SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 - For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-28538
Titanium Metals Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-5630895
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 296-5600
Securities registered pursuant to Section 12(b) of the Act:
None.
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Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock
($.01 par value per share)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K ___
As of February 28, 1998, 31,457,905 shares of common stock were outstanding.
The aggregate market value of the 20.4 million shares of voting stock held by
nonaffiliates of Titanium Metals Corporation as of such date approximated $615
million.
Documents incorporated by reference:
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
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Forward-Looking Information
The statements contained in this Annual Report on Form 10-K which are not
historical facts, including, but not limited to, statements found in Item 1 -
Business, Item 3 - Legal Proceedings and Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations are forward-looking
statements or discussions of trends which by their nature involve substantial
risks and uncertainties that could significantly impact expected results.
Actual future results could differ materially from those described in such
forward-looking statements. Among the factors that could cause actual results
to differ materially are the risks and uncertainties discussed in this Annual
Report, including in the portions referenced above and those described from time
to time in the Company's other filings with the Securities and Exchange
Commission, such as the cyclicality of the Company's business and its dependence
on the aerospace industry, the sensitivity of the Company's business to global
industry capacity, global economic conditions, changes in product pricing, the
possibility of labor disruptions, control by certain stockholders and possible
conflicts of interest, potential difficulties in integrating acquisitions,
uncertainties associated with new product development and the supply of raw
materials and services.
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PART I
ITEM 1: BUSINESS
~ General.~~~~~Titanium Metals Corporation ("TIMET" or the "Company") is the
world's leading integrated producer of titanium sponge and mill products and has
the largest sales volume worldwide. The Company is the only integrated producer
with major manufacturing facilities in both of the world's principal markets for
titanium, the United States and Europe. The Company estimates that in 1997 it
accounted for approximately 25% of worldwide industry shipments of mill products
and approximately 15% of world sponge production.
Titanium was first manufactured for commercial use in the 1950s.
Titanium's unique combination of corrosion resistance, elevated-temperature
performance and high strength-to-weight ratio makes it particularly desirable
for use in commercial and military aerospace applications in which these
qualities are essential design requirements for certain critical parts such as
wing supports and jet engine components. While aerospace applications have
historically accounted for a substantial portion of the worldwide demand for
titanium and were over 40% of industry mill product shipments in 1997, the
number of non-aerospace end-use markets for titanium has expanded substantially.
Today, numerous industrial uses for titanium exist, including chemical and
industrial power plants, desalination plants and pollution control equipment.
Demand for titanium is also increasing in diverse new and emerging uses such as
medical implants, sporting equipment, offshore oil and gas production
installations, geothermal facilities, military armor and automotive uses.
TIMET's products include: titanium sponge, the basic form of titanium
metal used in processed titanium products; titanium ingot and slab, the result
of melting sponge and titanium scrap, either alone or with various other
alloying elements; and forged and cast products produced from ingot or slab,
including billet, bar, flat products (plate, sheet, and strip), extrusions, wire
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and castings. The Company believes it is a low-cost producer of titanium sponge
and melt products due in part to its economies of scale, manufacturing expertise
and investment in technology. The titanium industry is comprised of several
manufacturers which, like the Company, produce a relatively complete range of
titanium products and a significant number of producers worldwide that
manufacture a limited range of titanium mill products. The Company believes
that at least 90% of the world's titanium sponge is produced by six companies.
The Company intends to continue its focus on the following goals and
objectives to change the traditional way business is conducted.
. Maximize the long-term value of its core aerospace business by focusing
on the Company's basic strengths of sponge production, melting, forging
and casting of various shapes of titanium products and by entering into
strategic agreements with major titanium users to help mitigate
cyclicality of the aerospace business.
. Invest in strategic alliances, including joint ventures, acquisitions
and entreprenurial arrangements, as well as new markets, applications
and products to help reduce dependence on the aerospace sector.
. Invest in technology, capacity and innovative projects aimed at reducing
costs and enhancing productivity, quality, customer service and
production capacity.
. Stabilize the cost and supply of raw materials.
. Maintain a strong balance sheet.
TIMET has taken a number of recent actions to further these objectives
including the items discussed below.
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The Company has an agreement with The Boeing Company under which TIMET
will be the principal supplier of titanium products to Boeing Commercial
Airplane Group ("Boeing"), and its family of suppliers for a 10-year period
beginning in 1998 (the "Boeing Agreement"). This innovative agreement with the
world's largest end user of titanium provides TIMET with a significantly higher
market share of Boeing titanium requirements than it might otherwise have and
should help mitigate cyclical fluctuations in aerospace prices and volumes. See
~Markets~and~Customer~Base.
~
In order to meet the expected volume increases as a result of the Boeing
Agreement, the Company is adding additional melting and forging capacity
intended to be cost effective even in a market downturn. These capacity
additions are generally expected to be completed during the second half of 1998.
TIMET has also entered into a long-term agreement to purchase, beginning in
1998, titanium sponge produced in Kazakhstan to help stabilize both cost and
supply of this raw material. See ~Raw~Materials.
~
In 1997, the Company combined its U.S. welded tube operations with those
of Valinox Welded, a French manufacturer of welded tubing, principally stainless
steel and titanium, with operations in France and China. The joint venture,
"ValTimet," is 46% owned by TIMET and 54% owned by Valinox Welded (a subsidiary
of Vallourec). The joint venture is intended to combine best manufacturing
practices and market coverage. TIMET is the principal supplier of titanium to
ValTimet.
The Company has agreed to acquire for cash the titanium business of
Loterios S.p.A., one of Italy's largest fabricators and distributors of titanium
products, with 1997 sales of approximately $22 million. Loterios has emerged in
recent years as one of the premier producers and suppliers of titanium pipe and
fittings to the offshore oil and gas drilling and productions markets and is the
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leading supplier of these products in the North Sea offshore market. The
acquisition of Loterios, scheduled to close in April 1998, is expected to
increase TIMET's market share in industrial markets and to provide increased
geographic sales coverage.
TIMET's strategy for investing in new markets and uses for titanium also
includes investing in emerging businesses. In this regard, during 1997 the
Company acquired equity interests in Ti.Pro, LLC, Titanium Memory Systems, Inc.
("TMS") and TiComp, Inc. Ti.Pro's focus is on developing the market for
titanium in automobile racing and other specialty vehicle applications, TMS is
engaged in development and production of a titanium substrate for use in
computer hard disk drives, and TiComp is working on the development and
production of layered titanium and composite materials for a variety of
potential applications.
~ Acquisitions~and~Capital~Transactions~during~1996.~At the beginning of
1996, the Company was 75%-owned by Tremont Corporation and its operations were
conducted primarily in the United States. During 1996, among other things, the
Company expanded both geographically and operationally as a result of the
acquisition of the titanium business of IMI plc (the "IMI Titanium
Acquisition"), the acquisition of certain assets from Axel Johnson Metals, Inc.
("the "AJM Acquisition") and certain smaller acquisitions in Europe, all of
which transactions are more fully described in Note 3 to the Consolidated
Financial Statements.
The Company also significantly improved its liquidity and capital
structure during 1996 through its initial public offering of common stock (which
included sales by some of its shareholders) and the issuance of Company-
obligated mandatorily redeemable preferred securities (the "Convertible
Preferred Securities") through a subsidiary trust, TIMET Capital Trust I. See
Notes 9 and 10 to the Consolidated Financial Statements.
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Tremont now holds approximately 30% of TIMET's outstanding common stock.
See Note 13 to the Consolidated Financial Statements.
~ Recent~Industry~Conditions.~The titanium industry historically has derived
the majority of its business from the aerospace industry. The cyclical nature
of the aerospace industry has been the principal cause of the historical
fluctuations in performance of titanium companies and contributed to cyclical
peaks in titanium mill product shipments in 1980 and 1989 and cyclical lows in
1983 and 1991. The titanium industry improved dramatically during the last
three years due to a combination of factors, including a resurgence in
commercial aerospace demand beginning in 1995, continuing and stable industrial
demand and the emergence of new uses for titanium in diverse sectors such as
military armor and consumer goods. Worldwide industry mill product shipments
increased in each of the last three years. Industry shipments of approximately
60,000 metric tons in 1997 were 65% above 1994 levels.
Aerospace demand for titanium products, which includes both jet engine
components such as rotor blades, discs, rings and engine cases, and air frame
components, such as bulkheads, tail sections and wing supports, can be separated
into commercial and military sectors. Industry shipments to the commercial
aerospace sector in 1997 accounted for approximately 80% of total aerospace
demand (33% of total industry wide titanium demand).
According to the Airline Monitor, the commercial airline industry reported
operating income of over $16 billion (estimated) in 1997, up one-third from $12
billion in 1996, and substantially better than profitability levels of 1995 and
1994 and the significant losses during 1990 to 1993. Despite recent aircraft
deferrals and cancellations by some Asian airlines, most major carriers are
believed to be continuing to invest in upgrading and expanding their fleets.
The Company understands commercial aircraft producers carry record backlogs with
deliveries not expected to peak until 2000. In addition, current generations of
airplanes use substantially more titanium than their predecessors. The Company
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can give no assurance as to the extent or duration of the current commercial
aerospace cycle or the extent to which it will result in demand for titanium
products.
Since titanium's initial application in the aerospace sector, the number
of end-use markets for titanium has expanded substantially. Existing industrial
uses for titanium include chemical plants, industrial power plants, desalination
plants, and pollution control equipment. Titanium is also experiencing increased
customer demand in new and emerging uses such as medical implants, sporting
equipment, offshore oil and gas production installations, geothermal facilities
and automotive uses. Several of these emerging applications represent potential
growth opportunities that the Company believes may reduce the industry's
historical dependence on the aerospace market.
~ Products~and~Operations.~The Company is a vertically integrated titanium
producer whose products include: titanium sponge, the basic form of titanium
metal used in processed titanium products; titanium ingot and slab, the result
of melting sponge and titanium scrap, either alone or with various other
alloying elements; and forged and cast products produced from ingot or slab,
including billet, bar, flat products (plate, sheet, and strip), extrusions, wire
and castings. The titanium product chain is described below.
Titanium sponge (so called because of its appearance) is the commercially
pure, elemental form of titanium metal. The first step in sponge production
involves the chlorination of titanium-containing rutile ores, derived from beach
sand, with chlorine and coke to produce titanium tetrachloride. Titanium
tetrachloride is purified and then reacted with magnesium in a closed system,
producing titanium sponge and magnesium chloride as co-products. A portion of
the Company's titanium sponge production capacity in Henderson, Nevada,
incorporates Vacuum Distillation Process ("VDP") technology, which removes the
magnesium and magnesium chloride residues by applying heat to the sponge mass
while maintaining vacuum in the chamber. The combination of heat and vacuum
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boils the residues from the reactor mass into the condensing vessel. The
titanium mass is then mechanically pushed out of the original reactor, sheared
and crushed, while the residual magnesium chloride is electrolytically separated
and recycled. The balance of the Company's sponge production capacity uses a
leaching process rather than distillation to remove residues.
Titanium ingots and slab are solid shapes (cylindrical and rectangular,
respectively) that weigh up to 8 metric tons in the case of ingots and up to 16
metric tons in the case of slabs. Each is formed by melting titanium sponge or
scrap or both, usually with various other alloying elements such as vanadium,
aluminum, molybdenum, tin and zirconium. Titanium scrap is a by-product of
milling and machining operations, and significant quantities of scrap are
generated in the production process for most finished titanium products. TIMET
closely monitors the melting process for ingots and slabs utilizing computer
control systems to maintain product quality and consistency and meet customer
specifications.
Titanium mill products result from forging, rolling, drawing and/or
extruding titanium ingots or slabs into products of various sizes and grades.
These mill products include titanium billet, bar, rod, plate, sheet, strip and
extrusions. The Company sends certain products to outside vendors for further
processing before being shipped to customers or to the Company's service
centers. The Company's customers usually process the Company's products for
their ultimate end-use or for sale to third parties.
Titanium cast products are produced by remelting ingot or billet and
pouring molten metal into a cast, the cavity of which has been created in the
shape of the part to be produced. After the metal has cooled and solidified, the
part is removed from the cast and delivered to the customer or a third party for
finishing. The casting process provides significant flexibility in the shapes
that can be produced and is frequently utilized in forming tolerance-critical
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components such as diffusers, fan frames, seal rings, fluid system components
and missile components.
During the production process and following the completion of products,
the Company performs extensive testing on its products, including sponge, mill
products and castings. Testing may involve chemical analysis, mechanical
testing, ultrasonic and x-ray testing, and dye penetration testing. The
inspection process is critical to ensuring that the Company's products meet the
high quality requirements of customers, particularly in aerospace components
production.
The Company is dependent upon the services of outside processors to
perform important processing functions with respect to certain of its products.
In particular, the Company currently relies upon a single processor to perform
certain rolling steps for some of its plate, sheet, and strip products, and upon
a single processor to perform certain finishing and conditioning steps for its
slab products. Although the Company believes that there are other metal
processors with the capability to perform these same functions, arranging for
alternative processors or possibly acquiring or installing comparable
capabilities, could take several months and any interruption in these functions
could have a material and adverse effect on the Company's business, results of
operations, financial condition and cash flows in the short term. The Company
is exploring ways to lessen its dependence on any individual processor.
In 1997 approximately 92% of the Company's sales were generated from the
sale of titanium ingot, slab, a wide variety of mill products and sponge, 5% was
generated from titanium castings, and the balance from sales of titanium
tetrachloride and other by-products.
~ Raw~Materials.~The principal raw materials used in the production of
titanium mill and cast products are titanium sponge, titanium scrap and alloying
materials. The Company is the only domestic integrated titanium products
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producer that processes rutile ore into titanium tetrachloride and further
processes the titanium tetrachloride into titanium sponge. As a result, the
Company is less susceptible to fluctuations in the market price of titanium
sponge than its competitors. In 1997, the Company produced 11,100 metric tons
of sponge, of which approximately 20% was sold pursuant to a long-term agreement
with the remainder used internally.
While the Company is one of six major worldwide producers of titanium
sponge, under current market conditions it cannot supply all of its needs for
titanium sponge internally and is dependent, therefore, on third parties for a
portion of its sponge needs (approximately one-half in 1997). The Company
obtains sponge from suppliers in Japan and the former Soviet Union ("FSU"), both
on a spot purchase basis and pursuant to fixed price contracts.
TIMET has entered into a long-term agreement for the purchase of titanium
sponge produced in Kazakhstan. The sponge purchase agreement is for ten years
beginning in 1998, with firm pricing for the first five years (subject to
certain adjustments). Volumes purchased under the contract will be up to 10,000
metric tons annually. The Company expects to have annual contracts with other
sponge suppliers which it believes will cover the balance of its 1998 needs.
The primary raw materials used in the production of titanium sponge are
titanium-containing rutile ore, chlorine, magnesium and petroleum coke.
Titanium-containing rutile ore is currently available from a number of suppliers
around the world, principally located in Australia, Africa (South Africa and
Sierra Leone), India and the United States. A majority of the Company's supply
of rutile ore is currently purchased from Australian suppliers. The Company
believes the availability of rutile ore will be adequate for the foreseeable
future and does not anticipate any interruptions of its raw material supplies,
although political or economic instability in the countries from which the
Company obtains its raw materials could materially and adversely affect
availability. In addition, although the Company believes that the availability
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of rutile ore is adequate in the near-term, there can be no assurance that the
Company will not experience interruptions. Chlorine is currently obtained from
a single source near the Company's Henderson, Nevada plant, but alternative
suppliers are available. Magnesium and petroleum coke are generally available
from a number of suppliers.
Various alloying elements used in the production of titanium ingot are
available from a number of suppliers. The Company has long-term agreements with
certain suppliers for a substantial portion of its alloy requirements at fixed
and/or formula determined prices.
~ Markets~and~Customer~Base.~About 55% of the Company's 1997 sales were to
customers within North America, with about 38% to European customers and the
balance to customers in other regions. No single customer represents more than
10% of the Company's direct sales. However, in 1997, about 70% of the Company's
sales were used by the Company's customers to produce parts and other materials
for the aerospace industry. The Company expects that while a majority of its
1998 sales will be to the aerospace sector, industrial and consumer goods
markets will continue to represent a significant portion of sales.
The aerospace industry is dominated by two major manufacturers of
commercial aircraft and four major manufacturers of aircraft engines. Typically,
the Company's sales are not made directly to the major aircraft and engine
manufacturers but rather to companies that use the Company's titanium to produce
parts and other materials for such manufacturers. However, if any of the major
aerospace manufacturers were to significantly reduce build rates, there could be
a material adverse effect on certain of the Company's direct customers who
supply to such manufacturer and, therefore, an indirect adverse effect on the
Company.
The Company entered into the Boeing Agreement to help mitigate the impact
of aerospace cyclicality. Under the terms of the Boeing Agreement, TIMET will
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supply a minimum of 70% of Boeing's annual needs for titanium, depending upon
Boeing's requirements each year. TIMET's share of Boeing's total titanium
requirements will increase as Boeing's volume requirements decrease, down to a
minimum mutual commitment of 6.5 million pounds (3,000 metric tons) per year.
The agreement is effective for shipments beginning in 1998, but it is not
anticipated to reach expected volume levels until 1999.
