SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2005
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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5600
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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 No X
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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No
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Indicate by check mark whether the registrant is a shell company
(as defined by rule 12b-2 of the Exchange Act).
Yes No X
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Number of shares of common stock outstanding on January 3, 2006: 35,482,522
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q
("Quarterly Report") that are not historical facts, including, but not limited
to, statements found in the Notes to Consolidated Financial Statements and in
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 generally 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
assurance that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly affect expected results. Actual future results could differ
materially from those described in such forward-looking statements, and the
Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Among the factors that could cause actual results to differ
materially are the risks and uncertainties discussed in this Quarterly Report,
including risks and uncertainties 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, the possibility of labor disruptions, fluctuations in currency exchange
rates, fluctuations in the market price of marketable securities, control by
certain stockholders and possible conflicts of interest, uncertainties
associated with new product or new market development, the availability of raw
materials and services, changes in raw material prices 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 potential for adjustment of the Company's deferred income tax asset
valuation allowance and other risks and uncertainties. Should one or more of
these risks materialize (or the consequences of such a development worsen), or
should the underlying assumptions prove incorrect, actual results could differ
materially from those forecasted or expected.
TITANIUM METALS CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 2005 (unaudited)
and December 31, 2004 2
Consolidated Statements of Operations - Three and nine months
ended September 30, 2005 and 2004 (unaudited) 4
Consolidated Statements of Comprehensive Income (Loss) - Three
and nine months ended September 30, 2005 and 2004 (unaudited) 5
Consolidated Statements of Cash Flows - Nine months ended
September 30, 2005 and 2004 (unaudited) 6
Consolidated Statement of Changes in Stockholders' Equity -
Nine months ended September 30, 2005 (unaudited) 8
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 6. Exhibits 37
-1-
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
ASSETS 2005 2004
-------------------- --------------------
(unaudited) (as restated,
see Note 1)
Current assets:
Cash and cash equivalents $ 5,540 $ 7,194
Restricted cash and cash equivalents 146 721
Accounts and other receivables, less
allowance of $1,614 and $1,683, respectively 140,353 96,756
Inventories 337,157 258,324
Prepaid expenses and other 4,766 2,400
Deferred income taxes 3,218 4,974
-------------------- --------------------
Total current assets 491,180 370,369
Marketable securities 48,560 47,214
Investment in joint ventures 24,183 22,591
Investment in common securities of TIMET Capital Trust I 180 6,259
Property and equipment, net 245,257 228,173
Intangible assets, net 4,309 5,057
Deferred income taxes 16,293 1,053
Other 11,401 11,577
-------------------- --------------------
Total assets $ 841,363 $ 692,293
==================== ====================
See accompanying Notes to Consolidated Financial Statements
-2-
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
September 30, December 31,
LIABILITIES, MINORITY INTEREST AND 2005 2004
-------------------- --------------------
STOCKHOLDERS' EQUITY (unaudited) (as restated, see
Note 1)
Current liabilities:
Notes payable $ 64,996 $ 43,176
Accounts payable 55,940 44,164
Accrued liabilities 57,304 53,130
Deferred gain on sale of property - 12,016
Customer advances 18,827 6,913
Income taxes payable 12,139 2,516
Other 556 257
-------------------- --------------------
Total current liabilities 209,762 162,172
Long-term debt 10,727 -
Accrued OPEB cost 14,824 14,470
Accrued pension cost 72,414 77,515
Accrued environmental cost 1,948 1,985
Deferred income taxes 57 60
Debt payable to TIMET Capital Trust I 5,965 12,010
Other 4,823 5,114
-------------------- --------------------
Total liabilities 320,520 273,326
-------------------- --------------------
Minority interest 12,237 12,539
-------------------- --------------------
Stockholders' equity:
Series A Preferred Stock, $.01 par value; $167,686 liquidation preference;
3,469 and 4,025 shares authorized, respectively, 3,354 and 3,909 shares
issued, respectively 148,978 173,650
Common stock, $.01 par value; 90,000 shares
authorized, 34,174 and 31,926 shares
issued, respectively 342 319
Additional paid-in capital 383,257 350,707
Accumulated earnings (deficit) 27,619 (77,044)
Accumulated other comprehensive loss (51,590) (39,989)
Treasury stock, at cost; 0 and 90 shares, respectively - (1,208)
Deferred compensation - (7)
-------------------- --------------------
Total stockholders' equity 508,606 406,428
-------------------- --------------------
Total liabilities, minority interest and stockholders' equity $ 841,363 $ 692,293
==================== ====================
Commitments and contingencies (Note 14)
See accompanying Notes to Consolidated Financial Statements
-3-
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
(as restated, (as restated,
see Note 1) see Note 1)
Net sales $ 190,032 $ 120,246 $ 529,013 $ 364,859
Cost of sales 134,284 105,534 396,430 320,356
--------------- --------------- --------------- ---------------
Gross margin 55,748 14,712 132,583 44,503
Selling, general, administrative and development expense 13,287 11,710 38,625 32,378
Equity in earnings joint ventures 1,235 393 3,381 161
Other income (expense), net 8,048 10,088 10,723 12,941
--------------- --------------- --------------- ---------------
Operating income 51,744 13,483 108,062 25,227
Interest expense 1,080 3,099 2,697 11,497
Other non-operating income (expense), net 1,350 15,399 17,518 16,296
--------------- --------------- --------------- ---------------
Income before income taxes and minority interest 52,014 25,783 122,883 30,026
Income tax expense (benefit) 14,426 (629) 4,886 692
Minority interest, net of tax 1,325 120 3,430 881
--------------- --------------- --------------- ---------------
Net income 36,263 26,292 114,567 28,453
Dividends on Series A Preferred Stock 2,830 1,099 9,426 1,099
--------------- --------------- --------------- ---------------
Net income attributable to
common stockholders $ 33,433 $ 25,193 $ 105,141 $ 27,354
=============== =============== =============== ===============
Earnings per share attributable to common stockholders:
Basic $ 1.02 $ 0.79 $ 3.27 $ 0.86
Diluted $ 0.80 $ 0.71 $ 2.53 $ 0.85
Weighted average shares outstanding:
Basic 32,737 31,774 32,191 31,752
Diluted 45,476 40,078 45,326 33,375
See accompanying Notes to Consolidated Financial Statements
-4-
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In thousands)
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
(as restated, (as restated,
see Note 1) see Note 1)
Net income $ 36,263 $ 26,292 $ 114,567 $ 28,453
--------------- --------------- --------------- ---------------
Other comprehensive income (loss):
Currency translation adjustment, net
of taxes (2,268) 445 (10,378) 428
Unrealized gains (losses) on marketable
securities, net of taxes (768) 4,950 (935) 11,536
TIMET's share of VALTIMET SAS's `
unrealized net losses on derivative
financial instruments qualifying as cash
flow hedges, net of taxes (404) (67) (288) (122)
--------------- --------------- --------------- ---------------
Total other comprehensive (loss) income (3,440) 5,328 (11,601) 11,842
--------------- --------------- --------------- ---------------
Comprehensive income $ 32,823 $ 31,620 $ 102,966 $ 40,295
=============== =============== =============== ===============
See accompanying Notes to Consolidated Financial Statements
-5-
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine months ended
September 30,
----------------------------------------
2005 2004
------------------- ------------------
(as restated,
see Note 1)
Cash flows from operating activities:
Net income $ 114,567 $ 28,453
Depreciation and amortization 23,357 24,303
Gain on exchange on BUCS - (15,465)
(Gain) loss on disposal of fixed assets (13,532) 33
Noncash impairment of equipment 1,251 -
Equity in (earnings) losses of joint ventures, net
of distributions (3,381) 1,518
Equity in earnings of common securities of TIMET
Capital Trust I, net of distributions - 536
Deferred income taxes (10,549) (1,270)
Minority interest, net of tax 3,429 881
Other, net (50) 16
Change in assets and liabilities:
Receivables (48,861) (18,854)
Inventories (86,925) (50,692)
Prepaid expenses and other (3,298) (898)
Accounts payable and accrued liabilities 17,343 12,273
Customer advances 12,298 14,194
Income taxes 10,201 3,316
Accrued OPEB and pension costs 384 2,820
Accrued interest on debt payable to TIMET Capital Trust I - (18,936)
Other, net 818 (1,642)
------------------- ------------------
Net cash provided (used) by operating activities 17,052 (19,414)
------------------- ------------------
Cash flows from investing activities:
Capital expenditures (43,292) (10,868)
Purchase of marketable securities (2,223) (29,135)
Change in restricted cash, net 576 -
Proceeds from the sale of property 1,289 -
------------------- ------------------
Net cash used by investing activities (43,650) (40,003)
------------------- ------------------
Cash flows from financing activities:
Indebtedness:
Borrowings 255,248 101,114
Repayments (222,701) (67,359)
Dividends paid on Series A Preferred Stock (9,687) -
Dividend paid to minority shareholder (2,216) (691)
Issuance of common stock 5,256 -
Principal payments on capitalized leases (16) (488)
------------------- ------------------
Net cash provided by financing activities 25,884 32,576
------------------- ------------------
Net cash used by operating, investing and financing activities $ (714) $ (26,841)
=================== ==================
See accompanying Notes to Consolidated Financial Statements
-6-
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(In thousands)
Nine months ended
September 30,
----------------------------------------
2005 2004
------------------ ------------------
(as restated,
see Note 1)
Cash and cash equivalents:
Net decrease from:
Operating, investing and financing activities $ (714) $ (26,841)
Effect of exchange rate changes on cash (940) (226)
------------------ ------------------
(1,654) (27,067)
Cash and cash equivalents at beginning of period 7,194 35,040
------------------ ------------------
Cash and cash equivalents at end of period $ 5,540 $ 7,973
================== ==================
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized of
