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 June 30, 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 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
---------------
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 July 31, 2000: 31,841,405.
-----------
<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
Page
number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1999 and
June 30, 2000 2-3
Consolidated Statements of Operations - Three months and
six months ended June 30, 1999 and 2000 4
Consolidated Statements of Comprehensive Loss - Three
months and six months ended June 30, 1999 and 2000 5
Consolidated Statements of Cash Flows - Six
months ended June 30, 1999 and 2000 6-7
Consolidated Statement of Stockholders' Equity - Six
months ended June 30, 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 4. Submission of Matters to a Vote of Security Holders. 20
Item 6. Exhibits and Reports on Form 8-K. 20-21
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, JUNE 30,
ASSETS 1999 2000
-------------------- --------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 20,671 $ 6,230
Accounts and other receivables, less
allowance of $3,330 and $3,140 106,204 80,792
Receivable from related parties 4,071 6,265
Refundable income taxes 10,651 3,823
Inventories 191,535 160,040
Prepaid expenses and other 7,177 6,176
Deferred income taxes 2,250 2,035
-------------------- --------------------
Total current assets 342,559 265,361
-------------------- --------------------
Other assets:
Investments in joint ventures 26,938 20,167
Preferred securities 80,000 80,000
Accrued dividends on preferred securities 6,530 8,015
Goodwill 54,789 51,914
Other intangible assets 16,326 14,492
Deferred income taxes 9,600 19,966
Other 12,979 11,763
-------------------- --------------------
Total other assets 207,162 206,317
-------------------- --------------------
Property and equipment:
Land 6,230 6,177
Buildings 24,647 26,253
Information technology systems 55,226 53,923
Manufacturing and other 331,591 318,704
Construction in progress 8,122 5,698
-------------------- --------------------
425,816 410,755
Less accumulated depreciation 92,432 96,597
-------------------- --------------------
Net property and equipment 333,384 314,158
-------------------- --------------------
$ 883,105 $ 785,836
==================== ====================
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES, MINORITY INTEREST AND December 31, JUNE 30,
STOCKHOLDERS' EQUITY 1999 2000
------------------- ---------------------
<S> <C> <C>
Current liabilities:
Notes payable $ 9,635 $ 43,980
Current maturities of long-term debt and
capital lease obligations 85,679 2,086
Accounts payable 48,679 35,557
Accrued liabilities 42,879 36,648
Payable to related parties 1,984 1,287
Income taxes 516 702
Deferred income taxes 5,049 2,987
------------------- ---------------------
Total current liabilities 194,421 123,247
------------------- ---------------------
Noncurrent liabilities:
Long-term debt 22,425 23,696
Capital lease obligations 9,776 8,927
Payable to related parties 1,332 1,332
Accrued OPEB cost 19,961 19,550
Accrued pension cost 5,634 3,916
Accrued environmental cost - 3,262
Deferred income taxes 12,950 11,916
Accrued dividends and other - 4,518
------------------- ---------------------
Total noncurrent liabilities 72,078 77,117
------------------- ---------------------
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 8,222
Stockholders' equity:
Preferred stock - -
Common stock 315 319
Additional paid-in capital 347,984 350,035
Retained earnings 64,827 40,186
Accumulated other comprehensive loss (3,837) (11,614)
Treasury stock (1,208) (1,208)
Deferred compensation - (1,718)
------------------- ---------------------
Total stockholders' equity 408,081 376,000
------------------- ---------------------
$ 883,105 $ 785,836
=================== =====================
</TABLE>
Commitments and contingencies (Note 10)
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
-------------------------------- --------------------------------
1999 2000 1999 2000
--------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues and other income:
Net sales $127,608 $108,838 $261,744 $213,550
Equity in losses of joint ventures (632) (672) (1,080) (725)
Other, net 975 1,364 1,780 3,893
--------------- ------------- -------------- --------------
127,951 109,530 262,444 216,718
--------------- ------------- -------------- --------------
