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 June 30, 2005
-------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
Commission file number 0-28538
-------
Titanium Metals Corporation
--------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-5630895
-------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5600
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
Number of shares of common stock outstanding on July 29, 2005: 16,096,224
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in the Notes to Consolidated Financial Statements and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), are forward-looking statements that represent management's
beliefs and assumptions based on currently available information.
Forward-looking statements can generally be identified by the use of words such
as "believes," "intends," "may," "will," "looks," "should," "could,"
"anticipates," "expects" or comparable terminology or by discussions of
strategies or trends. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurance that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly affect expected results. Actual future results could differ
materially from those described in such forward-looking statements, and the
Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Among the factors that could cause actual results to differ
materially are the risks and uncertainties discussed in this Quarterly Report,
including risks and uncertainties in those portions referenced above and those
described from time to time in the Company's other filings with the Securities
and Exchange Commission ("SEC") which include, but are not limited to, the
cyclicality of the commercial aerospace industry, the performance of aerospace
manufacturers and the Company under their long-term agreements, the renewal of
certain long-term agreements, the difficulty in forecasting demand for titanium
products, global economic and political conditions, global productive capacity
for titanium, changes in product pricing and costs, the impact of long-term
contracts with vendors on the ability of the Company to reduce or increase
supply or achieve lower costs, the possibility of labor disruptions,
fluctuations in currency exchange rates, fluctuations in the market price of
marketable securities, control by certain stockholders and possible conflicts of
interest, uncertainties associated with new product development, the
availability of raw materials and services, changes in raw material prices and
other operating costs (including energy costs), possible disruption of business
or increases in the cost of doing business resulting from terrorist activities
or global conflicts, the potential for adjustment of the Company's deferred
income tax asset valuation allowance and other risks and uncertainties. Should
one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected.
TITANIUM METALS CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 2005 (unaudited)
and December 31, 2004 2
Consolidated Statements of Operations - Three and six months
ended June 30, 2005 and 2004 (unaudited) 4
Consolidated Statements of Comprehensive Income (Loss) -
Three and six months ended June 30, 2005 and 2004 (unaudited) 5
Consolidated Statements of Cash Flows - Six months ended
June 30, 2005 and 2004 (unaudited) 6
Consolidated Statement of Changes in Stockholders' Equity -
Six months ended June 30, 2005 (unaudited) 8
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk 33
Item 4. Controls and Procedures 33
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 35
Item 4. Submission of Matters to a Vote of Security Holders 35
Item 6. Exhibits 36
- 1 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
ASSETS 2005 2004
-------------------- --------------------
(unaudited) (as restated,
see Note 1)
Current assets:
Cash and cash equivalents $ 4,938 $ 7,194
Restricted cash and cash equivalents 146 721
Accounts and other receivables, less
allowance of $1,479 and $1,683, respectively 130,023 96,756
Inventories 305,261 258,324
Prepaid expenses and other 3,163 2,400
Deferred income taxes 2,138 4,974
-------------------- --------------------
Total current assets 445,669 370,369
Marketable securities 49,328 47,214
Investment in joint ventures 24,119 22,591
Investment in common securities of TIMET Capital Trust I 6,259 6,259
Property and equipment, net 242,048 228,173
Intangible assets, net 4,529 5,057
Deferred income taxes 22,375 1,053
Other 10,967 11,577
-------------------- --------------------
Total assets $ 805,294 $ 692,293
==================== ====================
See accompanying Notes to Consolidated Financial Statements
- 2 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
June 30, December 31,
LIABILITIES, MINORITY INTEREST AND 2005 2004
STOCKHOLDERS' EQUITY ------------------- --------------------
(unaudited) (as restated,
see Note 1)
Current liabilities:
Notes payable $ 66,672 $ 43,176
Accounts payable 60,878 44,164
Accrued liabilities 50,136 53,130
Deferred gain on sale of property - 12,016
Customer advances 29,971 6,913
Income taxes payable 7,272 2,516
Other 462 257
------------------- --------------------
Total current liabilities 215,391 162,172
Accrued OPEB cost 14,704 14,470
Accrued pension cost 73,387 77,515
Accrued environmental cost 1,948 1,985
Deferred income taxes 57 60
Debt payable to TIMET Capital Trust I 12,010 12,010
Other 4,901 5,114
------------------- --------------------
Total liabilities 322,398 273,326
------------------- --------------------
Minority interest 11,019 12,539
------------------- --------------------
Stockholders' equity:
Series A Preferred Stock, $.01 par value; $195,455
liquidation preference; 4,025 shares authorized,
3,909 shares issued 173,650 173,650
Common stock, $.01 par value; 90,000 shares authorized,
16,042 and 15,963 shares issued, respectively 160 160
Additional paid-in capital 352,762 350,866
Accumulated deficit (5,337) (77,044)
Accumulated other comprehensive loss (48,150) (39,989)
Treasury stock, at cost (45 shares) (1,208) (1,208)
Deferred compensation - (7)
------------------- --------------------
Total stockholders' equity 471,877 406,428
------------------- --------------------
Total liabilities, minority interest and
stockholders' equity $ 805,294 $ 692,293
=================== ====================
Commitments and contingencies (Note 12)
See accompanying Notes to Consolidated Financial Statements
- 3 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
---------------------------------- ----------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
(as restated, (as restated,
see Note 1) see Note 1)
Net sales $ 183,746 $ 124,125 $ 338,981 $ 244,613
Cost of sales 135,866 107,119 262,146 214,822
--------------- --------------- --------------- ---------------
Gross margin 47,880 17,006 76,835 29,791
Selling, general, administrative and
development expense 12,978 11,151 25,339 20,668
Equity in earnings (losses) of joint ventures 1,344 (149) 2,145 (232)
Other income (expense), net 690 2,778 2,676 2,853
--------------- --------------- --------------- ---------------
Operating income 36,936 8,484 56,317 11,744
Interest expense 943 4,088 1,617 8,398
Other non-operating income (expense), net 15,426 159 16,169 897
--------------- --------------- --------------- ---------------
Income before income taxes and
minority interest 51,419 4,555 70,869 4,243
Income tax expense (benefit) 13,339 799 (9,540) 1,321
Minority interest, net of tax 1,181 371 2,105 761
--------------- --------------- --------------- ---------------
Net income 36,899 3,385 78,304 2,161
Dividends on Series A Preferred Stock 3,298 - 6,597 -
--------------- --------------- --------------- ---------------
Net income attributable to
common stockholders $ 33,601 $ 3,385 $ 71,707 $ 2,161
=============== =============== =============== ===============
Earnings (loss) per share attributable to
common stockholders:
Basic $ 2.10 $ 0.21 $ 4.49 $ 0.14
Diluted $ 1.63 $ 0.21 $ 3.47 $ 0.14
Weighted average shares outstanding:
Basic 15,993 15,879 15,961 15,871
Diluted 22,659 15,935 22,629 15,915
See accompanying Notes to Consolidated Financial Statements
- 4 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(In thousands)
Three months ended Six months ended
June 30, June 30,
---------------------------------- ----------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
(as restated, (as restated,
see Note 1) see Note 1)
Net income $ 36,899 $ 3,385 $ 78,304 $ 2,161
--------------- --------------- --------------- ---------------
Other comprehensive income (loss):
Currency translation adjustment (6,814) (1,634) (8,110) (18)
Unrealized gains (losses) on marketable
securities, net of taxes 10 2,135 (167) 6,585
TIMET's share of VALTIMET SAS's
unrealized net (losses) gains on
derivative financial instruments
qualifying as cash flow hedges (636) (304) 116 (54)
--------------- --------------- --------------- ---------------
Total other comprehensive (loss) income (7,440) 197 (8,161) 6,513
--------------- --------------- --------------- ---------------
Comprehensive income $ 29,459 $ 3,582 $ 70,143 $ 8,674
=============== =============== =============== ===============
See accompanying Notes to Consolidated Financial Statements
- 5 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six months ended June 30,
----------------------------------------
2005 2004
------------------- ------------------
(as restated,
see Note 1)
Cash flows from operating activities:
Net income $ 78,304 $ 2,161
Depreciation and amortization 15,767 16,385
(Gain) loss on disposal of fixed assets (13,655) 28
Noncash impairment of equipment 1,251 -
Equity in (earnings) losses of joint ventures, net
of distributions (2,145) 232
Equity in earnings of common securities of TIMET
Capital Trust I, net of distributions - 536
Deferred income taxes (18,473) (96)
Minority interest, net of tax 2,105 761
Other, net (50) (30)
Change in assets and liabilities:
Receivables (37,660) (16,860)
Inventories (53,789) (23,528)
Prepaid expenses and other (1,006) 884
Accounts payable and accrued liabilities 17,385 7,543
Customer advances 23,425 23,957
Income taxes 5,190 2,814
Accrued OPEB and pension costs 408 2,260
Accrued interest on debt payable to TIMET Capital Trust I - (17,857)
Other, net 843 (1,328)
------------------- ------------------
Net cash provided (used) by operating activities 17,900 (2,138)
------------------- ------------------
Cash flows from investing activities:
Capital expenditures (34,888) (6,714)
Purchase of marketable securities (2,223) (16,533)
Change in restricted cash, net 576 -
Proceeds from the sale of property 1,289 -
------------------- ------------------
Net cash used by investing activities (35,246) (23,247)
------------------- ------------------
Cash flows from financing activities:
Indebtedness:
Borrowings 155,161 21,070
Repayments (131,666) (20,070)
Dividends paid on Series A Preferred Stock (6,597) -
