has a maximum obligation of $1.5 million. Freedom
Forge filed for Chapter 11 bankruptcy protection on July 13, 2001, and
discontinued payment on the underlying workers' compensation claims in November
2001. During the third quarter of 2002, TIMET received notices that the issuers
of the bonds were required to make payments on one of the bonds with respect to
certain of these claims and were requesting reimbursement from TIMET. Based upon
current loss projections, the Company anticipates claims will be incurred up to
the maximum amount payable under the bond and, therefore, recorded $1.6 million
for this bond (including $0.1 million in legal fees reimbursable to the issuer
of the bond) as other non-operating expense in 2002. Through December 31, 2002,
TIMET has reimbursed the issuer approximately $0.4 million under this bond. At
this time the Company understands that no claims have been paid under the second
bond, and no such payments are currently anticipated. Accordingly, no accrual
has been recorded for potential claims that could be filed under the second
bond. TIMET may revise its estimated liability under these bonds in the future
as additional facts become known or claims develop.
Interest expense for 2002 decreased 17% compared to 2001, primarily due to
lower average outstanding borrowings and lower interest rates during 2002.
Interest expense for 2001 decreased over 2000 primarily due to the paydown of
the Company's revolving U.S. debt following settlement of the Boeing related
litigation.
In 2000, the Company sold its 20% interest in a castings joint venture with
Wyman-Gordon (the 80% owner) to Wyman-Gordon for approximately $7 million and
recorded a gain on the sale of approximately $1.2 million. The Company also
recorded a $1.3 million pre-tax loss on the early extinguishment of debt related
to deferred financing costs that the Company was required to write off in
conjunction with the early termination of a previous bank financing agreement.
This amount was previously reflected as an extraordinary item ($0.8 million net
of tax); however, based on the Company's adoption of Statement of Financial
Accounting Standards ("SFAS") No. 145, Rescission of FASB Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections in 2002,
this amount was reassessed, whereby the Company determined this loss did not
meet the necessary "unusual and infrequent" criteria to be considered an
extraordinary item. Therefore, the Company was required to retroactively
reclassify this amount to non-operating income (loss). See Note 1 to the
Consolidated Financial Statements.
Income taxes. Based on the Company's recent history of U.S. losses, its
near-term outlook and management's evaluation of available tax planning
strategies, in the fourth quarter of 2001 the Company concluded that realization
of its previously recorded U.S. deferred tax assets did not continue to meet the
"more-likely-than-not" recognition criteria. Accordingly, during 2001 the
Company increased its U.S. deferred tax valuation allowance by $35.5 million to
offset deferred tax benefits related to net U.S. deferred tax assets, primarily
net operating loss and minimum tax credit carryforwards. Additionally, the
Company determined that it would not recognize a deferred tax benefit related to
future U.S. losses continuing for an uncertain period of time. The Company
increased its U.S. deferred tax valuation allowance by $39.4 million in 2002
based upon additional U.S. losses and increases to the U.S. minimum pension
liability. See Note 16 to the Consolidated Financial Statements.
25
During the fourth quarter of 2002, the Company was required to record a
charge to other comprehensive loss to reflect an increase in its U.K. minimum
pension liability. The related tax effect of this charge resulted in the Company
shifting from a net deferred tax liability position to a net deferred tax asset
position. Based on the Company's recent history of U.K. losses, its near-term
outlook and management's evaluation of available tax planning strategies, the
Company determined that it would not recognize this deferred tax asset because
it did not meet the "more-likely-than-not" recognition criteria. Accordingly,
the Company recorded a U.K. deferred tax asset valuation allowance of $7.2
million through other comprehensive income in the fourth quarter to offset the
related U.K. deferred tax asset that arose due to the increase in U.K. minimum
pension liabilities. Commencing in the first quarter of 2003 and continuing for
an uncertain period of time, the Company will not recognize deferred tax
benefits related to either future U.K. losses or future increases in U.K.
minimum pension liabilities. See Note 16 to the Consolidated Financial
Statements.
During the first quarter of 2002, the Job Creation and Worker Assistance
Act of 2002 (the "JCWA Act") was signed into law. The Company benefits from
certain provisions of the JCWA Act, which liberalized certain net operating loss
("NOL") and alternative minimum tax restrictions. Prior to the law change, NOLs
could be carried back two years and forward 20 years. The JCWA Act increases the
carryback period for losses generated in 2001 and 2002 to five years with no
change to the carryforward period. In addition, losses generated in 2001 and
2002 can be carried back and offset against 100% of a taxpayer's alternative
minimum taxable income ("AMTI"). Prior to the law change, an NOL could offset no
more than 90% of a taxpayer's AMTI. The suspension of the 90% limitation is also
applicable to NOLs carried forward into 2001 and 2002. Based on these changes,
the Company recognized $1.8 million of refundable U.S. income taxes during the
first quarter of 2002. The Company received $0.8 million of this refund in the
fourth quarter of 2002.
Minority interest. Annual dividend expense related to the Company's 6.625%
Convertible Preferred Securities generally approximates $13.3 million and is
reported as minority interest. In 2000, this expense was reported net of
allocable income taxes; however, as a result of the Company's decision to
increase its deferred tax valuation allowance as described above, no income tax
benefit associated with this expense was recorded and this expense was reported
gross in 2002 and 2001. In addition, in 2001 the Company recorded $0.5 million
of pre-tax dividend expense related to dividends in arrears. In April 2000, the
Company exercised its right to defer future dividend payments on these
securities. On June 1, 2001, the Company resumed payment of dividends on these
securities, made the scheduled payment of $3.3 million and paid the previously
deferred aggregate dividends of $13.9 million. In October 2002, the Company
again exercised its right to defer future dividend payments on these securities,
effective with the Company's December 1, 2002 scheduled dividend payment.
Dividends will continue to accrue at the coupon rate on the principal and unpaid
dividends and have been classified as long-term in the Consolidated Financial
Statements. The Company will consider resuming payment of dividends on the
Convertible Preferred Securities once the outlook for the Company's business
improves substantially.
Other minority interest relates primarily to the 30% interest in TIMET
Savoie held by CEZUS. See Note 12 to the Consolidated Financial Statements.
26
Cumulative effect of change in accounting principle. On January 1, 2002,
the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under
SFAS No. 142, goodwill is no longer amortized on a periodic basis, but instead
is subject to a two-step impairment test to be performed on at least an annual
basis. In order to test for transitional impairment, SFAS No. 142 required the
Company to identify its reporting units and determine the carrying amount of
each reporting unit by assigning its assets and liabilities, including existing
goodwill and intangible assets, to those reporting units as of January 1, 2002.
The Company determined that it operates one reporting unit, as that term is
defined by SFAS No. 142, consisting of the Company in total. The first step of
the impairment test required the Company to determine the fair value of its
reporting unit and compare it to that reporting unit's carrying amount. This
evaluation was completed with the assistance of an external valuation specialist
and considered a combination of fair value indicators including quoted market
prices, prices of comparable businesses and discounted cash flows. The
evaluation, which was completed during the second quarter of 2002, indicated
that the Company's recorded goodwill might be impaired and required the Company
to complete the second step of the impairment test.
The second step of the impairment test, which was completed during the
third quarter of 2002, required the Company to compare the implied fair value of
its reporting unit's goodwill with the carrying amount of that goodwill. With
the assistance of the external valuation specialist utilized in the step one
testing, the Company determined the implied fair value of its goodwill was zero.
Accordingly, the Company recorded a non-cash goodwill impairment charge of $44.3
million, representing the entire balance of the Company's recorded goodwill at
January 1, 2002. There was no income tax benefit associated with this charge.
While the goodwill associated with the Company's U.S. operations is deductible
for income tax purposes, the Company does not currently recognize an income tax
benefit associated with its U.S. losses. In addition the goodwill associated
with the Company's European operations is not deductible for income tax
purposes. Pursuant to the transition requirements of SFAS No. 142, this charge
has been reported in the Company's Consolidated Statements of Operations as a
cumulative effect of a change in accounting principle as of January 1, 2002. The
effect of the change in accounting principle on the first quarter of 2002 was to
increase the Company's first quarter net loss by $44.3 million, or $14.04 per
share, to $80.4 million, or $25.47 per share. The change had no effect on the
second, third or fourth quarters of 2002.
European operations. The Company has substantial operations and assets
located in Europe, principally the United Kingdom, with smaller operations in
France and Italy. Titanium is sold worldwide, and many factors influencing the
Company's U.S. and European operations are similar. Approximately 44% of the
Company's sales revenue originated in Europe in 2002, of which approximately 60%
was denominated in currencies other than the U.S. dollar, principally the
British pound sterling and 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 that are
denominated in currencies other than their 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 U.S. are denominated in U.S. dollars and as such are not
subject to currency exchange rate fluctuations.
27
The Company does not use currency contracts to hedge its currency
exposures. Net currency transaction gains/losses included in earnings were a
loss of $0.6 million in 2002, a gain of $0.1 million in 2001 and a loss of $1.1
million in 2000. At December 31, 2002, consolidated assets and liabilities
denominated in currencies other than functional currencies were approximately
$29.8 million and $36.6 million, respectively, consisting primarily of U.S.
dollar cash, accounts receivable, accounts payable and borrowings.
Related party transactions. The Company is a party to certain transactions
with related parties. See Note 18 to the Consolidated Financial Statements.
Supplemental information. In July 2002, the Company successfully negotiated
new three-year labor agreements with its labor unions at its Toronto, Ohio
facility. The Company's European operations require annual labor union
negotiations, at which all contracts were successfully extended during 2002, and
such negotiations are currently under way for 2003.
On February 4, 2003, the Company's stockholders approved a proposal to
amend TIMET's Certificate of Incorporation to effect a reverse stock split of
the Company's common stock at a ratio of one share of post-split common stock
for each eight, nine or ten shares of pre-split common stock issued and
outstanding, with the final exchange ratio to be selected by the Board of
Directors. Subsequently, the Company's Board of Directors unanimously approved
the reverse stock split on the basis of one share of post-split common stock for
each outstanding ten shares of pre-split common stock. The reverse stock split
became effective after the close of trading on February 14, 2003. All share and
per share disclosures for all periods presented in MD&A have been adjusted to
give effect to the reverse stock split.
Outlook. The Outlook section contains a number of forward-looking
statements, all of which are based on current expectations, and exclude the
effect of potential future charges related to restructurings, asset impairments,
valuation allowances and similar items. Undue reliance should not be placed on
forward-looking statements, as more fully discussed in the "Forward-Looking
Information" statement of this Annual Report. Actual results may differ
materially. See Notes to the Consolidated Financial Statements regarding
commitments, contingencies, legal, environmental and other matters, which may
materially affect the Company's future business, results of operations,
financial position and liquidity.
As previously discussed, the economic slowdown in the United States and
other regions of the world in the latter part of 2001 in combination with the
effects of the September 11, 2001 terrorist attacks negatively impacted
commercial air travel in the United States and abroad throughout 2002. Although
general economic conditions have improved relative to 2001 levels, current data
indicates that commercial airline passenger traffic remains below pre-attack
levels, and the Company expects the current slowdown in the commercial aerospace
sector to continue through 2005 before beginning a modest upturn in 2006. In
addition, the continuing war on terrorism and potential global conflicts could
damage an already fragile economy, delay the recovery in airline passenger
traffic and exacerbate the current downturn in the commercial aerospace
industry. As a result, demand for titanium in the commercial aerospace market
remains soft.
28
In response, airlines have announced a number of actions to reduce both
costs and capacity including, but not limited to, the early retirement of
airplanes, the deferral of scheduled deliveries of new aircraft and allowing
purchase options to expire. The major commercial airframe and jet engine
manufacturers have substantially reduced their production levels in 2003, and
the forecast of engine and aircraft deliveries over the next few years is
expected to remain at these reduced levels. The Company expects that aggregate
industry mill product shipments will decrease in 2003 by approximately 3% to
about 42,500 metric tons. The Company believes that demand for mill products for
the commercial aerospace sector could decline by up to 15% in 2003, primarily
due to a combination of reduced aircraft production rates and excess inventory
accumulated throughout the aerospace supply chain since September 11, 2001.
Excess inventory accumulation typically leads to order demand for titanium
products falling below actual consumption.
According to The Airline Monitor, a leading aerospace publication, the
worldwide commercial airline industry reported an estimated operating loss of
approximately $8 billion in 2002, compared with an operating loss of $11 billion
in 2001 and operating income of $11 billion in 2000. The Airline Monitor
traditionally issues forecasts for commercial aircraft deliveries each January
and July. According to The Airline Monitor, large commercial aircraft deliveries
for the 1996 to 2002 period peaked in 1999 with 889 aircraft, including 254 wide
body aircraft that use substantially more titanium than their narrow body
counterparts. Large commercial aircraft deliveries totaled 673 (including 176
wide bodies) in 2002. The Airline Monitor's most recently issued forecast of
January 2003 calls for 580 deliveries in 2003, 570 deliveries in 2004 and 560
deliveries in 2005. Relative to 2002, these forecasted delivery rates represent
anticipated declines of about 14% in 2003, 15% in 2004 and 17% in 2005. After
2005, The Airline Monitor calls for a continued increase each year in large
commercial aircraft deliveries through 2010, with forecasted deliveries of 780
aircraft in 2009 exceeding 2002 levels. Deliveries of titanium generally precede
aircraft deliveries by about one year, although this varies considerably by
titanium product. This correlates to the Company's cycle, which historically
precedes the cycle of the aircraft industry and related deliveries. The Company
can give no assurance as to the extent or duration of the current commercial
aerospace cycle or the extent to which it will affect demand for the Company's
products.
Although the current business environment makes it particularly difficult
to predict TIMET's future performance, the Company believes sales revenue in
2003 will remain flat compared to 2002 at approximately $360 million to $370
million, reflecting the combined effects of increases in sales volume offset by
continued softening of market selling prices and changes in customer and product
mix. Mill product sales volume is expected to increase approximately 5% from
2002 levels to about 9,300 metric tons and melted product sales volume is
expected to increase approximately 40% relative to 2002, to approximately 3,300
metric tons. The Company expects approximately 55% of its 2003 mill product
sales volume will be derived from the commercial aerospace sector (as compared
to 59% in 2002), with the balance from military aerospace, industrial and
emerging markets. The overall mill product sales volume increase in 2003 is
principally driven by an anticipated increase in the Company's military
aerospace, military armor and industrial sales volume compared to 2002,
partially offset by sales volume declines in commercial aerospace and various
emerging markets.
29
Market selling prices on new orders for titanium products, while difficult
to forecast, are expected to continue to soften throughout 2003. However, about
one-half of the Company's anticipated commercial aerospace volume in 2003 is
under LTAs that provide the Company with selling price stability on that portion
of its business. The Company may sell substantially similar titanium products to
different customers at varying selling prices due to the effect of LTAs, timing
of purchase orders and market fluctuations. There are also wide differences in
selling prices across different titanium products that the Company offers.
Accordingly, the mix of customers and products sold affects the average selling
price realized and has an important impact on sales revenue and gross margin.
Average selling prices, as reported by the Company, are a reflection not just of
actual selling prices received by the Company, but other related factors such as
currency exchange rates and customer and product mix in a given period.
Consequently, changes in average selling prices from period to period will be
impacted by changes occurring not just in actual prices, but in these other
factors as well.
The Company's cost of sales is affected by a number of factors including,
among others, customer and product mix, material yields, plant operating rates,
raw material costs, labor and energy costs. Raw material costs represent the
largest portion of the Company's manufacturing cost structure. The Company
expects to manufacture a significant portion of its titanium sponge requirements
in 2003 and purchase the balance. The Company expects the aggregate cost of
purchased sponge and scrap to remain relatively stable in 2003 as compared to
2002. The Company expects its overall capacity utilization to average about 50%
in 2003, down from 55% in 2002; however, the Company's practical capacity
utilization measures can vary significantly based on product mix. As the Company
reduces production volume in response to reduced requirements, certain
manufacturing overhead costs decrease at a slower rate and to a lesser extent
than production volume changes, generally resulting in higher costs relative to
production levels. During 2002 the Company undertook a number of actions to
reduce its costs, including reductions in employment levels, more stringent
spending controls and programs to improve manufacturing yields. However, the
continued softening of market selling prices is expected to substantially offset
the benefits of these actions, resulting in an expected gross margin in 2003 of
between negative 2% and break even. The Company expects gross margin to improve
during the year as production volumes begin to increase somewhat.
Selling, general, administrative and development expenses for 2003 should
approximate $40 million. Interest expense in 2003 should approximate $3 million.
Minority interest on the Company's Convertible Preferred Securities in 2003
should approximate $14 million, including additional dividend costs related to
the deferral of the related dividend payments.
The Company anticipates that Boeing will purchase about 0.8 million pounds
of product in 2003. At this projected order level, the Company expects to
recognize about $25 million of income under the Boeing LTA's take-or-pay
provisions in 2003. Any such earnings will be reported as operating income, but
will not be included in sales revenue, sales volume or gross margin.
30
The Company's effective consolidated income tax rate is expected to be
significantly below the U.S. statutory rate, as no income tax benefit is
expected to be recorded on U.S. or U.K. losses during 2003. During the fourth
quarter of 2002, TIMET UK began to generate net deferred tax assets, and the
Company determined that future realization of its UK deferred tax assets did not
meet the "more-likely-than-not" recognition criteria. Therefore, no income tax
benefit is expected to be recorded on UK losses during 2003. The Company
operates in several tax jurisdictions and is subject to varying income tax
rates. As a result, the geographic mix of pre-tax income (loss) can
significantly impact the Company's overall effective tax rate.
The Company presently expects an operating loss in 2003 of $15 million to
$25 million and a net loss of $35 million to $45 million, before any potential
restructuring or other special charges or changes in accounting principle. The
Company presently anticipates its results in the last half of 2003 will be
improved compared to the first half due to the improvement in gross margins and
because the estimated $25 million expected to be earned under the take-or-pay
provision of the Boeing LTA will be recognized in the last half of the year.
The Company expects to generate $20 million to $30 million in cash flow
from operations during 2003. This is principally driven by reductions in working
capital, especially inventory, and the deferral of the dividends on the
Convertible Preferred Securities. The Company received the 2003 advance of $27.7
million ($28.5 million less $0.8 million for 2002 subcontractor purchases) from
Boeing in early January 2003. Capital expenditures in 2003 should approximate
$10 million, principally covering capital maintenance, safety and environmental
programs. Depreciation and amortization should approximate $36 million.
Bank debt is expected to decrease in 2003 as compared to year-end 2002
levels. At December 31, 2002, the Company had over $130 million of borrowing
availability under its various worldwide credit agreements. The Company believes
its cash, cash flow from operations and borrowing availability will satisfy its
expected working capital, capital expenditures and other requirements in 2003.
The Company is not satisfied with the projected results for 2003 and has
undertaken further cost reduction measures. The Company is redoubling its
efforts to achieve aggressive spending reductions, supplier price concessions
and manufacturing process improvements, and additional salaried headcount
reductions are expected. On a longer-term basis, the Company is continuing to
evaluate product line and facilities consolidations that may permit it to
meaningfully reduce its cost structure in the future while maintaining and even
increasing its market share. Accordingly, the Company's results in 2003 could
include one or more charges for restructurings, asset impairments or similar
charges that might be material. Likewise, to the extent that cost reductions
meet or exceed target goals, results may be somewhat better than currently
forecast.
In 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
143, Accounting for Asset Retirement Obligations. Under SFAS No. 143, the fair
value of a liability for an asset retirement obligation covered under the scope
of SFAS No. 143 is recognized in the period in which the liability is incurred,
with an offsetting increase in the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The Company expects to
recognize a cummulative effect loss of approximately $0.2 million and an asset
retirement obligation of approximately $0.4 million upon adoption of SFAS No.
143 on January 1, 2003. See Note 1 to the Consolidated Financial Statements.
31
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The Company has adopted the disclosure
requirements of the Interpretation as of December 31, 2002. See Note 19 to the
Consolidated Financial Statements related to discussion of the Company's
workers' compensation surety bond guarantees. The Company will adopt the
recognition and initial measurement provisions of this Interpretation on a
prospective basis for any guarantees issued or modified after December 31, 2002.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities. Except for TIMET Capital Trust I (discussed in
Note 12 to the Consolidated Financial Statements), the Company does not believe
it has any variable interest entity covered by the scope of FASB Interpretation
No. 46. The Company has consolidated TIMET Capital Trust I since its formation,
as the Company owns 100% of the trust's outstanding voting securities. The
Company will adopt this Interpretation no later than the quarter ended September
30, 2003. The adoption of this Interpretation is not expected to have a material
effect on the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows provided by operating, investing and
financing activities for each of the past three years are presented below. The
following should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto.
Year ended December 31,
------------------------------------------------------
2002 2001 2000
--------------- ---------------- ---------------
(In thousands)
Cash provided (used) by:
Operating activities:
Excluding changes in assets and liabilities $ (4,100) $ 97,908 $ (7,851)
Changes in assets and liabilities (9,495) (35,334) 73,313
--------------- ---------------- ---------------
(13,595) 62,574 65,462
Investing activities (7,467) (16,093) (4,218)
Financing activities 3,523 (31,358) (72,812)
--------------- ---------------- ---------------
Net cash (used) provided by operating,
investing and financing activities $ (17,539) $ 15,123 $ (11,568)
=============== ================ ===============
Operating activities. Cash (used) provided by operating activities,
excluding changes in assets and liabilities, during the past three years
generally follows the trend in operating results. Changes in assets and
liabilities reflect the timing of purchases, production and sales, and can vary
significantly from period to period.