Costs and expenses:
Cost of sales 113,504 107,619 235,774 215,630
Selling, general, administrative and
development 12,606 11,216 25,367 22,557
Restructuring charge (credit) - (896) - 2,805
Interest 1,691 1,996 2,986 4,258
--------------- ------------- -------------- --------------
127,801 119,935 264,127 245,250
--------------- ------------- -------------- --------------
Income (loss) before income taxes,
minority interest and extraordinary item 150 (10,405) (1,683) (28,532)
Income tax expense (benefit) 53 (3,653) (589) (10,037)
Minority interest - Convertible Preferred
Securities 2,167 2,191 4,334 4,358
Other minority interest 423 575 961 915
--------------- ------------- -------------- --------------
Loss before extraordinary item (2,493) (9,518) (6,389) (23,768)
Extraordinary item, early extinguishment of
debt, net of tax - - - (873)
--------------- ------------- -------------- --------------
Net loss $ (2,493) $ (9,518) $ (6,389) $(24,641)
=============== ============= ============== ==============
Basic and diluted loss per share:
Before extraordinary item $ (.08) $ (.30) $ (.20) $ (.76)
Extraordinary item - - - (.03)
--------------- ------------- -------------- --------------
$ (.08) $ (.30) $ (.20) $ (.79)
=============== ============= ============== ==============
Basic and diluted weighted
average shares outstanding 31,370 31,373 31,370 31,372
=============== ============= ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
Three months ended Six months ended
June 30, June 30,
-------------------------------- --------------------------------
1999 2000 1999 2000
--------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss $ (2,493) $ (9,518) $ (6,389) $(24,641)
Other comprehensive loss - currency
translation adjustment (1,106) (5,145) (6,615) (7,777)
--------------- ------------- -------------- --------------
Comprehensive loss $ (3,599) $(14,663) $(13,004) $(32,418)
=============== ============= ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1999 and 2000
(In thousands)
1999 2000
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (6,389) $(24,641)
Depreciation and amortization 21,260 21,406
Non cash restructuring charge - 2,405
Non cash special charges - 6,729
Gain on sale of castings joint venture - (1,205)
Extraordinary loss on early extinguishment of debt, net - 873
Equity in losses of joint ventures, net of dividends received 1,580 975
Deferred income taxes (1,300) (11,781)
Other minority interest 961 915
Other, net - 47
Change in assets and liabilities:
Receivables 21,345 21,437
Inventories 18,546 27,061
Prepaid expenses and other 2,415 539
Accounts payable and accrued liabilities (24,700) (16,266)
Accrued restructuring charges (5,351) (1,904)
Income taxes 3,119 8,012
Accounts with related parties, net 256 (2,559)
Accrued dividends on preferred securities (2,775) (1,485)
Accrued dividends on Convertible Preferred Securities - 3,358
Other, net (5,015) (4,627)
--------------- ---------------
Net cash provided by operating activities 23,952 29,289
--------------- ---------------
Cash flows from investing activities:
Capital expenditures (14,532) (4,814)
Proceeds from sale of castings joint venture - 7,000
Proceeds from sales of property and equipment 3,043 -
Other, net 209 -
--------------- ---------------
Net cash provided (used) by investing activities (11,280) 2,186
--------------- ---------------
Cash flows from financing activities:
Indebtedness:
Borrowings 12,398 194,715
Repayments (32,161) (240,805)
Dividends paid (2,509) -
Other, net (284) (114)
--------------- ---------------
Net cash used by financing activities (22,556) (46,204)
--------------- ---------------
Net cash used by operating,
investing and financing activities $ (9,884) $(14,729)
=============== ===============
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Six months ended June 30, 1999 and 2000
(In thousands)
1999 2000
-------------- ---------------
<S> <C> <C>
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $ (9,884) $(14,729)
Currency translation (536) 288
-------------- ---------------
(10,420) (14,441)
Balance at beginning of period 15,464 20,671
-------------- ---------------
Balance at end of period $ 5,044 $ 6,230
============== ===============
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 2,769 $ 3,915
Convertible Preferred Securities dividends 6,666 3,333
Income taxes (refund), net (5,709) (6,107)
</TABLE>
See accompanying notes to consolidated financial statements.
