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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
AMENDMENT NO. 1 TO
FORM 10-K
(FORM 10-K/A)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
COMMISSION FILE NUMBER 0-1339
______
OREGON METALLURGICAL CORPORATION
(Exact name of registrant as specified in its charter)
Oregon 93-0448167
_______________________________ __________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
530 34th Avenue S.W.
Albany, Oregon 97321
______________________________ ____________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 967-9000
______________
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class which is registered
None None
___________________ _____________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
______________________________
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<PAGE>
Pursuant to Rule 12b-15, promulgated under the Securities Exchange Act
of 1934, as amended ("Exchange Act"), Oregon Metallurgical Corporation hereby
amends each of the following Items of its Annual Report on Form 10-K for the
year ended December 31, 1995, so that, as amended, such Items read as set
forth herein:
Part I
Item 1. Business
Item 2. Properties
Part II
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data
Part III
Item 13. Certain Relationships and Related Transactions
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
As used in this Form 10-K/A, the terms "OREMET" or "Company" mean Oregon
Metallurgical Corporation and its consolidated subsidiaries, taken as a
whole, unless the context indicates otherwise.
OREMET<REGISTERED TRADEMARK> IS A REGISTERED TRADEMARK OF THE COMPANY.
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<PAGE>
PART I
ITEM 1. BUSINESS
The following information contains forward-looking statements which
involve certain risks and uncertainties. Actual results and events may
differ significantly from those discussed in the forward-looking statements.
THE COMPANY
The Company is one of two leading U.S. integrated producers and
distributors of titanium sponge, ingot, mill products and castings for use in
the aerospace, industrial, golf and military markets. Since 1993, the
Company has developed new market opportunities for titanium, expanded its
distribution network, increased its production capacity, and improved its
manufacturing efficiency. As a result, management believes that it is well-
positioned to capitalize on improving and emerging markets in the titanium
industry. In 1995, the Company reported net sales of $146.9 million, an
operating loss of $0.3 million and a net loss of $2.4 million.
On September 20, 1994, the Company completed the acquisition of the net
assets and subsidiaries of the Titanium Industries Distribution Group from
Kamyr, Inc. The acquired business is being operated under the name of
Titanium Industries, Inc., an 80% owned subsidiary of OREMET. TI operates
full-line titanium metal service centers in the U.S., U.K., Germany and
Canada and it produces small diameter titanium bar, weld wire and fine wire.
The acquisition was accounted for as a purchase, with the results of TI
included in the Company's financial statements from the acquisition date.
The Company was incorporated in Oregon in 1955 and began operations in
1956. The Company funded its growth internally and through investments by
corporate partners. In December 1987, the Company repurchased its Common
Stock from its major corporate partner and immediately sold shares of its
Common Stock to the Oregon Metallurgical Corporation Employee Stock Ownership
Plan (the "ESOP"). Initially, the ESOP owned approximately 67% of the Common
Stock and at December 31, 1995, the ESOP's ownership interest was
approximately 35%.
INDUSTRY OVERVIEW
Titanium was first commercially produced in the 1950s. Titanium's
superior strength-to-weight ratio, stability at high temperatures and
corrosion resistance make it well suited for the aerospace and jet engine
market. Historically, approximately 70% to 80% of U.S. titanium consumption
has been for aerospace applications both in the commercial and military
sectors.
The aerospace industry has historically been characterized by severe
cyclicality, which has had a significant impact on the sales and
profitability of titanium producers, including OREMET. The last peak in the
titanium industry cycle occurred in the 1988-1990 period when domestic
industry mill product shipments averaged over 50 million pounds per year. In
1991, U.S. titanium industry shipments declined by approximately 35% to 34
million pounds. This decline was primarily due to lower demand resulting
from a slump in the commercial aerospace industry and the curtailment or
cancellation of military programs resulting from the end of the Cold War.
Data reported by the USGS indicate that domestic industry mill product
shipments increased by approximately one million pounds per year in 1992 and
1993, while they dropped to approximately 35 million pounds in 1994. Based
on data of the USGS, U.S. mill product industry shipments were approximately
44 million pounds in 1995. The improvement in industry shipments is the
result of increased demand from the commercial aerospace industry and from
the producers of golf clubheads.
Beginning in 1995, demand for titanium significantly strengthened due
primarily to increased demand from the aerospace market. Historically,
commercial airlines have tended to place new aircraft orders when their
operating profits were improving. In 1995, the domestic commercial airline
industry reported significantly higher operating profits than the prior year,
and in the second half of 1995 aircraft manufacturers began to increase
aircraft build rates. Aerospace industry-related sales represented
approximately 46% of the Company's net sales for the
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year 1995, 44% of which were made to subcontractors in the aerospace industry
and 2% of which were made directly to major U.S. and international aircraft
manufacturers.
The aerospace industry is expected to remain the largest source of
demand for titanium products. However, many opportunities exist in the
non-aerospace markets where the characteristics of titanium metal provide
advantages over competing materials, such as aluminum, nickel and stainless
steel. Golf clubhead manufacturers are using titanium because of its
strength and low weight which enables production of clubs with larger heads.
Titanium's resistance to the effects of atmospheric conditions and a variety
of chemicals and acids make it an attractive metal for marine and other
industrial applications where corrosion is of critical concern. As a result,
titanium is used increasingly in pollution control equipment, offshore oil
installations, mining operations and waste storage facilities. Its favorable
strength-to-weight ratio and biocompatibility also make it an increasingly
popular metal for biomedical products such as medical implants, and consumer
products such as eyeglass frames and bicycles.
PRODUCTION PROCESS
Since it began operations in 1956, OREMET has been innovative in
developing process technologies for the production of titanium. The
production of titanium requires several raw materials, including titanium
tetrachloride (a liquid derivative of rutile ore, coke and chlorine gas),
magnesium, titanium scrap and master alloys, such as vanadium-aluminum.
The flow of the Company's titanium production process is illustrated
below.
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<PAGE>
OREMET TITANIUM PRODUCTION PROCESS
The remainder of this page contains a flow chart, with directional
arrows, demonstrating the Company's titanium production process, beginning
with the input of titanium tetrachloride and magnesium to produce titanium
sponge. The flow chart shows that the titanium sponge is then either sold to
non-integrated producers or used internally, along with master alloys and
titanium scrap, to produce ingot. In addition, the flow chart shows that
ingot is then either used to produce mill products, which are sold to
aerospace, golf product and industrial parts manufacturers, used to produce
castings, which are sold to industrial and marine product manufacturers, or
used by forgers and mill product manufacturers.
<PAGE>
The Company's manufacturing processes are dependent on the reliable
operation of its machinery and equipment. The Company has certain critical
pieces of machinery and equipment which may require significant lead times to
complete necessary repairs or replacements and the functions of which may not
be easily replaced by an outsider converter. Additionally, given the
Company's belief that all other titanium manufacturers are currently
operating at or near production capacity, there can be no assurance that the
Company could locate an outside converter that has sufficient available
capacity to enable the Company to meet its production demands in a timely
manner, or that an agreement could be reached with any such outside converter
on commercially acceptable terms. Any such event could result in a
disruption in the Company's production or distribution which could have a
material adverse effect on the Company, its financial condition or its
prospects. Additionally, although the Company maintains business
interruption insurance to reduce the potential effect of any such loss, a
natural disaster or other catastrophic event occurring at its Albany
manufacturing facilities could have a material adverse effect on the Company,
its financial condition or its prospects.
PRODUCTS
Titanium products is the Company's single business segment. A full
range of titanium products is produced for applications in both the aerospace
and non-aerospace markets. The principal product forms are titanium sponge,
titanium ingots, titanium mill products and castings.
The amount of the Company's consolidated sales and the percentage of
consolidated sales represented by each class of product during the three
years ended December 31, 1995, were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
___________________________________________________
1993 1994 1995
_______________ _______________ _______________
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales
Sponge $ 19,391 35% $ 12,360 18% $ 10,558 7%
Ingot 9,963 18 14,992 21 22,315 15
Mill Products 19,860 36 22,752 32 46,839 32
Castings 4,473 8 6,442 9 7,225 5
Distribution ---- --- 11,517 16 54,455 37
Other 1,664 3 3,103 4 5,461 4
________ ___ ________ ___ ________ ___
Total Net Sales $ 55,351 100% $ 71,166 100% $146,853 100%
======== === ======== === ======== ===
</TABLE>
Sponge. Titanium sponge is the commercially pure, elemental form of
titanium metal. Titanium sponge is produced by OREMET at its facility in
Albany, Oregon by reducing titanium tetrachloride using magnesium as the
reduction agent. OREMET produces titanium sponge in 15,000 pound batches by
using a modified Kroll process developed by OREMET engineers. Titanium
tetrachloride and magnesium are combined in a horizontal retort and swept
with heated helium in one of the Company's eight sponge reduction furnaces,
producing titanium sponge and magnesium chloride. The magnesium chloride is
separated electrolytically into magnesium and chlorine in OREMET's magnesium
recovery facility. The recovered magnesium is recycled for use in the
Company's titanium sponge manufacturing facility. The chlorine by-product is
sold, but does not produce material revenues for the Company.
OREMET began producing titanium sponge for internal use in 1970 and
began selling it in 1987. The Company sells sponge principally to domestic
non-integrated titanium producers who use the sponge to produce ingot and
mill products. During 1995, the sponge plant operated at approximately 75%
of its practical annual capacity of 13.5 million pounds and since the second
half of 1995 it has been operating at near capacity. The Company supplements
its sponge needs by purchasing from third parties.
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<PAGE>
The Company has a contract to supply titanium sponge and certain other
titanium products to RMI Titanium Company ("RMI") through 2003. Under this
contract, RMI may require that the Company supply it with up to seven million
pounds of titanium sponge per year (approximately 52% of the sponge plant's
capacity). RMI has notified the Company that it will take no more than
approximately 80% of the maximum amount of sponge at specified prices per
pound during 1996 and 1997. Thereafter, through 2003, the price of the
sponge supplied will at RMI's option be at either U.S. market prices or the
prices in effect under the contract for 1996 plus adjustments for changes in
certain of the Company's costs, such as labor, electricity and materials, but
in any event, the price charged will not be below the Company's cost. The
Company's agreement to supply titanium sponge has not had and is not likely
to have a material adverse effect on the Company, its financial condition or
its prospects. Sales to RMI accounted for approximately 5%, 13% and 30% of
OREMET's net sales in 1995, 1994 and 1993, respectively. No other customer
accounted for more than 10% of OREMET's net sales in any of these periods.
Ingot. Titanium ingots are cylinders with a weight of up to 20,000
pounds and a diameter of up to 36 inches. Titanium ingots are made by OREMET
at its facility in Albany, Oregon by melting sponge or titanium scrap, or a
combination of the two, with certain other elements to form titanium alloys.
Prior to melting, the materials are measured by a computerized weighing
system to meet customer specifications and compacted into briquettes that are
welded together to form an electrode. An electrode can also be formed by
melting the materials in the Company's plasma furnace, which allows the
Company to combine a larger percentage and more varied types of titanium
scrap. An electrode is then melted in one of the Company's vertical,
water-cooled vacuum arc furnaces. Melting may be repeated once or twice to
produce standard and premium grades of titanium ingot. The melting process
is monitored through computer-operated sensors, controls and video displays
to maintain high levels of quality and consistency. After melting, samples
from finished ingots are analyzed in the Company's laboratory to ensure
proper chemical content and quality. Ingots are converted in a forge, either
by OREMET or by its customers, into semi-finished shapes and then into
finished mill products. The Company produces ingots in a variety of sizes
and grades to meet the customer's specifications. During 1995, the ingot
plant operated at approximately 65% of its estimated annual capacity of 22
million pounds and since the second half of 1995 it has been operating at
near capacity. In addition to its own ingot production, the Company
contracts to have melting done by other domestic and international suppliers.
Mill Products. Titanium mill products result from the forging, rolling,
drawing and/or extruding of titanium ingots or slabs. OREMET produces
titanium billet, bar, rod, wire, plate and sheet. OREMET sells its mill
products to manufacturers of aircraft, jet engines, vessels and piping for
chemical plants, prosthetic and orthopedic implants, armor, golf clubheads
and other consumer goods. OREMET produces mill products at its plants in
Albany, Oregon and Frackville, Pennsylvania. During 1995, the mill products
facility in Albany, Oregon operated at 50% of its estimated annual capacity
of 15 million pounds and is currently operating at approximately 65% of its
capacity.
The Company is dependent on the services of outside processors to
perform certain important processing functions. For some of its products,
OREMET is dependent on the services provided by Titanium Hearth Technologies
("THT"), an outside processor which is 50% owned by one of the Company's
principal competitors. THT owns and operates a cold hearth EB furnace which
the Company utilizes for melting titanium slab, that is further processed
into titanium plate and sheet for non-aerospace applications, and titanium
electrodes for aerospace applications. OREMET has not experienced any delays
or problems associated with the competitor's ownership of THT. Other than
for those provided by THT, the services performed by the outside processors
are typically available from multiple sources. Services are provided by THT
in accordance with a three-year agreement ending December 31, 1996. This
agreement is renewed automatically for successive one-year terms unless
either party has given the other not less than six months' notice of its
desire not to renew such term. OREMET and other THT customers have received
notice from THT that it will not renew on present terms, but that it intends
to negotiate new supply contracts. Should the THT services agreement not be
renewed, OREMET would attempt to obtain these services from another
competitor which has a cold hearth melting furnace. OREMET believes that the
loss of the services provided by THT would result in production delays and
have an adverse effect on the Company, its financial condition or its
prospects.
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The Company maintains a process engineering staff which continually
evaluates and identifies potential improvements in the manufacturing process.
OREMET's quality control group tests products for compliance with customer
specifications, including detailed metallurgical and chemical analyses, sonic
tests and mechanical capability and property tests. The results of these
tests are certified for conformity to specifications and then recorded for
future traceability.