$526 and $5, respectively $ 2,297 $ 29,863
Income taxes, net $ 5,214 $ -
See accompanying Notes to Consolidated Financial Statements
-7-
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Nine months ended September 30, 2005
(In thousands)
Accumulated
Series A Additional Accumulated Other Comp- Deferred
Common Common Preferred Paid-in (Deficit) rehensive Treasury Comp-
Shares Stock Stock Capital Earnings Loss Stock ensation Total
------ ----- ------- ------- -------- ---- ----- -------- --------
Balance at December 31, 2004 (as
restated, see Note 1) 31,836 $ 319 $173,650 $350,707 $(77,044) $(39,989) $(1,208) $(7) $406,428
Comprehensive income - - - - 114,567 (11,601) - - 102,966
Issuance of common stock 485 5 - 5,393 - - - - 5,398
Conversion of Series A
Preferred Stock 1,853 19 (24,672) 24,653 - - - - -
Treasury stock retirement - (1) - (990) (217) - 1,208 - -
Tax benefit of stock options
exercised and restricted
stock vested - - - 3,494 - - - - 3,494
Dividends declared on Series A
Preferred Stock - - - - (9,687) - - - (9,687)
Amortization of deferred
compensation - - - - - - - 7 7
------- ------ -------- -------- -------- -------- ------- --- --------
Balance at September 30, 2005 34,174 $ 342 $148,978 $383,257 $ 27,619 $(51,590) $ - $- $508,606
======= ====== ======== ======== ======== ======== ======= === ========
See accompanying Notes to Consolidated Financial Statements
-8-
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Organization and basis of presentation
Titanium Metals Corporation ("TIMET") is a vertically integrated
producer of titanium sponge, melted products and a variety of mill products for
aerospace, industrial and other applications. The accompanying Consolidated
Financial Statements include the accounts of TIMET and its majority owned
subsidiaries (collectively, the "Company"), except the TIMET Capital Trust I
(the "Capital Trust"). All material intercompany transactions and balances with
consolidated subsidiaries have been eliminated. Certain prior year amounts have
been reclassified to conform to the current year presentation. The Consolidated
Balance Sheet at September 30, 2005 and the Consolidated Statements of
Operations, Comprehensive Income (Loss), Changes in Stockholders' Equity and
Cash Flows for the interim periods ended September 30, 2005 and 2004, as
applicable, have been prepared by the Company without audit in accordance with
accounting principles generally accepted in the United States of America
("GAAP"). In the opinion of management, all adjustments necessary to fairly
state the consolidated financial position, results of operations and cash flows
have been made. The results of operations for interim periods are not
necessarily indicative of the operating results of a full year or of future
operations. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with GAAP have been condensed or
omitted. The Company's first three fiscal quarters reported are the approximate
13-week periods ending on the Saturday generally nearest to March 31, June 30
and September 30. The Company's fourth fiscal quarter and fiscal year always end
on December 31. For presentation purposes, the Company's Consolidated Financial
Statements and notes thereto have been presented as ending on March 31, June 30,
September 30 and December 31, as applicable. The accompanying Consolidated
Financial Statements should be read in conjunction with the Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2004 (the "2004 Annual Report").
At September 30, 2005, Valhi, Inc. and subsidiaries ("Valhi") held
40.9% of TIMET's outstanding common stock and 0.4% of the Company's 6.75% Series
A Convertible Preferred Stock (the "Series A Preferred Stock"). At September 30,
2005, Contran Corporation ("Contran") held, directly or through subsidiaries,
approximately 92% of Valhi's outstanding common stock. At September 30, 2005,
the Combined Master Retirement Trust ("CMRT"), a trust sponsored by Contran to
permit the collective investment by trusts that maintain the assets of certain
employee benefit plans adopted by Contran and certain related companies, held
11.2% of the Company's common stock. TIMET's U.S. pension plans invest in a
portion of the CMRT that does not hold TIMET common stock. 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, or is held by Mr. Simmons or persons or other entities related
to Mr. Simmons. In addition, Mr. Simmons is the sole trustee of the CMRT and a
member of the trust investment committee for the CMRT. At September 30, 2005,
Mr. Simmons directly owned 1.5% of TIMET's outstanding common stock and Mr.
Simmons' spouse owned 0.4% of TIMET's outstanding common stock and 47.7% of the
Company's outstanding Series A Preferred Stock. Consequently, Mr. Simmons may be
deemed to control each of Contran, Valhi and TIMET. During October 2005, Mr.
Simmons purchased 190,000 shares of TIMET common stock in open market
transactions, increasing his direct ownership to approximately 2.0%.
-9-
Effective January 1, 2005, the Company changed its method for inventory
costing from the last-in, first-out ("LIFO") cost method to the specific
identification cost method for the approximate 40% of the Company's consolidated
inventories previously accounted for under the LIFO cost method. With the
significant volatility seen recently in raw material prices, the Company
believes this change in accounting method provides a better matching of revenues
and expenses. As required by GAAP, the Company has restated its financial
statements for prior periods. As a result, the Company's net inventory balance
as of December 31, 2004 increased by $26.7 million from the previously reported
amount, with a corresponding decrease to the Company's accumulated deficit.
There was no impact on the Company's cash flow from operations for the three or
nine months ended September 30, 2004 related to this accounting change. The
effect of the accounting change on income for the three and nine months ended
September 30, 2004 was to (i) increase net income by $1.1 million and $3.0
million, respectively, (ii) increase earnings per basic share by $0.03 and
$0.10, respectively and (iii) increase earnings per diluted share by $0.02 and
$0.09, respectively. See Note 2.
The Company completed a two-for-one split of its common stock, which
was effected in the form of a stock dividend (whereby an additional one share of
post-split stock was distributed for each share of pre-split stock) and became
effective after the close of trading on September 6, 2005. The Company completed
a five-for-one split of its common stock, which was effected in the form of a
stock dividend (whereby an additional four shares of post-split stock were
distributed for each share of pre-split stock) and became effective after the
close of trading on August 26, 2004. All share and per share disclosures have
been adjusted to give effect to these stock splits.
The Company currently follows the disclosure alternative prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, and has chosen to account for its
stock-based employee compensation related to stock options in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and its various interpretations. See Note 15. 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 underlying stock
on the grant date. 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,
and the Company recognized no compensation expense for stock options during the
three and nine months ended September 30, 2005 and 2004. If the Company had
applied the fair value recognition provisions of SFAS No. 123 to all options
granted, basic and diluted earnings per share attributable to common
stockholders would have been unchanged for all periods presented.
VALTIMET, the Company's 43.7% owned affiliate accounted for by the
equity method, has entered into certain derivative financial instruments that
qualify as cash flow hedges under GAAP. The Company's pro-rata share of
VALTIMET's unrealized net gains (losses) on such derivative financial
instruments is included as a component of other comprehensive income.
-10-
Note 2 - Inventories
September 30, December 31,
2005 2004
--------------------- -------------------
(In thousands)
Raw materials $ 91,101 $ 71,067
Work-in-process 145,031 97,848
Finished products 88,636 77,012
Supplies 12,389 12,397
--------------------- -------------------
$ 337,157 $ 258,324
===================== ===================
In connection with finalizing the preparation of the Company's
consolidated financial statements for the third quarter of 2005, the Company
determined that certain cost variances in prior periods that had been charged to
cost of sales when incurred should have been capitalized into inventory and
allocated to cost of sales when the related inventory was sold. The Company has
analyzed the impact of this error and has determined that prior periods' annual
and quarterly financial statements were not materially misstated. The Company
corrected its methodology of capitalizing variances to inventory, effective
during the third quarter of 2005, so that such variances are now initially
capitalized into inventory and then expensed to cost of sales in future periods
as the related inventory is sold. The cumulative effect of this change on the
Company's consolidated third quarter results during the third quarter of 2005
was an increase in inventory and a decrease in cost of sales of $0.9 million,
and an increase in net income attributable to common stockholders of $0.6
million (or $0.01 per diluted share).
Effective January 1, 2005, the Company changed its method for inventory
costing from the LIFO cost method to the specific identification cost method, as
described in Note 1. As a result of this accounting change, the Company's net
inventory balance as of December 31, 2004 increased by $26.7 million from the
previously reported amount (representing the elimination of the Company's LIFO
reserve at such date).
Note 3 - Marketable securities
The following table summarizes the Company's marketable securities as
of September 30, 2005 and December 31, 2004:
September 30, 2005 December 31, 2004
----------------------------- --------------------------------
Market Market
Marketable security Shares value Shares value
------------------------------------------------ ------------ ------------- -------------- --------------
($ in thousands)
CompX International, Inc. ("CompX") 2,696,420 $ 44,222 2,549,520 $ 42,144
NL Industries, Inc. ("NL") 222,100 4,173 222,100 4,908
Kronos Worldwide, Inc. ("Kronos") 5,203 165 3,985 162
------------- --------------
$ 48,560 $ 47,214
============= ==============
-11-
During the first nine months of 2004, the Company purchased 2,212,820
shares of CompX Class A common shares and, on October 1, 2004, contributed such
shares to CompX Group, Inc. ("CGI") in return for a 17.6% ownership interest in
CGI (the remaining 82.4% interest is held by NL). As of September 30, 2005 and
December 31, 2004, the Company directly held 483,600 and 336,700 shares,
respectively, of CompX, which were purchased subsequent to October 1, 2004. The
Company has not contributed any of the 483,600 shares purchased subsequent to
October 1, 2004, and currently does not expect to contribute those shares or any
other shares of CompX Class A common stock that it may subsequently acquire, to
CGI.