Accounts receivable decreased during 2002 primarily as a result of reduced
sales, partially offset by an increase in days sales outstanding as certain
customers extended their payment terms to the Company. Accounts receivable
increased in 2001, principally as a result of increased sales. Accounts
receivable decreased during 2000, reflecting the decrease in sales levels as
well as an improvement in collections as reflected by a decrease in the average
number of days that receivables were outstanding. The significant reduction in
receivables in 2000 was also attributable to $16 million of customer payments
received in the first quarter of 2000 related to a bill-and-hold arrangement
entered into near the end of 1999. See Note 9 to the Consolidated Financial
Statements.
32
Inventories decreased during 2002 primarily as a result of reduced
production in the fourth quarter of 2002 and an increase in the Company's
reserves for excess inventories, which the Company recorded in response to
decreased demand for its products and other changes in business conditions.
Inventories increased in 2001, reflecting material purchases and production
rates that were based on expected sales levels higher than actual sales levels
achieved. Due to the impact of the September 11, 2001 terrorist attacks, a
number of customer order deferrals and cancellations were received late in 2001,
contributing to the inventory increase. The Company reduced inventories during
2000 as excess raw materials and other inventory items were consumed and
inventory reduction and control efforts were put in place.
In April 2001, the Company reached a settlement of the litigation between
TIMET and Boeing. Pursuant to the settlement, the Company received a cash
payment of $82 million ($73 million net of legal fees) and in December 2001
received a $28.5 million customer advance from Boeing related to fiscal 2002
purchases. This advance was reduced to $0.8 million at the end of 2002 as a
result of shipments and orders from Boeing as well as the recognition of
take-or-pay income. Through 2007 the Company will receive a similar annual
advance in January of the year to which the advance is related. See Notes 10 and
19 to the Consolidated Financial Statements.
Net accounts with related parties decreased during 2002 primarily as a
result of cash received from Tremont related to an intercorporate services
agreement and from a reduction in sales to VALTIMET. Changes in net accounts
with related parties during 2001 and 2000 resulted primarily from relative
changes in receivable levels with joint ventures. Prepaid expenses and other
current assets decreased during 2002 due to the receipt of raw materials for
which the Company had made advance payments during 2001 and the ongoing usage of
other prepaid assets.
Dividends for the period October 1998 through December 1999 on the
Company's investment in SMC 6.625% convertible preferred securities were
deferred by SMC. In April 2000, SMC resumed current dividend payments of $1.3
million each quarter; however, dividends and interest in arrears were not paid.
On October 11, 2001, the Company was notified by SMC of SMC's intention to again
defer the payment of dividends effective with the dividend due on October 28,
2001. The SMC convertible preferred securities held by TIMET are not publicly
traded and, accordingly, quoted market prices are unavailable. As more fully
discussed in "Results of Operations - Non-operating income (expense), net", the
Company recorded a pre-tax impairment charge of $61.5 million related to these
securities, including accrued dividends and interest, in the fourth quarter of
2001 and ceased accruing dividend income on these securities at that time.
Additionally, the Company recorded a charge of $27.5 million related to these
securities in the first quarter of 2002 that reduced the carrying amount of
these securities to zero. The ultimate amount, if any, which the Company may
realize from its investment in the SMC securities is unknown due to the
uncertainties associated with SMC's bankruptcy proceedings; however, the Company
believes it is unlikely that it will recover any amount from this investment.
See Note 5 to the Consolidated Financial Statements.
Deferred income tax benefits in 2002 primarily reflect benefits recognized
related to European losses, as the Company did not record any benefits related
to its U.S. losses. Beginning in 2003, the Company will also not record any
benefits related to its U.K. losses. Deferred income taxes in 2001 were
primarily due to an increase in the Company's deferred tax asset valuation
allowance to offset previously recorded tax benefits which did not meet the
"more-likely-than-not" recognition criteria. Deferred income taxes in 2000
primarily reflect net tax refunds of $8 million. See Note 16 to the Consolidated
Financial Statements.
33
As more fully discussed in "Results of Operations - Minority interest," in
October 2002 the Company exercised its right to defer future dividend payments
on its Convertible Preferred Securities, although dividends will continue to
accrue at the coupon rate on the principal and unpaid dividends. This deferral
was effective beginning with the Company's December 1, 2002 scheduled dividend
payment. The Company will consider resuming payment of dividends on the
Convertible Preferred Securities once the outlook for the Company's business
improves substantially. Since the Company exercised its right to defer dividend
payments, it is unable under the terms of these securities to, among other
things, pay dividends on or reacquire its capital stock during the deferral
period. However, the Company is permitted to reacquire the Convertible Preferred
Securities during the deferral period, subject to certain U.S. credit facility
limitations. In April 2000, the Company similarly exercised its right to defer
future dividend payments on its Convertible Preferred Securities. In the second
quarter of 2001, a portion of the Boeing settlement, described above, was used
to pay the previously deferred aggregate dividends of $13.9 million and resume
the payment of the regularly scheduled dividends. Changes in accrued dividends
on Convertible Preferred Securities reflect this activity.
Investing activities. The Company's capital expenditures were $7.8 million
in 2002, $16.1 million in 2001 and $11.2 million in 2000. Capital spending for
2002 and 2001 was principally for safety and maintaining capacity. Capital
spending for 2000 was principally for capacity enhancements, capital
maintenance, and safety and environmental projects.
Proceeds of $7.0 million from the sale of the Company's castings joint
venture in 2000 represent the proceeds from the Company's sale to Wyman-Gordon
of the Company's 20% interest in Wyman-Gordon Titanium Castings, LLC. This
transaction is more fully described in Note 4 to the Consolidated Financial
Statements.
Financing activities. Net borrowings of $6.3 million during 2002 are
primarily attributable to increases in working capital (exclusive of cash).
TIMET Savoie made a $1.1 million dividend payment to CEZUS in the second quarter
of 2002. The Company incurred approximately $1.1 million in financing costs in
conjunction with the Company's amendment of its U.S. revolving credit agreement
in 2002. These costs are deferred and amortized over the life of the agreement,
which matures in February 2006. See further discussion in "Borrowing
arrangements." Net repayments of $32 million in 2001 are principally the result
of the Company's litigation settlement with Boeing. Net repayments of $70
million in 2000 reflect reductions of outstanding borrowings principally in the
U.S. resulting from collection of receivables, reduction in inventories, tax
refunds, proceeds from the sale of the Company's casting joint venture and
deferral of dividend payments on the Company's Convertible Preferred Securities.
In addition, the Company incurred approximately $2.1 million in financing costs
in 2000 in conjunction with the Company's completion of a new U.S. revolving
credit agreement.
Borrowing arrangements. At December 31, 2002, the Company's net debt (cash
and cash equivalents less indebtedness, excluding capital lease obligations,
Convertible Preferred Securities and accrued dividends thereon) was
approximately $13.2 million, consisting of $6.2 million of cash and equivalents
and $19.4 million of debt (principally borrowings under the Company's U.S. and
U.K. credit agreements). This compares to a net cash position of approximately
$12.1 million as of December 31, 2001. During January 2003, the Company received
approximately $27.7 million from Boeing under the terms of the parties' amended
LTA, which was used to reduce outstanding borrowings under the Company's U.S.
credit agreement.
34
On October 23, 2002, the Company amended its existing U.S. asset-based
revolving credit agreement, extending the maturity date to February 2006. Under
the terms of the amendment, borrowings are limited to the lesser of $105 million
or a formula-determined borrowing base derived from the value of accounts
receivable, inventory and equipment ("borrowing availability"). This facility
requires the Company's U.S. daily cash receipts to be used to reduce outstanding
borrowings, which may then be reborrowed, subject to the terms of the agreement.
Interest generally accrues at rates that vary from LIBOR plus 2% to LIBOR plus
2.5%. Borrowings are collateralized by substantially all of the Company's U.S.
assets. The credit agreement prohibits the payment of dividends on TIMET's
Convertible Preferred Securities if "excess availability," as defined, is less
than $25 million, limits additional indebtedness, prohibits the payment of
dividends on the Company's common stock if excess availability is less than $40
million, requires compliance with certain financial covenants and contains other
covenants customary in lending transactions of this type. The Company was in
compliance in all material respects with all covenants for all periods during
the years ended December 31, 2002 and 2001. Excess availability is essentially
unused borrowing availability and is defined as borrowing availability less
outstanding borrowings and certain contractual commitments such as letters of
credit. As of December 31, 2002, excess availability was approximately $85
million. The weighted average interest rate on borrowings outstanding under
these credit agreements was 3.7% and 5.3% as of December 31, 2002 and 2001,
respectively.
The Company's U.S. credit agreement allows the lender to modify the
borrowing base formulas at its discretion, subject to certain conditions. During
the second quarter of 2002, the Company's lender elected to exercise such
discretion and modified the Company's borrowing base formulas, which reduced the
amount that the Company could have borrowed against its inventory and equipment
by approximately $7 million. In the event the lender exercises such discretion
in the future, such event could have a material adverse impact on the Company's
liquidity. Borrowings outstanding under this U.S. facility are classified as a
current liability.
The Company's subsidiary, TIMET UK, has a credit agreement that provides
for borrowings limited to the lesser of (pound)22.5 million or a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and equipment ("borrowing availability"). The credit agreement
includes a revolving and term loan facility and an overdraft facility (the "U.K.
facilities"). On December 20, 2002, the Company renewed and amended its existing
U.K. facilities, extending the maturity date to December 20, 2005 and reducing
the maximum borrowing base from (pound)30.0 million to (pound)22.5 million to
more appropriately match TIMET UK's collateral base. Borrowings under the U.K.
facilities can be in various currencies including U.S. dollars, British pounds
sterling and euros; accrue interest at rates that vary from LIBOR plus 1% to
LIBOR plus 1.25%; and are collateralized by substantially all of TIMET UK's
assets. The U.K. facilities require the maintenance of certain financial ratios
and amounts and other covenants customary in lending transactions of this type.
TIMET UK was in compliance in all material respects with all covenants for all
periods during the years ended December 31, 2002 and 2001. The U.K. overdraft
facility is subject to annual review in December of each year. In the event the
overdraft facility is not renewed, the Company believes it could refinance any
outstanding overdraft borrowings under either the revolving or term loan
features of the U.K. facilities. Unused borrowing availability as of December
31, 2002 under the U.K. facilities was approximately $30 million. The weighted
average interest rate on borrowings outstanding under these credit agreements
was 4.6% and 3.6% as of December 31, 2002 and 2001, respectively.
35
The Company also has overdraft and other credit facilities at certain of
its other European subsidiaries. These facilities accrue interest at various
rates and are payable on demand. Unused borrowing availability as of December
31, 2002 under these facilities was approximately $16 million. The weighted
average interest rate on borrowings outstanding under these credit agreements
was 3.7% and 3.6% as of December 31, 2002 and 2001, respectively.
Although excess availability under TIMET's U.S. credit agreement remains
above $40 million, no dividends were paid by TIMET on its common shares during
2002, 2001 or 2000. TIMET does not anticipate paying dividends on its common
shares during 2003 and, as previously discussed, is not permitted to pay such
dividends while deferring dividend payments on its Convertible Preferred
Securities.
Contractual commitments. As more fully described in Notes 11, 12, 18 and 19
to the Consolidated Financial Statements, the Company is a party to various
debt, lease and other agreements at December 31, 2002 that contractually and
unconditionally commit the Company to pay certain amounts in the future. The
following table summarizes such contractual commitments that are unconditional
both in terms of timing and amount by the type and date of payment.
Unconditional Payment Due Date
--------------------------------------------------------------------------
2004/ 2006/ 2008 &
2003 2005 2007 After Total
---------- ------------ ------------ ------------ ------------
Contractual Commitment (In thousands)
-----------------------------------
Indebtedness $ 12,994 $ 6,401 $ - $ - $ 19,395
Capital leases 642 885 411 8,279 10,217
Operating leases 3,384 2,336 947 339 7,006
Obligations to Basic Management, Inc. 1,324 1,922 1,063 1,107 5,416
Minimum sponge purchase commitments (1) 9,975 19,950 19,950 - 49,875
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely
subordinated debt securities ("BUCS") - - - 201,241 201,241
Accrued dividends on BUCS (2) - - - 4,462 4,462
---------- ------------ ------------ ------------ ------------
$ 28,319 $ 31,494 $ 22,371 $ 215,428 $ 297,612
========== ============ ============ ============ ============
-----------------------------------------------------------------------------------------------------------------------
(1) Commitments based on an assumed constant mix of products purchased.
(2) Represents total dividends accrued on the BUCS at December 31, 2002,
including dividends due on December 1, 2002 and deferred as of that date.
Based on the deferral, the deferred dividends are not contractually due
until March 1, 2008.
36
Defined benefit pension plans. The Company maintains two defined benefit
pension plans in the U.S., one in the U.K. and one in France. The majority of
the discussion below relates to the U.S. and U.K. plans, as the French plan is
not material to the Company's Consolidated Balance Sheets, Statements of
Operations or Cash Flows.
The Company recorded consolidated pension expense of $4.9 million, $1.5
million and $1.4 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Pension expense for these periods was calculated based upon a
number of actuarial assumptions, most significant of which are the discount rate
and the expected long-term rate of return on plan assets.
The discount rate the Company utilizes for determining pension expense and
pension obligations is based on a review of long-term bonds (10 to 15 year
maturities) that receive one of the two highest ratings given by recognized
rating agencies (generally Merrill Lynch, Moody's, Solomon Smith Barney and UBS
Warburg) as well as composite indices provided by the Company's actuaries.
Changes in the Company's discount rate over the past three years reflect the
decline in such bond rates during that time period. The Company establishes a
rate that is used to determine obligations as of the year-end date and expense
for the subsequent year. The Company used the following discount rates for its
pension plans:
Discount rates used for:
------------------------------------------------------------------------------------------------
Obligation at Obligation at Obligation at
December 31,2002 December 31,2001 December 31, 2000
and expense in 2003 and expense in 2002 and expense in 2001
------------------------------ ------------------------------ ---------------------------
U.S. Plans 6.25% 7.00% 7.25%
U.K. Plan 5.70% 6.00% 6.00%
In developing the Company's expected long-term rate of return assumption,
the Company evaluated historical market rates of return and input from its
actuaries, including a review of asset class return expectations as well as
long-term inflation assumptions. Projected returns are based on broad equity
(large cap, small cap and international) and bond (corporate and government)
indices as well as an anticipation that the plans' active investment managers
will generate premiums above the standard market projections. The Company's
assumed rate of return for 2002 was 9.00% for its U.S. plans and 7.50% for its
U.K. plan based upon these projections.
Lowering the expected long-term rate of return on the Company's U.S. plans'
assets by 0.25% (from 9.00% to 8.75%) would have increased 2002 pension expense
by approximately $0.1 million, and lowering the discount rate assumption by
0.25% (from 7.00% to 6.75%) would have increased the Company's U.S. plans' 2002
pension expense by approximately $0.1 million. Lowering the expected long-term
rate of return on the Company's U.K. plan's assets by 0.25% (from 7.50% to
7.25%) would have increased 2002 pension expense by approximately $0.2 million,
and lowering the discount rate assumption by 0.25% would have increased the
Company's U.K. plan's 2002 pension expense by approximately $0.5 million.
37
Based on continued market declines and losses on the plan assets during
2002, as well as future projected asset mix, the Company reduced its assumed
long-term rate of return for 2003 to 8.50% for its U.S. plans and 6.70% for its
U.K. plan. The Company's future expected long-term rate of return on plan assets
for its U.S. and U.K. plans is based on an asset allocation assumption of 50%
equity securities and 50% fixed income securities. Because of market
fluctuations and prior funding strategies, actual asset allocation as of
December 31, 2002 was 61% equity securities and 39% fixed income securities for
the U.S. plans and 90% equity securities and 10% fixed income securities for the
U.K. plan. The Company believes, however, that the plans' future long-term asset
allocation on average will approximate the assumed 50/50 allocation. Although
the expected rate of return is a long-term measure, the Company will continue to
evaluate its expected rate of return, at least annually, and will adjust it as
considered necessary.
Among other things, the Company bases its determination of pension expense
for all plans on the fair value of plan assets. The expected return on the fair
value of the plan assets, determined based on the expected long-term rate of
return, is a component of pension expense. This methodology further recognizes
actual investment gains or losses (i.e. the difference between the expected and
actual returns based on the market value of assets) in pension expense through
amortization in future periods based upon the expected average remaining service
life of the plan participants.
Based on an expected rate of return on plan assets of 8.50%, a discount
rate of 6.25% and various other assumptions, the Company estimates that pension
expense for its U.S. plans will approximate $3.2 million in 2003, $2.6 million
in 2004 and $2.0 million in 2005. A 0.25% increase (decrease) in the discount
rate would decrease (increase) projected pension expense by approximately $0.1
million in 2003, 2004 and 2005. A 0.25% increase (decrease) in the long-term
rate of return would similarly decrease (increase) projected pension expense by
approximately $0.1 million in 2003 and 2004 and by $0.2 million in 2005. Based
on an expected rate of return on plan assets of 6.70%, a discount rate of 5.70%
and various other assumptions (including an exchange rate of $1.55/(pound)1.00),
the Company estimates that pension expense for its U.K. plan will approximate
$6.5 million in 2003, $6.1 million in 2004 and $5.6 million in 2005. A 0.25%
increase (decrease) in the discount rate would decrease (increase) projected
pension expense by approximately $0.5 million in 2003 and in 2004 and $0.6
million in 2005. A 0.25% increase (decrease) in the long-term rate of return
would decrease (increase) projected pension expense by approximately $0.2
million in 2003 and 2004 and $0.3 million in 2005. Actual future pension expense
will depend on future actual investment performance, changes in future discount
rates and various other factors related to the populations participating in the
Company's pension plans.
The Company made cash contributions of approximately $1.2 million in 2002
and $2.7 million in 2001 to the U.S. plans and cash contributions of
approximately $6.1 million in 2002 and $3.6 million in 2001 to the U.K. plan.
Based upon the current underfunded status of the plans and the actuarial
assumptions being used for 2003, the Company believes that it will be required
to make cash contributions of approximately $3.8 million in 2003, $7.0 million
in 2004 and $4.4 million in 2005 to the U.S. plans and approximately $6.5
million in 2003, $6.7 million in 2004 and $6.8 million in 2005 to the U.K. plan.
Certain employee contributions are also required by the U.K. plan.
38
The value of the plans' assets has decreased the past three years based
mainly on poor performance from equity securities. The U.S. plans' assets were
$48.2 million, $56.5 million and $57.2 million at December 31, 2002, 2001 and
2000, respectively, and the U.K. plan's assets were $69.8 million, $79.0 million
and $92.2 million at December 31, 2002, 2001 and 2000, respectively.
The combination of negative actual investment returns and declining
discount rates have increased the Company's underfunded plan status (plan assets
compared to accumulated benefit obligations) from $7.7 million at December 31,
2001 to $21.1 million at December 31, 2002 for the U.S. plans and from $12.2
million at December 31, 2001 to $40.0 million at December 31, 2002 for the U.K.
plan. Because of this underfunded status, the Company was required to record an
additional minimum pension liability charge to equity of $13 million related to
the U.S. plans and $28 million (net of $1.6 million in taxes) related to the
U.K. plan in 2002.
Postretirement benefit plans other than pensions. The Company provides
certain postretirement healthcare and life insurance ("OPEB") benefits to the
majority of its U.S. employees upon retirement. The Company funds such OPEB
benefits as they are incurred, net of any retiree contributions. The Company
paid OPEB benefits, net of retiree contributions, in the amount of $4.6 million
and $4.0 million during 2002 and 2001, respectively.
The Company recorded consolidated OPEB expense of $2.9 million, $1.8
million and $1.1 million for the years ended December 31, 2002, 2001 and 2000,
respectively. OPEB expense for these periods was calculated based upon a number
of actuarial assumptions, most significant of which are the discount rate and
the expected long-term health care trend rate.
The discount rate the Company utilizes for determining OPEB expense and
OPEB obligations is the same as that used for the Company's U.S. pension plans.
Lowering the discount rate assumption by 0.25% (from 7.00% to 6.75%) would have
increased the Company's 2002 OPEB expense by less than $0.1 million.
The Company estimates the expected long-term health care trend rate based
upon input from specialists in this area, as provided by the Company's
actuaries. In estimating the health care trend rate, the Company considers
industry trends, the Company's actual healthcare cost experience and the
Company's future benefit structure. For 2002, the Company used a beginning
health care trend rate of 11.15%, which is projected to reduce to an ultimate
rate of 5.00% in 2010. If the health care trend rate changed by 1.00% for each
year, OPEB expense would have increased/decreased by approximately $0.3 million
in 2002.
For 2003, the Company is using a beginning health care trend rate of
11.35%, which is projected to reduce to an ultimate rate of 4.25% in 2010. The
Company increased its beginning rate based upon actual plan and industry
experience during 2002. However, the Company continues to believe the ultimate
trend rate of 2010 is appropriate at this time.
Based on a discount rate of 6.25%, a health care trend rate as discussed
above and various other assumptions, the Company estimates that OPEB expense
will approximate $2.7 million in 2003 and 2004 and $2.6 million in 2005. A 0.25%
increase (decrease) in the discount rate would decrease (increase) projected
OPEB expense by approximately $0.1 million in 2003, 2004 and 2005. A 1.0%
increase (decrease) in the health care trend rate for each year would increase
(decrease) projected OPEB expense by approximately $0.3 million in 2003, 2004
and 2005.
39
Environmental matters. See "Business - Regulatory and environmental
matters" in Item 1 and Note 19 to the Consolidated Financial Statements for a
discussion of environmental matters.