Castings. In 1957, OREMET completed construction of a titanium and
zirconium casting foundry and began producing components in commercial
quantities. Since then, the foundry has continued to develop new technology
and make process improvements. OREMET produces titanium and zirconium
castings for customers primarily for the non-aerospace industry. Castings
are made by melting metal which is then poured under vacuum into graphite
molds. Castings generally weigh from one pound to 2,000 pounds. OREMET's
castings are made at its Albany, Oregon plant to customer specifications and
are used in marine and other industrial applications where corrosion is of
critical concern. Titanium and zirconium castings are used in a diversity of
applications including offshore oil production, chemical processing, mining,
armor, aerospace, power generation, pulp and paper manufacturing and marine
products. Both titanium and zirconium are recognized as cost-effective
materials for construction because of their light weight, excellent corrosion
resistance, low maintenance, high quality and long life cycle. As new
applications for titanium continue to grow, the Company expects the demand
for castings to follow. To address this increasing demand, the OREMET
foundry is in the process of increasing its production capacity.
Other Products. OREMET provides services to other titanium producers
and sells by-products of its titanium production process. Non-integrated
producers of titanium ingot and mill products contract with OREMET to melt
sponge or titanium scrap into ingot or to convert ingot into mill products.
OREMET also sells titanium scrap for use as an alloy addition in the
production of other metals such as steel and aluminum.
RAW MATERIALS
The primary raw materials used by the Company are titanium
tetrachloride, magnesium, titanium scrap and certain combinations of primary
metals that form master alloys. Titanium tetrachloride and magnesium are the
principal materials used in the production of titanium sponge. The principal
materials used in the production of titanium ingot are sponge, titanium scrap
and alloying elements.
OREMET purchases its titanium tetrachloride requirements from SCM
Chemicals, Inc. ("SCM") under a long-term contract that expires in 2001.
While the Company believes it could obtain commercial quantities of
sufficiently pure titanium tetrachloride from other sources, but at a
potentially higher cost, any extended disruption in the supply from SCM could
have a material adverse effect on OREMET's ability to produce titanium sponge
and could have a material adverse effect on the Company, its financial
condition or its prospects. Magnesium is generally available from a number
of suppliers.
While the Company is one of seven major worldwide producers of titanium
sponge, a basic raw material in the production of titanium ingot and mill
products, under current market conditions it cannot supply all of its needs
for titanium sponge internally and is dependent, therefore, on third parties
for a portion of its titanium sponge needs. Since 1993, the Company has
purchased sponge from third parties to take advantage of lower-priced
materials and to supplement that which it produces. The Company estimates it
will purchase approximately 42% of its sponge requirements from third parties
during 1996. The Company obtains sponge from domestic and foreign producers
of sponge, both on a spot purchase basis and pursuant to short-term sponge
contracts. The Company's purchases of imported sponge, in pounds, compared
to total purchases and production of sponge were 12%, 7% and 11% for the
years ended December 31, 1995, 1994, and 1993, respectively. There can be no
assurance that the Company will not experience interruptions in its sponge
supplies, which could have a material adverse effect on the Company, its
financial condition or its prospects.
Titanium scrap is typically available from many sources. The Company is
a major recycler of titanium scrap. Where possible, the Company utilizes
titanium scrap as a cost-effective alternative to titanium sponge; both
materials are used as primary ingredients in the manufacture of ingots. Much
of the titanium scrap which is
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<PAGE>
purchased by the Company originates from within the FSU as the availability
of attractively priced domestic scrap in sufficient quantities varies due to
fluctuations in the U.S. titanium market and demands from other purchasers,
including steel and aluminum producers. Certain of the primary metal
compounds used to form master alloys are produced by a limited number of
suppliers. During January 1996, in response to rapidly increasing scrap
costs, the Company added raw material surcharges to its product prices to
offset the higher costs it was experiencing.
The Company has historically obtained approximately 50% of its feedstock
for producing titanium ingot from sponge and the other 50% from scrap. The
Company believes it will continue to be able to obtain sufficient quantities
of sponge and scrap to enable it to meet its production needs.
When available at attractive prices, the Company has purchased titanium
sponge and scrap from various countries, including the FSU. The Company's
purchases of imported sponge and scrap in pounds, compared to total purchases
and production of sponge and scrap were 11%, 6% and 10% for the years ended
December 31, 1995, 1994, and 1993, respectively. Continued availability of
these materials at attractive prices from the FSU cannot be assured due to
the uncertainties concerning the manufacturing capabilities of the FSU
titanium producers and the potential for political and economic instability
within the FSU.
Historically, the Company has sought to recover increases in titanium
scrap and sponge prices through price increases of its products. The Company
has recently added raw material surcharges to its contracts in order to more
directly link changes in raw material costs to its sales prices. Although
the average cost of sponge and scrap (produced and purchased) increased 8%
during the year 1995 as compared to the average cost for the year 1994, the
average cost of purchased sponge and scrap increased 48% over the comparable
period for 1994. During the year ended 1995, the average sales prices for
ingot and mills products increased 19% and 5% respectively. Generally, the
Company does not incur import tariffs and anti-dumping duties on purchases of
FSU sponge as it is ultimately exported in the form of finished goods. If
such tariffs and duties are incurred, the Company would adjust the price or
surcharge accordingly. There are no import tariffs or duties on scrap. Any
increases in titanium scrap and sponge prices which are not offset by
increases in the Company's sales prices could have a material adverse effect
on the Company, its financial condition or its prospects.
MARKETS
Aerospace. The Company sells its titanium products to non-integrated
producers and fabricators which process the material for use by the aerospace
industry. While the percentage of its sales to the aerospace industry
accounted for approximately 46% in 1995, compared to 61% in 1994 and 77% in
1993, aggregate sales to the aerospace industry increased from $42.6 million
in 1993 to $67.1 million in 1995. The Company has also expanded its
capability to include more complex alloys and mill products used by the
aerospace industry. The Company anticipates that future aerospace industry
sales will vary from 40% to 60% of total net sales depending upon demand and
profitability. For the year ended 1995, aerospace related sales represented
46% of net sales. The Company's main route of supply is to provide products
to numerous forging houses, machine shops and other mill product producers
who in turn supply components to the major air frame and jet engine
manufacturers. Since 1994 the Company has been supplying products direct to
Airbus Industries for the fabrication of engine pylons. OREMET's commercial
aerospace product sales are dependent upon the production rates of major
airplane manufacturers both as a direct and as an indirect supplier. The
Company has historically experienced a high level of order cancellation and
deferrals in periods of industry downturn. The cyclicality of the commercial
and military aerospace industry has had and may continue to have a material
adverse effect on the Company, its financial condition or its prospects. The
Company can give no assurance as to the extent or duration of any recovery in
the aerospace market or the extent to which such recovery will result in
increases in demand for titanium products.
Golf. The titanium golf clubhead market evolved in 1988 when a few
investment casting houses started producing clubheads for export to markets
in the Far East. At the same time, some companies in Japan started to
produce clubheads by casting and forging. By 1993, the technology and
manufacturing processes were well developed and major U.S. club producers
became interested in producing heads with a larger hitting surface. Since
1993, most of the major golf club manufacturers have started their own lines
of titanium head drivers. The Company estimates that the use of titanium has
grown from 1.5 million pounds in 1994 to approximately 9 million
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pounds in 1996. Golf club manufacturers are now starting to produce titanium
fairway woods, irons and putters. The Company has excellent relationships
with the major golf clubhead casting companies. The Company believes it is
the market share leader and is supplying in excess of 50% of the titanium
sold to the golf market.
The Company believes that the market for golf clubheads has grown to be
the second largest consumer of titanium, after the commercial aerospace
market. The market for the Company's products sold to golf clubhead
producers has only recently begun to emerge as a significant component of the
Company's net sales, and there can be no assurance that demand for titanium
products used in the golf industry or the Company's products in particular,
will continue or that this market will expand as the Company anticipates. In
addition, the Company's major competitors in the titanium industry have
recently begun to supply the golf clubhead market and there is no assurance
that the Company will be able to maintain its leading market share.
Armor. Titanium has been studied by the defense industry as a ballistic
protection material. In the mid 1970s, titanium was designed into the A-10
military airplane to provide protection for the pilots performing close-in
ground support missions. As a result of the deficiencies with aluminum
protection systems experienced during the Faulkland's War, titanium was
studied as a replacement material for protecting strategic areas aboard naval
fighting ships.
In order to deploy forces more rapidly, certain military forces turned
to titanium to reduce the weight of vehicles while assuring good ballistic
protection. Since 1992, hatch covers on the Bradley fighting vehicle have
been made with titanium. In 1994 and 1995, OREMET supplied over 300,000
pounds of titanium plate for ballistic protection on a new French aircraft
carrier, the Charles DeGaulle. OREMET is supplying titanium parts for
construction of the Swedish Leopard II tank and the U.S. M1A2 tank. Military
engineers continue to search for other armor applications that can take
advantage of titanium's light weight and ballistic protection
characteristics. Research efforts for armor applications continue to be a
high priority for OREMET. The Company believes that titanium usage on tanks
and on various types of personnel carriers will increase.
In an effort to lessen the titanium industry's dependence on the
aerospace industry and to increase participation in other markets, the
Company, its competitors and certain end-users of titanium are devoting
significant efforts and resources to developing new markets and applications
for titanium, certain of which are still in the preliminary stages.
Developing these emerging applications involves substantial risk and
uncertainties due to the fact that titanium must compete with less expensive
materials in these potential applications. There can be no assurance that
the Company will be able to develop new markets and applications for its
products, or as to the time required for such development, or as to the
extent to which it will face competition in this regard. If the Company is
unable to develop these markets to a substantial degree, management expects
that the Company's business would be largely dependent on the cyclical
aerospace industry and the emerging golf market.
MARKETING, DISTRIBUTION AND SERVICE CENTERS
OREMET markets primarily to manufacturers of titanium metal end
products. The Company also sells its products to non-integrated titanium
producers, regional value-added distributors and other mill product
consumers. The majority of sales are made through the Company's internal
sales force. OREMET also uses independent sales representatives for the sale
of products outside of North America.
Shipments to customers may be made directly from one of the Company's
mills in Albany, Oregon or Frackville, Pennsylvania; from an outside
processor; or from one of the Company's service centers in North America and
Europe. The Company's service centers maintain a large inventory of titanium
mill products available for rapid delivery to points around the globe. A
complete line of first stage processing equipment is available and outside
machining can be arranged by the service centers to meet the needs of their
customers.
For nearly 25 years, TI, including its predecessor company, has been
supplying and developing titanium applications for industrial and commercial
customers. TI maintains a network of service centers established to satisfy
the titanium needs of the non-aerospace industry. TI opened its first
service center during 1972 in Fairfield, New Jersey. In response to the
increasing demands of its customers and in order to provide improved response
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times, TI established additional service centers throughout North America.
In 1988, TI established a service center in Birmingham, U.K. and in 1992,
expanded its position in the European market by acquiring an existing service
center distribution business, also in Birmingham. During the first quarter
of 1996, TI opened a service center in Dusseldorf, Germany. To support the
increasing demands for titanium in diverse commercial, consumer, aerospace
and industrial markets, the Company intends to continue to expand its
distribution business geographically. In addition to pursuing growth
opportunities through the establishment of additional service centers, TI
intends to grow through acquisitions of existing service centers and through
the expansion of its participation in the aerospace market. The Company
estimates that approximately 25% of TI's shipments are to the aerospace
market, primarily in Europe. TI is currently evaluating service center
opportunities in the Pacific Rim, Southern Europe and the Northeastern United
States.
The Company and TI maintain titanium sales offices and service centers
(which also include sales personnel) in the following locations:
<TABLE>
<CAPTION>
Location Established Function
________ ___________ ________
<S> <C> <C> <C>
United States Albany, OR 1956 Sales Office
Parsippany, NJ 1972 Service Center
Chicago, IL 1986 Service Center
Jacksonville, FL 1986 Service Center
Los Angeles, CA 1987 Service Center
Dallas, TX 1989 Sales Office
Pittsburgh, PA 1994 Sales Office
Canada Montreal, Quebec 1973 Service Center
Vancouver, B.C. 1989 Sales Office
Europe Birmingham, U.K. 1988 Service Center
Paris, France 1994 Service Center
Dusseldorf, Germany 1996 Service Center
</TABLE>
INTERNATIONAL AND EXPORT SALES
International and export sales, primarily in Europe and Asia, totaled
approximately 20%, 14% and 13% of OREMET's net sales in 1995, 1994 and 1993,
respectively. In May 1994, OREMET signed a three-year contract with
Aerospatiale, Societe Nationale Industrielle for engine pylon parts for the
Airbus aircraft, and in the second half of 1994 began supplying product under
the contract. The acquisition of TI provided the Company with a service
center located in the U.K. with an established operation. In 1996, TI opened
a service center in Germany. The Company intends to utilize these facilities
to meet its customers' needs in Europe. See note 12 to the Company's
Consolidated Financial Statements.
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<PAGE>
BACKLOG
The Company's twelve-month sales order backlog was $105 million at
December 31, 1995, compared to $44 million at December 31, 1994 and $18
million at December 31, 1993. OREMET produces titanium ingot, mill products
and castings in response to specific customer orders. Production times vary
among products and can be several months or more. The Company includes in
its backlog only those firm purchase orders scheduled for delivery during the
subsequent twelve-month period (which are generally subject to cancellation
by the customer). The Company has historically experienced a high level of
order cancellations and deferrals in periods of industry downturn.
<TABLE>
<CAPTION>
Twelve-Month Sales Order Backlog
As of the Quarter Ended
____________________________________________
March 31 June 30 September 30 December 31
________ _______ ____________ ___________
(in millions)
<S> <S> <S> <S> <S>
1995 48 64 $65 $105
1994 28 29 37 44
1993 27 25 19 18
</TABLE>
During the second half of 1995 and continuing into 1996, the Company has
experienced a significant increase in the volume of incoming orders at
increased prices. The Company has delayed opening its first quarter 1997
order book in order to better assess future raw material costs. The increase
in demand has been driven primarily by the recovery in the commercial
aerospace market and the emergence of the golf clubhead market. As capacity
utilization in the titanium industry continues to grow and lead times
lengthen, the Company expects prices on new orders to continue to strengthen.
COMPETITION
Although OREMET's sales are predominately to the domestic market, the
titanium industry is competitive on a worldwide basis as a result of many
factors, particularly the presence of excess capacity, which has intensified
price competition for available business. The Company is one of two
integrated producers in the U.S. and one of four in the world (the Company
considers an integrated producer one that produces at least titanium sponge
and ingot). OREMET's principal competitors are other integrated and non-
integrated producers of titanium located primarily in the U.S., Europe,
Japan, China and the FSU. There are also a number of non-integrated
producers that produce mill products from purchased sponge, scrap or ingot.
