UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 1997
--------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 SW, Albany, Oregon 97321
---------------------------------- ----------
(Address of principal executive
offices) (Zip Code)
Registrant's telephone number, including area code: (541) 967-9000
---------------
NONE
------------------------------------------------------
(Former name or address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
Class Outstanding as of May 13, 1997
----------------------------- ------------------------------
Common stock, $1.00 par value 16,310,855
================================================================================
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
OREGON METALLURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
March 30, March 31,
1997 1996
--------- ---------
<S> <C> <C>
Net sales .......................................... $ 72,031 $ 51,309
Cost of sales ...................................... 53,616 40,948
-------- --------
Gross profit ................................. 18,415 10,361
Selling, general and administrative
expenses ......................................... 5,038 4,290
Research, technical and product
development expenses ............................. 636 617
-------- --------
Income from operations ....................... 12,741 5,454
Interest income .................................... 745 --
Interest expense ................................... (189) (634)
Minority interests ................................. (256) (225)
-------- --------
Income before provision for income taxes ..... 13,041 4,595
Provision for income taxes ......................... 5,330 1,250
-------- --------
Net income ................................... $ 7,711 $ 3,345
======== ========
Net income per share ............................... $ 0.47 $ 0.30
======== ========
Weighted average common shares
and equivalents outstanding ...................... 16,408 11,327
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
OREGON METALLURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
<TABLE>
<CAPTION>
March 30, December 31,
1997 1996
--------- ------------
Unaudited
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................................... $ 1,013 $ 1,460
Short-term investments available-for-sale ........................... 46,531 67,712
Accounts receivable, less allowance for doubtful
accounts of $543 and $494 ......................................... 53,859 37,300
Inventories ......................................................... 120,411 119,553
Prepayments and other current assets ................................ 261 406
Deferred tax assets ................................................. 3,201 4,701
-------- --------
TOTAL CURRENT ASSETS ......................................... 225,276 231,132
Property, plant and equipment, net .................................... 35,554 34,890
Other assets, net ..................................................... 1,513 1,382
-------- --------
TOTAL ASSETS ................................................. $262,343 $267,404
======== ========
LIABILITIES
CURRENT LIABILITIES
Current portion of long-term debt ................................... $ 2,860 $ 3,785
Book overdraft ...................................................... -- 4,359
Accounts payable .................................................... 13,072 19,915
Accrued payroll and employee benefits ............................... 6,444 10,650
Accrued loss on long-term agreements ................................ 1,483 2,710
Other liabilities ................................................... 11,714 9,231
-------- --------
TOTAL CURRENT LIABILITIES .................................... 35,573 50,650
Long-term debt, less current portion .................................. 3,833 4,212
Deferred tax liabilities .............................................. 5,230 5,078
Accrued postretirement benefit ........................................ 1,645 1,621
Minority interests .................................................... 2,202 1,990
-------- --------
TOTAL LIABILITIES ............................................ 48,483 63,551
-------- --------
Contingency (Note 9)
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value; shares authorized:
25,000; shares issued and outstanding:
1997-16,196; 1996-16,127 .......................................... 16,196 16,127
Additional paid-in capital ........................................... 151,063 148,520
Retained earnings .................................................... 46,514 38,803
Cumulative foreign currency translation adjustment ................... 87 403
-------- --------
TOTAL SHAREHOLDERS' EQUITY ................................... 213,860 203,853
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... $262,343 $267,404
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
OREGON METALLURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Unaudited
<TABLE>
<CAPTION>
Cumulative
Foreign
Common Stock Additional Currency
-------------- Paid-in Retained Translation
Shares Amount Capital Earnings Adjustment Total
------ ------ ---------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1995 11,018 $11,018 $ 38,340 $ 16, 545 $ (16) $ 65,887
Common stock offering,
net of related expenses 4,600 4,600 98,638 -- -- 103,238
Awards for stock compensation plans 429 429 9,671 -- --
10,100
Exercise of stock purchase warrants 80 80 430 -- -- 510
