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, 2006
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
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(Exact name of registrant as specified in its charter)
Delaware 13-5630895
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(State or other jurisdiction of incorporation or (IRS Employer Identification
organization) No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
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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
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Indicate by check mark whether the registrant is large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large accelerated filer__ Accelerated filer X Non-accelerated filer__.
Indicate by check mark whether the registrant is a shell company (as defined by
rule 12b-2 of the Exchange Act).
Yes No X
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Number of shares of common stock outstanding on August 1, 2006: 161,125,557
TITANIUM METALS CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2006 (unaudited)
and December 31, 2005................................................................ 2
Condensed Consolidated Statements of Income for the three and
six months ended June 30, 2006 and 2005 (unaudited).................................. 4
Condensed Consolidated Statements of Comprehensive Income for the
three and six months ended June 30, 2006 and 2005 (unaudited)........................ 5
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2006 and 2005 (unaudited)............................................. 6
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the six months ended June 30, 2006 (unaudited)............................ 8
Notes to Condensed Consolidated Financial Statements..................................... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................ 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 31
Item 4. Controls and Procedures.................................................................. 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 33
Item 1A. Risk Factors............................................................................. 33
Item 4. Submission of Matters to a Vote of Security Holders...................................... 33
Item 6. Exhibits................................................................................. 33
- 1 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30, December 31,
ASSETS 2006 2005
-------------------- --------------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 13,754 $ 17,605
Restricted cash and cash equivalents 146 146
Accounts and other receivables, less allowance
of $1,865 and $1,983, respectively 196,758 142,902
Inventories 436,489 365,696
Prepaid expenses and other 2,966 4,486
Deferred income taxes 12,299 19,435
-------------------- --------------------
Total current assets 662,412 550,270
Marketable securities 50,806 46,477
Investment in joint ventures 32,613 25,978
Property and equipment, net 276,401 252,990
Prepaid pension cost 25,927 22,337
Deferred income taxes 7,025 8,009
Other 1,115 1,203
-------------------- --------------------
Total assets $ 1,056,299 $ 907,264
==================== ====================
See accompanying Notes to Condensed Consolidated Financial Statements.
- 2 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
June 30, December 31,
LIABILITIES, MINORITY INTEREST AND 2006 2005
-------------------- --------------------
STOCKHOLDERS' EQUITY (Unaudited)
Current liabilities:
Accounts payable $ 75,221 $ 61,457
Accrued liabilities 67,271 75,698
Customer advances 12,719 15,577
Income taxes payable 10,508 13,151
Other 1,027 967
-------------------- --------------------
Total current liabilities 166,746 166,850
Long-term debt 48,436 51,359
Accrued OPEB cost 16,625 15,580
Accrued pension cost 62,649 58,450
Accrued environmental cost 1,948 1,948
Deferred income taxes 27,709 27,445
Debt payable to TIMET Capital Trust I - 5,852
Other 4,828 4,089
-------------------- --------------------
Total liabilities 328,941 331,573
-------------------- --------------------
Minority interest 16,157 13,523
-------------------- --------------------
Stockholders' equity:
Series A Preferred Stock, $.01 par value; $85,778
liquidation preference; 4,025 shares authorized; 1,716
and 2,983 shares issued and outstanding, respectively 76,210 132,493
Common stock, $.01 par value; 200,000 shares
authorized; 161,084 and 141,930 shares
issued, respectively 1,611 1,419
Additional paid-in capital 482,311 400,348
Retained earnings 176,913 66,179
Accumulated other comprehensive loss (25,844) (38,271)
-------------------- --------------------
Total stockholders' equity 711,201 562,168
-------------------- --------------------
Total liabilities, minority interest and
stockholders' equity $ 1,056,299 $ 907,264
==================== ====================
Commitments and contingencies (Note 11)
See accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------------------- ----------------------------------
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
Net sales $ 300,941 $ 183,746 $ 587,837 $ 338,981
Cost of sales 194,640 135,866 373,216 262,146
--------------- --------------- --------------- ---------------
Gross margin 106,301 47,880 214,621 76,835
Selling, general, administrative and
development expense 17,365 12,978 32,619 25,339
Equity in earnings of joint ventures 4,067 1,344 6,325 2,145
Other income (expense), net 566 690 366 2,676
--------------- --------------- --------------- ---------------
Operating income 93,569 36,936 188,693 56,317
Interest expense 632 943 1,627 1,617
Other non-operating income (expense), net (1,672) 15,426 (1,382) 16,169
--------------- --------------- --------------- ---------------
Income before income taxes and
minority interest 91,265 51,419 185,684 70,869
Income tax expense (benefit) 32,849 13,339 66,104 (9,540)
Minority interest in after tax earnings 2,243 1,181 4,561 2,105
--------------- --------------- --------------- ---------------
Net income 56,173 36,899 115,019 78,304
Dividends on Series A Preferred Stock 1,855 3,298 3,929 6,597
--------------- --------------- --------------- ---------------
Net income attributable to
common stockholders $ 54,318 $ 33,601 $ 111,090 $ 71,707
=============== =============== =============== ===============
Earnings per share attributable to common stockholders:
Basic $ 0.36 $ 0.26 $ 0.75 $ 0.56
Diluted $ 0.31 $ 0.20 $ 0.63 $ 0.43
Weighted average shares outstanding:
Basic 152,085 127,941 149,027 127,687
Diluted 184,101 181,272 183,743 181,067
See accompanying Notes to Condensed Consolidated Financial Statements.
