SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 - FOR THE QUARTER ENDED SEPTEMBER 30, 1999
------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
COMMISSION FILE NUMBER 0-28538
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Titanium Metals Corporation
- ------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-5630895
- ------------------------------------------------- ---------------------
(State or other jurisdiction of incorporation or (IRS Employer
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
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
-------- ---------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON OCTOBER 31, 1999: 31,370,905
----------
<PAGE>
FORWARD - LOOKING INFORMATION
The statements contained in this Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in the Notes to Consolidated Financial Statements and under the
captions "Results of Operations" and "Liquidity and Capital Resources" (both
contained in Management's Discussion and Analysis of Financial Condition and
Results of Operations), are forward-looking statements that represent
management's beliefs and assumptions based on currently available information.
Forward-looking statements can be identified by the use of words such as
"believes," "intends," "may," "should," "anticipates," "expected" or comparable
terminology or by discussions of strategies or trends. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it cannot give any assurances that these expectations will prove to
be correct. Such statements by their nature involve substantial risks and
uncertainties that could significantly impact expected results. Actual future
results could differ materially from those described in such forward-looking
statements, and the Company disclaims any intention or obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Among the factors that could cause actual results to
differ materially are the risks and uncertainties discussed in this Quarterly
Report, including in those portions referenced above and those described from
time to time in the Company's other filings with the Securities and Exchange
Commission, such as the cyclicality of the Company's business and its dependence
on the aerospace industry, the sensitivity of the Company's business to global
industry capacity, global economic conditions, changes in product pricing, the
impact of long term contracts with customers on volumes and the ability to raise
prices, the impact of long term contracts with vendors on the ability of the
Company to reduce or increase supply or achieve lower costs, the possibility of
labor disruptions, control by certain stockholders and possible conflicts of
interest, potential difficulties in integrating acquisitions, uncertainties
associated with new product development and the supply of raw materials and
services and the possibility of disruptions of normal business activities from
"Year 2000" ("Y2K") issues. Should one or more of these risks materialize (or
the consequences of such a development worsen), or should one or more of the
underlying assumptions prove incorrect, actual results could differ materially
from those forecasted or expected.
<PAGE>
TITANIUM METALS CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
NUMBER
<S> <C> <C> <C> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1998 and
September 30, 1999 2-3
Consolidated Statements of Operations - Three months
and nine months ended September 30, 1998 and 1999 4
Consolidated Statements of Comprehensive Income - Three
months and nine months ended September 30, 1998 and 1999 5
Consolidated Statements of Cash Flows - Nine months
ended September 30, 1998 and 1999 6-7
Consolidated Statement of Stockholders' Equity - Nine
months ended September 30, 1999 8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 18
Item 6. Exhibits and Reports on Form 8-K. 18
</TABLE>
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1998 1999
-------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
CASH AND CASH EQUIVALENTS $ 15,464 $ 6,792
Accounts and other receivables, less
ALLOWANCE OF $1,932 AND $2,230 126,988 98,256
RECEIVABLE FROM RELATED PARTIES 8,119 6,437
REFUNDABLE INCOME TAXES 6,819 7,513
INVENTORIES 225,880 203,669
PREPAID EXPENSES AND OTHER 10,650 9,301
DEFERRED INCOME TAXES 1,900 2,293
-------------------- --------------------
TOTAL CURRENT ASSETS 395,820 334,261
-------------------- --------------------
Other assets:
INVESTMENTS IN JOINT VENTURES 32,633 30,329
PREFERRED SECURITIES 80,000 80,000