Tax benefits on issuance of common
stock for employee benefits -- -- 1,441 -- -- 1,441
Currency translation adjustment -- -- -- -- 419 419
Net income -- -- -- 22,258 -- 22,258
------ ------- -------- ------- ----- --------
BALANCES, DECEMBER 31, 1996 16,127 $16,127 $148,520 $38,803 403 $203,853
Awards for stock compensation plans 69 69 2,543 -- -- 2,612
Currency translation adjustment -- -- -- -- (316) (316)
Net income -- -- -- 7,711 -- 7,711
------ ------- -------- ------- ----- --------
BALANCES, MARCH 30, 1997 16,196 $16,196 $151,063 $46,514 $ 87 $213,860
------ ------- -------- ------- ----- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
OREGON METALLURGICAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended
----------------------
March 30, March 31,
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income .......................................... $ 7,711 $ 3,345
Adjustments to reconcile net income to cash used in
operating activities:
Depreciation and amortization ................... 1,098 1,381
Deferred income tax expense ..................... 1,652 545
Employee benefits paid or payable in common stock 2,540 1,307
Provision for loss on long-term agreements ...... (1,227) (283)
Minority interests .............................. 256 225
Changes in current assets and liabilities:
Accounts receivable .......................... (16,559) (7,144)
Inventories .................................. (858) (5,153)
Prepayments and other current assets ......... 64 (346)
Accounts payable ............................. (6,843) 630
Accrued payroll and employee benefits ........ (4,080) 760
Other liabilities ............................ 2,331 2,198
Other ........................................... (69) (24)
-------- --------
Net cash used in operating activities ................. (13,984) (2,559)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Short-term investments - matured .................... 23,727 --
Short-term investments - purchased .................. (2,546) --
Additions to property, plant and equipment .......... (1,618) (1,142)
Other ............................................... (131) (20)
-------- --------
Net cash provided by (used in) investing activities ... 19,432 (1,162)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from revolving credit agreements ........... -- 46,660
Payments on revolving credit agreements ............. (971) (44,118)
Proceeds from long-term debt ........................ -- 177
Payments on long-term debt .......................... (333) (31)
Book overdraft ...................................... (4,359) 1,643
-------- --------
Net cash provided by (used in) financing activities ... (5,663) 4,331
Effect of exchange rates on cash and
cash equivalents .................................... (232) (28)
-------- --------
Net increase (decrease) in cash and cash equivalents .. (447) 582
Cash and cash equivalents, beginning of period ........ 1,460 572
-------- --------
Cash and cash equivalents, end of period .............. $ 1,013 $ 1,154
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1 BASIS OF PRESENTATION
The interim consolidated financial statements have been prepared by Oregon
Metallurgical Corporation ("OREMET") and its subsidiaries (the "Company")
without audit. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the Company's results
of operations and cash flows, for the three-month periods ended March 30, 1997
and March 31, 1996; and the financial position as of March 30, 1997, and
December 31, 1996. The balance sheet data as of December 31, 1996, was derived
from audited financial statements, but does not include all disclosures
contained in the Company's 1996 Annual Report to Shareholders. The interim
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto appearing in the Company's
Annual Report to Shareholders.
The results of operations of interim periods are not necessarily indicative
of the operating results of a full year or future years.
NOTE 2 ORGANIZATION AND OPERATIONS
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.
NOTE 3 BASIS OF CONSOLIDATION
Titanium Industries, Inc. ("TI") an eighty percent (80%) owned subsidiary
operates full-line titanium metal service centers in the United States, Canada,
United Kingdom and Germany and produces small diameter bar, weld wire and fine
wire. The consolidated financial statements of the Company include the accounts
of TI, and the Company's wholly-owned subsidiary, OREMET France S.a.r.l. TI's
accounts reflect the activities of its wholly-owned subsidiaries, Titanium
International, LTD., Titanium Wire Corporation and Titanium International GmbH.
All material intercompany accounts and transactions have been eliminated in
consolidation.
NOTE 4 CHANGE IN FISCAL YEAR
On April 24, 1997, OREMET's Board of Directors approved a change in
OREMET's fiscal year. Effective January 1, 1997, OREMET prospectively changed
its financial reporting year from a calendar year to a fiscal year consisting of
52 or 53 weeks ending on the Sunday closest to the end of the calendar year.
Consistent with the change in its fiscal year, OREMET has modified its quarterly
financial reporting from calendar quarters to fiscal quarters ending on the
Sunday closest to the end of the calendar quarter.
NOTE 5 SHORT-TERM INVESTMENTS AVAILABLE-FOR-SALE
At March 30, 1997, all of the Company's short-term investments had
maturities of less than one year. The fair value of investments approximates
amortized cost.