In each of the Company's major product lines, OREMET competes primarily on
the basis of price, quality, delivery time and customer service. The
principal methods of competition in the titanium industry and for all of the
Company's products are product quality and qualifications to supply products.
Many of the Company's products (sponge, ingot, mill products and castings)
are qualified for both aerospace and non-aerospace applications. The Company
competes by maintaining strict quality standards. In addition, as one of two
integrated producers in the U.S., the Company is positioned to control
quality and the costs of producing sponge, ingot, mill products, and
castings.
Availability of material and lead time to produce are competitive
factors with respect to mill products and castings and distribution sales.
The Company maintains an inventory of finished and intermediate inventory to
meet customers' delivery requirements. The Company also works on cycle time
reduction to be more responsive to customer needs. In addition, the Company
provides engineered products to customer specifications.
In the U.S. market, the increasing presence of non-U.S. participants has
become a significant competitive factor. Until 1993, imports of foreign
titanium products into the U.S. had not been significant due to relatively
favorable currency exchange rates, tariffs, and with respect to Japan and
Russia, existing and prior duties (including anti-dumping duties). However,
imports of titanium sponge, scrap, and other products, principally from the
FSU, have increased in recent years and have had a significant competitive
impact on the U.S. titanium industry. To the
- -10-
<PAGE>
extent the Company has been able to take advantage of this situation by
purchasing such sponge, scrap or intermediate mill products for use in its
own operations during the last three years, the negative effect of these
imports on the Company has been somewhat diminished. Given the current
political and economic uncertainties in some of the countries of the FSU,
there can be no assurance that this supply of titanium products will continue
to be available to the Company without interruption or at attractive prices.
The Company estimates that its share of U.S. sponge capacity is
approximately 30% and that its share of world capacity is about 5%. While
approximately 20% of the world's sponge production capacity is located within
the U.S., up to one half is located within the FSU (which sponge capacity was
primarily developed to serve the needs of the Soviet military, principally
the aerospace and submarine services, both of which have been sharply
curtailed). The Company believes that the FSU production capacity may be
limited as a result of deferred plant maintenance and a general lack of
financing. As a result, significant unused production capacity, beyond that
which is now supplying the FSU's export markets (including sales to the
Company), may exist in this region. If exports of titanium products from the
FSU were to increase significantly, this additional supply could adversely
affect the demand for the Company's products. After the end of the Cold War,
sponge produced in the FSU became available and has been imported into the
U.S. at low prices in increasing quantities. USGS estimates that
approximately 11 million pounds of sponge annually were imported into the
U.S. from the FSU during 1994 and 1995, approximately 350% higher than the
amount imported during 1993 and representing about 25% of the 1995
consumption by U.S. producers. The excess capacity of sponge in the FSU is
beneficial, at this time, to different sectors of the industry as it provides
additional raw material to meet the increasing raw material needs of ingot
producers. In the event such sponge is qualified for aerospace applications
and large quantities were introduced into the market, especially in a market
downturn, such effect would be adverse to the existing sponge producers,
including the Company.
As the participation of non-U.S. companies increases, the competitive
environment for the Company may become more difficult, especially if existing
tariffs are eased and certain market participants are no longer subject to
anti-dumping duties. Currently, imports of titanium sponge, ingot and mill
products from countries that receive the most favored nation ("MFN") tariff
rate are subject to a 15% tariff. The tariff rate applicable to imports from
countries that do not receive MFN treatment is 25% for sponge and ingot and
45% for mill products. In addition to regular tariffs, imports of titanium
sponge from certain countries in the FSU (Russia, Kazakhstan and Ukraine) are
presently subject to anti-dumping duties of 84%. If these anti-dumping
duties are eased or removed with respect to imports from some of these
countries, substantial additional capacity could enter the market and if the
demand for the industry's products is less than its capacity, the
profitability of the industry, including the Company, could be adversely
affected.
The titanium producers in the FSU are currently working with several
U.S. companies to have their "new production" sponge qualified for use in
critical aerospace applications. A review of the anti-dumping duty by the
U.S. Department of Commerce is pending for the periods after August 1, 1993.
An elimination or reduction of the anti-dumping duties on sponge from the FSU
could result in additional imports of their product which in turn could
reduce the demand for sponge produced by the Company.
While the FSU producers have not been significant participants in the
U.S. market for mill products, it is believed that they have the largest
titanium mill products production capacity in the world. Imports of titanium
ingot from the FSU totaled just under two million pounds during 1995. While
this is an increase of almost 250% from the quantity imported from the FSU in
1994, it represents less than 5% of the estimated 1995 production of the U.S.
producers. Continued expansion into the U.S. market by FSU producers could
materially affect the operations of the Company and the industry to the
extent that the worldwide supply of product exceeds market demand and prices
are reduced.
EMPLOYEE RELATIONS
As of December 31, 1995, the Company employed 580 employees, of which 46
were employed outside of the U.S. All of the hourly production and
maintenance workers (approximately 342) at the Albany, Oregon and Frackville,
Pennsylvania manufacturing facilities are represented by labor unions. In
August 1994, the Company and the union representing the Albany, Oregon
employees agreed upon a new labor contract which will continue
- -11-
<PAGE>
through July 2000. This contract can be re-opened after three years to
address economic issues. The contract covering the Frackville, Pennsylvania
employees was negotiated in September 1994, and will continue for three
years. Since 1974, the Company has not experienced a strike or labor
disruption. OREMET considers its relations with its employees and the union
to be good.
RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT
OREMET's RT&D efforts are focused on improving production processes and
developing new applications and markets for titanium. Production process
improvements have included improving sponge production efficiencies, making
technical improvements to scrap processes, revising vacuum arc melting
techniques, enhancing forging practices and improving overall yield. In
addition, the Company strives to reduce costs by shortening cycle times, by
implementing synchronous manufacturing principles and by eliminating product
rejections.
OREMET's focus on product development has resulted in the development of
high purity sponge for use by the electronics industry, consistent production
of titanium aluminides for aerospace applications and new alloys for armor
and golf applications.
In order to keep abreast of new developments, the Company maintains
contact with university and research facilities, as well as with major end
users of titanium products. These groups assess new applications for
titanium and the need for new or alternative alloys and titanium
compositions. OREMET then develops alloy systems, processes and procedures
for the manufacture of new products.
JOINT VENTURES
OREMET is involved in several joint ventures which, like its RT&D
efforts, utilize shared investment as a means to access technology or
capabilities.
OREMET is a 50% partner with Precision Castparts Corporation in a joint
venture which owns a plasma furnace operated by OREMET in Albany, Oregon.
The plasma furnace produces remelt electrodes for both parties' consumption.
The venture started in 1983 and is producing in excess of 2 million pounds of
electrode per year.
OREMET is a 33% member in MZI, L.L.C., which owns an advanced ultrasonic
inspection system for testing of certain aerospace products. The other
members are Titanium Metals Corporation and Teledyne Allvac. This venture is
in its second year of operations and has inspected 2.5 million pounds of
product.
REGULATORY AND ENVIRONMENTAL MATTERS
The Company is subject to federal, state and local statutes and
regulations concerning environmental matters and land use. Although the
Company believes it is in material compliance with these laws, they are
frequently modified to be more restrictive and it is impossible to predict
accurately the future effect that changes in these laws may have on the
Company. There can be no assurance that the Company will not face costs and
liabilities as a result of environmental regulation which could have a
material adverse effect on the Company, its financial condition or its
prospects.
The risk of environmental contamination is ever-present in the Company's
operations. The Company uses and produces substantial quantities of
substances, chemicals and compounds that have been identified as hazardous or
toxic under federal, state and local environmental and worker safety and
health laws and regulations. In addition, at its Albany, Oregon facility,
the Company uses substantial quantities of titanium tetrachloride, which is
classified as extremely hazardous under federal environmental laws. The
Company has used such substances and compounds throughout its history and has
undertaken some remediation to alleviate concerns over past releases or
disposal practices. The Company conducts its operations at industrial sites
where hazardous materials have been managed for many years in connection with
its operations, including periods before careful management of these
materials was required or generally believed to be necessary. Consequently,
the Company is subject to various environmental laws that impose compliance
obligations and can create liability for historical releases of hazardous
substances. While the Company takes environmental, safety and health
precautions appropriate for the industry, the Company's operations pose an
ongoing risk of accidental releases of, and worker exposure to, hazardous or
toxic substances.
- -12-
<PAGE>
The Company entered into a consent order in August 1994 with the Oregon
Department of Environmental Quality pursuant to which the Company is
conducting an investigation of hazardous substances in portions of the soil
and groundwater at its plant site in Albany, Oregon. The Company anticipates
that its investigation will result in a determination that at least some
remedial action is necessary, for which an accrual has been made. A
neighboring property owner also is investigating groundwater contamination at
its property that has migrated to OREMET's property and for which OREMET may
have legal claims to recover a portion of its investigation costs.
In February 1995, the Oregon Department of Environmental Quality
modified OREMET's waste water discharge permit. The new permit imposes more
stringent discharge limits according to a specified schedule. OREMET has
identified several feasible alternatives for meeting the new limits, the most
expensive of which would require capital expenditures of approximately
$700,000. OREMET is working with the Department to explore less expensive
alternatives.
In connection with the preparation of its application for a new federal
operating permit under Title V of the 1990 Clean Air Act Amendment, the
Company discovered that some of its air emissions may have been greater than
previously recognized. The Company has voluntarily reported these facts to
the Oregon Department of Environmental Quality. To resolve these issues, the
Company has agreed to undertake an evaluation of its emissions that could
result in requirements to install additional pollution control equipment. At
this point, the Company is unable to determine whether additional controls
will be required, but the Company does not believe the cost of such
additional controls would have a material effect on its capital expenditures,
earnings or competitive position.
Although no claims have been filed against the Company related to the
above matters, it has completed engineering studies with regards to these
environmental matters. As a result of these studies, which are ongoing, the
Company made provisions for environmental expenses of $0, $240,000 and
$970,000 in 1995, 1994 and 1993, respectively. These amounts are in addition
to recurring environmental costs which are expensed as incurred and are
included in cost of sales. At the present time, management cannot reasonably
predict when these environmental issues will be resolved.
Commencing in 1991, the Pennsylvania Department of Environmental
Regulation and the Environmental Protection Agency ("EPA") have performed
periodic site inspections, including soil and water sampling, at TI's site in
Frackville, Pennsylvania, in connection with a regional groundwater
investigation of the Frackville, Pennsylvania area. While this investigation
is ongoing, the Company has not been informed by either agency of any pending
or potentially required actions which may arise from this investigation.
In conjunction with the Company's purchase of TI, Kamyr, Inc. (the
seller) has agreed to undertake specified clean-up activities. In addition,
Kamyr, Inc. has agreed to a limited indemnification of the Company in the
event damages arise that result from conditions which were not in compliance
with environmental laws and regulations as they existed at the time OREMET
purchased TI.
ITEM 2. PROPERTIES
The Company's principal executive office and production facilities are
located in Albany, Oregon on 210 acres of property owned (in fee without any
major encumbrances) by the Company. The Company occupies approximately
461,000 square feet in six buildings and uses approximately 65 acres on the
site. The facilities include plants for the production of titanium sponge,
ingot, mill products and castings. The Company also maintains separate
facilities for recovering magnesium and processing titanium scrap. TI's
executive offices are located in Fairfield, New Jersey and it owns (in fee
without any major encumbrances) and operates a production facility in
Frackville, Pennsylvania. The Company believes that the plants are adequate
and suitable in conjunction with the Company's access to outside processing
vendors for its current operating needs. Other than the facility in
Birmingham, U.K., the service centers and sales offices which the Company
utilizes are leased. See "Business - Products" for a discussion of productive
capacity and extent of utilization.
- -13-
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for each of the years in the five-year
period ended December 31, 1995 have been derived from the audited
consolidated financial statements of the Company. The Company's categories
of sales, shipments and employee data have been derived from the Company's
reports. The Company uses a fiscal year ending on December 31 of each year.
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company
(including in each case the notes thereto).
<TABLE>
<CAPTION>
Year Ended
December 31,
_____________________________________________________
1991 1992 1993 1994(1) 1995
____ ____ ____ _______ ____
(In thousands, except employee and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales:
Sponge $ 6,452 $ 22,412 $ 19,391 $ 12,360 $ 10,558
Ingot 20,686 14,955 9,963 14,992 22,315
Mill products 17,221 13,268 19,860 22,752 46,839
Castings 6,480 4,890 4,473 6,442 7,225
Distribution ---- ---- ---- 11,517 54,455
Other 3,402 1,260 1,664 3,103 5,461
_________ _________ _________ _________ _________
Total net sales 54,241 56,785 55,351 71,166 146,853
Cost of sales 57,432 57,352 52,636 64,527 131,002(2)
_________ _________ _________ _________ _________
Gross profit (loss) (3,191) (567) 2,715 6,639 15,851
Research, technical and product
development expenses 353 750 773 1,376 1,595
Selling, general and administrative
expenses 4,954 4,417 5,124 7,517 14,512
Provisions for environmental costs(3) ---- 200 970 240 ----
Restructuring costs(4) ---- ---- 2,027 ---- ----
_________ _________ _________ _________ _________
Income (loss) from operations (8,498) (5,934) (6,179) (2,494) (256)
Interest income 1,191 847 816 391 ----
Interest expense (477) (689) (532) (606) (2,104)
Minority interests(1) ---- ---- ---- (29) (480)
_________ _________ _________ _________ _________
Income (loss) before income
taxes and cumulative effect of
changes in accounting principles (7,784) (5,776) (5,895) (2,738) (2,840)
Income tax benefit (expense) 3,099 1,654 1,797 715 425(5)
Income (loss) before cumulative effect
of changes in accounting principles (4,685) (4,122) (4,098) (2,023) (2,415)
Cumulative effect of changes in
accounting principles ---- (69)(6) ---- ---- ----
_________ _________ _________ _________ _________
Net income (loss) $ (4,685) $ (4,191) $ (4,098) $ (2,023) $ (2,415)
========= ========= ========= ========= =========
Per common share:
Income (loss) before cumulative
effect of changes in accounting
principles $ (.44) $ (.38) $ (.38) $ (.18) $ (.22)
========= ========= ========= ========= =========
Weighted average common shares
and equivalents outstanding 10,603 10,754 10,839 11,001 11,219
</TABLE>
- -14-
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31,
_____________________________________________________
1991 1992 1993 1994(1) 1995
____ ____ ____ _______ ____
(In thousands, except employee and per share data)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 39,291 $ 37,296 $ 36,467 $ 49,082 $ 63,769
Total assets 86,520 85,701 83,326 111,972 133,077
Long-term debt, including current
maturities 8,250 8,100 4,750 17,177 27,362
Shareholders' equity 68,436 68,402 67,065 67,282 65,887
OTHER OPERATING DATA:
EBITDA(7) $ (4,306) $ (1,352) $ (1,426) $ 1,882 $ 3,896
Cash flows provided by (used in):
Operating activities 961 7,454 841 (4,459) (10,969)
Investing activities (3,165) (11,201) (1,974) (2,680) (2,248)
Financing activities (3,592) 2,278 (921) 8,754 12,145
_________ _________ _________ _________ _________
Total (5,796) (1,469) (2,054) 1,615 (1,072)
Product shipments
(in pounds):
Ingot 4,297 3,447 2,319 3,517 4,418
Mill products 2,172 1,892 3,119 3,540 6,910
Product sales:
Aerospace $ 39,596 $ 45,428 $ 42,620 $ 43,254 $ 67,148
Non-aerospace 14,645 11,357 12,731 27,912 79,705
Active employees at period end 354 359 310 482 580
Order backlog at period end(8) $ 33,000 $ 28,000 $ 18,000 $ 44,000 $ 105,000
_______________________________
<FN>
<F1> Includes Titanium Industries, Inc., after its acquisition by the
Company on September 20, 1994. Minority interests represent the
minority shareholder's 20% interest in the net income of TI.