- 4 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Six months ended June 30,
----------------------------------------
2006 2005
------------------ ------------------
Net income $ 115,019 $ 78,304
------------------ ------------------
Other comprehensive income (loss), net of tax:
Currency translation adjustment 7,744 (8,110)
Unrealized gains (losses) on marketable securities 4,329 (167)
TIMET's share of VALTIMET SAS's unrealized net gains on
derivative financial instruments qualifying as cash flow hedges 354 116
------------------ ------------------
Total other comprehensive income (loss) 12,427 (8,161)
------------------ ------------------
Comprehensive income $ 127,446 $ 70,143
================== ==================
See accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended June 30,
----------------------------------------
2006 2005
------------------- ------------------
Cash flows from operating activities:
Net income $ 115,019 $ 78,304
Depreciation and amortization 16,852 15,767
Non-cash impairment of equipment - 1,251
Loss (gain) on disposal of fixed assets 59 (13,655)
Equity in earnings of joint ventures, net
of distributions (5,244) (2,145)
Deferred income taxes 8,672 (18,473)
Excess tax benefit of stock option exercises (9,552) -
Minority interest, net of tax 4,561 2,105
Other, net 9 (50)
Change in assets and liabilities:
Receivables (49,382) (37,660)
Inventories (63,166) (53,621)
Prepaid expenses and other 651 (1,006)
Accounts payable and accrued liabilities 6,756 9,339
Customer advances (3,482) 23,425
Income taxes 6,724 5,190
Deferred revenue (5,920) 421
Accrued OPEB and pension costs 1,045 408
Other, net (705) 253
------------------- ------------------
Net cash provided by operating activities 22,897 9,853
------------------- ------------------
Cash flows from investing activities:
Capital expenditures (34,904) (26,842)
Purchase of marketable securities - (2,223)
Proceeds from sale of property - 1,289
Other, net (660) 576
------------------- ------------------
Net cash used in investing activities (35,564) (27,200)
------------------- ------------------
Cash flows from financing activities:
Indebtedness:
Borrowings 330,517 155,161
Repayments (334,675) (131,666)
Dividends paid on Series A Preferred Stock (4,285) (6,597)
Dividend paid to minority shareholder (2,994) (2,216)
Issuance of common stock 10,591 1,107
Excess tax benefit of stock option exercises 9,552 -
Other, net (755) (10)
------------------- ------------------
Net cash provided by financing activities 7,951 15,779
------------------- ------------------
Net cash used in operating, investing and financing activities $ (4,716) $ (1,568)
=================== ==================
See accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
(Unaudited)
Six months ended June 30,
----------------------------------------
2006 2005
------------------ ------------------
Cash and cash equivalents:
Net decrease from:
Operating, investing and financing activities $ (4,716) $ (1,568)
Effect of exchange rate changes on cash 865 (688)
------------------ ------------------
(3,851) (2,256)
Cash and cash equivalents at beginning of period 17,605 7,194
------------------ ------------------
Cash and cash equivalents at end of period $ 13,754 $ 4,938
================== ==================
Supplemental disclosures:
Cash paid for:
Interest $ 1,114 $ 1,228
Income taxes, net $ 50,524 $ 3,737
Noncash investing and financing activities:
Capital lease obligations incurred on certain leases
entered into for new equipment $ 516 $ -
See accompanying Notes to Condensed Consolidated Financial Statements.
- 7 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2006
(In thousands)
(Unaudited)
Accumulated
Series A Additional Other
Common Common Preferred Paid-in Retained Comprehensive
Shares Stock Stock Capital Earnings Loss Total
---------- ---------- ----------- ------------ ---------- --------------- --------
Balance at December 31, 2005 141,930 $ 1,419 $ 132,493 $ 400,348 $ 66,179 $ (38,271) $ 562,168
Net income - - - - 115,019 - 115,019
Other comprehensive
income - - - - - 12,427 12,427
Issuance of common stock 2,260 23 - 10,627 - 10,650
Conversion of Series A
Preferred Stock 16,894 169 (56,283) 61,784 - - 5,670
Tax benefit of stock options
exercised - - - 9,552 - - 9,552
Dividends declared on
Series A Preferred Stock - - - - (4,285) - (4,285)
---------- ---------- ----------- ------------ ---------- --------------- -------------
Balance at June 30, 2006 161,084 $ 1,611 $ 76,210 $ 482,311 $ 176,913 $ (25,844) $ 711,201
========== ========== =========== ============ ========== =============== =============
See accompanying Notes to Condensed Consolidated Financial Statements.
- 8 -
TITANIUM METALS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of presentation and organization
Basis of presentation. The unaudited Condensed Consolidated Financial
Statements contained in this Quarterly Report have been prepared on the same
basis as the audited Consolidated Financial Statements in our Annual Report on
Form 10-K for the year ended December 31, 2005 that we filed with the Securities
and Exchange Commission ("SEC") on March 24, 2006 (our "2005 Annual Report").
They include the accounts of Titanium Metals Corporation and its majority owned
subsidiaries (collectively referred to as "TIMET") except the TIMET Capital
Trust I ("Capital Trust"). Unless otherwise indicated, references in this report
to "we", "us" or "our" refer to TIMET and its subsidiaries, taken as a whole.
All material intercompany transactions and balances with consolidated
subsidiaries have been eliminated. In our opinion, we have made all necessary
adjustments (which include only normal recurring adjustments) in order to state
fairly, in all material respects, our consolidated financial position, results
of operations and cash flows as of the dates and for the periods presented. We
have condensed the Consolidated Balance Sheet at December 31, 2005 contained in
this Quarterly Report as compared to our audited Consolidated Financial
Statements at that date, and we have condensed or omitted certain information
and footnote disclosures (including those related to the Consolidated Balance
Sheet at December 31, 2005) normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States
of America ("GAAP"). Our results of operations for the interim periods ended
June 30, 2006 may not be indicative of our operating results for the full year.
The Condensed Consolidated Financial Statements contained in this Quarterly
Report should be read in conjunction with the 2005 Consolidated Financial
Statements contained in our 2005 Annual Report. In preparing our Condensed
Consolidated Statements of Cash Flows, any significant capital expenditure with
extended payment terms is reflected as a capital expenditure included in the
determination of cash flows from investing activities when paid. We have
conformed our Condensed Consolidated Statement of Cash Flows for the six months
ended June 30, 2005 for this, and as a result, the amounts shown in this Form
10-Q for cash flows provided by operating activities, capital expenditures and
cash flows used in investing activities for such period are each $8.0 million
lower than previously reported. Our 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. Our fourth fiscal quarter and fiscal year always
end on December 31. For presentation purposes, our financial statements and
accompanying notes have been presented as ended on March 31, June 30, September
30 and December 31, as applicable.