Other. On September 9, 2002, Moody's Investor Service lowered its rating on
the Company's Convertible Preferred Securities to Caa2 from B3. Standard &
Poor's Ratings Services ("S&P") lowered its rating on the Company's Convertible
Preferred Securities to CCC- from CCC on September 10, 2002, to C from CCC- on
October 29, 2002 and to D from CCC- on December 2, 2002. The Company's ability
to obtain additional capital in the future could be negatively affected by these
rating actions.
The Company periodically evaluates its liquidity requirements, capital
needs and availability of resources in view of, among other things, its
alternative uses of capital, debt service requirements, the cost of debt and
equity capital and estimated future operating cash flows. As a result of this
process, the Company has in the past, or in light of its current outlook, may in
the future, seek to raise additional capital, modify its common and preferred
dividend policies, restructure ownership interests, incur, refinance or
restructure indebtedness, repurchase shares of common stock or Convertible
Preferred Securities, sell assets, or take a combination of such steps or other
steps to increase or manage its liquidity and capital resources.
In the normal course of business, the Company investigates, evaluates,
discusses and engages in acquisition, joint venture, strategic relationship and
other business combination opportunities in the titanium, specialty metal and
other industries. In the event of any future acquisition or joint venture
opportunities, the Company may consider using then-available liquidity, issuing
equity securities or incurring additional indebtedness.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the Company to
make estimates and judgments, and select from a range of possible estimates and
assumptions, that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period. On an on-going basis, the Company evaluates its estimates, including
those related to allowances for uncollectible accounts receivable, inventory
allowances, impairments of investments in preferred securities and investments
accounted for by the equity method, the recoverability of other long-lived
assets, including property and equipment, goodwill and other intangible assets,
pension and other post-retirement benefit obligations and the related underlying
actuarial assumptions, the realization of deferred income tax assets, and
accruals for environmental remediation, litigation, income tax and other
contingencies. The Company bases its estimates and judgments, to varying
degrees, on historical experience, advice of external specialists and various
other factors it believes to be prudent under the circumstances. Actual results
may differ from previously estimated amounts and such estimates, assumptions and
judgments are regularly subject to revision. The policies and estimates
discussed below are considered by management to be critical to an understanding
of the Company's financial statements because their application requires the
most significant judgments from management in estimating matters for financial
reporting that are inherently uncertain. See Notes to the Consolidated Financial
Statements for additional information on these policies and estimates, as well
as discussion of additional accounting policies and estimates.
40
Impairments of long-lived assets. Generally, when events or changes in
circumstances indicate that the carrying amount of long-lived assets, including
property and equipment, goodwill and other intangible assets, may not be
recoverable, the Company prepares an evaluation of the assets or asset group. If
this evaluation indicates that the carrying amount of the asset or asset group
is not recoverable, the amount of the impairment would typically be calculated
using discounted expected future cash flows or appraised values. All relevant
factors are considered in determining whether an impairment exists.
The Company completed an entity-wide impairment assessment under SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets during the
fourth quarter of 2002 in response to continued poor conditions in the
commercial aerospace market. In order to complete this assessment, the Company
identified its lowest level of identifiable cash flows, resulting in the
identification of four asset groups - U.S., U.K., France and Italy. Of these
asset groups, Italy is not reliant on sales into the commercial aerospace market
and therefore an analysis of its potential impairment was not considered
necessary. The result of this assessment led the Company to conclude that there
was no impairment related to the long-lived assets in the three asset groups
tested, as the undiscounted cash flows exceeded the net carrying value of the
applicable net assets in each of the three asset groups. Although management
utilizes certain external information sources such as The Airline Monitor as the
basis for aerospace sales volume projections, significant management judgment is
required in estimating other factors that are material to future cash flows
including, but not limited to, customer demand, the Company's market position,
selling prices, competitive forces and manufacturing costs. Future cash flows
are inherently uncertain, and there can be no assurance that the Company will
achieve the future cash flows reflected in its projections.
The Company also completed an impairment assessment of its goodwill and
intangible assets under SFAS No. 142, Goodwill and Other Intangible Assets,
during 2002, as more fully discussed in "Results of Operations - Cumulative
effect of change in accounting principle." Management judgment was required in
order to identify the Company's reporting units, determine the carrying amount
of each reporting unit by assigning its assets and liabilities, including
existing goodwill and intangible assets, to those reporting units as of January
1, 2002, and determine the implied fair value of its goodwill. This evaluation,
which was completed with the assistance of an external valuation specialist and
considered a combination of fair value indicators including quoted market
prices, prices of comparable businesses and discounted projected cash flows,
indicated that the Company's recorded goodwill might be impaired and required
the Company to complete the second step of the impairment test. Based on the
results of the impairment test, the Company recorded a non-cash goodwill
impairment charge of $44.3 million, representing the entire balance of the
Company's recorded goodwill at January 1, 2002.
41
Valuation and impairment of securities. In accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the Company
evaluates its investments in debt and equity securities whenever events or
conditions occur to indicate that the fair value of such investments has
declined below their carrying amounts. If the decline in fair value is judged to
be other than temporary, the carrying amount of the security is written down to
fair value. In response to certain events previously described in this MD&A, the
Company undertook assessments in the fourth quarter of 2001 and the first
quarter of 2002 of its investment in SMC with the assistance of an external
valuation specialist. Those assessments indicated that it was unlikely that the
Company would recover its then existing carrying amount of the SMC securities in
accordance with the securities' contractual terms and that an other than
temporary decline in the fair value of its investment had occurred. Accordingly,
the Company recorded impairment charges of $61.5 million in the fourth quarter
of 2001 and $27.5 million in the first quarter of 2002.
The SMC convertible preferred securities held by the Company are not
publicly traded and, accordingly, quoted market prices are unavailable. The
estimate of fair value requires significant judgment and considered a number of
factors including, but not limited to, the financial health and prospects of the
issuer and market yields of comparable securities. The ultimate amount, if any,
which the Company may ultimately realize from its investment in the SMC
securities is unknown due to the uncertainties associated with its bankruptcy
proceedings; however, the Company believes it is unlikely that it will recover
any amount from this investment.
Deferred income tax valuation allowances. Under SFAS No. 109, Accounting
for Income Taxes, and related guidance, the Company is required to record a
valuation allowance if realization of deferred tax assets is not
"more-likely-than-not." Substantial weight must be given to recent historical
results and near-term projections and management must assess the availability of
tax planning strategies that might impact either the need for, or amount of, any
valuation allowance.
As more fully discussed in "Results of Operations - Income taxes," based on
the Company's recent history of losses, its near-term outlook and management's
evaluation of available tax planning strategies, in the fourth quarter of 2001
the Company concluded that realization of its previously recorded U.S. deferred
tax assets did not continue to meet the "more-likely-than-not" recognition
criteria. Accordingly, during 2001 the Company increased its deferred tax
valuation allowance by $35.5 million to offset deferred tax benefits related to
net U.S. deferred tax assets, primarily net operating loss and minimum tax
credit carryforwards, and determined that it would not recognize deferred tax
benefits related to future U.S. losses continuing for an uncertain period of
time.
Additionally, during the fourth quarter of 2002, the Company determined
that it would not recognize a deferred tax asset related to its U.K. net
deferred tax assets because it did not meet the "more-likely-than-not"
recognition criteria. Accordingly, the Company recorded a deferred tax asset
valuation allowance of $7.2 million through other comprehensive loss in the
fourth quarter of 2002 to offset the related U.K. deferred tax asset that arose
due to an increase in U.K. minimum pension liabilities and determined that it
would not recognize deferred tax assets related to either future U.K. losses or
future increases in U.K. minimum pension liabilities continuing for an uncertain
period of time.
Regular reviews of the "more-likely-than-not" criteria and availability of
tax planning strategies will continue to require significant management
judgment.
42
Inventory allowances. The Company values approximately one-half of its
inventory using the last-in, first-out ("LIFO") method with the remainder
primarily stated using an average cost method. The Company periodically reviews
its inventory for estimated obsolescence or unmarketable inventory and records
any write-down equal to the difference between the cost of inventory and its
estimated net realizable value based upon assumptions about alternative uses,
market conditions and other factors.
Pension and OPEB expenses and obligations. The Company's pension and OPEB
expenses and obligations are calculated based on several estimates, including
discount rates, expected rates of returns on plan assets and expected health
care trend rates. The Company reviews these rates annually with the assistance
of its actuaries. See further discussion of the factors considered and potential
effect of these estimates in "Liquidity and Capital Resources - Pension plans"
and "Liquidity and Capital Resources - Postretirement benefit plans other than
pensions."
Revenue recognition. Sales revenue is generally recognized when the Company
has certified that its product meets the related customer specifications, the
product has been shipped, and title and substantially all the risks and rewards
of ownership have passed to the customer. Payments received from customers in
advance of these criteria being met are recorded as customer advances until
earned. The Company believes that its revenue recognition policies are in
compliance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements.
Other loss contingencies. Accruals for estimated loss contingencies,
including, but not limited to, product-related liabilities, environmental
remediation, and litigation, are recorded when it is probable that a liability
has been incurred and the amount of the loss can be reasonably estimated.
Disclosure is made when there is a reasonable possibility that a loss may have
been incurred. Contingent liabilities are often resolved over long time periods.
Estimating probable losses often requires analysis of various projections that
are dependent upon the future outcome of multiple factors, including costs, the
findings of investigations, and actions by the Company and third parties.
43
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rates. The Company is exposed to market risk from changes in
interest rates related to indebtedness. The Company typically does not enter
into interest rate swaps or other types of contracts in order to manage its
interest rate market risk. At December 31, 2002 substantially all of the
Company's indebtedness was denominated in U.S. dollars, British pounds sterling
or euros and bore interest at variable rates, primarily related to spreads over
LIBOR. Because the Company's indebtedness reprices with changes in market
interest rates, the carrying amount of such debt is believed to approximate fair
value. The following table summarizes the Company's indebtedness and related
maturities as of December 31, 2002.
Contractual maturity date (1)
--------------------------------------------------------------------- Interest
2003 2004 2005 2006 2007 rate (2)
----------- ---------- ----------- ---------- ----------- -----------
(In millions)
Variable rate debt:
U. S. dollars $ 11.9 $ - $ 2.0 $ - $ - 3.7%
British pounds sterling - - 4.4 - - 5.3%
Euros 1.0 - - - - 3.7%
(1) Non-U. S. dollar denominated amounts are translated at year-end rates of exchange.
(2) Weighted average.
The Company's indebtedness as of December 31, 2001 is summarized below.
Contractual maturity date (1)
--------------------------------------------------------------------- Interest
2002 2003 2004 2005 2006 rate (2)
----------- ---------- ----------- ---------- ----------- -----------
(In millions)
Variable rate debt:
U. S. dollars $ - $ - $ 8.1 $ - $ - 3.0%
British pounds sterling - - 2.6 - - 5.3%
Euros 1.7 - - - - 3.9%
(1) Non-U. S. dollar denominated amounts are translated at year-end rates of exchange.
(2) Weighted average.
Foreign currency exchange rates. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of its
international operations. The Company typically does not enter into currency
forward contracts to manage its foreign exchange market risk associated with
receivables, payables and indebtedness denominated in a currency other than the
functional currency of the particular entity. See "Results of Operations -
European operations" in Item 7 (MD&A) for further discussion.
Commodity prices. The Company is exposed to market risk arising from
changes in commodity prices as a result of its long-term purchase and supply
agreements with certain suppliers and customers. These agreements, which offer
various fixed or formula-determined pricing arrangements, effectively obligate
the Company to bear (i) the risk of increased raw material and other costs to
the Company which cannot be passed on to the Company's customers through
increased titanium product prices (in whole or in part) or (ii) the risk of
decreasing raw material costs to the Company's suppliers which are not passed on
to the Company in the form of lower raw material prices.
44
Other. The Company holds convertible preferred securities of Special Metals
Corporation with a principal amount of $80 million and an estimated fair value
of zero. These securities are not publicly traded, and, accordingly, quoted
market prices are unavailable. These securities are accounted for at estimated
fair value and are considered "available-for-sale" securities. See "Liquidity
and Capital Resources - Operating activities" in Item 7 (MD&A) and Note 5 to the
Consolidated Financial Statements for further discussion.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in a separate section of
this Annual Report. See Index of Financial Statements and Schedules on page F.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
45
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
TIMET's definitive proxy statement to be filed with the SEC pursuant to
Regulation 14A within 120 days after the end of the fiscal year covered by this
Annual Report (the "TIMET Proxy Statement").
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement. See also Note 18 to the Consolidated Financial
Statements.
ITEM 14: CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that the Company files or submits to the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it files
or submits to the SEC under the Exchange Act is accumulated and communicated to
the Company's management, including its principal executive officer and its
principal financial officer, as appropriate to allow timely decisions to be made
regarding required disclosure. Both J. Landis Martin, the Company's principal
executive officer, and JoAnne A. Nadalin, the Company's principal financial
officer, have evaluated the Company's disclosure controls and procedures as of a
date within 90 days of the filing of this Form 10-K. Based upon their
evaluation, these executive officers have concluded that the Company's
disclosure controls and procedures are effective as of the date of such
evaluation.
46
The Company also maintains a system of internal controls. The term
"internal controls," as defined by the American Institute of Certified Public
Accountants' Codification of Statement on Auditing Standards, AU Section 319,
means controls and other procedures designed to provide reasonable assurance
regarding the achievement of objectives in the reliability of the Company's
financial reporting, the effectiveness and efficiency of the Company's
operations and the Company's compliance with applicable laws and regulations.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date of their last evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
47
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
The consolidated financial statements and schedules listed by the
Registrant on the accompanying Index of Financial Statements and Schedules (see
page F) are filed as part of this Annual Report.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended December 31, 2002 and through
February 27, 2003:
Date of Report Items Reported
------------------------ -----------------------
November 4, 2002 5 and 7
November 4, 2002 5 and 7
November 19, 2002 5 and 7
November 19, 2002 5 and 7
December 4, 2002 5 and 7
December 12, 2002 5 and 7
December 23, 2002 5 and 7
December 23, 2002 5 and 7
February 4, 2003 5 and 7
February 5, 2003 5 and 7
February 14, 2003 5 and 7
(c) Exhibits
Included as exhibits are the items listed in the Exhibit Index. TIMET will
furnish a copy of any of the exhibits listed below upon payment of $4.00 per
exhibit to cover the costs to TIMET of furnishing the exhibits. Instruments
defining the rights of holders of long-term debt issues which do not exceed 10%
of consolidated total assets will be furnished to the Commission upon request.
48
Item No. Exhibit Index
-------- ----------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of Titanium Metals
Corporation, as amended effective February 14, 2003.
3.2 Bylaws of Titanium Metals Corporation as Amended and Restated, dated
February 4, 2003.
4.1 Certificate of Trust of TIMET Capital Trust I, dated November 13,
1996, incorporated by reference to Exhibit 4.1 to Titanium Metals
Corporation's Current Report on Form 8-K filed with the SEC on
December 5, 1996.
4.2 Amended and Restated Declaration of Trust of TIMET Capital Trust I,
dated as of November 20, 1996, among Titanium Metals Corporation, as
Sponsor, the Chase Manhattan Bank, as Property Trustee, Chase
Manhattan Bank (Delaware), as Delaware Trustee and Joseph S.
Compofelice, Robert E. Musgraves and Mark A. Wallace, as Regular
Trustees, incorporated by reference to Exhibit 4.2 to the Registrant's
Current Report on Form 8-K filed with the SEC on December 5, 1996.
4.3 Indenture for the 6 5/8% Convertible Junior Subordinated Debentures,
dated as of November 20, 1996, among Titanium Metals Corporation and
The Chase Manhattan Bank, as Trustee, incorporated by reference to
Exhibit 4.3 to the Registrant's Current Report on Form 8-K filed with
the SEC on December 5, 1996.
4.4 Form of 6 5/8% Convertible Preferred Securities (included in Exhibit
4.2 above), incorporated by reference to Exhibit 4.4 to the
Registrant's Current Report on Form 8-K filed with the SEC on December
5, 1996.
4.5 Form of 6 5/8% Convertible Junior Subordinated Debentures (included in
Exhibit 4.3 above), incorporated by reference to Exhibit 4.6 to the
Registrant's Current Report on Form 8-K filed with the SEC on December
5, 1996.
4.6 Form of 6 5/8% Trust Common Securities (included in Exhibit 4.2
above), incorporated by reference to Exhibit 4.5 to the Registrant's
Current Report on Form 8-K filed with the SEC on December 5, 1996.
4.7 Convertible Preferred Securities Guarantee, dated as of November 20,
1996, between Titanium Metals Corporation, as Guarantor, and The Chase
Manhattan Bank, as Guarantee Trustee, incorporated by reference to
Exhibit 4.7 to the Registrant's Current Report on Form 8-K filed with
the SEC on December 5, 1996.
4.8 Purchase Agreement, dated November 20, 1996, between Titanium Metals
Corporation, TIMET Capital Trust I, Salomon Brothers Inc, Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co.
Incorporated, as Initial Purchasers, incorporated by reference to
Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed with
the SEC on December 5, 1996.
49
Item No. Exhibit Index
-------- ----------------------------------------------------------------------
4.9 Registration Agreement, dated November 20, 1996, between TIMET Capital
Trust I and Salomon Brothers Inc, as Representative of the Initial
Purchasers, incorporated by reference to Exhibit 99.2 to the
Registrant's Current Report on Form 8-K filed with the SEC on December
5, 1996.
9.1 Shareholders' Agreement, dated February 15, 1996, among Titanium
Metals Corporation, Tremont Corporation, IMI plc, IMI Kynoch Ltd., and
IMI Americas, Inc., incorporated by reference to Exhibit 2.2 to
Tremont Corporation's Current Report on Form 8-K (No. 1-10126) filed
with the SEC on March 1, 1996.
9.2 Amendment to the Shareholders' Agreement, dated March 29, 1996, among
Titanium Metals Corporation, Tremont Corporation, IMI plc, IMI Kynoch
Ltd., and IMI Americas, Inc., incorporated by reference to Exhibit
10.30 to Tremont Corporation's Annual Report on Form 10-K (No.
1-10126) for the year ended December 31, 1995.
10.1 Lease Agreement, dated January 1, 1996, between Holford Estates Ltd.
and IMI Titanium Ltd. related to the building known as Titanium Number
2 Plant at Witton, England, incorporated by reference to Exhibit 10.23
to Tremont Corporation's Annual Report on Form 10-K (No. 1-10126) for
the year ended December 31, 1995.
10.2 Loan and Security Agreement by and among Congress Financial
Corporation (Southwest) as Lender and Titanium Metals Corporation and
Titanium Hearth Technologies, Inc. as borrowers, dated February 25,
2000, incorporated by reference to Exhibit 10.12 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1999.
10.3 Amendment No. 1 to Loan and Security Agreement by and among Congress
Financial Corporation (Southwest) as Lender and Titanium Metals
Corporation and Titanium Hearth Technologies, Inc. as borrowers, dated
September 7, 2001, incorporated by reference to Exhibit 10.3 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001.
10.4 Amendment No. 2 to Loan and Security Agreement by and among Congress
Financial Corporation (Southwest) as Lender and Titanium Metals
Corporation and Titanium Hearth Technologies, Inc. as borrowers, dated
October 23, 2002, incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002.
10.5 Investment Agreement dated July 9, 1998, between Titanium Metals
Corporation, TIMET Finance Management Company and Special Metals
Corporation, incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated July 9, 1998.
10.6 Amendment to Investment Agreement, dated October 28, 1998, among
Titanium Metals Corporation, TIMET Finance Management Company and
Special Metals Corporation, incorporated by reference to Exhibit 10.4
to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.
50
Item No. Exhibit Index
-------- ----------------------------------------------------------------------
10.7 Registration Rights Agreement, dated October 28, 1998, between TIMET
Finance Management Company and Special Metals Corporation,
incorporated by reference to Exhibit 10.5 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.
10.8 Certificate of Designations for the Special Metals Corporation Series
A Preferred Stock, filed on October 28, 1998, with the Secretary of
State of Delaware, incorporated by reference to Exhibit 4.5 of a
Current Report on Form 8-K dated October 28, 1998, filed by Special
Metals Corporation (No. 000-22029).
10.9* 1996 Long Term Performance Incentive Plan of Titanium Metals
Corporation, incorporated by reference to Exhibit 10.19 to Titanium
Metals Corporation's Amendment No. 1 to Registration Statement on Form
S-1 (No. 333-18829).
10.10* Senior Executive Cash Incentive Plan, incorporated by reference to
Appendix B to Titanium Metals Corporation's proxy statement included
as part of a statement on Schedule 14A dated April 17, 1997.
10.11* Executive Severance Policy, as amended and restated effective May 17,
2000, incorporated by reference to Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
10.12* Titanium Metals Corporation Executive Stock Ownership Loan Plan, as
amended and restated effective February 28, 2001, incorporated by
reference to Exhibit 10.17 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2000.
10.13* Form of Loan and Pledge Agreement by and between Titanium Metals
Corporation and individual TIMET executives under the Corporation's
Executive Stock Ownership Loan Program, incorporated by reference to
Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2000.
10.14 Settlement Agreement and Release of Claims dated April 19, 2001
between Titanium Metals Corporation and The Boeing Company,
incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.
10.15 Intercorporate Services Agreement between Titanium Metals Corporation
and Tremont Corporation, effective as of January 1, 2002, incorporated
by reference to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002.
10.16 Intercorporate Services Agreement between Titanium Metals Corporation
and NL Industries, Inc., effective as of January 1, 2002, incorporated
by reference to Exhibit 10.3 to the NL Industries, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002.