-7-
<PAGE>
<TABLE>
<CAPTION>
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2000
(In thousands)
Accumulated Other
Comprehensive Loss
Additional -----------------------
Common Common Paid-In Retained Currency Pension Treasury Deferred
Shares Stock Capital Earnings Translation Liabilities Stock Compensation 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 - - - (24,641) (7,777) - - - (32,418)
Long-term incentive plan
awards for 467,500 shares 468 4 2,041 - - - - (2,045) -
Amortization of deferred
compensation - - - - - - - 327 327
Other 2 - 10 - - - - - 10
------- ------ ---------- --------- ------------ ------------ ---------- -------------- ----------
Balance at June 30, 2000 31,841 $ 319 $ 350,035 $ 40,186 $ (7,814) $ (3,800) $ (1,208) $ (1,718) $ 376,000
======= ====== ========== ========= ============ ============ ========== ============== ==========
</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 June 30, 2000 and the consolidated
statements of operations, comprehensive loss, stockholders' equity and cash
flows for the interim periods ended June 30, 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.
The Company will adopt the Securities and Exchange Commission's ("SEC")
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition", as amended, in
the fourth quarter of 2000. SAB No. 101 provides guidance on the recognition,
presentation and disclosure of revenue, including specifying basic criteria that
must be met before revenue can be recognized. The Company expects that the
adoption of SAB No. 101 will not have a material impact on its consolidated
financial position, liquidity or results of operations.
Basic earnings per share is based on the weighted average number of
unrestricted common shares outstanding during each period (See Note 7). Diluted
earnings per share reflects the dilutive effect of common stock options,
restricted stock 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 June 30, 1999 and 2000 because the effect was
antidilutive. The effect of the conversion on diluted earnings per share for
both the 1999 and 2000 six-month periods would have been to decrease net losses
by $4.4 million and increase average shares outstanding by 5.4 million shares.
Stock options and restricted shares omitted from diluted shares because they
were antidilutive were 1.6 million and 1.8 million in the 1999 and 2000
six-month periods, respectively.
-9-
<PAGE>
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".
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 six months ended June 30,
2000 includes special items recorded in the first quarter of 2000 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. The restructuring accrual was revised and a credit of $.9
million was recorded in the second quarter of 2000 (See Note 4). Substantially
all inventories and receivables at December 31, 1999 and June 30, 2000, along
with substantially all depreciation and amortization and capital expenditures
for the interim periods ended June 30, 1999 and 2000, relate to the "Titanium
melted and mill products" segment.
-10-
<PAGE>
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
1999 2000 1999 2000
------------- -------------- ------------- --------------
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Net sales:
Titanium melted & mill products $127,161 $108,838 $ 261,240 $ 213,550
Other 885 - 1,337 -
Eliminations (438) - (833) -
------------- -------------- ------------- --------------
$127,608 $108,838 $ 261,744 $ 213,550
============= ============== ============= ==============
Mill products shipments:
Volume (metric tons) 2,800 2,890 5,800 5,590
Average price ($ per Kilogram) $ 35.00 $ 28.65 $ 34.75 $ 29.70
Operating income (loss):
Titanium melted & mill products $ 1,531 $ (9,468) $ 634 $ (27,883)
Other (476) - (1,008) -
------------- -------------- ------------- --------------
1,055 (9,468) (374) (27,883)
Dividends and interest income 1,530 1,406 3,063 3,054
General corporate income
(expense), net (744) (347) (1,386) 555