During each of the first three quarters of 2005, CompX and Kronos each
paid cash dividends on their respective common stock. NL paid a first quarter
2005 dividend in the form of shares of Kronos common stock and paid second and
third quarter 2005 cash dividends. See Note 11.
Note 4 - Property and equipment
September 30, December 31,
2005 2004
-------------------- ------------------
(In thousands)
Land and improvements $ 6,292 $ 8,703
Buildings and improvements 31,735 31,780
Information technology systems 61,396 63,609
Manufacturing equipment and other 327,056 333,031
Construction in progress 47,298 14,819
-------------------- ------------------
473,777 451,942
Less accumulated depreciation 228,520 223,769
-------------------- ------------------
$ 245,257 $ 228,173
==================== ==================
During the first quarter of 2005, the Company determined that certain
of its manufacturing equipment would no longer be utilized in its operations,
and, accordingly, recognized a $1.2 million noncash abandonment charge to cost
of sales during the period.
In November 2004, pursuant to an agreement with Basic Management, Inc.
and certain of its affiliates ("BMI"), the Company sold certain property located
adjacent to its Henderson, Nevada plant site to BMI, a 32%-owned indirect
subsidiary of Valhi, and recorded a $12.0 million deferred gain related to the
cash proceeds received in November 2004. During the second quarter of 2005, the
Company ceased using the property and, accordingly, recognized a $13.9 million
gain related to the sale of such property, which is comprised of (i) the
previously reported $12.0 million cash proceeds received in November 2004, (ii)
the reversal of $0.6 million previously accrued by the Company for potential
environmental issues related to the property and (iii) an additional $1.2
million cash payment received from BMI in June 2005. See Note 11.
-12-
Note 5 - Other noncurrent assets
September 30, December 31,
2005 2004
-------------------- ------------------
(In thousands)
Prepaid pension cost $ 11,047 $ 10,531
Deferred financing costs 179 786
Notes receivable from officers - 49
Other 175 211
-------------------- ------------------
$ 11,401 $ 11,577
==================== ==================
Note 6 - Accrued liabilities
September 30, December 31,
2005 2004
--------------------- ------------------
(In thousands)
OPEB cost $ 2,686 $ 2,777
Pension cost 4,856 5,285
Payroll and vacation 4,825 5,810
Performance-based employee incentive compensation 15,996 12,570
Other employee benefits 9,756 9,721
Deferred income 2,013 1,736
Environmental costs 1,632 2,530
Taxes, other than income 6,240 4,166
Other 9,300 8,535
--------------------- ------------------
$ 57,304 $ 53,130
===================== ==================
Note 7 - Customer advances
Under the terms of the Company's previous long-term agreement ("LTA")
with The Boeing Company ("Boeing"), in 2002 through 2007, Boeing was required to
advance TIMET $28.5 million annually less $3.80 per pound of titanium product
purchased by Boeing subcontractors from TIMET during the preceding year. The
advance related to Boeing's take-or-pay obligations under the previous LTA.
Effectively, the Company collected $3.80 less from Boeing than the LTA selling
price for each pound of titanium product sold directly to Boeing and reduced the
related customer advance recorded by the Company. For titanium products sold to
Boeing subcontractors, the Company collected the full LTA selling price, but
gave 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 of September 30, 2005,
approximately $11.8 million of customer advances related to the Company's
previous LTA with Boeing.
Effective July 1, 2005, the Company amended its LTA with Boeing for the
purchase and sale of titanium products. The new LTA expires on December 31, 2010
and provides for, among other things, (i) mutual annual purchase and supply
commitments by both parties, (ii) continuation of the existing buffer inventory
program currently in place for Boeing and (iii) certain improved product
pricing. Beginning in 2006, the new LTA also replaces the take-or-pay provisions
of the previous LTA with an annual makeup payment early in the following year in
the event Boeing purchases less than its annual volume commitment in any year.
-13-
Note 8 - Bank debt
During the second quarter of 2005, the Company amended its U.S. credit
facility to increase its maximum authorized borrowings from $105 million to $125
million. In addition, the amended credit facility reduced the excess
availability requirement related to the payment of dividends on the Company's
Series A Preferred Stock and distributions on the Capital Trust's 6.625%
mandatorily redeemable convertible preferred securities, beneficial unsecured
convertible securities ("BUCS") from $25 million to $10 million.
During the second quarter of 2005, the Company's subsidiary, TIMET UK,
terminated its previous credit agreement and entered into a new working capital
credit facility that expires on April 30, 2008. Under the new U.K. credit
facility, TIMET UK may borrow up to (pound)22.5 million, subject to a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and property, plant and equipment. Borrowings under the U.K. facility
can be in various currencies, including U.S. dollars, British pounds sterling
and euros and are collateralized by substantially all of TIMET UK's assets.
Interest on outstanding borrowings generally accrues at rates that vary from
1.125% to 1.375% above the lender's published base rate. The U.K. facility
agreement also contains financial ratios and covenants customary in lending
transactions of this type, including a minimum net worth covenant.
As of September 30, 2005, the Company had outstanding borrowings of
$65.0 million under its U.S. credit agreement and $10.7 million under its
European credit facilities. Aggregate unused borrowing availability under the
Company's U.S. and European credit facilities was approximately $102 million as
of September 30, 2005.
Note 9 - Capital Trust
In August 2004, the Company completed an exchange offer, pursuant to
which the Company had offered to exchange any and all of the 4,024,820
outstanding BUCS issued by the Capital Trust for shares of the Company's Series
A Preferred Stock at the exchange rate of one share of Series A Preferred Stock
for each BUCS. Based upon the 3,909,103 BUCS tendered and accepted for exchange
as of the close of the offer on August 31, 2004, the Company issued 3,909,103
shares of Series A Preferred Stock in exchange for such BUCS. During the third
quarter of 2004, the Company recognized a $15.5 million non-cash non-operating
gain related to the BUCS exchange, reflecting the difference between the
carrying value of the related Subordinated Debentures ($195.5 million) and the
fair value of the Series A Preferred Stock issued ($173.7 million, based on the
closing price of the BUCS on August 31, 2004 according to NASDAQ's website of
$45.25 per share, less $3.2 million attributable to accrued and unpaid
dividends), less $6.3 million of unamortized deferred financing costs related to
the exchanged BUCS.
On September 1, 2005, the Company and the Capital Trust agreed to the
cancellation of 120,907 of the Capital Trust's common securities (all of which
were held by the Company) and a corresponding cancellation of $6.0 million of
the Company's 6.625% convertible junior subordinated debentures (the
"Subordinated Debentures") (all of which were held by the Capital Trust). There
was no net effect of this transaction on the Company's consolidated financial
position or results of operations, as the Company's carrying value of the common
securities of the Capital Trust that were cancelled equaled the carrying value
of the Subordinated Debentures that were also cancelled.
-14-
Note 10 - Stockholders' equity
Preferred stock. During the third quarter of 2005, certain holders of
the Company's Series A Preferred Stock converted an aggregate of 555,390 shares
of the Series A Preferred Stock into 1,852,697 shares of TIMET's common stock.
Treasury stock. On August 12, 2005, the Company retired all 90,000
shares of its treasury stock. The retirement of such treasury stock, which had a
cost basis of $1.2 million, resulted in a $900 reduction of common stock, a
$990,000 reduction of additional paid-in capital and a $217,000 decrease in
accumulated earnings.
Note 11 - Other income (expense)
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------- -------------- -------------
(In thousands)
Other operating income (expense):
Settlement of customer claim $ - $ - $ 1,800 $ -
Boeing take-or-pay 8,285 10,058 8,729 12,565
Other, net (237) 30 194 376
-------------- ------------- -------------- -------------
$ 8,048 $ 10,088 $ 10,723 $ 12,941
============== ============= ============== =============
Other non-operating income (expense):
Dividends and interest $ 491 $ 68 $ 1,440 $ 304
Equity in earnings of common
securities of the Capital Trust 70 103 276 320
Gain on sale of property (Note 4) - - 13,881 -
Gain on BUCS exchange - 15,465 - 15,465
Foreign exchange gain (loss), net 498 (471) 2,030 100
Other, net 291 234 (109) 107
-------------- ------------- -- -------------- -------------
$ 1,350 $ 15,399 $ 17,518 $ 16,296
============== ============= ============== =============
During the first quarter of 2005, the Company received $1.8 million
related to its settlement of a customer claim regarding prior order
cancellations from such customer. Additionally, the Company received dividends
from its investments in marketable securities, as discussed in Note 3.
-15-
Note 12 - Income taxes
Nine months ended September 30,
--------------------------------------------
2005 2004
--------------------- -------------------
(In thousands)
Expected income tax expense, at 35% (1) $ 43,009 $ 10,509
Non-U.S. tax rates (863) (217)
U.S. state income taxes, net 1,706 (103)
Dividends received deduction (227) (25)
Change in state income tax law 550 -
Tax on repatriation of foreign earnings 998 -
Revision of estimated tax liability - (551)
Adjustment of deferred income tax asset
valuation allowance (1) (41,345) (8,800)
Other, net 1,058 (121)
--------------------- -------------------
$ 4,886 $ 692
===================== ===================
----------------------------------------------------------------------------------------------------------------------
(1) 2004 amount as restated. See Note 1.