<F2> A provision for a loss on long-term agreements of $4,417 was
recorded in the fourth quarter of 1995. See note 6 to the
Company's Consolidated Financial Statements.
<F3> See note 11 to the Company's Consolidated Financial Statements.
<F4> See note 13 to the Company's Consolidated Financial Statements.
<F5> The Company's 1995 effective tax benefit rate on the net loss before
income tax benefit and minority interests was 18%. The Company's income
tax rate varied from the normally expected statutory rate because the
valuation allowance was established for certain deferred tax assets.
<F6> The cumulative effect of changes in accounting principles reflects the
adoption of SFAS No. 109, "Accounting for Income Taxes," which resulted
in the recognition of $0.6 million, or $0.05 per share, of income.
Simultaneously, the Company adopted SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" which resulted in the
recognition of $0.7 million, or $0.06 per share, of expense, net of tax
benefits of $0.4 million. The combined effect of adopting SFAS
No.'s 109 and 106 was the recognition of $69, or $0.01 per share, of
additional expense.
<F7> EBITDA represents income (loss) before cumulative effect of accounting
changes plus income taxes, interest expense, depreciation and
amortization. EBITDA is presented because it is a widely accepted
financial indicator of cash flow and the ability to service debt.
EBITDA should not be considered as an alternative to, or more meaningful
than, operating income, net income or cash flow as an indicator of the
Company's performance. EBITDA has been included because the Company
uses it as one means of analyzing its ability to service its debt,the
Company's lenders use it for the purpose of analyzing the Company's
performance with respect to its credit agreements and the Company
understands that it is used by certain investors as one measure of a
company's historical ability to service its debt. Not all companies
calculate EBITDA in the same fashion and therefore EBITDA as presented
may not be comparable to other similarly titled measures of other
companies.
<F8> Order backlog is defined as firm purchase orders scheduled for delivery
during the subsequent twelve-month period (which are generally subject
to cancellation by the customer upon payment of specified charges).
</FN>
</TABLE>
- -15-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the Consolidated Financial Statements and notes thereto
of the Company. The following information contains forward-looking
statements which involve certain risks and uncertainties. Actual results and
events may differ significantly from those discussed in the forward-looking
statements.
OVERVIEW
Historically, aerospace applications in both the commercial and military
sectors have accounted for a majority of U.S. titanium consumption. The
aerospace industry has been characterized by severe cyclicality, which has
had a significant impact on the sales and profitability of titanium
producers, including OREMET. The last cyclical peak for the titanium
industry occurred in the 1988-1990 period, when domestic industry mill
product shipments averaged over 50 million pounds per year. In 1991, U.S.
titanium industry mill product shipments declined by approximately 35% to 34
million pounds. This decline was primarily due to lower demand resulting
from a slump in commercial aerospace and the curtailment or cancellation of
military programs as the Cold War ended. Data reported by the USGS indicate
that industry shipments reached approximately 36 million pounds in 1993 but
dropped to about 35 million pounds in 1994.
During the past five years, when the titanium industry was in a severe
downturn, the Company incurred net losses of $4.7 million, $4.2 million, $4.1
million, $2.0 million and $2.4 million in 1991, 1992, 1993, 1994 and 1995,
respectively. For the years 1993 through 1995, the Company's aggregate net
losses were $8.5 million, and the combined losses of the Company and the
other major titanium producers for whom data are publicly available (RMI
Titanium Company ("RMI"), IMI plc, and Titanium Metals Corporation) were
$181.3 million. Although the Company operated profitably in the fourth
quarter of 1994 and first six months of 1995, during the last two quarters of
1995 and for the year, the Company incurred losses. Strong increases in
demand resulted in shortages in raw material supply and escalating costs. The
Company's rapid increase in production levels coupled with a larger and more
complex mix of products, resulted in production inefficiencies, and higher
conversion costs. These factors combined to depress margins on most of the
Company's sales.
The USGS reported that in 1995, U.S. industry shipments of titanium mill
products increased by 26% over 1994 levels to 44 million pounds. The
improvement in industry shipments was the result of an increase in demand in
the commercial aerospace market and the emergence of new uses of titanium
metal, primarily in golf clubheads. Reported orders for new commercial
aircraft have increased significantly, particularly for wide body planes such
as the Boeing 777, which use a greater percentage of titanium per plane than
narrow body aircraft. The Company believes that industry mill product
shipments to the commercial aerospace market increased by more than three
million pounds to 20 million pounds in 1995. While shipments to the military
industry have fallen below delivery levels in the 1980s as a result of
reduced defense budgets, this decline has been offset by demand from new
markets. The Company believes that in 1996, shipments to the golf market,
which were 1.5 million pounds in 1994, will be approximately 9 million pounds
and be greater than shipments to the entire military sector.
Beginning in 1993, several members of the Company's current executive
management team, including Carlos E. Aguirre, the President and Chief
Executive Officer, joined the Company from other companies within the
titanium industry. The new management implemented a plan to: (i) diversify
the Company's revenue base from a market, customer and product perspective,
(ii) develop and establish a major presence in new markets, (iii) expand the
Company's distribution and service center business and (iv) increase
production levels while improving product quality. Aerospace industry-
related sales represented approximately 46% of net sales in 1995, compared to
approximately 61% of net sales in 1994. International sales have increased
from 14% of net sales in 1994 to 20% of net sales in 1995. Sales for
non-aerospace applications have increased from $27.9 million, 39% of total
net sales in 1994 to $79.7 million, 54% of total net sales, in 1995.
The Company has devoted significant resources to develop its presence in
new markets. The Company believes it is the market leader in shipments to the
golf industry, with 1995 shipments of 1.8 million pounds and
- -16-
<PAGE>
1996 shipments anticipated to be approximately 5 million pounds. New markets
where the Company has also established a major presence include armor for
sale to the military and high purity sponge for the electronics industry.
The Company also developed a process to produce titanium aluminide ingots,
primarily for use by the aerospace industry. In addition, the Company has
instituted synchronized manufacturing techniques and additional programs to
improve cycle time and yield.
On September 20, 1994, the Company completed the acquisition of TI for
$13.5 million. TI operates full-line titanium metal service centers in the
U.S., Canada and U.K. and Germany and also produces small diameter titanium
bars, weld wire and fine wire. The acquisition was accounted for as a
purchase, with the results of TI included in the Company's financial
statements from the acquisition date. TI sells its products primarily to
industrial markets and to a lesser extent, the commercial aerospace market.
Historically, TI's service centers have reported results that are more stable
and less cyclical than the Company's core manufacturing business. The
acquisition of TI has enhanced the Company's revenue diversification and its
ability to identify promising new market opportunities.
OREMET has historically utilized large amounts of low cost scrap in its
melting operations. The Company believes that the ability to efficiently
consume different types of scrap will become increasingly important as the
demand for titanium increases.
The Company's twelve-month order backlog has increased from $44 million
as of December 31, 1994 to $105 million as of December 31, 1995. OREMET's
backlog is based on firm purchase orders scheduled for delivery during the
subsequent twelve-month period. Beginning in the second half of 1995, the
Company has experienced a significant increase in requests for quotations as
well as increased orders and prices on accepted orders. The increase in
demand is primarily a result of the recovery in the commercial aerospace
market and the growth of the golf clubhead market. Because of the strong
demand, the Company has been increasingly selective in the new orders that it
accepts. In addition, the Company has delayed opening its first quarter 1997
order book in order to better access future raw material costs.
The increase in demand for titanium products has resulted in higher
prices for certain raw materials used by the Company, including titanium
scrap, titanium sponge and alloying materials. During 1995, the Company's
profitability was negatively impacted by higher raw material costs and fixed
price long-term sales agreements with certain customers, primarily in the
commercial aerospace industry. The Company recorded a $4.4 million provision
in the fourth quarter of 1995 to recognize anticipated losses on existing
long-term agreements ("LTAs") as a result of higher raw material costs.
Starting with the first quarter of 1996, the Company added raw material
surcharges in order to more directly link changes in raw material costs to
its contracts. The Company has also instituted price increases for certain
of its long-term sales agreements which were entered into prior to 1996.
However, there can be no assurance as to the Company's continuing ability to
recover raw material cost increases. The future profitability of the
Company's fixed price LTAs is subject to change based upon the Company's
costs of production.
- -17-
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating items of the Company's
consolidated results of operations as a percentage of net sales for each of
the years in the five-year period ended December 31, 1995.
<TABLE>
<CAPTION>
Year Ended
December 31,
________________________________________
1991 1992 1993 1994 1995
____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C>
Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Gross profit (loss)(1) (5.9) (1.0) 4.9 9.3 10.8
Income (loss) from operations(1) (15.7) (10.4) (11.2) (3.5) (0.2)
Net income (8.6)% (7.4)% (7.4)% (2.8)% (1.6)%
______________________
<FN>
<F1> A provision for a loss on LTAs of $4.4 million was recorded in the
fourth quarter of 1995. Gross profit and income from operations,
exclusive of this provision, as a percentage of net sales would have
been 13.8% and 2.8% in 1995, respectively.
</FN>
</TABLE>
Quarterly Results of Operations
The following table presents the Company's unaudited consolidated
quarterly financial data for fiscal years 1994 and 1995. Although the
Company's business is not seasonal, growth rates of sales have varied from
quarter to quarter as a result of the purchase of TI in September 1994,
the timing of new products, industry cyclicality and general U.S. and
international economic conditions.
<TABLE>
<CAPTION>
1994 Quarters 1995 Quarters
____________________________________ _______________________________________
First Second Third Fourth First Second(1) Third Fourth(1)
_____ ______ _____ ______ _____ _________ _____ _________
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 13.3 $ 14.5 $ 17.0 $ 26.4 $ 30.8 $ 35.2 $ 41.2 $ 39.7
Gross profit 0.1 0.6 1.7 4.2 5.3 5.3 4.1 1.2
Income (loss)
from operations (1.7) (0.9) (0.6) 0.7 1.6 1.4 0.1 (3.4)
Net income (loss) $ (1.1) $ (0.6) $ (0.4) $ 0.1 $ 0.5 $ 0.5 $ (0.4) $ (3.0)
_____________________
<FN>
<F1> During the second quarter of 1995, the Company reported a pre-tax charge to income of $1.3 million to reflect the impact of
projected conversion costs on long-term agreements which were in excess of selling price. During the fourth quarter of 1995,
the Company reported a pre-tax charge to income of $4.4 million to reflect the impact of increased raw material costs on long-
term agreements.
</FN>
</TABLE>
Comparison of 1995 to 1994
Net Sales. Net sales increased $75.7 million, or 106% to $146.9 million
in 1995, compared to $71.2 million in 1994. 1995 represented the first
complete year in which TI results were consolidated with the Company. On a
pro forma basis, as if TI had been included in results for all of 1994, the
sales increase in 1995 would have been 53%. The increase in sales was
primarily driven by increased demand and higher prices for both the Company's
manufactured and service center products. Of the $75.7 million net sales
increase, $61.5 million was the result of volume increases and $14.2 million
from higher average prices.
- -18-
<PAGE>
Titanium Sponge. Sales of titanium sponge and sponge conversion
services decreased 15% to $10.6 million in 1995, compared to $12.4 million in
1994. Sponge shipments decreased 18% and average sponge prices per pound
increased. Sales of titanium sponge have decreased due to greater internal
consumption by the Company. During the second half of 1995, the Company's
integrated sponge facility operated at near capacity, primarily supplying the
Company's internal demand for titanium sponge and sales to RMI under a
long-term titanium sponge conversion agreement. The Company projects that it
will continue to operate its sponge facility at near capacity with
substantially all production being utilized for internal consumption and for
supply to RMI (approximately 39% of capacity in 1996). The Company is
presently supplementing its sponge production with purchases from other
producers.
Ingot. Sales of ingot increased 49% to $22.3 million in 1995, compared
to $15.0 million in 1994. Ingot shipments increased 26% and the average
ingot price per pound also increased 19%. The increase of sales is primarily
due to higher demand from the aerospace industry. The Company began
operating its melt facilities at near capacity during the second half of 1995
and expects to continue to do so in 1996. The Company produces ingot for
both internal use in its mill products division and for sale primarily to
aerospace customers.
Mill Products. The Company produces or contracts for outside
production, a variety of mill products including: billet, bar, plate, sheet
and engineered parts. Mill product sales increased 106% to $46.8 million in
1995, compared to $22.8 million in 1994. Shipments of mill products
increased 95% and the average price per pound increased 5%. During 1995,
mill products sales increased across all product lines. Sales to the casters
of golf clubheads had a favorable effect on 1995 mill product sales.
Castings. Sales of castings increased 12% to $7.2 million in 1995,
compared to $6.4 million in 1994. During the fourth quarter of 1995, a
significant competitor of the Company discontinued its casting operations
which had a positive impact on casting orders and sales.