Interest expense (1,691) (1,996) (2,986) (4,258)
------------- -------------- ------------- --------------
Income (loss) before income
taxes, minority interest and
extraordinary item $ 150 $(10,405) $ (1,683) $ (28,532)
============= ============== ============= ==============
Equity in losses of joint ventures:
Titanium melted & mill products $ (124) $ (672) $ (18) $ (725)
Other (508) - (1,062) -
------------- -------------- ------------- --------------
$ (632) $ (672) $ (1,080) $ (725)
============= ============== ============= ==============
</TABLE>
<TABLE>
<CAPTION>
December 31, JUNE 30,
1999 2000
------------------- --------------------
(In thousands)
<S> <C> <C>
Investment in joint ventures:
Titanium melted and mill products $ 21,143 $ 20,167
Other 5,795 -
------------------- --------------------
$ 26,938 $ 20,167
=================== ====================
</TABLE>
-11-
<PAGE>
<TABLE>
<CAPTION>
Note 3 - Inventories:
December 31, JUNE 30,
1999 2000
------------------- ---------------------
(In thousands)
<S> <C> <C>
Raw materials $ 45,004 $ 34,853
Work-in-process 69,809 80,896
Finished products 83,893 52,831
Supplies 18,329 16,960
------------------- ---------------------
217,035 185,540
Less adjustment of certain
inventories to LIFO basis 25,500 25,500
------------------- ---------------------
$ 191,535 $ 160,040
=================== =====================
Note 4 - Accrued liabilities:
December 31, JUNE 30,
1999 2000
--------------------- --------------------
(In thousands)
OPEB cost $ 3,269 $ 2,868
Pension cost 1,287 1,284
Other employee benefits 14,375 13,580
Deferred income 9,295 6,314
Environmental costs 1,238 888
Restructuring costs 1,490 2,379
Taxes, other than income 1,209 1,551
Accrued dividends - Convertible Preferred Securities 1,111 -
Other 9,605 7,784
--------------------- --------------------
$ 42,879 $ 36,648
===================== ====================
</TABLE>
Accrued restructuring costs at June 30, 2000 consists 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 six months ended June 30,
2000, payments of $.2 million, $.5 million and $1.6 million were applied against
the accrued costs related to the 1998, 1999 and 2000 plans, respectively. In the
second quarter of 2000, the restructuring accrual was reduced by $.9 million
primarily related to a reduction in the previously-reported number of employee
terminations from 250 to 200 people due to near-term production levels that are
now expected to be somewhat higher than previously anticipated. As of June 30,
2000, the nominal amount of remaining accrued costs related to the 1998
restructuring plan is expected to be paid by yearend. Most of the remaining
accrued costs related to the 1999 plan are expected to be paid by 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-2001. See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
-12-
<PAGE>
<TABLE>
<CAPTION>
Note 5 - Notes payable, long-term debt and capital lease obligations:
December 31, JUNE 30,
1999 2000
------------------- -----------------
(In thousands)
<S> <C> <C>
Notes payable:
U.S. credit agreement $ - $ 38,248
European credit agreements 9,635 5,732
------------------- -----------------
$ 9,635 $ 43,980
=================== =================
Long-term debt:
Bank credit agreement - U.S. $ 85,000 $ -
Bank credit agreement - U.K. 21,867 24,863
Other 922 703
------------------- -----------------
107,789 25,566
Less current maturities 85,364 1,870
------------------- -----------------
$ 22,425 $ 23,696
=================== =================
Capital lease obligations $ 10,091 $ 9,143
Less current maturities 315 216
------------------- -----------------
$ 9,776 $ 8,927
=================== =================
</TABLE>
The weighted average interest rate on borrowings outstanding under the
U.S. and U.K. credit agreements at June 30, 2000 was 8.5% and 7.6%,
respectively. As of June 30, 2000, the Company had approximately $112 million of
unused borrowing availability under its U.S. and European credit agreements.