6
<PAGE>
NOTE 6 INVENTORIES
<TABLE>
<CAPTION>
March 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Finished goods ................................... $ 35,353 $ 33,739
Work-in-progress ................................. 31,169 34,897
Raw materials .................................... 53,889 50,917
-------- --------
$120,411 $119,553
======== ========
</TABLE>
NOTE 7 PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
March 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Land ............................................. $ 1,189 $ 1,189
Buildings and improvements ....................... 11,393 11,531
Machinery and equipment .......................... 44,931 44,790
Integrated sponge facility ....................... 46,045 46,045
Construction in progress ......................... 3,137 1,459
-------- --------
106,695 105,014
Less accumulated depreciation .................... 71,141 70,124
-------- --------
$ 35,554 $ 34,890
======== ========
</TABLE>
NOTE 8 LONG-TERM DEBT
<TABLE>
<CAPTION>
March 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
U.K. based credit facility ....................... $ 1,363 $ 2,334
Subordinated loan from Kamyr, Inc. ............... 4,200 4,500
Obligations under capital leases and other ....... 1,130 1,163
-------- --------
6,693 7,997
Less current maturities .......................... 2,860 3,785
-------- --------
$ 3,833 $ 4,212
======== ========
</TABLE>
NOTE 9 CONTINGENCIES
TUNGSTEN CONTAMINATION: In the Fourth Quarter of 1996, the Company
discovered that certain of its finished products contained tungsten particles.
The tungsten was introduced into the Company's manufacturing process through the
use of titanium recycle which contained tungsten welds. The Company has
identified products and customers who have been affected by this matter, and
believes that substantially all of the material in question will meet required
specifications for its intended end-use. Some of the material has been converted
into fastener stock and fasteners for the commercial aerospace industry.
Pursuant to studies performed by the Company and others, some commercial
aerospace manufacturers and the U.S. Federal Aviation Administration have
approved the fasteners for use. The Company established a reserve of $750 in the
Fourth Quarter of 1996 to cover customer claims and internal costs. Should
significant amounts of material be subsequently rejected by customers or end
users of the material, the Company's potential liability may significantly
exceed its established reserves. The Company expects this issue to be resolved
during the second quarter of this year.
ENVIRONMENTAL MATTERs: The Company is subject to Federal, state, and local
statutes and regulations concerning environmental matters and land use. Note 13
to the Company's 1996 Annual Report to Shareholders contains information
regarding the Company's environmental matters.
7
<PAGE>
NOTE 10 NEW ACCOUNTING PRONOUNCEMENT
CHANGES IN ACCOUNTING PRINCIPLES: In February 1997, The Financial
Accounting Standards Board issued Statement of Financial Accounting Standard No.
128, earnings per share ("FAS128"). FAS 128 specifies the computation,
presentation, and disclosure requirements for earnings per share. FAS 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. Earlier application of FAS 128 is not
permitted. The effect of implementing FAS 128 on the Company's earnings per
share computations would not be significant.
NOTE 11 SUBSEQUENT EVENT
On April 15, 1997, the Company signed a Letter of Intent to acquire the
assets and business of Rome Metals, Inc. (Rome). Rome, with operations in
western Pennsylvania is a leading provider of finishing services to the
titanium, zirconium, and specialty metals flat products industries. Completion
of the transaction is expected to occur by June 30, 1997, and is subject, among
other things, to the negotiation of a definitive purchase agreement and the
approval of the Company's Board of Directors.
8
<PAGE>
PART 1: FINANCIAL INFORMATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
1996 Annual Report on Form 10-K 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. Factors that might cause such a difference include, but are not
limited to, dependence on aerospace industry, uncertainty of emerging golf
market, highly competitive industry, substantial excess production capacity,
planned significant investment in electron beam furnace, dependence on essential
machinery and equipment, dependence on raw materials and services, environmental
regulation, labor agreements, and contingencies described in the Company's
financial statements.
OVERVIEW
Demand for the Company's products remained strong during the first quarter
of 1997. The Company reported record sales and except for the first quarter of
1989, a quarter in which the Company received an unusual tax refund, record net
income. The strength of the commercial aerospace industry was the dominant
factor behind the Company's first quarter results. Pricing for the Company's
primary products continued to increase during the first quarter of 1997.
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 in prior
years, and in the second half of 1995 aircraft manufacturers began to increase
aircraft build rates. Newer wide body planes such as the Boeing 777 and the
Airbus A-330 and A-340, use a higher percentage of titanium in their airframes,
engines and parts (as measured by total flyweight) than narrow body planes. The
Boeing 777, for example, utilizes titanium for approximately 9% of total fly
weight, compared to between 2% and 3% on the older 737, 747 and 767 models.