Dividend paid to minority shareholder (2,216) (691)
Other, net 1,096 (446)
------------------- ------------------
Net cash provided (used) by financing activities 15,778 (137)
------------------- ------------------
Net cash used by operating, investing and
financing activities $ (1,568) $ (25,522)
=================== ==================
See accompanying Notes to Consolidated Financial Statements
- 6 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(In thousands)
Six months ended June 30,
----------------------------------------
2005 2004
------------------ ------------------
(as restated,
see Note 1)
Cash and cash equivalents:
Net decrease from:
Operating, investing and financing activities $ (1,568) $ (25,522)
Effect of exchange rate changes on cash (688) (302)
------------------ ------------------
(2,256) (25,824)
Cash and cash equivalents at beginning of period 7,194 35,040
------------------ ------------------
Cash and cash equivalents at end of period $ 4,938 $ 9,216
================== ==================
Supplemental disclosures:
Cash paid for:
Interest $ 1,228 $ 25,860
Income taxes, net $ 3,737 $ -
See accompanying Notes to Consolidated Financial Statements
- 7 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Six months ended June 30, 2005
(In thousands)
Accumulated
Series A Additional Other
Common Common Preferred Paid-in Accumulated Comprehensive Treasury Deferred
Shares Stock Stock apital Deficit Loss Stock Compensation Total
-------- ------- ---------- ---------- ---------- ---------- -------- -------- ----------
Balance at December 31, 2004 (as
restated, see Note 1) 15,918 $ 160 $ 173,650 $ 350,866 $ (77,044) $ (39,989) $(1,208) $ (7) $ 406,428
Comprehensive income - - - - 78,304 (8,161) - 70,143
Issuance of common stock 79 - - 1,250 - - - - 1,250
Tax benefit of stock options
exercised and restricted
stock vested - - - 646 - - - - 646
Dividends declared on Series A
Preferred Stock - - - - (6,597) - - - (6,597)
Amortization of deferred
compensation - - - - - - - 7 7
-------- ------- ---------- ---------- ---------- ---------- -------- -------- ----------
Balance at June 30, 2005 15,997 $ 160 $ 173,650 $ 352,762 $ (5,337) $ (48,150) $(1,208) $ - $ 471,877
======== ======= ========== ========== ========== ========== ======== ======== ==========
See accompanying Notes to Consolidated Financial Statements
- 8 -
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Organization and basis of presentation
Titanium Metals Corporation ("TIMET") is a vertically integrated producer
of titanium sponge, melted products and a variety of mill products for
aerospace, industrial and other applications. The accompanying Consolidated
Financial Statements include the accounts of TIMET and its majority owned
subsidiaries (collectively, the "Company"), except the TIMET Capital Trust I
(the "Capital Trust"). All material intercompany transactions and balances with
consolidated subsidiaries have been eliminated, and certain prior year amounts
have been reclassified to conform to the current year presentation. The
Consolidated Balance Sheet at June 30, 2005 and the Consolidated Statements of
Operations, Comprehensive Income (Loss), Changes in Stockholders' Equity and
Cash Flows for the interim periods ended June 30, 2005 and 2004, as applicable,
have been prepared by the Company without audit in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). In the
opinion of management, all adjustments necessary to fairly state the
consolidated financial position, results of operations and cash flows have been
made. The results of operations for interim periods are not necessarily
indicative of the operating results of a full year or of future operations.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted. The
Company's first three fiscal quarters reported are the approximate 13-week
periods ending on the Saturday generally nearest to March 31, June 30 and
September 30. The Company's fourth fiscal quarter and fiscal year always end on
December 31. For presentation purposes, the Company's Consolidated Financial
Statements and notes thereto have been presented as ending on March 31, June 30,
September 30 and December 31, as applicable. The accompanying Consolidated
Financial Statements should be read in conjunction with the Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2004 (the "2004 Annual Report").
At June 30, 2005, Valhi, Inc. and subsidiaries ("Valhi") held 43.8% of
TIMET's outstanding common stock and 0.4% of the Company's 6.75% Series A
Convertible Preferred Stock (the "Series A Preferred Stock"). At June 30, 2005,
the Combined Master Retirement Trust ("CMRT"), a trust formed by Valhi to permit
the collective investment by trusts that maintain the assets of certain employee
benefit plans adopted by Valhi and certain related companies, held 12.0% of the
Company's common stock. TIMET's U.S. pension plans invest in a portion of the
CMRT that does not hold TIMET common stock. At June 30, 2005, Contran
Corporation ("Contran") held, directly or through subsidiaries, approximately
91% of Valhi's outstanding common stock. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of
certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is
sole trustee, or is held by Mr. Simmons or persons or other entities related to
Mr. Simmons. In addition, Mr. Simmons is the sole trustee of the CMRT and a
member of the trust investment committee for the CMRT. At June 30, 2005, Mr.
Simmons directly owned 0.8% of TIMET's outstanding common stock and Mr. Simmons'
spouse owned 40.9% of the Company's outstanding Series A Preferred Stock.
Consequently, Mr. Simmons may be deemed to control each of Contran, Valhi and
TIMET.
- 9 -
Effective January 1, 2005, the Company changed its method for inventory
costing from the last-in, first-out ("LIFO") cost method to the specific
identification cost method for the approximate 40% of the Company's consolidated
inventories previously accounted for under the LIFO cost method. With the
significant volatility seen recently in raw material prices, the Company
believes this change in accounting method provides a better matching of revenues
and expenses. As required by GAAP, the Company has restated its financial
statements for prior periods. As a result, the Company's net inventory balance
as of December 31, 2004 increased by $26.7 million from the previously reported
amount, with a corresponding decrease to the Company's accumulated deficit.
There was no impact on the Company's cash flow from operations for the three or
six months ended June 30, 2004 related to this accounting change. The effect of
the accounting change on income for the three and six months ended June 30, 2004
was to (i) increase net income by $1.5 million and $1.9 million, respectively
and (ii) increase earnings per basic and diluted share by $0.09 and $0.13,
respectively. See Note 2.
The Company completed a five-for-one stock split of its common stock, which
was effected in the form of a stock dividend (whereby an additional four shares
of post-split stock were distributed for each one share of pre-split stock) and
became effective after the close of trading on August 27, 2004. All share and
per share disclosures for the 2004 period have been adjusted to give effect to
this stock split.
The Company currently follows the disclosure alternative prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, and has chosen to account for its
stock-based employee compensation related to stock options in accordance with
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and its various interpretations. See Note 15. Under APB Opinion
No. 25, compensation cost is generally recognized for fixed stock options for
which the exercise price is less than the market price of the underlying stock
on the grant date. All of the Company's stock options have been granted with
exercise prices equal to or in excess of the market price on the date of grant,
and the Company recognized no compensation expense for stock options during the
three and six months ended June 30, 2005 and 2004. If the Company had applied
the fair value recognition provisions of SFAS No. 123 to all options granted,
basic and diluted earnings per share attributable to common stockholders would
have been unchanged for the three and six months ended June 30, 2005, and the
three months ended June 30, 2004. For the six months ended June 30, 2004, basic
and diluted earnings per share would have decreased by $0.01.
VALTIMET, the Company's 43.7% owned affiliate accounted for by the equity
method, has entered into certain derivative financial instruments that qualify
as cash flow hedges under GAAP. The Company's pro-rata share of VALTIMET's
unrealized net gains (losses) on such derivative financial instruments is
included as a component of other comprehensive income.
- 10 -
Note 2 - Inventories
June 30, December 31,
2005 2004
------------------- -------------------
(In thousands)
Raw materials $ 89,141 $ 71,067
Work-in-process 121,309 97,848
Finished products 82,261 77,012
Supplies 12,550 12,397
------------------- -------------------
$ 305,261 $ 258,324
=================== ===================
Effective January 1, 2005, the Company changed its method for inventory
costing from the LIFO cost method to the specific identification cost method, as
described in Note 1. As a result of this accounting change, the Company's net
inventory balance as of December 31, 2004 increased by $26.7 million from the
previously reported amount (representing the elimination of the Company's LIFO
reserve at such date).
Note 3 - Marketable securities
The following table summarizes the Company's marketable securities as of
June 30, 2005 and December 31, 2004:
June 30, 2005 December 31, 2004
----------------------------- --------------------------------
Market Market
Marketable security Shares value Shares value
------------------------------------------------ ------------ ------------- -------------- --------------
($ in thousands)
CompX International, Inc. ("CompX") 2,696,420 $ 45,785 2,549,520 $ 42,144
NL Industries, Inc. ("NL") 222,100 3,387 222,100 4,908
Kronos Worldwide, Inc. ("Kronos") 5,203 156 3,985 162
------------- --------------
$ 49,328 $ 47,214
============= ==============
During the first nine months of 2004, the Company purchased 2,212,820
shares of CompX Class A common shares and, on October 1, 2004, contributed such
shares to CompX Group, Inc. ("CGI") in return for a 17.6% ownership interest in
CGI (the remaining 82.4% interest is held by NL). As of June 30, 2005 and
December 31, 2004, the Company directly held 483,600 and 336,700 shares,
respectively, of CompX, which were purchased subsequent to October 1, 2004. The
Company has not contributed any of the 483,600 shares purchased subsequent to
October 1, 2004, and currently does not expect to contribute those shares or any
other shares of CompX Class A common stock that it may subsequently acquire, to
CGI.