Organization. At June 30, 2006, Valhi, Inc. and subsidiaries held 35.1% of
our outstanding common stock and 0.9% of our 6.75% Series A Convertible
Preferred Stock. At June 30, 2006, Contran Corporation held, directly or through
subsidiaries, approximately 92% of Valhi's outstanding common stock. At June 30,
2006, the Combined Master Retirement Trust ("CMRT"), a trust sponsored by
Contran to permit the collective investment by trusts that maintain the assets
of certain employee benefit plans adopted by Contran and certain related
companies, held 9.5% of our 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, 2006, Mr.
Simmons directly owned 2.6% of our outstanding common stock and Mr. Simmons'
spouse owned 93.3% of our outstanding Series A Preferred Stock and a nominal
number of shares of our common stock. Consequently, Mr. Simmons may be deemed to
control each of Contran, Valhi and us.
- 9 -
Stock split. We effected two-for-one splits of our common stock on
September 5, 2005, February 16, 2006 and May 15, 2006. All share and per share
disclosures contained in this report have been adjusted for all periods to give
effect to these stock splits.
Recent Accounting Pronouncements
Share-based payments. On January 1, 2006, we adopted Statement of Financial
Accounting Standards ("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS
123R"), which requires all employee share-based payments to employees, including
grants of employee stock options, to be accounted for under the fair value
method and eliminates the ability to account for these instruments under the
intrinsic value method prescribed by Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, which was allowed under the
original provisions of SFAS 123, Accounting for Stock-Based Compensation. Prior
to the adoption of SFAS 123R and as permitted by SFAS 123 and SFAS 148,
Accounting for Stock-Based Compensation Transition and Disclosure, we elected to
follow APB 25 and related interpretations in accounting for our employee stock
options and implemented the disclosure-only provisions of SFAS 123 and SFAS 148.
We adopted SFAS 123R using the modified prospective method. Under this
transition method, stock compensation expense would include the cost for all
share-based payments granted prior to, but not yet vested, as of January 1 2006,
as well as those share-based payments granted subsequent to December 31, 2005.
All of our outstanding options were fully vested as of our adoption date, and
all compensation costs previously measured under SFAS 123 have been previously
reported in our pro forma disclosures. Our adoption of SFAS 123R did not have a
material effect on our consolidated financial position or results of operations.
If we were to grant a significant number of options or modify, repurchase or
cancel existing options in the future, we could recognize material amounts of
compensation cost related to such options in our consolidated financial
statements. If we had accounted for our stock-based employee compensation in
accordance with the fair value-based recognition provisions of SFAS 123 for all
awards granted subsequent to January 1, 1995, there would have been no material
effect on our reported net income and related per share amounts, for the three
and six months ended June 30, 2005. Also upon adoption of SFAS 123R, we began
reflecting the excess tax benefits from the exercise of stock-based compensation
awards in cash flows from financing activities. SFAS 123R also requires certain
expanded disclosures regarding share-based compensation, and we provided these
expanded disclosures in our 2005 Annual Report.
Inventory costs. On January 1, 2006, we adopted SFAS 151, Inventory Costs,
an amendment of ARB No. 43, Chapter 4. SFAS 151 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. Our adoption of SFAS 151 did not have a material impact on our
consolidated financial position or results of operations as our existing
production cost accounting already conforms to the requirements of SFAS 151.
Purchases and sales of inventory with the same counterparty. On April 1,
2006, we adopted Emerging Issues Task Force ("EITF") Issue 04-13, Accounting for
Purchases and Sales of Inventory with the Same Counterparty. The EITF requires
inventory purchases and sales transactions with the same counterparty to be
combined for financial reporting purposes if they were entered into in
contemplation of each other. The EITF provided indicators to be considered for
purposes of determining whether such transactions are entered into in
contemplation of each other. Guidance was also provided on the circumstances
under which nonmonetary exchanges of inventory within the same line of business
should be recognized at fair value. The adoption of EITF 04-13 did not have a
material impact on our consolidated financial position or results of operations.
- 10 -
Uncertain tax positions. In the second quarter of 2006 the FASB issued FASB
Interpretation ("FIN") No. 48, Accounting for Uncertain Tax Positions, which
will become effective for us on January 1, 2007. FIN 48 clarifies when and how
much of a benefit we can recognize in our consolidated financial statements for
certain positions taken in our income tax returns under SFAS 109, Accounting for
Income Taxes, and enhances the disclosure requirements for our income tax
policies and reserves. Among other things, FIN 48 will prohibit us from
recognizing the benefits of a tax position unless we believe it is
more-likely-than-not our position will prevail with the applicable tax
authorities and limits the amount of the benefit to the largest amount for which
we believe the likelihood of realization is greater than 50%. FIN 48 also
requires companies to accrue penalties and interest on the difference between
tax positions taken on their tax returns and the amount of benefit recognized
for financial reporting purposes under the new standard. We will also be
required to classify any future reserves for uncertain tax positions in a
separate current or noncurrent liability, depending on the nature of the tax
position. We are currently evaluating the impact of FIN 48 on our consolidated
financial statements.
Note 2 - Inventories
June 30, December 31,
2006 2005
--------------------- -------------------
(In thousands)
Raw materials $ 115,655 $ 89,956
Work-in-process 209,704 169,856
Finished products 75,992 73,395
Inventory consigned to customers 18,208 20,000
Supplies 16,930 12,489
--------------------- -------------------
Total inventories $ 436,489 $ 365,696
===================== ===================
Note 3 - Marketable securities
The following table summarizes our marketable securities as of June 30,
2006 and December 31, 2005:
June 30, 2006 December 31, 2005
------------------------------ ------------------------------
Market Market
Marketable security Shares Value Shares Value
------------------------------------------------ -------------- ------------ -------------- -------------
(Dollars in thousands)
CompX International, Inc. ("CompX") (1) 2,696,420 $ 48,266 2,696,420 $ 43,197
NL Industries, Inc. ("NL") 222,100 2,388 222,100 3,129
Kronos Worldwide, Inc. ("Kronos") 5,203 152 5,203 151
------------ -------------
Total marketable securities $ 50,806 $ 46,477
============ =============
--------------------------------------------------------------------------------------------------------------------
(1) We directly held 483,600 shares of CompX as of June 30, 2006 and December
31, 2005. The remaining 2,212,800 shares are held through CompX Group Inc.