Distribution. The Company's service centers market a wide variety of
mill products including engineered parts that are manufactured by various
producers. Sales of service center products were included for a full year in
1995, compared to approximately three months in 1994. During 1995, the
increase in sales was due to increased shipments and favorable pricing and
product mix. The markets served by the Company's service centers, which were
entered by the Company with the acquisition of TI, displayed strong growth
during 1995.
Cost of Sales and Gross Profit. Cost of sales for 1995 increased 103%
to $131.0 million, compared to $64.5 million in 1994. TI's cost of sales
were included for a full year in 1995, compared to approximately three months
in 1994. The primary reasons for the increase in cost of sales were
increased shipments coupled with rising raw material costs. The Company's
gross profit margin increased to 10.8% in 1995 from 9.3% in 1994.
The Company recorded a provision for loss on LTAs of $4.4 million in the
fourth quarter of 1995 to cover estimated losses on LTAs with certain
aerospace customers. The provision for losses on LTAs was charged to cost of
sales. The Company's most significant unfavorable LTA expires during the
third quarter of 1997. In response to the changing market conditions, the
Company has negotiated more favorable terms on many of its LTAs and has
instituted raw material surcharges.
Research, Technical and Product Development Expenses. Research,
technical and product development expenses ("RT&D") increased $0.2 million to
$1.6 million compared to $1.4 million in 1994. RT&D salaries and related
expenses increased in 1995 compared to 1994, reflecting an increase in
technical personnel to support the Company's long-term commitments for
research, development of new products and improvements in operating
processes. The main focus of RT&D is to develop enhanced production
procedures, provide customers with required technical support and develop new
products and markets. RT&D works jointly on projects with customers,
research agencies and universities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased $7.0 million, or 93%, in 1995 to
$14.5 million from $7.5 million in 1994. The inclusion of TI for a full year
in the Company's 1995 results is the primary reason for the increase in the
Company's SG&A. In response
- -19-
<PAGE>
to an increased activity level, all departments included in the SG&A category
added personnel during 1995. However, as a percentage of sales, SG&A
decreased to 9.9% in 1995 from 10.6% in 1994.
Interest Expense. Interest expense increased by $1.5 million to $2.1
million in 1995 compared to $0.6 million in 1994. The increase in interest
expense in 1995 compared to 1994 is the direct result of the purchase of TI
in September 1994 and increased borrowing required to support the Company's
increased operating levels.
Income Tax Benefit. The Company's 1995 effective tax rate on the net
loss before income tax benefit and minority interests is 18%. The Company's
income tax rate varied from the normally expected statutory rate due to
differences between book and tax income for which recognition of a deferred
tax asset was not considered appropriate.
Net Loss. The Company reported a net loss of $2.4 million, $0.22 per
share, for 1995 compared to a net loss of $2.0 million, $0.18 per share, for
1994.
Comparison of 1994 to 1993
Net Sales. Net sales increased 29% to $71.2 million in 1994, compared
to $55.4 million in 1993. The Company's 1994 net sales include $11.5 million
of sales attributable to TI. Net sales of ingot, mill products and castings
increased 29% to $44.2 million in 1994 from $34.3 million in 1993. The
expansion in sales across the Company's primary product lines reflected a
strengthening general economy. The increase in revenue for these products
was primarily the result of increased shipments; average prices remained
stable between the two periods. Sales of titanium sponge and sponge
conversion services decreased 36% to $12.4 million in 1994. The decrease in
sales and conversion of titanium sponge was a direct result of competition
from lower priced titanium sponge available principally from the FSU.
Cost of Sales and Gross Profit. Cost of sales for 1994 increased 22.6%
to $64.5 million compared to $52.6 million in 1993. The change was primarily
due to the increase in volume. As a result, gross profit margin increased to
9.3% in 1994 from 4.9% in 1993.
Restructuring Costs. During 1993 the Company recorded a non-recurring
provision for restructuring costs of $2.0 million as a result of severance
benefits to salaried employees. No additional restructuring charges were
incurred during 1994.
Provision for Estimated Environmental Costs. In 1994, the Company
recorded a provision for estimated environmental costs of $0.2 million,
compared to $1.0 million in 1993.
Research, Technical and Product Development Expenses. RT&D expenses
increased in 1994 to $1.4 million from $0.8 million in 1993 as a result of
the Company's increased emphasis on new product development and technical
support.
Selling, General and Administrative Expenses. SG&A increased 47% in
1994 to $7.5 million from $5.1 million in 1993. The addition of TI
represented $1.7 million of the 1994 increase in SG&A. SG&A as a percentage
of sales increased to 10.6% in 1994 from 9.3% in 1993.
Income Tax Benefit. The Company reported an income tax benefit of $0.7
million, or an effective tax rate of 26% for 1994, compared to a tax benefit
of $1.8 million, or an effective tax rate of 31% for 1993.
Net Loss. The Company reported a net loss of $2.0 million, $0.18 per
share, for 1994 compared to a net loss of $4.1 million, $0.38 per share, for
1993.
- -20-
<PAGE>
Comparison of 1993 to 1992
Net Sales. Net sales decreased $1.4 million, or 2.5% to $55.4 million
in 1993, compared to $56.8 in 1992. Decreased sales of ingot, castings,
titanium sponge and conversion services were only partially offset by
increased sales of mill products. Favorable mix shifts and small price
changes in sponge, ingots, castings and mill products offset an approximate
5% decline in shipments. These net decreases were primarily due to a
continuing weak demand for titanium metal and shrinkage of the military and
commercial aerospace markets. Imports from the FSU have intensified the
downward pressure on pricing.
Cost of Sales and Gross Profit. Cost of sales for 1993 decreased 8% to
$52.6 million, compared to $57.4 million in 1992. The decrease in cost of
sales was primarily a result of a decrease in shipments. The Company's gross
profit margin increased to 4.9% from a negative margin of 1% in 1992, as a
result of increased sales of higher value-added mill products and increased
prices as previously noted.
Restructuring Cost. In 1993, the Company recorded a provision for
restructuring costs of $2.0 million, which included non-recurring costs for
severance pay and benefits of $1.0 million and a write-down of construction
in progress of $1.0 million related to the curtailed expansion of the
titanium sponge reduction and magnesium recovery plants. This downsizing and
restructuring was done to reduce fixed costs to a level which was more
supportable by the then current level of business and to recognize that at
that level and with the availability of low priced sponge from the FSU, the
expansion was no longer needed. See note 13 to the Company's Consolidated
Financial Statements.
Provision for Estimated Environmental Matters. The Company recorded a
provision for estimated environmental expenses of $1.0 million in 1993
compared to $0.2 million in 1992. See note 11 to the Company's Consolidated
Financial Statements.
Selling, General and Administrative, and Research Technical and Product
Development Expenses. SG&A and RT&D expenses increased $0.7 million, or 14%
in 1993 to $5.9 million from $5.2 million in 1992. The increase is primarily
the result of employment related expenses related to the transition to the
new management team. As a percentage of sales, SG&A and RT&D expenses
increased to 10.7% in 1993 from 9.1% in 1992.
Interest Expense. Interest expense decreased to $0.5 million in 1993
compared to $0.7 million in 1992 due primarily to a reduction in the bank
term loans.
Income Tax Benefit. The loss before income taxes increased slightly to
$5.9 million in 1993 compared to $5.8 million in 1992. The income tax
benefits of $1.8 million in 1993 and $1.7 million in the prior year are
recorded at a rate different than the statutory rate primarily as a result of
recording a state tax valuation allowance in both 1993 and 1992, and in 1993
recording an alternative minimum tax limitation.
Net Loss. The Company reported a net loss of $4.1 million, or $0.38 per
share for 1993, compared to a net loss of $4.2 million or $0.39 per share,
for 1992.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Net cash used in operating activities totaled $11.0 million for the year
ended 1995, compared to $4.5 million for the comparable period of 1994.
Working capital increases required to support the sharp increase in operating
levels were responsible for the most significant portion of the cash used by
the Company's operating activities in 1995. The increase in the amount of
cash flow used in operating activities is a trend which began in the second
quarter of 1994, consistent with the Company's experience of increasing
sales, sales order backlog and production.
- -21-
<PAGE>
During 1995, the Company incurred $2.7 million in expenses relating to
its Stock Compensation Plans and Savings Plan. Liabilities arising under
these plans are satisfied by issuing shares of the Company's common stock.
See note 10 to the Company's Consolidated Financial Statements.
During the fourth quarter of 1995, the Company incurred a non-cash
charge to earnings of $4.4 million to establish a provision for anticipated
future losses on fixed price LTAs. See note 6 to the Company's Consolidated
Financial Statements.
Net cash used in investing activities totaled $2.2 million in 1995
compared to $2.7 million in 1994. The Company had additions to property,
plant and equipment of $1.9 million in 1995 and 1994.
In 1994, the Company paid $8.2 million, net of cash received of $0.8
million, and issued debt to the seller in the amount of $4.5 million, for the
purchase of TI.
Net cash provided by financing activities totaled $12.1 million in 1995,
compared to $8.8 million in 1994. For 1995, $11.3 million was provided from
net borrowings on the Company's credit facilities and book overdraft, and
$1.0 million from a capital lease obligation.
Review of Significant Working Capital Accounts
Inventories. Inventories increased by $17.0 million, or 35%, to $66.0
million at December 31, 1995, compared to $49.0 million at December 31, 1994.
In addition to an increase in finished goods inventory, increases in raw
materials and work-in-process have been made in support of higher production
levels. In response to a growing sales backlog, the Company is continuing to
raise its production levels. The Company is also experiencing higher raw
material and conversion costs, which have increased the cost of the Company's
inventory.
Accounts Receivable. Accounts receivable increased by $5.5 million, or
27%, to $25.9 million at December 31, 1995, compared to $20.4 million as of
December 31, 1994. The increase in accounts receivable is consistent with
the Company's increase in sales volume.
Book Overdraft. The Company had a book overdraft at December 31, 1995
and December 31, 1994 of $2.0 million, and $0.0 million, respectively. The
book overdraft represents Company checks which have been disbursed and are in
transit as of the end of the reporting period. When the checks clear the
Company's bank, they are funded by draws on the Company's U.S. credit
facility to the extent they are not funded by deposits.
Accounts Payable. Accounts payable at December 31, 1995 were $17.0
million, which is comparable to the December 31, 1994 balance of $16.9
million. The minimal change in the accounts payable balance between 1995 and
1994 reflects the Company's use of other financing facilities, primarily its
credit agreements, to fund the substantial increases in accounts receivable
and inventory.
Accrued Payroll and Employee Benefits. Accrued payroll and employee
benefits increased $3.7 million, or 126% to $6.7 million at December 31,
1995, compared to $2.9 million at December 31, 1994. Accruals related to the
Company's cash bonus program, stock appreciation rights plan, Stock
Compensation Plans and Savings Plan account for a substantial portion of the
increase.
Credit Agreements
The Company may borrow up to $25 million under the terms of a U.S.
revolving credit agreement with BankAmerica Business Credit, Inc. ("BABC").
The U.S. credit agreement expires in September 1997. The balance outstanding
under the credit agreement as of December 31, 1995, was $21.2 million. As of
December 31, 1995, interest charged under the credit agreement was calculated
based on BABC's reference rate plus 1.5% or a borrowing option based on LIBOR
plus 2.5%. The Company anticipates that the credit facility with BABC will
expand to $35 million in 1996 in anticipation of increased financing
requirements necessary to support higher operating levels.
- -22-
<PAGE>
As of December 31, 1995, the Company was not in compliance with certain
of its financial covenants contained in its BABC credit agreement. The
Company obtained a written waiver from BABC on these matters. The Company
believes that in the future, it will meet the covenants contained in its
credit agreement with BABC. The Company has classified the outstanding
balance on the credit agreement as a long-term liability on the Company's
Consolidated Balance Sheets. See note 8 to the Company's Consolidated
Financial Statements.
Titanium International Limited, a subsidiary of TI, has a short-term
credit facility with Midland Bank plc, in the U.K., permitting borrowings of
approximately L2.3 million (approximately $3.6 million at current exchange
rates). The U.K. credit agreement is subject to renewal on December 31,
1996. The balance outstanding under the U.K. credit agreement as of
December 31, 1995 was $0.5 million (at current exchange rates).
Capital Expenditures
The Company anticipates that capital expenditures during 1996, will
approximate $9 million, which will be provided by internally generated funds
or credit facilities. Capital expenditures required to maintain compliance
with applicable environmental regulations are included in the Company's
capital expenditure plan to the extent that they can be determined. The
Company has no material open commitments which obligate it to make future
capital expenditures.
The 1996 capital expenditures budget includes amounts to rebuild and
modernize existing equipment and to increase production capacity. The
Company's revolving credit facility with BABC provides that capital
expenditures may not exceed $4.5 million for any fiscal year. A change in
the covenant to reflect the higher budgeted capital spending amount is
currently being discussed with BABC.
Income Taxes
For financial and income tax reporting purposes the Company incurred net
losses for 1991 through 1994. The Company is unable to carry back any
further losses for federal or state tax refunds. In 1995, the Company
reported a loss for financial reporting purposes, but expects to report
taxable income for both federal and state income tax reporting purposes. The
Company anticipates that it will be able to utilize federal and state net
operating loss carryforwards to offset 1995 taxable income, limiting the
amount of taxes actually payable to the taxing jurisdictions where it is
subject.
Adequacy of Liquidity and Capital Resources
The Company's access to borrowing facilities, internally generated cash
and the capital markets are expected to be sufficient to support the
Company's operating needs and to finance its continued growth, capital
expenditures and repayment of long-term debt obligations.
Non-U.S. Operations and Monetary Assets
Approximately 11% of the Company's 1995 net sales were derived from its
service centers in the U.K. and France. Changes in the value of non-U.S.
currencies relative to the U.S. dollar cause fluctuations in U.S. dollar
financial position and operating results. The impact of currency
fluctuations on the Company was not significant in 1995.
Forward Foreign Exchange Contracts
See notes 1 and 14 to the Company's Consolidated Financial Statements.
- -23-
<PAGE>
Impact of Inflation
Inflation can be expected to have an effect on many of the Company's
operating costs and expenses. Due to worldwide competition in the titanium
industry, the Company may not be able to pass through such increased costs to
its customers.