The following table reflects aircraft orders for the three major aircraft
producers:
<TABLE>
<CAPTION>
MAJOR COMMERCIAL AIRCRAFT PRODUCERS
(Based on aircraft producer reports)
AIRCRAFT ORDERS (Number of Planes)
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Boeing 717 346 119 247 243
McDonnell Douglas 47 110 9 10 36
Airbus 484 106 136 38 118
----- ---- ---- ---- ----
Total 1,248 562 264 295 397
===== ==== ==== ==== ====
</TABLE>
Commercial aerospace related sales represented approximately 57% of the
Company's net sales for the first quarter of 1997, compared to 39% for the first
quarter of 1996. The commercial aerospace industry is expected to remain the
largest source of demand for titanium products for the foreseeable future.
Sales for the quarter to the golf club industry totaled $6.9 million, or
9.6% of sales, compared to $10.5 million, or 17% of sales in the fourth quarter
of 1996. The reduction in sales is due to a combination of inventory
accumulation by the golf clubhead producers, their increased efficiency in
recycling internal scrap and competition from titanium producers located in the
Former Soviet Union. Net sales to golf clubhead producers approximated $40
million in 1996. The Company believes its sales to this industry will
approximate $15 million in 1997. Consumer demand for titanium golf clubs remains
strong.
The military continues to display interest in using titanium for armor
applications. The Company has developed alloy plate and billet products that
have excellent ballistic characteristics, and these products have been selected
for programs in the U.S. and Europe. Market development for armor applications
is a high
9
<PAGE>
priority as the Company believes that titanium usage on tanks and
various types of personnel carriers will increase.
International and export sales approximated $16 million, or 22% of net
sales, for the first quarter of 1997, compared to $11 million, or 22% of net
sales for the comparable period of 1996. International and export sales are
principally to markets in Europe and Asia.
The Company's nine-month sales order backlog was $152 million at March 30,
1997. In spite of strong demand, the Company had not opened its 1998 sales order
book at the end of the first quarter of 1997, pending further analysis of market
strategies and raw material costs. The Company's twelve-month sales order
backlog was $134 million at March 31, 1996, and $183 million at December 31,
1996. The March 30, 1997, backlog represents sales orders expected to be
fulfilled during the next nine months, while the March 31, 1996, and December
31, 1996, backlogs represented sales orders to be filled during the next twelve
months. The Company's backlog is based on firm purchase orders with a scheduled
delivery date. Customer orders may be subject to cancellation by the customer
upon payment of specified charges.
In 1995, the increase in demand for titanium products 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 ("LTA's")
as a result of higher raw material costs. During the first three months of 1997,
the Company reduced its prior accrual for losses of $1.2 million on certain of
its LTA's, reducing its accrual for future losses to $1.5 million at March 30,
1997. 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 revenues derived from the Company's fixed
price LTA's are subject to change based upon the Company's costs of production.
On August 26, 1996, the Company completed an Offering ("Offering") of 4.6
million shares of its common stock for a price of $23.75 per share. Proceeds
from the Offering, net of underwriting fees and expenses, totaled $103 million.
The Company has used approximately $18 million of the proceeds to pay down its
U.S. revolving credit agreement. The balance of the proceeds will be used to
construct a new electron beam furnace ("EB furnace"), expand the Company's
distribution business, and for working capital and other general corporate
purposes.
10
<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, 1996, and for the three months
ended March 30, 1997 and March 31, 1996.
<TABLE>
<CAPTION>
Three Months Ended
------------------- Year Ended
March 30 March 31 December 31,
-------- -------- ----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales..................... 100.0% 100.0% 100.0% 100.0 % 100.0 % 100.0 % 100.0 %
Gross profit (loss) (1)...... 25.6 20.2 24.4 10.8 9.3 4.9 (1.0)
Income (loss) from
operations (1)............. 17.7 10.6 14.8 (0.2) (3.5) (11.2) (10.4)
Net income.................... 10.7% 6.5% 9.4% (1.6)% (2.8)% (7.4)% (7.4)%
- --------------
<FN>
<F1> A provision for a loss on LTA's of $5.7 million was recorded in 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 1995 and 1996, and the first quarter of 1997.
Although the Company's business is not seasonal, growth rates of sales have
varied from quarter to quarter as a result of the timing of new products,
industry cyclicality and general U.S. and international economic conditions.