During each of the first and second quarters of 2005, CompX and Kronos each
paid cash dividends on their respective common stock. NL, which paid its first
quarter 2005 dividend in the form of shares of Kronos common stock, paid its
second quarter 2005 dividend in the form of cash. See Note 9.
- 11 -
Note 4 - Property and equipment
June 30, December 31,
2005 2004
------------------- ------------------
(In thousands)
Land and improvements $ 6,309 $ 8,703
Buildings and improvements 31,799 31,780
Information technology systems 61,257 63,609
Manufacturing equipment and other 324,949 333,031
Construction in progress 41,397 14,819
------------------- ------------------
465,711 451,942
Less accumulated depreciation 223,663 223,769
------------------- ------------------
$ 242,048 $ 228,173
=================== ==================
During the first quarter of 2005, the Company determined that certain of
its manufacturing equipment would no longer be utilized in its operations, and,
accordingly, recognized a $1.2 million noncash abandonment charge to cost of
sales during the period.
In November 2004, pursuant to an agreement with Basic Management, Inc. and
certain of its affiliates ("BMI"), the Company sold certain property located
adjacent to its Henderson, Nevada plant site to BMI, a 32%-owned indirect
subsidiary of Valhi and recorded a $12.0 million deferred gain related to the
cash proceeds received in November 2004. During the second quarter of 2005, the
Company ceased using the property and, accordingly, recognized a $13.9 million
gain related to the sale of such property, which is comprised of (i) the
previously reported $12.0 million cash proceeds received in November 2004, (ii)
the reversal of $0.6 million previously accrued by the Company for potential
environmental issues related to the property and (iii) an additional $1.2
million cash payment received from BMI in June 2005. See Note 9.
Note 5 - Other noncurrent assets
June 30, December 31,
2005 2004
------------------- ------------------
(In thousands)
Prepaid pension cost $ 10,564 $ 10,531
Deferred financing costs 181 786
Notes receivable from officers 39 49
Other 183 211
------------------- ------------------
$ 10,967 $ 11,577
=================== ==================
- 12 -
Note 6 - Accrued liabilities
June 30, December 31,
2005 2004
------------------- ------------------
(In thousands)
OPEB cost $ 2,716 $ 2,777
Pension cost 4,942 5,285
Payroll and vacation 6,973 5,810
Performance-based employee incentive compensation 10,218 12,570
Other employee benefits 9,123 9,721
Deferred income 2,275 1,736
Environmental costs 1,586 2,530
Taxes, other than income 5,035 4,166
Other 7,268 8,535
------------------- ------------------
$ 50,136 $ 53,130
=================== ==================
Note 7 - Customer advances
Under the terms of the Company's long-term agreement ("LTA") with The
Boeing Company ("Boeing"), in 2002 through 2007, Boeing is required to advance
TIMET $28.5 million annually less $3.80 per pound of titanium product purchased
by Boeing subcontractors from TIMET during the preceding year. The advance
relates to Boeing's take-or-pay obligations under the LTA. Effectively, the
Company collects $3.80 less from Boeing than the LTA selling price for each
pound of titanium product sold directly to Boeing and reduces the related
customer advance recorded by the Company. For titanium products sold to Boeing
subcontractors, the Company collects the full LTA selling price, but gives
Boeing credit by reducing the next year's annual advance by $3.80 per pound of
titanium product sold to Boeing subcontractors. The Boeing customer advance is
also reduced as take-or-pay benefits are earned. As of June 30, 2005,
approximately $22.8 million of customer advances related to the Company's LTA
with Boeing.
Note 8 - Bank debt
During the second quarter of 2005, the Company amended its U.S. credit
facility to increase its maximum authorized borrowings from $105 million to $125
million. In addition, the amended credit facility reduced the excess
availability requirement related to the payment of dividends on the Company's
Series A Preferred Stock and distributions on the Capital Trust's 6.625%
mandatorily redeemable convertible preferred securities, beneficial unsecured
convertible securities ("BUCS") from $25 million to $10 million.
During the second quarter of 2005, the Company's subsidiary, TIMET UK,
terminated its previous credit agreement and entered into a new working capital
credit facility that expires on April 30, 2008. Under the new U.K. credit
facility, TIMET UK may borrow up to (pound)22.5 million, subject to a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and property, plant and equipment. Borrowings under the U.K. facility
can be in various currencies, including U.S. dollars, British pounds sterling
and euros and are collateralized by substantially all of TIMET UK's assets.
Interest on outstanding borrowings generally accrues at rates that vary from
1.125% to 1.375% above the lender's published base rate. The U.K. facility
agreement also contains financial ratios and covenants customary in lending
transactions of this type, including a minimum net worth covenant.
- 13 -
As of June 30, 2005, the Company had outstanding borrowings of $66.1
million under its U.S. credit agreement and $0.6 million under its European
credit facilities. Aggregate unused borrowing availability under the Company's
U.S. and European credit facilities was approximately $110 million as of June
30, 2005.
Note 9 - Other income (expense)
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------- -------------- -------------
(In thousands)
Other operating income (expense):
Settlement of customer claim $ - $ - $ 1,800 $ -
Boeing take-or-pay 444 2,507 444 2,507
Other, net 246 271 432 346
-------------- ------------- -------------- -------------
$ 690 $ 2,778 $ 2,676 $ 2,853
============== ============= ============== =============
Other non-operating income (expense):
Dividends and interest $ 462 $ 35 $ 949 $ 187
Equity in earnings of common
securities of the Capital Trust 103 103 206 217
Gain on sale of property (Note 4) 13,881 - 13,881 -
Foreign exchange gain, net 1,272 99 1,532 571
Other, net (292) (78) (399) (78)
-------------- ------------- -------------- -------------
$ 15,426 $ 159 $ 16,169 $ 897
============== ============= ============== =============
During the first quarter of 2005, the Company received $1.8 million related
to its settlement of a customer claim regarding prior order cancellations from
such customer. Additionally, the Company received dividends from its investments
in marketable securities, as discussed in Note 3.
- 14 -
Note 10 - Income taxes
Six months ended June 30,
-----------------------------------------
2005 2004
------------------ -------------------
(In thousands)
Expected income tax expense, at 35% $ 24,804 $ 1,485
Non-U.S. tax rates (811) (166)
U.S. state income taxes, net 472 (208)
Dividends received deduction (110) (13)
Change in state income tax law 550 -
Tax on repatriation of foreign earnings 998 -
Adjustment of deferred income tax asset
valuation allowance (35,592) 44
Other, net 149 179
------------------ -------------------
$ (9,540) $ 1,321
================== ===================
The Company periodically reviews its deferred income tax assets to
determine if future realization is more likely than not. During the first
quarter of 2005, based on the Company's recent history of U.S. income, its near
term outlook and the effect of its change in method of inventory costing from
the LIFO cost method to the specific identification cost method for U.S. federal
income tax purposes (see Note 1), the Company changed its estimate of its
ability to utilize the tax benefits of its U.S. net operating loss ("NOL")
carryforwards, alternative minimum tax ("AMT") credit carryforwards and other
net deductible temporary differences (other than the majority of the Company's
capital loss carryforwards). Consequently, the Company determined that its net
deferred income tax asset related to such U.S. tax attributes and other net
deductible temporary differences now meets the "more-likely-than-not"
recognition criteria. Accordingly, the Company reversed $22.6 million of the
valuation allowance attributable to such U.S. deferred income tax asset in the
first half of 2005 ($5.3 million in the second quarter) and the Company will
reverse the remaining valuation allowance attributable to such U.S. deferred
income tax asset of $14.2 million during the final two quarters of 2005 in
accordance with the GAAP requirements of accounting for income taxes at interim
dates.
During the first quarter of 2005, based on the Company's recent history of
U.K. income, its near term outlook and its historic U.K. profitability, the
Company also changed its estimate of its ability to utilize its net deductible
temporary differences and other tax attributes related to the U.K., primarily
comprised of (i) the future benefits associated with the reversal of its U.K.
minimum pension liability deferred income tax asset and (ii) the benefits of its
U.K. NOL carryforward. Consequently, the Company determined that its net
deferred income tax asset in the U.K. now meets the "more-likely-than-not"
recognition criteria. Accordingly, the Company reversed $13.0 million of the
valuation allowance attributable to such deferred income tax asset in the first
half of 2005 ($0.4 million in the second quarter) and the Company will reverse
the remaining U.K. valuation allowance of $0.4 million during the final two
quarters of 2005 in accordance with the GAAP requirements of accounting for
income taxes at interim dates.
At June 30, 2005, the Company had, for U.S. federal income tax purposes,
(i) NOL carryforwards of $72 million that expire in 2020 through 2023, (ii) a
capital loss carryforward of $73 million that expires in 2008 and (iii) AMT
credit carryforwards of $4 million, which can be utilized to offset regular
income taxes payable in future years, with an indefinite carryforward period. In
addition, at June 30, 2005, the Company had the equivalent of a $1 million NOL
carryforward in Germany, which has an indefinite carryforward period.