ACCRUED DIVIDENDS - PREFERRED SECURITIES - 5,123
GOODWILL 59,547 56,311
OTHER INTANGIBLE ASSETS 19,894 17,030
OTHER 14,129 18,791
-------------------- --------------------
TOTAL OTHER ASSETS 206,203 207,584
-------------------- --------------------
Property and equipment:
LAND 5,974 6,217
BUILDINGS 26,128 24,689
INFORMATION TECHNOLOGY SYSTEMS AND EQUIPMENT 53,168 55,574
MANUFACTURING AND OTHER EQUIPMENT 281,072 329,936
CONSTRUCTION IN PROGRESS 52,651 11,430
-------------------- --------------------
418,993 427,846
LESS ACCUMULATED DEPRECIATION 67,770 88,137
-------------------- --------------------
NET PROPERTY AND EQUIPMENT 351,223 339,709
-------------------- --------------------
$ 953,246 $ 881,554
==================== ====================
<PAGE>
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY DECEMBER 31, SEPTEMBER 30,
1998 1999
-------------------- -- --------------------
<S> <C> <C> <C> <C> <C> <C>
Current liabilities:
NOTES PAYABLE $ 5,134 10,434
Current maturities of long-term debt and
CAPITAL LEASE OBLIGATIONS 771 670
ACCOUNTS PAYABLE 69,302 50,477
ACCRUED LIABILITIES 50,628 33,203
PAYABLE TO RELATED PARTIES 3,223 2,509
INCOME TAXES 5,391 6,781
DEFERRED INCOME TAXES 2,500 -
-------------------- --------------------
TOTAL CURRENT LIABILITIES 136,949 104,074
-------------------- --------------------
Noncurrent liabilities:
LONG-TERM DEBT 99,950 84,454
CAPITAL LEASE OBLIGATIONS 10,069 9,798
PAYABLE TO RELATED PARTIES 1,395 1,340
ACCRUED OPEB COST 24,065 22,619
ACCRUED PENSION COST AND OTHER 8,754 7,205
DEFERRED INCOME TAXES 14,200 15,089
-------------------- --------------------
TOTAL NONCURRENT LIABILITIES 158,433 140,505
-------------------- --------------------
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 8,237 7,464
Stockholders' equity:
PREFERRED STOCK - -
COMMON STOCK 315 315
ADDITIONAL PAID-IN CAPITAL 347,972 347,984
RETAINED EARNINGS 99,981 82,359
ACCUMULATED OTHER COMPREHENSIVE INCOME 1,317 (1,189)
TREASURY STOCK (1,208) (1,208)
-------------------- --------------------
TOTAL STOCKHOLDERS' EQUITY 448,377 428,261
-------------------- --------------------
$ 953,246 $ 881,554
==================== ====================
<FN>
Commitments and contingencies (Note 1)
</FN>
</TABLE>
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ --------------------------------
1998 1999 1998 1999
------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenues and other income:
NET SALES $173,512 $112,706 $551,390 $374,451
Equity in earnings (losses) of joint
VENTURES 782 (409) 964 (1,489)
OTHER, NET 2,082 1,768 4,832 3,547
-------------
------------- -------------- ---------------
176,376 114,065 557,186 376,509
------------- ------------- -------------- ---------------
Costs and expenses:
COST OF SALES 130,494 108,722 418,437 344,495
Selling, general, administrative and
DEVELOPMENT 16,414 11,286 44,832 36,653
RESTRUCTURING CHARGE - - 6,000 -
INTEREST 1,376 2,049 2,325 5,035
-------------
------------- -------------- ---------------
148,284 122,057 471,594 386,183
------------- ------------- -------------- ---------------
Income (loss) before income taxes
AND MINORITY INTEREST 28,092 (7,992) 85,592 (9,674)
INCOME TAX EXPENSE (BENEFIT) 9,551 (2,796) 29,134 (3,384)
Minority interest - Convertible
PREFERRED SECURITIES 2,133 2,166 6,566 6,500
OTHER MINORITY INTEREST 267 107 1,645 1,068
------------- ------------- -------------- ---------------
NET INCOME (LOSS) $ 16,141 $ (7,469) $ 48,247 $ (13,858)
============= ============= ============== ===============
DILUTED NET INCOME (LOSS) $ 18,274 $ (5,303) $ 54,813 $ (7,358)
============= ============= ============== ===============
Earnings per share:
BASIC $ .51 $ (.24) $ 1.53 $ (.44)
DILUTED .50 * $ 1.49 *
Weighted average shares outstanding:
BASIC 31,455 31,369 31,457 31,371
DILUTED 36,844 36,758 36,875 36,760
<FN>
* Antidilutive
</FN>
</TABLE>
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------- --------------------------------
1998 1999 1998 1999
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
NET INCOME (LOSS) $16,141 $(7,469) $48,247 $(13,858)
Other comprehensive income - currency
TRANSLATION ADJUSTMENT 4,754 4,109 3,714 (2,506)
------------- ------------- -------------- --------------
COMPREHENSIVE INCOME (LOSS) $20,895 $(3,360) $51,961 $(16,364)
============= ============= ============== ==============
</TABLE>
<PAGE>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1998 1999
--------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