51
Item No. Exhibit Index
-------- ----------------------------------------------------------------------
10.17* Titanium Metals Corporation Amended and Restated 1996 Non-Employee
Director Compensation Plan, as amended and restated effective May 7,
2002, incorporated by reference to Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
10.18* Trust Agreement, effective as of May 22, 2001, by and between Titanium
Metals Corporation and Robert E. Musgraves, incorporated by reference
to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001.
10.19* Agreement to Defer Bonus Payment, effective as of May 22, 2001, by and
between Titanium Metals Corporation and J. Landis Martin, incorporated
by reference to Exhibit 10.2 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2001.
10.20* Amended and Restated Employment Contract between TIMET Savoie, S.A.
and Christian Leonhard, incorporated by reference to Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002.
10.21 Purchase and Sale Agreement (For Titanium Products) between The Boeing
Company, acting through its division, Boeing Commercial Airplanes, and
Titanium Metals Corporation (as amended and restated effective April
19, 2001), incorporated by reference to Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 2002.
10.22 Purchase and Sale Agreement between Rolls-Royce plc and Titanium
Metals Corporation dated December 22, 1998, as amended, incorporated
by reference to Exhibit 10.3 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002.
10.23 Loan and Overdraft Facilities between Lloyds TSB Bank plc and TIMET UK
Limited dated December 20, 2002.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
* Management contract, compensatory plan or arrangement.
52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By /s/ J. Landis Martin
------------------------------------
J. Landis Martin, February 28, 2003
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/s/ J. Landis Martin /s/ Thomas P. Stafford
--------------------------------------- ---------------------------------------
J. Landis Martin, February 28, 2003 Thomas P. Stafford, February 28, 2003
Chairman of the Board, President Director
and Chief Executive Officer
/s/ Norman N. Green /s/ Steven L. Watson
--------------------------------------- ---------------------------------------
Norman N. Green, February 28, 2003 Steven L. Watson, February 28, 2003
Director Director
/s/ Albert W. Niemi, Jr. /s/ Paul J. Zucconi
--------------------------------------- ---------------------------------------
Albert W. Niemi, Jr., February 28, 2003 Paul J. Zucconi, February 28, 2003
Director Director
/s/ Glenn R. Simmons /s/ JoAnne A. Nadalin
--------------------------------------- ---------------------------------------
Glenn R. Simmons, February 28, 2003 JoAnne A. Nadalin, February 28, 2003
Director Vice President and Corporate Controller
Principal Financial Officer
Principal Accounting Officer
53
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, J. Landis Martin, Chairman of the Board, President and Chief Executive
Officer of Titanium Metals Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of Titanium Metals
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
54
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 28, 2003
/s/ J. Landis Martin
J. Landis Martin
Chairman of the Board, President
and Chief Executive Officer
55
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, JoAnne A. Nadalin, Vice President and Corporate Controller, and Principal
Financial Officer of Titanium Metals Corporation, certify that:
1. I have reviewed this annual report on Form 10-K of Titanium Metals
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
56
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 28, 2003
/s/ JoAnne A. Nadalin
JoAnne A. Nadalin
Vice President and Corporate Controller
Principal Financial Officer
57
TITANIUM METALS CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(a) and 14(d)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
Page
Financial Statements
Report of Independent Accountants F-1
Consolidated Balance Sheets - December 31, 2002 and 2001 F-2
Consolidated Statements of Operations -
Years ended December 31, 2002, 2001 and 2000 F-4
Consolidated Statements of Comprehensive Income (Loss) -
Years ended December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Cash Flows -
Years ended December 31, 2002, 2001 and 2000 F-6
Consolidated Statements of Changes in Stockholders' Equity -
Years ended December 31, 2002, 2001 and 2000 F-8
Notes to Consolidated Financial Statements F-9
Financial Statement Schedules
Report of Independent Accountants on Financial Statement Schedule S-1
Schedule II - Valuation and Qualifying Accounts S-2
F
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Titanium Metals Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of comprehensive income (loss),
of changes in stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Titanium Metals Corporation and
Subsidiaries at December 31, 2002 and December 31, 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002 the Company changed its method of accounting for goodwill and
other intangible assets.
/s/ PricewaterhouseCoopers LLP
Denver, Colorado
January 28, 2003, except for Note 22,
as to which the date is February 14, 2003
F-1
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31,
-----------------------------------
ASSETS 2002 2001
---------------- ----------------
Current assets:
Cash and cash equivalents $ 6,214 $ 24,500
Accounts and other receivables, less
allowance of $2,859 and $2,739 66,393 83,075
Receivable from related parties 2,398 6,179
Refundable income taxes 1,703 470
Inventories 181,932 185,052
Prepaid expenses and other 3,077 9,026
Deferred income taxes 809 385
---------------- ----------------
Total current assets 262,526 308,687
---------------- ----------------
Investment in joint ventures 22,287 20,585
Preferred securities of Special Metals Corporation ("SMC") - 27,500
Property and equipment, net 254,672 275,308
Goodwill, net - 44,310
Other intangible assets, net 8,442 9,836
Deferred income taxes - 56
Other 15,851 13,101
---------------- ----------------
Total assets $ 563,778 $ 699,383
================ ================
F-2
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
December 31,
-----------------------------------
LIABILITIES, MINORITY INTEREST AND 2002 2001
---------------- ----------------
STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 12,994 $ 1,522
Current maturities of long-term debt and capital lease obligations 642 512
Accounts payable 26,460 42,821
Accrued liabilities 46,511 41,799
Customer advances 5,416 33,242
Payable to related parties 602 1,612
Income taxes - 746
Deferred income taxes - 106
---------------- ----------------
Total current liabilities 92,625 122,360
---------------- ----------------
Long-term debt 6,401 10,712
Capital lease obligations 9,575 8,598
Payable to related parties 644 953
Accrued OPEB cost 13,417 15,980
Accrued pension cost 61,080 23,690
Accrued environmental cost 3,531 3,262
Deferred income taxes 1,036 5,509
Accrued dividends on Convertible Preferred Securities 4,462 -
Other - 237
---------------- ----------------
Total liabilities 192,771 191,301
---------------- ----------------
Minority interest - Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debt securities ("Convertible Preferred Securities") 201,241 201,241
Other minority interest 10,416 8,727
Stockholders' equity:
Preferred stock $.01 par value; 100 shares authorized,
none outstanding - -
Common stock, $.01 par value; 9,900 shares authorized,
3,194 and 3,195 shares issued, respectively 32 32
Additional paid-in capital 350,889 350,801
Accumulated deficit (127,371) (15,841)
Accumulated other comprehensive loss (62,737) (35,274)
Treasury stock, at cost (9 shares) (1,208) (1,208)
Deferred compensation (255) (396)
---------------- ----------------
Total stockholders' equity 159,350 298,114
---------------- ----------------
Total liabilities and stockholders' equity $ 563,778 $ 699,383
================ ================
Commitments and contingencies (Note 19)
See accompanying notes to consolidated financial statements.
F-3
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year ended December 31,
----------------------------------------------------
2002 2001 2000
----------------- -------------- -------------
Net sales $ 366,501 $ 486,935 $ 426,798
Cost of sales 369,624 447,042 422,917
----------------- -------------- -------------
Gross margin (3,123) 39,893 3,881
Selling, general, administrative and
development expense 42,998 51,788 44,017
Equity in earnings (losses) of joint ventures 1,990 2,515 (865)
Restructuring (income) charge - (220) 2,805
Other income (expense), net 23,282 73,640 2,156
----------------- -------------- -------------
Operating (loss) income (20,849) 64,480 (41,650)
Interest expense 3,381 4,060 7,704
Other non-operating income (expense), net (30,305) (55,949) 4,878
----------------- -------------- -------------
(Loss) income before income taxes, minority
interest and cumulative effect of change in
accounting principle (54,535) 4,471 (44,476)
Income tax (benefit) expense (1,952) 31,112 (15,567)
Minority interest - Convertible Preferred Securities,
net of tax in 2000 13,351 13,850 8,710
Other minority interest, net of tax 1,286 1,275 1,283
----------------- -------------- -------------
Loss before cumulative effect of change in
accounting principle (67,220) (41,766) (38,902)
Cumulative effect of change in accounting principle (44,310) - -
----------------- -------------- -------------
Net loss $ (111,530) $ (41,766) $ (38,902)
================= ============== =============
Basic and diluted loss per share:
Before cumulative effect of change
in accounting principle $ (21.27) $ (13.26) $ (12.40)
Cumulative effect of change in accounting
principle (14.02) - -
----------------- -------------- -------------
Basic and diluted loss per share $ (35.29) $ (13.26) $ (12.40)
================= ============== =============
Weighted average shares outstanding 3,161 3,150 3,137
See accompanying notes to consolidated financial statements.
F-4
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
Year ended December 31,
-------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Net loss $ (111,530) $ (41,766) $ (38,902)
Other comprehensive income (loss):
Currency translation adjustment 13,359 (3,475) (10,883)
Pension liabilities adjustment, net of tax benefit
of $1,588, $4,834 and $909 in 2002, 2001 and
2000, respectively (40,822) (15,391) (1,688)
-------------- -------------- --------------
(27,463) (18,866) (12,571)
-------------- -------------- --------------
Comprehensive loss $ (138,993) $ (60,632) $ (51,473)
============== ============== ==============
See accompanying notes to consolidated financial statements.
F-5
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
--------------------------------------------------
2002 2001 2000
--------------- -------------- --------------
Cash flows from operating activities:
Net loss $ (111,530) $ (41,766) $ (38,902)
Depreciation and amortization 37,098 40,134 41,942
Cumulative effect of change in accounting principle 44,310 - -
Noncash equipment impairment charge - 10,840 -
Noncash joint venture impairment charge - - 3,467
Noncash impairment of SMC securities 27,500 61,519 -
Gain on sale of castings joint venture - - (1,205)
Equity in (earnings) losses of joint ventures, net
of distributions (961) (2,040) 1,710
Deferred income taxes (3,694) 26,822 (17,715)
Other minority interest 1,286 1,275 1,283
Other, net 1,891 1,124 1,569
Change in assets and liabilities:
Receivables 20,580 (7,953) 25,273
Inventories 10,756 (38,631) 37,026
Prepaid expenses and other 6,072 (3,112) (452)
Accounts payable and accrued liabilities (17,159) 3,895 (1,751)
Accrued restructuring charges (117) (592) (974)
Customer advances (26,386) 29,291 (86)
Income taxes (1,863) 98 10,386
Accounts with related parties, net 2,194 (743) (1,247)
Accrued OPEB and pension costs (6,998) (4,288) (4,256)
Accrued dividends on SMC securities - - (1,606)
Accrued dividends on Convertible
Preferred Securities 3,351 (10,043) 10,043
Other, net 75 (3,256) 957
--------------- -------------- --------------
Net cash (used) provided by operating activities (13,595) 62,574 65,462
--------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures (7,767) (16,124) (11,182)
Proceeds from sale of castings joint venture - - 7,000
Proceeds from sale of fixed assets 300 31 38
Other, net - - (74)
--------------- -------------- --------------
Net cash used by investing activities (7,467) (16,093) (4,218)
--------------- -------------- --------------
Cash flows from financing activities:
Indebtedness:
Borrowings 420,146 537,884 364,214
Repayments (413,842) (569,569) (434,257)
Dividends paid to minority interest (1,115) - -
Deferred financing costs (1,050) - (2,134)
Other, net (616) 327 (635)
--------------- -------------- --------------
Net cash provided (used) by financing activities 3,523 (31,358) (72,812)
--------------- -------------- --------------
Net cash (used) provided by operating, investing
and financing activities $ (17,539) $ 15,123 $ (11,568)
=============== ============== ==============
F-6
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
Year ended December 31,
-------------------------------------------------
2002 2001 2000
-------------- -------------- --------------
Cash and cash equivalents:
Net (decrease) increase from:
Operating, investing and financing activities $ (17,539) $ 15,123 $ (11,568)
Currency translation (747) (419) 693
-------------- -------------- --------------
(18,286) 14,704 (10,875)
Cash at beginning of year 24,500 9,796 20,671
-------------- -------------- --------------
Cash at end of year $ 6,214 $ 24,500 $ 9,796
============== ============== ==============
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 2,044 $ 3,065 $ 7,642
Convertible Preferred Securities dividends $ 9,999 $ 23,893 $ 3,333
Income taxes, net $ 3,605 $ 4,192 $ -
Noncash investing and financing activities:
Capital lease obligations of $969 and $519 were incurred
during 2002 and 2001, respectively, when the Company
entered into certain leases for equipment
See accompanying notes to consolidated financial statements.
F-7
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 2002, 2001 and 2000
(In thousands)
Accumulated Other
Comprehensive Income (Loss)
Additional Retained ------------------------------
Common Common Paid-in Earnings Currency Pension Treasury Deferred
Shares Stock Capital (Deficit) Translation Liabilities Stock Compensation Total
-------- ------- ---------- ---------- ----------- ---------- --------- --------- ----------
Balance at December 31, 1999 3,137 $ 32 $ 348,267 $ 64,827 $ (37) $ (3,800) $(1,208) $ - $ 408,081
Comprehensive income (loss) - - - (38,902) (10,883) (1,688) - - (51,473)
Long-term incentive plan
stock awards, net of 45 - 1,940 - - - - (1,940) -
cancellations
Amortization of deferred
compensation - - - - - - - 749 749
Other - - 158 - - - - - 158
-------- ------- ---------- ---------- ----------- ---------- --------- --------- ----------
Balance at December 31, 2000 3,182 32 350,365 25,925 (10,920) (5,488) (1,208) (1,191) 357,515
Comprehensive income (loss) - - - (41,766) (3,475) (15,391) - - (60,632)
Issuance of common stock 8 - 581 - - - - - 581
Stock award cancellations (4) - (322) - - - - 322 -
Amortization of deferred
compensation - - - - - - - 473 473
Other - - 177 - - - - - 177
-------- ------- ---------- ---------- ----------- ---------- --------- --------- ----------
Balance at December 31, 2001 3,186 32 350,801 (15,841) (14,395) (20,879) (1,208) (396) 298,114
Comprehensive income (loss) - - - (111,530) 13,359 (40,822) - - 138,993)
Issuance of common stock - - 21 - - - - - 21
Stock award cancellations (1) - (66) - - - - 66 -
Amortization of deferred
compensation - - - - - - - 208 208
Other - - 133 - - - - (133) -
-------- ------- ---------- ---------- ----------- ---------- --------- --------- ----------
Balance at December 31, 2002 3,185 $ 32 $ 350,889 $(127,371) $ (1,036) $(61,701) $(1,208) $ (255) $ 159,350
======== ======= ========== ========== =========== ========== ========= ========= ==========
See accompanying notes to consolidated financial statements.
F-8
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies
Reverse stock split. On February 4, 2003, the stockholders of Titanium
Metals Corporation ("TIMET") approved a proposal to amend TIMET's Certificate of
Incorporation to effect a reverse stock split of TIMET's common stock at a ratio
of one share of post-split common stock for each eight, nine or ten shares of
pre-split common stock issued and outstanding, with the final ratio to be
selected by the Board of Directors. Subsequently, the Board of Directors of
TIMET unanimously approved a reverse stock split on the basis of one share of
post-split common stock for each outstanding ten shares of pre-split common
stock. The reverse stock split became effective after the close of trading on
February 14, 2003. All share and per share disclosures for all periods presented
in the accompanying Consolidated Financial Statements have been adjusted to give
effect to the reverse stock split.
Principles of consolidation. The accompanying consolidated financial
statements include the accounts of TIMET and its majority-owned subsidiaries
(collectively, the "Company"). All material intercompany transactions and
balances have been eliminated.
Cash and cash equivalents. Cash equivalents include highly liquid
investments with original maturities of three months or less.
Inventories and cost of sales. Inventories include material, labor and
overhead and are stated at the lower of cost or market. Approximately one-half
of inventories are costed using the last-in, first-out ("LIFO") method with the
balance primarily stated using an average cost method.
Investments. The Special Metals Corporation ("SMC") convertible preferred
securities held by the Company are carried at fair value, estimated by the
Company to be zero as of December 31, 2002. These securities are not publicly
traded and, accordingly, quoted market prices are unavailable. As of December
31, 2001, the SMC securities have been classified as "available-for-sale"
securities with unrealized gains and losses included in stockholders' equity and
unrealized losses deemed to be other than temporary charged to earnings.
Investment securities are periodically reviewed for impairment considering the
extent to which fair value is below the carrying amount, the duration of the
decline and the financial health and prospects of the issuer. Prior to December
31, 2001, the securities were classified as "held-to-maturity" and reported at
cost. See Note 5.
Investments in 20% to 50%-owned joint ventures are accounted for by the
equity method. Differences between the Company's investment in joint ventures
and its proportionate share of the joint ventures' reported equity are amortized
based upon the respective useful lives of the assets to which the differences
relate, which is generally over not more than 15 years.
F-9
Property, equipment and depreciation. Property and equipment are recorded
at cost and depreciated principally on the straight-line method over the
estimated useful lives of 15 to 40 years for buildings and three to 25 years for
machinery and equipment. Capitalized software costs are amortized over the
software's estimated useful life, generally three to five years. Maintenance,
repairs and minor renewals are expensed as incurred and included in cost of
sales. Major improvements are capitalized and depreciated over the estimated
period to be benefited. Interest costs of $1.0 million related to major,
long-term capital projects were capitalized as a component of construction costs
during 2000. No interest was capitalized during 2002 or 2001.
Generally, when events or changes in circumstances indicate the carrying
amount of long-lived assets, including property and equipment, may not be
recoverable, the Company prepares an evaluation comparing the carrying amount of
the assets to the undiscounted expected future cash flows of the assets or asset
group. If this comparison indicates the carrying amount is not recoverable, the
amount of the impairment would typically be calculated using discounted expected
future cash flows or appraised values. All relevant factors are considered in
determining whether an impairment exists.
During 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 144, Accounting for Impairment or Disposal of Long-Lived
Assets, which standard was effective retroactive to January 1, 2001. SFAS No.
144, which supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, retains the fundamental
provisions with respect to the recognition and measurement of long-lived asset
impairment but does not apply to goodwill and other intangible assets. However,
SFAS No. 144 provides expanded guidance with respect to appropriate cash flows
to be used to determine whether recognition of any long-lived asset impairment
is required, and if required, how to measure the amount of the impairment. SFAS
No. 144 also requires that any net assets to be disposed of by sale be reported
at the lower of carrying value or fair value less cost to sell, and expands the
reporting of discontinued operations to include any component of an entity with
operations and cash flows that can be clearly distinguished from the rest of the
entity. The adoption of SFAS No. 144 had no effect on the Company's results of
operations, financial position or liquidity.
Intangible assets and amortization. Goodwill, representing the excess of
cost over the fair value of individual net assets acquired in business
combinations accounted for by the purchase method, was amortized using the
straight-line method over 15 years and is stated net of accumulated amortization
through December 31, 2001. On January 1, 2002, the Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill is no longer
amortized on a periodic basis, but instead is subject to a two-step impairment
test to be performed on at least an annual basis. See Note 7. Patents and other
intangible assets, except intangible pension assets, are amortized using the
straight-line method over the periods expected to be benefited, generally seven
to nine years. The Company periodically assesses the amortization period and
recoverability of the carrying amount of other intangible assets and the effects
of revisions are reflected in the period they are determined to be necessary.
F-10
Stock-based compensation. The Company has elected the disclosure
alternative prescribed by SFAS No. 123, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation - Transition
and Disclosure, and to account for its stock-based employee compensation related
to stock options in accordance with Accounting Principles Board Opinion ("APB")
No. 25, Accounting for Stock Issued to Employees and its various
interpretations. Under APB Opinion No. 25, compensation cost is generally
recognized for fixed stock options for which the exercise price is less than the
market price of the Company's common stock on the grant date. Accordingly, since
all of the Company's stock options have been granted with exercise prices equal
to or in excess of the market price on the date of grant, the Company recognized
no compensation cost for fixed stock options in 2002, 2001 or 2000. The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of SFAS No. 123:
Year ended December 31,
-------------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
(In thousands)
Net loss, as reported $ (111,530) $ (41,766) $ (38,902)
Less: total stock option related stock-based
employee compensation expense,
net of tax in 2000 (850) (1,882) (2,101)
---------------- ---------------- ----------------
Pro forma net loss $ (112,380) $ (43,648) $ (41,003)
================ ================ ================
Basic and diluted loss per share:
As reported $ (35.29) $ (13.26) $ (12.40)
================ ================ ================
Pro forma $ (35.56) $ (13.86) $ (13.07)
================ ================ ================
Income taxes. Deferred income tax assets and liabilities are recognized
based on the expected future tax consequences of temporary differences between
the income tax and financial reporting carrying amounts of assets and
liabilities, including investments in subsidiaries not included in TIMET's
consolidated U.S. tax group. The Company periodically reviews its deferred tax
assets to determine if future realization is "more-likely-than-not" and a change
in the valuation allowance is recorded in the period it is determined to be
necessary. See Note 16.
Employee benefit plans. Accounting and funding policies for retirement
plans and postretirement benefits other than pensions ("OPEB") are described in
Note 17.
Research and development. Research and development expense, which includes
activities directed toward expanding the use of titanium and titanium alloys in
all market sectors, is recorded as selling, general, administrative and
development expense and totaled $3.3 million in 2002 and $2.6 million in each of
2001 and 2000. Related engineering and experimentation costs associated with
ongoing commercial production are recorded in cost of sales.
Advertising costs. Advertising costs, which are not significant, are
expensed as incurred.
F-11
Shipping and handling costs. Shipping and handling costs are included in
cost of sales.