As of June 30, 2006 and December 31, 2005, the aggregate cost basis of our
marketable securities was $36.9 million. We recognized an unrealized gain of
$4.3 million (net of taxes) for the six months ended June 30, 2006 and an
unrealized loss of $0.2 (net of tax benefits) for the six months ended June 30,
2005 in stockholders' equity as a component of other comprehensive income
(loss).
- 11 -
Note 4 - Property and equipment
June 30, December 31,
2006 2005
-------------------- ------------------
(In thousands)
Land and improvements $ 8,808 $ 8,922
Buildings and improvements 38,094 37,259
Information technology systems 64,294 61,175
Manufacturing equipment and other 363,478 348,080
Construction in progress 54,087 31,488
-------------------- ------------------
Total property and equipment 528,761 486,924
Less accumulated depreciation 252,360 233,934
-------------------- ------------------
Total property and equipment, net $ 276,401 $ 252,990
==================== ==================
Note 5 - Accrued liabilities
June 30, December 31,
2006 2005
--------------------- ------------------
(In thousands)
OPEB cost $ 2,093 $ 2,181
Pension cost 5,739 5,353
Payroll and vacation 6,251 6,227
Incentive compensation 10,758 20,091
Other employee benefits 13,256 9,938
Deferred revenue 8,617 14,525
Environmental costs 978 1,718
Taxes, other than income 7,079 5,318
Other 12,500 10,347
--------------------- ------------------
Total accrued liabilities $ 67,271 $ 75,698
===================== ==================
Note 6 - Bank debt and capital lease obligations
On February 17, 2006, we entered into a new $175 million long-term credit
agreement, replacing the previous U.S. credit agreement terminated on that date.
We incurred $0.7 million of financing costs related to this new credit agreement
that were deferred and are being amortized over the five-year term of the credit
agreement. As of June 30, 2006, the weighted average interest rate on borrowings
outstanding under our U.S. credit agreement was 6.1% and 5.6% under our U.K.
credit facility.
- 12 -
June 30, December 31, 2005
2006
--------------------- ------------------
(In thousands)
Long-term debt:
U.S. credit facility $ 45,173 $ 40,255
U.K. credit facility 3,263 11,104
--------------------- ------------------
Total long-term debt $ 48,436 $ 51,359
===================== ==================
Capital lease obligations:
Current $ 196 $ 19
Non-current 461 138
--------------------- ------------------
Total capital lease obligations $ 657 $ 157
===================== ==================
As of June 30, 2006, we had $4.1 million of letters of credit outstanding
under our U.S. credit facility required by various utilities and government
entities for performance and insurance guarantees, and we had $3.7 million of
letters of credit outstanding under our European credit facilities as collateral
under certain inventory purchase contracts. These letters of credit reduce our
borrowing availability under our credit facilities. The amount we show as
outstanding under our U.S. credit facility at June 30, 2006 includes $10.2
million of outstanding checks. GAAP requires us to classify these outstanding
checks as borrowings under this facility. Our borrowing availability under our
U.S. and European credit facilities, including the effect of our outstanding
checks, was $179.7 million as of June 30, 2006.
Note 7 - Capital Trust
Prior to March 3, 2006, the Capital Trust was our wholly-owned finance
subsidiary that issued our 6.625% mandatorily redeemable convertible preferred
securities, beneficial unsecured convertible securities ("BUCS"). On March 3,
2006, we called all of the outstanding BUCS for redemption. The redemption price
equaled 100.6625% of the $50.00 liquidation amount per BUCS, or $50.3313, plus
accrued distributions to the March 24, 2006 redemption date of the BUCS of
$0.2116 per BUCS. Subsequent to March 3, 2006 and through March 20, 2006,
substantially all of the 113,400 outstanding BUCS were converted into 607,356
shares of our common stock, and a nominal number of BUCS were redeemed for cash
on March 24, 2006. Subsequently, the Capital Trust was dissolved and,
accordingly, our investment in the common securities of the Capital Trust was
reduced to zero.
- 13 -
Note 8 - 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,
--------------------------------- ------------------------------
2006 2005 2006 2005
---------------- ------------- ------------- -------------
(In thousands)
Service cost $ 1,125 $ 940 $ 2,222 $ 1,897
Interest cost 3,436 3,462 6,804 6,952
Expected return on plan assets (4,556) (3,756) (9,040) (7,547)
Amortization of net losses 811 1,229 1,599 2,454
Amortization of unrecognized prior
service cost 139 139 278 278
---------------- ------------- ------------- -------------
Total pension expense $ 955 $ 2,014 $ 1,863 $ 4,034
================ ============= ============= =============
We contributed an aggregate of $4.6 million to our defined benefit pension
plans during the first six months of 2006, and we expect to make additional cash
contributions of approximately $4.6 million to our defined benefit pension plans
during the remaining six months of 2006.