NET INCOME (LOSS) $ 48,247 $ (13,858)
DEPRECIATION AND AMORTIZATION 22,660 31,943
Equity in (earnings) losses of joint ventures, net of dividends
RECEIVED (964) 2,660
RESTRUCTURING CHARGE - NONCASH PORTION 4,104 -
DEFERRED INCOME TAXES 10,478 (2,426)
OTHER MINORITY INTEREST 1,645 1,068
Change in assets and liabilities, net of acquisitions:
RECEIVABLES 12,612 27,197
INVENTORIES (49,169) 20,492
PREPAID EXPENSES AND OTHER 608 1,477
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 11,351 (31,502)
ACCRUED RESTRUCTURING CHARGES 1,397 (5,683)
INCOME TAXES 3,239 1,151
ACCOUNTS WITH RELATED PARTIES, NET 9,286 (4,208)
OTHER, NET (786) (7,310)
--------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 74,708 21,001
--------------- ---------------
Cash flows from investing activities:
CAPITAL EXPENDITURES (79,210) (18,672)
BUSINESS ACQUISITIONS (27,038) -
PROCEEDS FROM SALES OF PROPERTY AND EQUIPMENT - 3,043
OTHER, NET (67) 209
--------------- ---------------
NET CASH USED BY INVESTING ACTIVITIES (106,315) (15,420)
--------------- ---------------
Cash flows from financing activities:
Indebtedness:
BORROWINGS 121,800 57,731
REPAYMENTS (17,537) (66,944)
DIVIDENDS PAID (2,517) (3,764)
TREASURY STOCK PURCHASED (1,208) -
OTHER, NET 117 (289)
--------------- ---------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 100,655 (13,266)
--------------- ---------------
Net cash provided (used) by operating,
FINANCING AND INVESTING ACTIVITIES $ 69,048 $ (7,685)
=============== ===============
<PAGE>
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1998 1999
-------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Net increase (decrease) in cash and equivalents from:
OPERATING, INVESTING AND FINANCING ACTIVITIES $ 69,048 $ (7,685)
CASH ACQUIRED 1,187 -
CURRENCY TRANSLATION 3,399 (987)
-------------- ----------------
73,634 (8,672)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 68,957 15,464
-------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 142,591 $ 6,792
============== ================
Supplemental disclosures - cash paid for:
INTEREST, NET OF AMOUNTS CAPITALIZED $ 1,971 $ 4,650
CONVERTIBLE PREFERRED SECURITIES DIVIDENDS 9,999 9,999
INCOME TAXES (REFUND), NET 11,183 (5,239)
Business acquisitions:
CASH ACQUIRED $ 1,187 $ -
RECEIVABLES 6,574 -
INVENTORIES 15,352 -
PROPERTY AND EQUIPMENT AND OTHER 21,765 -
Investments in joint ventures 8,085
GOODWILL AND OTHER INTANGIBLES 8,566 -
LIABILITIES ASSUMED (18,117) -
-------------- ----------------
43,412 -
Less noncash consideration, principally property and
EQUIPMENT (16,374) -
-------------- ----------------
CASH PAID $ 27,038 $ -
============== ================
<PAGE>
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income
Additional ------------------------
Common Common Paid-In Retained Currency Pension Treasury
Shares Stock Capital Earnings Translation Liabilities Stock Total
------ ------ ---------- --------- ----------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 31,369 $ 315 $ 347,972 $ 99,981 $ 5,600 $ (4,283) $ (1,208) $ 448,377
Comprehensive income (loss) - - - (13,858) (2,506) - - (16,364)
Dividends paid ($.12 per share) - - - (3,764) - - - (3,764)
Other 2 - 12 - - - - 12
------ ------ --------- -------- ----------- ---------- -------- --------
Balance at September 30, 1999 31,371 $ 315 $ 347,984 $ 82,359 $ 3,094 $ (4,283) $ (1,208) $ 428,261
====== ====== ========= ======== =========== ========== ======== =========
<PAGE>
<FN>
</FN>
</TABLE>
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation:
The consolidated balance sheet of Titanium Metals Corporation ("TIMET")
and subsidiaries (collectively, the "Company") at December 31, 1998 has been
condensed from the Company's audited consolidated financial statements at that
date. The consolidated balance sheet at September 30, 1999 and the consolidated
statements of operations, comprehensive income, stockholders' equity and cash
flows for the interim periods ended September 30, 1998 and 1999 have been
prepared by the Company without audit. In the opinion of management, all
adjustments necessary to present fairly the consolidated financial position,
results of operations and cash flows have been made. The results of operations
for interim periods are not necessarily indicative of the operating results of a
full year or of future operations.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The accompanying consolidated
financial statements should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998 (the "1998 Annual Report").
