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 MARCH 31, 2000
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 (IRS Employer Identification No.)
of incorporation or organization)
1999 Broadway, Suite 4300, Denver, Colorado 80202
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5600
----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
-------- ---------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING ON APRIL 30, 2000: 31,371,405.
<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", "will", "looks", "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 affect
expected results. Actual future results could differ materially from those
described in such forward-looking statements, and the Company disclaims any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. Among the
factors that could cause actual results to differ materially are the risks and
uncertainties discussed in this Quarterly Report, including in those portions
referenced above and those described from time to time in the Company's other
filings with the Securities and Exchange Commission include, but are not limited
to, the cyclicality of the commercial aerospace industry, the performance of The
Boeing Company and other aerospace manufacturers under their long-term purchase
agreements with the Company, global economic conditions, global productive
capacity for titanium, changes in product pricing, 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, uncertainties
associated with new product development and the supply of raw materials and
services and other risks and uncertainties. Should one or more of these risks
materialize (or the consequences of such a development worsen), or should the
underlying assumptions prove incorrect, actual results could differ materially
from those forecasted or expected.
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
INDEX
<S> <C> <C>
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1999 and
March 31, 2000 2-3
Consolidated Statements of Operations - Three months
ended March 31, 1999 and 2000 4
Consolidated Statements of Comprehensive Loss - Three
months ended March 31, 1999 and 2000 5
Consolidated Statements of Cash Flows - Three months
ended March 31, 1999 and 2000 6-7
Consolidated Statement of Stockholders' Equity - Three
months ended March 31, 2000 8
Notes to Consolidated Financial Statements 9-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 15-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 20
Item 6. Exhibits and Reports on Form 8-K. 20
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, March 31,
ASSETS 1999 2000
-------------------- --------------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 20,671 $ 6,304
Accounts and other receivables, less
Allowance of $3,330 and $3,270 106,204 76,180
Receivable from related parties 4,071 3,865
Refundable income taxes 10,651 10,504
Inventories 191,535 186,044
Prepaid expenses and other 7,177 6,283
Deferred income taxes 2,250 2,265
-------------------- --------------------
Total current assets 342,559 291,445
-------------------- --------------------
Other assets:
Investments in joint ventures 26,938 21,089
Preferred securities 80,000 80,000
Accrued dividends on preferred securities 6,530 7,999
Goodwill 54,789 53,604
Other intangible assets 16,326 15,482
Deferred income taxes 9,600 14,346
Other 12,979 11,706
-------------------- --------------------
Total other assets 207,162 204,226
-------------------- --------------------
Property and equipment:
Land 6,230 6,216
Buildings 24,647 26,294
Information technology systems 55,226 54,118
Manufacturing and other 331,591 317,174
Construction in progress 8,122 8,080
-------------------- --------------------
425,816 411,882
Less accumulated depreciation 92,432 88,788
-------------------- --------------------
Net property and equipment 333,384 323,094
-------------------- --------------------
$ 883,105 $ 818,765
==================== ====================
</TABLE>
See accompanying notes to consolidated financial statements.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY December 31, March 31,
1999 2000
------------------- ---------------------
Current liabilities:
<S> <C> <C>
Notes payable $ 9,635 $ 51,532
Current maturities of long-term debt and
capital lease obligations 85,679 2,177
Accounts payable 48,679 41,215
Accrued liabilities 42,879 43,809
Payable to related parties 1,984 1,082
Income taxes 516 32
Deferred income taxes 5,049 3,247
------------------- ---------------------
Total current liabilities 194,421 143,094
------------------- ---------------------
Noncurrent liabilities:
Long-term debt 22,425 26,154
Capital lease obligations 9,776 9,353
Payable to related parties 1,332 1,332
Accrued OPEB cost 19,961 20,103
Accrued pension cost 5,634 4,909
Accrued environmental cost - 3,262
Deferred income taxes 12,950 11,494