Pricing under the Boeing Agreement is firm for the first five years and
will be reviewed annually for inflationary conditions for the next five years
based upon an aerospace-related index. The companies have also agreed to
utilize Boeing's Lean Manufacturing program to develop cost savings that will be
shared by both companies.
The Company may also enter into similar long-term agreements with other
key aerospace customers.
The Company's order backlog was approximately $530 million at December 31,
1997 compared to $440 million at December 31, 1996. Approximately 95% of the
1997 year end backlog is expected to be delivered during 1998. Although the
Company believes that the backlog is a reliable indicator of near-term business
activity, conditions in the aerospace industry could change and result in future
cancellations or deferrals of existing aircraft orders and materially and
adversely affect the Company's existing backlog, orders, and future financial
condition and operating results.
As of December 31, 1997, the estimated firm order backlog for Boeing
(including McDonnell Douglas) and Airbus, as reported by The Airline Monitor,
was 2,753 planes versus 2,370 planes at the end of 1996 and 1,869 planes at the
end of 1995, an increase of 16% in 1997 following a 27% increase in 1996. The
newer wide body planes, such as the Boeing 777 and the Airbus A-330 and A-340,
tend to use a higher percentage of titanium in their frames, engines and parts
(as measured by total fly weight) than narrow body planes. "Fly weight" is the
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empty weight of a finished aircraft with engines but without fuel or passengers.
The Boeing 777, for example, utilizes titanium for approximately 9% of total fly
weight, compared to between 2% to 3% on the older 737, 747 and 767 models. The
estimated firm order backlog for wide body planes at year end 1997 was 890 (32%
of total backlog) compared to 817 at the end of 1996 and 682 at the end of 1995.
Growth in firm order backlog for narrow body aircraft increased 35% during 1996
and 20% in 1997, to 1,863 at the end of the year.
Through various strategic relationships, the Company seeks to gain access
to unique process technologies for the manufacture of its products and to expand
existing markets and create and develop new markets for titanium. The Company
has explored and will continue to explore strategic arrangements in the areas of
product development, production and distribution. The Company also will continue
to work with existing and potential customers to identify and develop new or
improved applications for titanium that take advantage of its unique qualities.
~ ~
~ Competition.~The titanium metals industry is highly competitive on a
worldwide basis. Producers of mill products are located primarily in the United
States, Japan, Europe, FSU and China. The Company is one of four integrated
producers in the world. The Company regards firms that produce at least both
sponge and ingot as integrated producers. A number of non-integrated producers
exist that produce mill products from purchased sponge, scrap or ingot. The
Company believes that U.S., European and Japanese producers are generally
operating near practical capacity levels while some unused capacity is available
in the FSU.
The Company's principal competitors include Oregon Metallurgical
Corporation ("OREMET") and Allegheny Teledyne, Inc. (which have proposed to
combine) and RMI Titanium Company. The Company competes primarily on the basis
of price, quality of products, technical support and the availability of
products to meet customers' delivery schedules.
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In the U.S. market, the increasing presence of non-U.S. participants has
become a significant competitive factor. Until 1993, imports of foreign titanium
products into the U.S. had not been significant. This was primarily attributable
to relative currency exchange rates, tariffs and, with respect to Japan and the
FSU, import duties (including antidumping duties). However, imports of titanium
sponge, scrap, and mill products, principally from the FSU, have increased in
recent years and have had a significant competitive impact on the U.S. titanium
industry. To the extent the Company has been able to take advantage of the
increased availability of imports by purchasing sponge, scrap or intermediate
mill products for use in its own operations, the negative effect of increased
imports on the Company has been somewhat diminished.
Generally, imports into the U.S. of titanium products from countries
designated as "most favored nations" are subject to a 15% tariff (45% for other
countries). Starting in 1993, imports of titanium mill products from Russia
were exempted from this duty under the "generalized system of preferences" or
"GSP" program designed to aid developing economies. In recent years, the GSP
program has been subject to annual review and renewal and is currently scheduled
to expire in June 1998.
In 1997, GSP benefits to Russian products were suspended when the level of
imports of Russian mill products reached 50% of all U.S. imports of titanium
mill products. A petition was filed in 1997 to restore duty-free status to
these products. In addition, a petition has also been filed to bring titanium
sponge and ingot under the GSP program, which would allow such products from the
countries of the FSU (notably Russia and, in the case of sponge, Kazakhstan) to
be imported into the U.S. without the payment of regular duties. The Company
believes these petitions are likely to be acted upon during the second quarter
of 1998.
In addition to regular duties, titanium sponge imported from Russia,
Kazakhstan, and Ukraine has for many years been subject to substantial
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antidumping penalties. However, beginning in 1996 these antidumping duties were
significantly reduced, and in one case eliminated altogether, for the two
principal importers of Russian sponge into the U.S. Regular annual reviews to
assess the appropriate level of antidumping duties with respect to titanium
sponge from Russia and Kazakhstan are currently underway. In March 1998, the
United States International Trade Commission ("ITC") initiated a changed
circumstances review of the antidumping duty orders on titanium sponge from the
FSU and Japan in order to determine whether revocation of the orders would
result in a recurrence of material injury to the Untied States titanium sponge
industry. If the ITC determines that injury would not recur, the orders will be
revoked in July 1998. In addition, proceedings will begin in 1998 to evaluate
the continuation generally of all outstanding U.S. antidumping orders, including
those covering titanium sponge.
Further reductions in, or the complete elimination of, all or any of these
tariffs could lead to increased imports of foreign sponge, ingot, and mill
products into the U.S. and an increase in the amount of such products on the
market generally, which could adversely affect pricing for titanium sponge and
mill products and thus the business, financial condition, results of operations
and cash flows of the Company. However, the Company has, in recent years, been
one of the largest importers of foreign titanium sponge and mill products into
the U.S. To the extent the Company remains a substantial purchaser of these
products, any adverse effects on product pricing as a result of any reduction
in, or elimination of, any of these tariffs would be partially ameliorated by
the decreased cost to the Company for these products to the extent the Company
currently bears the cost of the import duties.
Producers of other metal products, such as steel and aluminum, maintain
forging, rolling and finishing facilities that could be modified without
substantial expenditures to produce titanium products. The Company believes,
however, that entry as a producer of titanium sponge would require a significant
capital investment and substantial technical expertise. Titanium mill products
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also compete with stainless steels, nickel alloys, steel, plastics, aluminum and
composites in certain applications.
~Research~and~Development.~The Company's research and development
activities are directed toward improving process technology, developing new
alloys, enhancing the performance of the Company's products in current
applications, and searching for new uses of titanium products. For example, one
of the Company's proprietary alloys, TIMETAL(R)21S, has been specified for a
number of aerospace applications including the Boeing 777. Additionally, TIMETAL
LCB, a new low cost beta alloy, is being tested for new non-aerospace
applications; and TIMETAL 15-3 has been introduced into the sporting goods
markets. The Company conducts the majority of its research and development
activities at its Nevada laboratory, which the Company believes is one of the
largest titanium research and development centers in the world. Additional
research and development activities are performed at the Witton, England
facility. The Company's research and development expenditures approximated $3.6
million in 1997, up from $2 million during each of the two prior years, and are
expected to be $4 million to $5 million in 1998.
~ Patents~and~Trademarks.~The Company holds U.S. and non-U.S. patents
applicable to certain of its titanium alloys and manufacturing technology. The
Company continually evaluates whether patent protection with respect to its
technical base is advisable and in the past has occasionally entered into
cross-licensing arrangements with third parties. However, most of the titanium
alloys and manufacturing technology used by the Company do not benefit from
patent or other intellectual property protection. The Company believes that the
trademarks TIMET(R) and TIMETAL, which are protected by registration in the U.S.
and other countries, are significant to its business.
~ Employees.~As of December 31, 1997, the Company employed approximately
2,125 persons in the U.S. and approximately 900 persons in Europe, up 2.5% from
a total of 2,950 at the end of 1996. The Company's production and maintenance
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workers in Henderson, Nevada and its production, maintenance, clerical and
technical workers in Toronto, Ohio are represented by the United Steelworkers of
America ("USWA") under contracts expiring in October 2000 and July 2002,
respectively. Employees at the Company's other U.S. facilities are not covered
by collective bargaining agreements. In February 1997, employees at TIMET
Castings' Albany, Oregon facility voted to not be represented by the USWA.
Substantially all of the salaried and hourly employees at the Company's
European facilities are covered by collectively bargained labor agreements. In
January 1998, new one-year agreements covering the U.K. and French union
employees were entered into, providing for modest wage increases in 1998.
The USWA engaged in a nine month work stoppage at the Company's Henderson
facility in 1993 - 1994 and in a three month stoppage at the Toronto facility in
1994. While the Company currently has long-term contracts with the USWA and
considers its employee relations to be satisfactory, it is possible that there
could be future work stoppages that could materially and adversely affect the
Company's business, financial condition, results of operations or cash flows.
~ Regulatory~and~Environmental~Matters.~The Company's operations are
governed by various Federal, state, local and foreign environmental and worker
safety laws and regulations. In the U.S., such laws include the Federal Clean
Air Act, the Clean Water Act and the Resource Conservation and Recovery Act. The
Company uses and manufactures substantial quantities of substances that are
considered hazardous or toxic under environmental and worker safety and health
laws and regulations. In addition, at the Company's Henderson, Nevada facility,
the Company uses substantial quantities of titanium tetrachloride, a material
classified as extremely hazardous under Federal environmental laws. The Company
has used such substances during substantially the entire history of its
operations. As a result, risk of environmental damage is inherent in the
Company's operations. The Company's operations pose a continuing risk of
accidental releases of, and worker exposure to, hazardous or toxic substances.
<PAGE>
There is also a risk that government environmental requirements, or enforcement
thereof, may become more stringent in the future. There can be no assurances
that some, or all, of the risks discussed under this heading will not result in
liabilities that would be material to the Company's business, results of
operations, financial condition or cash flows.
The Company's operations in Europe are similarly subject to foreign laws
and regulations respecting environmental and worker safety matters, which laws
are generally less stringent than U.S. laws and which have not had, and are not
presently expected to have, a material adverse effect on the Company. There can
be no assurance that such foreign laws will not become more stringent.
The Company believes that its operations are in compliance in all material
respects with applicable requirements of environmental and worker safety laws.
The Company's policy is to continually strive to improve environmental
performance. From time to time, the Company may be subject to environmental
regulatory enforcement under various statutes, resolution of which typically
involves the establishment of compliance programs. Occasionally, resolution of
these matters may result in the payment of penalties, but to date no material
penalties have been incurred. The Company incurred capital expenditures for
safety, environmental protection and compliance of approximately $3 million in
1997 and its capital budget provides for approximately $7 million of such
expenditures in 1998. However, the imposition of more strict standards or
requirements under environmental laws and regulations could result in
expenditures in excess of amounts estimated to be required for such matters.
See Note 14 to the Consolidated Financial Statements - "Commitments and
Contingencies - Environmental Matters," which information is incorporated herein
by reference.
~Business~and~Geographic~Segment~Information.~~~See Note 2 to the
Consolidated Financial Statements, which information is incorporated herein by
reference.
<PAGE>
ITEM 2: PROPERTIES
Set forth below is a listing of the Company's manufacturing facilities.
In addition to its U.S. sponge capacity discussed below, the Company's current
worldwide melting capacity aggregates approximately 43,000 metric tons (25% of
world capacity), and its mill products capacity aggregates approximately 17,000
metric tons (28% of world capacity). During 1998, the Company expects to
operate its major production facilities at or near practical capacity and to add
additional melting and mill products capacity that should become operational
during the last half of 1998 or early 1999.
~MANUFACTURING~LOCATION~ ~PRODUCTS~MANUFACTURED~
Henderson, Nevada+ Sponge, Ingot
Morgantown, Pennsylvania+ Slab, Ingot, Raw Materials Processing
Vallejo, California* Slab, Ingot (including non-titanium
superalloys)
Verdi, Nevada* Slab, Ingot
Toronto, Ohio+ Billet, Bar, Plate, Sheet, Strip
Albany, Oregon+ Castings
Pomona, California* Ingot, Castings
Witton, England* Ingot, Billet, Extrusions
Ugine, France* Ingot, Bar, Billet, Wire, Extrusions
Waunarlwydd (Swansea), Wales+ Bar, Plate, Sheet
________________
+ Owned facilities
* Leased facilities
<PAGE>
TIMET UK's Witton facilities are leased from IMI pursuant to long-term
capital leases. TIMET Savoie has the right, on a long-term basis, to utilize
portions of a plant in Ugine, France, owned by CEZUS, a French metals producer.
~United~States~Production.~The Company's VDP sponge facility operated at
approximately 85% of its annual practical capacity of 9,100 metric tons during
both 1997 and 1996. The plant produces VDP sponge principally as a raw material
for an ingot melting facility, also at the Nevada site, and for the cold hearth
melting facilities operated by the Company's Titanium Hearth Technologies
("THT") subsidiary. In connection with market demand for certain grades of
sponge, the Company reopened its original Kroll-leach process sponge plant in
Nevada in 1996 and increased Kroll-leach production to an annual rate of
approximately 4,500 metric tons during 1997.
The Company's Henderson melting facility operated at about 90% of its
13,600 metric ton annual practical capacity in 1997 (1996 - 65%). THT operates
four electron beam cold hearth melting furnaces (aggregate 14,300 metric ton
annual capacities) located in Pennsylvania (two), Nevada, and California, raw
materials processing operations located in Pennsylvania, and a 700 metric ton
annual capacity vacuum induction melting furnace located in California. THT
operated at approximately full capacity in 1997, up from about 95% in 1996.
Titanium mill products are principally produced at a forging and rolling
facility in Ohio, which receives titanium ingots from the Nevada plant, titanium
slabs from THT and titanium slabs and hot bands purchased from outside vendors.
The Ohio facility operated at about 85% of practical capacity in 1997, up from
about 80% in 1996. Certain sheet and plate mill products are also produced at
the Tennessee facility now owned by ValTimet. Such operations are being
relocated to Ohio in 1998.
TIMET Castings, with plants located in California and Oregon, produces
titanium castings used principally for aerospace applications. Melting
operations at the Pomona plant were reopened in 1997 and the castings business
<PAGE>
remaining at this facility will be relocated to Oregon during 1998. The Oregon
castings plant operated at approximately 65% of annual capacity in 1997 compared
to 55% in 1996.
Significant capacity additions expected to be completed in 1998 include a
new forge press in Ohio and additional melting capacity in Pennsylvania.
~European~Production.~TIMET UK operates an 8,800 metric ton practical
capacity melting facility in Witton, England. Ingots produced in Witton are
sold to customers and used as raw material feedstock for the forging and rolling
operations in Witton, which processes the ingots principally into billet and
intermediate products used as input stock to its facility in Waunarlwydd, Wales.
The facility in Wales principally produces bar and plate. TIMET UK purchases its
requirements of sponge principally from suppliers located in Japan and FSU. In
1997, the Witton facility operated at virtually full capacity and the Wales
facility operated at approximately 75%, compared to 90% and 60%, respectively,
in 1996.
Capacity of 70%-owned TIMET Savoie in Ugine, France is to a certain extent
dependent upon the level of activity in CEZUS' zirconium business, which may
from time to time provide TIMET Savoie with capacity in excess of that
contractually required to be provided by CEZUS (the 30% minority partner in
TIMET Savoie). During 1997, TIMET Savoie operated at approximately 125% of the
capacity required to be provided by CEZUS (100% in 1996).
Significant European capacity additions expected to be completed in 1998
include additional forging and melting in England and additional rolling in
Wales.
~Distribution.~The Company sells its products through its own sales force
based in the U.S. and Europe, and through independent agents worldwide. The
Company's marketing and distribution system also includes eight Company operated
<PAGE>
service centers (five in the U.S., including one opened in March 1998, and three
in Europe), which sell the Company's products on a just-in-time basis. A sixth
U.S. service center, principally to support the Boeing Agreement, is scheduled
to open during the fourth quarter of 1998. Loterios will operate as a fourth
service center in Europe, in addition to fabricating pipe spools, fittings and
pressure vessels.
The Company believes that the location of its production plants and
service centers, which are in close proximity to major customers, enhance the
Company's ability to provide customer service and provide a competitive sales
and cost advantage. Service centers primarily sell value-added and customized
mill products including bar and flat-rolled sheet and strip. The Company
believes its service centers foster customer relationships by customizing
products to suit specific customer requirements and responding quickly to
customer needs.
ITEM 3: LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. See Note
14 of the Consolidated Financial Statements, which information is incorporated
herein by reference.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1997.
PART II
<PAGE>
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
TIMET's common stock is traded on the Nasdaq National Market (symbol:
"TIMT"). On March 24, 1998 the closing price of TIMET common stock according to
the Nasdaq National Market Composite Tape was $30.00 per share. The high and
low sales prices for the Company's common stock, according to the NASDAQ
Composite Tape, are set forth below.
<PAGE>
<TABLE>
<CAPTION>
<S> High Low
~Year~ended~December~31,~1996:~ <C> <C>
Second Quarter (from June 4, 1996) $ 25.875 $ 24.375
Third Quarter 30.500 22.500
Fourth Quarter 35.875 28.250
~Year~ended~December~31,~1997:~ High Low
First Quarter $ 33.625 $ 25.000
Second Quarter 32.750 25.250
Third Quarter 37.375 29.375
Fourth Quarter 38.000 27.625
</TABLE>
<PAGE>
As of February 28, 1998, there were approximately 12,000 common
shareholders of record.