Note 6 - Accrued dividends and other:
Accrued dividends and other consists primarily of principal and
interest on the Company's Convertible Preferred Securities. The Company
exercised its right under the terms of the Convertible Preferred Securities to
defer future dividend payments on these securities beginning with the dividend
payment due June 1, 2000. The securities permit deferral of dividend payments
for up to 20 consecutive quarters, although interest will continue to accrue at
the coupon rate on the principal and unpaid dividends. See also "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Note 7 - Stockholders' equity:
During the second quarter of 2000, the Company awarded 467,500 shares
of TIMET restricted common stock, under its Long-Term Performance Incentive
Plan, to certain of its officers and employees. The restrictions on the stock
grants lapse ratably on an annual basis over a five-year period. Since holders
of restricted stock have all the rights of other common stockholders, subject to
forfeiture unless certain periods of employment are completed, all of such
shares of restricted stock are considered to be currently issued and
outstanding. The market value of the restricted stock awards was approximately
$2 million on the date of grant ($4.375 per share), and this amount has been
recorded as deferred compensation, a separate component of stockholders' equity.
The Company amortizes deferred compensation to expense over the five-year
period.
-13-
<PAGE>
Note 8 - 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>
Six months ended
June 30,
-------------------------------
1999 2000
------------- -------------
(In thousands)
<S> <C> <C>
Expected income tax benefit, at 35% $ (589) $ (9,987)
Non-U.S. tax rates 357 561
U.S. state income taxes, net (196) (313)
Dividends received deduction (680) (688)
Valuation allowance - 336
Other, net 519 54
------------- -------------
$ (589) $ (10,037)
============= =============
</TABLE>
Minority interest - Convertible Preferred Securities is stated net of
income tax benefits of $2.3 million in both the 1999 and 2000 six-month periods.
The extraordinary loss for the 2000 six-month period is stated net of income tax
benefits of $.4 million.
Note 9 - Ownership structure:
At June 30, 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 held an aggregate of approximately 73% of Tremont's
outstanding common stock at June 30, 2000. Mr. Simmons may be deemed to control
each of Valhi, Tremont and TIMET.
Note 10 - Commitments and contingencies:
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
recently filed its answer to TIMET's complaint denying substantially all of
TIMET's allegations and making certain counterclaims against TIMET. TIMET
believes such counterclaims are without merit and intends to vigorously defend
against such claims. Since April 2000, the Company and Boeing have been in
discussions to determine if a settlement can be reached. Those discussions are
ongoing; however, no assurance can be given that a settlement will be achieved.
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 AND OPERATING INCOME (LOSS). The Company's results of operations
before special items in the first half of 2000 decreased from the comparable
period in 1999 due primarily to an 8% decline in average mill product selling
prices caused by lower demand in the aerospace market and competitive pricing
pressures in certain product lines. Mill product sales volume in the first half
of 2000 decreased 4% from the comparable period in 1999. Ingot and slab sales
volume in the first half of 2000, which represents about 10% of the Company's
net sales, decreased 2% compared to the first half of 1999, while average
selling prices decreased 4%. Net sales of $108.8 million in the second quarter
of 2000 were 15% lower than the second quarter of last year due principally to a
10% decline in average mill product selling prices offset by a 3% increase in
sales volume. Ingot and slab volume for the second quarter of 2000 increased 34%
from year-ago levels, while average prices declined 4%. As compared to the first
quarter of 2000, mill product sales volume in the second quarter of 2000
increased 7%, while average selling prices decreased 6%. Ingot and slab sales
volume in the second quarter of 2000 increased 53% compared to the first quarter
of 2000, while average selling prices decreased 4%.
Cost of sales (excluding special charges of $6.7 million in the first
quarter of 2000) as a percentage of net sales in the second quarter and first
half of 2000 (99% and 98%, respectively) increased from the comparable periods
in 1999 (89% and 90%, respectively) primarily due to the reduction in selling
prices more than offsetting the benefits received from various cost reduction
programs.
As previously reported, the Company implemented a plan to address
then-current market and operating conditions, which resulted in the recognition
of a $3.7 million restructuring charge in the first quarter of 2000. During the
second quarter of 2000, the restructuring accrual was reduced by $.9 million
primarily related to a reduction in the previously-reported number of employee
terminations from 250 to 200 people due to near-term production levels that are
expected to be somewhat higher than previously anticipated. The $2.8 million net
restructuring 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 200 employees terminated.