Acquisitions in 1998 consist of the previously-reported April 1998
acquisition of Loterios S.p.A. and July 1998 transaction with Wyman-Gordon
Company.
For information concerning certain legal proceedings and certain
contingencies related to the Company, see (i) Part I, Item 2 -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
("MD&A"), (ii) Part II, Item 1 -- "Legal Proceedings," and (iii) the 1998 Annual
Report.
Note 2 - Segment information:
The Company is a vertically integrated producer of titanium sponge,
melted products (ingot and slab) and a variety of mill products for aerospace,
industrial and other applications. The Company's production facilities are
located principally in the United States, the United Kingdom and France, and its
products are sold throughout the world. These worldwide integrated activities
compose the Company's principal segment, "Titanium melted and mill products."
The "Other" segment includes the Company's titanium castings
operations, which were combined in a joint venture in August 1998, and other
nonintegrated joint ventures.
Operating income, inventory and receivables are the key management
measures used to evaluate segment performance. Substantially all inventories and
receivables at December 31, 1998 and September 30, 1999, along with
substantially all depreciation and amortization and capital expenditures for the
interim periods ended September 30, 1998 and 1999, relate to the "Titanium
melted and mill products" segment.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- --------------------------------------
1998 1999 1998 1999
-------------- ---------------- ------------------- ----------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales:
TITANIUM MELTED & MILL PRODUCTS $ 171,060 $ 112,835 $ 531,045 $ 374,076
OTHER 3,205 294 22,946 1,631
ELIMINATIONS (753) (423) (2,601) (1,256)
-------------- ---------------- ------------------- ----------------
$ 173,512 $ 112,706 $ 551,390 $374,451
============== ================ =================== ================
Mill products shipments:
VOLUME (METRIC TONS) 3,500 2,800 11,400 8,600
AVERAGE PRICE ($ PER KILOGRAM) $ 35.50 $ 31.75 $ 34.75 $ 33.75
Equity in earnings (losses) of joint ventures:
TITANIUM MELTED & MILL PRODUCTS $ 1,181 $ 137 $ 1,923 $ 119
OTHER (399) (546) (959) (1,608)
-------------- ---------------- ------------------- ----------------
$ 782 $ (409) $ 964 $ (1,489)
============== ================ =================== ================
Operating income (loss):
TITANIUM MELTED & MILL PRODUCTS $ 28,285 $ (7,298) $ 88,651 $ (6,664)
OTHER (943) (543) (5,786) (1,551)
-------------- ---------------- ------------------- ----------------
27,342 (7,841) 82,865 (8,215)
GENERAL CORPORATE INCOME, NET 2,126 1,898 5,052 3,576
INTEREST EXPENSE (1,376) (2,049) (2,325) (5,035)
-------------- ---------------- ------------------- ----------------
Income (loss) before income taxes
AND MINORITY INTEREST $ 28,092 $ (7,992) $ 85,592 $ (9,674)
============== ================ =================== ================
</TABLE>
Operating income of the "Other" segment in the 1998 nine-month period
includes a $6 million restructuring charge. See Note
4 and MD&A.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------ ---------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment in joint ventures:
TITANIUM MELTED & MILL PRODUCTS $ 22,044 $ 20,963
OTHER 10,589 9,366
------------------ ---------------------
$ 32,633 $ 30,329
================== =====================
</TABLE>
<PAGE>
Note 3 - Inventories:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------------- --------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
RAW MATERIALS $ 56,109 $ 34,660
WORK-IN-PROCESS 97,947 103,216
FINISHED PRODUCTS 61,213 53,317
SUPPLIES 10,611 12,476
------------------- --------------------
$ 225,880 $ 203,669
=================== ====================
</TABLE>
The average cost of LIFO inventories exceeded the net carrying amount
of such inventories by approximately $28 million at each of December 31, 1998
and September 30, 1999.