Total noncurrent liabilities 72,078 76,607
------------------- ---------------------
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 7,275 7,488
Stockholders' equity:
Preferred stock - -
Common stock 315 315
Additional paid-in capital 347,984 347,984
Retained earnings 64,827 49,706
Accumulated other comprehensive loss (3,837) (6,471)
Treasury stock, at cost (90 shares) (1,208) (1,208)
------------------- ---------------------
Total stockholders' equity 408,081 390,326
------------------- ---------------------
$ 883,105 $ 818,765
=================== =====================
</TABLE>
Commitments and contingencies (Note 9)
See accompanying notes to consolidated financial statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended March 31, 1999 and 2000
(In thousands, except per share data)
1999 2000
---------------- ------------------
Revenues and other income:
<S> <C> <C>
Net sales $134,136 $ 104,712
Equity in losses of joint ventures (448) (53)
Other, net 805 2,529
---------------- ------------------
134,493 107,188
---------------- ------------------
Costs and expenses:
Cost of sales 122,270 108,011
Selling, general, administrative and
Development 12,761 11,339
Restructuring charge - 3,702
Interest 1,295 2,262
---------------- ------------------
136,326 125,314
---------------- ------------------
Loss before income taxes,
minority interest and extraordinary item (1,833) (18,126)
Income tax benefit (642) (6,384)
Minority interest - Convertible Preferred Securities 2,167 2,167
Other minority interest 538 339
---------------- ------------------
Loss before extraordinary item (3,896) (14,248)
Extraordinary item, net of tax - (873)
---------------- ------------------
Net loss $ (3,896) $ (15,121)
================ ==================
Basic and diluted loss per share:
Before extraordinary item $ (.12) $ (.45)
Extraordinary item - (.03)
---------------- ------------------
$ (.12) $ (.48)
================ ==================
Basic and diluted weighted
average shares outstanding 31,369 31,371
================ ==================
</TABLE>
See accompanying notes to consolidated financial statements.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Three months ended March 31, 1999 and 2000
(In thousands)
1999 2000
--------------- --------------
<S> <C> <C>
NET LOSS $(3,896) $(15,121)
Other comprehensive loss - currency
Translation adjustment (5,509) (2,634)
--------------- --------------
Comprehensive loss $(9,405) $(17,755)
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 1999 and 2000
(In thousands)
1999 2000
--------------- ---------------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (3,896) $(15,121)
Depreciation and amortization 10,560 10,790
Non cash restructuring charge - 3,301
Non cash special charges - 6,729
Gain on sale of castings joint venture - (1,205)
Extraordinary loss on early extinguishment of debt, net - 873
Losses of joint ventures 448 53
Deferred income taxes (100) (7,204)
Other minority interest 538 339
Other, net - 144
Change in assets and liabilities:
Receivables 11,734 30,020
Inventories 13,331 1,798
Prepaid expenses and other 680 630
Accounts payable and accrued liabilities (19,865) (9,870)
Accrued restructuring charges (3,513) (327)
Income taxes 1,568 (682)
Accounts with related parties, net (924) (890)
Accrued dividends on preferred securities (1,369) (1,469)
--------------- ---------------
Net cash provided by operating activities 9,192 17,909
--------------- ---------------
Cash flows from investing activities:
Capital expenditures (10,026) (2,115)
Proceeds from sale of castings joint venture - 7,000
Proceeds from sales of property and equipment 3,289 -
--------------- ---------------
Net cash provided (used) by investing activities (6,737) 4,885
--------------- ---------------
Cash flows from financing activities:
Indebtedness:
Borrowings 8,068 124,009
Repayments (12,646) (160,786)
Dividends paid (1,255) -
--------------- ---------------
Net cash used by financing activities (5,833) (36,777)
--------------- ---------------
Net cash used by operating,
Investing and financing activities $ (3,378) $(13,983)
=============== ===============
</TABLE>
- 6 -
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended March 31, 1999 and 2000
(In thousands)
1999 2000
-------------- ----------------
Cash and cash equivalents:
Net decrease from:
<S> <C> <C>
Operating, investing and financing activities $ (3,378) $ (13,983)
Currency translation (620) (384)
-------------- ----------------
(3,998) (14,367)
Balance at beginning of period 15,464 20,671
-------------- ----------------
Balance at end of period $11,466 $ 6,304
============== ================
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 1,111 $ 1,703
Convertible Preferred Securities dividends 3,333 3,333
Income taxes (refund), net (3,147) 521
</TABLE>
See accompanying notes to consolidated financial statements.