<TABLE>
<CAPTION>
1997 Quarter 1996 Quarters 1995 Quarters
------------ ------------------------------------ ---------------------------------------
First First Second Third Fourth First Second(1) Third Fourth(1)
------- ------- ------- ------- ------- ------- --------- ----- ---------
(in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 72.0 $ 51.3 $ 58.8 $ 64.7 $ 62.1 $ 30.8 $ 35.2 $ 41.2 $ 39.7
Gross profit 18.4 10.4 14.2 16.2 16.9 5.3 5.3 4.1 1.2
Income (loss)
from operations 12.7 5.5 9.0 9.8 10.7 1.6 1.4 0.1 (3.4)
Net income (loss) $ 7.7 $ 3.3 $ 5.2 $ 6.4 $ 7.3 $ 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 FIRST THREE MONTHS OF 1997 TO FIRST THREE MONTHS OF 1996
- -----------------------------------------------------------------------
NET SALES. Net sales increased $20.7 million, or 40% to $72.0 million in
the first three months of 1997, compared to $51.3 million in 1996. 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 $20.7 million sales
increase, $4.3 million was the result of volume increases and $16.4 million from
higher average selling prices.
TITANIUM SPONGE. During the first three months of 1997, the Company's
integrated sponge facility operated at near capacity, primarily supplying the
Company's internal demand for titanium sponge as well as sales to RMI Titanium
Company ("RMI") under a long-term titanium sponge conversion agreement. Sales of
titanium sponge and sponge conversion services increased 18% to $3.8 million
from $3.2 million for the first three months of 1997 compared to the first three
months of 1996. Sponge shipments increased 48% and the average sponge price per
pound decreased 20%. A change in product mix between the two quarters is
responsible for the decrease in the average price per pound. The Company expects
to continue to operate its sponge facility at near capacity with substantially
all production being utilized for internal consumption or for supply to RMI
(approximately 45% of capacity in 1996). The Company is presently supplementing
its sponge production with purchases from foreign producers.
11
<PAGE>
INGOT. Sales of ingot increased 110% to $19.2 million for the first three
months of 1997 compared to $9.1 million for the first three months of 1996.
Ingot shipments increased 38% and the average ingot price per pound increased
52%. The Company operated its melt facilities at near capacity during the first
three months of 1997 and expects to continue to do so for the remainder of 1997.
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 34% to $24.9 million for the first three
months of 1997 compared to $18.6 million for the first three months of 1996.
Shipments of mill products remained substantially the same between the two
quarters and the average price per pound increased 39%. Sales to producers of
aerospace components are responsible for a substantial portion of the growth in
mill product sales. Sales to producers of golf clubheads decreased 13% during
the first three months of 1997 compared to the comparable period of 1996.
DISTRIBUTION. The Company's service centers market a wide variety of mill
products including engineered parts that are manufactured by various producers.
During the first three months of 1997, sales of service center products
increased 14% to $19.1 million compared to $16.7 million for the first three
months of 1996. The increase in sales was due to increased shipments and
favorable pricing and product mix.
CASTINGS. Sales of castings increased 27% to $2.7 million for the first
three months of 1997 compared to $2.2 million for the first three months of
1996. The Company is operating at a higher production rate in 1997 and is
expanding its casting facilities.
COST OF SALES AND GROSS PROFIT. Cost of sales for the first three months of
1997 increased 31% to $53.6 million, compared to $40.9 million in the first
three months of 1996. The primary reasons for the increase in cost of sales were
increased shipments, higher material costs for the distribution business, and a
shift in mix to more costly aerospace products. The Company's gross profit
margin increased to 25.6% for the first three months of 1997 from 20.2% for the
first three months of 1996, as a result of higher prices and improved production
efficiencies.
RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT EXPENSES ("RT&D"). RT&D
expenses increased slightly during the first three months of 1997 to $0.6
million compared to the comparable three-month period of 1996. 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 ("SG&A"). SG&A increased $0.7
million, or 17%, for the first three months of 1997 to $5.0 million from $4.3
million in the comparable three-month period of 1996. The increase is primarily
a result of additional employees hired to support the increase in operating
activity. As a percentage of sales, SG&A decreased to 7% in the first three
months of 1997 from 8% in the first three months of 1996. During the first
quarter of 1997, SG&A decreased by $0.6 as a result of a decrease in the market
price of the Company's common stock which led to a resulting reduction in the
Company's accrual under its Stock Appreciation Rights program.
INTEREST INCOME. Net proceeds from the Offering have been invested in
short-term marketable securities, which is the primary factor giving rise to the
increase in interest income.
INTEREST EXPENSE. Interest expense decreased $0.4 million to $0.2 million
in the first three months of 1997 compared to the first three months of 1996,
resulting from a decrease in average borrowings. In August 1996, the Company
paid down its U.S. revolving credit agreement with funds received from the
Offering.