The Company has not declared any cash dividends during the last five
years. Any payment of future dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other things, the
Company's earnings, financial condition, capital requirements, extent of
indebtedness and contractual restrictions with respect to payment of dividends
and stock repurchases. The Company's principal bank credit facility generally
limits dividends on common stock to 25% of consolidated net income. At December
31, 1997, approximately $110 million was available for dividends on, or
repurchases of, common stock.
ITEM 6: SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with the Company's Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<PAGE>
<TABLE>
<CAPTION>
<S> Years Ended December 31,
1993 1994 1995 1996 (1) 1997
($ In millions, except per share data)
STATEMENT OF OPERATIONS DATA: <C> <C> <C> <C> <C>
Net sales $ 151.2 $ 146.0 $ 184.7 $ 507.1 $733.6
Operating income (loss) (16.7) (34.7) 5.4 59.8 133.0
Interest expense 5.7 7.6 10.4 9.0 2.0
Net income (loss) (20.2) (42.1) (4.2) 47.6 83.0
Earnings per share:
Basic $ (1.78) $ (2.87) $ (.27) $ 1.72 $ 2.64
Diluted (1.78) (2.87) (.27) 1.72 2.49
Cash dividends per share - - - - -
BALANCE SHEET DATA:
Cash and cash equivalents $ 6.7 $ - $ - $ 86.5 $ 69.0
Total assets 262.5 240.2 248.8 703.0 793.1
Indebtedness (2) 75.0 92.9 89.6 22.1 16.2
Minority interest - Convertible - - - 201.2 201.2
Preferred Securities
Stockholders' equity 109.0 64.7 68.1 326.2 408.9
OTHER OPERATING DATA:
EBITDA (3) $ (12.3) $ (26.7) $ 18.6 $ 79.8 $165.6
Cash flows provided (used):
Operating activities $ 12.4 $ (20.0) $ (6.1) $ (.7) $ 72.6
Investing activities (16.3) (4.6) (2.5) (131.4) (79.8)
Financing activities 4.7 17.7 8.6 215.1 (9.8)
<PAGE>
Total $ .8 $ (6.9) $ - $ 83.0 $ (17.0)
Mill product shipments (metric tons 5.1 4.8 5.5 12.4 15.1
000's)
Active employees at year end 1,070 880 1,020 2,950 3,025
Order backlog at year end (4) $ 80.0 $ 85.0 $ 125.0 $440.0 $530.0
Capital expenditures 16.3 4.6 3.0 21.7 66.3
</TABLE>
<PAGE>
(1) Significant acquisitions accounted for by the purchase method were made
during 1996. See Note 3 to the Consolidated Financial Statements.
(2) Includes bank and other debt, capital lease obligations and loans payable
to related parties.
(3) EBITDA represents income (loss) before cumulative effect of accounting
changes plus minority interest, income taxes, interest expense,
depreciation and amortization less equity in earnings of nonoperating joint
ventures. EBITDA is presented because it is a widely accepted financial
indicator of cash flow and the ability to service debt. EBITDA should not
be considered as an alternative to, or more meaningful than, operating
income, net income or cash flow as an indicator of the Company's
performance.
(4) "Order backlog" is defined as firm purchase orders (which are generally
subject to cancellation by the customer upon payment of specified charges).
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
~General~
The aerospace industry in recent history has accounted for approximately
two-thirds of U.S. and 40% to 50% of worldwide titanium mill products
consumption, and has had a significant effect on the overall sales and
profitability of the titanium industry. The aerospace industry, and
consequently the titanium metals industry, is highly cyclical. The Company and
<PAGE>
the industry were significantly and adversely affected during the early 1990s by
excess worldwide production capacity, depressed levels of spending for both
military and commercial aircraft, and depressed selling prices resulting from,
among other things, weak demand and relatively inexpensive titanium scrap,
sponge and other mill products, principally from the FSU. The Company estimates
that worldwide industry shipments of titanium mill products were relatively flat
in the period between 1991 and 1994, increased 21% in 1995, 18% in 1996 and
further increased 14% in 1997, to approximately 60,000 metric tons. The Company
also estimates that industry mill product shipments to the commercial aerospace
market in 1997 approximated 20,000 metric tons, a 20% increase over 1996 levels
following a 34% increase in 1996.
The Company's order backlog increased to approximately $530 million at
December 31, 1997, from $440 million at December 31, 1996.
Beginning in the second half of 1995 and continuing through 1997, the
Company experienced a significant increase in requests for quotations,
increased orders and increased prices on accepted orders resulting in an
increase in average mill product prices of 14% in 1997 following a 16% increase
in 1996. Prices for 1998 have generally flattened, in part due to the price
stabilizing influence of the Boeing Agreement. Growth in the Company's earnings
over the next few years is expected to be primarily dependent upon volume
increases and productivity improvements rather than higher prices.
The Company expects to operate its plants at or near practical capacity in
1998. Due to the volume increases that the Company expects as a result of the
Boeing Agreement, expected continued growth in industrial markets and emerging
uses of titanium, the Company is adding additional melting and forging capacity
during 1998 that should be more cost effective than certain present capacity and
would replace existing equipment in the event of a downturn.
<PAGE>
While aircraft production rates and backlogs appear to indicate a longer,
flatter aerospace cycle than previous cycles, the Company believes that
customers have built inventories based on expected further increases in aircraft
production rates that were later modified. As a result, the Company believes
there is some excess titanium in the aerospace production system that could
result in delay of some shipments to customers and some order cancellations
as customers adjust their inventories in the short term.
Certain current initiatives to invest in the Company's future are expected
to result in higher expenses in 1998, with benefits not fully realized until
1999 or beyond. Spending in 1998 for research and development, other corporate
development activities related to development of new markets and expenses
related to the Company's enterprise-wide business process/information systems
(SAP) project and related upgrade of information technology infrastructure are
expected to be higher than in 1997.
As a result of certain systems being designed to use two digits rather than
four to define the applicable year, certain of TIMET's information and
manufacturing systems have date-sensitive software and hardware that may
recognize a date using "00" as the year 1900 rather than the year 2000 (the
"Year 2000 Issue"). This could result in system failures or miscalculations
resulting in disruptions of manufacturing or other normal business activities.
Many of TIMET's information systems are being replaced in connection with
the implementation of SAP, which is expected to be completed in 1999. SAP is
Year 2000 compliant. TIMET is in process of expediting its remaining portfolios
of non-compliant software and hardware and expects to complete this process in
1999. The Company preliminarily estimates that the costs, excluding the
implementation of SAP, to address the Year 2000 Issue could be over $6 million,
which is expected to be incurred primarily from mid-1998
through mid-1999.
<PAGE>
~Sales~and~Operating~Income
~
All mill products price and volume comparisons in this discussion are pro
forma assuming the IMI Titanium Acquisition and the Axel Johnson Metals
Acquisition, both completed during 1996, had occurred at the beginning of 1995.
The pro forma effect of other acquisitions on price and volume information is
not material.
The significant improvements in sales, operating income and operating
margins in 1997 over 1996 and in 1996 over 1995 were driven by price and volume
increases for titanium products in both commercial aerospace and other markets.
Sales volume of titanium mill products increased 15% in 1997, to approximately
15,000 metric tons, following a 27% increase in 1996. Average selling prices in
1997 were approximately 14% over 1996, which were up approximately 16% over
1995. The selling price increases reflect both the pass-through of cost
increases, particularly raw material costs, and real price improvement
associated with increased market demand.
Operating levels at the Company's plants in both 1997 and 1996 were
generally higher than in the respective prior year and contributed to the
better operating results. The VDP titanium sponge plant operated at
approximately 85% of its annual practical capacity in both 1997 and 1996 and 75%
in 1995. The Company restarted production of titanium sponge at its original
Kroll-leach facility during the second quarter of 1996 in response to demand for
certain grades of titanium sponge, and further increased production levels in
1997. In 1997, the Company's worldwide mill product capacity utilization
approximated 85%, up from 80% in 1996 and 45% in 1995.
Operating income in 1996 included a special charge of $4.8 million and in
1995 included a restructuring credit of $1.2 million. See Note 2 to the
Consolidated Financial Statements.
<PAGE>
The Company has substantial operations and assets located in Europe,
principally the United Kingdom. The U.S. dollar value of the Company's foreign
sales and operating costs are subject to currency exchange rate fluctuations
which may slightly impact reported earnings and may affect the comparability of
period-to-period operating results. Approximately one-half of the Company's
European sales are denominated in currencies other than the U.S. dollar,
principally major European currencies. Certain purchases of raw materials,
principally titanium sponge, for the Company's European operations are
denominated in U.S. dollars, while labor and other production costs are
primarily denominated in local currencies.
~Interest~Expense
~
~
~ Interest expense declined in both 1997 and 1996 principally due to
relative average borrowing levels.
~Minority~Interest
~
~ ~Annual dividend expense related to the 6.625% Convertible Preferred
Securities, issued in November 1996, approximates $13.6 million, including
amortization of financing costs, and is reported as minority interest net of
allocable income taxes. Other minority interest relates primarily to the 30%
interest in TIMET Savoie held by CEZUS.
~Income~Taxes
~
The Company's income tax rate in 1997 and 1996 varied from the U.S.
statutory rate principally due to reductions in the deferred tax valuation
allowance related to current year utilization of tax attributes and, in 1996, a
$10 million reduction in the deferred tax valuation allowance resulting from a
change in estimate of the net operating loss carryforwards and alternative
<PAGE>
minimum tax carryforwards that would more likely than not be realized in the
future. The Company's effective income tax rate in 1995 varied from the U.S.
statutory rate due primarily to losses for which recognition of a deferred tax
asset was not considered appropriate at the time. See Note 11 to the
Consolidated Financial Statements.
~ ~The Company operates in several tax jurisdictions and is subject to
varying income tax rates. For financial reporting purposes, the Company has
recognized substantially all of its carryforwards and, accordingly, expects that
its effective income tax rate beginning in 1998 will increase and more closely
approximate the U.S. federal statutory rate.
~LIQUIDITY~AND~CAPITAL~RESOURCES~
At December 31, 1997, the Company had $69 million of cash and equivalents
and $220 million of borrowing availability under its U.S. and European bank
credit lines. Indebtedness consisted primarily of capital lease obligations
related to certain of its European manufacturing facilities and a relatively
nominal amount of European working capital borrowings. The Convertible
Preferred Securities do not require principal amortization and the Company has
the right to defer interest payments for one or more periods of up to 20
consecutive quarters.
~Operating~Activities.~Reflecting improved operating results, cash provided
by operating activities (before changes in assets and liabilities) was $121
million in 1997 compared to $53 million in 1996 and $4 million in 1995. Changes
in assets and liabilities used $49 million of cash in 1997, $54 million in 1996
and $10 million in 1995 reflecting the higher levels of working capital
necessary to support the higher production and sales levels. One of the
Company's goals is to better manage working capital such that both "days sales
outstanding" in receivables and "days sales in inventory" improve in 1998 over
1997.
<PAGE>
~Investing~Activities.~~~~~The Company's capital expenditures were $66
million in 1997, up from $22 million in 1996 and $3 million in 1995. About one-
third of capital expenditures in 1997 relate to capacity expansion projects, the
largest of which include a 10,000 metric ton annual capacity electron beam
furnace in the U.S. and a rotary forge press in the U.K., both to be completed
by the second half of 1998. Capital spending in 1997 related to the major SAP
project to implement integrated information systems throughout the Company,
expected to be completed in 1999, approximated $12 million. Certain significant
costs associated with the SAP systems project, including training and
reengineering, are expensed as incurred. The companies acquired during 1996
accounted for $10 million of the $19 million increase in capital spending over
1995, with much of the remaining increase resulting from projects deferred in
prior years.
The Company estimates capital expenditures in 1998 will total $110 million
to $120 million, approximately 60% of which is related to the capacity expansion
projects associated with volume expected under long-term customer agreements.
In addition, the $24 million Loterios acquisition closed in April
1998.
Other cash investments in 1997 include $8 million of cash contributions in
connection with the formation of ValTimet and otherwise consist principally of
the Company's investments in companies developing new markets and uses for
titanium.
Acquisitions, principally the IMI Titanium Acquisition and AJM Acquisition,
aggregated $180 million in 1996 ($110 million cash; $70 million stock). The
Company believes these acquisitions augmented the Company's scale and geographic
reach and increased its production flexibility. In addition, the acquisition of
the scrap processing business acquired in the AJM Acquisition enhanced the
Company's flexibility in optimizing its mix of its raw material purchases.
<PAGE>
~Financing~Activities.~Debt repayments in 1997 relate primarily to
reductions in European working capital borrowings, including amounts due to
TIMET's minority partner in Timet Savoie.
The Company's net proceeds from the initial public offering in June 1996
approximated $131 million. The Company used approximately $125 million of such
net proceeds to repay existing indebtedness. The Company received net proceeds
of approximately $192 million from the sale of the Convertible Preferred
Securities by TIMET Capital Trust I in November 1996. The Company used
approximately $96 million of such net proceeds to prepay indebtedness incurred
in conjunction with the AJM Acquisition.
Reductions of indebtedness in 1995 included installments on bank term debt
and payment of the final installment due on the note associated with the
Company's purchase of its original 50% interest in THT in 1992.
The Company periodically evaluates its liquidity requirements, capital
needs and availability of resources in view of, among other things, its
alternative uses of capital, its debt service requirements, the cost of debt and
equity capital, and estimated future operating cash flows. As a result of this
process, the Company has in the past and may in the future seek to raise
additional capital, modify its dividend policy, restructure ownership interests,
incur, refinance or restructure indebtedness, repurchase shares of capital
stock, sell assets, or take a combination of such steps or other steps to
increase or manage its liquidity and capital resources. In the normal course of
business, the Company investigates, evaluates, discusses and engages in
acquisition, joint venture, strategic relationship and other business
combination opportunities in the titanium, specialty metal and related
industries. In the event of any future acquisition or joint venture
opportunities, the Company may consider using available cash, issuing equity
securities or incurring additional indebtedness.
<PAGE>
~ Environmental~Matters.~See Note 14 to the Consolidated Financial
Statements for a discussion of environmental matters.
~New~Accounting~Principles.~~~See Note 15 to the Consolidated Financial
Statements for a discussion of new accounting principles not yet adopted.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" on
page F-1.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth certain information with regard to executive
officers of the Company. The information required with respect to Directors and
by Item 405 of Regulation S-K is incorporated by reference to TIMET's definitive
Proxy Statement to be filed with the Securities and Exchange Commission (the
"Commission") pursuant to Regulation 14A within 120 days after the end of the
fiscal year covered by this report (the "TIMET Proxy Statement").
Name Age Position(s)
_________________
<PAGE>
J. Landis Martin 52 Chairman and Chief Executive Officer
Andrew R. Dixey 47 President, Chief Operating Officer and
Director
William C. Acton 44 Vice President; President-North American Mill
Products Operations
Paul J. Bania 47 Vice President-Quality and Technology
Joseph S. Broz 41 Vice President-Corporate Development
Thomas A. Buck 48 Vice President-Manufacturing Strategy
& Logistics
Charles H. Entrekin, Jr. 49 Vice President; President-THT Operations
Christian Leonhard 52 Vice President; President-European Mill
Products Operations
Leslie P. Lundberg 40 Vice President-Human Resources
John P. Monahan 52 Vice President; President-Service Center
Operations
J. Thomas Montgomery, Jr. 51 Vice President-Finance and Treasurer
Robert E. Musgraves 43 Vice President-General Counsel and Secretary
Mark A. Wallace 40 Vice President-Strategic Change and
Information Technology
J. LANDIS MARTIN, has been Chairman of the Company and a director since
1987 and Chief Executive Officer of the Company since 1995. Mr. Martin has
served as Chairman of Tremont since 1990 and as President of Tremont since 1987
(except for a brief period in 1990). He has also served as President and Chief
Executive Officer of NL Industries, Inc., a manufacturer of titanium dioxide
pigments, since 1987 and as a director of NL since 1986. Tremont and NL may be
deemed to be affiliates of the Company. From 1990 until its acquisition by
Dresser Industries, Inc. in 1994, Mr. Martin served as Chairman of the Board and
Chief Executive Officer of Baroid Corporation, an oilfield services company
which may have been deemed to have been an affiliate of NL and Tremont for a
portion of such period. In addition to Tremont and NL, Mr. Martin is a director
of Dresser, which is engaged in the petroleum services, hydrocarbon processing
<PAGE>
and engineering industries, and Apartment Investment & Management Corporation, a
real estate investment trust.
ANDREW R. DIXEY, has been President, Chief Operating Officer and a director
of the Company since 1996. Prior to this appointment, Mr. Dixey was, from 1995,
Managing Director of IMI Titanium Ltd., where he had responsibility for IMI's
titanium interests in both Europe and North America. During 1995, Mr. Dixey was
Chief Executive Officer of Helix plc, which is engaged in the scholastic
supplies business, and from 1971 to 1994, Mr. Dixey held various executive
positions in the GKN plc Group of companies, a manufacturer of automobile
components.