Postretirement benefits other than pensions ("OPEB"). The components of net
OPEB expense are set forth below:
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2006 2005 2006 2005
-------------- ------------- -------------- -------------
(In thousands)
Service cost $ 251 $ 160 $ 426 $ 331
Interest cost 490 359 899 826
Amortization of unrecognized prior
service cost 474 (116) 358 (232)
Amortization of net losses (116) 166 117 490
-------------- ------------- -- -------------- -------------
Total OPEB expense $ 1,099 $ 569 $ 1,800 $ 1,415
============== ============= ============== =============
- 14 -
Note 9 - Other income and expense
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2006 2005 2006 2005
------------- -------------- ------------- --------------
(In thousands)
Other operating income (expense):
Settlement of customer claim $ - $ - $ - $ 1,800
Boeing take-or-pay - 444 - 444
Other, net 566 246 366 432
------------- -------------- ------------- --------------
Total other operating income, net $ 566 $ 690 $ 366 $ 2,676
============= ============== ============= ==============
Other non-operating income (expense):
Dividends and interest $ 711 $ 462 $ 1,455 $ 949
Gain on sale of property - 13,881 - 13,881
Foreign exchange gain (loss), net (1,104) 1,272 (1,495) 1,532
Surety bond guarantee (1,332) - (1,332) (40)
Other, net 53 (189) (10) (153)
------------- -------------- ------------- --------------
Total other non-operating income
(expense), net $ (1,672) $ 15,426 $ (1,382) $ 16,169
============= ============== ============= ==============
During the second quarter of 2006, we accrued an additional $1.3 million
for a change in estimate of the aggregate liability for worker's compensation
bonds issued on behalf of a former subsidiary, Freedom Forge Corporation.
Note 10 - Income taxes
Six months ended June 30,
----------------------------------------
2006 2005
------------------ ------------------
(In thousands)
Expected income tax expense, at 35% $ 64,990 $ 24,804
Non-U.S. tax rates (935) (811)
Incremental tax on earnings of non-U.S. group affiliates 117 -
U.S. state income taxes, net 3,228 472
Dividends received deduction (192) (110)
Change in state income tax law - 550
Tax on repatriation of foreign earnings - 998
Adjustment of deferred income tax asset valuation allowance - (35,592)
Domestic manufacturing credit (986) -
Other, net (118) 149
------------------ ------------------
Total income tax expense (benefit) $ 66,104 $ (9,540)
================== ==================
At June 30, 2006, we had a capital loss carryforward of $73.0 million for
U.S. federal income tax purposes that expires in 2008. We have recognized a
deferred income tax asset valuation allowance for the majority of this capital
loss carryforward.
- 15 -
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law 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). Our provision for income taxes for the
first six months of 2006 includes a tax benefit of $1.0 million related to such
special deduction and no tax benefit on our income tax provision during the
first half of 2005.
Note 11 - Commitments and contingencies
Environmental matters. We are continuing assessment work with respect to
our active plant site in Henderson, Nevada. As of June 30, 2006, we have accrued
$2.2 million representing our estimate of the probable costs for remediation of
this site. We expect these accrued expenses to be paid over the remediation
period of up to thirty years. We estimate the upper end of the range of
reasonably possible costs related to this matter, including the current accrual,
to be approximately $4.4 million.
We accrue liabilities related to environmental remediation obligations when
estimated future costs are probable and estimable. We evaluate and adjust our
estimates as additional information becomes available or as circumstances
change. Estimated future costs are not discounted to their present value. In the
future, if the standards or requirements under environmental laws or regulations
become more stringent, if our testing and analytical procedures at our operating
facilities identify additional environmental remediation, or if we determine
that we are responsible for the remediation of hazardous substance contamination
at other sites, then we may incur additional costs in excess of our current
estimates. We do not know if actual costs will exceed our current estimates, if
additional sites or matters will be identified which require remediation or if
the estimated costs associated with previously identified sites requiring
environmental remediation will become estimable in the future.
Legal proceedings. We are also involved in various other environmental,
contractual, product liability, patent (or intellectual property), employment
and other claims and disputes incidental to our present and former businesses.
In certain cases, we have insurance coverage for these items, although we do not
currently expect any additional material insurance coverage for our
environmental claims. We currently believe the disposition of all claims and
disputes, individually or in the aggregate, should not have a material adverse
effect on our consolidated financial position, results of operations and
liquidity beyond the accruals already provided for.
See our 2005 Annual Report for additional information concerning certain
legal and environmental matters, commitments and contingencies.
- 16 -
Note 12 - 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 our 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:
Three months ended June 30, Six months ended
June 30,
------------------------------- -------------------------------
2006 2005 2006 2005
-------------- ------------- -------------- -------------
(In thousands)
Numerator:
Net income attributable to common
stockholders (1) $ 54,318 $ 33,601 $ 111,090 $ 71,707
Interest expense on BUCS, net of tax - 83 42 174
Dividends on Series A
Preferred Stock 1,855 3,298 3,929 6,597
-------------- ------------- -------------- -------------
Diluted net income attributable
to common stockholders $ 56,173 $ 36,982 $ 115,061 $ 78,478
============== ============= ============== =============
Denominator:
Average common shares outstanding 152,085 127,941 149,027 127,687
Average dilutive stock options
and restricted stock (2) 318 590 500 639
BUCS - 620 135 620
Series A Preferred Stock 31,698 52,121 34,081 52,121
-------------- ------------- -------------- -------------
Diluted shares 184,101 181,272 183,743 181,067
============== ============= ============== =============
----------------------------------------------------------------------------------------------------------------------
(1) Net income attributable to common stockholders for the three and six months
ended June 30, 2006 and 2005 included $0.5 million and $0.7 million,
respectively, of undeclared dividends on our Series A Preferred Stock.
(2) Stock option conversion excludes anti-dilutive shares of 2,020 during the
three and six months ended June 30, 2005.