- 15 -
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law provides for a special 85% deduction for certain dividends
received from controlled foreign corporations in 2005. In the second quarter of
2005, the Company completed its evaluation of this new provision and determined
that it would benefit from the special dividend received deduction. As a
consequence, the Company plans to repatriate approximately $19 million of
earnings from its European subsidiaries in the third quarter of 2005. The $1.0
million related tax impact of this repatriation has been recorded as tax expense
in the second quarter in accordance with the requirements of FASB Staff Position
No. 109-2. However, the Company has not provided for U.S. deferred income taxes
or foreign withholding taxes on basis differences in its non-U.S. subsidiaries
that result primarily from undistributed earnings the Company intends to
reinvest indefinitely. Determination of the deferred income tax liability on
these basis differences is not practicable because such liability, if any, is
dependent on circumstances existing if and when remittance occurs.
The new law also provides for a special deduction from U.S. taxable income
equal to a specified percentage of a U.S. company's qualified income from
domestic manufacturing activities (as defined). Although the Company believes
that the majority of its operations meet the definition of qualified domestic
manufacturing activities, the Company does not expect to benefit from the
special manufacturing deduction in 2005, primarily because the Company projects
its U.S. taxable income in 2005 will be fully offset by its existing U.S. NOL
carryforwards.
In June 2005, the State of Ohio enacted a new tax law, which phases out
Ohio's existing income tax system over the next five years and replaces it with
a tax based on gross receipts. In the second quarter of 2005, as a result of
this phase out, the Company reduced its deferred income tax asset related to its
Ohio NOL carryforwards by $0.6 million.
Note 11 - Employee benefits
Defined benefit pension plans. The components of the net periodic pension
expense are set forth below:
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------- -------------- -------------
(In thousands)
Service cost $ 940 $ 792 $ 1,897 $ 1,677
Interest cost 3,462 3,143 6,952 6,294
Expected return on plan assets (3,756) (3,265) (7,547) (6,534)
Amortization of net losses 1,229 1,091 2,454 2,184
Amortization of unrecognized prior 244
service cost 139 122 278
-------------- ------------- -------------- -------------
Net periodic pension expense $ 2,014 $ 1,883 $ 4,034 $ 3,865
============== ============= ============== =============
Through June 30, 2005, the Company has made $4.6 million of cash
contributions to its defined benefit pension plans in 2005, and the Company
currently expects to make additional cash contributions of approximately $4.3
million to its defined benefit pension plans during the remainder of 2005. All
of the contributions relate to the Company's U.K. plan.
- 16 -
Postretirement benefits other than pensions. The components of net periodic
OPEB expense are set forth below:
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------- -------------- -------------
(In thousands)
Service cost $ 160 $ 126 $ 331 $ 253
Interest cost 359 403 826 806
Amortization of unrecognized prior
service cost (116) (116) (232) (232)
Amortization of net losses 166 227 490 454
-------------- ------------- -------------- -------------
Net periodic OPEB expense $ 569 $ 640 $ 1,415 $ 1,281
============== ============= ============== =============
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
(the "Medicare Act of 2003") introduced a prescription drug benefit under
Medicare (Medicare Part D) as well as a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. In May 2004, the Financial Accounting Standards
Board ("FASB") issued FSP No. 106-2 which provides guidance on (i) accounting
for the effects of the Medicare Act of 2003 once the Company is able to
determine actuarial equivalency and (ii) various required disclosures.
During 2005, the Company determined that the benefits provided by its U.S.
health and welfare plan are actuarially equivalent to the Medicare Part D
benefit and therefore the Company is eligible for the federal subsidy provided
for by the Medicare 2003 Act. The effect of such subsidy, which was accounted
for prospectively from the date actuarial equivalence was determined as
permitted and in accordance with FASB Staff Position No. 106-2, resulted in a
reduction in the Company's accumulated OPEB obligation of approximately $5
million and a reduction in net periodic OPEB cost of approximately $0.6 million
in 2005.
Note 12 - Commitments and contingencies
Environmental matters. In November 2004, the Company and BMI entered into
several agreements pursuant to which the Company conveyed certain land owned by
the Company adjacent to its Henderson, Nevada plant site on which the Company
operated settling ponds (the "TIMET Pond Property") to BMI. See Note 4.
Subsequent to the conveyance, TIMET continued to use certain of the settling
ponds located on the TIMET Pond Property (pursuant to a lease with BMI) until
May 2005, at which time all such usage ceased. Based on the terms of the
conveyance agreement, BMI assumed the Company's obligation for certain potential
environmental issues related to the TIMET Pond Property.
The Company is also continuing assessment work with respect to its own
active plant site in Henderson, Nevada. The Company currently has $3.3 million
accrued based on the undiscounted cost estimates of the probable costs for
remediation of this site related to specific future remediation costs which the
Company now considers probable. The Company expects these accrued expenses to be
paid over a period of up to thirty years.
- 17 -
At June 30, 2005, the Company had accrued an aggregate of approximately
$3.5 million for environmental matters, including those discussed above. The
upper end of the range of reasonably possible costs to remediate these matters
is approximately $6 million. The Company records liabilities related to
environmental remediation obligations when estimated future costs are probable
and reasonably estimable. Such accruals are adjusted as further information
becomes available or circumstances change. Estimated future costs are not
discounted to their present value. It is not possible to estimate the range of
costs for certain sites. The imposition of more stringent standards or
requirements under environmental laws or regulations, the results of future
testing and analysis undertaken by the Company at its operating facilities, or a
determination that the Company is potentially responsible for the release of
hazardous substances at other sites, could result in costs in excess of amounts
currently estimated to be required for such matters. No assurance can be given
that actual costs will not exceed accrued amounts or that costs will not be
incurred with respect to sites as to which no problem is currently known or
where no estimate can presently be made. Further, there can be no assurance that
additional environmental matters will not arise in the future.
Legal proceedings. The Company records liabilities related to legal
proceedings when estimated costs are probable and reasonably estimable. Such
accruals are adjusted as further information becomes available or circumstances
change. Estimated future costs are not discounted to their present value. It is
not possible to estimate the range of costs for certain matters. No assurance
can be given that actual costs will not exceed accrued amounts or that costs
will not be incurred with respect to matters as to which no problem is currently
known or where no estimate can presently be made. Further, there can be no
assurance that additional legal proceedings will not arise in the future.
Other. The Company has entered into letters of credit to collateralize (i)
potential workers' compensation claims in Ohio and Nevada and (ii) future usage
of electricity in Nevada. As of June 30, 2005, the outstanding amounts for such
letters of credit, which reduce the Company's excess availability under its U.S.
credit agreement, were $2.3 million and $1.3 million, respectively.
The Company is involved in various employment, environmental, contractual,
product liability and other claims, disputes and litigation incidental to its
business including those discussed above. While management currently believes
that the outcome of these matters, individually and in the aggregate, will not
have a material adverse effect on the Company's financial position, liquidity or
overall trends in results of operations, all such matters are subject to
inherent uncertainties. Were an unfavorable outcome to occur with respect to
several of these matters in a given period, it is possible that it could have a
material adverse impact on the results of operations or cash flows in that
particular period.
See the 2004 Annual Report for additional information concerning certain
legal and environmental matters, commitments and contingencies.
Note 13 - Earnings per share
Basic earnings per share is based on the weighted average number of
unrestricted common shares outstanding during each period. Diluted earnings per
share attributable to common stockholders reflects the dilutive effect of common
stock options, restricted stock and the assumed conversion of the Company's BUCS
and the Series A Preferred Stock, if applicable. A reconciliation of the
numerator and denominator used in the calculation of basic and diluted earnings
per share is presented below:
- 18 -
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------- -------------- -------------
(In thousands)
Numerator:
Net income attributable to common
stockholders $ 33,601 $ 3,385 $ 71,707 $ 2,161
Interest on BUCS (1) 83 - 174 -
Dividends on Series A 6,597
Preferred Stock 3,298 - -
-------------- ------------- -------------- -------------
Diluted net income attributable
to common stockholders $ 36,982 $ 3,385 $ 78,478 $ 2,161
============== ============= ============== =============
Denominator:
Average common shares outstanding 15,993 15,879 15,961 15,871
Average dilutive stock options
and restricted stock 74 56 76 44
BUCS (1) 77 - 77 -
Series A Preferred Stock 6,515 - 6,515 -
-------------- ------------- -------------- -------------
Diluted shares 22,659 15,935 22,629 15,915
============== ============= ============== =============
----------------------------------------------------------------------------------------------------------------------
(1) Antidilutive during 2004.
Stock options to purchase 252,540 shares of common stock during the three
and six months ended June 30, 2005 and 308,400 and 383,200 shares of common
stock during the three and six months ended June 30, 2004, respectively, were
excluded from the calculation of diluted earnings per share because the exercise
price for such options was greater than the average market price of the common
shares and such options were therefore antidilutive during the respective
period. Net income attributable to common stockholders for the three and six
months ended June 30, 2005 included $1.1 million ($0.28 per outstanding share)
of undeclared dividends on its Series A Preferred Stock.