The Company periodically reviews its deferred income tax assets to
determine if future realization is more likely than not. During the first
quarter of 2005, based on the Company's recent history of U.S. income, its near
term outlook and the effect of its change in method of inventory costing from
the LIFO cost method to the specific identification cost method for U.S. federal
income tax purposes (see Note 1), the Company changed its estimate of its
ability to utilize the tax benefits of its U.S. net operating loss ("NOL")
carryforwards, alternative minimum tax ("AMT") credit carryforwards and other
net deductible temporary differences (other than the majority of the Company's
capital loss carryforwards). Consequently, the Company determined that its net
deferred income tax asset related to such U.S. tax attributes and other net
deductible temporary differences now meets the "more-likely-than-not"
recognition criteria. Accordingly, the Company reversed $28.2 million of the
valuation allowance attributable to such U.S. deferred income tax asset in the
first three quarters of 2005 ($5.6 million in the third quarter) and the Company
will reverse the remaining valuation allowance attributable to such U.S.
deferred income tax asset of $8.6 million during the fourth quarter of 2005 in
accordance with the GAAP requirements of accounting for income taxes at interim
dates.
During the first quarter of 2005, based on the Company's recent history
of U.K. income, its near term outlook and its historic U.K. profitability, the
Company also changed its estimate of its ability to utilize its net deductible
temporary differences and other tax attributes related to the U.K., primarily
comprised of (i) the future benefits associated with the reversal of its U.K.
minimum pension liability deferred income tax asset and (ii) the benefits of its
U.K. NOL carryforward. Consequently, the Company determined that its net
deferred income tax asset in the U.K. now meets the "more-likely-than-not"
recognition criteria. Accordingly, the Company reversed $13.1 million of the
valuation allowance attributable to such deferred income tax asset in the first
three quarters of 2005 ($0.1 million in the third quarter) and the Company will
reverse the remaining U.K. valuation allowance of $0.3 million during the fourth
quarter of 2005 in accordance with the GAAP requirements of accounting for
income taxes at interim dates.
-16-
At September 30, 2005, the Company had, for U.S. federal income tax
purposes, (i) NOL carryforwards of $46 million that expire in 2020 through 2023,
(ii) a capital loss carryforward of $73 million that expires in 2008 and (iii)
AMT credit carryforwards of $5 million, which can be utilized to offset regular
income taxes payable in future years, with an indefinite carryforward period. In
addition, at September 30, 2005, the Company had the equivalent of a $0.7
million NOL carryforward in Germany, which has an indefinite carryforward
period.
In October 2004, the American Jobs Creation Act of 2004 was enacted
into law. The new law provides for a special 85% deduction for certain dividends
received from controlled foreign corporations in 2005. In the second quarter of
2005, the Company completed its evaluation of this new provision and determined
that it would benefit from the special dividend received deduction. As a
consequence, the Company repatriated $19 million of earnings from its European
subsidiaries in the third quarter of 2005. The $1 million related tax impact of
this repatriation was recorded as tax expense in the second quarter of 2005 in
accordance with the requirements of FASB Staff Position No. 109-2. However, the
Company has not provided for U.S. deferred income taxes or foreign withholding
taxes on basis differences in its non-U.S. consolidated subsidiaries that result
primarily from undistributed earnings the Company intends to reinvest
indefinitely. Determination of the deferred income tax liability on these basis
differences is not practicable because such liability, if any, is dependent on
circumstances existing if and when remittance occurs.
The new law also provides for a special deduction from U.S. taxable
income equal to a specified percentage of a U.S. company's qualified income from
domestic manufacturing activities (as defined). The Company believes that the
majority of its operations meet the definition of qualified domestic
manufacturing activities. However, the Company expects to derive only a minimal
benefit from the special manufacturing deduction in 2005, because the Company
projects that its existing U.S. NOL carryforwards will offset the majority of
its 2005 U.S. taxable income.
In June 2005, the State of Ohio enacted a new tax law that phases out
Ohio's existing corporate income tax system over the next five years and
replaces it with a tax based on gross receipts. In the second quarter of 2005,
as a result of this phase out, the Company reduced its deferred income tax asset
related primarily to its Ohio NOL carryforwards by $0.6 million.
Note 13 - Employee benefits
Defined benefit pension plans. The components of the net periodic
pension expense are set forth below:
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------- -------------- -------------
(In thousands)
Service cost $ 901 $ 789 $ 2,798 $ 2,466
Interest cost 3,346 3,135 10,298 9,429
Expected return on plan assets (3,651) (3,257) (11,198) (9,791)
Amortization of net losses 1,186 1,088 3,640 3,272
Amortization of unrecognized prior service cost 139 122 417 366
-------------- ------------- -- -------------- -------------
Net periodic pension expense $ 1,921 $ 1,877 $ 5,955 $ 5,742
============== ============= ============== =============
-17-
During the first three quarters of 2005, the Company has made $6.6
million of cash contributions to its defined benefit pension plans, and the
Company currently expects to make additional cash contributions of approximately
$2.2 million to its defined benefit pension plans during the fourth quarter of
2005. All of the contributions relate to the Company's U.K. plan.
Postretirement benefits other than pensions. The components of net
periodic OPEB expense are set forth below:
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------- -------------- -------------
(In thousands)
Service cost $ 165 $ 152 $ 496 $ 405
Interest cost 413 529 1,239 1,335
Amortization of unrecognized prior service cost (116) (116) (348) (348)
Amortization of net losses 245 386 735 840
-------------- ------------- -- -------------- -------------
Net periodic OPEB expense $ 707 $ 951 $ 2,122 $ 2,232
============== ============= ============== =============
The Medicare Prescription Drug, Improvement and Modernization Act of
2003 (the "Medicare Act of 2003") introduced a prescription drug benefit under
Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. In May 2004, the Financial Accounting Standards
Board ("FASB") issued FSP No. 106-2 which provides guidance on (i) accounting
for the effects of the Medicare Act of 2003 once the Company is able to
determine actuarial equivalency and (ii) various required disclosures.
During 2005, the Company determined that the benefits provided by its
U.S. health and welfare plan are actuarially equivalent to the Medicare Part D
benefit and therefore the Company is eligible for the federal subsidy provided
for by the Medicare 2003 Act. The effect of such subsidy, which was accounted
for prospectively from the date actuarial equivalence was determined in
accordance with FASB Staff Position No. 106-2, resulted in a reduction in the
Company's accumulated OPEB obligation of approximately $5 million and a
reduction in net periodic OPEB cost of approximately $0.6 million in 2005.
Note 14 - Commitments and contingencies
Environmental matters. In November 2004, the Company and BMI entered
into several agreements pursuant to which the Company conveyed certain land
owned by the Company adjacent to its Henderson, Nevada plant site on which the
Company operated settling ponds (the "TIMET Pond Property") to BMI. See Note 4.
Subsequent to the conveyance, TIMET continued to use certain of the settling
ponds located on the TIMET Pond Property (pursuant to a lease with BMI) until
May 2005, at which time all such usage ceased. Based on the terms of the
conveyance agreement, BMI assumed the Company's obligation for certain potential
environmental issues related to the TIMET Pond Property.
The Company is also continuing assessment work with respect to its own
active plant site in Henderson, Nevada. The Company currently has $3.4 million
accrued based on the undiscounted cost estimates of the probable costs for
remediation of this site related to specific future remediation costs which the
Company now considers probable. The Company expects these accrued expenses to be
paid over a period of up to thirty years.
-18-
At September 30, 2005, the Company had accrued an aggregate of
approximately $3.6 million for environmental matters, including those discussed
above. The upper end of the range of reasonably possible costs to remediate
these matters is approximately $6 million. 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. 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. The Company records liabilities related to legal
proceedings when estimated 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 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.
Other. The Company has entered into letters of credit to collateralize
(i) potential workers' compensation claims in Ohio and Nevada and (ii) potential
obligations under contracts relating to future usage of electricity in Nevada.
As of September 30, 2005, the outstanding amounts for such letters of credit,
which reduce the Company's excess availability under its U.S. credit agreement,
were $2.3 million and $1.3 million, respectively.
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
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 with
respect to several of these matters in a 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.
See the 2004 Annual Report for additional information concerning
certain legal and environmental matters, commitments and contingencies.
Note 15 - Earnings per share
Basic earnings per share is based on the weighted average number of
unrestricted common shares outstanding during each period. Diluted earnings per
share attributable to common stockholders reflects the dilutive effect of common
stock options, restricted stock and the assumed conversion of the Company's BUCS
and the Series A Preferred Stock, if applicable. A reconciliation of the
numerator and denominator used in the calculation of basic and diluted earnings
per share is presented below:
-19-
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------- -------------- -------------
(In thousands)
Numerator:
Net income attributable to common
Stockholders (1) $ 33,433 $ 25,193 $ 105,141 $ 27,354
Interest on BUCS (2) 73 2,254 235 -
Dividends on Series A
Preferred Stock 2,830 1,099 9,426 1,099
-------------- ------------- -------------- -------------
Diluted net income attributable
to common stockholders $ 36,336 $ 28,546 $ 114,802 $ 28,453
============== ============= ============== =============
Denominator:
Average common shares outstanding 32,737 31,774 32,191 31,752
Average dilutive stock options
and restricted stock 175 173 162 112
BUCS (2) 155 3,549 155 -
Series A Preferred Stock 12,409 4,582 12,818 1,511
-------------- ------------- -------------- -------------
Diluted shares 45,476 40,078 45,326 33,375
============== ============= ============== =============
----------------------------------------------------------------------------------------------------------------------
(1) 2004 amounts as restated. See Note 1.
(2) Antidilutive during the nine months ended September 30, 2004.