Self insurance. The Company is self insured for certain losses relating to
workers' compensation claims, employee medical benefits, environmental, product
and other liabilities. The Company maintains certain stop loss and other
insurance to reduce its exposure and provides accruals for estimates of known
liabilities and incurred but not reported claims. See Notes 18 and 19.
Translation of foreign currencies. Assets and liabilities of subsidiaries
whose functional currency is deemed to be other than the U.S. dollar are
translated at year-end rates of exchange, and revenues and expenses are
translated at average exchange rates prevailing during the year. Resulting
translation adjustments are accumulated in the currency translation adjustments
component of other comprehensive income (loss). Currency transaction gains and
losses are recognized in income currently and were a net loss of $0.6 million in
2002, a net gain of $0.1 million in 2001 and a net loss of $1.1 million in 2000.
Revenue recognition. Sales revenue is generally recognized when the Company
has certified that its product meets the related customer specifications, the
product has been shipped, and title and substantially all the risks and rewards
of ownership have passed to the customer. Payments received from customers in
advance of these criteria being met are recorded as customer advances until
earned. The Company believes that its revenue recognition policies are in
compliance with the Securities and Exchange Commission's Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements.
Derivatives and hedging activities. The Company adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended,
effective January 1, 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
are recognized as either assets or liabilities and are measured at fair value.
The accounting for changes in fair value of derivatives depends upon the
intended use of the derivative, and such changes are recognized either in net
income or other comprehensive income. As permitted by the transition
requirements of SFAS No. 133, as amended, the Company has exempted from the
scope of SFAS No. 133 all host contracts containing embedded derivatives that
were issued or acquired prior to January 1, 1999. The Company was not a party to
any significant derivative or hedging instrument covered by SFAS No. 133 during
2002 or 2001, and the adoption of SFAS No. 133 had no material effect on the
Company's results of operations, financial position or liquidity.
Fair value of financial instruments. Carrying amounts of certain of the
Company's financial instruments including, among others, cash and cash
equivalents, accounts receivable, accrued compensation, and other accrued
liabilities approximate fair value because of their short maturities. The
Company's bank debt reprices with changes in market interest rates and,
accordingly, the carrying amount of such debt is believed to approximate market
value.
The convertible preferred securities of SMC held by the Company are not
publicly traded and, accordingly, quoted market prices are unavailable. The
Company has estimated the fair value of these securities to be zero at December
31, 2002 and $27.5 million at December 31, 2001. See Note 5.
F-12
Use of estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amount of
revenues and expenses during the reporting period. Estimates are used in
accounting for, among other things, allowances for uncollectible accounts,
inventory allowances, environmental accruals, self insurance accruals, deferred
tax valuation allowances, loss contingencies, fair values of financial
instruments, the determination of discount and other rate assumptions for
pension and postretirement employee benefit costs, asset impairments,
restructuring accruals and other special items. Actual results may, in some
instances, differ from previously estimated amounts. Estimates and assumptions
are reviewed periodically, and the effects of revisions are reflected in the
period they are determined to be necessary.
Reclassification. Certain prior year amounts have been reclassified to
conform to the current year presentation.
Recently adopted accounting principles. The Company adopted SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections, effective April 1, 2002. SFAS No. 145, among
other things, eliminated the prior requirement that all gains and losses from
the early extinguishment of debt were to be classified as an extraordinary item.
Upon adoption of SFAS No. 145, gains and losses from the early extinguishment of
debt are classified as an extraordinary item only if they meet the "unusual and
infrequent" criteria contained in APB Opinion No. 30. In addition, upon adoption
of SFAS No. 145, all gains and losses from the early extinguishment of debt that
had previously been classified as an extraordinary item are to be reassessed to
determine if they would have met the "unusual and infrequent" criteria of APB
Opinion No. 30. Any such gain or loss that would not have met the APB Opinion
No. 30 criteria is retroactively reclassified and reported as a component of
income before extraordinary items. The Company has concluded that its previously
recognized loss from the early extinguishment of debt that occurred during 2000
(approximately $0.8 million net of tax) would not have met the APB Opinion No.
30 criteria for classification as an extraordinary item and, accordingly, such
loss has been retroactively reclassified and reported as a component of income
before extraordinary items for the year ended December 31, 2000. There was no
impact on net income (loss) from adopting SFAS No. 145.
Accounting principles not yet adopted. The Company will adopt SFAS No. 143,
Accounting for Asset Retirement Obligations, as of January 1, 2003. Under SFAS
No. 143, the fair value of a liability for an asset retirement obligation
covered under the scope of SFAS No. 143 would be recognized in the period in
which the liability is incurred, with an offsetting increase in the carrying
amount of the related long-lived asset. Over time, the liability would be
accreted to its present value, and the capitalized cost would be depreciated
over the useful life of the related asset. Upon settlement of the liability, an
entity would either settle the obligation for its recorded amount or incur a
gain or loss upon settlement.
F-13
Under the transition provisions of SFAS No. 143, at the date of adoption
the Company will recognize (i) an asset retirement cost capitalized as an
increase to the carrying value of its property, plant and equipment, (ii)
accumulated depreciation on such capitalized cost and (iii) a liability for the
asset retirement obligation. Amounts resulting from the initial application of
SFAS No. 143 are measured using information, assumptions and interest rates all
as of January 1, 2003. The amount recognized as the asset retirement cost is
measured as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement obligation, and accumulated depreciation on
the asset retirement cost, is recognized for the time period from the date the
asset retirement cost and liability would have been recognized had the
provisions of SFAS No. 143 been in effect at the date the liability was
incurred, through January 1, 2003. The difference between the amounts to be
recognized as described above and any associated amounts recognized in the
Company's balance sheet as of December 31, 2002 is recognized as a cumulative
effect of a change in accounting principle as of the date of adoption. The
Company expects to recognize a cummulative effect loss of approximately $0.2
million and an asset retirement obligation of approximately $0.4 million upon
adoption of SFAS No. 143.
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The
Company has adopted the disclosure requirements of the Interpretation as of
December 31, 2002. See Note 19 related to discussion of the Company's workers'
compensation surety bond guarantees. The Company will adopt the recognition and
initial measurement provisions of this Interpretation on a prospective basis for
any guarantees issued or modified after December 31, 2002.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities. Except for TIMET Capital Trust I (discussed in
Note 12), the Company does not believe it has involvement with any variable
interest entity covered by the scope of FASB Interpretation No. 46. The Company
has consolidated TIMET Capital Trust I since its formation, as the Company owns
100% of the trust's outstanding voting securities. The Company will adopt this
Interpretation no later than the quarter ended September 30, 2003. The adoption
of this Interpretation is not expected to have a material effect on the Company.
Note 2 - Segment information
The Company is a vertically integrated producer of titanium sponge, melted
products and a variety of mill products for aerospace, industrial and other
applications. In addition to mill and melted products, the Company sells certain
other products, such as titanium sponge, titanium tetrachloride and fabricated
titanium assemblies. 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 comprise the
"Titanium melted and mill products" segment, currently the Company's only
segment. Prior to 2000, the Company operated an additional segment, "Other,"
consisting of the Company's investment in nonintegrated joint ventures. These
investments have been either sold or charged off due to an impairment of the
value of the investment and generated operating income during 2000 of less than
$0.1 million.
F-14
Sales, gross margin, operating income (loss), inventory and receivables are
the key management measures used to evaluate segment performance. The following
table provides supplemental segment information to the Company's Consolidated
Balance Sheets and Consolidated Statements of Operations:
Year ended December 31,
-------------------------------------------------------
2002 2001 2000
---------------- --------------- ----------------
($ in thousands, except selling price data)
Net sales - Titanium melted and mill products:
Mill product net sales $ 278,204 $ 363,257 $ 326,319
Melted product net sales 34,800 64,063 47,366
Other 53,497 59,615 53,113
---------------- --------------- ----------------
$ 366,501 $ 486,935 $ 426,798
================ =============== ================
Mill product shipments:
Volume (metric tons) 8,860 12,180 11,370
Average price ($ per kilogram) $ 31.40 $ 29.80 $ 28.70
Melted product shipments:
Volume (metric tons) 2,400 4,415 3,470
Average price ($ per kilogram) $ 14.50 $ 14.50 $ 13.65
Geographic segments:
Net sales - point of origin:
United States $ 311,194 $ 399,708 $ 345,370
United Kingdom 91,467 139,210 139,599
Other Europe 68,487 70,079 74,432
Eliminations (104,647) (122,062) (132,603)
---------------- --------------- ----------------
$ 366,501 $ 486,935 $ 426,798
================ =============== ================
Net sales - point of destination:
United States $ 193,740 $ 247,410 $ 234,350
Europe 145,118 188,729 163,661
Other 27,643 50,796 28,787
---------------- --------------- ----------------
$ 366,501 $ 486,935 $ 426,798
================ =============== ================
Long-lived assets - property and equipment, net:
United States $ 186,777 $ 208,069 $ 227,994
United Kingdom 62,369 62,463 69,212
Other Europe 5,526 4,776 4,924
---------------- --------------- ----------------
$ 254,672 $ 275,308 $ 302,130
================ =============== ================
Export sales from U.S. based operations approximated $18 million in 2002,
$37 million in 2001 and $24 million in 2000.
F-15
Note 3 - Inventories
December 31,
--------------------------------------
2002 2001
----------------- -----------------
(In thousands)
Raw materials $ 53,830 $ 43,863
Work-in-process 81,185 94,709
Finished products 63,458 54,074
Supplies 13,829 13,476
----------------- -----------------
212,302 206,122
Less adjustment of certain inventories to LIFO basis 30,370 21,070
----------------- -----------------
$ 181,932 $ 185,052
================= =================
Note 4 - Investment in joint ventures
December 31,
--------------------------------------
2002 2001
----------------- -----------------
(In thousands)
Joint ventures:
VALTIMET $ 22,017 $ 20,214
Other 270 371
----------------- -----------------
$ 22,287 $ 20,585
================= =================
VALTIMET SAS ("VALTIMET") is a manufacturer of welded stainless steel and
titanium tubing with operations in the United States, France and China. At
December 31, 2002, VALTIMET was owned 43.7% by TIMET, 51.3% by Valinox Welded, a
French manufacturer of welded tubing, and 5.0% by Sumitomo Metals Industries,
Ltd., a Japanese manufacturer of steel products. At December 31, 2002, the
unamortized net difference between the Company's carrying amount of its
investment in VALTIMET and its proportionate share of VALTIMET's net assets was
approximately $4.8 million, and is principally attributable to the difference
between the carrying amount and fair value of fixed assets initially contributed
by TIMET. This difference is being amortized over 15 years and reduces the
amount of equity in earnings or increases the amount of equity in losses that
the Company reports related to its investment in VALTIMET. The consolidated
financial statements of VALTIMET reflected the following summarized financial
information:
Year ended December 31,
-----------------------------------------------------------
2002 2001 2000
---------------- ----------------- -----------------
(In thousands)
Net sales $ 90,318 $ 80,800 $ 67,970
Gross margin $ 18,911 $ 19,017 $ 12,908
Net income (loss) $ 4,523 $ 4,251 $ (238)
F-16
December 31,
--------------------------------------
2002 2001
----------------- -----------------
(In thousands)
Current assets $ 52,021 $ 46,537
Noncurrent assets $ 19,730 $ 15,409
Current liabilities $ 25,972 $ 21,687
Noncurrent liabilities $ 3,004 $ 2,616
Minority interest $ 2,235 $ 2,096
In 1998, the Company completed a series of strategic transactions with
Wyman-Gordon Company ("Wyman-Gordon") in which (i) the Company exchanged certain
of its titanium castings assets and $5 million in cash for Wyman-Gordon's
Millbury, Massachusetts vacuum arc re-melting equipment, which produced titanium
ingot, (ii) Wyman-Gordon and the Company combined their respective titanium
castings businesses into a new joint venture, Wyman-Gordon Titanium Castings
LLC, 80% owned by Wyman-Gordon and 20% by the Company and (iii) the Company and
Wyman-Gordon entered into a contract pursuant to which the Company expects to be
the principal supplier of titanium material to Wyman-Gordon through 2007. The
Company accounted for the castings business/melting facility transaction at fair
value, which approximated the $18 million net carrying value of the assets
exchanged, and, accordingly, recognized no gain on the transaction. The Company
accounted for its interest in the castings joint venture by the equity method.
Early in 2000, the Company sold its interest in the castings joint venture to
Wyman-Gordon for approximately $7 million and recorded a pre-tax gain of
approximately $1.2 million.
Other joint ventures in 2002 and 2001 consist primarily of investments in
outside providers of certain testing services.
Note 5 - Preferred securities of Special Metals Corporation
In 1998, the Company purchased $80 million in non-voting convertible
preferred securities of SMC, a U.S. manufacturer of wrought nickel-based
superalloys and special alloy long products. The convertible preferred
securities accrue dividends at the annual rate of 6.625%, are mandatorily
redeemable in April 2006 and are convertible into SMC common stock at $16.50 per
share. SMC's common stock is traded on the NASDAQ under the symbol "SMCXQ.OB"
and had a quoted market price on December 31, 2002 of $0.07 per share. From
October 1998 through December 1999, SMC deferred payment of dividends on the
preferred securities. In April 2000, SMC resumed dividend payments on the
securities; however, dividends and interest in arrears due the Company were not
paid. On October 11, 2001, SMC notified the Company of its intention to again
defer dividend payments effective with the dividend due on October 28, 2001, and
the Company believes such dividends are likely to be deferred indefinitely.
Subsequently, on March 27, 2002, SMC and its U.S. subsidiaries filed a voluntary
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
F-17
Because of various factors affecting SMC subsequent to the terrorist
attacks of September 11, 2001, the Company undertook an assessment of its
investment in the SMC securities in the fourth quarter of 2001 with the
assistance of an external valuation specialist. The SMC convertible preferred
securities are not publicly traded and, accordingly, quoted market prices are
unavailable. As such, the assessment of fair value of these securities required
significant judgment and considered a number of factors, including, but not
limited to, the financial health and prospects of SMC and market yields of
comparable securities. The assessment indicated that it was unlikely the Company
would recover its then existing carrying amount, including accrued dividends and
interest, of the securities in accordance with the securities' contractual terms
and that an other than temporary decline in the fair value of its investment had
occurred. The Company recorded a $61.5 million pre-tax impairment charge in the
fourth quarter of 2001 to reduce the carrying amount of this investment,
including accrued dividends and interest, to an estimated fair value of $27.5
million. At that time the Company also ceased accruing for any additional
dividends due on these securities. As a result of the SMC bankruptcy filing in
March 2002, the Company undertook a further assessment of its investment in SMC,
again with the assistance of the same external valuation specialist, and
recorded an additional $27.5 million impairment charge during the first quarter
of 2002 for an other than temporary decline in the estimated fair value of its
investment in SMC. This charge reduced the Company's carrying amount of its
investment in the SMC securities to zero. As of December 31, 2002, unrecorded
dividends and interest due the Company approximated $15.8 million. The ultimate
amount, if any, which the Company may realize from its investment in the SMC
securities is unknown due to the uncertainties associated with SMC's bankruptcy
proceedings; however, the Company believes it is unlikely that it will recover
any amount from this investment.
Note 6 - Property and equipment
December 31,
---------------------------------------
2002 2001
------------------ -----------------
(In thousands)
Land $ 6,224 $ 6,138
Buildings 38,874 36,574
Information technology systems 58,217 55,112
Manufacturing and other 312,163 300,315
Construction in progress 3,493 11,631
------------------ -----------------
418,971 409,770
Less accumulated depreciation 164,299 134,462
------------------ -----------------
$ 254,672 $ 275,308
================== =================
In 2001, the Company recorded a $10.8 million charge to cost of sales for
the impairment of the melting equipment acquired from Wyman-Gordon in 1998. The
Company completed studies of the potential uses of this equipment in the
foreseeable future as well as the economic viability of those alternatives,
resulting in the determination that the equipment's undiscounted future cash
flows could no longer support its carrying value. The loss on impairment
represented the difference between the equipment's estimated fair value, as
determined through a third-party appraisal, and its previous carrying amount. In
2000, the Company recorded a $3.5 million charge to cost of sales for the
impairment of certain other equipment.
F-18
Note 7 - Goodwill and intangible assets
The Company's goodwill, arising from several previous business combinations
accounted for under the purchase method, was stated net of accumulated
amortization recognized through December 31, 2001. On January 1, 2002, the
Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS
No. 142, goodwill is no longer amortized on a periodic basis, but instead is
subject to a two-step impairment test to be performed on at least an annual
basis.
In order to test for transitional impairment, SFAS No. 142 required the
Company to identify its reporting units and determine the carrying amount of
each reporting unit by assigning its assets and liabilities, including existing
goodwill and intangible assets, to those reporting units as of January 1, 2002.
The Company determined that it operates one reporting unit, as that term is
defined by SFAS No. 142, consisting of the Company in total. The first step of
the impairment test required the Company to determine the fair value of its
reporting unit and compare it to that reporting unit's carrying amount. This
evaluation was completed with the assistance of an external valuation specialist
and considered a combination of fair value indicators including quoted market
prices, prices of comparable businesses and discounted cash flows. The
evaluation, which was completed during the second quarter of 2002, indicated
that the Company's recorded goodwill might be impaired and required the Company
to complete the second step of the impairment test.
The second step of the impairment test, which was completed during the
third quarter of 2002, required the Company to compare the implied fair value of
its reporting unit's goodwill with the carrying amount of that goodwill. With
the assistance of the external valuation specialist utilized in the step one
testing, the Company determined the implied fair value of its goodwill was zero.
Accordingly, the Company recorded a non-cash goodwill impairment charge of $44.3
million, representing the entire balance of the Company's recorded goodwill at
January 1, 2002. No income tax benefit associated with this charge was
recognized. While the goodwill associated with the Company's U.S. operations is
deductible for income tax purposes, the Company does not currently recognize an
income tax benefit associated with its U.S. losses. In addition the goodwill
associated with the Company's European operations is not deductible for income
tax purposes. Pursuant to the transition requirements of SFAS No. 142, this
charge has been reported in the Company's Consolidated Statements of Operations
as a cumulative effect of a change in accounting principle as of January 1,
2002.
F-19
The following table reflects what the Company's reported consolidated net
loss before the cumulative effect of the change in accounting principle would
have been in 2001 and 2000 had the goodwill amortization included in the
Company's reported consolidated net loss not been recognized:
Year ended December 31,
------------------------------------------------------
2002 2001 2000
--------------- -------------- ----------------
(In thousands, except per share data)
Net loss before cumulative effect of change in
accounting principle, as reported $ (67,220) $ (41,766) $ (38,902)
Adjustments for:
Goodwill amortization - 4,604 4,775
Tax provision on amortization - - (1,229)
--------------- -------------- ----------------
Adjusted net loss before cumulative effect of
change in accounting principle (67,220) (37,162) (35,356)
Cumulative effect of change in
accounting principle (44,310) - -
--------------- -------------- ----------------
Adjusted net loss $ (111,530) $ (37,162) $ (35,356)
=============== ============== ================
Net loss per basic and diluted share before
cumulative effect of change in
accounting principle, as reported $ (21.27) $ (13.26) $ (12.40)
Adjustments for:
Goodwill amortization - 1.46 1.52
Tax provision on amortization - - (.39)
--------------- --------------- ----------------
Adjusted net loss per basic and diluted share
before cumulative effect of change in
accounting principle (21.27) (11.80) (11.27)
Cumulative effect of change in
accounting principle (14.02) - -
--------------- --------------- ----------------
Adjusted net loss per basic and diluted share $ (35.29) $ (11.80) $ (11.27)
=============== =============== ================
F-20
As required by SFAS No. 142, the Company has evaluated the remaining useful
lives of its intangible assets with definite lives, comprised of patents and
covenants not to compete. Based on this evaluation, the Company's patents will
continue to be amortized over their weighted average remaining amortization
periods of just over three years as of December 31, 2002. The Company's
covenants not to compete will become fully amortized during the first half of
2003. The carrying amount and accumulated amortization of the Company's
intangible assets are as follows:
December 31, 2002 December 31, 2001
---------------------------------- -------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------- ----------------- ------------ --------------
(In thousands)
Intangible assets:
Definite lives, subject to amortization:
Patents $ 13,903 $ 9,375 $ 13,405 $ 7,606
Covenants not to compete 3,967 3,769 8,353 7,514
Other intangible asset - pension asset (1) 3,716 - 3,198 -
------------- ----------------- ------------ --------------
$ 21,586 $ 13,144 $ 24,956 $ 15,120
============= ================= ============ ==============
(1) Not covered by the scope of SFAS No. 142.
The Company's amortization expense relating to its intangible assets was
$2.1 million in 2002, $2.8 million in 2001 and $3.1 million in 2000. The
estimated aggregate annual amortization expense for the Company's patents and
covenants not to compete for the next five fiscal years is summarized in the
table below:
Estimated Annual
Amortization Expense
----------------------------------
(In thousands)
Year ending December 31,
2003 $1,655
2004 $1,456
2005 $ 937
2006 $ 678
2007 $ -
Note 8 - Other noncurrent assets
December 31,
---------------------------------------
2002 2001
------------------ -----------------
(In thousands)
Deferred financing costs $ 8,244 $ 8,212
Notes receivable from officers 163 163
Prepaid pension cost 7,295 4,006
Other 149 720
------------------ -----------------
$ 15,851 $ 13,101
================== =================
F-21
Note 9 - Accrued liabilities
December 31,
--------------------------------------
2002 2001
----------------- -----------------
(In thousands)
OPEB cost $ 3,818 $ 2,969
Pension cost 7,969 555
Incentive compensation 1,326 6,077
Severance benefits 1,195 -
Other employee benefits 15,953 14,616
Deferred income 1,679 325
Environmental costs 803 654
Accrued tungsten costs 2,190 2,743
Taxes, other than income 3,519 4,867
Dividends on Convertible Preferred Securities (Note 12) - 1,111
Other 8,059 7,882
----------------- -----------------
$ 46,511 $ 41,799
================= =================
During the third quarter of 2002, the Company implemented a program to
reduce global employment levels by approximately 300 employees or approximately
13% of the workforce. Severance costs aggregating $2.4 million were recorded
during the third and fourth quarter of 2002 for actual and probable terminations
based upon benefit agreements and/or arrangements applicable to the affected
salaried and hourly positions. Depending upon the terminated employees' years of
service and payroll classification, severance benefits could include
continuation of pay as well as continuation of certain health and life insurance
benefits. During the fourth quarter of 2002 the Company made payments of $1.2
million to terminated employees, and as of December 31, 2002, severance benefits
of $1.2 million remain accrued and are expected to be paid during 2003.