WILLIAM A. ACTON has been a Vice President of the Company since 1996 and
President-North American Mill Products Operations since May 1997. From October
1996 until May 1997 he was Vice President-THT Operations. Prior to the AJM
Acquisition in 1996, Mr. Acton had been, since 1993, President of Axel Johnson
Metals and THT. Mr. Acton was Senior Vice President of Axel Johnson Metals from
1991 until 1993.
PAUL J. BANIA has been Vice President-Quality and Technology since 1994.
Dr. Bania was the Company's Vice President-Research and Market Development from
1992 to 1994 and Director of Product Development from 1989 until 1992. Dr.
Bania is also a minority owner of Ti.Pro, the Company's 80%-owned subsidiary
developing titanium applications for the racing and other specialty vehicle
markets.
JOSEPH S. BROZ has been Vice President-Corporate Development since May
1997. Prior to joining the Company, he was Director of Aftermarket Product
Development and Strategy for Tenneco Automotive Europe, Executive Director
of Operations and Quality Systems for Tenneco, Inc. and Director of Technology
and Environmental Affairs for Tenneco Gas since 1992. From 1991 to 1992 Dr.
Broz served as a White House Fellow and as Special Assistant to the
President's Science Advisor in the Bush Administration.
<PAGE>
THOMAS A. BUCK has been Vice President-Manufacturing Strategy & Logistics
since May 1997 and prior to that was Vice President-U.S. Manufacturing since
1991.
CHARLES H. ENTREKIN, JR. has been Vice President; President-THT Operations
since May 1997. Prior to that time, Dr. Entrekin served as Vice President-
Commercial for THT since 1993 and as its Vice President-Technology from 1985 to
1993.
CHRISTIAN LEONHARD has been Vice President; President-European Mill
Products Operations since May 1997. Prior to that time, he was in charge of the
Company's operations and sales activities in France since 1988.
LESLIE P. LUNDBERG has been Vice President-Human Resources since January
1997. From 1995 until joining the Company, she was Vice President, Human
Resources for Dade International, Inc., a distributor of diagnostic equipment
for use in clinical laboratories, and from 1991 until 1995 she was Vice
President, Human Resources for the Edwards CVS division of Baxter Healthcare
International, a manufacturer of heart valves and angioplasty rings.
JOHN P. MONAHAN has been Vice President; President-Service Center
Operations since June 1997, was Vice President-Sales and Marketing from 1995 to
1997, and was Vice President-North American Sales and Marketing from 1990 to
1995.
J. THOMAS MONTGOMERY, JR. has been Vice President-Finance and Treasurer
since 1996. Prior to that, he was Vice President and Controller of Valhi, Inc.
and Contran Corporation since 1987. Valhi is principally engaged, through NL,
in the chemicals industry and may be deemed to be an affiliate of the Company.
Contran is principally a holding company which may be deemed to control Valhi,
<PAGE>
NL, Tremont and the Company. Mr. Montgomery has also served as Vice President,
Controller and Treasurer of Tremont since May 1997.
ROBERT E. MUSGRAVES has been Vice President and General Counsel of the
Company since 1990. He has also served as Secretary of the Company since 1991.
Since 1993, Mr. Musgraves has been General Counsel and Secretary of Tremont, and
since 1994 has also served as Vice President of Tremont.
MARK A. WALLACE has been Vice President--Strategic Change since 1996.
Prior to that, he was Vice President-Finance and Treasurer of the Company since
1992. He has also served as Vice President and Controller of Tremont since
1992. From 1990 to 1992, Mr. Wallace was Assistant Controller of Valhi.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement.
ITEM 13: CERTAIN REGULATIONS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
TIMET Proxy Statement. See also Note 13 to the Consolidated Financial
Statements.
PART IV
<PAGE>
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
The consolidated financial statements and schedules listed by the
Registrant on the accompanying Index of Financial Statements and Schedules (see
page F-1) are filed as part of this Annual Report.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended December 31, 1997 and
the months of January and February 1998:
October 21, 1997 - reported items 5 and 7.
November 11, 1997 - reported items 5 and 7.
November 13, 1997 - reported items 5 and 7.
December 22, 1997 - reported items 5 and 7.
January 22, 1998 - reported items 5 and 7.
February 13, 1998 - reported items 5 and 7.
February 17, 1998 - reported items 5 and 7.
(c) Exhibits
Included as exhibits are the items listed in the Exhibit Index.
TIMET will furnish a copy of any of the exhibits listed below upon payment of
$4.00 per exhibit to cover the costs to TIMET of furnishing the exhibits.
Instruments defining the rights of holders of long-term debt issues which do not
exceed 10% of consolidated total assets will be furnished to the Commission upon
request.
Item No. Exhibit Index
<PAGE>
3.1 Amended and Restated Certificate of Incorporation of Titanium Metals
Corporation, incorporated by reference to Exhibit 3.1 to Titanium
Metals Corporation's Registration Statement on Form S-1 (No.
333-2940).
3.2 Bylaws of Titanium Metals Corporation as Amended and Restated, dated
February 14, 1997, incorporated by reference to Exhibit 3.2 to the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1996.
4.1 Certificate of Trust of TIMET Capital Trust I, dated November 13,
1996, incorporated by reference to Exhibit 4.1 to Titanium Metals
Corporation's Current Report on Form 8-K filed with the Commission on
December 5, 1996.
4.2 Amended and Restated Declaration of Trust of TIMET Capital Trust I,
dated as of November 20, 1996, among Titanium Metals Corporation, as
Sponsor, The Chase Manhattan Bank, as Property Trustee, Chase
Manhattan Bank (Delaware), as Delaware Trustee and Joseph S.
Compofelice, Robert E. Musgraves and Mark A. Wallace, as Regular
Trustees, incorporated by reference to Exhibit 4.2 to the Registrant's
Current Report on Form 8-K filed with the Commission on December 5,
1996.
4.3 Indenture for the 6 5/8% Convertible Subordinated Debentures, dated as
of November 20, 1996, among Titanium Metals Corporation and The Chase
Manhattan Bank, as Trustee, incorporated by reference to Exhibit 4.3
to the Registrant's Current Report on Form 8-K filed with the
Commission on December 5, 1996.
4.4 Form of 6 5/8% Convertible Preferred Securities (included in Exhibit
4.1 above), incorporated by reference to Exhibit 4.5 to the
<PAGE>
Registrant's Current Report on Form 8-K filed with the Commission on
December 5, 1996.
4.5 Form of 6 5/8% Convertible Subordinated Debentures (included in
Exhibit 4.2 above), incorporated by reference to Exhibit 4.5 to the
Registrant's Current Report on Form 8-K filed with the Commission on
December 5, 1996.
4.6 Form of 6 5/8% Trust Common Securities (included in Exhibit 4.2
above), incorporated by reference to Exhibit 4.5 to the Registrant's
Current Report on Form 8-K filed with the Commission on December 5,
1996.
4.7 Convertible Preferred Securities Guarantee, dated as of November 20,
1996, between Titanium Metals Corporation, as Guarantor, and The Chase
Manhattan Bank, as Guarantee Trustee, incorporated by reference to
Exhibit 4.6 to the Registrant's Current Report on Form 8-K filed with
the Commission on December 5, 1996.
9.1 Shareholders' Agreement, dated February 15, 1996, among Titanium
Metals Corporation, Tremont Corporation, IMI plc, IMI Kynoch Ltd., and
IMI Americas, Inc., incorporated by reference to Exhibit 2.2 to
Tremont Corporation's Current Report on Form 8-K (No. 1-10126) filed
with the Commission on March 1, 1996.
9.2 Amendment to the Shareholders' Agreement, dated March 29, 1996, among
Titanium Metals Corporation, Tremont Corporation, IMI plc, IMI Kynoch
Ltd., and IMI Americas Inc., incorporated by reference to Exhibit
10.30 to Tremont Corporation's Annual Report on Form 10-K (No.
1-10126) for the year ended December 31, 1995.
<PAGE>
10.1 Acquisition Agreement, dated February 15, 1996, by and between
Titanium Metals Corporation, IMI Kynoch Ltd., and IMI Americas Inc.,
incorporated by reference to Exhibit 2.1 to Tremont Corporation's
Current Report on Form 8-K (No. 1-10126) filed with the Commission on
March 1, 1996.
10.2 Sponge Purchase Agreement, dated May 30, 1990, between Titanium Metals
Corporation and Union Titanium Sponge Corporation and Amendments No. 1
and 2, incorporated by reference to Exhibit 10.25 of Tremont
Corporation's Annual Report on Form 10-K (No. 1-10126) for the year
ended December 31, 1991.
10.3 Amendment No. 3 to the Sponge Purchase Agreement, dated December 3,
1993, between Titanium Metals Corporation and Union Titanium Sponge
Corporation, incorporated by reference to Exhibit 10.33 of Tremont
Corporation's Annual Report on Form 10-K (No. 1-10126) for the year
ended December 31, 1993.
10.4 Amendment No. 4 to the Sponge Purchase Agreement, dated May 2, 1996,
between Titanium Metals Corporation and Union Titanium Sponge
Corporation, incorporated by reference to Exhibit 10.1 to Tremont
Corporation's Quarterly Report on Form 10-Q (No. 1-10126) for the
quarter ended March 31, 1996.
10.5 Lease Agreement, dated January 1, 1996, between Holford Estates Ltd.
and IMI Titanium Ltd. related to the building known as Titanium Number
2 Plant at Witton, England, incorporated by reference to Exhibit 10.23
to Tremont Corporation's Annual Report on Form 10-K (No. 1-10126) for
the year ended December 31, 1995.
10.6 Intercorporate Services Agreement between Titanium Metals
Corporation and Tremont Corporation, effective as of January 1, 1997,
<PAGE>
incorporated by reference to Exhibit 10.2 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997.
10.7* 1996 Long Term Performance Incentive Plan of Titanium Metals
Corporation, incorporated by reference to Exhibit 10.19 to Titanium
Metals Corporation's Amendment No. 1 to Registration Statement on Form
S-1 (No. 333-18829).
10.8* 1996 Amended and Restated Non-Employee Director Compensation Plan.
10.9* Employment Agreement between Andrew R. Dixey and Titanium Metals
Corporation, dated February 13, 1996, incorporated by reference to
Exhibit 10.21 to Titanium Metals Corporation's Registration Statement
on Form S-1 (No. 333-2940).
10.10 Agreement, dated June 28, 1995, among Titanium Metals Corporation,
Tremont Corporation and Union Titanium Sponge Corporation,
incorporated by reference to Exhibit 10.24 to Titanium Metals
Corporation's Registration Statement on Form S-1 (No. 333-2940).
10.11 Asset Purchase Agreement, dated October 1, 1996, by and between
Titanium Metals Corporation and Axel Johnson Metals, Inc.,
incorporated by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed with the Commission on October 16, 1996.
10.12 Purchase Agreement, dated November 20, 1996, between Titanium Metals
Corporation, TIMET Capital Trust I, Salomon Brothers Inc, Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co.
Incorporated, as Initial Purchasers, incorporated by reference to
Exhibit 99.1 to the Registrant's Current Report on Form 8-K filed with
the Commission on December 5, 1996.
<PAGE>
10.13 Registration Agreement, dated November 20, 1996, between TIMET Capital
Trust I and Salomon Brothers Inc, as Representative of the Initial
Purchasers, incorporated by reference to Exhibit 99.1 to the
Registrant's Current Report on Form 8-K filed with the Commission on
December 5, 1996.
10.14 $200,000,000 Credit Agreement among Titanium Metals Corporation and
various lending institutions dated as of July 30,1997 incorporated by
reference to Exhibit 10.1 of a Current Report on Form 8-K dated July
30, 1997 filed by the Registrant.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Coopers & Lybrand, L.L.P.
27.1 Financial Data Schedule for the year ended December 31, 1997.
* Management contract, compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TITANIUM METALS CORPORATION
(Registrant)
<PAGE>
By /s/ J. Landis Martin
J. Landis Martin, March 27, 1998
(Chairman of the Board
and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ J. Landis Martin /s/ Andrew R. Dixey
J. Landis Martin, March 27, 1998 Andrew R. Dixey, March 27, 1998
(Chairman of the Board and (President, Chief Operating
Chief Executive Officer) Officer and Director)
/s/ Edward C. Hutcheson, Jr. /s/ Joseph S. Compofelice
Edward C. Hutcheson, Jr., March 27, 1998 Joseph S. Compofelice, March 27,
(Director) 1998
(Director)
<PAGE>
/s/ Thomas P. Stafford /s/ J. Thomas Montgomery, Jr.
Thomas P. Stafford, March 27, 1998 J. Thomas Montgomery,Jr., March 27, 1998
(Director) (Vice President - Finance and
Treasurer)
(Principal Finance and Accounting Officer)
/s/ Hiroomi Mikami
Hiroomi Mikami, March 27, 1998
(Director)
<PAGE>
TITANIUM METALS CORPORATION
ANNUAL REPORT ON FORM 10-K/A
ITEMS 8, 14(a) and 14(d)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
Page
FINANCIAL STATEMENTS
Report of Independent Accountants F-2
Consolidated Statements of Operations for the Years ended F-3
December 31, 1995, 1996 and 1997
Consolidated Balance Sheets at December 31, 1996 and 1997 F-4/F-5
Consolidated Statements of Cash Flows for the Years ended
December 31, 1995, 1996 and 1997 F-6/F-7
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1995, 1996 and 1997 F-8
Notes to Consolidated Financial Statements F-9/F-28
FINANCIAL STATEMENT SCHEDULES
Report of Independent Accountants S-1
Schedule II-Valuation and qualifying accounts S-2
<PAGE>
Schedules I, III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Titanium Metals Corporation:
We have audited the accompanying consolidated balance sheets of Titanium
Metals Corporation as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Titanium Metals
Corporation as of December 31, 1996 and 1997, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
<PAGE>
COOPERS & LYBRAND L.L.P.