Environmental Matters
See note 11 to the Company's Consolidated Financial Statements.
CHANGES IN ACCOUNTING PRINCIPLES
The Company expects to elect the disclosure alternative prescribed by
SFAS No. 123, "Accounting for Stock-Based Compensation," and to account for
stock-based employee compensation with respect to the Common Stock in
accordance with Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and its various interpretations.
Under APB No. 25, no compensation cost is generally recognized for fixed
stock options in which the exercise price is not less than the market price
on the grant date. Under the disclosure alternative SFAS No. 123, the
Company will disclose, starting with its 1996 fiscal year, its respective pro
forma net income and earnings per share as if the fair value based accounting
method of SFAS No. 123 had been used to account for stock-based compensation
cost for all awards granted by the Company after January 1, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Company's consolidated financial statements and
related notes and supplemental data under Item 14 filed with this Report.
- -24-
<PAGE>
PART III
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1994, the Company paid $8.2 million, net of cash received of $0.8
million, and issued debt to the seller in the amount of $4.5 million, for the
purchase of TI, an 80% owned subsidiary of OREMET. After the transaction,
James S. Paddock is the sole minority shareholder (20%) of TI and the
president, chief executive officer and chief operating officer of TI and an
officer and director of the Company. In connection with the acquisition of
TI, OREMET entered into an agreement with the minority shareholder to acquire
the remaining 20% interest of TI, based upon a formula related to the book
value of TI, in annual increments of at least 15% no earlier than 1999 and no
later than 2004.
At December 31, 1995, warrants to purchase 200,000 shares of Common
Stock were outstanding in connection with the Company's acquisition of TI.
The warrants were issued to James S. Paddock at fair market value and are
exercisable at $6.375 per share, expiring in September 2004. Mr. Paddock is
the president, chief executive officer and chief operating officer of TI and
an officer and director of the Company.
In 1995, the Company paid Weatherford, Thompson, Quick & Ashenfelter,
P.C. $134,816 as attorneys' fees, and Mr. Thompson's salary for his position
as Secretary. Mr. Thompson is of counsel with Weatherford, Thompson, Quick &
Ashenfelter, P.C.
- -25-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. Financial Statements: The following Financial Statements of
Oregon Metallurgical Corporation and Report of Independent
Accountants are filed as part of this Report:
Page
____
Index to Consolidated Financial Statements .................. F-1
Report of Independent Accountants ........................... F-2
Consolidated Statements of Operations
for the years ended December 31, 1995, 1994 and 1993 ...... F-3
Consolidated Balance Sheets
as of December 31, 1995 and 1994 .......................... F-4
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1995, 1994 and 1993 ...... F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1995, 1994 and 1993 ...... F-6
Notes to Consolidated Financial Statements ........... F-7 to F-21
2. Financial Statement Schedules: The following financial statement
schedule of Oregon Metallurgical Corporation for the years ended
December 31, 1995, 1994 and 1993 is incorporated by reference from
the Annual Report on Form 10-K for the year ended December 31, 1995
and should be read in conjunction with the Consolidated Financial
Statements of Oregon Metallurgical Corporation:
Report of Independent Accountants on Financial Statement Schedules
Schedule II : Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be
set forth therein is included in the Consolidated Financial
Statements or Notes thereto.
3. Exhibits
The Exhibit Index of the Annual Report on Form 10-K which lists the
exhibits that are filed as part of this Report is incorporated by
reference, except that the following additional exhibit is filed as
part of this Report:
Exhibit 23.2 Consent of Independent Accountants.
- -26-
<PAGE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the year ended
December 31, 1995.
- -27-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, this Registrant has duly caused this amendment to the
Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OREGON METALLURGICAL CORPORATION
Date: August 14, 1996 /s/ Dennis P. Kelly
____________________________________
Dennis P. Kelly, Vice President,
Finance and Treasurer
- -28-
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
____
Report of Independent Accountants F - 2
Consolidated Statements of Operations
for the years ended December 31, 1995, 1994 and 1993 F - 3
Consolidated Balance Sheets
as of December 31, 1995 and 1994 F - 4
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1995, 1994 and 1993 F - 5
Consolidated Statements of Cash Flows
for the years ended December 31, 1995, 1994 and 1993 F - 6
Notes to Consolidated Financial Statements F - 7 to F - 21
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
OREGON METALLURGICAL CORPORATION AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheets of Oregon
Metallurgical Corporation and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Oregon
Metallurgical Corporation and subsidiaries as of December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Eugene, Oregon
February 16, 1996, except for the second
paragraph of Note 8, as to which the date
is March 1, 1996
F-2
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
for the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
____ ____ ____
<S> <C> <C> <C>
Net sales $146,853 $ 71,166 $ 55,351
Cost of sales, including provision for future losses on
long-term agreements of $4,417 in 1995 (See Note 6) 131,002 64,527 52,636
________ ________ ________
Gross profit 15,851 6,639 2,715
Research, technical and product development expenses 1,595 1,376 773
Selling, general and administrative expenses 14,512 7,517 5,124
Provisions for estimated environmental costs ---- 240 970
Restructuring cost ---- ---- 2,027
________ ________ ________
Loss from operations (256) (2,494) (6,179)
Interest income ---- 391 816
Interest expense (2,104) (606) (532)
Minority interests (480) (29) ----
________ ________ ________
Loss before income tax benefit (2,840) (2,738) (5,895)
Income tax benefit 425 715 1,797
________ ________ ________
Net loss $ (2,415) $ (2,023) $ (4,098)
======== ======== ========
Net loss per share $ (0.22) $ (0.18) $ (0.38)
======= ======== ========
Weighted average common shares and equivalents
outstanding 11,219 11,001 10,839
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
____ ____
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 572 $ 1,636
Accounts receivable, less allowance for doubtful accounts
of $1,257 and $1,024 25,894 20,444
Inventories 66,010 49,023
Prepayments and other current assets 689 1,352
Deferred tax assets 3,242 517
________ ________
Total current assets 96,407 72,972
Property, plant and equipment, net 35,138 37,520
Other assets, net 1,532 1,480
________ ________
TOTAL ASSETS $133,077 $111,972
======== ========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 616 $ 13
Book overdraft 2,014 ----
Accounts payable 16,973 16,860
Accrued payroll and employee benefits 6,659 2,944
Accrued loss on long-term agreements 2,781 ----
Other accrued expenses 3,595 4,073
________ ________
Total current liabilities 32,638 23,890
Long-term debt, less current portion 26,746 17,164
Deferred tax liabilities 3,149 1,098
Deferred compensation payable 678 881
Accrued postretirement benefit 1,563 1,457
Accrued loss on long-term agreements, less
current portion 1,636 ----
Minority interests 780 200
________ ________
Total liabilities 67,190 44,690
________ ________
Commitments and contingencies (Note 11)
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value; shares authorized, 25,000;
shares issued, 1995 - 11,018; 1994 - 10,893 11,018 10,893
Additional paid-in capital 38,340 37,445
Retained earnings 16,545 18,960
Cumulative foreign currency translation adjustment (16) (16)
________ ________
Total shareholders' equity 65,887 67,282
________ ________
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $133,077 $111,972
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
for the years ended December 31, 1993, 1994 and 1995
<TABLE>
<CAPTION>
Cumulative
Foreign
Additional Currency Note
Common Stock Paid-in Retained Translation Receivable
_________________
Shares Amount Capital Earnings Adjustment ESOP Total
______ ______ __________ ________ ___________ __________ _____
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1992 10,827 $ 10,827 $ 37,149 $ 25,081 $ ---- $ (4,655) $ 68,402
Repayment of loan by ESOP ---- ---- ---- ---- ---- 2,429 2,429
Issuance of common stock for:
Employee benefits 8 8 59 ---- ---- ---- 67
Restructuring cost 53 53 212 ---- ---- ---- 265
Net loss ---- ---- ---- (4,098) ---- ---- (4,098)
______ ________ ________ ________ ________ ________ ________
Balances, December 31, 1993 10,888 10,888 37,420 20,983 ---- (2,226) 67,065
Repayment of loan by ESOP ---- ---- ---- ---- ---- 2,226 2,226
Issuance of common stock for
employee benefits 5 5 25 ---- ---- ---- 30
Currency translation adjustment ---- ---- ---- ---- (16) ---- (16)
Net loss ---- ---- ---- (2,023) ---- ---- (2,023)
______ ________ ________ ________ ________ ________ ________
Balances, December 31, 1994 10,893 10,893 37,445 18,960 (16) ---- 67,282
Issuance of common stock for
employee benefits 125 125 895 ---- ---- ---- 1,020
Net loss ---- ---- ---- (2,415) ---- ---- (2,415)
______ ________ ________ ________ ________ ________ ________
Balances, December 31, 1995 11,018 $ 11,018 $ 38,340 $ 16,545 $ (16) $ ---- $ 65,887
====== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
for the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
____ ____ ____
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,415) $ (2,023) $ (4,098)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 4,632 4,014 3,937
Loss on disposition of assets ---- ---- 1,000
Deferred income tax benefit (674) (1,434) (403)
Employee benefits paid or payable in common stock 2,666 125 ----
Provision for loss on long-term agreements 4,417 ---- ----
Minority interests 480 29 ----
Changes in current assets and liabilities, net of effects
of acquisition of a business:
Accounts receivable (5,450) (4,158) (3,141)
Inventories (16,987) (12,209) (930)
Prepayments and other current assets 663 1,107 1,174
Accounts payable 113 7,198 1,161
Accrued payroll and employee benefits 2,153 1,577 211
Other accrued expenses (478) 920 1,204
Other (89) 395 726
________ ________ ________
Net cash provided by (used in) operating activities (10,969) (4,459) 841
________ ________ ________
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of a business, net of cash acquired ---- (8,223) ----
Additions to property, plant and equipment (1,914) (1,929) (1,244)
Short-term investments - purchased ---- (1,228) (15,651)
Short-term investments - redeemed ---- 8,811 14,856
Other (334) (111) 65
________ ________ ________
Net cash used in investing activities (2,248) (2,680) (1,974)
________ ________ ________
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit agreements 107,049 40,361 ----
Payments on revolving credit agreements (97,800) (27,865) ----
Capitalized loan fees and acquisition costs (54) (1,260) ----
Proceeds from long-term debt 990 ---- ----
Payments of long-term debt (54) (4,754) (3,350)
Book overdraft 2,014 ---- ----
Proceeds from note receivable - ESOP ---- 2,226 2,429
Other ---- 46 ----
________ ________ ________
Net cash provided by (used in) financing activities 12,145 8,754 (921)
________ ________ ________
Effect of exchange rates on cash and cash equivalents 8 (16) ----
________ ________ ________
Net increase (decrease) in cash and cash equivalents (1,064) 1,599 (2,054)
Cash and cash equivalents, beginning of year 1,636 37 2,091
________ ________ ________
Cash and cash equivalents, end of year $ 572 $ 1,636 $ 37
======== ======== ========
</TABLE>
<PAGE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Operations - Oregon Metallurgical Corporation ("OREMET") and subsidiaries
(the "Company") is one of two U.S. integrated producers and distributors of
titanium sponge, ingot, mill products and castings for use in the aerospace,
industrial, golf and military markets. Titanium Industries, Inc. ("TI"), an 80%
owned subsidiary, operates full-line titanium metal service centers in the U.S.,
Canada, U.K. and Germany and produces small diameter bar, weld wire and fine
wire. As of December 31, 1995, the Company is owned 35% by the Oregon
Metallurgical Corporation Employee Stock Ownership Plan (the "ESOP").
In September 1994, the Company completed the acquisition of the net
operating assets and subsidiaries of Titanium Industries Distribution Group from
Kamyr, Inc. The acquisition cost of approximately $13,502 was funded by $5,000
in cash, $4,002 of bank financing and $4,500 of seller financing. The
acquisition of TI was accounted for as a purchase, with its results included in
the Company's financial statements from the acquisition date.
Basis of Consolidation - The consolidated financial statements include the
accounts of OREMET, TI and another wholly-owned subsidiary. All material
intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company classifies all cash on deposit with
banks and all highly liquid debt investments purchased with a maturity of 90
days or less as cash and cash equivalents.
Concentrations of Credit Risk - Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash
and cash equivalents and trade receivables. The Company places its cash and
cash equivalents with high credit quality financial institutions and limits the
amount of credit exposure at any one financial institution. At times, temporary
cash investments may be in excess of the Federal Deposit Insurance Corporation
insurance limit. Management believes that risk of loss on the Company's trade
receivables is significantly reduced by ongoing credit evaluations of customers'
financial condition. Generally, the Company does not require collateral.
Inventories - Inventories are carried at the lower of cost or market. Cost
is determined using the weighted average cost method. Inventory costs generally
include material, labor cost and manufacturing overhead.
Property, Plant and Equipment - Property, plant and equipment are recorded
at historical cost. Depreciation is provided using the straight-line method
over the estimated useful lives of the assets for financial reporting purposes;
and, accelerated methods are used for income tax reporting purposes. The cost
and accumulated depreciation applicable to assets retired are removed from the
accounts and the gain or loss on disposition is recognized in the statement of
operations.
Excess of Cost Over Net Assets Acquired - The excess of cost over the fair
value of net assets acquired of TI of $857 is included in other assets and is
being amortized on a straight-line basis over 15 years. Accumulated
amortization was $70 and $13 in 1995 and 1994, respectively.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Income Taxes - The Company uses the liability method to record deferred tax
assets and liabilities based on the difference between the financial reporting
and tax bases of assets and liabilities.
Forward Foreign Exchange Contracts - The Company may enter into forward
foreign exchange contracts as a hedge against fluctuations relating to net
foreign currency transactions and commitments denominated in foreign currencies.
Gains and losses on forward contracts are deferred and offset against foreign
exchange gains or losses on the underlying hedged items.
Foreign Currency Translation - The Company's foreign subsidiaries' accounts
are measured using local currency as the functional currency. Assets and
liabilities are translated at the exchange rate in effect at year end. Revenues
and expenses are translated at the average rate of exchange prevailing during
the year. Translation adjustments arising from differences in exchange rates
from period to period are included in the cumulative adjustment account in
shareholders' equity, net of related deferred income taxes.
Net Income (Loss) Per Share - Net income (loss) per share is based on the
weighted average number of shares of common stock and common stock equivalents
outstanding. Common stock equivalents consist of stock warrants and amounts due
to be settled in shares pursuant to OREMET's benefit plans. Common stock
equivalents are computed using the treasury stock method.