Note 13 - Business segment information
Our production facilities are located in the U.S., U.K., France and Italy,
and our products are sold throughout the world. Our Chief Executive Officer
functions as our chief operating decision maker ("CODM"), and the CODM receives
consolidated financial information about us. He makes decisions concerning
resource utilization and performance analysis on a consolidated and global
basis. We have one reportable segment, our 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
our Condensed Consolidated Financial Statements:
- 17 -
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2006 2005 2006 2005
-------------- ------------- -------------- -------------
(Dollars in thousands, except selling price data)
Titanium melted and mill products:
Melted product net sales $ 59,288 $ 23,780 $ 106,377 $ 45,844
Mill Product net sales 207,188 131,763 412,088 245,686
Other product sales 34,465 28,203 69,372 47,451
-------------- ------------- -------------- -------------
Total net sales $ 300,941 $ 183,746 $ 587,837 $ 338,981
============== ============= ============== =============
Melted product shipments:
Volume (metric tons) 1,550 1,355 3,005 2,770
Average selling price (per kilogram) $ 38.25 $ 17.55 $ 35.40 $ 16.55
Mill product shipments:
Volume (metric tons) 3,750 3,340 7,425 6,440
Average selling price (per kilogram) $ 55.25 $ 39.45 $ 55.50 $ 38.15
- 18 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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 we believe that the expectations reflected in
such forward-looking statements are reasonable, we do not know if 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 we disclaim 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 our other filings with
the SEC which include, but are not limited to, the cyclicality of the commercial
aerospace industry, the performance of aerospace manufacturers and us under our
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 our
ability to reduce or increase supply, the possibility of labor disruptions,
fluctuations in currency exchange rates, fluctuations in the market price of
marketable securities, uncertainties associated with new product or new market
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, competitive products and strategies
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.
Overview. Titanium Metals Corporation is a vertically integrated producer
of titanium sponge, melted products and a variety of mill products for
commercial aerospace, military, industrial and other applications. We are the
only titanium producer with major production facilities in both the U.S. and
Europe, the world's principal titanium markets.
The following discussion and analysis should be read in conjunction with
our Condensed Consolidated Financial Statements and related notes included
elsewhere in this Quarterly Report and with our Consolidated Financial
Statements and the information under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations," which are included
in our 2005 Annual Report.
We effected two-for-one splits of our common stock on September 5, 2005,
February 16, 2006 and May 15, 2006. All share and per share disclosures
contained herein have been adjusted for all periods to give effect to these
stock splits.
- 19 -
RESULTS OF OPERATIONS
Quarter ended June 30, 2006 compared to quarter ended June 30, 2005
Summarized financial information. The following table summarizes certain
information regarding our results of operations for the three months ended June
30, 2006 and 2005. Our reported average selling prices are a reflection of
actual selling prices received by us after the effects of currency exchange
rates, customer and product mix, and other related factors realized throughout a
given period. Consequently, changes in average selling prices from period to
period will be impacted by changes in actual prices and these other factors. The
percentage change information presented in the table represent changes from the
respective prior year.
Three months ended
June 30,
---------------------------------
2006 2005 Change %
-------------- --------------- ---------------
(Dollars in thousands, except
selling price data)
Net sales:
Melted products $ 59,288 $ 23,780 +149%
Mill products 207,188 131,763 +57%
Other products 34,465 28,203 +22%
-------------- ---------------
Total net sales 300,941 183,746 +64%
Cost of sales (194,640) (135,866) +43%
-------------- ---------------
Gross margin 106,301 47,880 +122%
Selling, general, administrative and
development expense (17,365) (12,978) +34%
Other operating income and expenses, net 4,633 2,034 +128%
-------------- ---------------
Operating income $ 93,569 $ 36,936 +153%
============== ===============
Gross margin percentage 35% 26% +9 pts
Operating income percentage 31% 20% +11 pts
Melted product shipments:
Volume (metric tons) 1,550 1,355 +14%
Average selling price (per kilogram) $ 38.25 $ 17.55 +118%
Mill product shipments:
Volume (metric tons) 3,750 3,340 +12%
Average selling price (per kilogram) $ 55.25 $ 39.45 +40%
Net sales. We experienced significant growth during the second quarter of
2006, as net sales increased 64%, or $117.2 million, compared to the second
quarter of 2005. We, and the industry as a whole, have benefitted from
significantly increased demand for titanium from the commercial aerospace and
military sectors that has driven melted and mill titanium prices to record
levels. As a result of these market factors, average selling prices for melted
and mill products have increased 118% and 40%, respectively, over the same
period in the prior year. In addition to the improved pricing we have
experienced, we delivered 14% more melted products and 12% more mill products
compared to the 2005 period. Our higher sales volume was a result of increased
demand across all market sectors. Further, other product sales increased 22%
compared to the prior year period due principally to improved demand for our
fabrication products.
- 20 -
As a result of current and future outlook for demand for our products, we
are currently producing at approximately 90% of capacity at the majority of our
facilities and therefore have initiated several strategic capital improvement
projects at our existing facilities that will add capacity to capitalize on the
anticipated increase in demand, as further discussed below.
Cost of sales. Our cost of raw materials, primarily sponge and scrap,
increased compared to the prior year due to increased industry-wide demand as
well as demand in non-titanium markets that use titanium as an alloying agent.
Additionally, we have experienced increasing rutile and energy costs compared to
the prior year, but we have experienced a decrease in our non-titanium alloy
costs in 2006 compared to 2005. To support the continued growth of our business,
we increased our manufacturing headcount by approximately 130 compared to the
2005 period. Somewhat offsetting these cost increases, we were favorably
impacted by improved plant operating rates, which increased to 91% of practical
capacity in the second quarter of 2006 from 80% in the second quarter of 2005.
Gross margin. During the second quarter 2006, gross margin increased 122%
to $106.3 million compared to the same period in 2005, and our gross margin
percentage increased to 35% in the second quarter of 2006 from 26% in the second
quarter of 2005. The improvement was generally driven by the increase in sales
prices partially offset by increased cost of goods sold.
Operating income. Our second quarter of 2006 operating income increased
153% to $93.6 million compared to the same period in 2005, and our operating
income percentage increased to 31% in the first quarter of 2006 from 20% in the
second quarter of 2005. The increase in operating income is driven primarily by
increases in gross margin.
Our selling, general, administrative and development expense ("SGA&D")
during the second quarter of 2006 increased $4.4 million to $17.4 million
compared to the same period of 2005 primarily due to (i) $3.9 million of travel,
relocation and severance expenses incurred in connection with the relocation of
our headquarters to Dallas, Texas and our operational management and information
technology group to Exton, Pennsylvania and (ii) increased employee compensation
as a result of additional personnel to support expansion of our business.