-7-
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2000
(In thousands)
Accumulated Other
Comprehensive Loss
Additional ---------------------------------
Common Common Paid-In Retained Currency Pension Treasury
Shares Stock Capital Earnings Translation Liabilities Stock Total
--------- -------- ------------ ---------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 31,371 $ 315 $ 347,984 $ 64,827 $ (37) $ (3,800) $ (1,208) $ 408,081
Comprehensive loss - - - (15,121) (2,634) - - (17,755)
--------- -------- ------------ ----------- -------------- ------------ ----------- -------------
Balance at March 31, 2000 31,371 $ 315 $ 347,984 $ 49,706 $ (2,671) $ (3,800) $ (1,208) $ 390,326
========= ======== ============ =========== ============== ============ =========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
- 8 -
<PAGE>
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, 1999 has been
condensed from the Company's audited consolidated financial statements at that
date. The consolidated balance sheet at March 31, 2000 and the consolidated
statements of operations, comprehensive loss, stockholders' equity and cash
flows for the interim periods ended March 31, 1999 and 2000 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 prior year amounts have been reclassified to conform to the current year
presentation.
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, 1999 (the "1999 Annual Report").
The Company will adopt Statement of Financial Accountants Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended, no later than the first quarter of 2001. SFAS No. 133
establishes accounting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Under SFAS No. 133, all derivatives will be recognized as either assets or
liabilities and measured at fair value. The accounting for changes in fair value
of derivatives will depend upon the intended use of the derivative. The Company
is currently studying this new accounting rule, and the impact of adopting SFAS
No. 133, if any, will be dependent upon the extent to which the Company is then
a party to derivative contracts or engaged in hedging activities. As permitted
by the transition requirements of SFAS No. 133, as amended, the Company will
exempt from the scope of SFAS No. 133 all host contracts containing embedded
derivatives which were issued or acquired prior to January 1, 1999.
Basic earnings per share is based on the weighted average number of
common shares outstanding during each period. Diluted earnings per share
reflects the dilutive effect of common stock options and, if applicable, of the
assumed conversion of the Convertible Preferred Securities. The assumed
conversion of the Convertible Preferred Securities was omitted from the diluted
earnings per share calculation for the interim periods ended March 31, 1999 and
2000 because the effect was antidilutive. The effect of the conversion on
diluted earnings per share for the 1999 and 2000 periods would have been to
decrease net losses and increase average shares outstanding by $2.2 million and
5.4 million shares, respectively. Stock options omitted from diluted shares
because they were antidilutive were 1.8 million and 1.5 million in the 1999 and
2000 periods, respectively.
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, United Kingdom and France, and its
products are sold throughout the world. These worldwide integrated activities
compose the Company's segment, "Titanium melted and mill products".
- 9 -
<PAGE>
The "Other" segment consisted of the Company's nonintegrated joint
ventures, which investments have been either sold or charged off due to an asset
impairment.
Operating income (loss), inventory and receivables are the key
management measures used to evaluate segment performance. Operating loss of the
"Titanium melted and mill products" segment for the three months ended March 31,
2000 includes special items of $10.4 million, consisting of $3.7 million of
restructuring charges, $3.4 million of equipment-related impairment charges and
$3.3 million of environmental remediation charges. See Notes 3 and 9.
Substantially all inventories and receivables at December 31, 1999 and March 31,
2000, along with substantially all depreciation and amortization and capital
expenditures for the interim periods ended March 31, 1999 and 2000, relate to
the "Titanium melted and mill products" segment.
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------------------
1999 2000
------------------- --------------------
(In thousands)
Net sales:
<S> <C> <C>
Titanium melted and mill products $ 134,080 $ 104,712
Other 452 -
Eliminations (396) -
------------------- --------------------
$ 134,136 $ 104,712
=================== ====================
Mill products shipments:
Volume (metric tons) 3,000 2,700
Average price ($ per kilogram) $ 34.50 $ 30.90
Operating loss:
Titanium melted and mill products $ (1,005) $ (18,416)
Other (424) -
------------------- --------------------
(1,429) (18,416)
Dividends and interest income 1,533 1,648
General corporate income (expense), net (642) 904
Interest expense (1,295) (2,262)
------------------- --------------------
Loss before income taxes,
Minority interest and extraordinary item $ (1,833) $ (18,126)
=================== ====================
Equity in earnings (losses) of joint ventures:
Titanium melted and mill products $ 106 $ (53)
Other (554) -
------------------- --------------------
$ (448) $ (53)
=================== ====================
</TABLE>
- 10 -
<PAGE>
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------------- --------------------
(In thousands)
Investment in joint ventures:
<S> <C> <C>
Titanium melted and mill products $ 21,143 $ 21,089
Other 5,795 -
------------------- --------------------
$ 26,938 $ 21,089
=================== ====================
</TABLE>
Note 3 - Restructuring and special charges:
During the first quarter of 2000, the Company implemented a plan to
address current market and operating conditions, which resulted in recognizing a
$3.7 million restructuring charge. Such charge is principally related to
personnel severance and benefits for the approximately 250 employees to be
terminated (see Note 5). Additionally, in the first quarter of 2000, the Company
recorded $6.7 million of special charges to cost of sales, consisting of a $3.4
million charge for the write-down associated with an impairment of certain
inoperative equipment and a $3.3 million charge for environmental remediation
liabilities (see Note 9).