- 19 -
Note 14 - Business segment information
The Company's production facilities are located in the U.S., U.K., France
and Italy, and its products are sold throughout the world. The Company's Chief
Executive Officer is the Company's chief operating decision maker ("CODM") as
that term is defined in SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The CODM receives financial information
about TIMET from which he makes decisions concerning resource utilization and
performance analysis only on a global, consolidated basis. Based upon this level
of decision-making, the Company currently has one segment, its worldwide
"Titanium melted and mill products" segment. Sales, gross margin, operating
income, inventory and receivables are the key management measures used to
evaluate segment performance. The following table provides segment information
supplemental to the Company's Consolidated Financial Statements:
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------- -------------- -------------
($ in thousands, except product shipment data)
Titanium melted and mill products:
Melted product net sales $ 23,780 $ 18,089 $ 45,844 $ 35,402
Mill product net sales 131,763 89,755 245,686 180,730
Other product sales 28,203 16,281 47,451 28,481
-------------- ------------- -------------- -------------
$ 183,746 $ 124,125 $ 338,981 $ 244,613
============== ============= ============== =============
Melted product shipments:
Volume (metric tons) 1,355 1,335 2,770 2,755
Average selling price ($ per kilogram) $ 17.55 $ 13.55 $ 16.55 $ 12.85
Mill product shipments:
Volume (metric tons) 3,340 2,900 6,440 5,830
Average selling price ($ per kilogram) $ 39.45 $ 30.95 $ 38.15 $ 31.00
Note 15 - Accounting principles not yet adopted
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4 ("SFAS No. 151"), which clarifies the types
of costs that should be expensed rather than capitalized as inventory. This
statement also clarifies the circumstances under which fixed overhead costs
associated with operating facilities involved in inventory processing should be
capitalized. The guidance is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005, and the Company will adopt SFAS No.
151 no later than January 1, 2006. The Company has not yet determined the
impact, if any, that this statement will have on its consolidated financial
position or results of operations.
- 20 -
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment ("SFAS No. 123R"), which replaces SFAS No. 123 and supersedes APB No.
25. SFAS No. 123R requires the measurement of all employee share-based payments
to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair values. Under SFAS No. 123R, the
pro forma disclosures previously permitted under SFAS No. 123 will no longer be
an alternative to financial statement recognition. As permitted by SEC
regulations, the Company will adopt SFAS No. 123R as of January 1, 2006 and does
not believe the adoption of SFAS No. 123R will have any effect on the Company's
financial position or results of operations, as all of TIMET's outstanding
options are fully vested.
Note 16 - Subsequent events
During July 2005, certain holders of the Series A Preferred Stock converted
an aggregate of 55,221 shares of the Series A Preferred Stock into 92,034 shares
of TIMET's common stock (at the conversion rate of one and two-third shares of
common stock for each share of Series A Preferred Stock tendered).
- 21 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Summarized financial information. The following table summarizes certain
information regarding the Company's results of operations for the three and six
months ended June 30, 2005 and 2004. Average selling prices, as reported by the
Company, are a reflection of not just actual selling prices received by the
Company, but also include other related factors such as currency exchange rates
and customer and product mix during a given period. Consequently, changes in
average selling prices from period to period will be impacted by changes
occurring not just in actual prices, but by these other factors as well. The
percentage change information presented below represents changes from the
respective prior year. See "Results of Operations - Outlook" for further
discussion of the Company's business expectations for the remainder of 2005.
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------- -------------- -------------
($ in thousands, except product shipment data)
Net sales:
Melted products $ 23,780 $ 18,089 $ 45,844 $ 35,402
Mill products 131,763 89,755 245,686 180,730
Other products 28,203 16,281 47,451 28,481
-------------- ------------- -------------- -------------
Net sales $ 183,746 $ 124,125 $ 338,981 $ 244,613
============== ============= ============== =============
Gross margin (1) 47,880 17,006 76,835 29,791
Gross margin percent of net sales (1) 26% 14% 23% 12%
Melted product shipments:
Volume (metric tons) 1,355 1,335 2,770 2,755
Average selling price ($ per kilogram) $ 17.55 $ 13.55 $ 16.55 $ 12.85
Mill product shipments:
Volume (metric tons) 3,340 2,900 6,440 5,830
Average selling price ($ per kilogram) $ 39.45 $ 30.95 $ 38.15 $ 31.00
Percentage change in:
Sales volume:
Melted products +1 +3 +1 +21
Mill products +15 +33 +10 +30
Average selling prices:
Melted products +30 +8 +29 +1
Mill products +27 -3 +23 -3
Selling prices - excludes changes in
product mix:
Melted products +22 +6 +19 +2
Mill products in U.S. dollars +21 +3 +19 +3
Mill products in billing currencies (2) +20 -2 +17 -2
----------------------------------------------------------------------------------------------------------------------
(1) The 2004 periods have been restated for the Company's change in method of
inventory costing, effective on January 1, 2005. See Notes 1 and 2 to the
Consolidated Financial Statements.
(2) Excludes the effect of changes in foreign currencies.
- 22 -
Second quarter of 2005 compared to second quarter of 2004. Melted product
sales increased 31% and mill product sales increased 47% during the second
quarter of 2005 compared to the year ago period, primarily due to significant
increases in average selling prices for both melted and mill products. Other
non-mill product sales increased 73% compared to the year ago period due
principally to higher selling prices for titanium scrap and improved demand for
the Company's fabrication products. Average selling prices use actual customer
and product mix and foreign currency exchange rates prevailing during the
respective periods. The Company's melted products are generally sold only in
U.S. dollars. Average selling prices for both melted and mill products were
positively affected by current market conditions and changes in customer and
product mix. Mill product average selling prices during the second quarter of
2005 were also positively affected by the relative weakness of the U.S. dollar
compared to both the British pound sterling and the euro.
In addition to average selling price increases, the second quarter of 2005
was positively impacted by a 15% increase in mill product sales volume,
primarily driven by increased demand from the commercial aerospace market.
Effective January 1, 2005, the Company changed its method for inventory
costing from the LIFO cost method to the specific identification cost method for
the approximate 40% of the Company's consolidated inventories previously
accounted for under the LIFO cost method. With the significant volatility seen
recently in raw material prices, the Company believes this change in accounting
method provides a better matching of revenues and expenses. As required by GAAP,
the Company has restated its financial statements for prior periods. As a result
of this change, the Company's cost of sales for the three months ended June 30,
2004 was restated to $107.2 million, a decrease of $1.5 million from the
previously reported amount. See Notes 1 and 2 to the Consolidated Financial
Statements.
Gross margin (net sales less cost of sales) increased during the second
quarter of 2005 compared to the year ago period primarily due to higher average
selling prices and improved plant operating rates (from 72% in the second
quarter of 2004 to 80% in the second quarter of 2005). In addition, the Company
generated an additional $6.7 million of gross margin from the sale of titanium
scrap and other non-mill products during the second quarter of 2005, as compared
to the year ago period. These positive effects were partially offset by higher
costs for raw materials and $2.5 million of additional costs during the 2005
period related to the accrual of certain performance-based employee incentive
compensation payments, as compared to the year ago period.
Selling, general, administrative and development expenses increased from
$11.2 million during the second quarter of 2004 to $13.0 million during the
second quarter of 2005, principally as a result of increased personnel costs,
including $0.6 million of additional costs related to the accrual of certain
performance-based employee incentive compensation payments, as compared to the
year ago period.
The Company recognized equity in earnings of joint ventures of $1.3 million
during the second quarter of 2005, compared to equity in losses of $0.1 million
during the year ago period. This change was principally due to improved
operating results of VALTIMET, the Company's minority-owned welded tube joint
venture.
Net other income (expense) decreased during the second quarter of 2005 as
compared to the year ago period primarily related to lower Boeing take-or-pay
income during the 2005 period as compared to the 2004 period. Boeing purchased
approximately 728,000 pounds of titanium from the Company during the 2005
period, as compared to approximately 477,000 pounds of titanium during the 2004
period.
- 23 -
First six months of 2005 compared to first six months of 2004. Melted
product sales increased 29% and mill product sales increased 36% during the
first six months of 2005 compared to the first six months of 2004, primarily due
to significant increases in average selling prices for both melted and mill
products. Other non-mill product sales increased 67% compared to the year ago
period due principally to higher selling prices for titanium scrap and improved
demand for the Company's fabrication products. Average selling prices use actual
customer and product mix and foreign currency exchange rates prevailing during
the respective periods. Average selling prices for both melted and mill products
were positively affected by current market conditions and changes in customer
and product mix. Mill product average selling prices during the second quarter
of 2005 were also positively affected by the relative weakness of the U.S.
dollar compared to both the British pound sterling and the euro.
In addition to average selling price increases, the first half of 2005 was
positively impacted by a 10% increase in mill product sales volume, driven by
increased demand across all market segments.
As a result of the Company's change in inventory costing methods (as
previously discussed), the Company's cost of sales for the six months ended June
30, 2004 was restated to $214.8 million, a decrease of $1.9 million from the
previously reported amount. See Notes 1 and 2 to the Consolidated Financial
Statements.
Gross margin increased during the six months ended June 30, 2005 compared
to the year ago period primarily due to higher average selling prices and
improved plant operating rates (from 72% in the first half of 2004 to 79% in the
first half of 2005). In addition, the Company generated an additional $9.8
million of gross margin from the sale of titanium scrap and other non-mill
products during the first six months of 2005, as compared to the year ago
period. These positive effects were offset by higher raw material costs as well
as charges to cost of sales during the 2005 period for:
o $3.8 million of additional costs during the 2005 period related to the
accrual of certain performance-based employee incentive compensation
payments, as compared to the first six months of 2004; and
o A $1.2 million noncash impairment charge during the 2005 period
related to the Company's abandonment of certain manufacturing
equipment.