Note 4 - Accrued liabilities:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------------- --------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
OPEB COST $ 2,371 $ 2,291
PENSION COST 1,482 1,113
OTHER EMPLOYEE BENEFITS 20,881 13,913
ENVIRONMENTAL COSTS 2,273 1,156
RESTRUCTURING COSTS 6,727 1,044
TAXES, OTHER THAN INCOME 1,292 315
CONVERTIBLE PREFERRED SECURITIES - ACCRUED DIVIDENDS 1,111 1,111
OTHER 14,491 12,260
------------------- --------------------
$ 50,628 $ 33,203
=================== ====================
</TABLE>
Payments for restructuring costs during the nine months ended September
30, 1999 related to the Company's previously-reported restructuring plan
implemented beginning in 1998 (aggregate charge in 1998 of $24 million). The
remaining accrued restructuring costs at September 30, 1999 of $1 million
consist primarily of unpaid personnel severance and benefits. Certain terminated
employees are being paid in installments and payments for items such as benefit
continuation for terminated employees continue for specified periods of time.
Substantially all such payments for the 1998 restructuring will be made by the
end of 1999 although a nominal amount will be paid in 2000.
As previously reported, TIMET is considering further personnel
reductions and rationalization of plant capacity and, as a result, will likely
incur a restructuring charge in the fourth quarter of 1999. See also MD&A.
<PAGE>
Note 5 - Notes payable, long-term debt and capital lease obligations:
Notes payable at December 31, 1998 and September 30, 1999 consist of
borrowings under the Company's short-term European bank credit agreements.
Long-term debt at September 30, 1999 consists of $76 million of
borrowings under the Company's U.S. bank credit agreement (December 31, 1998 -
$80 million), $7 million of borrowings under its U.K. bank credit agreement
(December 31, 1998 - $19 million) and approximately $1 million of other European
debt. At September 30, 1999, the Company had approximately $32 million of unused
borrowing availability under its U.S. and European bank credit agreements. See
MD&A.
Capital lease obligations relate principally to U.K. production
facilities held under long-term leases with IMI plc.
Note 6 - Income taxes:
The difference between the Company's provision for income tax expense
(benefit) attributable to pretax income (loss) and the amounts that would be
expected using the U.S. federal statutory income tax rate of 35% is summarized
below.
<TABLE>
<CAPTION>
Nine months
ended September
30,
-------------------------------
1998 1999
------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
EXPECTED INCOME TAX EXPENSE (BENEFIT) $ 29,957 $ (3,386)
FOREIGN TAX RATES (152) 624
FOREIGN SALES CORPORATION BENEFIT (1,134) (65)
U.S. STATE INCOME TAXES, NET 495 (521)
OTHER, NET (32) (36)
------------- -------------
$ 29,134 $ (3,384)
============= =============
</TABLE>
Minority interest - Convertible Preferred Securities is stated net of
income tax benefits of $3.5 million in both the 1998 and 1999 nine-month
periods.
Note 7 - Ownership structure:
At September 30, 1999, Tremont Corporation held approximately 39% of
TIMET's outstanding common stock. Valhi, Inc. and other entities related to
Harold C. Simmons hold an aggregate of approximately 55% of Tremont's
outstanding common stock. Mr.
Simmons may be deemed to control each of Valhi, Tremont and TIMET.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
SALES AND OPERATING INCOME. The Company's 1999 results were below those
of the same periods in 1998 principally due to a 25% decline in year-to-date
mill products volume caused by lower demand in both aerospace and industrial
markets, as reported in earlier periods.
Sales of $113 million in the third quarter of 1999 were 12% lower than
the second quarter of this year principally due to both lower sales volume and
to product mix changes, as lower priced industrial products represented a higher
percentage of mill product volume during the most recent quarter. The average
third quarter mill product selling price decreased from the second quarter
largely due to this mix change. Third quarter ingot sales volume was also down
from the second quarter.
Total cost of sales was 96% of sales in the third quarter of 1999
compared to 89% in the second quarter of this year. As previously reported,
third quarter volumes were impacted by declines in demand, including
cancellations and push-outs by major aerospace customers, and by production
difficulties and inefficiencies primarily in TIMET's North American Operations.
Yield, rework and deviated material costs were higher, plant operating rates
were lower and resumption of production following certain maintenance shutdowns
took longer than expected. The Company is focusing additional attention and
resources on immediately improving certain aspects of its operating performance.