Denver, Colorado
January 22, 1998
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
Years ended December 31, 1995, 1996 and 1997
(In thousands, except per share data)
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Revenues and other income:
Net sales $ 184,723 $ 507,074 $ 733,577
Other, net 5,293 7,286 3,517
190,016 514,360 737,094
Costs and expenses:
Cost of sales 170,699 418,775 554,546
Selling, general, administrative and development 14,065 29,917 45,319
Special charges (credit) (1,200) 4,824 -
Interest 10,414 8,953 2,066
193,978 462,469 601,931
Income (loss) before income taxes and minority interest (3,962) 51,891 135,163
Income tax expense 255 2,336 41,004
Minority interest - Convertible Preferred Securities - 826 8,840
Other minority interest - 1,085 2,309
Net income (loss) $ (4,217) $ 47,644 $ 83,010
Diluted net income (loss) $ (4,217) $ 48,470 $ 91,850
<PAGE>
Earnings per share:
Basic $ (.27) $ 1.72 $ 2.64
Diluted (.27) 1.72 2.49
Weighted average shares outstanding:
Basic 15,383 27,623 31,457
Diluted 15,383 28,142 36,955
</TABLE>
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1997
(In thousands, except per share data)
<PAGE>
<TABLE>
<CAPTION>
ASSETS 1996 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 86,526 $ 68,957
Accounts and other receivables, less
allowance of $4,788 and $2,218 114,100 155,678
Receivable from related parties 1,676 15,844
Inventories 155,488 153,818
Prepaid expenses and other 12,510 13,253
Deferred income taxes 718 6,219
Total current assets 371,018 413,769
Other assets:
Investment in joint ventures 270 23,270
Goodwill 67,430 59,771
Other intangible assets 19,314 17,889
Other 13,799 15,341
Deferred income taxes 11,618 593
Total other assets 112,431 116,864
Property and equipment:
Land 6,129 6,545
Buildings 32,929 26,823
Equipment 207,046 222,845
Construction in progress 17,513 58,740
263,617 314,953
Less accumulated depreciation 44,048 52,527
<PAGE>
Net property and equipment 219,569 262,426
$ 703,018 $ 793,059
</TABLE>
<PAGE>
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1996 and 1997
(In thousands, except per share data)
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY 1996 1997
<S> <C> <C>
Current liabilities:
Notes payable $ 7,992 $ 3,372
Current maturities of long-term debt and capital lease obligations 469 1,354
Accounts payable 49,628 59,501
Accrued liabilities 46,173 46,809
Payable to related parties 1,577 1,298
Income taxes 6,638 11,482
Deferred income taxes 348 -
Total current liabilities 112,825 123,816
Noncurrent liabilities:
Long-term debt 1,158 451
Capital lease obligations 11,562 10,996
Payable to related parties 996 847
Accrued OPEB cost 27,512 26,192
Accrued pension cost 2,743 836
Deferred income taxes 10,629 11,620
Other 3,920 1,441
Total noncurrent liabilities 58,520 52,383
Minority interest - Company-obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely
subordinated debt securities ("Convertible Preferred Securities") 201,250 201,250
Other minority interest 4,207 6,663
<PAGE>
Stockholders' equity:
Preferred stock $.01 par value; 1 million shares authorized,
none outstanding - -
Common stock, $.01 par value; 99 million shares authorized,
31.5 million shares issued and outstanding 315 315
Additional paid-in capital 346,133 346,723
Retained earnings (deficit) (25,009) 58,001
Currency translation adjustment 5,635 3,908
Pension liabilities adjustment (858) -
Total stockholders' equity 326,216 408,947
$ 703,018 $ 793,059
Commitments and contingencies (Notes 13 and 14)
</TABLE>
<PAGE>
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1996 and 1997
(In thousands)
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,217) $ 47,644 $ 83,010
Depreciation and amortization 13,218 18,974 28,384
Earnings of joint ventures in excess of (3,824) (5,992) 1,013
distributions
Deferred income taxes - (10,416) 6,578
Other minority interest - 1,085 2,309
Other, net (1,286) 1,753 (36)
3,891 53,048 121,258
Change in assets and liabilities, net of
acquisitions:
Receivables (870) (29,998) (41,781)
Inventories (15,477) (13,309) 294
Prepaid expenses 19 (6,207) 1,600
Accounts payable and accrued liabilities 6,036 (106) 1,231
Income taxes 165 4,521 5,526
Accounts with related parties (275) (8,412) (13,292)
Other, net 396 (269) (2,266)
Net cash provided (used) by operating activities (6,115) (732) 72,570
Cash flows from investing activities:
Capital expenditures (2,981) (21,679) (66,295)
Business acquisitions - (109,934) (476)
Other investments - - (13,020)
<PAGE>
Other, net 421 213 -
Net cash used by investing activities (2,560) (131,400) (79,791)
Cash flows from financing activities:
Indebtedness:
Borrowings 9,371 113,793 -
Reductions (7,371) (179,480) (4,833)
Deferred financing costs - (579) (2,230)
Related parties loans (repayments) 5,500 (42,521) (930)
Proceeds from issuance of:
Common stock, net - 131,488 -
Convertible Preferred Securities, net - 192,409 -
Other, net 1,148 - (1,830)
Net cash provided (used) by financing activities 8,648 215,110 (9,823)
$ (27) $ 82,978 $ (17,044)
</TABLE>
<PAGE>
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1995, 1996 and 1997
(In thousands)
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
<S> <C> <C> <C>
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $ (27) $ 82,978 $ (17,044)
Cash acquired - 3,053 -
Currency translation 51 471 (525)
24 86,502 (17,569)
Balance at beginning of year - 24 86,526
Balance at end of year $ 24 $ 86,526 $ 68,957
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 9,970 $ 8,958 $ 2,159
Convertible Preferred Securities dividends - - 13,531
Income taxes 112 6,348 22,483
Acquisitions:
Cash and cash equivalents $ $ 3,053 $
- -
Goodwill and other intangibles - 85,158 577
Other noncash assets - 180,847 3,503
Liabilities - (89,124) (3,604)
Common stock issued to IMI plc - (70,000) -
<PAGE>
Cash paid $ - $109,934 $ 476
Noncash assets contributed to joint venture $ - $ - $ 11,287
</TABLE>
<PAGE>
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1995, 1996 and 1997
(In thousands)
<PAGE>
<TABLE>
<CAPTION>
<S> Additional
Common Common paid-in
shares stock capital
<C> <C> <C>
Balance at December 31, 1994 15,066 $ 150 $ 135,709
Net loss - - -
Conversion of stockholder indebtedness 568 6 10,846
Cash contribution 59 1 1,147
Noncash distribution to stockholders - - (4,982)
Adjustments, net - - -
Balance at December 31, 1995 15,693 157 142,720
Net income - - -
Common stock issued:
IMI Titanium Acquisition (Note 3) 9,561 96 69,904
Stock Offering (Note 10) 6,200 62 132,926
Other 1 - 28
Other, net - - 555
Adjustments, net - - -
Balance at December 31, 1996 31,455 315 346,133
Net income - - -
Other, net 3 - 590
Adjustments, net - - -
Balance at December 31, 1997 31,458 $ 315 $ 346,723
<PAGE>
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
<S> Retained Adjustments
Earnings Currency Pension
(deficit) translation liabilities Total
<C> <C> <C> <C>
$ (68,436) $ 160 $ (2,835) $ 64,748
(4,217) - - (4,217)
- - - 10,852
- - - 1,148
- - - (4,982)
- 123 456 579
(72,653) 283 (2,379) 68,128
47,644 - - 47,644
- - - 70,000
- - - 132,988
- - - 28
- - - 555
- 5,352 1,521 6,873
(25,009) 5,635 (858) 326,216
83,010 - - 83,010
- - - 590
- (1,727) 858 (869)
$ 58,001 $ 3,908 $ - $ 408,947
<PAGE>
</TABLE>
<PAGE>
<PAGE>
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Summary of significant accounting policies:
~ Principles~of~consolidation.~~~~~The accompanying consolidated financial
statements include the accounts of Titanium Metals Corporation ("TIMET") and its
majority-owned subsidiaries (collectively, the "Company"). All material
intercompany accounts and balances have been eliminated. Certain prior year
amounts have been reclassified to conform to the current year presentation.
~Use~of~estimates.~~~ The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amount of revenues and expenses
during the reporting period. Ultimate actual results may, in some instances,
differ from previously estimated amounts.
~Translation~of~foreign~currencies.~~~~~Assets and liabilities of
subsidiaries whose functional currency is deemed to be other than the
U.S. dollar are translated at year end rates of exchange and revenues and
expenses are translated at average exchange rates prevailing during the year.
Resulting translation adjustments are accumulated in the currency translation
adjustments component of stockholders' equity, net of related deferred income
taxes. Currency transaction gains and losses are recognized in income
currently.
~Net~sales.~~~ Sales are recognized when products are shipped.
<PAGE>
~Inventories~and~cost~of~sales.~~~~~Inventories are stated at the lower of
cost or market. The first-in, first-out ("FIFO") method and last-in, first-out
("LIFO") method are each used to determine the cost of approximately one-half of
inventories.
~Cash~and~cash~equivalents.~~~ Cash equivalents include highly liquid
investments with original maturities of three months or less.
~Investment~in~joint~ventures.~~~~~Investments in 20% to 50%-owned joint
ventures are accounted for by the equity method. Differences between the
Company's investment and it's pro rata share of the investee's reported equity
is amortized by the straight-line method over not more than 15 years.
~
~ ~Intangible~assets~and~amortization.~~~~~Goodwill, representing the excess
of cost over the fair value of individual net assets acquired in business
combinations accounted for by the purchase method, is amortized by the straight
line method over 15 years and is stated net of accumulated amortization of $9.5
million at December 31, 1997 (1996 - $1.6 million). Patents and other
intangible assets, except intangible pension assets, are amortized by the
straight-line method over the periods expected to be benefited, generally nine
years.
~ Property,~equipment~and~depreciation.~~~~~Property and equipment are
stated at cost. Maintenance, repairs and minor renewals are expensed; major
improvements are capitalized. Interest costs related to major, long-term
capital projects are capitalized as a component of construction costs and were
$1.0 million in 1997 (nil in 1995 and 1996). Depreciation is computed
principally on the straight-line method over the estimated useful lives of 15 to
40 years for buildings and three to 25 years for machinery and equipment.
Software development costs are capitalized and amortized over the
software's estimated useful life, generally three to five years. Training,
reengineering and similar costs are expensed as incurred.
<PAGE>
~Employee~benefit~plans.~~~ Accounting and funding policies for
retirement plans and postretirement benefits other than pensions ("OPEB") are
described in Note 12.
S~tock-based~compensation.~~~~~The Company has elected the disclosure
alternative prescribed by Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," and to account for the
Company's stock-based employee compensation in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and its various interpretations. Under APB No. 25, no compensation
cost is generally recognized for fixed stock options for which the exercise
price is not less than the market price of the Company's common stock on the
grant date. See Note 10.
~Research~and~development.~~~~~Research and development expense
approximated $3.6 million in 1997 ($2 million in each of 1995 and 1996).
~Advertising~costs.~~~ Advertising costs, which are not significant, are
expensed as incurred.
~Income~taxes.~~~ Deferred income tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the income tax and financial reporting carrying amounts of assets and
liabilities, including investments in subsidiaries not included in TIMET's
consolidated U.S. tax group.
~Stock~split~and~earnings~per~share.~~~~~Common shares outstanding for all
periods presented have been adjusted to reflect the 65-for-1 split (the "Stock
Split") of the Company's common stock effected in connection with TIMET's June
1996 initial public offering of common stock (the "Stock Offering"). The
<PAGE>
Company retroactively adopted SFAS No. 128, "Earnings per Share," in 1997.
Diluted earnings per share reflects the assumed conversion of the Convertible
Preferred Securities and the dilutive effect of common stock options. See Note
17.
~Fair~value~of~financial~instruments.~~~The Company's bank debt reprices
with changes in market interest rates and, accordingly, the carrying amount of
such debt approximates market value. The fair value of the Convertible
Preferred Securities based on quoted market prices approximated $200 million at
December 31, 1997 and $220 million at December 31, 1996 (book value at both
dates - $201 million).
At December 31, 1997, the fair value of the Company's common equity, based
on the quoted market price at that date of $28.88 per share, was approximately
$908 million (book value - $409 million).
Note 2--Business and geographic segments:
The Company's operations are conducted in one business segment, titanium
metals operations. The Company is a vertically integrated producer of titanium
sponge, ingot, slab, forged and/or rolled mill products, and cast products for
aerospace, industrial and other markets. The Company's production facilities
are located principally in the United States, United Kingdom, and France with
its products sold throughout the world.
<PAGE>
<TABLE>
<CAPTION>
<S> 1995 1996 1997
(In thousands)
<C> <C> <C>
Sales $ 184,723 $ 507,074 $ 733,577
Operating income $ 5,378 $ 59,849 $ 132,962
General corporate income, net 1,074 995 4,267
Interest expense (10,414) (8,953) (2,066)
Income (loss) before income taxes $ (3,962) $ 51,891 $ 135,163
~Geographic~segments~
Net sales - point of origin:
United States $ 174,802 $ 354,651 $ 534,440
Europe 13,862 186,063 288,196
Eliminations (3,941) (33,640) (89,059)
$ 184,723 $ 507,074 $ 733,577
Net sales - point of destination:
United States $ 135,421 $ 312,640 $ 401,217
Europe 33,520 155,364 276,419
Other 15,782 39,070 55,941
$ 184,723 $ 507,074 $ 733,577
Operating income:
<PAGE>
United States $ 4,408 $ 39,014 $ 76,434
Europe 970 20,835 56,528
$ 5,378 $ 59,849 $ 132,962
Identifiable assets:
United States $ 235,844 $ 442,163 $ 511,199
Europe 12,940 173,210 221,006
General corporate - 87,645 60,855
$ 248,784 $ 703,018 $ 793,059
</TABLE>
<PAGE>
Export sales from U.S. based operations approximated $40 million in 1995,
$58 million in 1996 and $97 million in 1997. At December 31, 1997, the net
assets of non-U.S. subsidiaries included in consolidated net assets approximated
$124 million.
General corporate assets consist principally of cash equivalents and
general corporate income in 1996 and 1997 consists principally of interest
income thereon. In 1995, general corporate income consists principally of the
Company's equity in earnings of Basic Investments, Inc. ("BII") and Victory
Valley Land Company L.P. ("VVLC").
Operating income in 1995 includes a restructuring credit of $1.2 million
resulting from prior years restructuring charges being less than originally
estimated. Operating income in 1996 includes $4.8 million of special charges
principally related to the IMI Titanium Acquisition.
Note 3--Business combinations:
~IMI~Titanium~Acquisition.~~~~~In February 1996, the Company acquired the
titanium metals businesses of IMI plc and affiliates (the "IMI Titanium
Acquisition"). IMI previously conducted its titanium business principally
through its wholly owned United Kingdom subsidiary, IMI Titanium Ltd. (now
known as TIMET UK), and its U.S. subsidiary, IMI Titanium, Inc. (now known as
TIMET Castings). IMI conveyed all of its titanium-related businesses to the
Company in exchange for 9.6 million newly issued shares of the Company's common
stock valued at $70 million. In addition, the Company issued $20 million of the
Company's subordinated debt to IMI in exchange for a like amount of debt
previously owed to IMI by its U.K. subsidiary.
<PAGE>
The Company accounted for the IMI Titanium Acquisition by the purchase
method of accounting (purchase price approximately $72 million, including
transaction costs). The Company has included the results of operations of the
IMI titanium business in its consolidated results of operations effective at the
beginning of 1996 with preacquisition earnings of approximately $.4 million
deducted in determining net income for 1996. Preacquisition sales of the IMI
titanium business included in consolidated sales for 1996 approximated
$11.7 million.
~Axel~Johnson~Metals~Acquisition.~~~~~In October 1996, the Company acquired
substantially all of the assets and assumed substantially all of the liabilities
of Axel Johnson Metals, Inc. ("AJM") for approximately $97 million cash (the
"AJM Acquisition"). The AJM Acquisition was completed through a newly formed
subsidiary, Titanium Hearth Technologies, Inc. ("THT"), and included the
acquisition of the 50% interest in the Titanium Hearth Technologies partnership
that TIMET did not previously own. THT operates titanium scrap processing
facilities and electron beam cold hearth melting furnaces.
The Company accounted for the AJM Acquisition by the purchase method and
consolidated THT's results effective October 1, 1996; revenues for the fourth
quarter of 1996 approximated $21 million. Prior to the AJM Acquisition, the
Company accounted for its 50% interest in the THT partnership by the equity
method.
~Other~European~acquisitions.~~~~~During the last half of 1996 and January
1997, the Company completed three acquisitions in Europe for an aggregate cash
cost of approximately $12 million, all of which were accounted for by the
purchase method.
In August 1996, TIMET and Compagnie Europeenne du Zirconium - CEZUS, S.A.
("CEZUS") completed an agreement to form a new jointly-owned French company
("TIMET Savoie") to manufacture and sell titanium products. TIMET Savoie is
<PAGE>
70%-owned by TIMET and 30%-owned by CEZUS. TIMET Savoie manufactures products
inside CEZUS' production facility in Ugine, France both directly, utilizing its
own personnel and equipment, and, for melting and forging and certain other
operations, indirectly by subcontracting to CEZUS under a long-term
manufacturing agreement. In July 1996, TIMET purchased the 74% equity interest
in TISTO, a German distributor of titanium products, that it did not already
own. In January 1997, the Company purchased LASAB Laser Applikations-und
Bearbeitungs GmbH, which is in the titanium and stainless steel laser-welded
tube and pipe and laser cutting business.
~Proforma~financial~information~(unaudited).~On a proforma basis assuming
the IMI Titanium Acquisition and the AJM Acquisition occurred at the beginning
of 1996, net sales for 1996 were $564.4 million, operating income was $59.8
million, net income was $43.2 million and basic earnings per share was $1.50.
The proforma effect of the other transactions is not material. The pro forma
financial information is not necessarily indicative of the operating results
that might have occurred if the IMI and AJM transactions had been completed at
such earlier dates or the operating results which may occur in the future.
Note 4 - Joint ventures:
<PAGE>
<TABLE>
<CAPTION>
<S> December 31,
1996 1997
(in thousands)
<C> <C>
ValTimet $ - $ 19,845
Other 270 3,425
$ 270 $ 23,270
</TABLE>
<PAGE>
Effective in July 1997, TIMET combined its Tennessee-based welded tubing
operations with those of Valinox Welded, a French manufacturer of welded tubing,
principally stainless steel and titanium, with operations in France and China.
The joint venture, "ValTimet", is 46% owned by TIMET and 54% owned by Valinox
Welded. For the six months ended December 31, 1997, ValTimet reported sales of
$56.6 million and net income of $.1 million. At December 31, 1997, ValTimet
reported total assets of $80.1 million and equity of $28.7 million.
TIMET's strategy for developing new markets and uses for titanium includes
providing funds to third parties to prove out a new use or uses of titanium.
Other joint ventures consist principally of such investments.
Note 5--Inventories:
<PAGE>
<TABLE>
<CAPTION>
<S> December 31,
1996 1997
(In thousands)
<C> <C>
Raw materials $ 27,463 $ 23,925
Work-in-process 82,707 91,884
Finished products 39,089 31,230
Supplies 6,229 6,779
$ 155,488 $ 153,818
</TABLE>
<PAGE>
The average cost of LIFO inventories exceeded the net carrying amount of
such inventories by approximately $32 million at each of December 31, 1996 and
1997.