Revenue Recognition - Revenues from the sale of commercial products are
primarily recognized upon shipment. Revenues from long-term, fixed price
agreements are recognized as the product is shipped. Estimated losses at
completion of agreements are recognized and charged to income in the period such
losses are estimated.
Accounting Standards Pronouncements - For the year ended December 31, 1995,
the Company has adopted Statement of Financial Accounting Standards ("SFAS")
Board No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The Standard requires that long-lived
assets and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount on an asset may not be recoverable. The adoption of
SFAS No. 121 had no effect on the Company's financial position or results of
operations.
Reclassifications - Certain amounts in the 1993 and 1994 financial
statements have been reclassified to conform with the current year's
presentation. The reclassifications do not affect previously reported results
of operations or cash flows.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
2. ADDITIONAL STATEMENT OF CASH FLOWS INFORMATION:
The Company's noncash investing and financing activities and cash payments
for interest and income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
________________________
1995 1994 1993
____ ____ ____
<S> <C> <C> <C>
Cash paid (received) for:
Interest $ 2,253 $ 614 $ 523
Income taxes (refunds, net of payments) 9 (1,327) (2,817)
Noncash investing and financing activities:
Acquisition of business, net of
cash acquired:
Working capital, other than cash $(9,630)
Property, plant and equipment (3,278)
Long-term debt assumed 185
Note payable issued to seller 4,500
_______
$(8,223)
=======
Issuance of common stock for employee
benefits including related tax benefits $ 1,020 $ 30 $ 67
</TABLE>
3. INVENTORIES:
<TABLE>
<CAPTION>
December 31,
___________________
1995 1994
____ ____
<S> <C> <C>
Finished goods $ 18,141 $ 14,656
Work-in-progress 19,837 15,288
Raw materials 28,032 19,079
________ ________
Total $ 66,010 $ 49,023
======== ========
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
December 31,
__________________
1995 1994
____ ____
<S> <C> <C>
Land $ 1,189 $ 1,189
Buildings and improvements 11,455 11,087
Machinery and equipment 42,248 39,940
Integrated sponge facility 45,641 45,309
Construction in progress 846 1,976
________ ________
101,379 99,501
Less accumulated depreciation 66,241 61,981
________ ________
$ 35,138 $ 37,520
======== ========
</TABLE>
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
5. OTHER ACCRUED EXPENSES:
<TABLE>
<CAPTION>
December 31,
__________________
1995 1994
____ ____
<S> <C> <C>
Accrual for estimated environmental costs $ 909 $ 1,150
Sales returns and allowances 607 1,050
Income taxes payable 478 755
Other 1,601 1,118
________ ________
$ 3,595 $ 4,073
======== ========
</TABLE>
6. PROVISION FOR LOSS ON LONG-TERM AGREEMENTS:
The Company has historically entered into long-term agreements ("LTAs")
with certain customers, primarily in the aerospace industry. The LTAs typically
obligate the Company to sell the product at a fixed price for a two or
three-year period. As a result of projected raw materials and processing costs
being higher than anticipated when the LTAs were executed, the Company recorded
a provision for loss on LTAs of $5,717 during 1995, of which $4,417 remains
outstanding at December 31, 1995.
7. INCOME TAXES:
The income tax benefit consists of the following:
<TABLE>
<CAPTION>
Year Ended
December 31,
__________________________
1995 1994 1993
____ ____ ____
<S> <C> <C> <C>
Current provision (benefit):
Federal $ (372) $ 422 $ (1,583)
State 155 80 18
Foreign 466 ---- ----
Deferred benefit (674) (1,217) (232)
________ ________ ________
Total tax benefit $ (425) $ (715) $ (1,797)
======== ======== ========
</TABLE>
The differences between the Company's income tax benefit and the federal
income tax benefit at statutory rates are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
________________________
1995 1994 1993
____ ____ ____
<S> <C> <C> <C>
Federal provision (benefit) at
statutory rates $ (966) $ (931) $ (2,004)
State tax provision (benefit) (193) (179) (389)
Change in valuation allowance 1,138 216 597
Alternative minimum tax limitation 21 ---- 212
Adjustment of prior-year tax accrual (264) ---- ----
Other (161) 179 (213)
________ ________ ________
Total $ (425) $ (715) $ (1,797)
======== ======== ========
</TABLE>
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
7. INCOME TAXES: (Continued)
At December 31, 1995, the Company has net operating loss carryforwards for
federal and state income tax purposes, which may be used to offset future
taxable income. These operating loss carryforwards expire as follows:
<TABLE>
<CAPTION>
Year Federal State
____ _______ _____
<S> <C> <C>
2006 $ ---- $ 12,241
2007 ---- 8,593
2008 667 6,917
2009 2,838 2,288
________ ________
$ 3,505 $ 30,039
======== ========
</TABLE>
At December 31, 1995, the Company also had federal alternative minimum tax
("AMT") and state credit carryforwards of $717 and $151, respectively, which may
be utilized to offset regular income taxes payable in future years. The AMT has
an indefinite carryforward period. The state credits expire in 1996 and 1997.
The components of the deferred taxes are as follows:
<TABLE>
<CAPTION>
1995 1994
____ ____
<S> <C> <C>
Deferred tax assets:
Tax loss and credit carryforwards $ 4,089 $ 3,881
Pension, retirement and other employment
related items 1,715 1,722
Allowance for doubtful accounts 455 346
Safe harbor lease 215 296
Environmental accrual 350 467
Capitalized inventory costs 281 619
Provision for losses on long-term agreements 1,627 ----
Other 871 345
Less valuation allowance (2,948) (1,810)
________ ________
6,655 5,866
Deferred tax liabilities:
Accumulated depreciation and amortization 6,562 6,421
Other ---- 26
________ ________
6,562 6,447
________ ________
Net deferred tax assets (liabilities) $ 93 $ (581)
======== ========
Balance sheet classification:
Current deferred tax assets $ 3,242 $ 517
Long-term deferred tax liabilities (3,149) (1,098)
________ ________
Net deferred tax assets (liabilities) $ 93 $ (581)
======== ========
</TABLE>
The Company has recorded a valuation allowance with respect to certain
deferred tax assets as a result of the uncertainty of their future realization.
Realization is dependent on generating sufficient taxable income prior
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
7. INCOME TAXES: (Continued)
to expiration of net operating loss carryforwards and the reversal of certain
deferred tax credits. The amount of the deferred tax assets considered
realizable, however, could be increased in the near term if estimates of future
taxable income during the carryforward period are increased.
8. LONG-TERM DEBT:
<TABLE>
<CAPTION>
December 31,
______________
1995 1994
____ ____
<S> <C> <C>
U.S. revolving credit agreement $ 21,228 $ 12,496
U.K. based credit facility 517 ----
Subordinated loan from Kamyr, Inc. 4,500 4,500
Obligations under capital leases
(see Note 11) and other 1,117 181
________ ________
27,362 17,177
Less current maturities 616 13
________ ________
$ 26,746 $ 17,164
======== ========
</TABLE>
U.S. Revolving Credit Agreement - The Company may borrow up to $25,000
under the terms of a revolving credit agreement with a U.S. bank at an interest
rate of prime (8.5% at December 31, 1995) plus 1.5%, or LIBOR (6.43% at December
31, 1995) plus 2.5%. The Company has exercised the LIBOR option. Borrowings
under the agreement are collateralized by accounts receivable, inventories and
other intangible assets, including the Company's stock in TI. The Company must
pay a nonuse fee of .5% annually on the unused portion of the commitment. The
credit agreement matures in September 1997 and can be renewed for one-year
periods with the consent of both parties. The credit agreement contains
restrictive covenants with regard to various financial ratios and imposes
limitations on capital expenditures and dividends. Annual cash dividends are
limited to the lesser of fifty percent (50%) of net income or $1.8 million.
As of December 31, 1995, the Company was not in compliance with certain
covenants principally relating to interest coverage and minimum net worth
requirements. On March 1, 1996, the Company obtained a written waiver from the
lender with respect to the violations which existed at December 31, 1995. The
Company believes that it will be in compliance with its financial covenants in
the future.
U.K. Based Credit Facility - On January 19, 1996, Titanium International
Limited ("TIL"), a wholly-owned subsidiary of TI, amended its credit facility
with Midland Bank plc. The facility provides for a credit facility of
approximately $2,300, a foreign exchange facility for $900 and other guarantees
of approximately $450. Aggregate borrowings which include parent loans cannot
exceed TIL's shareholders' equity less intangible assets. The credit facility
is collateralized by the assets of TIL only. Interest is to be charged at the
rate of 1.5% over Midland Bank's base rate on amounts borrowed up to $1,500 and
2% over Midland Bank's base rate on amounts borrowed in excess of $1,500. The
credit facility has financial covenants pertaining to net worth and prepayment
of a loan to TI. The Bank has the option of terminating the availability of
credit at its discretion and the facility is subject to review on December 31,
1996.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
8. LONG-TERM DEBT: (Continued)
Subordinated Loan From Kamyr, Inc. - On September 19, 1994, as part of the
Company's acquisition of TI, TI entered into a subordinated debt agreement with
the seller, Kamyr, Inc., for $4,500, interest at 8%, payable quarterly. The
initial principal payment of $300 is due March 1997, with additional quarterly
installments of $350 through March 2000. The subordinated debt agreement
includes covenants relative to shareholders' equity, the maximum amount of
senior debt, financial ratios and restrictions on dividends, new borrowings and
guarantees and liens. The loan is collateralized by a second lien on the
accounts receivable, inventories, and general intangibles of TI.
Aggregate contractual maturities of long-term debt approximate the
following at December 31, 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 $ 616
1997 22,683
1998 1,512
1999 1,518
2000 491
Thereafter 542
________
$ 27,362
========
</TABLE>
9. STOCK PURCHASE WARRANTS:
At December 31, 1995, warrants to purchase 200 thousand shares of Common
Stock were outstanding in connection with the Company's acquisition of TI. The
warrants were issued at fair market value and are exercisable at $6.375 per
share, expiring in September 2004. The warrant holder is the president of TI,
who is also an officer and director of the Company.
10. EMPLOYEE BENEFIT PLANS:
Pension Plans - OREMET has pension plans covering its eligible hourly and
salaried employees. The cost of these plans was $1,581, $1,287 and $1,274 for
the years ended 1995, 1994 and 1993, respectively. OREMET's hourly employees
are covered by a union pension plan, the contributions for which are based on
a fixed rate per hour established under a negotiated union contract.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
10. EMPLOYEE BENEFIT PLANS: (Continued)
Salaried employees who have completed at least one year of service and have
reached age 21 are covered by the defined benefit pension plan. The benefits
under this plan are based on years of service and an employee's final average
earnings. The plan's assets consist of interest-bearing obligations and
equities (principally listed securities). The following table sets forth the
amounts recognized in the Company's financial statements for the salaried plan:
<TABLE>
<CAPTION>
Year Ended December 31,
__________________________
1995 1994 1993
____ ____ ____
<S> <C> <C> <C>
Pension costs for the year:
Service cost $ 474 $ 522 $ 565
Interest cost 981 859 779
Actual return on plan assets (2,252) (250) (717)
Net amortization of deferral 1,571 (397) 119
________ ________ ________
Net pension cost $ 774 $ 734 $ 746
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
_______________
1995 1994
____ ____
<S> <C> <C>
Plan assets at fair value $ 12,246 $ 9,863
________ ________
Actuarial value of benefits based on
employment service to date and
present pay levels:
Vested 10,036 7,976
Nonvested 528 300
________ ________
Accumulated benefit obligation 10,564 8,276
Additional amounts related to projected
compensation increases 4,443 2,550
________ ________
Projected benefit obligation 15,007 10,826
________ ________
Projected benefit obligation in
excess of plan assets (2,761) (963)
Unrecognized net obligation 237 276
Unrecognized prior service cost 255 182
Unrecognized net loss from experience
different from actuarial assumptions 1,874 76
________ ________
Prepaid pension cost
(pension liability) $ (395) $ (429)
======== ========
</TABLE>
Assumptions utilized to measure net pension cost and the projected benefit
obligation are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
____ ____ ____
<S> <C> <C> <C>
Weighted average discount rate 7.25% 8.50% 6.75%
Rate of compensation increase 4.50 4.50 4.50
Long-term rate of return on plan assets 8.00 8.00 8.00
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
10. EMPLOYEE BENEFIT PLANS: (Continued)
Primarily as a result of the change in the weighted average discount rate
to 7.25% in 1995 from 8.50% in 1994, the Projected Benefit Obligation ("PBO")
as of December 31, 1995 increased $4,181 to $15,007, compared to the 1994 PBO
of $10,826. Similarly, the decrease in the weighted average discount rate was
the principal reason for the increase in the unrecognized net loss to $1,874 at
December 31, 1995, as compared to the unrecognized net loss of $76 at December
31, 1994. The increase in the unrecognized net loss was partially offset by the
returns on plan assets which were more than the assumed 8.0%.
The decrease in the PBO and unrecognized net loss at December 31, 1994
compared to 1993 was the result of the increase in the weighted average discount
rate to 8.5% in 1994 from 6.75% in 1993.
During 1993, the Company restructured its workforce, resulting in the
termination of a significant number of employees. The termination resulted in
a partial curtailment of the salaried pension plan and increased the
restructuring cost by $151.
Postretirement Benefit Plans Other Than Pensions - The Company accrues the
cost of postretirement benefits other than pensions during the period of
employment of the salaried employees. The following table sets forth the plan's
status, reconciled with the amount shown in the Company's balance sheets, as of
December 31:
<TABLE>
<CAPTION>
1995 1994
____ ____
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 611 $ 638
Fully eligible active plan participants 121 140
Other active plan participants 1,190 770
________ ________
1,922 1,548
Unrecognized net loss from experience
different from actuarial assumptions (359) (91)
________ ________
Accrued postretirement benefit cost $ 1,563 $ 1,457
======== ========
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
10. EMPLOYEE BENEFIT PLANS: (Continued)
The components of net periodic postretirement benefit costs are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
__________________________
1995 1994 1993
____ ____ ____
<S> <C> <C> <C>
Service cost, benefits attributed to
employee service during the year $ 89 $ 96 $ 97
Interest cost on accumulated
postretirement benefit obligation 119 118 123
Net amortization and deferrals ---- 15 15
________ ________ ________
Net periodic postretirement benefit cost $ 208 $ 229 $ 235
======== ======== ========
</TABLE>
For measurement purposes, a 9% annual increase in the per capita cost of
postretirement medical benefits was assumed for 1995; the rate is assumed to
decrease gradually to 6% for 2001 and remain at that level thereafter. The
health care cost trend rate assumption has a significant affect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates
by one percentage point in each year would increase the accumulated
postretirement benefit obligation as of December 31, 1995 by $250, and the
aggregate of the service and interest cost components of net periodic
postretirement cost for the year then ended by $36.