Selling, general and administrative and development expenses in the
1999 periods were lower than in the corresponding 1998 periods, but higher as a
percentage of sales, as not all such costs are variable, particularly in the
short term.
Net sales of the "Other" segment in 1999 were lower than last year
primarily as a result of the Company's ceasing to consolidate its castings
business commencing August 1998. See Note 2 to the Consolidated Financial
Statements. Equity in earnings of joint ventures of both segments were lower
than in 1998 as the result of declines in profitability or increased losses.
TIMET currently believes its fourth quarter results, excluding
restructuring charges, will improve from third quarter 1999 levels, although it
expects to report an operating loss for the quarter. The failure of a 2,500 ton
press in the Company's Toronto, Ohio mill products plant in mid-October may
result in lower sales volume. The Company is currently evaluating alternatives
for production originally scheduled on this press. As previously reported, TIMET
is considering further personnel reductions and rationalization of plant
capacity in light of its revised market outlook and, as a result, will likely
incur a restructuring charge in the fourth quarter of 1999.
The Company believes next year presents continuing challenges as the
commercial aerospace market is expected to remain depressed. TIMET's results for
next year will be heavily dependent upon volumes actually ordered under its
long-term agreements, particularly the contract with Boeing. The Company is
continuing to work with Boeing to both determine volume for next year and to
improve the way the contract is administered by Boeing within its supplier base
in order to achieve the intended benefits to both parties. The Company is
continuing its efforts to return to profitability by focusing on its
manufacturing processes and reducing overall costs, in addition to its efforts
to work closely with other major customers to solidify its volume position for
2000.
EUROPEAN OPERATIONS. The Company has substantial operations and assets
located in Europe, principally the United Kingdom, with smaller operations in
France, Italy and Germany. Titanium is a worldwide market and the factors
influencing the Company's U.S. and European operations are substantially the
same.
Approximately one-half of the Company's European sales are denominated
in currencies other than the U.S. dollar, principally major European currencies.
Certain purchases of raw materials, principally titanium sponge and alloys, for
the Company's European operations are denominated in U.S. dollars, while labor
and other production costs are primarily denominated in local currencies. The
functional currencies of the Company's European subsidiaries are those of their
respective countries; thus, the U.S. dollar value of these subsidiaries' sales
and costs denominated in currencies other than the respective functional
currency, including sales and costs denominated in U.S. dollars, are subject to
exchange rate fluctuations which may impact reported earnings and may affect the
comparability of period-to-period operating results. Borrowings of the Company's
European operations may be in U.S. dollars or in local currencies. The Company's
export sales from the United States are denominated in U.S. dollars and as such
are not subject to currency exchange rate fluctuations.
The U.S. dollar sales and purchases of the Company's European
operations described above provide some natural hedge of non-functional
currencies, and the Company does not use currency contracts to hedge its
currency exposures. Net currency transaction/translation losses were $1 million
during the nine months ended September 30, 1999. Foreign currency gains were $.4
million during the 1998 nine-month period. At September 30, 1999, consolidated
assets and liabilities denominated in currencies other than functional
currencies were approximately $27 million and $14 million, respectively,
consisting primarily of U.S. dollar cash, accounts receivable, accounts payable
and borrowings. Exchange rates among 11 European currencies (including the
French franc, Italian lira and German mark, but excluding the UK pound sterling)
became fixed relative to each other as a result of the new European currency
unit ("euro") effective in 1999. Costs associated with modifications of systems
to handle euro-denominated transactions have not been significant.
GENERAL CORPORATE INCOME. General corporate income, net (which accounts
for substantially all of the Consolidated Statement of Operations caption "Other
income") includes earnings on corporate cash equivalents, which vary with cash
levels and interest rates, and accrued dividends on preferred securities.
INTEREST EXPENSE. Interest expense in the 1999 periods is higher than
in the comparable 1998 periods, reflecting higher average borrowing levels,
higher interest rates and lower levels of interest capitalization on capital
projects in process.
MINORITY INTEREST. Dividend expense related to the Company's 6.625%
Convertible Preferred Securities approximated $3.3 million per quarter in both
1999 and 1998 and is reported as minority interest, net of allocable income
taxes.
INCOME TAXES. The Company operates in several tax jurisdictions and is
subject to various income tax rates. As a result, the geographical mix of pretax
income can impact the Company's effective tax rate. See also Note 6 to the
Consolidated Financial Statements.