Note 6--Accrued liabilities:
<PAGE>
<TABLE>
<CAPTION>
<S> December 31,
1996 1997
(In thousands)
<C> <C>
OPEB cost $ 2,024 $ 2,102
Pension cost 1,507 1,072
Other employee benefits 21,360 25,869
Environmental cost 1,643 1,762
Taxes, other than income 2,292 3,062
Accrued dividends - Convertible Preferred Securities 1,270 1,103
Other 16,077 11,839
$ 46,173 $ 46,809
</TABLE>
<PAGE>
Note 7--Intangible and other noncurrent assets:
<PAGE>
<TABLE>
<CAPTION>
<S> December 31,
1996 1997
(In thousands)
<C> <C>
Intangible assets:
Patents $ 14,103 $ 14,333
Covenants not to compete 5,000 5,000
Intangible pension assets 1,199 1,997
20,302 21,330
Less accumulated amortization 988 3,441
$ 19,314 $ 17,889
Other noncurrent assets:
Deferred financing costs $ 8,775 $ 8,482
Prepaid pension costs 1,340 2,228
Other 3,684 4,631
$ 13,799 $ 15,341
</TABLE>
<PAGE>
Note 8--Notes payable, long-term debt and capital lease obligations:
<PAGE>
<TABLE>
<CAPTION>
<S> December 31,
1996 1997
(In thousands)
<C> <C>
Notes payable - non U.S. credit agreements $ 7,992 $ 3,372
Long-term debt:
Bank credit agreement $ - $ -
Other 1,555 1,612
Less current maturities 397 1,161
$ 1,158 $ 451
Capital lease obligations $ 11,634 $ 11,189
Less current maturities 72 193
$ 11,562 $ 10,996
</TABLE>
<PAGE>
~Non-U.S.~credit~agreements.~TIMET UK has a Pounds15.5 million ($26
million) overdraft/revolving bank credit facility through January 1998 which has
been extended pending completion of renewal negotiations. Borrowings are
collateralized by TIMET UK's inventories and receivables and currently generally
bear interest at the bank's base rate plus 1.5% (8% at December 31, 1997). At
December 31, 1997, aggregate unused borrowing availability under TIMET UK's bank
credit agreement and a short-term bank credit agreement in France approximated
$26 million.
TIMET UK's credit agreement is expected to be renewed on a longer term
basis with lower interest rates than the current agreement.
~Long-term~bank~credit~agreement.~~~TIMET has a $200 million revolving
bank credit facility expiring in July 2002. Borrowings bear interest initially
at LIBOR plus 0.50% and are collateralized by substantially all of TIMET's
assets. The credit agreement generally limits dividends on TIMET's common stock
to 25% of net income, limits additional indebtedness and transactions with
affiliates, requires the maintenance of certain financial ratios and contains
other covenants customary in transactions of this type. At December 31, 1997,
approximately $110 million was available for dividends on, or repurchase of,
common stock.
~Capital~lease~obligations.~In connection with the IMI Titanium
Acquisition, TIMET UK entered into long-term leases with IMI principally
covering production facilities within England. In connection with the TIMET
Savoie transaction, TIMET Savoie entered into long-term leases with CEZUS
covering machinery and equipment. The terms of these capital leases range from
10-30 years. The UK rentals are subject to adjustment every five years based on
changes in certain published price indexes. TIMET has guaranteed TIMET UK's
obligations under its leases. Assets held under capital leases included in
<PAGE>
buildings and equipment at December 31, 1997 were $10.6 million and $.8 million,
respectively, with related aggregate accumulated depreciation of $.8 million.
Aggregate maturities of long-term debt and capital lease obligations:
<PAGE>
<TABLE>
<CAPTION>
<S> Capital Long-term
Leases Debt
(In thousands)
<C> <C>
Years ending December 31,
1998 $ 1,189 $ 1,161
1999 1,189 86
2000 1,189 86
2001 1,189 86
2002 1,189 86
2003 and thereafter 25,114 107
Less amounts representing interest (19,870) -
$ 11,189 $ 1,612
</TABLE>
<PAGE>
Note 9--Minority interest:
~Convertible~Preferred~Securities.~In November 1996, TIMET Capital Trust I
(the "Trust"), a wholly-owned subsidiary of TIMET, issued $201 million of 6.625%
Company-obligated mandatorily redeemable preferred securities and $6 million of
6.625% common securities. TIMET holds all of the outstanding common securities
of the Trust. The Trust used the proceeds from such issuance to purchase from
the Company $207 million principal amount of TIMET's 6.625% convertible junior
subordinated debentures due 2026 (the "Subordinated Debentures"). TIMET's
guarantee of payment of the Convertible Preferred Securities (in accordance with
the terms thereof) and its obligations under the Trust documents, in the
aggregate, constitute a full and unconditional guarantee by the Company of the
Trust's obligations under the Convertible Preferred Securities. The sole assets
of the Trust are the Subordinated Debentures. The Convertible Preferred
Securities represent undivided beneficial ownership interests in the Trust, are
entitled to cumulative preferred distributions from the Trust of 6.625% per
annum, compounded quarterly, and are convertible, at the option of the holder,
into TIMET common stock at the rate of 1.339 shares of common stock per
Convertible Preferred Security (an equivalent price of $37.34 per share), for an
aggregate of approximately 5.4 million common shares if fully converted.
The Convertible Preferred Securities mature December 2026 and are
redeemable at the Company's option beginning December 1999, initially at
approximately 104.6% of principal amount declining to 100% from December 2006.
The Company has the right to defer dividend payments for up to 20 consecutive
quarters ("Extension Period") on one or more occasions. In the event the
Company exercises this right, it would be unable during any Extension Period to,
among other things, pay dividends on or reacquire its capital stock.
<PAGE>
Dividends on the Convertible Preferred Securities are reported in the
Consolidated Statement of Operations as minority interest, net of allocable
income tax benefit.
~Other.~~~~~~Other minority interest relates principally to TIMET Savoie.
Note 10--Stockholders' equity:
~Common~stock.~~~~~In June 1996, the Company completed the sale of
6.2 million shares of its common stock in the Stock Offering at an initial price
to the public of $23 per share. In connection with the Stock Offering, the
Company effected the Stock Split, increased its authorized common shares to
99 million shares, increased its authorized preferred stock to 1 million shares,
and reserved up to 3.1 million shares to be issued under the 1996 Long Term
Incentive Plan (the "TIMET Incentive Plan"). The Company's net proceeds from
the Stock Offering approximated $131 million. The Company used approximately
$42.5 million of the net proceeds to repay existing indebtedness to stockholders
($22.5 million to Tremont and $20 million to IMI) and $82 million to repay bank
indebtedness.
Certain key executive officers of the Company received shares (the
"Management Shares") of the Company's common stock and cash payments with a
combined value of approximately $3 million in consideration for their services
in connection with the IMI Titanium Acquisition, which cost was expensed as
incurred. The Management Shares were converted into 93,000 shares of the
Company's common stock in connection with the Stock Offering.
~Preferred~stock.~~~~~The Company is authorized to issue 1 million shares
of preferred stock. The rights of preferred stock as to, among other things,
dividends, liquidation, redemption, conversions, and voting rights are
determined by the Board of Directors.
<PAGE>
~Common~stock~options.~The TIMET Incentive Plan provides for the
discretionary grant of restricted common stock, stock options, stock
appreciation rights and other incentive compensation to officers and other key
employees of the Company. Options vest over five years and expire ten years
from date of grant.
Additionally, a plan for TIMET's nonemployee directors provides for
eligible directors to annually be granted options to purchase 1,500 shares (625
shares prior to 1998) of the Company's common stock at a price equal to the
market price on the date of grant and to receive, as partial payment of director
fees, annual grants of 400 shares of common stock. Options granted to
nonemployee directors vest in one year and expire ten years from date of grant
(five year expiration for grants prior to 1998).
The weighted average remaining life of options outstanding at December 31,
1997 was 8.7 years. At December 31, 1997, options to purchase 2,500 shares were
exercisable at an average exercise price of $23 per share and approximately
190,000 options become exercisable in 1998.
At December 31, 1997, approximately 2.3 million shares and 56,350 shares
were available for future grant under the TIMET Incentive Plan and the
nonemployee director plan, respectively.
The following table summarizes information about the Company's stock
options.
<PAGE>
<TABLE>
<CAPTION>
<S> Amount
Payable Weighted
Exercise Upon Weighted Average fair
price per Exercise Average value at
Shares share (thousands) exercise Grant date
price
<C> <C> <C> <C> <C>
Outstanding at December 31, - $ - $ - $ -
1995
Granted:
At market 370,275 23.00-31.25 9,110 24.60 $ 12.46
Above market 167,000 26.00-29.00 4,592 27.50 10.22
Canceled (1,000) 23.00 (23) 23.00
Outstanding at December 31, 536,275 23.00-31.25 13,679 25.51
1996
Granted:
At market 230,075 25.94-29.50 6,414 27.88 $ 12.72
Above market 134,000 31.00-34.00 4,355 32.50 11.29
Exercised (1,250) 23.00-29.50 (33) 26.25
<PAGE>
Canceled (79,100) 23.00-34.00 (2,045) 25.86
Outstanding at December 31, 820,000 $23.00-34.00 $ 22,370 $ 27.28
1997
</TABLE>
<PAGE>
Weighted average fair values of options at grant date were estimated using
the Black-Scholes model and assumptions listed below.
Assumptions: 1996 1997
Expected life (years) 6 6
Risk-free interest rate 6.67% 6.00%
Volatility 40% 35%
Dividend yield 0% 0%
Had stock-based compensation cost been determined based on the estimated
fair values of options granted and recognized as compensation expense over the
vesting period of the grants in accordance with SFAS No. 123, the Company's
pretax income, net income and diluted earnings per share for 1997 would have
been reduced by $3.7 million, $2.4 million and $.06 per share, respectively, and
for 1996 would have been reduced by $1.1 million, $.7 million and $.02 per
share, respectively.
Note 11--Income taxes:
Summarized below are (i) the components of income (loss) before income
taxes and minority interest ("pretax income"), (ii) the difference between the
income tax expense attributable to pretax income and the amounts that would be
expected using the U.S. federal statutory income tax rate of 35%, and (iii) the
components of the income tax expense attributable to pretax income.
<PAGE>
<TABLE>
<CAPTION>
<S> 1995 1996 1997
(In thousands)
<C> <C> <C>
Expected income tax expense (benefit) $ (1,387) $ 18,161 $ 47,307
Non-U.S. tax rates 37 (464)
U.S. state income taxes, net - 848 126
Adjustment of deferred tax valuation allowance 1,502 (16,519) (5,785)
Other, net 140 (191) (180)
$ 255 $ 2,336 $ 41,004
Income tax expense:
Current income taxes:
U.S. $ $ 6,516 $ 17,146
-
Non-U.S. 255 6,236 17,280
255 12,752 34,426
Deferred income taxes (benefit):
U.S. - (10,809) 5,998
Non-U.S. - 393 580
- (10,416) 6,578
$ 255 $ 2,336 $ 41,004
<PAGE>
Pretax income (loss):
U.S. $ (4,589) $ 33,941 $ 81,766
Non-U.S. 627 17,950 53,397
$ (3,962) $ 51,891 $135,163
Comprehensive tax provision allocable to:
Pretax income $ 255 $ 2,336 $ 41,004
Minority interest - Convertible Preferred - (444) (4,760)
Securities
Stockholders' equity, principally deferred taxes
allocable to adjustment components - 2,500 (533)
$ 255 $ 4,392 $ 35,711
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
<S> December 31,
1996 1997
Assets Liabilitie Assets Liabilitie
s s
(In millions)
Temporary differences relating to net assets: <C> <C> <C> <C>
Inventories $ - $ (4.9) $ .1 $ (5.5)
Property and equipment - (16.0) .2 (17.8)
Accrued OPEB cost 11.4 - 11.7 -
Accrued liabilities and other deductible 10.9 - 8.7 -
differences
Other taxable differences - (5.5) - (7.7)
Tax loss and credit carryforwards 11.7 - 5.9 -
Valuation allowance (6.2) - (.4) -
Gross deferred tax assets (liabilities) 27.8 (26.4) 26.2 (31.0)
Netting (15.5) 15.5 (19.4) 19.4
Total deferred taxes 12.3 (10.9) 6.8 (11.6)
Less current deferred taxes .7 (.3) 6.2 -
Net noncurrent deferred taxes $ 11.6 $ (10.6) $ .6 $ (11.6)
</TABLE>
<PAGE>
The Company's valuation allowance (nominal at December 31, 1997) decreased
in the aggregate (including amounts allocated to items other than pretax income)
by $.9 million in 1995, $16.5 million in 1996 and $5.8 million in 1997. The
1996 reduction included $10 million due to a change in estimate of the future
tax benefits of certain tax net operating loss carryforwards ("NOLs") and
alternative minimum tax credit ("AMT") carryforwards that will more likely than
not be realized.
At December 31, 1997, the Company had, for U.S. federal income tax
purposes, NOLs of approximately $9.4 million expiring in 2008 and 2009. At
December 31, 1997, the Company had an AMT credit carryforward of approximately
$2 million, which can be utilized to offset regular income taxes payable in
future years. The AMT carryforward has an indefinite carryforward period. The
utilization of the Company's NOLs and AMT carryforwards is subject to an annual
limitation.
Note 12--Employee benefit plans:
~Variable~compensation~plans.~~~~~Approximately 85% of the Company's total
worldwide employees, including a significant portion of its domestic hourly
employees, participate in compensation programs which provide for variable
compensation based upon the financial performance of the Company and, in certain
circumstances, the individual performance of the employee. The cost of these
plans was $.3 million in 1995, $12 million in 1996 and $11 million in 1997.
~Defined~contribution~plans.~~All of the Company's domestic hourly and
salaried employees (70% of total worldwide employees at December 31, 1997) are
eligible to participate in contributory savings plans with partial matching
employer contributions. Company matching contributions are based on company
profitability for 60% of eligible employees. Approximately 40% of the Company's
total employees at December 31, 1997 also participate in a defined contribution
<PAGE>
pension plan with contributions based, beginning in 1996, upon a fixed
percentage of the employee's eligible earnings. The cost of these pension and
savings plans was insignificant in 1995, $3 million in 1996 and $3 million in
1997.
~Defined~benefit~pension~plans.~~~~~The Company maintains contributory and
noncontributory defined benefit pension plans covering substantially all
European employees and a minority of its domestic workforce. Defined pension
benefits are generally based on years of service and compensation, and the
related expense is based upon independent actuarial valuations. The Company's
funding policy for U.S. plans is to contribute annually amounts satisfying the
funding requirements of the Employee Retirement Income Security Act of 1974, as
amended. Non-U.S. defined benefit pension plans are funded in accordance with
applicable statutory requirements. The defined benefit pension plans were
closed to new participants prior to 1997 and, in some cases, benefit levels have
been frozen.
The funded status of the Company's defined benefit pension plans and the
components of net periodic defined benefit pension cost are set forth below.
The rates used in determining the actuarial present value of benefit obligations
at December 31, 1997 were: (i) discount rates -- 7% to 7.25% (1996 - 7% to
8.75%), and (ii) rates of increase in future compensation levels -- 3% to 5%
(1996 - 3% to 6.5%). The expected long-term rates of return on assets used was
7% to 9% (1996 - 7% to 9.75%). The benefit obligations are sensitive to changes
in these estimated rates and actual results may differ from the obligations
noted below. At December 31, 1997, the assets of the plans are primarily
comprised of government obligations, corporate stocks and bonds.
<PAGE>
<TABLE>
<CAPTION>
<S> Assets exceed Accumulated benefits
Accumulated benefits exceed assets
December 31, December 31,
1996 1997 1996 1997
(In thousands)
<C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligations $ 47,733 $ 69,033 $ 34,424 $ 28,820
Nonvested benefits 3,040 3,767 1,448 1,639
Accumulated benefit obligations 50,773 72,800 35,872 30,459
Effect of projected salary increases 27,766 32,905 114 203
Projected benefit obligations 78,539 105,705 35,986 30,662
Plan assets at fair value 82,118 108,199 31,624 28,628
Plan assets over (under) projected benefit
obligations 3,579 2,494 (4,362) (2,034)
Unrecognized net gain (loss) from
experience
different from actuarial assumptions (2,674) (778) 1,981 787
Unrecognized prior service cost 1,269 1,068 1,199 2,009
Unrecognized net assets being amortized
over 14 years (834) (556) (1,011) (673)
Adjustment to recognize minimum liability - - (2,057) (1,997)
Total prepaid (accrued) pension cost 1,340 2,228 (4,250) (1,908)
Current portion - - (1,507) (1,072)
<PAGE>
Noncurrent prepaid (accrued) pension $ 1,340 $ 2,228 $ (2,743) $ (836)
cost
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
<S> 1995 1996 1997
(In thousands)
<C> <C> <C>
Service cost benefits earned $ 630 $ 3,260 $ 3,906
Interest cost on projected benefit obligations 3,959 7,696 9,201
Actual return on plan assets (9,560) (7,256) (20,555)
Net amortization and deferrals 5,910 (1,951) 9,724
Net pension expense $ 939 $ 1,749 $ 2,276
</TABLE>
<PAGE>
~Postretirement~benefits~other~than~pensions.~~~~~The Company provides
certain postretirement health care and life insurance benefits to certain of its
domestic retired employees. The Company funds such benefits as they are
incurred, net of any contributions by the retirees. Under plans currently in
effect, a majority of TIMET's active domestic employees would become eligible
for these benefits if they reach normal retirement age while working for TIMET.
These plans have been revised to discontinue employer-paid health care coverage
for future retirees once they become Medicare-eligible.
The components of the periodic OPEB cost and accumulated OPEB obligations
are set forth below. The rates used in determining the actuarial present value
of the accumulated OPEB obligations at December 31, 1997 were: (i) discount
rate--7% (1996 - 7.75%), (ii) rate of increase in future compensation levels --
3% and (iii) rate of increase in future health care costs--10% in 1998,
gradually declining to 5.25% in 2016 and thereafter. If the health care cost
trend rate was increased by one percentage point for each year, OPEB expense
would have increased approximately $.2 million in 1997, and the actuarial
present value of accumulated OPEB obligations at December 31, 1997 would have
increased approximately $2.6 million. The accrued OPEB cost is sensitive to
changes in these estimated rates and actual results may differ from the
obligations noted below.