Note 4 - Inventories:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------------- ---------------------
(In thousands)
<S> <C> <C>
Raw materials $ 45,004 $ 42,230
Work-in-process 69,809 92,407
Finished products 83,893 59,029
Supplies 18,329 17,878
------------------- ---------------------
217,035 211,544
Less adjustment of certain
Inventories to LIFO basis 25,500 25,500
------------------- ---------------------
$ 191,535 $186,044
=================== =====================
</TABLE>
Note 5 - Accrued liabilities:
<TABLE>
<CAPTION>
December 31, March 31, 2000
1999
--------------------- --------------------
(In thousands)
<S> <C> <C>
OPEB cost $ 3,269 $ 2,233
Pension cost 1,287 899
Other employee benefits 14,375 13,796
Deferred income 9,295 8,177
Environmental costs 1,238 1,028
Restructuring costs 1,490 4,826
Taxes, other than income 1,209 1,523
Accrued dividends - Convertible Preferred Securities 1,111 1,111
Other 9,605 10,216
--------------------- --------------------
$ 42,879 $ 43,809
===================== ====================
</TABLE>
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<PAGE>
Accrued restructuring costs at March 31, 2000 consist of unpaid
personnel severance and benefits and other exit costs, primarily carrying costs
on closed leased facilities, relating to the Company's restructuring plans
implemented during the last three years. During the first quarter of 2000,
payments of $.4 million and $.3 million were applied against the accrued costs
related to the 1999 and 2000 plans, respectively. Most of the remaining accrued
costs related to the 1999 plan are expected to be paid by mid to late 2000,
although certain payments, for items such as benefit continuation for terminated
employees, are expected to be paid later. Substantially all of the accrued costs
related to the 2000 plan are expected to be paid by mid to late 2001. The
remaining accrued costs of $.3 million related to the 1998 plan are expected to
be paid during the second quarter of 2000. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Note 6 - Notes payable, long-term debt and capital lease obligations:
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------------- -----------------
(In thousands)
Notes payable:
<S> <C> <C>
U.S. credit agreement $ - $ 44,023
European credit agreements 9,635 7,509
------------------- -----------------
$ 9,635 $ 51,532
=================== =================
Long-term debt:
Bank credit agreement - U.S. $ 85,000 $ -
Bank credit agreement - U.K. 21,867 27,390
Other 922 703
------------------- -----------------
107,789 28,093
Less current maturities 85,364 1,939
------------------- -----------------
$ 22,425 $ 26,154
=================== =================
Capital lease obligations $ 10,091 $ 9,591
Less current maturities 315 238
------------------- -----------------
$ 9,776 $ 9,353
=================== =================
</TABLE>
Upon completion of the Company's new U.S. and U.K. credit facilities in
February 2000, the Company's previous U.S. credit facility was repaid and
terminated. The deferred financing costs associated with the previous U.S.
facility were written off and reflected as an extraordinary item in 2000 of $.9
million after taxes, or $.03 per share. The weighted average interest rate on
borrowings outstanding under the new U.S. and U.K. credit agreements at March
31, 2000 was 8.3% and 7.2%, respectively. As of March 31, 2000, the Company had
approximately $95 million of unused borrowing availability under its U.S. and
European credit agreements.
- 12 -
<PAGE>
Note 7 - Income taxes:
The difference between the Company's income tax benefit attributable to
pretax loss and the amounts that would be expected using the U.S. federal
statutory income tax rate of 35% is summarized below.