In addition, gross margin during the 2004 period was positively affected by
a $1.6 million reduction in cost of sales related to the modification of the
Company's vacation policy.
Selling, general, administrative and development expenses increased from
$20.7 million during the first six months of 2004 to $25.3 million during the
first six months of 2005, principally as a result of (i) $1.0 million of
additional auditing and consulting costs incurred during the first quarter of
2005 primarily related to the Company's compliance with the Sarbanes-Oxley Act's
internal control requirements for the fiscal year ended December 31, 2004, (ii)
additional personnel costs, including $0.9 million of additional costs related
to the accrual of certain performance-based employee incentive compensation
payments and (iii) a $0.3 million reduction in the first quarter of 2004 related
to the previously discussed change in the Company's vacation policy.
The Company recognized equity in earnings of joint ventures of $2.1 million
during the first half of 2005, compared to equity in losses of $0.2 million
during the first half of 2004. This change was principally due to improved
operating results of VALTIMET.
- 24 -
Net other income (expense) increased during the first six months of 2005
primarily related to (i) the Company's receipt of $1.8 million from settlement
of a customer claim during the first quarter regarding prior order cancellations
from such customer and (ii) lower Boeing take-or-pay income during the 2005
period as compared to the 2004 period. Boeing purchased approximately 1,383,000
pounds of titanium from the Company during the 2005 period, as compared to
approximately 840,000 pounds of titanium during the 2004 period.
Non-operating income (expense).
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2005 2004 2005 2004
-------------- ------------- -------------- -------------
(In thousands)
Interest expense:
On debt payable to the Capital Trust $ (199) $ (3,495) $ (398) $ (7,246)
On bank debt and capital leases (744) (593) (1,219) (1,152)
-------------- ------------- -------------- -------------
$ (943) $ (4,088) $ (1,617) $ (8,398)
============== ============= ============== =============
Dividends and interest $ 462 $ 35 $ 949 $ 187
Equity in earnings of common
securities of the Capital Trust 103 103 206 217
Gain on sale of property 13,881 - 13,881 -
Foreign exchange gain, net 1,272 99 1,532 571
Other, net (292) (78) (399) (78)
-------------- ------------- -------------- -------------
$ 15,426 $ 159 $ 16,169 $ 897
============== ============= ============== =============
Prior to September 1, 2004, quarterly interest expense on the Company's
debt payable to the Capital Trust approximated $3.4 million, exclusive of any
accrued interest on deferred interest payments. On September 1, 2004, the
Company exchanged 97.1% of its outstanding BUCS for its Series A Preferred
Stock. Interest expense related to the remaining debt payable to the Capital
Trust is approximately $0.2 million per quarter, partially offset by $0.1
million of equity in earnings related to the Company's holdings of the common
securities of the Capital Trust.
Dividends and interest income during the three and six months ended June
30, 2005 and 2004 consisted of dividends received on the Company's investments
in marketable securities and interest income earned on cash and cash
equivalents.
In November 2004, pursuant to an agreement with BMI, the Company sold
certain property located adjacent to its Henderson, Nevada plant site to BMI, a
32%-owned indirect subsidiary of Valhi and recorded a $12 million deferred gain
related to the cash proceeds received in November 2004. During the second
quarter of 2005, the Company ceased using the property and, accordingly,
recognized a $13.9 million gain related to the sale of such property, which is
comprised of (i) the previously reported $12.0 million cash proceeds received in
November 2004, (ii) the reversal of $0.6 million previously accrued by the
Company for potential environmental issues related to the property and (iii) an
additional $1.2 million cash payment received from BMI in June 2005.
- 25 -
Income taxes. The Company operates in several tax jurisdictions and is
subject to varying income tax rates. As a result, the geographic mix of pretax
income or loss can impact the Company's overall effective tax rate. For the six
months ended June 30, 2005 and 2004, the Company's income tax rate varied from
the U.S. statutory rate primarily due to changes in the deferred income tax
valuation allowance related to the Company's tax attributes with respect to the
"more-likely-than-not" recognition criteria during those periods. See Note 10 to
the Consolidated Financial Statements.
The Company periodically reviews its deferred income tax assets to
determine if future realization is more likely than not. During the first
quarter of 2005, based on the Company's recent history of U.S. income, its near
term outlook and the effect of its change in method of inventory costing from
the LIFO cost method to the specific identification cost method for U.S. federal
income tax purposes (see Note 1), the Company changed its estimate of its
ability to utilize the tax benefits of its U.S. NOL carryforwards, AMT credit
carryforwards and other net deductible temporary differences (other than the
majority of the Company's capital loss carryforwards). Consequently, the Company
determined that its net deferred income tax asset related to such U.S. tax
attributes and other net deductible temporary differences now meets the
"more-likely-than-not" recognition criteria. Accordingly, the Company reversed
$22.6 million of the valuation allowance attributable to such U.S. deferred
income tax asset in the first half of 2005 ($5.3 million in the second quarter)
and the Company will reverse the remaining U.S. valuation allowance attributable
to its U.S. net deferred income tax asset of $14.2 million during the final two
quarters of 2005 in accordance with the GAAP requirements of accounting for
income taxes at interim dates.
During the first quarter of 2005, based on the Company's recent history of
U.K. income, its near term outlook and its historic U.K. profitability, the
Company also changed its estimate of its ability to utilize its net deductible
temporary differences and other tax attributes related to the U.K., primarily
comprised of (i) the future benefits associated with the reversal of its U.K.
minimum pension liability deferred income tax asset and (ii) the benefits of its
U.K. NOL carryforward. Consequently, the Company determined that its net
deferred income tax asset in the U.K. now meets the "more-likely-than-not"
recognition criteria. Accordingly, the Company reversed $13.0 million of the
valuation allowance attributable to such deferred income tax asset in the first
half of 2005 ($0.4 million in the second quarter) and the Company will reverse
the remaining U.K. valuation allowance of $0.4 million during the final two
quarters of 2005 in accordance with the GAAP requirements of accounting for
income taxes at interim dates.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law provides for a special 85% deduction for certain dividends
received from controlled foreign corporations in 2005. In the second quarter of
2005, the Company completed its evaluation of this new provision and determined
that it would benefit from the special dividend received deduction. As a
consequence, the Company plans to repatriate approximately $19 million of
earnings from its European subsidiaries in the third quarter of 2005. The $1.0
million related tax impact of this repatriation has been recorded as tax expense
in the second quarter in accordance with the requirements of FASB Staff Position
No. 109-2. However, the Company has not provided for U.S. deferred income taxes
or foreign withholding taxes on basis differences in its non-U.S. subsidiaries
that result primarily from undistributed earnings the Company intends to
reinvest indefinitely. Determination of the deferred income tax liability on
these basis differences is not practicable because such liability, if any, is
dependent on circumstances existing if and when remittance occurs.
- 26 -
Dividends on Series A Preferred Stock. Shares of the Company's Series A
Preferred Stock are convertible, at any time, at the option of the holder
thereof, into one and two-thirds shares of the Company's common stock, subject
to adjustment in certain events. The Series A Preferred Stock is not mandatorily
redeemable, but is redeemable at the option of the Company under certain
circumstances. When, as and if declared by the Company's board of directors,
holders of the Series A Preferred Stock are entitled to receive cumulative cash
dividends at the rate of 6.75% of the $50 per share liquidation preference per
annum per share (equivalent to $3.375 per annum per share). The Company paid
dividends of $3.3 million and $6.7 million during the three and six months ended
June 30, 2005, respectively, to holders of the Series A Preferred Stock. During
July 2005, certain holders of the Series A Preferred Stock converted an
aggregate of 55,221 shares of the Series A Preferred Stock into 92,034 shares of
TIMET's common stock.
European operations. The Company has substantial operations located in
Europe, principally the U.K., France and Italy. Approximately 42% of the
Company's sales originated in Europe for the six months ended June 30, 2005, of
which approximately 61% were denominated in the British pound sterling or the
euro. Certain purchases of raw materials, principally titanium sponge and
alloys, for the Company's European operations are denominated in U.S. dollars,
while labor and other production costs are primarily denominated in local
currencies. The functional currencies of the Company's European subsidiaries are
those of their respective countries, and the European subsidiaries are subject
to exchange rate fluctuations that may impact reported earnings and may affect
the comparability of period-to-period operating results. Borrowings of the
Company's European operations may be in U.S. dollars or in functional
currencies. The Company's export sales from the U.S. are denominated in U.S.
dollars and are not subject to currency exchange rate fluctuations.
The Company does not use currency contracts to hedge its currency
exposures. At June 30, 2005, consolidated assets and liabilities denominated in
currencies other than functional currencies were approximately $58.5 million and
$37.5 million, respectively, consisting primarily of U.S. dollar cash, accounts
receivable and accounts payable.
VALTIMET has entered into certain derivative financial instruments that
qualify as cash flow hedges under GAAP. The Company's pro-rata share of
VALTIMET's unrealized net gains on such derivative financial instruments is
included as a component of other comprehensive income.
Outlook. The "Outlook" section contains a number of forward-looking
statements, all of which are based, unless otherwise noted, on current
expectations and exclude the effect of potential future charges related to
restructurings, asset impairments, valuation allowances, changes in accounting
principles and similar items. Undue reliance should not be placed on these
statements, as more fully discussed in the "Forward-Looking Information"
statement of this Quarterly Report. Actual results may differ materially. See
also Notes to the Consolidated Financial Statements regarding commitments,
contingencies, legal matters, environmental matters and other matters, including
new accounting principles, which could materially affect the Company's future
business, results of operations, financial position and liquidity.