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.25%, 8.5% and 7.0% for 1995, 1994 and 1993,
respectively. The changes in the unrecognized net loss reflect the changes in
the discount rate.
During 1993, the Company restructured its workforce, resulting in the
termination of a significant number of employees. The terminations resulted in
a partial curtailment of the postretirement benefit plan and decreased the
unrecognized loss component of the postretirement benefit liability by $210.
Defined Contribution Plans - Beginning in 1995, OREMET implemented a
domestic 401(k) retirement savings plan for the benefit of both union and
salaried employees. Under the provisions of the plan, OREMET will contribute
one share of Common Stock for each day worked, or approximately 260 shares a
year for a full-time employee as defined by the plan. OREMET will also
contribute a matching contribution based on the profitability of the Company.
The matching contribution is limited to 3% of the participant's compensation.
OREMET's costs under the plan totaled $1,041 in 1995. No shares of the Common
Stock were issued under the plan in 1995. As of December 31, 1995,
approximately 110 thousand shares are issuable pursuant to the OREMET savings
plan.
TI sponsors a domestic 401(k) retirement savings plan. Under the
provisions of the plan, participants may contribute a percentage of their
compensation not to exceed 12%. TI matches the participants' contributions up
to 3%. Participants are fully vested with regard to TI's contributions and
earnings thereon after one (1) year of service. TI's contributions to the plan
were approximately $64 in 1995 and $21 in 1994.
TIL sponsors a defined contribution pension plan for all employees over the
age of 25 with one (1) year of service. Under the plan, participants may
contribute between 17.5% to 40% of base pay depending upon their age.
Participants are fully vested and TIL matches between 2% and 14% of the
employee's base pay, depending upon employee age and as long as the employee's
contributions are at least 2%. TIL's contributions for 1995 and 1994 were
approximately $51 and $19, respectively.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
10. EMPLOYEE BENEFIT PLANS: (Continued)
The ESOP - In 1987, the Company established The Oregon Metallurgical
Corporation Employee Stock Ownership Plan ("ESOP"), an employee stock ownership
plan covering substantially all employees of OREMET. The ESOP borrowed $17
million from the Company to purchase approximately 6.3 million shares of Common
Stock.
The loan obligation of the ESOP is considered unearned employee benefit
expense and, as such, is recorded as a reduction of shareholders' equity. Both
the loan obligation and the unearned benefit expense have been reduced by loan
repayments made by the ESOP. In December 1994, the note receivable from the
ESOP was fully repaid. As of December 31, 1995, the ESOP owned approximately
3.9 million shares or 35% of the outstanding Common Stock. All of the Common
Stock held in the ESOP has been allocated to OREMET employees. The Company made
no contribution to the ESOP in 1995. The ESOP contribution expense totaled
$2,382 and $2,755 in 1994 and 1993, respectively.
Excess Benefit Plan ("EBP") - OREMET maintains an unfunded EBP for
participants whose allocations of Common Stock to the ESOP are reduced as a
result of limitations imposed under federal income tax law. The Company made
no contributions to the EBP in 1995. EBP costs were $332 and $259 in 1994 and
1993, respectively. As of December 31, 1995, the Company had recorded a
liability to the EBP for 115 thousand shares of stock.
Stock Compensation Plans - Beginning in 1995, OREMET implemented stock
compensation plans for the benefit of both its union and salaried employees.
Eligible employees earn one share of the Common Stock for every one hundred
dollars earned in salaries and wages. Stock Compensation Plan costs were $1,750
in 1995. During 1995, approximately 107 thousand shares were issued, and as of
December 31, 1995 another 62 thousand are issuable under the union and salaried
stock compensation plans.
Stock Appreciation Rights ("SARs") - In December of 1995, the Company
established an incentive SARs plan. At the discretion of the Board of
Directors, SARs may be granted to officers and other key employees. Upon
exercise of a SAR, the holder is entitled to receive cash equal to the amount
by which the market value of the Common Stock on the exercise date exceeds the
market value of the Common Stock on the date of grant. The SARs become fully
exercisable over a four-year vesting period measured from the date of grant; no
SARs are vested as of December 31, 1995. The Board of Directors awarded 166.5
thousand SARs, with a grant price of $10.25 per share, on December 14, 1995
(fair market value at date of award). The SARs plan will expire in 2005 unless
extended by the Board of Directors.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
11. COMMITMENTS AND CONTINGENCIES:
Operating Leases - Minimum annual rental commitments at December 31, 1995,
under noncancelable capital leases and operating leases, principally for
facilities, and equipment are payable as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
_______ _________
<S> <C> <C>
1996 $ 148 $ 802
1997 148 617
1998 148 403
1999 148 368
2000 148 235
Thereafter 499 203
________ ________
Total minimum lease payments $ 1,239 $ 2,628
========
Less amounts representing interest 289
________
Present value of net minimum payments 950
Current portion 85
________
Long-term capitalized lease obligations
(included in long-term debt) $ 865
========
</TABLE>
Total rental costs were $951, $533 and $421 in 1995, 1994 and 1993,
respectively.
Other - At the time of the acquisition of TI, OREMET entered into an
agreement with the minority shareholder to acquire the remaining 20% interest
of TI, based upon a formula related to the book value of TI, in annual
increments of at least 15% no earlier than 1999 and no later than 2004.
Environmental Matters - The Company is subject to federal, state and local
statutes and regulations concerning environmental matters and land use.
Although the Company believes it is in material compliance with these laws, they
are frequently modified to be more restrictive and it is impossible to predict
accurately the future effect that changes in these laws may have on the Company.
There can be no assurance that the Company will not face costs and liabilities
as a result of environmental regulation which could have a material adverse
effect on the Company, its financial condition or its prospects.
The risk of environmental contamination is ever-present in the Company's
operations. The Company uses and produces substantial quantities of substances,
chemicals and compounds that have been identified as hazardous or toxic under
federal, state and local environmental and worker safety and health laws and
regulations. In addition, at its Albany, Oregon facility, the Company uses
substantial quantities of titanium tetrachloride, which is classified as
extremely hazardous under federal environmental laws. The Company has used such
substances and compounds throughout its history and has undertaken some
remediation to alleviate concerns over past releases or disposal practices. The
Company conducts its operations at industrial sites where hazardous materials
have been managed for many years in connection with its operations, including
periods before careful management of these materials was generally believed to
be necessary. Consequently, the Company is subject to various environmental
laws that impose compliance obligations and can create liability for historical
releases of hazardous substances. While the Company takes environmental, safety
and health precautions appropriate for the industry, the Company's operations
pose an ongoing risk of accidental releases of, and worker exposure to,
hazardous or toxic substances.
The Company has entered into a consent order with the Oregon Department of
Environmental Quality pursuant to which the Company is conducting an
investigation of hazardous substances in portions of the soil and
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
11. COMMITMENTS AND CONTINGENCIES: (Continued)
groundwater at its plant site. The Company anticipates that its investigation
will result in a determination that at least some remedial action is necessary
for which an accrual has been made. A neighboring property owner also is
investigating groundwater contamination at its property that has migrated to
OREMET's property and for which OREMET may have legal claims to recover a
portion of its investigation costs.
In February 1995, the Oregon Department of Environmental Quality modified
OREMET's waste water discharge permit. The new permit imposes more stringent
discharge limits according to a specified schedule. OREMET has identified
several feasible alternatives for meeting the new limits, the most expensive of
which would require capital expenditures of approximately $700. OREMET is
working with the Department to explore less expensive alternatives.
In connection with the preparation of its application for a new federal
operating permit under Title V of the 1990 Clean Air Act Amendment, the Company
discovered that some of its air emissions may have been greater than previously
recognized. The Company has voluntarily reported these facts to the Oregon
Department of Environmental Quality. To resolve these issues, the Company has
agreed to undertake an evaluation of its emissions that could result in
requirements to install additional pollution control equipment. At this point,
the Company is unable to determine whether additional controls will be required,
but the Company does not believe the cost of such additional controls would have
a material effect on its capital expenditures, earnings or competitive position.
Although no claims have been filed against the Company related to the above
matters, the Company has completed various engineering studies with regards to
the items. As a result of these studies, which are ongoing, the Company made
provisions for environmental expenses of $0, $240 and $970 in 1995, 1994 and
1993, respectively, of which an accrued liability of $909 remains at December
31, 1995. These amounts are in addition to recurring environmental costs which
are expensed as incurred and are included in cost of sales. At the present
time, management cannot reasonably predict when these environmental issues will
be resolved.
Commencing in 1991, the Pennsylvania Department of Environmental Regulation
and the Environmental Protection Agency ("EPA") have performed periodic site
inspections, including soil and water sampling, at TI's site in Frackville,
Pennsylvania, in connection with a regional groundwater investigation of the
Frackville, Pennsylvania area. While this investigation is ongoing, the Company
has not been informed by either agency of any pending or potentially required
actions which may arise from this investigation.
In conjunction with the Company's purchase of TI, Kamyr, Inc. (the seller)
has agreed to undertake specified clean-up activities. In addition, Kamyr, Inc.
has agreed to a limited indemnification of the Company in the event damages
arise that result from conditions which were not in compliance with
environmental laws and regulations as they existed at the time OREMET purchased
TI.
Legal Proceedings - From time to time, the Company is involved in legal
proceedings which arise in the normal course of business. The Company is not
currently involved as a defendant in any legal proceedings where the outcome,
if determined adversely, could have a material effect on the business or results
of operations of the Company.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
12. MAJOR CUSTOMERS AND BUSINESS SEGMENTS:
The Company has a contract to supply titanium sponge and certain other
titanium products to RMI Titanium Company ("RMI") through 2003. Sales to RMI
accounted for approximately 5%, 13% and 30% of the Company's net sales in 1995,
1994 and 1993, respectively.
The Company's operations are conducted primarily in one business segment,
the production and marketing of titanium metal and related products. In May
1994, OREMET signed a three-year contract with Aerospatiale Societe Nationale
Industrielle for engine pylon parts for the Airbus aircraft, and in the second
half of 1994 began supplying product under that contract. The acquisition of
TI provided the Company with a service center located in the U.K. with an
established operation. In 1996, TI opened a service center in Germany. The
Company intends to utilize these facilities to meet its customers' needs in
Europe.
The Company's foreign operations (principally in Europe) are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
__________________________
1995 1994 1993
____ ____ ____
<S> <C> <C> <C>
Revenues - unaffiliated customers $ 18,882 $ 4,123 $ ----
Operating profits 1,370 219 ----
Identifiable assets at year end $ 11,509 10,685 $ ----
</TABLE>
Export sales from the Company's United States operations (primarily to
Europe and Asia) approximated $11 million, $6 million and $7 million, for the
years ended December 31, 1995, 1994 and 1993, respectively. No individual
foreign region had sales in excess of 10% of total sales during 1995, 1994 or
1993.
13. RESTRUCTURING COST:
In 1993, the Company recorded a provision for restructuring of $2,027 which
includes nonrecurring costs of severance pay and benefits of $1,027, incurred
and substantially all paid in the third and fourth quarters of 1993, and a
write-down, in the fourth quarter of 1993, of construction in progress of $1,000
related to a curtailed expansion of the Titanium Sponge Reduction Plant and the
related Magnesium Recovery Facility. The downsizing and restructuring were done
to reduce fixed costs and to write-off the nonrecoverable portion of funds spent
to increase sponge production capacity.
14. FINANCIAL INSTRUMENTS:
Foreign Currency Contracts - The Company enters into forward foreign
exchange contracts to hedge foreign currency transactions on a continuing basis
for periods consistent with its committed exposures. The Company does not enter
into foreign currency contracts for trading or speculative purposes. This
hedging minimizes the impact of foreign exchange rate movements on the Company's
operating results. The Company's foreign exchange contracts do not subject the
Company's results of operations to risk due to exchange rate movements because
gains and losses on these contracts generally offset losses and gains on the
assets and liabilities being hedged.
At December 31, 1995 and 1994, the Company had notional principal amounts
of approximately $490 and $1,813, respectively, in contracts to buy U.S. dollars
in the future, with maturities of less than eight months. Net
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
14. FINANCIAL INSTRUMENTS: (Continued)
foreign currency transaction gains occurring in 1995 and 1994 were approximately
$121 and $48, respectively, which have been included in cost of goods sold.
Other Financial Instruments - At December 31, 1995 and 1994, the carrying
value of financial instruments classified as current assets or liabilities
approximated their fair values, based on the short-term maturities of these
instruments. Fair value is determined based on future cash flows, discounted
at market interest rates, and other appropriate valuation methodologies. At
December 31, 1995 and 1994, the fair value of long-term debt with fixed interest
terms approximated carrying value. Both periods include long-term borrowing
with variable interest terms, for which the carrying value approximated market.
The fair value of debt is determined by obtaining quotes from financial
institutions.
Exposure to market risk on foreign currency contracts results from
fluctuations in currency rates during the periods the contracts are outstanding.
The counterparties to foreign currency exchange contracts are major financial
institutions. Credit loss from counterparty nonperformance is not anticipated.
F-21
COOPERS COOPERS & LYBRAND L.L.P.
& LYBRAND a professional services firm
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements of
Oreegon Metallurgical Corporation on Forms S-8 (File Nos. 33-18650, 33-63449 and
333-00167) of our reports dated February 16, 1996, except for the second
paragraph of Note 8, as to which the date is March 1, 1996, on our audits of the
consolidated financial statements and financial statement schedule of Oregon
Metallurgical Corporation as of December 31, 1995 and 1994, and for the years
ended December 31, 1995, 1994, and 1993, which reports are included or
incorporated by reference in this amendment on Form 10-K/A.
/s/ Coopers & Lybrand
Eugene, Oregon
August 13, 1996
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand
International, a limited liability association incoprorated in
Switzerland.