Selling, general, administrative and development expenses in the second
quarter and first half of 2000 decreased $1.4 million and $2.8 million,
respectively, from the comparable periods in 1999 due to lower information
technology costs associated with the support of the Company's
business-enterprise system and the partial realization of certain benefits from
the 2000 restructuring plan.
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 June 2000 was
approximately $160 million. Comparable backlogs at the end of March 2000 and
June 1999 were approximately $185 million and $240 million, respectively.
-15-
<PAGE>
The Company believes that its business in the second quarter of 2000
continued to be adversely impacted by an excess supply of titanium inventory
throughout the aerospace industry supply chain. Although there appear to be
signs that this situation is abating in selected products, the competitive
environment has continued to result in soft selling prices. Current indications
are that sales and operating margins, before special items, will be slightly
lower for the balance of 2000 compared to the first half of this year. The
Company is continuing its efforts to increase sales and reduce costs wherever
possible.
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 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, is 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 $.7 million during the
six months ended June 30, 2000 and $1.5 million during the same period in 1999.
At June 30, 2000, consolidated assets and liabilities denominated in currencies
other than functional currencies were approximately $21 million and $17 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 for the six months ended June 30, 2000 is
due to a $1.2 million gain on the sale of the Company's interest in its castings
joint venture in the first quarter of 2000.
INTEREST EXPENSE. Interest expense in the second quarter and first half
of 2000 increased $.3 million and $1.3 million, respectively, from the
comparable periods in 1999 primarily due to increased interest rates related to
the Company's credit facilities completed in February 2000. The effect of the
interest rate increases more than offset the benefit of lower average
outstanding borrowings. Interest expense in the first half of 2000 is also
higher due to a lower level of interest capitalized in the first quarter of 2000
as compared to the year-ago period.
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 8 to the
Consolidated Financial Statements.
-16-
<PAGE>
MINORITY INTEREST. Dividend expense related to the Company's 6.625%
Convertible Preferred Securities approximated $6.6 million in both the 1999 and
2000 six month periods, and is reported as minority interest, net of allocable
income taxes.
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.
The Company will adopt the SEC's Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition", as amended, in the fourth quarter of 2000. SAB No.
101 provides guidance on the recognition, presentation and disclosure of
revenue, including specifying basic criteria that must be met before revenue can
be recognized. The Company expects that the adoption of SAB No. 101 will not
have a material impact on its consolidated financial position, liquidity or
results of operations.
-17-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had net debt of $64 million ($70 million
of notes payable and long-term debt and $6 million of cash and equivalents). The
Company also had approximately $112 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 5 to the Consolidated Financial Statements.
OPERATING ACTIVITIES. Cash provided by operating activities was $29
million for the six-month period ended June 30, 2000, up from $24 million for
the same period in 1999, as summarized below.
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------------------
1999 2000
--------------- ---------------
(In millions)
<S> <C> <C>
Cash provided (used) by:
Operating activities:
Excluding changes in assets and liabilities $ 16.1 $ (4.3)
Changes in assets and liabilities 7.9 33.6
--------------- ---------------
24.0 29.3
Investing activities (11.3) 2.2
Financing activities (22.6) (46.2)
--------------- ---------------
Net cash used by operating, investing
and financing activities $ (9.9) $ (14.7)
=============== ===============
</TABLE>
Cash from operating activities, excluding changes in assets and
liabilities, generally followed the trend in operating results. Results of
operations in 2000 included non-cash special charges of $6.7 million.
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 more
effective working capital management, particularly inventories and receivables,
both of which were reduced in the first half of 2000. The significant reduction
in receivables in the first half of 2000 was also attributable to $16 million of
customer payments received in the first quarter of 2000 related to a
bill-and-hold shipment from 1999. The Company received tax refunds of $6.7
million in the second quarter of 2000. In July 2000, the Company received an
additional $.7 million in tax refunds.