In April 2001, the Company reached a settlement of the litigation between
TIMET and The Boeing Company ("Boeing") related to the parties' long-term
agreement ("LTA") entered into in 1997. Under the terms of the LTA, as amended,
Boeing is required to purchase from the Company a buffer inventory of titanium
products for use by the Company in the production of titanium products ordered
by Boeing in the future. As the buffer inventory is completed, Boeing is billed
and takes title to the inventory, although the Company may retain an obligation
to further process the material as directed by Boeing. Accordingly, the revenue
and costs of sales on the buffer inventory is deferred and subsequently
recognized at the time the final product is delivered to Boeing. As of December
31, 2002, approximately $1.6 million of deferred revenue related to the Boeing
buffer inventory.
In 1999, the Company had customer orders for approximately $16 million of
titanium ingot for which the customer had not yet determined the final mill
product specifications. At the customer's request, the Company manufactured the
ingots and stored the material at the Company's facilities. As agreed with the
customer, the customer was billed for and took title to the ingots in 1999;
however, the Company retained an obligation to convert the ingots into mill
products in the future. Accordingly, the revenue (and related cost of sales) on
this product was deferred and subsequently recognized during 2002, 2001 and 2000
in the amounts of $0.1 million, $2.5 million and $13.4 million, respectively.
F-22
Note 10 - Boeing advance
Under the terms of the amended Boeing LTA, in years 2002 through 2007,
Boeing is required to advance TIMET $28.5 million annually less $3.80 per pound
of titanium product purchased by Boeing subcontractors during the preceding
year. Effectively, the Company collects $3.80 less from Boeing than the LTA
selling price for each pound of titanium product sold directly to Boeing and
reduces the related customer advance recorded by the Company. For titanium
products sold to Boeing subcontractors, the Company collects the full LTA
selling price, but gives Boeing credit by reducing the next year's annual
advance by $3.80 per pound of titanium product sold to Boeing subcontractors.
The Boeing customer advance is also reduced as take-or-pay benefits are earned,
as described in Note 14. As of December 31, 2002, approximately $0.8 million of
customer advances related to the Company's LTA with Boeing and represented
amounts to be credited against the 2003 advance for 2002 subcontractor
purchases.
Note 11 - Notes payable, long-term debt and capital lease obligations
December 31,
---------------------------------------
2002 2001
------------------ -----------------
(In thousands)
Notes payable:
U.S. credit agreement $ 11,944 $ 30
European credit agreements 1,050 1,492
------------------ -----------------
$ 12,994 $ 1,522
================== =================
Long-term debt:
Bank credit agreement - U.K. $ 6,401 $ 10,712
Other - 172
------------------ -----------------
6,401 10,884
Less current maturities - 172
------------------ -----------------
$ 6,401 $ 10,712
================== =================
Capital lease obligations $ 10,217 $ 8,938
Less current maturities 642 340
------------------ -----------------
$ 9,575 $ 8,598
================== =================
F-23
Long-term bank credit agreements. On October 23, 2002, the Company amended
its existing U.S. asset-based revolving credit agreement, extending the maturity
date to February 2006. Under the terms of the amendment, borrowings are limited
to the lesser of $105 million or a formula-determined borrowing base derived
from the value of accounts receivable, inventory and equipment ("borrowing
availability"). This facility requires the Company's U.S. daily cash receipts to
be used to reduce outstanding borrowings, which may then be reborrowed, subject
to the terms of the agreement. Interest generally accrues at rates that vary
from LIBOR plus 2% to LIBOR plus 2.5%. Borrowings are collateralized by
substantially all of the Company's U.S. assets. The credit agreement prohibits
the payment of dividends on TIMET's Convertible Preferred Securities if "excess
availability," as defined, is less than $25 million, limits additional
indebtedness, prohibits the payment of dividends on the Company's common stock
if excess availability is less than $40 million, requires compliance with
certain financial covenants and contains other covenants customary in lending
transactions of this type. The Company was in compliance in all material
respects with all covenants for all periods during the years ended December 31,
2002 and 2001. Excess availability is essentially unused borrowing availability
and is defined as borrowing availability less outstanding borrowings and certain
contractual commitments such as letters of credit. As of December 31, 2002
excess availability was approximately $85 million. The weighted average interest
rate on borrowings outstanding under these credit agreements was 3.7% and 5.3%
as of December 31, 2002 and 2001, respectively.
The Company's U.S. credit agreement allows the lender to modify the
borrowing base formulas at its discretion, subject to certain conditions. During
the second quarter of 2002, the Company's lender elected to exercise such
discretion and modified the Company's borrowing base formulas, which reduced the
amount that the Company could have borrowed against its inventory and equipment
by approximately $7 million. In the event the lender exercises such discretion
in the future, such event could have a material adverse impact on the Company's
liquidity. Borrowings outstanding under this U.S. facility are classified as a
current liability.
The Company's subsidiary, TIMET UK, has a credit agreement that provides
for borrowings limited to the lesser of (pound)22.5 million or a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and equipment ("borrowing availability"). The credit agreement
includes a revolving and term loan facility and an overdraft facility (the "U.K.
facilities"). On December 20, 2002, the Company renewed and amended its existing
U.K. facilities, extending the maturity date to December 20, 2005 and reducing
the maximum borrowing base from (pound)30.0 million to (pound)22.5 million to
more appropriately match TIMET UK's collateral base. Borrowings under the U.K.
facilities can be in various currencies including U.S. dollars, British pounds
sterling and euros; accrue interest at rates that vary from LIBOR plus 1% to
LIBOR plus 1.25%; and are collateralized by substantially all of TIMET UK's
assets. The U.K. facilities require the maintenance of certain financial ratios
and amounts and other covenants customary in lending transactions of this type.
TIMET UK was in compliance in all material respects with all covenants for all
periods during the years ended December 31, 2002 and 2001. The U.K. overdraft
facility is subject to annual review in December of each year. In the event the
overdraft facility is not renewed, the Company believes it could refinance any
outstanding overdraft borrowings under either the revolving or term loan
features of the U.K. facilities. Unused borrowing availability as of December
31, 2002 under the U.K. facilities was approximately $30 million. The weighted
average interest rate on borrowings outstanding under these credit agreements
was 4.6% and 3.6% as of December 31, 2002 and 2001, respectively.
F-24
The Company also has overdraft and other credit facilities at certain of
its other European subsidiaries. These facilities accrue interest at various
rates and are payable on demand. Unused borrowing availability as of December
31, 2002 under these facilities was approximately $16 million. The weighted
average interest rate on borrowings outstanding under these credit agreements
was 3.7% and 3.5% as of December 31, 2002 and 2001, respectively.
Capital lease obligations. Certain of the Company's U.K. production
facilities are under thirty year leases expiring in 2026. The rents under the
U.K. leases are subject to adjustment every five years based on changes in
certain published price indices. TIMET has guaranteed TIMET UK's obligations
under its leases. The Company's 70%-owned French subsidiary, TIMET Savoie, S.A.
("TIMET Savoie"), leases certain machinery and equipment from Compagnie
Europeenne du Zirconium-CEZUS, S.A. ("CEZUS"), the 30% minority shareholder,
under a ten year agreement expiring in 2006. Certain of the Company's U.S.
equipment is under three year leases expiring at various times during 2003, 2004
and 2005. Assets held under capital leases included in buildings were $9.4
million and $8.5 million, and assets included in equipment were $2.6 million and
$1.5 million at December 31, 2002 and 2001, respectively. The related aggregate
accumulated depreciation was $3.5 million and $2.4 million at December 31, 2002
and 2001, respectively.
Aggregate maturities of long-term debt and capital lease obligations are
reflected in the following table:
Capital Long-term
Leases Debt
----------------- -----------------
(In thousands)
Year ending December 31,
2003 $ 1,570 $ -
2004 1,496 -
2005 1,095 6,401
2006 1,043 -
2007 979 -
2008 and thereafter 17,278 -
----------------- -----------------
23,461 6,401
Less amounts representing interest 13,244 -
----------------- -----------------
$ 10,217 $ 6,401
================= =================
F-25
Note 12 - Minority interest
Convertible Preferred Securities. In November 1996, TIMET Capital Trust I
(the "Trust"), a wholly-owned subsidiary of TIMET, issued $201 million of 6.625%
Company-obligated mandatorily redeemable convertible preferred securities and $6
million of common securities. TIMET holds all of the outstanding common
securities of the Trust. The Trust used the proceeds from such issuance to
purchase from the Company $207 million principal amount of TIMET's 6.625%
convertible junior subordinated debentures due 2026 (the "Subordinated
Debentures"). TIMET's guarantee of payment of the Convertible Preferred
Securities (in accordance with the terms thereof) and its obligations under the
Trust documents constitute, in the aggregate, a full and unconditional guarantee
by the Company of the Trust's obligations under the Convertible Preferred
Securities. The sole assets of the Trust are the Subordinated Debentures. The
Convertible Preferred Securities represent undivided beneficial ownership
interests in the Trust, are entitled to cumulative preferred distributions from
the Trust of 6.625% per annum, compounded quarterly, and are convertible, at the
option of the holder, into TIMET common stock at the rate of 0.1339 shares of
common stock per Convertible Preferred Security (an equivalent price of $373.40
per share), for an aggregate of approximately 0.5 million common shares if fully
converted. Based on limited trading data, the fair value of the Convertible
Preferred Securities was approximately $56.6 million at December 31, 2002.
The Convertible Preferred Securities mature December 2026, do not require
principal amortization and are redeemable at the Company's option. The
redemption price approximates 103% of the principal amount as of December 1,
2002 and declines annually to 100% on December 1, 2006. The Company's U.S.
credit agreement prohibits the payment of dividends on these securities if
excess availability, as determined under the agreement, is less than $25
million. The Convertible Preferred Securities allow the Company the right to
defer dividend payments for a period of up to 20 consecutive quarters, although
interest continues to accrue at the coupon rate on the principal and unpaid
dividends. In April 2000, the Company exercised its right to defer future
dividend payments on these securities. On June 1, 2001, the Company resumed
payment of dividends on these securities, made the scheduled payment of $3.3
million and paid the previously deferred aggregate dividends of $13.9 million.
In October 2002, the Company again exercised its right to defer future dividend
payments on these securities, effective beginning with the Company's December 1,
2002 scheduled dividend payment. The Company will consider resuming payment of
dividends on the Convertible Preferred Securities once the outlook for the
Company's business improves substantially.
Based on the deferral, accrued dividends on the Convertible Preferred
Securities are reflected as long-term liabilities in the Consolidated Balance
Sheet at December 31, 2002. Dividends on the Convertible Preferred Securities
are reported in the Consolidated Statements of Operations as minority interest,
which is recorded net of allocable income tax benefits in 2000. Since the
Company exercised its right to defer dividend payments, it is unable under the
terms of these securities to, among other things, pay dividends on or reacquire
its capital stock during the deferral period. However, the Company is permitted
to reacquire the Convertible Preferred Securities during the deferral period
provided the Company has satisfied certain conditions under its U.S. credit
facility, including maintenance of the Company's excess availability above $25
million before and after such reacquisition.
F-26
Other. Other minority interest relates principally to the Company's
70%-owned French subsidiary, TIMET Savoie. The Company has the right to purchase
from CEZUS, the holder of the remaining 30% interest, CEZUS' interest in TIMET
Savoie for 30% of TIMET Savoie's equity determined under French accounting
principles, or approximately $10.5 million as of December 31, 2002. CEZUS has
the right to require the Company to purchase its interest in TIMET Savoie for
30% of TIMET Savoie's registered capital, or approximately $2.6 million as of
December 31, 2002. During the second quarter of 2002, TIMET Savoie made a
dividend payment of $1.1 million to CEZUS.
Note 13 - Stockholders' equity
Preferred stock. At December 31, 2002, the Company was authorized to issue
one million shares of preferred stock. In conjunction with the previously
discussed one-for-ten reverse stock split, the Company's Board of Directors
(based upon prior shareholder approval) also reduced the number of preferred
shares authorized for issuance to 100,000 shares. The Board of Directors
determines the rights of preferred stock as to, among other things, dividends,
liquidation, redemption, conversions and voting rights.
Common stock. At December 31, 2002, the Company was authorized to issue 99
million shares of common stock. In conjunction with the previously discussed
one-for-ten reverse stock split of its common stock, the Company's Board of
Directors (based upon prior shareholder approval) also reduced the number of
common shares authorized for issuance to 9.9 million shares. The Company's U.S.
credit agreement, as amended, limits the payment of common stock dividends. See
Note 11.
Restricted stock and common stock options. The Company's 1996 Long-Term
Performance Incentive Plan (the "Incentive Plan") provides for the discretionary
grant of restricted common stock, stock options, stock appreciation rights and
other incentive compensation to officers and other key employees of the Company.
Options generally vest over five years and expire ten years from date of grant.
During 2000, the Company awarded 46,750 shares of TIMET restricted common
stock under the Incentive Plan to certain officers and employees. No shares were
awarded during 2001 or 2002. The restrictions on the stock grants lapse ratably
on an annual basis over a five-year period. Since holders of restricted stock
have all of the rights of other common stockholders, subject to forfeiture
unless certain periods of employment are completed, all such shares of
restricted stock are considered to be currently issued and outstanding. During
2002 and 2001, 6,560 and 3,370 shares of restricted stock were forfeited,
respectively. The market value of the restricted stock awards was approximately
$2.0 million on the date of grant ($43.75 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. Compensation expense recognized by the Company related to restricted
stock awards was $0.2 million in 2002, $0.5 million in 2001 and $0.7 million in
2000.
Additionally, a separate plan (the "Director Plan") provides for annual
grants to eligible non-employee directors of options to purchase 500 shares of
the Company's common stock at a price equal to the market price on the date of
grant and to receive, as partial payment of director fees, annual grants of 100
shares of common stock (50 shares prior to 2001). Options granted to eligible
directors vest in one year and expire ten years from date of grant (five year
expiration for grants prior to 1998).
F-27
The weighted average remaining life of options outstanding at December 31,
2002 was 4.8 years (2001 - 6.1 years). At December 31, 2002, 2001 and 2000,
options to purchase 105,386, 89,594 and 66,175 shares, respectively, were
exercisable at average exercise prices of $217.74, $237.79 and $257.54,
respectively. Options to purchase 18,300 shares become exercisable in 2003. In
February 2001, the Director Plan was amended to authorize an additional 20,000
shares for future grants under such plan. At December 31, 2002, 128,679 shares
and 16,475 shares were available for future grant under the Incentive Plan and
the Director Plan, respectively.
The following table summarizes information about the Company's stock
options:
Amount
payable Weighted Weighted
Exercise upon average average fair
price per exercise exercise value at
Options option (thousands) price grant date
----------- -------------- ------------ ------------ -------------
Outstanding at December 31, 1999 173,820 $ 73.80-353.10 $ 37,059 $ 213.20
Granted:
At market 2,500 39.40 98 39.40 $ 19.90
Above market 25,000 70.00-110.00 2,150 86.00 15.30
Canceled (36,170) 79.70-353.10 (7,285) 201.40
----------- -------------- ------------ ------------
Outstanding at December 31, 2000 165,150 39.40-353.10 32,022 193.90
Granted:
At market 3,000 36.00-142.10 362 120.70 $ 81.10
Canceled (12,840) 79.70-353.10 (2,427) 163.50
----------- -------------- ------------ ------------
Outstanding at December 31, 2001 155,310 36.00-353.10 29,957 195.40
Granted:
At market 3,000 16.60-38.60 105 34.90 $ 23.00
Canceled (18,568) 79.70-353.10 (3,385) 182.30
----------- -------------- ------------ ------------
Outstanding at December 31, 2002 139,742 $ 16.60-353.10 $ 26,677 $ 190.90
=========== ============== ============ ============
F-28
The following table summarizes the Company's options outstanding and
exercisable as of December 31, 2002 by price range:
Options Outstanding Options Exercisable
------------------------------------------------------------------------------- -----------------------------------
Weighted
average
remaining Weighted Weighted
Range of Outstanding at contractual average Exercisable average
exercise prices 12/31/02 life exercise price at 12/31/02 exercise price
-------------------------------------- --------------- ----------------- --------------- ---------------
$ 16.60-35.30 500 10.0 $ 16.60 - $ -
35.31-70.62 13,500 7.6 61.79 5,000 63.54
70.63-105.93 44,176 5.8 85.71 26,096 85.16
105.94-141.25 5,000 7.1 110.00 2,000 110.00
141.26-176.56 1,500 8.4 142.10 1,500 142.10
211.88-247.18 15,260 3.0 230.00 15,260 230.00
247.19-282.50 17,116 3.3 274.64 17,116 274.64
282.51-317.81 30,810 3.9 293.77 27,854 293.84
317.82-353.10 11,880 3.4 338.76 10,560 338.84
----------------- --------------- ----------------- --------------- ---------------
139,742 4.8 $ 190.90 105,386 $ 217.74
================= =============== ================= =============== ===============
Weighted average fair values of options at grant date were estimated using
the Black-Scholes model and assumptions listed below:
2002 2001 2000
---------------- ---------------- ----------------
Assumptions at date of grant:
Expected life (years) 6 7 6
Risk-free interest rate 2.01% 3.44% 4.95%
Volatility 74% 68% 45%
Dividend yield 0% 0% 0%
F-29
Note 14 - Other income (expense)
Year ended December 31,
----------------------------------------------------
2002 2001 2000
--------------- -------------- --------------
(In thousands)
Other operating income (expense):
Boeing settlement, net $ - $ 73,000 (1) $ -
Boeing take-or-pay income 23,408 - -
Gain on termination of UTSC agreement - - 2,000
Other income (expense) (126) 640 156
--------------- -------------- --------------
$ 23,282 $ 73,640 $ 2,156
=============== ============== ==============
Other non-operating income (expense):
Dividends and interest income $ 118 $ 5,460 $ 6,154
Surety bond guarantee (1,575) - -
Impairment of investment in SMC (27,500) (61,519) -
Gain on sale of castings joint venture - - 1,205
Loss on early extinguishment of debt - - (1,343)
Foreign exchange gain (loss) (587) 92 (1,085)
Other income (expense) (761) 18 (53)
--------------- -------------- --------------
$ (30,305) $ (55,949) $ 4,878
=============== ============== ==============
(1) The Boeing settlement includes cash received from Boeing at settlement of
$82.0 million less legal fees of $9.0 million. Additionally, $6.2 million
in related employee incentive compensation was recorded as a component of
selling, general administrative and development expense.
The terms of the amended Boeing LTA allow Boeing to purchase up to 7.5
million pounds of titanium product annually from TIMET through 2007, but limit
TIMET's maximum quarterly volume obligation to 3.0 million pounds. The LTA is
structured as a take-or-pay agreement such that, beginning in calendar year
2002, Boeing forfeits $3.80 per pound of its advance payment in the event that
its orders for delivery are less than 7.5 million pounds in any given calendar
year. The Company recognizes income to the extent Boeing's year-to-date orders
for delivery plus TIMET's maximum quarterly volume obligations for the remainder
of the year total less than 7.5 million pounds. This income is recognized as
other operating income and is not included in sales revenue, sales volume or
gross margin. Based on actual purchases of approximately 1.3 million pounds
during 2002, the Company recognized $23.4 million of income for the year ended
December 31, 2002 related to the take-or-pay provisions for 6.2 million pounds
that Boeing did not purchase under the LTA during 2002. Recognition of the
take-or-pay income reduces the Boeing customer advance as described in Note 10.
F-30
Note 15 - Restructuring charges
In 2000 and 1999, the Company implemented restructuring plans designed to
address then-current market and operating conditions. The 2000 plan included the
termination of approximately 170 people, primarily in the Company's
manufacturing operations. The 1999 plan included the disposition of one plant
and termination of an aggregate of 100 people. The components of the 2000 and
1999 restructuring plan charges are summarized in the following table:
2000 Plan 1999 Plan
--------------- ---------------
(In millions)
Titanium Melted and Mill Products Segment:
Property and equipment $ 0.3 $ 0.3
Disposition of German subsidiary 0.1 2.0
Pension and OPEB costs, net - (0.1)
Personnel severance and benefits 2.6 2.5
--------------- ---------------
$ 3.0 $ 4.7
=============== ===============
Substantially all of the property and equipment charges relate to items
sold, scrapped or abandoned. Depreciation of equipment temporarily idled but not
impaired was not suspended. The disposition of the German subsidiary was
completed in the second quarter of 2000. The pension and OPEB costs relate to
actuarial valuations of accelerated defined benefits for employees terminated
and curtailment of pension and OPEB liabilities.
During each of 2001, 2000 and 1999, the Company recorded income of $0.2
million related to revisions to estimates of previously established
restructuring accruals. The 1999 credit was related to the Company's
previously-operated "Other" segment. Total net restructuring charges recognized
in the Company's results of operations for 2000 and 1999 were $2.8 million and
$4.5 million, respectively.