Stock options to purchase 61,000 and 441,380 shares of common stock
during the three and nine months ended September 30, 2005, respectively, and
576,600 and 726,200 shares of common stock during the three and nine months
ended September 30, 2004, respectively, were excluded from the calculation of
diluted earnings per share because the exercise price for such options was
greater than the average market price of the common shares and such options were
therefore antidilutive during the respective period. Net income attributable to
common stockholders for the three and nine months ended September 30, 2005
included $0.9 million ($0.28 per outstanding share) of undeclared dividends on
its Series A Preferred Stock.
Note 16 - Business segment information
The Company's production facilities are located in the U.S., U.K.,
France and Italy, and its products are sold throughout the world. The Company's
Chief Executive Officer is the Company's chief operating decision maker ("CODM")
as that term is defined in SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The CODM receives financial information
about TIMET from which he makes decisions concerning resource utilization and
performance analysis only on a global, consolidated basis. Based upon this level
of decision-making, the Company currently has one segment, its worldwide
"Titanium melted and mill products" segment. Sales, gross margin, operating
income, inventory and receivables are the key management measures used to
evaluate segment performance. The following table provides segment information
supplemental to the Company's Consolidated Financial Statements:
-20-
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------- -------------- -------------
($ in thousands, except product shipment data)
Titanium melted and mill products:
Melted product net sales $ 31,137 $ 16,461 $ 77,044 $ 51,942
Mill product net sales 128,184 87,183 373,793 268,111
Other product sales 30,711 16,602 78,176 44,806
-------------- ------------- -------------- -------------
$ 190,032 $ 120,246 $ 529,013 $ 364,859
============== ============= ============== =============
Melted product shipments:
Volume (metric tons) 1,345 1,180 4,120 3,935
Average selling price ($ per kilogram) $ 23.15 $ 13.95 $ 18.70 $ 13.20
Mill product shipments:
Volume (metric tons) 2,940 2,695 9,380 8,525
Average selling price ($ per kilogram) $ 43.60 $ 32.35 $ 39.85 $ 31.45
Note 17 - Accounting principles not yet adopted
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4 ("SFAS No. 151"), which clarifies the types
of costs that should be expensed rather than capitalized as inventory. This
statement also clarifies the circumstances under which fixed overhead costs
associated with operating facilities involved in inventory processing should be
capitalized. The guidance is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005, and the Company will adopt SFAS No.
151 on January 1, 2006. Because of the Company's currently expected capacity
utilization levels for 2006, the Company does not believe that adoption of this
statement will have a material impact on its consolidated financial position or
results of operations.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
Share-Based Payment ("SFAS No. 123R"), which replaces SFAS No. 123 and
supersedes APB No. 25. SFAS No. 123R requires the measurement of all employee
share-based payments to employees, including grants of employee stock options,
to be recognized in the financial statements based on their fair values. Under
SFAS No. 123R, the pro forma disclosures previously permitted under SFAS No. 123
will no longer be an alternative to financial statement recognition. As
permitted by SEC regulations, the Company will adopt SFAS No. 123R as of January
1, 2006 and the adoption of SFAS No. 123R will not have any effect on the
Company's financial position or results of operations, as all of TIMET's
outstanding options are fully vested.
-21-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Summarized financial information. The following table summarizes
certain information regarding the Company's results of operations for the three
and nine months ended September 30, 2005 and 2004. Average selling prices, as
reported by the Company, are a reflection of not just actual selling prices
received by the Company, but also include other related factors such as currency
exchange rates and customer and product mix during 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.
The percentage change information presented below represents changes from the
respective prior year.
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------- -------------- -------------
($ in thousands, except product shipment data)
Net sales:
Melted products $ 31,137 $ 16,461 $ 77,044 $ 51,942
Mill products 128,184 87,183 373,793 268,111
Other products 30,711 16,602 78,176 44,806
-------------- ------------- -------------- -------------
Net sales $ 190,032 $ 120,246 $ 529,013 $ 364,859
============== ============= ============== =============
Gross margin (1) 55,748 14,712 132,583 44,503
Gross margin percent of net sales (1) 29% 12% 25% 12%
Melted product shipments:
Volume (metric tons) 1,345 1,180 4,120 3,935
Average selling price ($ per kilogram) $ 23.15 $ 13.95 $ 18.70 $ 13.20
Mill product shipments:
Volume (metric tons) 2,940 2,695 9,380 8,525
Average selling price ($ per kilogram) $ 43.60 $ 32.35 $ 39.85 $ 31.45
Percentage change in:
Sales volume:
Melted products +14 -3 +5 +12
Mill products +9 +34 +10 +31
Average selling prices:
Melted products +66 +39 +42 +12
Mill products +35 - +27 -2
Selling prices - excludes changes in product mix:
Melted products +44 +15 +29 +6
Mill products in U.S. dollars +31 +6 +23 +4
Mill products in billing currencies (2) +31 +2 +22 -1
----------------------------------------------------------------------------------------------------------------------
(1) The 2004 periods have been restated for the Company's change in method of
inventory costing, effective on January 1, 2005. See Notes 1 and 2 to the
Consolidated Financial Statements.
(2) Excludes the effect of changes in foreign currencies.
-22-
In connection with finalizing the preparation of the Company's
consolidated financial statements for the third quarter of 2005, the Company
determined that certain cost variances in prior periods that had been charged to
cost of sales when incurred should have been capitalized into inventory and
allocated to cost of sales when the related inventory was sold. The Company has
analyzed the impact of this error and has determined that prior periods' annual
and quarterly financial statements were not materially misstated. The Company
changed its methodology of capitalizing variances to inventory, effective during
the third quarter of 2005, so that such variances are now initially capitalized
into inventory and then expensed to cost of sales in future periods as the
related inventory is sold. The cumulative effect of this change on the Company's
consolidated third quarter results during the third quarter of 2005 was an
increase in inventory and a decrease in cost of sales of $0.9 million, and an
increase in net income attributable to common stockholders of $0.6 million (or
$0.01 per diluted share).
Third quarter of 2005 compared to third quarter of 2004. Melted product
sales increased 89% and mill product sales increased 47% during the third
quarter of 2005 compared to the year ago period, primarily due to significant
increases in average selling prices for both melted and mill products. Mill
product sales volume in the third quarter of 2005 was adversely impacted by
various manufacturing interruptions related to certain production equipment
breakdowns at the Company's U.S. and European locations. Other non-mill product
sales increased 85% compared to the year ago period due principally to higher
selling prices for titanium scrap and improved demand for the Company's
fabrication products. Average selling prices use actual customer and product mix
and foreign currency exchange rates prevailing during the respective periods.
The Company's melted products are generally sold only in U.S. dollars. Average
selling prices for both melted and mill products were positively affected by
current market conditions and changes in customer and product mix.
In addition to average selling price increases, the third quarter of
2005 was positively impacted by a 14% increase in melted product sales volume
and a 9% increase in mill product sales volume, a result of increased demand
across all market segments.
Effective January 1, 2005, the Company changed its method for inventory
costing from the LIFO cost method to the specific identification cost method for
the approximate 40% of the Company's consolidated inventories previously
accounted for under the LIFO cost method. With the significant volatility seen
recently in raw material prices, the Company believes this change in accounting
method provides a better matching of revenues and expenses. As required by GAAP,
the Company has restated its financial statements for prior periods. As a result
of this change, the Company's cost of sales for the three months ended September
30, 2004 was restated to $105.5 million, a decrease of $1.1 million from the
previously reported amount. See Notes 1 and 2 to the Consolidated Financial
Statements.
Gross margin (net sales less cost of sales) increased during the third
quarter of 2005 compared to the year ago period primarily due to higher average
selling prices and improved plant operating rates (from 72% in the third quarter
of 2004 to 77% in the third quarter of 2005). In addition, the Company generated
an additional $5.1 million of gross margin from the sale of titanium scrap and
other non-mill products during the third quarter of 2005, as compared to the
year ago period. These positive effects were partially offset by higher costs
for raw materials as compared to the year ago period.
Selling, general, administrative and development expenses increased
from $11.7 million during the third quarter of 2004 to $13.3 million during the
third quarter of 2005, principally as a result of increased personnel costs as
compared to the year ago period.
-23-
The Company recognized equity in earnings of joint ventures of $1.2
million during the third quarter of 2005, compared to $0.4 million during the
year ago period. This change was principally due to improved operating results
of VALTIMET, the Company's minority-owned welded tube joint venture.
Net other income (expense) decreased during the third quarter of 2005
as compared to the year ago period primarily related to lower Boeing take-or-pay
income during the 2005 period as compared to the 2004 period. Boeing purchased
approximately 0.8 million pounds of titanium from the Company during the 2005
period, as compared to approximately 0.4 million pounds of titanium during the
2004 period.
First nine months of 2005 compared to first nine months of 2004. Melted
product sales increased 48% and mill product sales increased 39% during the
first nine months of 2005 compared to the first nine months of 2004, primarily
due to significant increases in average selling prices for both melted and mill
products. Other non-mill product sales increased 74% compared to the year ago
period due principally to higher selling prices for titanium scrap and improved
demand for the Company's fabrication products. Average selling prices use actual
customer and product mix and foreign currency exchange rates prevailing during
the respective periods. Average selling prices for both melted and mill products
were positively affected by current market conditions and changes in customer
and product mix. Mill product average selling prices during the first nine
months of 2005 were also positively affected by the relative weakness of the
U.S. dollar compared to both the British pound sterling and the euro.
In addition to average selling price increases, the first nine months
of 2005 were positively impacted by a 5% increase in melted product sales volume
and a 10% increase in mill product sales volume, a result of increased demand
across all market segments.