Partially offsetting the increase in SGA&D, our other operating income for
the second quarter of 2006 increased $2.6 million to $4.6 million compared to
the prior year period due primarily to an increase in equity in earnings in
VALTIMET (our minority owned welded tube joint venture). Equity in earnings in
VALTIMET increased to $4.1 million in the second quarter of 2006 compared to
$1.3 million in the same period of 2005 due to stronger demand and increased
pricing in the industrial tubing market.
Interest expense. In March 2006, we redeemed all of the outstanding BUCS
issued by the Capital Trust for our common shares or cash, and the Capital Trust
was dissolved. As a result we incurred no interest expense associated with the
Capital Trust during the second quarter of 2006 compared to $0.7 million
incurred in the second quarter of 2005. This decrease in interest expense
related to the Capital Trust was partially offset by additional interest expense
on bank debt.
Net other non-operating income and expense. We recognized net other
non-operating expense of $1.7 million in the second quarter of 2006 compared to
net other non-operating income of $15.4 million in the second quarter of 2005.
During the second quarter of 2006, we accrued an additional $1.3 million
for a change in estimate of the aggregate liability for worker's compensation
bonds issued on behalf of a former subsidiary, Freedom Forge Corporation.
- 21 -
Additionally, during the second quarter of 2006, the U.S. dollar weakened
relative to British pound sterling and euro, which resulted in net currency
transaction losses of $1.1 million. In contrast, we realized net currency
transaction gains of $1.3 million during the second quarter of 2005, as the U.S.
dollar strengthened relative to the British pound sterling and the euro.
During the second quarter of 2005, we realized a gain of $13.9 million on
the sale of certain property adjacent to our Henderson, Nevada plant site.
Income taxes. We incurred income tax expense of $32.8 million in the second
quarter of 2006 compared to $13.3 million in the same period last year. The
increase in income tax expense in 2006 is primarily due to increased earnings
and the $5.7 million reversal of the valuation allowance in 2005 attributable to
our U.S. and U.K. deferred income tax assets.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law 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). Our provision for income taxes for the
three months ended June 30, 2006 includes a tax benefit of $0.4 million related
to such special deduction, and we included no tax benefit on our income tax
provision for the three months ended June 30, 2005. For the three months ended
June 30, 2006, our income tax rate did not vary significantly from the U.S.
statutory rate.
Minority interest. Minority interest relates principally to Compagnie
Europeenne du Zirconium-CEZUS, S.A. ("CEZUS"), the 30% holder of our 70%-owned
French subsidiary, TIMET Savoie, S.A. ("TIMET Savoie"). Minority interest during
the second quarter of 2006 increased over the comparable period in 2005 due to
increased net income at TIMET Savoie.
Dividends on Series A Preferred Stock. When, as and if declared by our
board of directors, holders of our 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). We paid dividends of $2.1 million to holders of the Series A Preferred
Stock during the three months ended June 30, 2006, compared to $3.3 million
during the three months ended June 30, 2005.
Shares of our Series A Preferred Stock are convertible, at any time, at the
option of the holder thereof, into thirteen and one-third shares of our common
stock, subject to adjustment in certain events. The Series A Preferred Stock is
not mandatorily redeemable, but is redeemable at our option after September 1,
2007. During the second quarter of 2006, certain holders of the Series A
Preferred Stock converted an aggregate of 0.7 million shares of our Series A
Preferred Stock into 9.7 million shares of our common stock.
- 22 -
First six months of 2006 compared to first six months of 2005
Summarized financial information. The following table summarizes certain
information regarding our results of operations for the six months ended June
30, 2006 and 2005.
Six months ended
June 30,
---------------------------------
2006 2005 Change %
--------------- -------------- ----------------
(Dollars in thousands, except
selling price data)
Net sales:
Melted products $ 106,377 $ 45,844 +132%
Mill products 412,088 245,686 +68%
Other products 69,372 47,451 +46%
--------------- --------------
Total net sales 587,837 338,981 +73%
Cost of sales (373,216) (262,146) +42%
--------------- --------------
Gross margin 214,621 76,835 +179%
Selling, general, administrative and
development expense (32,619) (25,339) +29%
Other operating income and expenses, net 6,691 4,821 +39%
--------------- --------------
Operating income $ 188,693 $ 56,317 +235%
=============== ==============
Gross margin percentage 37% 23% +14 pts
Operating income percentage 32% 17% +15 pts
Melted product shipments:
Volume (metric tons) 3,005 2,770 +8%
Average selling price (per kilogram) $ 35.40 $ 16.55 +114%
Mill product shipments:
Volume (metric tons) 7,425 6,440 +15%
Average selling price (per kilogram) $ 55.50 $ 38.15 +45%
Net sales. We experienced significant growth during the first six months of
2006, as net sales increased 73%, or $248.9 million, compared to the first six
months of 2005. We, and the industry as a whole, have benefitted from
significantly increased demand for titanium from the commercial aerospace and
military sectors that has driven melted and mill titanium prices to record
levels. As a result of these market factors, average selling prices for melted
and mill products have increased 114% and 45%, respectively, over the same
period in the prior year. In addition to the improved pricing we have
experienced, we have delivered 8% more melted products and 15% more mill
products compared to the 2005 period. Our higher sales volume was a result of
increased demand across all market sectors. Further, other product sales
increased 46% compared to the prior year period due principally to improved
demand for our fabrication products.
As a result of current and future outlook for demand for our products, we
are currently producing at approximately 90% of capacity at the majority of our
facilities and therefore have initiated several strategic capital improvement
projects at our existing facilities that will add capacity to capitalize on the
anticipated increase in demand, as further discussed below.
- 23 -
Cost of sales. Our cost of raw materials, primarily sponge and scrap,
increased compared to the prior year due to increased industry-wide demand as
well as demand in non-titanium markets that use titanium as an alloying agent.