Payments applied against the accrued costs related to the 2000 plan were
$0.1 million and $0.5 million during 2002 and 2001, respectively. There was no
remaining balance related to the 2000 plan as of December 31, 2002.
Payments applied against the accrued costs related to the 1999 plan were
zero and $0.1 million during 2002 and 2001, respectively. As of December 31,
2002, the remaining balance of accrued restructuring costs related to the 1999
plan was $0.1 million related to personnel severance and benefits for terminated
employees. The Company expects to pay the remaining balance of the accrued costs
under the 1999 restructuring plan during 2003.
F-31
Note 16 - Income taxes
Summarized in the following table are (i) the components of income (loss)
before income taxes and minority interest ("pre-tax income (loss)"), (ii) the
difference between the income tax expense (benefit) attributable to pre-tax
income (loss) and the amounts that would be expected using the U.S. federal
statutory income tax rate of 35%, (iii) the components of the income tax expense
(benefit) attributable to pre-tax income (loss) and (iv) the components of the
comprehensive tax provision (benefit):
Year ended December 31,
-------------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
(In thousands)
Pre-tax income (loss):
U.S. $ (51,354) $ (6,719) $ (44,173)
Non-U.S. (3,181) 11,190 (303)
---------------- ---------------- ----------------
$ (54,535) $ 4,471 $ (44,476)
================ ================ ================
Expected income tax expense (benefit), at 35% $ (19,087) $ 1,565 $ (15,567)
Non-U.S. tax rates 950 521 1,121
U.S. state income taxes, net (1,650) 307 8
Dividends received deduction (241) (1,110) (1,367)
Extraterritorial income exclusion (373) (462) -
Change in valuation allowance:
Effect of change in tax law (1,797) - -
Adjustment of deferred tax valuation allowance 20,022 30,102 49
Other, net 224 189 189
---------------- ---------------- ----------------
$ (1,952) $ 31,112 $ (15,567)
================ ================ ================
Income tax expense (benefit):
Current income taxes (benefit):
U.S. $ (1,688) $ 787 $ (548)
Non-U.S. 3,430 3,503 2,696
---------------- ---------------- ----------------
1,742 4,290 2,148
---------------- ---------------- ----------------
Deferred income taxes (benefit):
U.S. - 26,061 (16,082)
Non-U.S. (3,694) 761 (1,633)
(3,694) 26,822 (17,715)
---------------- ---------------- ----------------
$ (1,952) $ 31,112 $ (15,567)
================ ================ ================
Comprehensive tax provision (benefit) allocable to:
Pre-tax income (loss) $ (1,952) $ 31,112 $ (15,567)
Minority interest - Convertible Preferred Securities - - (4,675)
Stockholders' equity, including amounts allocated
to other comprehensive income (1,588) (4,834) (1,057)
---------------- ---------------- ----------------
$ (3,540) $ 26,278 $ (21,299)
================ ================ ================
F-32
The following table summarizes the Company's deferred tax assets and
deferred tax liabilities as of December 31, 2002 and 2001:
December 31,
-----------------------------------------------------------
2002 2001
---------------------------- ---------------------------
Assets Liabilities Assets Liabilities
------------ ------------ ----------- ------------
(In millions)
Temporary differences relating to net assets:
Inventories $ 0.3 $ - $ 0.3 $ (6.6)
Property and equipment, including software - (39.6) - (25.0)
Goodwill 10.0 - - (0.6)
Accrued OPEB cost 6.2 - 9.0 -
Accrued liabilities and other deductible differences 58.9 - 33.1 -
Other taxable differences - (3.0) - (9.5)
Tax loss and credit carryforwards 51.0 - 31.5 -
Valuation allowance (84.0) - (37.4) -
------------ ------------ ----------- ------------
Gross deferred tax assets (liabilities) 42.4 (42.6) 36.5 (41.7)
Netting (41.6) 41.6 (36.1) 36.1
------------ ------------ ----------- ------------
Total deferred taxes 0.8 (1.0) 0.4 (5.6)
Less current deferred taxes 0.8 - 0.4 (0.1)
------------ ------------ ----------- ------------
Net noncurrent deferred taxes $ - $ (1.0) $ - $ (5.5)
============ ============ =========== ============
Based on the Company's recent history of U.S. losses, its near-term outlook
and management's evaluation of available tax planning strategies, in the fourth
quarter of 2001 the Company concluded that realization of its previously
recorded U.S. deferred tax assets did not continue to meet the
"more-likely-than-not" recognition criteria. Accordingly, during 2001 the
Company increased its U.S. deferred tax valuation allowance by $35.5 million to
offset deferred tax benefits related to net U.S. deferred tax assets, primarily
net operating loss and minimum tax credit carryforwards. Additionally, the
Company determined that it would not recognize a deferred tax benefit related to
future U.S. losses continuing for an uncertain period of time. The Company
increased its U.S. deferred tax valuation allowance by $39.4 million in 2002
based upon additional U.S. losses and increases to the U.S. minimum pension
liability.
During the fourth quarter of 2002, the Company was required to record a
charge to other comprehensive loss to reflect an increase in its U.K. minimum
pension liability. The related tax effect of this charge resulted in the Company
changing from a net deferred tax liability position to a net deferred tax asset
position. Based on the Company's recent history of U.K. losses, its near-term
outlook and management's evaluation of available tax planning strategies, the
Company determined that it would not recognize this deferred tax asset because
it did not meet the "more-likely-than-not" recognition criteria. Accordingly,
the Company recorded a U.K. deferred tax asset valuation allowance of $7.2
million through other comprehensive income in the fourth quarter to offset the
related U.K. deferred tax asset that arose due to the increase in U.K. minimum
pension liabilities. Commencing in the first quarter of 2003 and continuing for
an uncertain period of time, the Company will not recognize deferred tax
benefits related to either future U.K. losses or future increases in U.K.
minimum pension liabilities.
F-33
The following table summarizes the components of the change in the
Company's deferred tax asset valuation allowance in 2002, 2001 and 2000:
Year ended December 31,
-------------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
(In thousands)
Income (loss) before income taxes $ 18,225 $ 30,102 $ 49
Minority interest - Convertible Preferred Securities 4,673 4,848 -
Cumulative effect of change in accounting principle 11,761 - -
Accumulated other comprehensive loss 11,966 554 -
---------------- ---------------- ----------------
$ 46,625 $ 35,504 $ 49
================ ================ ================
During the first quarter of 2002, the Job Creation and Worker Assistance
Act of 2002 (the "JCWA Act") was signed into law. The Company benefits from
certain provisions of the JCWA Act, which liberalized certain net operating loss
("NOL") and alternative minimum tax ("AMT") restrictions. Prior to the law
change, NOLs could be carried back two years and forward 20 years. The JCWA Act
increases the carryback period for losses generated in 2001 and 2002 to five
years with no change to the carryforward period. In addition, losses generated
in 2001 and 2002 can be carried back and offset against 100% of a taxpayer's
alternative minimum taxable income ("AMTI"). Prior to the law change, an NOL
could offset no more than 90% of a taxpayer's AMTI. The suspension of the 90%
limitation is also applicable to NOLs carried forward into 2001 and 2002. Based
on these changes, the Company recognized $1.8 million of refundable U.S. income
taxes during the first quarter of 2002. The Company received $0.8 million of
this refund in the fourth quarter of 2002.
At December 31, 2002 the Company had, for U.S. federal income tax purposes,
NOL carryforwards of approximately $115 million, which will expire in 2020
through 2022. At December 31, 2002, the Company had AMT credit carryforwards of
approximately $4 million, which can be utilized to offset regular income taxes
payable in future years. The AMT credit carryforward has an indefinite
carryforward period. At December 31, 2002, the Company had the equivalent of a
$19 million NOL carryforward in the United Kingdom and a $2 million NOL
carryforward in Germany, both of which have indefinite carryforward periods. The
German government has proposed certain changes to its income tax laws that would
limit the annual utilization of NOL carryforwards. However, because the deferred
tax benefit associated with the German NOL carryforward is fully offset by a
deferred tax valuation allowance, the anticipated enactment of these changes is
not expected to materially affect the Company's deferred income tax assets or
liabilities.
Note 17 - Employee benefit plans
Variable compensation plans. The majority of the Company's total worldwide
employees, including a significant portion of its U.S. hourly employees,
participate in compensation programs providing for variable compensation based
upon the financial performance of the Company and, in certain circumstances, the
individual performance of the employee. The cost of these plans was $1.3
million, $7.2 million and $0.9 million in 2002, 2001 and 2000, respectively.
F-34
Defined contribution plans. Approximately 38% of the Company's worldwide
employees at December 31, 2002 participate in a defined contribution pension
plan with employer contributions based upon a fixed percentage of the employee's
eligible earnings. All of the Company's U.S. hourly and salaried employees (60%
of worldwide employees at December 31, 2002) are also eligible to participate in
contributory savings plans with partial matching employer contributions. For
approximately 80% of these participants, the Company makes additional matching
contributions based on higher levels of Company annual financial performance.
The cost of these pension and savings plans approximated $2.4 million in 2002,
$2.8 million in 2001 and $2.0 million in 2000.
Defined benefit pension plans. The Company maintains contributory and
noncontributory defined benefit pension plans covering the majority of its
European employees and a minority of its U.S. workforce. Defined pension
benefits are generally based on years of service and compensation, and the
related expense is based upon independent actuarial valuations. The Company's
funding policy for U.S. plans is to annually contribute amounts satisfying the
funding requirements of the Employee Retirement Income Security Act of 1974, as
amended. The Company's European defined benefit pension plans are funded in
accordance with applicable statutory requirements. Between 1989 and 1995, the
U.S. defined benefit pension plans were closed to new participants and have
remained closed. Additionally, in some cases, benefit levels have been frozen.
The U.K. defined benefit plan was closed to new participants in 1996; however,
employees participating in the plan continue to earn benefits based on current
compensation and service.
The key rate assumptions used in determining the actuarial present value of
the Company's benefit obligations at December 31, 2002 were (i) discount rates -
6.25% for the U.S. plans, 5.70% for the U.K. plan and 5.70% for the Savoie plan
(7.0%, 6.0% and 6.0% at December 31, 2001), (ii) rates of increase in future
compensation levels - 2.0% for the U.S. plans, 3.0% for the U.K. plan and 2.0%
for the Savoie plan (3.0%, 3.0% and 2.0% at December 31, 2001) and (iii)
expected long-term rates of return on assets - 8.5% for the U.S. plans, 6.7% for
the U.K. plan and 6.0% for the Savoie plan (9.0%, 7.5% and 6.0% at December 31,
2001). The benefit obligations are sensitive to changes in these estimated
rates, and actual results may differ from the obligations noted below.
Information concerning the Company's defined benefit pension plans is set forth
in the following table:
F-35
Year ended December 31,
---------------------------------------
2002 2001
------------------ -----------------
(In thousands)
Change in projected benefit obligations:
Balance at beginning of year $ 161,668 $ 153,280
Service cost 3,960 3,657
Interest cost 10,410 9,534
Plan amendments 48 -
Actuarial loss 8,825 6,050
Benefits paid (9,486) (8,743)
Change in currency exchange rates 11,184 (2,110)
------------------ -----------------
Balance at end of year $ 186,609 $ 161,668
================== =================
Change in plan assets:
Fair value at beginning of year $ 135,762 $ 149,687
Actual return on plan assets (22,436) (9,830)
Employer contribution 7,357 6,267
Plan participants' contributions 716 737
Benefits paid (9,486) (8,743)
Change in currency exchange rates 7,290 (2,356)
Other (923) -
------------------ -----------------
Fair value at end of year $ 118,280 $ 135,762
================== =================
Funded status:
Plan assets under projected benefit obligations $ (68,329) $ (25,906)
Unrecognized:
Actuarial loss 79,382 34,407
Prior service cost 3,716 3,198
------------------ -----------------
Total prepaid pension cost $ 14,769 $ 11,699
================== =================
Amounts recognized in balance sheets:
Intangible pension asset $ 3,716 $ 3,198
Noncurrent prepaid pension cost 7,295 4,006
Current pension liability (7,969) (555)
Noncurrent pension liability (61,080) (23,690)
Accumulated other comprehensive loss 72,807 28,740
------------------ -----------------
$ 14,769 $ 11,699
================== =================
F-36
At December 31, 2002, the assets of the plans are primarily comprised of
government obligations, corporate stocks and bonds. Selected information related
to the Company's defined benefit pension plans that have accumulated benefit
obligations in excess of fair value of plan assets are presented below:
December 31,
---------------------------------------
2002 2001
------------------ -----------------
(In thousands)
Projected benefit obligation $ 186,609 $ 161,668
Accumulated benefit obligation $ 179,586 $ 156,001
Fair value of plan assets $ 118,280 $ 135,762
The components of the net periodic defined benefit pension expense are set
forth below:
Year ended December 31,
-------------------------------------------------------
2002 2001 2000
---------------- ---------------- ----------------
(In thousands)
Service cost benefits earned $ 3,410 $ 2,919 $ 3,768
Interest cost on projected benefit obligations 10,410 9,534 9,182
Expected return on plan assets (11,035) (11,737) (11,907)
Net amortization 2,077 732 342
---------------- ---------------- ----------------
Net pension expense $ 4,862 $ 1,448 $ 1,385
================ ================ ================
Postretirement benefits other than pensions. The Company provides certain
postretirement health care and life insurance benefits on a cost-sharing basis
to certain of its U.S. employees upon retirement. Health care coverage under the
plans terminates once the retiree (or eligible dependent) becomes
Medicare-eligible, effectively limiting coverage for most participants to less
than five years. The Company funds such benefits as they are incurred, net of
any contributions by the retirees. Under plans currently in effect, a majority
of TIMET's active U.S. employees would become eligible for these benefits if
they reach normal retirement age while working for TIMET.
The components of the periodic OPEB cost and change in the accumulated OPEB
obligations are set forth in the following table. The plan is unfunded and
contributions to the plan during the year equal benefits paid. The key rate
assumptions used in determining the actuarial present value of the accumulated
OPEB obligations at December 31, 2002 were (i) discount rate - 6.25% (7.0% at
December 31, 2001), (ii) rate of increase in health care costs for the following
period - 11.35% (11.15% at December 31, 2001) and (iii) ultimate health care
trend rate (achieved in 2010) - 4.25% (5.00% at December 31, 2001). The accrued
OPEB cost is sensitive to changes in these estimated rates and actual results
may differ from the obligations noted.
F-37
December 31,
---------------------------------------
2002 2001
------------------ -----------------
(In thousands)
Actuarial present value of accumulated OPEB obligations:
Balance at beginning of year $ 23,245 $ 22,757
Service cost 565 271
Interest cost 1,799 1,686
Amendments 731 -
Actuarial loss 5,383 2,499
Benefits paid, net of participant contributions (4,607) (3,968)
------------------ -----------------
Balance at end of year 27,116 23,245
Unrecognized net actuarial loss (10,471) (5,518)
Unrecognized prior service credits 590 1,222
------------------ -----------------
Total accrued OPEB cost 17,235 18,949
Less current portion 3,818 2,969
------------------ -----------------
Noncurrent accrued OPEB cost $ 13,417 $ 15,980
================== =================
Year ended December 31,
-------------------------------------------------
2002 2001 2000
-------------- -------------- -------------
(In thousands)
Service cost benefits earned $ 565 $ 271 $ 176
Interest cost on accumulated OPEB obligations 1,799 1,686 1,709
Curtailment gain - - (443)
Net amortization and deferrals 529 (203) (324)
-------------- -------------- -------------
Net OPEB expense $ 2,893 $ 1,754 $ 1,118
============== ============== =============
If the health care cost trend rate were increased by one percentage point
for each year, OPEB expense would have increased approximately $0.3 million in
2002, and the actuarial present value of accumulated OPEB obligations at
December 31, 2002 would have increased approximately $3.0 million. A
one-percentage point decrease would have a similar, but opposite, effect.
F-38
Note 18 - Related party transactions
During 2002, Tremont Corporation ("Tremont") purchased 26,450 shares of
TIMET common stock in market transactions, and at December 31, 2002, Tremont
held approximately 39.4% of TIMET's outstanding common stock. During 2002, the
Combined Master Retirement Trust ("CMRT"), a trust formed by Valhi, Inc.
("Valhi") to permit the collective investment by trusts that maintain the assets
of certain employee benefit plans adopted by Valhi and related companies
(excluding TIMET), purchased shares of TIMET common stock in market
transactions, and at December 31, 2002, the CMRT held approximately 9% of
TIMET's common stock. At December 31, 2002, subsidiaries of Valhi held an
aggregate of approximately 80% of Tremont's outstanding common stock. On
February 7, 2003, Valhi completed a merger with Tremont whereby, in a series of
transactions, Tremont was merged into Tremont LLC, a wholly-owned subsidiary of
Valhi. Between January 1, 2003 and February 26, 2003, Tremont, or its successor
Tremont LLC, purchased 7,400 additional shares of TIMET common stock in market
transactions. At December 31, 2002, Contran Corporation ("Contran") held,
directly or through subsidiaries, approximately 93% of Valhi's outstanding
common stock, which was reduced to 89% as of February 26, 2003, primarily as a
result of shares issued by Valhi to transact the Tremont merger. Substantially
all of Contran's outstanding voting stock is held by trusts established for the
benefit of certain children and grandchildren of Harold C. Simmons, of which Mr.
Simmons is sole trustee. In addition, Mr. Simmons, Chairman of the Board of
Contran and Valhi, is the sole trustee of the CMRT and is a member of the trust
investment committee for the CMRT. Mr. Simmons may be deemed to control each of
Contran, Valhi and TIMET.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (i) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties, and (ii) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. The Company
continuously considers, reviews and evaluates, and understands that Contran,
Valhi and related entities consider, review and evaluate such transactions.
Depending upon the business, tax and other objectives then relevant, it is
possible that the Company might be a party to one or more such transactions in
the future.
F-39
Receivables from and payables to related parties are summarized in the
following table:
December 31,
--------------------------------------
2002 2001
----------------- -----------------
(In thousands)
Receivables from related parties:
Tremont $ - $ 1,281
VALTIMET 2,398 4,898
----------------- -----------------
$ 2,398 $ 6,179
================= =================
Payables to related parties:
Tremont $ - $ 1,261
NL Industries, Inc. - 379
VALTIMET 1,246 925
----------------- -----------------
$ 1,246 $ 2,565
================= =================
Under the terms of various intercorporate services agreements ("ISAs")
entered into between the Company and various related parties, employees of one
company provide certain management, tax planning, financial and administrative
services to the other company on a fee basis. Such charges are based upon
estimates of the time devoted by the employees of the provider of the services
to the affairs of the recipient and the compensation of such persons. These ISAs
are reviewed and approved by the applicable independent directors of the
companies that are parties to the agreements.
The Company had an ISA with Tremont whereby the Company provided certain
management, financial and other services to Tremont for approximately $0.4
million in 2002 and 2001 and $0.3 million in 2000. The Company anticipates
entering into an ISA with Contran in 2003 to replace the Tremont ISA. Payments
under a Contran ISA will likely be less than those under the Tremont ISA since
Contran will now perform certain of the functions previously performed on behalf
of Tremont by TIMET. Additionally, Contran may provide certain financial
services to TIMET during 2003.
The Company had an ISA with NL Industries, Inc. ("NL"), a majority-owned
subsidiary of Valhi. Under the terms of the agreement, NL provided certain
financial and other services to TIMET for approximately $0.3 million in each of
2002, 2001 and 2000. The Company expects to renew this agreement for 2003 at a
reduced amount, as the Company now performs a portion of these financial and
other services internally.
The Company previously extended market-rate loans to certain officers
pursuant to a Board-approved program to facilitate the purchase of Company stock
and its Convertible Preferred Securities and to pay applicable taxes on shares
of restricted Company stock as such shares vest. The loans were generally
payable in five annual installments beginning six years from date of loan and
bore interest at a rate tied to the Company's borrowing rate, payable quarterly.
At December 31, 2002, approximately $0.2 million of officer notes receivable
remain outstanding. The Company terminated this program effective July 30, 2002,
subject to continuing only those loans outstanding at that time in accordance
with their then-current terms.
F-40
EWI RE, Inc. ("EWI") acts as a broker for certain of the Company's
insurance policies. At December 31, 2001, parties related to Contran owned all
of the outstanding common stock of EWI. On January 7, 2002, NL purchased EWI
from its previous owners and EWI became a wholly-owned subsidiary of NL. Through
December 31, 2000, a son-in-law of Harold C. Simmons managed the operations of
EWI. Subsequent to December 31, 2000, and pursuant to an agreement that, as
amended, is effective until terminated by either party with 90 days notice, such
son-in-law provides advisory services to EWI as requested by EWI. The Company
generally does not compensate EWI directly for insurance, but understands that,
consistent with insurance industry practices, EWI receives a commission from the
insurance underwriters for the policies that it arranges or brokers. The
Company's aggregate premiums for such policies were approximately $3.4 million
in 2002, $2.8 million in 2001 and $2.4 million in 2000. The Company expects that
these relationships with EWI will continue in 2003.
TIMET, together with other companies within the Contran group of companies,
purchase certain of their insurance coverages as a group, with the costs of the
jointly-owned policies being apportioned among the participating companies. With
respect to certain of these policies, it is possible that unusually large losses
incurred by one or more insureds during a given policy period could leave the
other participating companies without adequate coverage under that policy for
the balance of such policy period, which could dictate that such companies
purchase replacement coverage or could result in the need to negotiate a loss
sharing agreement.