Over the past several quarters, the Company has seen the availability of
raw materials tighten, and, consequently, the prices for such raw materials
increased generally over that period. The Company currently expects that a
shortage in raw materials is likely to continue throughout 2005 and into 2006,
which could limit the Company's ability to produce enough titanium products to
fully meet customer demand. In addition, the Company has certain long-term
agreements that limit the Company's ability to pass on all of its increased raw
material costs to its customers.
- 27 -
In July 2005, The Airline Monitor, a leading aerospace publication, issued
its semi-annual forecast for commercial aircraft deliveries. Beginning in 2006,
this new forecast increases its estimate of large commercial aircraft deliveries
over the next five years by 460 planes, including 55 additional Boeing 787 wide
bodies (which currently require a higher percentage of titanium in their
airframes, engines and other parts than any other commercial aircraft). This
updated forecast supports the Company's belief that the titanium industry is in
the early stages of the business cycle and that the current uptrend will likely
continue through 2006 and beyond.
During the third quarter of 2004, the Company modified its method of
calculating its backlog to include purchase orders under consignment
relationships. The Company believes inclusion of these orders provides a more
accurate reflection of the Company's overall backlog. Using the modified
methodology for all periods, the Company's backlog at the end of June 2005 was
$580 million, a $90 million (18%) increase over the $490 million backlog at the
end of March 2005 and a $260 million (81%) increase over the $320 million
backlog at the end of June 2004.
Consistent with the guidance released on July 19, 2005, the Company expects
its full year 2005 sales revenue to range from $730 million to $760 million, an
increase of $30 million over the guidance provided in the Company's March 31,
2005 Quarterly Report. At the upper end of the range, 2005 sales revenue would
be a record high for TIMET. This increase is primarily due to higher average
selling prices projected for both melted and mill products. As compared to full
year 2004, the Company currently expects 2005 average selling prices to increase
40% to 45% for melted products and 25% to 30% for mill products. The Company
expects full year 2005 product shipments to increase 5% to 10% for melted
products and 14% to 19% for mill products, as compared to full year 2004.
The Company's cost of sales is affected by a number of factors including
customer and product mix, material yields, plant operating rates, raw material
costs, labor and energy costs. Raw material costs, which include sponge, scrap
and alloys, represent the largest portion of the Company's manufacturing cost
structure. As previously reported, scrap and certain alloy prices have increased
significantly from year ago prices, and increased energy costs also continue to
have a negative impact on gross margin. However, the Company has recently begun
to see a softening of such raw material costs.
The Company currently expects production volumes to continue to increase in
2005, with overall capacity utilization expected to approximate 80% in 2005 (as
compared to 75% in 2004). However, practical capacity utilization measures can
vary significantly based on product mix.
Selling, general, administrative and development expenses for 2005 should
approximate $52 million, or 6.8% to 7.1% of net sales, which is an increase of
approximately $1 million from previous guidance related to higher
performance-based employee incentive compensation payments expected to be made
as a result of our higher than previously expected operating income.
The Company currently anticipates that it will receive orders from Boeing
for about 3.0 million pounds of product during 2005. At this projected order
level, the Company expects to recognize about $17 million of income in 2005
under the Boeing LTA's take-or-pay provisions.
- 28 -
Consistent with the guidance released on July 19, 2005, the Company expects
its 2005 operating income to range from $123 million to $138 million, an
increase of $53 million over the guidance provided in the Company's March 31,
2005 Quarterly Report. This increase primarily relates to (i) the Company's
projected increase in sales revenue and (ii) lower than previously expected raw
material costs.
Dividends on the Company's Series A Preferred Stock should approximate $13
million in 2005. Consistent with the guidance released on July 19, 2005, the
Company expects its 2005 net income attributable to common stockholders to range
from $117 million and $132 million, an increase of $37 million over the guidance
provided in the Company's March 31, 2005 Quarterly Report. The projected net
income attributable to common stockholders includes (i) a $9.6 million (net of
taxes) non-operating gain on the sale of certain property recognized in the
second quarter and (ii) the aggregate $50.2 million income tax benefits related
to reversal of the Company's U.S. and U.K. deferred income tax asset valuation
allowances discussed above.
The Company currently expects to generate $50 million to $60 million in
cash flow from operations during 2005, which is a $45 million increase from the
guidance provided in the Company's March 31, 2005 Quarterly Report, primarily
due to the Company's improved forecast for 2005. Depreciation and amortization
should approximate $32 million in 2005. In May 2005, the Company announced its
plans to expand its existing titanium sponge facility in Henderson, Nevada. This
expansion, which the Company expects to complete by the first quarter of 2007,
will provide the capacity to produce an additional 4,000 metric tons of sponge
annually, an increase of approximately 42% over current Henderson sponge
production capacity levels. The Company currently estimates the capital cost for
the project will approximate $38 million. Capital expenditures during 2005 are
now expected to approximate $78 million, an increase of $10 million over
previous guidance principally due to increased costs to construct the water
conservation facility at the Company's Henderson, Nevada plant. Projected
capital expenditures during 2005 also include $25 million related to the sponge
facility expansion.
The Company currently expects to make contributions of approximately $9
million to its defined benefit pension plans during 2005, and expects pension
expense to approximate $8 million in 2005.
Non-GAAP financial measures. In an effort to provide investors with
information in addition to the Company's results as determined by GAAP, the
Company has provided the following non-GAAP financial disclosures that it
believes may provide useful information to investors:
o The Company discloses percentage changes in its melted and mill
product selling prices in U.S. dollars, which have been adjusted to
exclude the effects of changes in product mix. The Company believes
such disclosure provides useful information to investors by allowing
them to analyze such changes without the impact of changes in product
mix, thereby facilitating period-to-period comparisons of the relative
changes in average selling prices. Depending on the composition of
changes in product mix, the percentage change in selling prices
excluding the effect of changes in product mix can be higher or lower
than such percentage change would be using the actual product mix
prevailing during the respective periods; and
- 29 -
o In addition to disclosing percentage changes in its mill product
selling prices adjusted to exclude the effects of changes in product
mix, the Company also discloses such percentage changes in billing
currencies, which have been further adjusted to exclude the effects of
changes in foreign currency exchange rates. The Company believes such
disclosure provides useful information to investors by allowing them
to analyze such changes without the impact of changes in foreign
currency exchange rates, thereby facilitating period-to-period
comparisons of the relative changes in average selling prices in the
various actual billing currencies. Generally, when the U.S. dollar
strengthens (weakens) against other currencies, the percentage change
in selling prices in billing currencies will be higher (lower) than
such percentage changes would be using actual exchange rates
prevailing during the respective periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows for the six months ended June 30,
2005 and 2004 are presented below. The following discussion should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto.
Six months ended June 30,
--------------------------------------------
2005 2004
-------------------- --------------------
(In thousands)
Cash provided (used) by:
Operating activities $ 17,900 $ (2,138)
Investing activities (35,246) (23,247)
Financing activities 15,778 (137)
-------------------- --------------------
Net cash used by operating, investing and
financing activities $ (1,568) $ (25,522)
==================== ====================
Operating activities. The titanium industry historically has derived a
substantial portion of its business from the aerospace industry. The aerospace
industry is cyclical, and changes in economic conditions within the aerospace
industry significantly impact the Company's earnings and operating cash flows.
Cash flow from operations is considered a primary source of the Company's
liquidity. Changes in titanium pricing, production volume and customer demand,
among other things, could significantly affect the Company's liquidity.
Certain items included in the determination of net income have an impact on
cash flows from operating activities, but the impact of such items on cash may
differ from their impact on net income. For example, pension expense and OPEB
expense will generally differ from the outflows of cash for payment of such
benefits. In addition, relative changes in assets and liabilities generally
result from the timing of production, sales and purchases. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period than that in which the underlying cash transaction occurs. For
example, raw materials may be purchased in one period, but the cash payment for
such raw materials may occur in a subsequent period. Similarly, inventory may be
sold in one period, but the cash collection of the receivable may occur in a
subsequent period.
Net income was $78.3 million for the six months ended June 30, 2005,
compared to net income of $2.2 million for the six months ended June 30, 2004.
- 30 -
Accounts receivable increased during the first half of 2005 and 2004
primarily as a result of increased sales. Inventories increased during the first
half of 2005 and 2004 as a result of increased run rates and related inventory
build in order to meet expected customer demand, as well as the effects of
increased raw material costs.
Changes in accounts payable and accrued liabilities reflect, among other
things, the timing of (i) payments to suppliers of titanium sponge, titanium
scrap and other raw material purchases and (ii) changes to accrued employee
benefits, including performance-based employee incentive compensation. During
the first six months of 2004, accrued liabilities also decreased due to payment
of the $2.8 million final installment related to termination of the Company's
prior agreement with Wyman-Gordon Company.
The increase in customer advances during the first half of 2005 and 2004
primarily reflects the Company's receipt of a $27.9 million advance from Boeing
in each of January 2005 and 2004, partially offset by the application of
customer purchases. Under the terms of the Boeing LTA, in years 2002 through
2007, Boeing advances TIMET $28.5 million annually, less $3.80 per pound of
titanium product purchased from TIMET by Boeing subcontractors during the
preceding year.