<PAGE>
YEAR 2000. Y2K issues exist because many computer systems and
applications currently use two-digit fields to designate a year. Date-sensitive
systems may recognize the year 2000 as 1900, or not at all. This inability to
treat the year 2000 properly could cause systems to process critical financial,
manufacturing and operational information incorrectly. The Company has been
actively involved in addressing Y2K issues because of the need to ensure, to the
greatest extent possible, that its business operations continue without
significant disruption after the millennium. Most of the Company's information
systems have been replaced in connection with the implementation of the
Company's business-enterprise system, the initial implementation of which was
substantially completed with the roll-out of the system to the Company's U.K.
subsidiary in February 1999. The cost of the new system, including related
equipment and networks, aggregated approximately $50 million ($41 million
capital and $9 million expense).
The Company, with the help of outside specialists and consultants (i)
has completed its assessment of potential Y2K issues in its non-information
systems (e.g., its manufacturing and communications systems), as well as in
those information systems that were not replaced by the new enterprise-wide
system, and (ii) has completed its system remediation and testing. Beginning in
the third quarter of 1999, the Company's Y2K efforts shifted from remediation
and testing to contingency planning. Nonetheless, Y2K testing and monitoring
will continue through the end of the year and into 2000 to help ensure that the
Company's systems continue to operate without Y2K problems. The Company has
developed contingency plans to be implemented in the event that mission critical
systems and/or associated processes experience a Y2K failure. The contingency
plans will be tested and rehearsed through the remainder of 1999. In this
regard, the Company is considering the temporary shutdown of certain sensitive
production operations for a few days around the turn of the millennium as an
additional safeguard against the unexpected loss of utilities service. The
Company expects to schedule production to provide for such temporary shutdowns.
The Company has expended approximately $4 million through September 1999 ($2
million of which was in 1999) on non-information system issues, principally
embedded system technology, and expects to additionally incur less than $1
million on such issues in the remainder of 1999. The Company's evaluation of
potential Y2K exposure related to key suppliers and customers is also in process
and will continue throughout 1999.
Although the Company believes its key information and non-information
systems are Y2K ready, it cannot predict whether it will find additional
problems that would result in unplanned upgrades of applications during the rest
of the year or even after December 1999. As a result of these uncertainties, the
Company cannot predict the impact on its financial condition, results of
operations or cash flows resulting from Y2K failures in systems that the Company
directly or indirectly relies upon. Should the Company's Y2K readiness plans not
be successful or be delayed beyond December 1999, the consequences to the
Company could be far-reaching and material, including an inability to produce
titanium metal products at its manufacturing facilities, which could lead to an
indeterminate amount of lost revenue. Other potential negative consequences
could include impeded communications or power supplies, slower transaction
processing and financial reporting, and potential liability to third parties.
Although not anticipated, the most reasonably likely worst-case scenario of
failure by the Company or its key suppliers or customers to become Y2K ready
would be a short-term slowdown or cessation of manufacturing operations at one
or more of the Company's facilities and a short-term inability on the part of
the Company to process orders and billings in a timely manner, and to deliver
products to customers.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had net debt of approximately $88
million ($95 million of notes payable and long-term debt and $7 million of cash
and equivalents). As limited by provisions of its U.S. credit agreement, the
Company had an aggregate of $32 million of unused borrowing availability under
its U.S. and European credit lines at September 30, 1999. The Company currently
believes it will not meet all of the financial covenants in its U.S. bank credit
agreement at the end of 1999, and intends to seek to amend or replace the credit
agreement.
OPERATING ACTIVITIES. Cash provided by operating activities was
approximately $21 million for the nine-month period ended September 30, 1999,
down from $75 million for the same period in 1998, as summarized below.
<TABLE>
<CAPTION>
Nine months ended
September 30,
----------------------------------
1998 1999
--------------- ---------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cash provided by operating activities:
Excluding changes in assets and liabilities $ 86,170 $ 19,387
Changes in assets and liabilities (11,462) 1,614
--------------- ---------------
$ 74,708 $ 21,001
=============== ===============
</TABLE>
Cash provided by operating activities, excluding changes in assets and
liabilities, generally followed the decline in operating results. Depreciation
in 1999 is higher than in 1998 resulting from the Company's major 1997-1998
capital program, including the business-enterprise system. Results of operations
in 1998 included a second quarter restructuring charge which was principally
noncash.