TIMET supplies titanium strip product to VALTIMET under a long-term
contract as the preferred supplier and previously supplied casting ingot to
Wyman-Gordon Titanium Castings. Sales to VALTIMET were $17 million in 2002 and
$22 million in 2001 and 2000. Early in 2000, TIMET sold its interest in the
castings joint venture at a pre-tax gain of $1.2 million.
In connection with the construction and financing of TIMET's vacuum
distillation process ("VDP") titanium sponge plant, Union Titanium Sponge
Corporation ("UTSC") licensed certain technology to TIMET in exchange for the
right to acquire up to 20% of TIMET's annual production capacity of VDP sponge
at agreed-upon prices through early 1997 and higher formula-determined prices
thereafter through 2008. The agreement also obligated UTSC to pay certain
amounts in the event that UTSC purchases were below contractual volume minimums.
In the fourth quarter of 2000, UTSC paid TIMET $2.0 million, which was included
in other operating income, in connection with the termination of this agreement.
Tremont LLC owns 32% of Basic Management, Inc. ("BMI"). Among other things,
BMI provides utility services (primarily water distribution, maintenance of a
common electrical facility and sewage disposal monitoring) to the Company and
other manufacturers within an industrial complex located in Henderson, Nevada.
Power transmission and sewer services are provided on a cost reimbursement
basis, similar to a cooperative, while water delivery is currently provided at
the same rates as are charged by BMI to an unrelated third party. Amounts paid
by the Company to BMI for these utility services were $1.5 million in 2002 and
2001 and $1.6 million in 2000. The Company paid BMI an electrical facilities
usage fee of $1.3 million in each of 2002, 2001 and 2000. This usage fee
continues at $1.3 million per year through 2004 and declines to $0.6 million for
2005, to $0.5 million annually for 2006 through 2009, and terminates completely
after January 2010.
F-41
Note 19 - Commitments and contingencies
Long-term agreements. The Company has LTAs with certain major aerospace
customers, including, but not limited to, Boeing, Rolls-Royce plc
("Rolls-Royce"), United Technologies Corporation ("UTC", Pratt & Whitney and
related companies) and Wyman-Gordon Company (a unit of Precision Castparts
Corporation ("PCC")). These agreements initially became effective in 1998 and
1999 and expire in 2007 through 2008, subject to certain conditions. The LTAs
generally provide for (i) minimum market shares of the customers' titanium
requirements or firm annual volume commitments and (ii) fixed or
formula-determined prices generally for at least the first five years.
Generally, the LTAs require the Company's service and product performance to
meet specified criteria and contain a number of other terms and conditions
customary in transactions of these types. In certain events of nonperformance by
the Company, the LTAs may be terminated early. Additionally, under a group of
related LTAs (which group represents approximately 12% of the Company's 2002
sales revenue) which currently have fixed prices that convert to formula-derived
prices in 2004, the customer may terminate the agreement as of the end of 2003
if the effect of the initiation of formula-derived pricing would cause such
customer "material harm." If any of such agreements within the group were to be
terminated by the customer on this basis, it is possible that some portion of
the business represented by that group of related LTAs would continue on a
non-LTA basis. However, the termination of one or more of the LTAs, including
any of those within the group of related LTAs, could result in a material and
adverse effect on the Company's business, results of operations, financial
position or liquidity.
During 2001, the Company recorded a charge of $3.0 million relating to a
titanium sponge supplier's agreement to renegotiate certain components of an
agreement entered into in 1997, including minimum purchase commitments for 1999
through 2001. As of December 31, 2002 and 2001, $1.7 million and $2.0 million of
this amount remained accrued and unpaid, respectively. In September 2002, the
Company entered into a new agreement with this supplier, effective from January
1, 2002 through December 31, 2007. This new agreement replaced and superceded
the 1997 agreement. The new agreement requires minimum annual purchases by the
Company of approximately $10 million in 2002 through 2007.
In April 2001, the Company reached a settlement of the litigation between
TIMET and Boeing related to the parties' LTA entered into in 1997. Pursuant to
the settlement, the Company received a cash payment of $82 million. The
Company's 2001 results reflect approximately $73 million (cash settlement less
legal fees) as other operating income, with partially offsetting operating
expenses of approximately $6.2 million for employee incentive compensation and
other costs reported as a component of selling, general, administrative and
development expense, resulting in a net pre-tax income effect of $66.8 million
in 2001.
F-42
In connection with the settlement, TIMET and Boeing also entered into an
amended LTA that, among other things, allows Boeing to purchase up to 7.5
million pounds of titanium product annually from TIMET through 2007, subject to
certain maximum quarterly volume levels. Under the amended LTA, Boeing is
required to advance TIMET $28.5 million annually for 2002 through 2007. The
annual advance for contract years 2002 and 2003 were made in December 2001 and
January 2003, respectively, with subsequent advances scheduled to occur in
January of each calendar year through 2007. The LTA is structured as a
take-or-pay agreement such that, beginning in calendar year 2002, Boeing
forfeits a proportionate part of the $28.5 million annual advance, or
effectively $3.80 per pound, in the event that its annual orders for delivery
for such calendar year are less than 7.5 million pounds. Under a separate
agreement TIMET must establish and hold buffer stock for Boeing at TIMET's
facilities, for which Boeing pays TIMET as such stock is produced. See Notes 10
and 14.
Concentration of credit and other risks. Substantially all of the Company's
sales and operating income (loss) are derived from operations based in the U.S.,
the U.K. and France. Over 67% of the Company's sales revenue is generated by
sales to customers in the aerospace industry (including airframe and engine
construction). As described previously, the Company has LTAs with certain major
aerospace customers, including Boeing, Rolls-Royce, UTC and Wyman-Gordon. These
agreements and others accounted for approximately 37%, 43% and 35% of sales
revenue in 2002, 2001 and 2000, respectively. Sales to PCC and related entities
approximated 9% of the Company's sales revenue in 2002. Sales to Rolls-Royce and
other Rolls-Royce suppliers under the Rolls-Royce LTAs (including sales to
certain of the PCC-related entities) represented approximately 12% of the
Company's sales revenue in 2002. The Company's ten largest customers accounted
for about 40% of sales revenue in 2002 and about 50% of sales revenue in 2001
and 2000. Such concentration of customers may impact the Company's overall
exposure to credit and other risks, either positively or negatively, in that
such customers may be similarly affected by economic or other conditions.
Operating leases. The Company leases certain manufacturing and office
facilities and various equipment. Most of the leases contain purchase and/or
various term renewal options at fair market and fair rental values,
respectively. In most cases management expects that leases will be renewed or
replaced by other leases in the normal course of business. Net rent expense was
approximately $5.0 million in 2002, $6.1 million in 2001 and $6.6 million in
2000.
At December 31, 2002, future minimum payments under noncancellable
operating leases having an initial or remaining term in excess of one year were
as follows:
Amount
-------------------
(In thousands)
Year ending December 31,
2003 $ 3,384
2004 1,579
2005 757
2006 629
2007 318
2008 and thereafter 339
-------------------
$ 7,006
===================
F-43
Environmental matters. In 1999, 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") entered into a
series of agreements with BMI and certain related companies pursuant to which,
among other things, BMI assumed responsibility for the conduct of soils
remediation activities on the properties described, including the responsibility
to complete all outstanding requirements pertaining to such activities under
existing consent agreements with the Nevada Division of Environmental
Protection. The Company contributed $2.8 million to the cost of this
remediation. The Company also agreed to convey to BMI, at no additional cost,
certain lands owned by the Company adjacent to its plant site (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 into settling ponds located on the
TIMET Pond Property. BMI will pay 100% of the first $15.9 million cost for this
project, and TIMET agreed to contribute 50% of the cost in excess of $15.9
million, up to a maximum payment by TIMET of $2 million. Preliminary estimates
indicate that one possible design of such a system may cost up to approximately
$20 million; however, the Company and BMI are continuing to review various
design alternatives in order to minimize the ultimate project costs, and no
design has yet been selected. The Company has not accrued any amount with
respect to the potential liability to fund 50% of the cost of the project in
excess of $15.9 million (subject to the $2 million cap) because it is not
probable such excess cost will be incurred. The Company, BMI and the other
Steering Committee Companies are continuing investigation with respect to
certain additional issues associated with the properties described above,
including any possible groundwater issues at the BMI Complex and the TIMET Pond
Property.
The Company is also continuing assessment work with respect to its own
active plant site in Henderson, Nevada. During 2000, a preliminary study was
completed of certain groundwater remediation issues at the Company's plant site
and other Company-owned sites within the BMI Complex. The Company accrued $3.3
million in 2000 based on the undiscounted cost estimates set forth in the study.
During 2002, the Company updated this study and accrued an additional $0.3
million based on revised cost estimates. These expenses are expected to be paid
over a period of up to thirty years.
In February 2002, the Company fulfilled all of its remaining obligations
under the 2000 Settlement Agreement of the U. S. Environmental Protection
Agency's 1998 civil action against TIMET (United States of America v. Titanium
Metals Corporation; Civil Action No. CV-S-98-682-HDM (RLH), U. S. District
Court, District of Nevada).
F-44
At December 31, 2002, the Company had accrued an aggregate of approximately
$4.3 million for environmental matters, including those discussed above. The
Company records liabilities related to environmental remediation obligations
when estimated future costs are probable and reasonably estimable. Such accruals
are adjusted as further information becomes available or circumstances change.
Estimated future costs are not discounted to their present value. It is not
possible to estimate the range of costs for certain sites. The imposition of
more stringent standards or requirements under environmental laws or
regulations, the results of future testing and analysis undertaken by the
Company at its operating facilities, or a determination that the Company is
potentially responsible for the release of hazardous substances at other sites,
could result in costs in excess of amounts currently estimated to be required
for such matters. No assurance can be given that actual costs will not exceed
accrued amounts or that costs will not be incurred with respect to sites as to
which no problem is currently known or where no estimate can presently be made.
Further, there can be no assurance that additional environmental matters will
not arise in the future.
Legal proceedings. In September 2000, the Company was named in an action
filed by the U.S. Equal Employment Opportunity Commission ("EEOC") 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,
as amended, alleges that several female employees at the Company's Henderson,
Nevada plant were the subject of sexual harassment and retaliation. In August
2002, TIMET filed a motion for summary judgment as to all claims of one employee
who had intervened as a separate party, and as to all other claims involved in
the EEOC's complaint. In December 2002, TIMET's motion was granted in part as to
the individual employee's state law claims, but denied as to the Federal law
claims of the individual employee and of the EEOC. The court also denied TIMET's
motion to stay and compel arbitration of one employee's claims. TIMET has
appealed this ruling. TIMET subsequently filed a motion to stay all proceedings
until its appeal is concluded, on which the court has not yet ruled. The Company
continues to vigorously defend this action. No trial date has been set.
At December 31, 2002, the Company had accrued an aggregate of $0.6 million
for expected costs related to various legal proceedings, including the
proceeding discussed above. The Company records liabilities related to legal
proceedings when estimated costs, including estimated legal fees, are probable
and reasonably estimable. Such accruals are adjusted as further information
becomes available or circumstances change. Estimated future costs are not
discounted to their present value. It is not possible to estimate the range of
costs for certain matters. No assurance can be given that actual costs will not
exceed accrued amounts or that costs will not be incurred with respect to
matters as to which no problem is currently known or where no estimate can
presently be made. Further, there can be no assurance that additional legal
proceedings will not arise in the future.
F-45
Other. TIMET is the primary obligor on two workers' compensation bonds
issued on behalf of a former subsidiary, Freedom Forge Corporation ("Freedom
Forge"), which TIMET sold in 1989. The bonds were provided as part of the
conditions imposed on Freedom Forge in order to self-insure its workers'
compensation obligations. Each of the bonds has a maximum obligation of $1.5
million. Freedom Forge filed for Chapter 11 bankruptcy protection on July 13,
2001, and discontinued payment on the underlying workers' compensation claims in
November 2001. During the third quarter of 2002, TIMET received notices that the
issuers of the bonds were required to make payments on one of the bonds with
respect to certain of these claims and were requesting reimbursement from TIMET.
Based upon current loss projections, the Company anticipates claims will be
incurred up to the maximum amount payable under the bond and, therefore,
recorded $1.6 million for this bond (including $0.1 million in legal fees
reimbursable to the issuer of the bonds) as other non-operating expense in 2002.
Through December 31, 2002, TIMET has reimbursed the issuer approximately $0.4
million under this bond and $1.2 million remains accrued for future payments. At
this time the Company understands that no claims have been paid under the second
bond, and no such payments are currently anticipated. Accordingly, no accrual
has been recorded for potential claims that could be filed under the second
bond. TIMET may revise its estimated liability under these bonds in the future
as additional facts become known or claims develop.
In March 2001, the Company was notified by one of its customers that a
product the customer manufactured from standard grade titanium produced by the
Company contained what has been confirmed to be a tungsten inclusion. At the
present time, the Company is aware of six standard grade ingots that have been
demonstrated to contain tungsten inclusions. Based upon the Company's assessment
of possible losses, TIMET recorded an aggregate charge to cost of sales for this
matter of $3.3 million during 2001. During 2001, the Company charged $0.3
million against this accrual to write down its remaining on-hand inventory and
made $0.3 million in settlement payments, resulting in a $2.7 million accrual as
of December 31, 2001 for potential future claims. During 2002, the Company made
settlement payments aggregating $0.3 million and has also revised its estimate
of the most likely amount of loss to be incurred, resulting in a credit of $0.2
million to cost of sales during 2002. As of December 31, 2002, $2.2 million is
accrued for pending and potential future claims. This amount represents the
Company's best estimate of the most likely amount of loss to be incurred. This
amount does not represent the maximum possible loss, which is not possible for
the Company to estimate at this time, and may be periodically revised in the
future as more facts become known. As of December 31, 2002, the Company has
received claims aggregating approximately $5 million and has made settlement
payments aggregating $0.6 million. Pending claims are being investigated and
negotiated. The Company believes that certain claims are without merit or can be
settled for less than the amount of the original claim. There is no assurance
that all potential claims have yet been submitted to the Company. The Company
has filed suit seeking full recovery from its silicon supplier for any liability
the Company might incur, although no assurances can be given that the Company
will ultimately be able to recover all or any portion of such amounts. The
Company has not recorded any recoveries related to this matter as of December
31, 2002.
F-46
The Company is involved in various employment, environmental, contractual,
product liability and other claims, disputes and litigation incidental to its
business including those discussed above. While management, including internal
counsel, currently believes that the outcome of these matters, individually and
in the aggregate, will not have a material adverse effect on the Company's
financial position, liquidity or overall trends in results of operations, all
such matters are subject to inherent uncertainties. Were an unfavorable outcome
to occur in any given period, it is possible that it could have a material
adverse impact on the results of operations or cash flows in that particular
period.
Note 20 - Earnings per share
Basic earnings (loss) per share is based on the weighted average number of
unrestricted common shares outstanding during each year. Diluted earnings (loss)
per share reflect the dilutive effect of common stock options, restricted stock
and the assumed conversion of the Convertible Preferred Securities, if
applicable. Basic and diluted earnings (loss) per share amounts for all periods
presented have been retroactively adjusted for the effects of the Company's
one-for-ten reverse stock split, which was effective after the close of trading
on February 14, 2003. The assumed conversion of the Convertible Preferred
Securities was omitted from the diluted earnings (loss) per share calculation
for 2002, 2001 and 2000 because the effect was antidilutive. Had the Convertible
Preferred Securities not been antidilutive, diluted losses would have been
decreased by $13.4 million in 2002, $13.9 million in 2001 and $8.7 million in
2000. Diluted average shares outstanding would have been increased by
approximately 540,000 shares for each of these periods. Stock options and
restricted shares omitted from the calculation because they were antidilutive
approximated 158,000 in 2002, 185,000 in 2001 and 213,000 in 2000. Dilutive
stock options of 10 in 2002, 1,800 in 2001 and 8,800 in 2000 were excluded from
the calculation of diluted earnings per share because their effect would have
been antidilutive due to the losses in those years.
F-47
Note 21 - Quarterly results of operations (unaudited)
For the quarter ended
----------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
------------- -------------- ------------- -------------
(In millions, except per share data)
Year ended December 31, 2002:
Net sales $ 104.4 $ 94.3 $ 82.8 $ 85.0
Gross margin 5.1 1.4 (4.9) (4.7)
Operating loss (1) (4.7) (7.0) (4.4) (4.8)
Loss before cumulative effect of change in
accounting principle (1) (36.1) (12.3) (9.1) (9.6)
Net loss (1) (2) (80.4) (12.3) (9.1) (9.6)
Basic and diluted loss per share (2) (3):
Before cumulative effect of change in
accounting principle $ (11.43) $ (3.91) $ (2.89) $ (3.05)
Basic and diluted loss per share$
$ (25.47) $ (3.91) $ (2.89) $ (3.05)
Year ended December 31, 2001:
Net sales $ 124.0 $ 120.0 $ 126.4 $ 116.5
Gross margin 7.3 (3.5) 20.8 15.3
Operating (loss) income (1.8) 48.6 10.0 7.7
Net (loss) income (1) (3.6) 29.6 4.3 (72.0)
(Loss) earnings per share (3):
Basic $ (1.15) $ 9.38 $ 1.38 $ (22.85)
Diluted $ (1.15) $ 8.62 $ 1.37 $ (22.85)
(1) The sum of quarterly amounts do not agree to the full year results due to
rounding.
(2) As compared to amounts previously reported on Form 10-Q, net loss and loss
per share for the quarter ended March 31, 2002 were increased by the $44.3
million ($14.04 per share) cumulative effect of change in accounting
principle recorded for the Company's goodwill impairment charge determined
during the third quarter of 2002.
(3) The sum of quarterly amounts may not agree to the full year results due to
rounding and the timing of potential conversion of options to common stock,
which would have an antidilutive effect on the calculation. All per share
amounts have been adjusted to reflect the Company's one-for-ten reverse
stock split which became effective after the close of trading on February
14, 2003.
The first quarter 2002 results included a $27.5 million impairment charge
related to the impairment of the Company's investment in SMC securities, as
discussed in Note 5. The fourth quarter 2001 results included a $61.5 million
pre-tax impairment charge related to the impairment of the Company's investment
in SMC securities, as discussed in Note 5, and a $35.5 million increase in the
Company's deferred tax asset valuation allowance, as discussed in Note 16. The
second quarter 2001 operating results included $73.0 million of income from the
Boeing settlement, with partially offsetting expenses of $10.2 million for
employee incentive compensation (which was subsequently reduced by $4.1 million
in the fourth quarter of 2001), as discussed in Note 14.
F-48
Note 22 - Subsequent event
As previously discussed in Note 1, on February 4, 2003, the Company's
stockholders approved a proposal to amend TIMET's Certificate of Incorporation
to effect a reverse stock split of TIMET's common stock at a ratio of one share
of post-split common stock for each eight, nine or ten shares of pre-split
common stock issued and outstanding, with the final ratio to be selected by the
Board of Directors. Subsequently, the Board of Directors of TIMET unanimously
approved a reverse stock split on the basis of one share of post-split common
stock for each outstanding ten shares of pre-split common stock. The reverse
stock split became effective after the close of trading on February 14, 2003.
All share and per share disclosures for all periods presented in the
accompanying Consolidated Financial Statements have been adjusted to give effect
to the reverse stock split.
F-49
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of Titanium Metals Corporation:
Our audits of the consolidated financial statements referred to in our
report dated January 28, 2003, except for Note 22 as to which the date is
February 14, 2003, appearing in this 2002 Annual Report on Form 10-K of Titanium
Metals Corporation also included an audit of the financial statement schedule
listed in the Index on page F of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/ PricewaterhouseCoopers LLP
Denver, Colorado
January 28, 2003, except for Note 22,
as to which the date is February 14, 2003
S-1
TITANIUM METALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
-----------------------------
Balance Charged
at to Charged Balance
beginning costs and to other at end
Description of year expenses accounts Deductions of year
------------------------------------ ------------- ------------- ------------ ------------- ------------
Year ended December 31, 2002:
Allowance for doubtful
accounts $ 2,739 $ 1,000 $ 152 (1) $ (1,032) (2) $ 2,859
============= ============= ============ ============= ============
Allowance for excess and
slow moving inventories $ 13,621 $ 3,757 $ 901 (1) $ (3,189) $ 15,090
============= ============= ============ ============= ============
Reserve for business
restructuring $ 198 $ - $ - $ (118) (3) $ 80
============= ============= ============ ============= ============
Year ended December 31, 2001:
Allowance for doubtful
accounts $ 2,927 $ 4 $ (22) (1) $ (170) (2) $ 2,739
============= ============= ============ ============= ============
Allowance for excess and
slow moving inventories $ 14,846 $ 1,755 $ (218) (1) $ (2,762) $ 13,621
============= ============= ============ ============= ============
Reserve for business
restructuring $ 1,012 $ (227) $ - $ (587) (3) $ 198
============= ============= ============ ============= ============
Year ended December 31, 2000:
Allowance for doubtful
accounts $ 3,330 $ 185 $ (223) (1) $ (365) (2) $ 2,927
============= ============= ============ ============= ============
Allowance for excess and
slow moving inventories $ 14,764 $ 2,707 $ (774) (1) $ (1,851) $ 14,846
============= ============= ============ ============= ============
Reserve for business
restructuring $ 1,490 $ 3,219 $ - $ (3,697) (3) $ 1,012
============= ============= ============ ============= ============
(1) Amount represent foreign currency translation adjustments for the related
account.
(2) Amounts written off, less recoveries.
(3) Amounts represent cash payments for restructuring severance obligations and
credits to reduce the initial restructuring charge.
S-2