Dividends on the $80 million of Special Metals Corporation 6.625%
convertible preferred securities held by the Company had previously been
deferred by SMC due to limitations imposed by SMC's bank credit agreements.
However, in April and July 2000, the Company received quarterly dividends of
$1.3 million per quarter. There can be no assurances that TIMET will continue to
receive additional dividends during the remainder of 2000.
-18-
<PAGE>
INVESTING ACTIVITIES. The Company's capital expenditures were $4.8
million for the six months ended June 30, 2000 compared to $14.5 million for the
same period in 1999. Capital expenditures for 2000 are estimated to be less than
$14 million and are planned to include those principally intended for capital
maintenance and 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.
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, reduction in inventories 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 U.S. credit agreement now 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. As previously
reported, the Company has exercised its right to defer future dividend payments
on these securities for a period of 10 quarters (subject to possible further
extension for up to an additional 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. As
of June 30, 2000, accrued dividends on the Company's Convertible Securities are
reflected as noncurrent liabilities in the consolidated balance sheet.
ENVIRONMENTAL AND LEGAL MATTERS. See Note 10 to the Consolidated
inancial 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 10 of the Consolidated Financial Statements
and to the Company's 1999 Annual Report for descriptions of certain
previously-reported legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held its Annual Meeting of Stockholders on May 17, 2000.
All nominees for director were elected. All directors are elected annually for
one-year terms. The vote with respect to each of the Company's directors was as
follows:
<TABLE>
<CAPTION>
Director Votes For Votes Withheld
--------------------------------------------- ---------------------------------- -------------------------------
<S> <C> <C>
Joseph S. Compofelice 28,046,922 1,064,679
Edward C. Hutcheson, Jr. 28,764,010 347,591
J. Landis Martin 28,757,129 354,472
Glenn R. Simmons 28,754,156 357,445
Gen. Thomas P. Stafford (retired) 28,759,460 352,141
Steven L. Watson 28,757,260 354,341
</TABLE>
The Company's shareholders also approved the Company's Executive Stock
Ownership Loan Plan with the voting results as follows:
<TABLE>
<CAPTION>
Votes Abstained or Broker/Nominee
Votes For Votes Against Non-Votes
------------------------------- ------------------------ -------------------------------------
<S> <C> <C>
21,550,869 903,269 6,657,463
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
10.1 Intercorporate Services Agreement, effective as
of January 1, 2000, by and between the Registrant
and Tremont Corporation.
10.2 Intercorporate Services Agreement, effective as
of January 1, 2000, by and between the Registrant
and NL Industries, Inc., incorporated by reference
to Exhibit 10.4 to a Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000 filed by NL
Industries, Inc. (File No. 1-640).
10.3 Executive Severance Policy, as amended and restated
effective May 17, 2000.
10.4 Titanium Metals Corporation Executive Stock
Ownership Loan Plan, effective as of February 19,
1998, incorporated by reference to Appendix A of
the Registrant's Proxy Statement dated April 4,
2000 for its Annual Meeting of Stockholders held
on May 17, 2000.
27.1 Financial Data Schedule for the quarter ended
June 30, 2000.
-20-
<PAGE>
(b) Reports on Form 8-K:
Reports on Form 8-K filed by the Registrant for the
quarter ended June 30, 2000 and the month of July, 2000:
<TABLE>
<CAPTION>
Date of Report Items Reported
---------------------------------------- -----------------------------------
<S> <C>
April 19, 2000 5 and 7
April 25, 2000 5 and 7
April 27, 2000 5 and 7
</TABLE>
-21-
<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: August 9, 2000 By /s/ Mark A. Wallace
------------------------- ----------------------------------------
Mark A. Wallace
(Executive Vice President and
Chief Financial Officer)
Date: August 9, 2000 By /s/ David P. Burlage
------------------------- ----------------------------------------
David P. Burlage
(Principal Accounting Officer)
-22-