<TABLE>
<CAPTION>
Three months
ended March 31,
-------------------------------
1999 2000
------------- -------------
(In thousands)
<S> <C> <C> <C>
Expected income tax benefit, at 35% $ (642) $ (6,345)
Non-U.S. tax rates 201 195
U.S. state income taxes, net (100) (235)
Dividends received deduction (101) (360)
Export sales credit (26) -
Adjustment of deferred tax valuation allowance - 423
Other, net 26 (62)
------------- -------------
$ (642) $ (6,384)
============= =============
</TABLE>
Minority interest - Convertible Preferred Securities is stated net of
income tax benefits of $1.2 million in both the 1999 and 2000 periods. The
extraordinary loss in the first quarter of 2000 is stated net of income tax
benefits of $.4 million.
Note 8 - Ownership structure:
At March 31, 2000, Tremont Corporation held approximately 39% of TIMET's
outstanding common stock. The Combined Master Retirement Trust, a trust formed
by Valhi, Inc. to permit the collective investment by trusts that maintain the
assets of certain employee benefit plans adopted by Valhi and related companies,
held an additional 8% of TIMET's common stock. Valhi, Inc. and other entities
related to Harold C. Simmons hold an aggregate of approximately 73% of Tremont's
outstanding common stock. Mr. Simmons may be deemed to control each of Valhi,
Tremont and TIMET.
Note 9 - Commitments and contingencies:
ENVIRONMENTAL MATTERS. A preliminary study of certain groundwater
remediation issues at the Company's Henderson, Nevada operations and other
Company sites within the BMI Complex was completed late in the first quarter of
2000. The Company accrued $3.3 million based on the cost estimates set forth in
the study. The undiscounted environmental remediation charges are substantially
non-cash for 2000 and are expected to be paid over a period of up to thirty
years.
- 13 -
<PAGE>
LONG-TERM AGREEMENTS. In March 2000, the Company filed a lawsuit
against The Boeing Company seeking damages estimated in excess of $600 million
in connection with the Company's long-term sales agreement with Boeing. Boeing
has not yet filed a formal response to TIMET's complaint. The Company and Boeing
have begun discussions to determine if a settlement of this litigation can be
reached, however, no assurance can be given that a settlement will be reached.
For additional 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", (ii) Part II, Item 1 -- "Legal Proceedings", and (iii) the 1999
Annual Report.
- 14 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales of $104.7 million in the first quarter of 2000 were 22% lower
than the first quarter of last year due principally to a 11% decline in mill
products volume and a 6% decline in average selling prices. Ingot and slab
volume decreased 30% from year-ago levels, while average prices declined 2%.
Total cost of sales was 103% of sales in the first quarter of 2000 compared to
91% in the same period last year. The higher cost of sales in 2000 is
principally due to $6.7 million of special charges, consisting of a $3.4 million
charge for the write-down associated with an impairment of certain inoperative
equipment and a $3.3 million charge for environmental remediation liabilities.
See Notes 3 and 9 to the Consolidated Financial Statements. The lower selling
prices in the 2000 period also contributed to the lower gross margin.
During the first quarter of 2000, the Company implemented a plan to
address current market and operating conditions, which resulted in the
recognition of a $3.7 million restructuring charge. Such charge is included in
the operating loss of the "Titanium melted and mill products" segment in 2000
and is principally related to personnel severance and benefits for the
approximately 250 employees to be terminated. As of March 31, 2000,
approximately two-thirds of the planned 250 personnel reductions had been
accomplished, with substantially all of the remainder expected to be
accomplished by the end of the second quarter 2000. See Notes 3 and 5 to the
Consolidated Financial Statements.
Selling, general, administrative and development expenses in 2000 were
lower than 1999 in dollar terms due in large part to the completion of the
implementation of the initial phase of the Company's business-enterprise system
during the first half of 1999. These costs as a percentage of sales, however,
increased to approximately 11% as not all such costs are variable, particularly
as the benefits of the 2000 restructuring plan have not yet been fully realized.
Net sales of the "Other" segment consisted of the Company's
nonintegrated joint ventures, which investments have been either sold or charged
off due to an asset impairment. Equity losses in the "Other" segment was lower
in 2000 principally as a result of the Company's no longer recognizing its share
of losses associated with nonintegrated joint ventures that were charged off in
the fourth quarter of 1999.
The Company's firm order backlog at the end of March 2000 was
approximately $185 million. Comparable backlogs at the end of March 1999 and
December 1999 were approximately $325 million and $195 million, respectively.