PROVISION FOR INCOME TAXES. The Company reported a provision for income
taxes of $5.3 million, or an effective tax rate of 40% (on income before income
taxes and minority interests) for the first three months of 1997 compared to
$1.3 million, or an effective tax rate of 26% for the comparable period in 1996.
The difference between the federal and state combined statutory tax rate of 40%
and the 1996 effective tax rate of 26% was primarily due to a change in the
Company's deferred tax asset valuation allowance, reflecting the belief that it
was more likely than not that the deferred tax assets will be realized by the
Company.
NET INCOME. The Company reported net income of $7.7 million, $0.47 per
share, for the first three months of 1997 compared to net income of $3.3
million, $0.30 per share, for the comparable period in 1996.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
- --------
Net cash used in operating activities totaled $14.0 million for the first
quarter of 1997 compared to $2.6 million for the first quarter of 1996. For the
first three months of 1997, the Company reported net income of $7.7 million,
compared to $3.3 million for the comparable period of 1996. Increases in sales
accounted for the increased levels of accounts receivable, which represented the
primary use of cash for the three-month period. 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. The increase in the amount of working capital 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.
During the first three months of 1997 and 1996, the Company incurred $2.5
million and $1.3 million in expenses relating to its Stock Compensation Plans
and Savings Plan. Increases in the average market value of the Company's common
stock and in the number of eligible employees are the primary factors for the
1997 increase.
Net cash provided by investing activities totaled $19.4 million for the
first three months of 1997 compared to net cash used in investing activities of
$1.2 million for the first three months of 1996. The Company utilized $21.1
million in short-term investments to fund working capital requirements and
capital additions. The Company's additions to property, plant and equipment
totaled $1.6 million and $1.1 million in the first three months of 1997 and
1996, respectively.
Net cash used in financing activities totaled $5.7 million for the first
three months of 1997, compared to net cash provided by financing activities of
$4.3 million for the comparable period of 1996. A decrease in the Company's book
overdraft of $4.4 million was the primary factor affecting first quarter 1997.
REVIEW OF SIGNIFICANT WORKING CAPITAL ACCOUNTS
SHORT-TERM INVESTMENTS. Proceeds from the Offering have been invested in a
portfolio of highly-liquid debt securities. The Company reported $46.5 million
in short-term investments as of March 30, 1997. The Company had no short-term
investments as of March 31, 1996.
INVENTORIES. Inventories increased by $0.9 million, during the first three
months of 1997, to $120.4 million, while they increased $5.2 million, or 8%, to
$66.0 million during the comparable period of 1996. During 1996, the Company
increased its level of inventories in response to a growing sales backlog and
increased production levels. The Company's manufacturing facilities are
presently operating at near capacity. While sales increased during the first
quarter of 1997, inventory levels remained relatively unchanged.
ACCOUNTS RECEIVABLE. Accounts receivable increased by $16.6 million, or
44%, during the first three months of 1997 to $53.9 million, while they
increased by $7.1 million, or 28%, to $33.0 million during the comparable period
of 1996. The increase in accounts receivable is the result of an increase in
sales volume and because first quarter 1997 sales were weighted towards the end
of the quarter.
BOOK OVERDRAFT. The Company had a book overdraft at March 30, 1997,
December 31, 1996 and March 31, 1996 of $-0- million, $4.4 million, and $3.7
million, respectively. The book overdraft represents Company checks which have
been disbursed and are in transit as of the end of the reporting period and
which are in excess of deposits at financial institutions.
ACCOUNTS PAYABLE. Accounts payable decreased $6.8 million, or 34%, during
the first three months of 1997 to $13.1 million, while it increased $0.6
million, or 4%, to $17.6 million at March 31, 1996. The decrease in accounts
payable during the first quarter of 1997 reflects a decrease in raw material
purchases. The increase in accounts payable during the first quarter of 1996 was
the result of raw material purchases required to keep pace with the Company's
increasing operating levels.
13
<PAGE>
ACCRUED PAYROLL AND EMPLOYEE BENEFITS. Accrued payroll and employee
benefits decreased by $4.2 million, or 39% during the first three months of 1997
to $6.4 million, while they increased by $.1 million, or 1% to $7.4 million
during the comparable period of 1996. The decrease during the first quarter of
1997 is attributable to payments of year-end bonuses and a decrease in the
accrual for outstanding Stock Appreciation Rights ("SARs"). SARs decreased $0.6
million during the first quarter of 1997, as a result of a decrease in the price
of the Company's common stock. For the first three months of 1996, accruals
related to the Company's Stock Compensation Plan and Savings Plans accounted for
a substantial portion of the increase.