Investing activities. The Company's capital expenditures were $34.9 million
for the six months ended June 30, 2005, compared to $6.7 million for the
comparable period in 2004, principally for replacement of machinery and
equipment and for capacity maintenance. The 2005 amount also includes $18.5
million related to construction of the water conservation facility and $3.7
million related to the expansion of the Company's sponge plant in Henderson,
Nevada. During the first six months of 2005, the Company purchased 146,900
shares of CompX Class A common stock for $2.2 million. During the first six
months of 2004, the Company purchased 1,365,510 shares of CompX Class A common
stock for $14.0 million and 221,100 shares of NL Industries, Inc. common stock
for $2.5 million. See Note 3 to the Consolidated Financial Statements.
Financing activities. Cash provided during the six months ended June 30,
2005 related primarily to the Company's net borrowings of $23.5 million, used in
part to (i) fund construction of the water conservation facility as well as the
Company's expansion of its sponge plant and (ii) support the accumulation of
inventory in order to meet expected customer demand. The Company also received
$1.1 million from the issuance of common stock related to the exercise of
certain employee stock options during the 2005 period. These cash inflows were
partially offset by the Company's $6.6 million payment of dividends on the
Company's Series A Preferred Stock. In addition, the Company's 70%-owned
subsidiary, TIMET Savoie, S.A. made dividend payments to its 30% minority
partner of $2.2 million during the second quarter of 2005 and $0.7 million
during the second quarter 2004. The Company had zero net borrowings during the
six months ended June 30, 2004.
- 31 -
Borrowing arrangements. During the second quarter of 2005, the Company
amended its U.S. credit facility to increase its maximum authorized borrowings
from $105 million to $125 million. In addition, the amended credit facility
reduced the excess availability requirement related to the payment of dividends
on the Company's Series A Preferred Stock and distributions on the Capital
Trust's BUCS from $25 million to $10 million. During the first quarter of 2004,
the Company amended its U.S. credit facility to, among other things, allow the
Company the flexibility to remove the equipment component from the determination
of the Company's borrowing availability in order to avoid the costs of an
appraisal. Interest currently accrues at rates based on LIBOR plus 2% or bank
prime rate plus 0.5%. Borrowings are collateralized by substantially all of the
Company's U.S. assets. The Company was in compliance with all covenants for all
periods during the six months ended June 30, 2005 and 2004. As of June 30, 2005,
the Company had outstanding borrowings under the U.S. credit agreement of $66.1
million, and excess availability was approximately $55 million.
During the second quarter of 2005, the Company's subsidiary, TIMET UK,
terminated its previous credit agreement and entered into a new working capital
credit facility that expires on April 30, 2008. Under the new U.K. credit
facility, TIMET UK may borrow up to (pound)22.5 million, subject to a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and property, plant and equipment. Borrowings under the U.K. facility
can be in various currencies, including U.S. dollars, British pounds sterling
and euros and are collateralized by substantially all of TIMET UK's assets.
Interest on outstanding borrowings generally accrues at rates that vary from
1.125% to 1.375% above the lender's published base rate. The U.K. facility
agreement also contains financial ratios and covenants customary in lending
transactions of this type, including a minimum net worth covenant. TIMET UK was
in compliance with all covenants for all periods during the six months ended
June 30, 2005 and 2004. As of June 30, 2005, the Company had no borrowings under
the U.K. facility, and unused borrowing availability was approximately $40
million.
The Company also has overdraft and other credit facilities at certain of
its other European subsidiaries. These facilities accrue interest at various
rates and are payable on demand. As of June 30, 2005, the Company had
outstanding borrowings of $0.6 million under these facilities, and unused
borrowing availability was approximately $15 million.
No dividends were paid by TIMET on its common stock during the three months
ended June 30, 2005 or 2004. During the quarter ended June 30, 2005, TIMET paid
$3.3 million in dividends on its Series A Preferred Stock.
Legal and environmental matters. See Note 12 to the Consolidated Financial
Statements for discussion of legal and environmental matters, commitments and
contingencies.
Other. The Company periodically evaluates its liquidity requirements,
capital needs and availability of resources in view of, among other things, its
alternative uses of capital, debt service requirements, the cost of debt and
equity capital and estimated future operating cash flows. As a result of this
process, the Company has in the past, or in light of its current outlook, may in
the future, seek to raise additional capital, modify its common and preferred
dividend policies, restructure ownership interests, incur, refinance or
restructure indebtedness, repurchase shares of common stock, purchase or redeem
BUCS or Series A Preferred Stock, sell assets, or take a combination of such
steps or other steps to increase or manage its liquidity and capital resources.
In the normal course of business, the Company investigates, evaluates, discusses
and engages in acquisition, joint venture, strategic relationship and other
business combination opportunities in the titanium, specialty metal and other
industries. In the event of any future acquisition or joint venture
opportunities, the Company may consider using then-available liquidity, issuing
equity securities or incurring additional indebtedness.
- 32 -
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (i) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties, and (ii) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. The Company
continuously considers, reviews and evaluates such transactions, and understands
that Contran, Valhi and related entities consider, review and evaluate such
transactions. Depending upon the business, tax and other objectives then
relevant, it is possible that the Company might be a party to one or more such
transactions in the future.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's market risks, refer to the Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk," in the 2004 Annual
Report. There have been no material changes to the information provided that
would require additional information with respect to the six months ended June
30, 2005.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. The Company maintains a
system of disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by regulations of the SEC, means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits to the SEC
under the Exchange Act is accumulated and communicated to the Company's
management, including its principal executive officer and its principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions to be made regarding required disclosure. Each of J.
Landis Martin, the Company's Chairman of the Board, President and Chief
Executive Officer, and Bruce P. Inglis, the Company's Vice President - Finance
and Corporate Controller, have evaluated the Company's disclosure controls and
procedures as of June 30, 2005. Based upon their evaluation, these executive
officers have concluded that the Company's disclosure controls and procedures
are effective as of the date of such evaluation.
- 33 -
Internal control over financial reporting. The Company also maintains
internal control over financial reporting. The term "internal control over
financial reporting," as defined by regulations of the SEC, means a process
designed by, or under the supervision of, the Company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the Company's board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP, and includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and
directors of the Company; and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the Company's Consolidated
Financial Statements.
As permitted by the SEC, the Company's assessment of internal control over
financial reporting excludes (i) internal control over financial reporting of
its equity method investees and (ii) internal control over the preparation of
the Company's financial statement schedules required by Article 12 of Regulation
S-X. However, the Company's assessment of internal control over financial
reporting with respect to the Company's equity method investees did include its
controls over the recording of amounts related to the Company's investments that
are recorded in its Consolidated Financial Statements, including controls over
the selection of accounting methods for the Company's investments, the
recognition of equity method earnings and losses and the determination,
valuation and recording of the Company's investment account balances.
Changes in internal control over financial reporting. There has been no
change to the Company's internal control over financial reporting during the
quarter ended June 30, 2005 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
- 34 -
PART II. - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Note 12 of the Consolidated Financial Statements,
which information is incorporated herein by reference, and to the Company's 2004
Annual Report for descriptions of certain previously reported legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 23, 2005, for
the following purposes:
1. To elect eight directors to serve until the 2006 Annual Meeting of
Stockholders and until their successors are duly elected and
qualified. All nominees for director were elected with the following
vote:
Director Votes For Votes Withheld
------------------------ ------------------ ----------------------
Norman N. Green 15,005,487 128,915
Gary C. Hutchison 15,014,762 119,640
J. Landis Martin 14,562,569 571,833
Albert W. Niemi, Jr. 15,018,903 115,499
Glenn R. Simmons 14,580,940 553,462
Harold C. Simmons 14,550,282 584,120
Steven L. Watson 14,587,185 547,217
Paul J. Zucconi 15,024,332 110,070
2. To consider and vote on the Titanium Metals Corporation Amended and
Restated 2005 Profit Sharing Plan. The plan was approved with the
following vote:
Votes For Votes Against Votes Abstained Broker Non-Vote
------------------------- ------------------ ---------------------- -----------------------
11,026,486 121,789 295,674 3,690,453
- 35 -
Item 6. EXHIBITS
10.1 Amendment No. 5 to Loan and Security Agreement by and among Wachovia
Bank, National Association, successor by merger to Congress Financial
Corporation (Southwest) as Lender and Titanium Metals Corporation and
Titanium Hearth Technologies, Inc. as borrowers, dated June 30, 2005.
10.2 Bank of Scotland Working Capital Facility of (pound)22,500,000/Payment
Systems, incorporated by reference to Exhibit 10.1 to the Registrant's
Current Report on Form 8-K filed with the SEC on May 23, 2005.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Note:The Company has retained a signed original of any exhibit listed
above that contains signatures, and the Company will provide any such
exhibit to the SEC or its staff upon request. Such request should be
directed to the attention of the Company's Corporate Secretary at the
Company's corporate offices located at 1999 Broadway, Suite 4300,
Denver, Colorado 80202.
- 36 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TITANIUM METALS CORPORATION
------------------------------------------------
Date: August 2, 2005 By /s/ J. Landis Martin
--------------------------------------------
J. Landis Martin
Chairman of the Board, President and
Chief Executive Officer
Date: August 2, 2005 By /s/ Bruce P. Inglis
--------------------------------------------
Bruce P. Inglis
Vice President - Finance and Corporate
Controller
- 37 -