Customers and end users continue to indicate that a substantial
titanium inventory overhang exists throughout the aerospace industry supply
chain that, along with the competitive environment, continues to place downward
pressure on the Company's sales volumes and prices in selected products. It is
very difficult to predict what will happen for the balance of 2000. Early
indications are that production volumes and operating margins, before special
charges, will be somewhat lower in the remaining three quarters of 2000 compared
to the first quarter. The Company is seeking to stem this apparent deterioration
through a stronger sales effort, selective price reductions and additional cost
reductions. However, it is too early to determine how successful these efforts
will be.
- 15 -
<PAGE>
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 60% of the Company's European sales are denominated in
currencies other than the U.S. dollar, principally the British pound and
European currencies tied to the euro. Certain purchases of raw materials,
principally titanium sponge and alloys, for the Company's European operations
are denominated in U.S. dollars, while labor and other production costs are
primarily denominated in local currencies. The functional currencies of the
Company's European subsidiaries are those of their respective countries; thus,
the U.S. dollar value of these subsidiaries' sales and costs denominated in
currencies other than their functional currency, including sales and costs
denominated in U.S. dollars, are subject to exchange rate fluctuations that may
impact reported earnings and may affect the comparability of period-to-period
operating results. Borrowings of the Company's European operations may be in
U.S. dollars or in functional currencies. The Company's export sales from the
U.S. are denominated in U.S. dollars and 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 losses were $.5 million during the
three months ended March 31, 2000 and $.8 million during the same period in
1999. At March 31, 2000, consolidated assets and liabilities denominated in
currencies other than functional currencies were approximately $17 million and
$19 million, respectively, consisting primarily of U.S. dollar cash, accounts
receivable, accounts payable and borrowings.
DIVIDENDS AND INTEREST INCOME. Dividends and interest income consists
principally of dividends on $80 million of non-voting preferred securities of
Special Metals Corporation which accrue at an annual rate of 6.625%.
GENERAL CORPORATE INCOME (EXPENSE), NET. General corporate income
(expense), net includes currency transaction losses described above. The
increase in general corporate income in the first quarter of 2000 is due to a
$1.2 million gain on the sale of the Company's interest in its castings joint
venture.
INTEREST EXPENSE. Interest expense in the first quarter of 2000 is
higher than in the comparable 1999 period, primarily due to a lower level of
interest being capitalized in 2000 compared to 1999 as additional capital
projects have been completed. The higher interest expense in 2000 also reflects
increased interest rates related to the new credit facilities and increased
market rates.
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 (loss) can impact the Company's effective tax rate. See Note 7 to the
Consolidated Financial Statements.
MINORITY INTEREST. Dividend expense related to the Company's 6.625%
Convertible Preferred Securities approximated $3.3 million in both the 1999 and
2000 periods and is reported as minority interest, net of allocable income
taxes.
- 16 -
<PAGE>
NEW ACCOUNTING PRINCIPLES NOT YET ADOPTED. The Company will adopt SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended, no later than the first quarter of 2001. SFAS No. 133 establishes
accounting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. Under SFAS
No. 133, all derivatives will be recognized as either assets or liabilities and
measured at fair value. The accounting for changes in fair value of derivatives
will depend upon the intended use of the derivative. The Company is currently
studying this new accounting rule, and the impact of adopting SFAS No. 133, if
any, will be dependent upon the extent to which the Company is then a party to
derivative contracts or engaged in hedging activities. As permitted by the
transition requirements of SFAS No. 133, as amended, the Company will exempt
from the scope of SFAS No. 133 all host contracts containing embedded
derivatives which were issued or acquired prior to January 1, 1999.
- 17 -
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had net debt of $73 million ($79 million
of notes payable and long-term debt and $6 million of cash and equivalents). The
Company also had $95 million of borrowing availability under its U.S. and
European credit lines. The Company believes its U.S. and European credit lines
will provide it with the liquidity necessary for current market and operating
conditions. See Note 6 to the Consolidated Financial Statements.
OPERATING ACTIVITIES. Cash provided by operating activities was $18
million for the three-month period ended March 31, 2000, up from $9 million for
the same period in 1999, as summarized below.