CREDIT AGREEMENTS
- -----------------
The Company may borrow up to $10 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. There was no balance
outstanding under the credit agreement as of March 30, 1997. As of March 30,
1997, interest charged under the credit agreement was calculated based on BABC's
reference rate plus 1.0% or a borrowing option based on LIBOR plus 2.5%. The
Company is in the process of evaluating proposals from lending institutions for
a new $60 million credit agreement.
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 $3.3 million. The U.K. credit agreement is subject to renewal on
May 31, 1997. The balance outstanding under the U.K. credit agreement as of
March 30, 1997 was $1.4 million.
CAPITAL EXPENDITURES
- --------------------
The Company intends to use approximately $38.5 million of the net proceeds
from the Offering for the construction, start-up, and product qualification
costs for a new EB furnace and related raw material processing facilities. The
construction and production ramp-up periods are expected to take approximately
18 months with approximately $18 million expended in 1997 (design, procurement
and construction phases), and approximately $20.5 million in 1998 (construction
and testing phases).
The Company also intends to use approximately $15 million of the net
proceeds from the Offering to establish or purchase additional service centers.
The Company anticipates that capital expenditures during 1997, excluding
the EB furnace, will approximate $14 million which will be provided by both
presently available and 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. Except for certain items relating to the
construction of the EB furnace, the Company has no material open commitments
which obligate it to make future capital expenditures.
INCOME TAXES
- ------------
The Company anticipates that in 1997 it will fully utilize its federal
alternative minimum tax (AMT) credit carryforward of $0.7 million and its
remaining State of Oregon net operating loss carryforwards of $10.5 million. In
addition to federal and State of Oregon income taxes, the Company pays income
and franchise taxes in various foreign jurisdictions and states.
ADEQUACY OF LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------------------
The Company's access to borrowing facilities, public markets and internally
generated cash are expected to be sufficient to support the Company's operating
needs and to finance its continued growth, acquisitions, capital expenditures
and repayment of long-term debt obligations.
NON-U.S. OPERATIONS AND MONETARY ASSETS
- ---------------------------------------
Approximately 10% of the Company's net sales for the first three months of
1997 were derived from its service centers in the U.K., Germany, 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 the first three
months of 1997.
14
<PAGE>
PART 2: OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES
---------------------
C. OREMET issued 6,200 shares of its common stock to directors as
a retainer on February 12, 1997. The shares were issued in
reliance on the SEC "no-registration/no-restriction" position
for bonus stock.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
A. An Annual Meeting of shareholders was held on April 24, 1997.
B. Carlos E. Aguirre, Thomas B. Boklund, Robert V. Carter,
Thomas L. Chrystie, Nicholas P. Collins, T. Grant John,
David H. Leonard, James S. Paddock, and James R. Pate were
elected as Directors of OREMET.
C. The matters voted upon at the Annual Meeting of Shareholders
were:
iii. The election of nine Directors. The results of the
election were as follows:
Nominee Votes For
------- ---------
Carlos E. Aguirre 13,250,511
Thomas B. Boklund 10,758,796
Robert V. Carter 13,091,799
Thomas L. Chrystie 12,835,136
Nicholas P. Collins 12,928,883
T. Grant John 12,839,975
David H. Leonard 13,566,516
James S. Paddock 12,818,151
James R. Pate 14,025,923
ii. Amend restated Articles of Incorporation to increase
authorized shares of the Company from 25,000,000 to
80,000,000 shares. The results of the shareholder vote
were as follows:
Votes For Votes Against Abstentions Broker Non-Votes
--------- ------------- ----------- ----------------
8,236,908 5,553,521 77,354 0
ITEM 6:EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
3.1 Amendment to Restated Articles of Incorporation.
11.1 Statement re: computation of per share earnings.
27.1 Financial Data Schedule.
B. Forms 8-K
No reports on Form 8-K were filed by the Company during the quarter ended March
30, 1997.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OREGON METALLURGICAL CORPORATION
Registrant
Date: May 13, 1997 /s/ Dennis P. Kelly
------------------ ----------------------------------
Dennis P. Kelly
Vice President, Finance and
Chief Financial Officer
Signing on behalf of the Registrant
and as Chief Accounting Officer
15
Phone: (503) 986-2200
Fax: (503) 378-4381 ARTICLES OF AMENDMENT -- BUSINESS/PROFESSIONAL/NONPROFIT
- --------------------------------------------------------------------------------
For office use only
Secretary of State Check the appropriate box below:
Corporation Division / / BUSINESS/PROFESSIONAL CORPORATION
255 Capitol St. NE, Suite 151 (Complete only 1, 2, 3, 4, 6, 7)
Salem, OR 97310-1327 / / NONPROFIT CORPORATION
(Complete only 1, 2, 3, 5, 6, 7)
Registry Number: ________________________________
Attach Additional Sheet if Necessary
Please Type or Print Legibly in Black Ink
1) NAME OF CORPORATION PRIOR TO AMENDMENT: OREGON METALLURGICAL CORPORATION
2) STATE THE ARTICLE NUMBER(S) AND SET FORTH THE ARTICLE (S) AS IT IS AMENDED
TO READ. (Attach a separate sheet if necessary.)
ARTICLE III: The aggregate number of shares which the corporation shall
have authority to issue is 80,000,000 shares common stock with a par value
of One Dollar ($1.00) per share.
3) THE AMENDMENT WAS ADOPTED ON: APRIL 24, 1997
(If more than one amendment was adopted, identify the date of adoption of
each amendment.)
- --------------------------------------------------------------------------------
BUSINESS/PROFESSIONAL CORPORATION ONLY
4) CHECK THE APPROPRIATE STATEMENT
/X/ Shareholder action was required to adopt the amendment(s). The vote was as
follows:
Number of
Class or Number of votes Number of Number of
series of shares entitled to votes cast votes cast
shares outstanding be cast FOR AGAINST
--------- ----------- ----------- ---------- ----------
Common 16,185,553 16,185,553 8,269,908 5,553,521
--------- ----------- ---------- ---------- ----------
/ / Shareholder action was not required to adopt the amendment(s). The
amendment(s) was adopted by the Board of Directors without shareholder
action.
/ / The corporation has not issued any shares of stock. Shareholder action was
not required to adopt the amendment(s). The amendment(s) was adopted by the
incorporators or by the Board of Directors.
NONPROFIT CORPORATION ONLY
5) CHECK THE APPROPRIATE STATEMENT
/ / Membership approval was not required. The amendment(s) was approved by a
sufficient vote of the Board of Directors or incorporators.
/ / Membership approval was required. The membership vote was as follows:
- --------------------------------------------------------------------------------
6) EXECUTION
Printed Name Signature Title
Dennis P. Kelly /s/ Dennis P. Kelly Secretary, Vice-President
---------------------- --------------------- Finance, Chief Financial
Officer and Treasurer
- --------------------------------------------------------------------------------
7) CONTACT NAME DAYTIME PHONE NUMBER
Thomas L. Black, Esquire (541) 926-2255
CR113(Rev. 6/96)
OREGON METALLURGICAL CORPORATION
EXHIBIT 11.1
EARNINGS PER SHARE COMPUTATION
(in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
March 30, March 31,
1997 1996
--------- ---------
<S> <C> <C>
Net income $ 7,711 $ 3,345
======= =======
Weighted average common shares outstanding 16,152 11,060
Weighted average common share equivalents
assumed issued from Excess Benefit Plan 31 108
Weighted average common share equivalents
assumed issued from exercise of warrants
and stock options 90 121
Weighted average common share equivalents
assumed issued as part of Employee
Compensation Plans 135 38
------- -------
Weighted average common shares and
equivalents outstanding 16,408 11,327
======= =======
Net income per share $ 0.47 $ 0.30
======= =======
</TABLE>
Earnings per share computed on both the primary and fully diluted bases are the
same.
Exhibit 11.1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's report on Form 10-Q for the period ended March 30, 1997, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-30-1997
<EXCHANGE-RATE> 1
<CASH> 1,013
<SECURITIES> 46,531
<RECEIVABLES> 47,074
<ALLOWANCES> (543)
<INVENTORY> 120,411
<CURRENT-ASSETS> 226,776
<PP&E> 106,695
<DEPRECIATION> (71,141)
<TOTAL-ASSETS> 263,843
<CURRENT-LIABILITIES> 37,073
<BONDS> 3,833
0
0
<COMMON> 16,196
<OTHER-SE> 197,664
<TOTAL-LIABILITY-AND-EQUITY> 263,843
<SALES> 72,031
<TOTAL-REVENUES> 72,031
<CGS> 53,616
<TOTAL-COSTS> 53,616
<OTHER-EXPENSES> 5,674
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 189
<INCOME-PRETAX> 13,041
<INCOME-TAX> 5,330
<INCOME-CONTINUING> 7,711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,711
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.47
</TABLE>