<PAGE>
<TABLE>
<CAPTION>
<S> December 31,
1996 1997
(In thousands)
<C> <C>
Actuarial present value of accumulated OPEB obligations:
Retiree benefits $ 16,266 $ 16,514
Other fully eligible active plan participants 1,236 1,420
Other active plan participants 3,750 4,363
21,252 22,297
Unrecognized net gain from experience different from
actuarial assumptions 4,536 2,673
Unrecognized prior service credits 3,748 3,324
Total accrued OPEB cost 29,536 28,294
Less current portion 2,024 2,102
Noncurrent accrued OPEB cost $ 27,512 $ 26,192
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
<S> 1995 1996 1997
(In thousands)
<C> <C> <C>
Service cost benefits earned $ 242 $ 407 $ 357
Interest cost on accumulated OPEB obligations 2,060 1,567 1,613
Net amortization and deferrals (475) (653) (635)
Net OPEB expense $ 1,827 $ 1,321 $ 1,335
</TABLE>
<PAGE>
Note 13--Related party transactions:
TIMET was a 75%-owned subsidiary of Tremont Corporation during 1995 with
the remaining 25% held by Union Titanium Sponge Corporation ("UTSC"), a
consortium of Japanese companies. In February 1996, TIMET acquired the titanium
businesses of IMI for stock and in June 1996 completed the Stock Offering which
together reduced Tremont's ownership in TIMET to 30% and UTSC's ownership to
10%. In 1997, UTSC reduced its ownership to less than 5%. In connection with
the IMI Titanium Acquisition, Tremont holds an option expiring in February 1999
to purchase up to 1.5 million shares of the Company's common stock from IMI for
$12 million ($7.95 per share) and UTSC holds a like option to purchase .5
million shares from IMI at the same price per share.
Contran Corporation and other entities related to Harold C. Simmons hold
an aggregate of approximately 49% of Tremont's outstanding common stock.
Mr. Simmons may be deemed to control each of Contran, Tremont and TIMET.
Corporations that may be deemed to be controlled by or affiliated with
Mr. Simmons sometimes engage in (i) intercorporate transactions with related
companies such as guarantees, management and expense sharing arrangements,
shared fee arrangements, joint ventures, partnerships, loans, options, advances
of funds on open account, and sales, leases and exchanges of assets, including
securities issued by both related and unrelated parties and (ii) common
investment and acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly-held minority equity interest in another related party. The
Company continuously considers, reviews and evaluates, and understands that
Contran, Tremont and related entities consider, review and evaluate such
transactions. Depending upon the business, tax and other objectives then
<PAGE>
relevant, it is possible that the Company might be a party to one or more such
transactions in the future.
It is the policy of the Company to engage in transactions with related
parties on terms which are, in the opinion of the Company, no less favorable to
the Company than could be obtained from unrelated parties.
TIMET supplies titanium strip product to ValTimet under a long-term
contract as the preferred supplier. Sales to ValTimet were $22 million in 1997
and receivables from related parties at December 31, 1997 relate principally to
sales to ValTimet.
In connection with the construction and financing of TIMET's vacuum
distillation process ("VDP") titanium sponge plant, UTSC licensed certain
technology to TIMET in exchange for the right to acquire up to 20% of TIMET's
annual production capacity of VDP sponge at agreed-upon prices through early
1997 and higher formula-determined prices based on cost thereafter through 2008.
A discount from market value represents TIMET's consideration to UTSC for the
licensed technology. Sales to UTSC approximated $9 million in 1995, $12 million
in 1996 and $17 million in 1997.
The Company has an intercorporate services agreement with Tremont whereby
the Company provides certain management, financial and other services to Tremont
for approximately $.4 million in each of 1996 and 1997, subject to renewal for
future years. Charges from Tremont approximated $.9 million in 1995 pursuant to
similar arrangements for compensation and intercorporate services.
TIMET's purchases from THT approximated $10 million in 1995 and $9 million
in 1996 prior to the AJM Acquisition.
Prior to October 1995, TIMET owned (i) a 32% equity interest in BII,
which, among other things, provides utility services in the industrial park
<PAGE>
where one of TIMET's plants is located, and (ii) a 12% interest in VVLC, which
is actively engaged in efforts to develop certain real estate. BII, through a
wholly-owned subsidiary, owned an additional 50% interest in VVLC. In October
1995, TIMET made a pro rata distribution to its shareholders consisting of its
interest in BII and VVLC, and certain real estate. The Company distributed the
assets at their net carrying amount, which approximated $5 million. The Company
purchases certain utility services from Basic Management, Inc. ("BMI"), a
subsidiary of BII. The amount paid to BMI approximated $1 million in each of
the past three years.
Interest expense on related party indebtedness approximated $2.1 million
in 1995, $2 million in 1996 and nil in 1997. The subordinated debt to both IMI
and Tremont accrued interest at 10.4% and was repaid in 1996 with proceeds from
the Stock Offering. During 1997, TIMET Savoie repaid amounts outstanding under
a revolving line of credit provided by CEZUS and terminated the facility.
CEZUS has the right to sell its interest in TIMET Savoie to the Company
for 30% of TIMET Savoie's registered capital and the Company has the right to
purchase CEZUS' 30% interest in TIMET Savoie for 30% of TIMET Savoie's equity
determined under French accounting principles.
TIMET completed a recapitalization in 1995 under which, among other
things, (i) Tremont made a $1 million cash capital contribution to TIMET and
exchanged $8 million of TIMET subordinated debt into TIMET common equity,
(ii) TIMET made a $1 million cash prepayment of accrued interest to UTSC, and
(iii) UTSC exchanged $3 million of interest owed by TIMET to UTSC into TIMET
common equity. In connection with the recapitalization, TIMET issued .5 million
shares of common stock pro rata to its then-existing shareholders.
In connection with amendments of a TIMET credit facility during 1995,
Tremont advanced the Company $8 million as additional subordinated TIMET debt
($5.5 million advanced in 1995), guaranteed $5 million of the term loans,
<PAGE>
collateralized such guarantee with approximately 600,000 shares of NL
Industries, Inc. common stock held by Tremont, and agreed to pledge additional
NL shares as necessary to meet certain market value thresholds. NL is an
indirect subsidiary of Contran. Contran entered into an agreement with TIMET's
lenders whereby Contran was obligated to purchase the pledged shares from
TIMET's lenders under certain conditions. In connection with the Stock
Offering, the security arrangements between the Company's lenders and Tremont
and Contran were terminated.
<PAGE>
Note 14--Commitments and contingencies:
~Long-term~agreements.~TIMET has a long-term supply agreement with The
Boeing Company under which TIMET will be the principal supplier of titanium
products to Boeing Commercial Airplane Group ("Boeing") and its family of
suppliers for the next ten years.
Under the terms of the agreement, TIMET will supply a minimum of 70% of
Boeing's annual needs for titanium, depending upon Boeing's requirements each
year. TIMET's share of Boeing's total titanium requirements will increase as
Boeing's volume requirements decrease, down to a minimum mutual commitment of
6.5 million pounds (3,000 metric tons) per year. The agreement is effective for
shipments beginning in 1998, but it is not anticipated to reach expected volume
levels until 1999.
Pricing under the Boeing agreement is firm for the first five years and
will be reviewed annually for inflationary conditions for the next five years
based upon an aerospace-related index. The companies have also agreed to
utilize Boeing's Lean Manufacturing program to develop cost savings that will be
shared by both companies.
TIMET has a long-term agreement for the purchase of titanium sponge
produced in Kazakhstan. The sponge purchase agreement is for ten years
beginning in 1998, with firm pricing for the first five years (subject to
certain adjustments). Volumes purchased under the contract will be up to 10,000
metric tons annually.
The Company may enter into long-term agreements with other customers and
suppliers.
<PAGE>
~Operating~leases.~~~~~The Company leases certain manufacturing and office
facilities and various equipment. Most of the leases contain purchase and/or
various term renewal options at fair market and fair rental values,
respectively. In most cases management expects that, in the normal course of
business, leases will be renewed or replaced by other leases. Net rent expense
was approximately $1.4 million in 1995, $2.7 million in 1996 and $3.6 million in
1997.
At December 31, 1997, future minimum payments under noncancellable
operating leases having an initial or remaining term in excess of one year were
as follows:
<PAGE>
<TABLE>
<CAPTION>
<S> Amount
(In thousands)
Years ending December 31, <C>
1998 $ 4,871
1999 3,192
2000 1,970
2001 1,333
2002 1,139
2003 and thereafter 884
13,389
Less sublease income 90
$ 13,299
</TABLE>
<PAGE>
~Environmental~matters.~
~ BMI~Companies.~TIMET and certain other companies, including Kerr-McGee
Chemical Corporation, Chemstar Lime Company and Pioneer Chlor Alkali, Inc.
(successor to Stauffer Chemical Company) operate facilities in a complex (the
"BMI Complex") owned by BMI, adjacent to TIMET's Henderson, Nevada plant. In
1993, TIMET and each of such companies, along with certain other companies who
previously operated facilities in the common areas of the BMI Complex
(collectively the "BMI Companies") completed a Phase I environmental assessment
of the common areas of the BMI Complex and each of the individual company sites
pursuant to consent agreements with the Nevada Division of Environmental
Protection ("NDEP"). In July 1996, the Company signed a consent agreement with
NDEP regarding implementation of the Phase II assessment of the Company property
within the BMI Complex. A report regarding the Phase II assessment of the
common areas of the BMI Complex was submitted to NDEP in August 1996. Until
completion of the sampling and analysis involved in the Phase II assessment of
the Company property and any further Phase II testing that NDEP may require for
the BMI Complex common areas, it is not possible to provide a reasonable
estimate of the additional remediation costs, if any, or the Company's likely
share of any such costs.
~ Pomona~facility.~The Company has conducted an additional study and
assessment work as required by the California Regional Water Quality Control
Board--Los Angeles Region (the "Water Quality Board") related to soil and
possible groundwater contamination at TIMET Castings' Pomona, California
facility. The site is near an area that has been designated as a
U.S. Environmental Protection Agency "Superfund" site. Although the Company
does not believe it will incur a material liability with respect to the Pomona
facility, the Water Quality Board has not completed its review.
<PAGE>
~Henderson~facility.~During 1997, TIMET was issued a Notice of Violation
by the U.S. Environmental Protection Agency ("EPA") in connection with the
permitting for, and operation of, a carbon monoxide burner at the Henderson,
Nevada facility. In December 1997, the EPA indicated that it was seeking
approximately $.9 million in penalties. TIMET believes it substantially
complied with applicable regulations and intends to vigorously defend this
matter, which is still in discussion with the EPA.
The Company adopted the requirements of AICPA Statement of Position No.
96-1, "Environmental Remediation Liabilities" in 1997, the effect of which was
not material. At December 31, 1997, the Company had accrued an aggregate of
approximately $1.3 million for the environmental matters discussed above under
~BMI~Companies,~Pomona~facility~and~Henderson~facility~. The Company records
liabilities related to environmental remediation obligations when estimated
future expenditures are probable and reasonably estimable. Such accruals are
adjusted as further information becomes available or circumstances change.
Estimated future expenditures are not discounted to their present value. It is
not possible to estimate the range of costs for certain sites. The imposition
of more stringent standards or requirements under environmental laws or
regulations, the results of future testing and analysis undertaken by the
Company at its operating facilities, or a determination that the Company is
potentially responsible for the release of hazardous substances at other sites,
could result in expenditures 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.
<PAGE>
~Other.~~~~~The Company is involved in various other environmental,
contractual, product liability and other claims and disputes incidental to its
business.
The Company currently believes the disposition of all claims and disputes,
individually or in the aggregate, should not have a material adverse effect on
the Company's financial condition, results of operations or liquidity.
~Concentration~of~credit~and~other~risks.~~~~~Substantially all of the
Company's sales and operating income are derived from operations based in the
U.S., the U.K. and France. The majority of the Company's sales are to customers
in the aerospace industry (including airframe and engine construction). Such
concentration of customers may impact the Company's overall exposure to credit
and other risks, either positively or negatively, in that such customers may be
similarly affected by economic or other conditions. The Company's ten largest
customers accounted for about one-third of net sales in each of the past three
years.
Note 15 - New accounting principles not yet adopted:
The Company is required to adopt SFAS No. 130, "Reporting Comprehensive
Income," ~~~ in the first quarter of 1998. Upon adoption of SFAS No. 130, the
Company will present a new Consolidated Statement of Comprehensive Income which
will report all changes in the Company's stockholders' equity other than
transactions with stockholders. Comprehensive income pursuant to SFAS No. 130
would include net income, as reported in the Consolidated Statement of
Operations, plus the net changes in the foreign currency translation and pension
liabilities components of stockholders' equity.
The Company is required to adopt SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," ~~~ in the fourth quarter of 1998.
SFAS No. 131 will supersede the business segment disclosure requirements
<PAGE>
currently in effect under SFAS No. 14. SFAS No. 131, among other things,
establishes standards regarding the information a company is required to
disclose about its operating segments and provides guidance regarding what
constitutes a reportable operating segment. The Company currently believes
segment disclosures pursuant to SFAS No. 131 will not be materially different
from the current disclosures pursuant to SFAS No. 14.
The Company is required to adopt the disclosure requirements of SFAS No.
132, "Employer's Disclosures about Pensions and Other Postretirement Benefits,"
~~~ in the fourth quarter of 1998. SFAS No. 132 revises disclosure requirements
for such pension and postretirement benefit plans to, among other things,
standardize certain disclosures and eliminate certain other disclosures no
longer deemed useful. SFAS No. 132 does not change the measurement or
recognition criteria for such plans.
Note 16--Quarterly results of operations (unaudited):
<PAGE>
<TABLE>
<CAPTION>
<S> Quarters ended
March 31 June 30 Sept. 30 Dec. 31
(In millions, except per share data)
<C> <C> <C> <C>
~Year~ended~December~31,~1997:~
Net sales $ 167.1 $ 181.4 $ 177.2 $ 207.9
Operating income 26.5 32.8 33.3 40.4
Net income 15.8 20.3 21.3 25.6
Net income per share:
Basic $ .50 $ .65 $ .68 $ .81
Diluted .49 .61 .64 .75
Market price:
High 33.625 32.750 37.375 38.000
Low 25.000 25.250 29.375 27.625
~Year~ended~December~31,~1996:~
Net sales $ 107.6 $ 118.8 $ 123.4 $ 157.3
Operating income 6.8 13.8 17.8 21.4
Net income 2.1 8.1 13.3 24.1
Net income per share:
Basic $ .10 $ .30 $ .42 $ .77
Diluted .10 .30 .42 .75
Market price (a):
High - 25.875 30.500 35.875
Low - 24.375 22.500 28.250
</TABLE>
<PAGE>
Due to the timing of the issuance of common stock, such as the Stock
Offering, and rounding in calculations the sum of quarterly earnings per share
is different than earnings per share for the full year.
(a) Stock began trading June 4, 1996.
Note 17 - Earnings per share:
A reconciliation of the numerator and denominator used in the calculation
of basic and diluted earnings per share is presented below. The Convertible
Preferred Securities were issued in November 1996. Stock options omitted from
the denominator because they were antidilutive were not material.
<PAGE>
<TABLE>
<CAPTION>
<S> 1995 1996 1997
(in thousands)
<C> <C> <C>
Numerator:
Net income (loss) $ (4,217) $ 47,644 $ 83,010
Minority interest - Convertible
Preferred Securities - 826 8,840
Diluted net income $ (4,217) $ 48,470 $ 91,850
Denominator:
Average common shares outstanding 15,383 27,623 31,457
Convertible Preferred Securities - 491 5,389
Average dilutive stock options - 28 109
Diluted shares 15,383 28,142 36,955
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of Titanium Metals Corporation:
Our report on the consolidated financial statements of Titanium Metals
Corporation as of December 31, 1996 and 1997 and for each of the three years in
the period ended December 31, 1997 is included on page F-2 of this Form 10-K.
In connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page F-1 of this
Annual Report on Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
January 22, 1998
<PAGE>
TITANIUM METALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<PAGE>
<TABLE>
<CAPTION>
<S> Additions
charged
Balance at (credited) to
Description Beginning costs and
of year expenses
Year ended December 31, 1997: <C> <C>
Allowance for doubtful accounts $ 4,788 $ 2
Valuation allowance for deferred
Income taxes $ 6,158 $ (5,785)
Reserve for excess and slow
Moving inventories $ 7,719 $ (1,427)
Year ended December 31, 1996:
Allowance for doubtful accounts $ 3,620 $ 4,695
Valuation allowance for deferred
Income taxes $ 22,677 $ (16,519)
Reserve for excess and slow
Moving inventories $ 6,000 $ (2,500)
<PAGE>
Year ended December 31, 1995:
Allowance for doubtful accounts $ 3,143 $ 2,453
Valuation allowance for deferred
Income taxes $ 23,599 $ (922)
Reserve for excess and slow
Moving inventories $ 5,000 $ 1,000
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
<S>
Balance
at end
Deductions Other of year
<C> <C> <C>
$ (2,572) (a) $ $ 2,218
$ - $ $ 373
$ - $ $ 6,292
$ (4,598) (a) $ 1,071 (b) $ 4,788
$ - $ $ 6,158
$ - $ 4,219 (b) $ 7,719
<PAGE>
$ (1,976) (a) $ $ 3,620
$ - $ $ 22,677
$ - $ $ 6,000
</TABLE>
<PAGE>
(a) Amounts written off, less recoveries.