As a result of the Company's change in inventory costing methods (as
previously discussed), the Company's cost of sales for the nine months ended
September 30, 2004 was restated to $320.4 million, a decrease of $3.0 million
from the previously reported amount. See Notes 1 and 2 to the Consolidated
Financial Statements.
Gross margin increased during the nine months ended September 30, 2005
compared to the year ago period primarily due to higher average selling prices
and improved plant operating rates (from 72% during the nine months ended
September 30, 2004 to 78% during the nine months ended September 30, 2005). In
addition, the Company generated an additional $15.0 million of gross margin from
the sale of titanium scrap and other non-mill products during the first nine
months of 2005, as compared to the year ago period. These positive effects were
offset by higher raw material costs as well as charges to cost of sales during
the 2005 period for:
o $3.6 million of additional costs during the 2005 period
related to the accrual of certain performance-based employee
incentive compensation payments, as compared to the first nine
months of 2004; and
o A $1.2 million noncash impairment charge during the 2005
period related to the Company's abandonment of certain
manufacturing equipment.
In addition, gross margin during the 2004 period was positively
affected by a $1.6 million reduction in cost of sales related to the
modification of the Company's vacation policy. On January 1, 2004, the Company
modified its vacation policy for its U.S. salaried employees, whereby such
employees no longer accrue their entire year's vacation entitlement on January
1, but rather accrue the current year's vacation entitlement over the course of
the year.
-24-
Selling, general, administrative and development expenses increased
from $32.4 million during the first nine months of 2004 to $38.6 million during
the first nine months of 2005, principally as a result of (i) $1.0 million of
additional auditing and consulting costs incurred during the first quarter of
2005 primarily related to the Company's compliance with the Sarbanes-Oxley Act's
internal control requirements for the fiscal year ended December 31, 2004, (ii)
additional personnel costs, including $0.9 million of additional costs related
to the accrual of certain performance-based employee incentive compensation
payments and (iii) a $0.3 million reduction in the first quarter of 2004 related
to the previously discussed change in the Company's vacation policy.
The Company recognized equity in earnings of joint ventures of $3.4
million during the first nine months of 2005, compared to $0.2 million during
year ago period. This change was principally due to improved operating results
of VALTIMET.
Net other income (expense) decreased during the first nine months of
2005 primarily related to lower Boeing take-or-pay income during the 2005 period
as compared to the 2004 period. Boeing purchased approximately 2.2 million
pounds of titanium from the Company during the 2005 period, as compared to
approximately 1.2 million pounds of titanium during the 2004 period. This
decrease was partially offset by the Company's settlement of a $1.8 million
customer claim during the first quarter of 2005 regarding prior order
cancellations from such customer.
Non-operating income (expense).
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------- -------------- -------------
(In thousands)
Interest expense:
On debt payable to the Capital Trust $ 165 $ 2,357 $ 563 $ 9,604
On bank debt and capital leases 915 742 2,134 1,893
-------------- ------------- -------------- -------------
$ 1,080 $ 3,099 $ 2,697 $ 11,497
============== ============= ============== =============
Dividends and interest $ 491 $ 68 $ 1,440 $ 304
Equity in earnings of common
securities of the Capital Trust 70 103 276 320
Gain on sale of property - - 13,881 -
Gain on BUCS exchange, net - 15,465 - 15,465
Foreign exchange gain, net 498 (471) 2,030 100
Other, net 291 234 (109) 107
-------------- ------------- -- -------------- -------------
$ 1,350 $ 15,399 $ 17,518 $ 16,296
============== ============= ============== =============
-25-
Prior to September 1, 2004, quarterly interest expense on the Company's
debt payable to the Capital Trust approximated $3.4 million, exclusive of any
accrued interest on deferred interest payments. On September 1, 2004, the
Company exchanged 97.1% of its outstanding BUCS for its Series A Preferred
Stock. After such exchange, interest expense related to the remaining debt
payable to the Capital Trust approximated $0.2 million per quarter, partially
offset by $0.1 million of equity in earnings related to the Company's holdings
of the common securities of the Capital Trust. On September 1, 2005, the Company
and the Capital Trust agreed to the cancellation of 120,907 of the Capital
Trust's common securities. Upon such cancellation, the related equity in
earnings became insignificant and the interest expense on debt payable to the
Capital Trust decreased to approximately $0.1 million per quarter. See Note 9 to
the Consolidated Financial Statements.
Dividends and interest income during the three and nine months ended
September 30, 2005 and 2004 consisted of dividends received on the Company's
investments in marketable securities and interest income earned on cash and cash
equivalents.
In November 2004, pursuant to an agreement with BMI, the Company sold
certain property located adjacent to its Henderson, Nevada plant site to BMI, a
32%-owned indirect subsidiary of Valhi, and recorded a $12 million deferred gain
related to the cash proceeds received in November 2004. During the second
quarter of 2005, the Company ceased using the property and, accordingly,
recognized a $13.9 million gain related to the sale of such property, which is
comprised of (i) the previously reported $12.0 million cash proceeds received in
November 2004, (ii) the reversal of $0.6 million previously accrued by the
Company for potential environmental issues related to the property and (iii) an
additional $1.2 million cash payment received from BMI in June 2005.
In August 2004, the Company completed an exchange offer, pursuant to
which the Company had offered to exchange any and all of the 4,024,820
outstanding BUCS issued by the Capital Trust for shares of the Company's Series
A Preferred Stock at the exchange rate of one share of Series A Preferred Stock
for each BUCS. Based upon the 3,909,103 BUCS tendered and accepted for exchange
as of the close of the offer on August 31, 2004, the Company issued 3,909,103
shares of Series A Preferred Stock in exchange for such BUCS. During the third
quarter of 2004, the Company recognized a $15.5 million non-cash non-operating
gain related to the BUCS exchange, reflecting the difference between the
carrying value of the related Subordinated Debentures ($195.5 million) and the
fair value of the Series A Preferred Stock issued ($173.7 million, based on the
closing price of the BUCS on August 31, 2004 according to NASDAQ's website of
$45.25 per share, less $3.2 million attributable to accrued and unpaid
dividends), less $6.3 million of unamortized deferred financing costs related to
the exchanged BUCS.
Income taxes. The Company operates in several tax jurisdictions and is
subject to varying income tax rates. As a result, the geographic mix of pretax
income or loss can impact the Company's overall effective tax rate. For the nine
months ended September 30, 2005 and 2004, the Company's income tax rate varied
from the U.S. statutory rate primarily due to changes in the deferred income tax
valuation allowance related to the Company's tax attributes with respect to the
"more-likely-than-not" recognition criteria during those periods. See Note 12 to
the Consolidated Financial Statements.
-26-
The Company periodically reviews its deferred income tax assets to
determine if future realization is more likely than not. During the first
quarter of 2005, based on the Company's recent history of U.S. income, its near
term outlook and the effect of its change in method of inventory costing from
the LIFO cost method to the specific identification cost method for U.S. federal
income tax purposes (see Note 1), the Company changed its estimate of its
ability to utilize the tax benefits of its U.S. NOL carryforwards, AMT credit
carryforwards and other net deductible temporary differences (other than the
majority of the Company's capital loss carryforwards). Consequently, the Company
determined that its net deferred income tax asset related to such U.S. tax
attributes and other net deductible temporary differences now meets the
"more-likely-than-not" recognition criteria. Accordingly, the Company reversed
$28.2 million of the valuation allowance attributable to such U.S. deferred
income tax asset in the first nine months of 2005 ($5.6 million in the third
quarter) and the Company will reverse the remaining U.S. valuation allowance
attributable to its U.S. net deferred income tax asset of $8.6 million during
the fourth quarter of 2005 in accordance with the GAAP requirements of
accounting for income taxes at interim dates.
During the first quarter of 2005, based on the Company's recent history
of U.K. income, its near term outlook and its historic U.K. profitability, the
Company also changed its estimate of its ability to utilize its net deductible
temporary differences and other tax attributes related to the U.K., primarily
comprised of (i) the future benefits associated with the reversal of its U.K.
minimum pension liability deferred income tax asset and (ii) the benefits of its
U.K. NOL carryforward. Consequently, the Company determined that its net
deferred income tax asset in the U.K. now meets the "more-likely-than-not"
recognition criteria. Accordingly, the Company reversed $13.1 million of the
valuation allowance attributable to such deferred income tax asset in the first
nine months of 2005 ($0.1 million in the third quarter) and the Company will
reverse the remaining U.K. valuation allowance of $0.3 million during the fourth
quarter of 2005 in accordance with the GAAP requirements of accounting for
income taxes at interim dates.
In October 2004, the American Jobs Creation Act of 2004 was enacted
into law. The new law provides for a special 85% deduction for certain dividends
received from controlled foreign corporations in 2005. In the second quarter of
2005, the Company completed its evaluation of this new provision and determined
that it would benefit from the special dividend received deduction. As a
consequence, the Company repatriated $19 million of earnings from its European
subsidiaries in the third quarter of 2005. The $1 million related tax impact of
this repatriation was recorded as tax expense in the second quarter of 2005 in
accordance with the requirements of FASB Staff Position No. 109-2. However, the
Company has not provided for U.S. deferred income taxes or foreign withholding
taxes on basis differences in its non-U.S. consolidated subsidiaries that result
primarily from undistributed earnings the Company intends to reinvest
indefinitely. Determination of the deferred income tax liability on these basis
differences is not practicable because such liability, if any, is dependent on
circumstances existing if and when remittance occurs.