Changes in assets and liabilities reflect primarily the timing of
purchases, production and sales. The Company's plan of action to address current
market conditions includes reductions in working capital, particularly
inventories and receivables, both of which have been reduced in 1999. Changes in
accounts payable and accrued liabilities in 1999 include the effect of payments
to suppliers of titanium sponge and other raw materials for purchases made in
late 1998 being higher than payables at the end of September for 1999 purchases,
as well as the effect of lower purchase and headcount levels on accounts payable
and accrued liabilities.
Dividends on the $80 million of Special Metals Corporation 6.675%
convertible preferred stock held by the Company have been deferred by SMC for
1999 due to limitations imposed by SMC's bank credit agreement. Management of
SMC has advised the Company they currently are seeking to amend SMC's credit
agreement and do not expect SMC to be permitted to pay dividends or dividends in
arrears during 2000. As a result, at September 30, 1999 the Company has
classified its accrued dividends on the SMC preferred securities as a
non-current asset. The Company currently believes that the realization of its
investment in SMC by the maturity date of the securities in 2005 is not
impaired.
INVESTING ACTIVITIES. The Company's major capital expenditure program,
which aggregated $180 million in 1997 and 1998, is completed and the Company
estimates that capital expenditures for all of 1999 will approximate $25
million. Business acquisitions in 1998 consist of the purchase of Loterios
S.p.A. and the Wyman-Gordon transaction. Proceeds from the sale of property and
equipment in 1999 include assets sold as part of the Company's restructuring
activities.
<PAGE>
FINANCING ACTIVITIES. Net borrowings in the 1998 period included amounts
used to fund the Company's acquisitions and its capital expenditure program. Net
repayments in 1999 reflect reductions of outstanding borrowings in both the U.S.
and U.K.
In November 1999, the Company's board of directors voted to suspend the
regular quarterly dividend on its common stock in view of, among other things,
the continuing weakness in overall market demand for titanium metal products.
The Company's Convertible Preferred Securities do not require principal
amortization, and TIMET has the right to defer dividend payments for one or more
periods of up to 20 consecutive quarters each. The board of directors decided to
continue distributions on the Company's Convertible Preferred Securities for the
fourth quarter of 1999. The board will re-evaluate the continuation of such
payments on a quarter-by-quarter basis.
The Company periodically evaluates its liquidity requirements, capital
needs and availability of resources in view of, among other things, its
alternative uses of capital, its debt service requirements, the cost of debt and
equity capital, and estimated future operating cash flows. As a result of this
process, the Company has in the past and, in the light of its current outlook,
may in the future seek to raise additional capital, modify its common and
preferred dividend policy, restructure ownership interests, incur, refinance or
restructure indebtedness, repurchase shares of capital stock, sell assets, or
take a combination of such steps or other steps to increase or manage its
liquidity and capital resources.
In the normal course of business, the Company investigates, evaluates,
discusses and engages in acquisition, joint venture, strategic relationship and
other business combination opportunities in the titanium, specialty metal and
related industries. In the event of any future acquisition or joint venture
opportunities, the Company may consider using then-available liquidity, issuing
equity securities or incurring additional indebtedness.
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Reference is made to the Company's 1998 Annual Report for descriptions
of certain previously-reported legal proceedings.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.1 Financial Data Schedule for the quarter ended September 30, 1999.
(b) Reports on Form 8-K:
Reports on Form 8-K filed by the Registrant for the quarter ended
September 30, 1999 and through November 8, 1999:
Filing Date Items Reported
----------------------------- ----------------------------------
July 26, 1999 5 and 7
July 26, 1999 5 and 7
October 4, 1999 5 and 7
October 7, 1999 5 and 7
October 28, 1999 5 and 7
November 4, 1999 5 and 7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TITANIUM METALS CORPORATION
--------------------------------
(Registrant)
Date: November 8, 1999 By /s/ J. Thomas Montgomery, Jr.
- ----------------------------- ----------------------------------------
J. Thomas Montgomery, Jr.
Vice President - Finance and Treasurer
(Principal Finance and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Titanium
Metals Corporation's Consolidated Financial Statements for the nine months ended
September 30, 1999 and is qualified in its entirety by reference to such
Consolidated Financial Statements.
</LEGEND>
<CIK> 0001011657
<NAME> Titanium Metals Corporation
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<PERIOD-START> JAN-01-1999
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