(b) Represents the effect of the IMI Titanium Acquisition and the AJM
Acquisition.
<PAGE>
TITANIUM METALS CORPORATION
AMENDED AND RESTATED
1996 NON-EMPLOYEE DIRECTOR COMPENSATION PLAN
EFFECTIVE FEBRUARY 19, 1998
1. Purpose. The purpose of the Amended and Restated 1996 Non-Employee
Director Compensation Plan is to promote the interests of the Company by
providing an inducement to obtain and retain the services of qualified persons
who are neither employees nor officers of the Company to serve as members of the
Company's Board of Directors.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Cause" shall mean any misappropriation of the assets of the
Company or any of its Subsidiaries resulting in material loss to
such entity.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(d) Company" shall mean Titanium Metals Corporation, a Delaware
corporation.
(e) "Director" shall mean any person serving as a member of the
Board.
(f) "Disability" shall mean the condition of a Grantee who is unable
to engage in any substantial gainful activities by reason of any
medically determinable physical or mental impairment which can be
expected to result in death or which has lasted or can be
<PAGE>
expected to last for a continuous period of not less than twelve
(12) months.
(g) "Eligible Directors" shall mean those Directors eligible to
participate in the Plan pursuant to Section 4.
(h) "Fair Market Value" shall mean the last reported sale price of
Stock on the NASDAQ National Market (or other exchange upon which
the Stock is traded as of the date of determination).
(i) "Grantee" shall mean an Eligible Director who has been granted an
Option.
(j) "Ineligible Directors" shall mean those Directors who are not
Eligible Directors.
(k) "Meeting Fees" shall mean all fees paid for attendance at each
regular or special meeting of the Board or Board committee
attended by an Eligible Director. Such fees initially shall be
$1000 per day for one or more meetings of the Board and/or
committees of the board attended in person, and $350 per day for
one or more telephonic meetings of the Board and/or committees of
the Board. Such initial fees shall each be subject to change by
the Ineligible Directors.
(l) "Option" shall mean an option to purchase shares of Stock,
granted pursuant to the Plan and subject to the terms and
conditions described in the Plan. Options shall not be incentive
stock options within the meaning of Code Section 422A.
(m) "Optionee" shall mean a person who holds an Option.
<PAGE>
(n) "Parent" shall mean a corporation defined in Code Section 424(e).
(o) "Plan" shall mean this Amended and Restated 1996 Non-Employee
Director Compensation Plan, as it may be amended from time to
time pursuant to Section 9.
(p) "Retainer" shall mean a retainer paid annually to Eligible
Directors which shall initially equal $8000 in cash plus 400
shares of Stock. The cash and Stock comprising such initial
retainer shall be subject in each case to change by the
Ineligible Directors.
(q) "Stock" shall mean the Company's $.01 par value common stock.
(r) "Subsidiary" shall mean a corporation of the type defined in Code
Section 425(f).
3. Administration. The Plan shall be administered by the Ineligible
Directors. The amount and nature of the awards to be granted under the Plan,
including grants of Options, shall be automatic as described in Section 7. The
Ineligible Directors, subject to the provisions of the Plan, have the power to
construe the Plan, to determine all questions thereunder and to adopt and amend
such rules and regulations for the administration of the Plan as they may deem
desirable. Any interpretation, determination, or other action made or taken by
the Ineligible Directors shall be final, binding, and conclusive. A majority of
the total number of Ineligible Directors shall constitute a quorum for purposes
of any action by the Ineligible Directors, and the vote of a majority of the
Ineligible Directors present at a meeting of the Ineligible Directors at which a
quorum is present shall be the act of the Ineligible Directors. Any action
reduced to writing and signed by all of the Ineligible Directors shall be as
fully effective as if it had been taken by a vote at a meeting of the Ineligible
Directors duly called and held. None of the Ineligible Directors shall be
<PAGE>
personally liable for any action, determination or interpretation made in good
faith with respect to the Plan or the Options.
4. Eligibility. All Directors of the Company shall be eligible to
participate in the Plan unless they are employees of the Company or any
Subsidiary or Parent of the Company.
5. Shares Subject to the Plan
(a) Class. The shares which are to be made the subject of awards
granted under the Plan shall be the Company's authorized but
unissued Stock. In connection with the issuance of Stock under
the Plan, the Company may repurchase Stock in the open market or
otherwise.
(b) Aggregate Amount. The total number of shares of Stock
authorized under the Plan shall not exceed 62,500 (subject to
adjustment under Section 10(c)). If any outstanding Option under
the Plan expires or is terminated for any reason, then the Stock
allocable to the unexercised portion of such Option shall not be
charged against the limitation of this Section 5(b) and may again
become the subject of an Option granted under the Plan.
6. Retainer\Meeting Compensation.
(a) Retainer. Commencing in 1999, the cash amount of the
Retainer shall be paid, and certificates for the Stock portion of
the Retainer shall be delivered, to Eligible Directors on or as
soon as practicable following the annual meeting of the
stockholders of the Company, in each such case to the Eligible
directors elected at such meeting. Such certificates shall be
registered in the name of the Eligible Director, and all Stock so
<PAGE>
issued shall be fully paid and nonassessable. The Company shall
pay any issuance or transfer taxes with respect to the issuance
of Stock.
(b) Meeting Fees. Meeting Fees shall be paid in cash on or as
soon as practicable after any regular or special meeting attended
by an Eligible Director.
7. Terms, Conditions and Form of Options. Each Option granted under the
Plan shall be evidenced by a written agreement substantially in the form
attached hereto or in such other form as the Ineligible Directors shall from
time to time approve, which agreements shall be executed by a duly authorized
officer of the Company and shall comply with and be subject to the following
terms and conditions:
(a) Option Grant Dates. Commencing in 1999, Options shall be
granted automatically to each Eligible Director elected at the
annual meeting of stockholders of the Company as of the date of
such meeting.
(b) Option Formula. Each Eligible Director shall receive an
Option to purchase 1,500 shares of Stock on the grant date of the
Option without further action by the Board or the Ineligible
Directors.
(c) Period of Options. Options shall vest and become exercisable
on the first anniversary of grant date of the Option; and Options
shall terminate and cease to be exercisable on the tenth
anniversary of the grant date of the Option (subject to prior
termination as provided in Sections 7(g) and (h) below).
<PAGE>
(d) Option Price. The exercise price of each Option shall be the
Fair Market Value of a share of Stock on the date the Option is
granted.
(e) Exercise of Options. Vested and exercisable Options may be
exercised (in full or in part) only by written notice of exercise
delivered to the Company at its principal executive office
accompanied either (i) by cash payment of the aggregate exercise
price for all shares of Stock being acquired upon exercise of
the Option, or (ii) written direction to deliver the shares of
Stock being acquired upon exercise of the Option to a registered
broker dealer with instruction to sell such shares for the
account of Optionee, and to remit to the Company out of such sale
proceeds a cash payment equal to the aggregate exercise price for
all shares of Stock being acquired upon exercise of the Option.
Such Option shall be deemed to have been exercised on the date
both such required items have been received by the Company.
(f) Transferability. No Option granted under the Plan shall be
transferable other than by will or by the laws of descent and
distribution; provided, however, that the Ineligible Directors
may determine to grant Options that are transferable, without
payment of consideration, to immediate family members of the
Grantee or to trusts or partnerships for such family members, and
may amend outstanding Options to provide for such
transferability. No interest of any Optionee in any Option shall
be subject to attachment, execution, garnishment, sequestration,
the laws of bankruptcy or any other legal or equitable process.
Except as otherwise determined by the Ineligible Directors,
during the lifetime of the Grantee, Options shall be exercisable
only by the Grantee or the Grantee's guardian or legal
representative.
<PAGE>
(g) Death or Disability of Grantee. If a Grantee dies or
terminates performance of services as a Director because of
Disability, any unvested and unexercisable Option granted to such
Grantee shall immediately and fully vest. Such Option, together
with any other vested and unexercisable Options granted to such
Grantee, may be exercised, at any time, or from time to time,
prior to the earlier of (i) the termination of such Option in
accordance with Section 7(c), or (ii) one year after the date of
Grantee's death or termination of services as a Director, at
which date all then-outstanding and unexercised Options granted
to such Grantee shall terminate. In the case of death, an Option
may be exercised by the person or persons to whom the Optionee's
rights under the Option pass by will or applicable law, or if no
such person has such rights, by the Optionee's executors or
administrators; provided that such person(s) consent in writing
to abide by and be subject to the terms of the Plan and the
Option and such writing is delivered to the Company.
(h) Termination of Services as Director.
(i) If a Grantee's performance of services for the Company and its
Subsidiaries shall terminate for any reason other than death or
Disability or termination of services as a Director for Cause,
any unvested and unexercisable Option granted to such Grantee
shall immediately and fully vest. Such Option, together with any
other vested and exercisable Options granted to such Grantee, may
be exercised, at any time, or from time to time, prior to the
earlier of (i) the termination of such Option in accordance with
Section 7(c) or (ii) three months after the date of such
Grantee's termination of services as a Director, at which date
<PAGE>
all then-outstanding and unexercised Options granted to such
Grantee shall terminate.
(ii) If a Grantee's performance of services as a Director is
terminated for Cause, any unvested and unexercisable Option granted to
such Grantee shall terminate as of the date of such termination of
services. All Option s previously granted to such Grantee which are,
as of the date of such termination of services, vested and
exercisable, may be exercised at any time, or from time to time, prior
to the earlier of (i) the termination of such Option in accordance
with Section 7(c) or (ii) one month after the date of such Grantee's
termination of services as a Director, at which date all then-
outstanding and unexercised Options granted to such Grantee shall
terminate. For this purpose of the Plan and any Option agreement,
such Grantee's service shall be deemed to have terminated on the
earlier of (A) the date when the Grantee's service in fact terminated
or (B) the date when such Grantee received written notice that his
service is to terminate for Cause.
(i) No Rights as Shareholder. No Optionee shall have any rights as a
shareholder with respect to any Stock subject to an Option prior to the
date of issuance to such Optionee of a certificate or certificates for such
shares.
8. Compliance With Other Laws and Regulations. The Plan, the grant and
exercise of Options under the Plan, and the obligation of the Company to
transfer shares under such Options shall be subject to all applicable federal
and state laws, rules and regulations, including those related to disclosure of
financial and other information to Optionees, and to any approvals by any
government or regulatory agency as may be required. The Company shall not be
required to issue or deliver any certificates for shares of Stock prior to (a)
the listing of such shares on any stock exchange on which the Stock may then be
<PAGE>
listed, where such listing is required under the rules or regulations of such
exchange, and (b) the compliance with applicable federal and state securities
laws and regulations relating to the issuance and delivery of such certificates;
provided, however, that the Company shall make all reasonable efforts to so list
such shares and to comply with such laws and regulations.
9. Amendment and Discontinuance. The Board may from time to time amend,
suspend or discontinue the Plan; provided, however, that, the Plan shall not be
amended without the consent of the shareholders of the Company to the extent
such consent is required under Rule 16b-3, Section 162(m) of the Code or any
stock exchange or market quotation system on which the Stock is then listed or
quoted. Except where approval of the Board is required by applicable law, the
power of the Board to amend, suspend or discontinue the Plan shall be exercised
by the Ineligible Directors.
10. General Provisions.
(a) Assignability. The rights and benefits under the Plan shall
not be assignable or transferable by an Eligible Director other
than by will or by the laws of descent and distribution, and,
except as otherwise determined by the Ineligible Directors, during
the lifetime of the Grantee, Options granted under the Plan shall
be exercisable only by the Grantee.
(b) Termination of Plan. No Options may be granted under the Plan
after May 18, 2006 (or if such date is not a business day, on the
next succeeding business day). The Plan shall automatically
terminate on the date all Options granted under the Plan have been
exercised or have terminated or expired.
(c) Adjustments in Event of Change in Stock. In the event of any
change in the Stock by reason of any stock dividend,
<PAGE>
recapitalization, reorganization, merger, consolidation, split-up,
combination, or exchange of shares, or of any similar change
affecting the Stock, the number and class of shares subject to
outstanding Options, the exercise price per share, and any other
terms of the Plan or the Options which in the Ineligible
Directors' sole discretion require adjustment shall be
appropriately adjusted consistent with such change in such manner
as the Ineligible Directors may deem appropriate.
(d) No Right to Continue as a Director. Neither the Plan, nor the
granting of an Option nor any other action taken pursuant to the
Plan, shall constitute or be evidence of any agreement or
understanding, express or implied, that the Company will retain a
Director for any period of time, or at any particular rate of
compensation.
(e) ERISA. The Plan is not an employee benefit plan which is
subject to the provisions of the Employee Retirement Income
Security Act of 1974, and the provisions of Section 401(a) of the
Code are not applicable to the Plan.
(f) Non-Statutory Options. All Options granted under the Plan
shall be non-statutory options not entitled to special tax
treatment under Section 422A of the Code.
(g) Effective Date of the Plan. The Plan originally took effect on
May 8, 1996 (ten days following last adoption by the stockholders
of the Company on May 8, 1996). The Plan was originally adopted
by the Board on March 29, 1996, was subsequently amended by the
Board on April 15, 1996, and was amended and restated by the Board
on February 14, 1997 and February 19, 1998. The Plan was
originally adopted by the stockholders of the Company on March 29,
<PAGE>
1996, and again on May 8, 1996 following the amendment of the Plan
by the Board.
(h) Effect of Amendment and Restatement of the Plan. This amended
and restated version of the Plan shall amend and supersede in its
entirety previous versions of the Plan, provided, however, that
such amendment and restatement is not intended to affect the
validity of any of the following actions taken pursuant to
previous versions of the Plan: (i) Retainers for 1996 were paid on
June 10, 1996, the closing of the Company's initial public
offering of Stock registered on Form S-1 under the federal
securities laws, and Retainers for 1997 were paid on January 2,
1997, the first business day of the Company's fiscal year, (ii)
Options for 1996 were granted on June 4, 1996, the date of the
pricing of the Company's initial public offering, subject to the
closing of such offering, and Options for 1997 and 1998 were
granted on January 24, 1997 and January 27, 1998, respectively,
which was three business days after the issuance by the Company of
the press release that summarized the Company's financial
performance for 1996 and 1997, respectively, (iii) each Option
granted in 1996 and 1997 was for 625 shares of Stock, (iv) each
Option granted in 1996 and 1997 will terminate on the fifth
anniversary of the grant date of the Option (subject to prior
termination as provided in Section 7(g) and 7(h)), and (v) each
Option granted in 1996 is exercisable at $23 per share of Stock,
which was the offering price in the Company's initial public
offering.
(i) Governing Law. The Plan and all determinations made and
actions taken pursuant hereto shall be governed by the laws of the
State of Colorado and construed accordingly.
<PAGE>
(j) Variation of Pronouns. All pronouns and any variations thereof
contained herein shall be deemed to refer to masculine, feminine,
neuter, singular or plural, as the identity of the person or
persons may require.
<PAGE>
EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT
Jurisdiction of % of Voting
Incorporation or Securities Held at
Name of Corporation Organization December 31, 1997
~Consolidated~Subsidiaries
~TioPro LLC Nevada 80%
TIMET Capital Trust I Delaware 100%
TIMET Castings Corporation Oregon 100%
TIMET Finance Management Company Delaware 100%
TIMET FSC, Ltd. Barbados 100%
TIMET UK Ltd. United Kingdom 100%
TIMET UK (Export) Ltd. United Kingdom 100%
TIMET Savoie, SA France 70%
TIMET Germany Holding GmbH Germany 100%
TIMET Germany GmbH Germany 100%
LASAB Laser Applikations-Und
Bearbitungs, GmbH Germany 100%
Titanium Hearth Technologies, Inc. Delaware 100%
TMCA International Inc. Delaware 100%
~Unconsolidated~affiliates~
MZI, LLC Oregon 33%
TICOMP, Inc. Delaware 20%
Titanium Memory Systems, Inc. California 24%
ValTimet SAS France 46%
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Titanium Metals Corporation on Form S-3 (File no. 333-18829) of our reports
dated January 22, 1998, on our audits of the consolidated financial statements
and the financial statement schedule of Titanium Metals Corporation as of
December 31, 1997 and 1996, and for the years ended December 31, 1997, 1996,
and 1995, which reports are included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P
Denver, Colorado
March 27, 1998
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Titanium
Metals Corporation's Consolidated Financial Statements for the twelve months
ended December 31, 1997 and is qualified in its entirety by reference to such
Consolidated Financial Statements.
</LEGEND>
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<NAME> TITANIUM METALS CORPORATION
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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<CASH> 68,957
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<RECEIVABLES> 155,678
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201,250
0
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