-27-
Dividends on Series A Preferred Stock. Shares of the Company's Series A
Preferred Stock are convertible, at any time, at the option of the holder
thereof, into three and one-third shares of the Company's common stock, subject
to adjustment in certain events. The Series A Preferred Stock is not mandatorily
redeemable, but is redeemable at the option of the Company under certain
circumstances. When, as and if declared by the Company's board of directors,
holders of the Series A Preferred Stock are entitled to receive cumulative cash
dividends at the rate of 6.75% of the $50 per share liquidation preference per
annum per share (equivalent to $3.375 per annum per share). During the third
quarter of 2005, certain holders of the Series A Preferred Stock converted an
aggregate of 555,390 shares of the Series A Preferred Stock into 1,852,697
shares of TIMET's common stock. The Company paid dividends of $2.8 million and
$9.4 million during the three and nine months ended September 30, 2005,
respectively, to holders of the Series A Preferred Stock.
European operations. The Company has substantial operations located in
Europe, principally the U.K., France and Italy. Approximately 40% of the
Company's sales originated in Europe for the nine months ended September 30,
2005, of which approximately 59% were denominated in the British pound sterling
or 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, and the European subsidiaries are subject
to exchange rate fluctuations that may impact reported earnings and may affect
the comparability of period-to-period operating results. Borrowings of the
Company's European operations may be in U.S. dollars or in functional
currencies. The Company's export sales from the U.S. are denominated in U.S.
dollars and are not subject to currency exchange rate fluctuations.
The Company does not use currency contracts to hedge its currency
exposures. At September 30, 2005, consolidated assets and liabilities
denominated in currencies other than functional currencies were approximately
$51.9 million and $41.9 million, respectively, consisting primarily of U.S.
dollar cash, accounts receivable and accounts payable.
VALTIMET has entered into certain derivative financial instruments that
qualify as cash flow hedges under GAAP. The Company's pro-rata share of
VALTIMET's unrealized net gains on such derivative financial instruments is
included as a component of other comprehensive income.
Outlook. The "Outlook" section contains a number of forward-looking
statements, all of which are based, unless otherwise noted, on current
expectations and exclude the effect of potential future charges related to
restructurings, asset impairments, valuation allowances, changes in accounting
principles and similar items. Undue reliance should not be placed on these
statements, as more fully discussed in the "Forward-Looking Information"
statement of this Quarterly Report. Actual results may differ materially. See
also Notes to the Consolidated Financial Statements regarding commitments,
contingencies, legal matters, environmental matters and other matters, including
new accounting principles, which could materially affect the Company's future
business, results of operations, financial position and liquidity.
Over the past several quarters, the Company has seen the availability
of raw materials (primarily titanium scrap and sponge) tighten, and,
consequently, the prices for such raw materials increased generally over that
period. The Company currently expects that a shortage in raw materials is likely
to continue throughout 2006, which could limit the Company's ability to produce
enough titanium products to fully meet customer demand. In addition, the Company
has certain long-term agreements that limit the Company's ability to pass on all
of its increased raw material costs to its customers.
-28-
In July 2005, The Airline Monitor, a leading aerospace publication,
issued its semi-annual forecast for commercial aircraft deliveries. This new
forecast increased its estimate of large commercial aircraft deliveries over the
next five years beginning in 2006 by 460 planes, including 55 additional Boeing
787 wide bodies (which are expected to require a higher percentage of titanium
in their airframes, engines and other parts than any other commercial aircraft).
This updated forecast supports the Company's belief that the titanium industry
is in the early stages of the business cycle and that the current uptrend will
likely continue through 2006 and beyond.
The Company's backlog at the end of September 2005 was a record $710
million, a $130 million (22%) increase over the $580 million backlog at the end
of June 2005 and a $310 million (78%) increase over the $400 million backlog at
the end of September 2004.
The Company's cost of sales is affected by a number of factors
including customer and product mix, material yields, plant operating rates, raw
material costs, labor and energy costs. Raw material costs, which include
sponge, scrap and alloys, represent the largest portion of the Company's
manufacturing cost structure. As previously reported, scrap and certain alloy
prices have increased significantly from year ago prices, and increased energy
costs also continue to have a negative impact on gross margin. However, the
Company has recently begun to see a softening of certain alloy costs.
Overall, the Company currently expects it sales and operating income in
the fourth quarter and full year of 2005 will continue to be higher than the
comparable amounts in 2004 due primarily to higher average selling prices and
sales volumes for both melted and mill products and higher production capacity
utilization, offset in part by higher costs for raw materials and energy. Income
attributable to common stockholders is also expected to be higher in the fourth
quarter and full year of 2005 due to the higher expected operating income as
well as the favorable effect of the $13.9 million second quarter 2005
non-operating gain on the sale of certain property and a $50.2 million income
tax benefit in 2005 related to the reversal of the Company's deferred income tax
asset valuation allowance in the U.S. and the U.K.
In May 2005, the Company announced its plans to expand its existing
titanium sponge facility in Henderson, Nevada. This expansion, which the Company
expects to complete by the first quarter of 2007, will provide the capacity to
produce an additional 4,000 metric tons of sponge annually, an increase of
approximately 42% over current Henderson sponge production capacity levels. The
Company currently estimates the capital cost for the project will approximate
$38 million.
Non-GAAP financial measures. In an effort to provide investors with
information in addition to the Company's results as determined by GAAP, the
Company has provided the following non-GAAP financial disclosures that it
believes may provide useful information to investors:
o The Company discloses percentage changes in its melted and mill product
selling prices in U.S. dollars, which have been adjusted to exclude the
effects of changes in product mix. The Company believes such disclosure
provides useful information to investors by allowing them to analyze
such changes without the impact of changes in product mix, thereby
facilitating period-to-period comparisons of the relative changes in
average selling prices. Depending on the composition of changes in
product mix, the percentage change in selling prices excluding the
effect of changes in product mix can be higher or lower than such
percentage change would be using the actual product mix prevailing
during the respective periods; and
-29-
o In addition to disclosing percentage changes in its mill product
selling prices adjusted to exclude the effects of changes in product
mix, the Company also discloses such percentage changes in billing
currencies, which have been further adjusted to exclude the effects of
changes in foreign currency exchange rates. The Company believes such
disclosure provides useful information to investors by allowing them to
analyze such changes without the impact of changes in foreign currency
exchange rates, thereby facilitating period-to-period comparisons of
the relative changes in average selling prices in the various actual
billing currencies. Generally, when the U.S. dollar strengthens
(weakens) against other currencies, the percentage change in selling
prices in billing currencies will be higher (lower) than such
percentage changes would be using actual exchange rates prevailing
during the respective periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows for the nine months ended
September 30, 2005 and 2004 are presented below. The following discussion should
be read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto.
Nine months ended September 30,
--------------------------------------------
2005 2004
-------------------- --------------------
(In thousands)
Cash provided (used) by:
Operating activities $ 17,052 $ (19,414)
Investing activities (43,650) (40,003)
Financing activities 25,884 32,576
-------------------- --------------------
Net cash used by operating, investing and
financing activities $ (714) $ (26,841)
==================== ====================
Operating activities. The titanium industry historically has derived a
substantial portion of its business from the aerospace industry. The aerospace
industry is cyclical, and changes in economic conditions within the aerospace
industry significantly impact the Company's earnings and operating cash flows.
Cash flow from operations is considered a primary source of the Company's
liquidity. Changes in titanium pricing, production volume and customer demand,
among other things, could significantly affect the Company's liquidity.
Certain items included in the determination of net income have an
impact on cash flows from operating activities, but the impact of such items on
cash may differ from their impact on net income. For example, pension expense
and OPEB expense will generally differ from the outflows of cash for payment of
such benefits. In addition, relative changes in assets and liabilities generally
result from the timing of production, sales and purchases. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period than that in which the underlying cash transaction occurs. For
example, raw materials may be purchased in one period, but the cash payment for
such raw materials may occur in a subsequent period. Similarly, inventory may be
sold in one period, but the cash collection of the receivable may occur in a
subsequent period.
Net income was $114.6 million for the nine months ended September 30,
2005, compared to net income of $28.5 million for the nine months ended
September 30, 2004.
-30-
Accounts receivable increased during the first nine months of 2005 and
2004 primarily as a result of increased sales. Inventories increased during the
first nine months of 2005 and 2004 as a result of increased run rates and
related inventory build in order to meet expected customer demand, as well as
the effects of increased raw material costs.
Changes in accounts payable and accrued liabilities reflect, among
other things, the timing of (i) payments to suppliers of titanium sponge,
titanium scrap and other raw material purchases and (ii) changes to accrued
employee benefits, including performance-based employee incentive compensation.
During the first nine months of 2004, accrued liabilities also decreased due to
payment of the $2.8 million final installment related to termination of the
Company's prior agreement with Wyman-Gordon Company.
The increase in customer advances during the first nine months of 2005
and 2004 primarily reflects the Company's receipt of a $27.9 million advance
from Boeing in each of January 2005 and 2004, partially offset by the
application of customer purchases. Under the terms of the previous Boeing LTA,
Boeing advanced TIMET $28.5 million annually, less $3.80 per pound of titanium
product purchased from TIMET by Boeing subcontractors during the preceding year.
See "Results of Operations - Income taxes" for discussion of the
Company's income taxes.
Investing activities. The Company's capital expenditures were $43.3
million for the nine months ended September 30, 2005, compared to $10.9 million
for the comparable period in 2004, principally for replacement of machinery and
equipment, capacity maintenance and environmental compliance and improvement.
The 2005 amount includes $20.2 million related to construction of the water
conservation facility and $4.9 million related to the expansion of the Company's
sponge plant in Henderson, Nevada. During the first nine months of 2005, the
Company purchased 146,900 shares of CompX Class A common stock for $2.2 million.