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------
1999 2000
--------------- ---------------
(In millions)
Cash provided (used) by:
Operating activities:
<S> <C> <C>
Excluding changes in assets and liabilities $ 7.6 $ (1.3)
Changes in assets and liabilities 1.6 19.2
--------------- ---------------
9.2 17.9
Investing activities (6.7) 4.9
Financing activities (5.8) (36.8)
--------------- ---------------
Net cash provided (used) by operating, investing
and financing activities $ (3.3) $ (14.0)
=============== ===============
</TABLE>
Cash provided by operating activities, excluding changes in assets and
liabilities, generally followed the trend in operating results.
Changes in assets and liabilities reflect primarily the timing of
purchases, production and sales and can vary significantly from period to
period. The Company's plan to address current market conditions includes
reductions in working capital, particularly inventories and receivables, both of
which were reduced in the first quarter of 2000. The significant reduction in
receivables in the first quarter of 2000 was also attributable to $16 million of
customer payments related to a bill-and-hold shipment from 1999. Changes in
accounts payable and accrued liabilities in the first quarter of 1999 reflect
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 March
for first quarter 1999 purchases.
Dividends on the $80 million of Special Metals Corporation 6.625%
convertible preferred securities held by the Company had been deferred by SMC
due to limitations imposed by SMC's bank credit agreements. However, in April
2000, the Company received a quarterly dividend of $1.3 million. There can be no
assurances that TIMET will continue to receive additional dividends during the
remainder of 2000.
INVESTING ACTIVITIES. The Company's capital expenditures were $2
million for the three months ended March 31, 2000 compared to $10 million for
the same period in 1999. Capital expenditures for 2000 are estimated to be less
than $15 million and are planned to include those principally intended for
capital maintenance, environmental, health and safety purposes. Proceeds from
the sale of property and equipment in 1999 included the sale of an interest in a
corporate aircraft and assets sold as part of the Company's restructuring
activities.
- 18 -
<PAGE>
In the first quarter of 2000, the Company sold its interest in the
castings joint venture to Wyman-Gordon for $7 million and recorded a pretax gain
of $1.2 million.
FINANCING ACTIVITIES. Net repayments in the 2000 period reflect
reductions of outstanding borrowings principally in the U.S. resulting from
collection of receivables and the sale of the castings joint venture. Net
repayments in 1999 reflect reductions of outstanding borrowings in both the U.S.
and U.K.
In November 1999, TIMET's Board of Directors voted to suspend the
regular quarterly dividend on the Company's common stock in view of, among other
things, the continuing weakness in overall market demand for titanium metal
products. The Company's new U.S. credit agreement entered into in February 2000
prohibits the payment of dividends on the Company's common stock.
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 for each period. Given uncertainty
concerning the results for the balance of 2000, the Company has exercised its
right to defer future dividend payments on these securities for a period of 10
quarters, although interest will continue to accrue at the coupon rate on the
principal and unpaid dividends. The Company's goal is to resume dividends on the
Convertible Preferred Securities when the outlook for TIMET's results from
operations improves substantially.
ENVIRONMENTAL AND LEGAL MATTERS. See Note 9 to the Consolidated
Financial Statements for a discussion of environmental and legal matters.
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 light of its current outlook, may
in the future seek to raise additional capital, modify its common and preferred
dividend policies, restructure ownership interests, incur, refinance or
restructure indebtedness, repurchase shares of 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.
- 19 -
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
Reference is made to Note 9 of the Consolidated Financial Statements
and to the Company's 1999 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 March 31, 2000.
(b) Reports on Form 8-K:
Reports on Form 8-K filed by the Registrant for the quarter ended
March 31, 2000 and the month of April, 2000:
January 25, 2000 - Reported Items 5 and 7
February 1, 2000 - Reported Items 5 and 7
March 2, 2000 - Reported Items 5 and 7
March 22, 2000 - Reported Items 5 and 7
- 20 -
<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: May 12, 2000 By /s/ Mark A. Wallace
- -------------------- ------------------------------------------
Mark A. Wallace
(Executive Vice President and
Chief Financial Officer)
Date: May 12, 2000 By /s/ David P. Burlage
- -------------------- ------------------------------------------
David P. Burlage
(Principal Accounting Officer)
- 21 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
Titanium Metals Corporation's Consolidated Financial Statements for the three
months ended March 31, 2000 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-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-01-2000
<PERIOD-END> Mar-31-2000
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<CURRENT-ASSETS> 291,445
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201,250
0
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</TABLE>