During the first nine months of 2004, the Company purchased 2,212,820 shares of
CompX Class A common stock for $26.7 million and 221,100 shares of NL
Industries, Inc. common stock for $2.5 million. See Note 3 to the Consolidated
Financial Statements.
Financing activities. Cash provided during the nine months ended
September 30, 2005 related primarily to the Company's net borrowings of $32.5
million, used in part to (i) fund construction of the water conservation
facility as well as the Company's expansion of its sponge plant and (ii) support
the accumulation of inventory in order to meet expected customer demand. The
Company also received $5.3 million from the issuance of common stock related to
the exercise of certain employee stock options during the 2005 period. These
cash inflows were partially offset by the Company's $9.7 million payment of
dividends on the Company's Series A Preferred Stock. In addition, the Company's
70%-owned subsidiary, TIMET Savoie, S.A. made dividend payments to its 30%
minority partner of $2.2 million during the second quarter of 2005 and $0.7
million during the second quarter 2004. The Company had $33.8 million of net
borrowings during the nine months ended September 30, 2004, primarily to support
the Company's accumulation of inventory in order to meet expected customer
demand during the balance of 2004 and into 2005 and to fund its investing
activities.
-31-
Borrowing arrangements. During the second quarter of 2005, the Company
amended its U.S. credit facility to increase its maximum authorized borrowings
from $105 million to $125 million. In addition, the amended credit facility
reduced the excess availability requirement related to the payment of dividends
on the Company's Series A Preferred Stock and distributions on the Capital
Trust's BUCS from $25 million to $10 million. During the first quarter of 2004,
the Company amended its U.S. credit facility to, among other things, allow the
Company the flexibility to remove the equipment component from the determination
of the Company's borrowing availability in order to avoid the costs of an
appraisal. Interest currently accrues at rates based on LIBOR plus 2% or bank
prime rate plus 0.5%. Borrowings are collateralized by substantially all of the
Company's U.S. assets. The Company was in compliance with all covenants for all
periods during the nine months ended September 30, 2005 and 2004. As of
September 30, 2005, the Company had outstanding borrowings under the U.S. credit
agreement of $65.0 million, and excess availability was approximately $56
million.
During the second quarter of 2005, the Company's subsidiary, TIMET UK,
terminated its previous credit agreement and entered into a new working capital
credit facility that expires on April 30, 2008. Under the new U.K. credit
facility, TIMET UK may borrow up to (pound)22.5 million, subject to a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and property, plant and equipment. Borrowings under the U.K. facility
can be in various currencies, including U.S. dollars, British pounds sterling
and euros and are collateralized by substantially all of TIMET UK's assets.
Interest on outstanding borrowings generally accrues at rates that vary from
1.125% to 1.375% above the lender's published base rate. The U.K. facility
agreement also contains financial ratios and covenants customary in lending
transactions of this type, including a minimum net worth covenant. TIMET UK was
in compliance with all covenants for all periods during the nine months ended
September 30, 2005 and 2004. As of September 30, 2005, the Company had
outstanding borrowings under the U.K. facility of $10.7 million, and unused
borrowing availability was approximately $29 million.
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. As of September 30, 2005, the Company had no
borrowings under these facilities, and unused borrowing availability was
approximately $17 million.
No dividends were paid by the Company on its common stock during the
three and nine months ended September 30, 2005 or 2004. During the three and
nine months ended September 30, 2005, the Company paid $3.1 million and $9.7
million in dividends on its Series A Preferred Stock.
Legal and environmental matters. See Note 14 to the Consolidated
Financial Statements for discussion of legal and environmental matters,
commitments and contingencies.
-32-
Other. 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, purchase or redeem
BUCS or Series A Preferred Stock, sell assets, or take a combination of such
steps or other steps to increase or manage its liquidity and capital resources.
In the normal course of business, the Company investigates, evaluates, discusses
and engages in acquisition, joint venture, strategic relationship and other
business combination opportunities in the titanium, specialty metal and 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.
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 such transactions, 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.
The Company completed a two-for-one split of its common stock, which
was effected in the form of a stock dividend (whereby an additional one share of
post-split stock was distributed for each share of pre-split stock) and became
effective after the close of trading on September 6, 2005. The Company completed
a five-for-one split of its common stock, which was effected in the form of a
stock dividend (whereby an additional four shares of post-split stock were
distributed for each share of pre-split stock) and became effective after the
close of trading on August 26, 2004. All share and per share disclosures have
been adjusted to give effect to these stock splits.
Effective July 1, 2005, the Company amended its LTA with Boeing for the
purchase and sale of titanium products. The new LTA expires on December 31, 2010
and provides for, among other things, (i) mutual annual purchase and supply
commitments by both parties, (ii) continuation of the existing buffer inventory
program currently in place for Boeing and (iii) certain improved product
pricing. Beginning in 2006, the new LTA also replaces the take-or-pay provisions
of the previous LTA with an annual makeup payment early in the following year in
the event Boeing purchases less than its annual volume commitment in any year.
Based on its current expectations of Boeing purchases during 2006, the Company
anticipates that any annual makeup payment for 2006 will be minimal.
-33-
On September 1, 2005, the Company and the Capital Trust agreed to the
cancellation of 120,907 of the Capital Trust's common securities (all of which
were held by the Company) and a corresponding cancellation of $6.0 million of
the Company's 6.625% convertible junior subordinated debentures (the
"Subordinated Debentures ") (all of which were held by the Capital Trust). There
was no net effect of this transaction on the Company's consolidated financial
position or results of operations, as the Company's carrying value of the common
securities of the Capital Trust that were cancelled equaled the carrying value
of the of the Subordinated Debentures that were also cancelled.
On August 12, 2005, the Company retired all 90,000 shares of its
treasury stock. The retirement of such treasury stock, which had a cost basis of
$1.2 million, resulted in a $900 reduction of common stock, a $990,000 reduction
of additional paid-in capital and a $217,000 increase in accumulated deficit.
-34-
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's market risks, refer to the Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk," in the 2004 Annual
Report. There have been no material changes to the information provided that
would require additional information with respect to the nine months ended
September 30, 2005.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure 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, or persons performing similar functions, as appropriate to
allow timely decisions to be made regarding required disclosure. Each of Harold
C. Simmons, the Company's Chairman of the Board and Chief Executive Officer, and
Bruce P. Inglis, the Company's Vice President - Finance and Corporate
Controller, have evaluated the Company's disclosure controls and procedures as
of September 30, 2005. 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.
Internal control over financial reporting. The Company also maintains
internal control over financial reporting. The term "internal control over
financial reporting," as defined by regulations of the SEC, means a process
designed by, or under the supervision of, the Company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the Company's board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP, and includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and directors
of the Company; and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's assets
that could have a material effect on the Company's Consolidated
Financial Statements.
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As permitted by the SEC, the Company's assessment of internal control
over financial reporting excludes (i) internal control over financial reporting
of its equity method investees and (ii) internal control over the preparation of
the Company's financial statement schedules required by Article 12 of Regulation
S-X. However, the Company's assessment of internal control over financial
reporting with respect to the Company's equity method investees did include its
controls over the recording of amounts related to the Company's investments that
are recorded in its Consolidated Financial Statements, including controls over
the selection of accounting methods for the Company's investments, the
recognition of equity method earnings and losses and the determination,
valuation and recording of the Company's investment account balances.
Changes in internal control over financial reporting. During the third
quarter of 2005, the Company implemented new accounting software at the
Company's operations in France, replacing a combination of older systems as the
Company's sole principal accounting software system at this location. The
implementation, effective July 3, 2005, was carried out according to a plan
based on Company policy that included controls to (i) safeguard data migrated to
the new system, (ii) test the functionality of the new system in a development
environment prior to implementation and (iii) develop a post-implementation
internal control environment. Management has conducted testing of the
implementation plan and the post-implementation environment and has limited
evidence that internal controls involved with the development of new software
are operating effectively. As a result of the implementation, certain controls
previously operating in France were migrated to the Company's UK location for
the third quarter of 2005. Further testing of the post-implementation control
environment will be necessary for management to conclude that its internal
controls over information technology and internal controls over financial
reporting as a whole are operating effectively at this location. Management
expects to conclude its evaluation by the end of the fourth quarter of 2005.
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PART II. - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Note 14 of the Consolidated Financial Statements,
which information is incorporated herein by reference, and to the Company's 2004
Annual Report for descriptions of certain previously reported legal proceedings.
Item 6. EXHIBITS
10.1* General Terms Agreement between The Boeing Company and Titanium Metals
Corporation, incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K/A filed with the SEC on
November 16, 2005.
10.2* Special Business Provisions between The Boeing Company and Titanium
Metals Corporation, incorporated by reference to Exhibit 10.3 to the
Registrant's Current Report on Form 8-K/A filed with the SEC on
November 16, 2005.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Portions of the exhibit have been omitted pursuant to a
request for confidential treatment.
Note: The Company has retained a signed original of any exhibit listed above
that contains signatures, and the Company will provide any such exhibit
to the SEC or its staff upon request. Such request should be directed
to the attention of the Company's Corporate Secretary at the Company's
corporate offices located at 1999 Broadway, Suite 4300, Denver,
Colorado 80202.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TITANIUM METALS CORPORATION
-----------------------------------------
Date: January 4, 2006 By /s/ Harold C. Simmons
-------------------------------------
Harold C. Simmons
Chairman of the Board and
Chief Executive Officer
Date: January 4, 2006 By /s/ Bruce P. Inglis
--------------------------------------
Bruce P. Inglis
Vice President - Finance and Corporate
Controller
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