Additionally, we have experienced increasing rutile and energy costs compared to
the prior year, but we have experienced a decrease in our non-titanium alloy
costs in 2006 compared to 2005. To support the continued growth of our business,
we increased our manufacturing headcount by approximately 135 compared to the
2005 period. Somewhat offsetting these cost increases, we were favorably
impacted by improved plant operating rates, which increased to 89% of practical
capacity in the first six months of 2006 from 80% in the first six months of
2005. In addition, the 2005 period included a $1.2 million noncash impairment
charge related to the abandonment of certain manufacturing equipment.
Gross margin. During the first six months of 2006, gross margin increased
179% to $214.6 million compared to the same period in 2005. Our gross margin
percentage increased to 37% in the first six months of 2006 from 23% in the
first six months of 2005. The improvement was generally driven by the increase
in sales prices partially offset by increased cost of goods sold.
Operating income. Our first six months of 2006 operating income increased
235% to $188.7 million compared to the same period in 2005, and our operating
income percentage increased to 32% in the first six months of 2006 from 17% in
the first six months of 2005. The increase in operating income is driven
primarily by increases in gross margin.
SGA&D during the first six months of 2006 increased $7.3 million to $32.6
million compared to the same period of 2005 primarily due to (i) $5.1 million of
travel, relocation and severance expenses incurred in connection with the
relocation of our headquarters to Dallas, Texas and our operational management
and information technology group to Exton, Pennsylvania and (ii) increased
employee compensation as a result of additional personnel to support expansion
of our business.
Partially offsetting the increase in SGA&D, our other operating income for
the first six months of 2006 increased $1.9 million to $6.7 million over the
prior year period due primarily to an increase in equity in earnings in
VALTIMET. Equity in earnings of VALTIMET increased to $6.3 million in the first
six months of 2006 compared to $2.1 million in the same period of 2005 due to
stronger demand and increased pricing in the industrial tubing market. Partially
offsetting this increase, other operating income decreased $2.3 million during
the first six months of 2006 compared to the 2005 period primarily related to
other income of $1.8 million recognized in the first quarter of 2005 related to
our settlement of a customer claim regarding prior order cancellations.
Interest expense. Interest expense on bank debt and capital leases was $0.3
million higher in the 2006 period due to higher average outstanding debt levels
as well as higher average interest rates, as compared to the 2005 period. This
was offset by a decrease in interest expense for the first six months of 2006
compared to 2005 related to the redemption of our BUCS at the end of the first
quarter of 2006.
Net other non-operating income and expense. During the six months ended
June 30, 2006, we recognized other non-operating expense of $1.4 million
compared to other non-operating income of $16.2 million during the six months
ended June 30, 2005.
- 24 -
As discussed previously, our non-operating expense during the first half of
2006 included expense of $1.3 million related to a change in our estimated
liability for certain worker's compensation bonds, and other non-operating
income during the first half of 2005 included a gain on the sale of certain
property of $13.9 million.
Additionally, during the six months ended June 30, 2006, the U.S. dollar
weakened relative to British pound sterling and euro, which resulted in net
currency transaction losses of $1.5 million. In contrast, we realized net
currency transaction gains of $1.5 million during the six months ended June 30,
2005 as the U.S. dollar strengthened relative to the British pound sterling and
the euro.
Income taxes. We incurred income tax expense of $66.1 million in the first
six months of 2006 compared to an income tax benefit of $9.5 million in the same
period last year. The increase in income tax expense in the first six months of
2006 is primarily due to increased earnings and the $35.6 million reversal of
the valuation allowance in 2005 attributable to our U.S. and U.K. deferred
income tax assets.
Our provision for income taxes for the six months ended June 30, 2006
includes a tax benefit of $1.0 million related to the special deduction under
the American Jobs Creation Act of 2004, and we included no tax benefit on our
income tax provision for the six months ended June 30, 2005. For the six months
ended June 30, 2006, our income tax rate did not vary significantly from the
U.S. statutory rate. See Note 10 to the Condensed Consolidated Financial
Statements.
Minority interest. Minority interest during the first six months of 2006
increased over the comparable period in 2005 due to increased net income at
TIMET Savoie.
Dividends on Series A Preferred Stock. We paid dividends of $4.3 million to
holders of the Series A Preferred Stock during the six months ended June 30,
2006, compared to $6.6 million during the six months ended June 30, 2005.
During the first six months of 2006, certain holders of the Series A
Preferred Stock converted an aggregate of 1.3 million shares of the Series A
Preferred Stock into 16.9 million shares of our common stock.
European operations
We have substantial operations located in the U.K., France and Italy.
Approximately 35% of our sales originated in Europe for the six months ended
June 30, 2006, of which approximately 54% were denominated in the British pound
sterling or the euro. Certain purchases of raw materials, principally titanium
sponge and alloys, for our European operations are denominated in U.S. dollars,
while labor and other production costs are primarily denominated in local
currencies. The functional currencies of our 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 our European
operations may be in U.S. dollars or in functional currencies. Our export sales
from the U.S. are denominated in U.S. dollars and are not subject to currency
exchange rate fluctuations.
We do not use currency contracts to hedge our currency exposures. At June
30, 2006, consolidated assets and liabilities denominated in currencies other
than functional currencies were approximately $87.4 million and $65.8 million,
respectively, consisting primarily of U.S. dollar cash, accounts receivable and
accounts payable.
- 25 -
VALTIMET has entered into certain derivative financial instruments that
qualify as cash flow hedges under GAAP. Our pro-rata share of VALTIMET's
unrealized net gains on such derivative financial instruments is included as a
component of other comprehensive income.
Outlook
In the first six months of 2006, we achieved record levels for net sales,
operating income and net income. These levels were largely driven by increased
demand in the commercial aerospace sector that, when coupled with the relatively
short supply of raw materials, resulted in average selling prices for both
melted and mill products reaching their highest historical levels. We expect
that current industry-wide demand trends will continue beyond 2006.
We also continue to expect the availability of certain raw materials to
tighten, and, consequently, the prices for these raw materials are increasing.
We currently expect the shortage in certain raw materials to continue throughout
the remainder of 2006, which could limit our ability to produce enough titanium
products to fully meet customer demand. In addition, we have certain long-term
customer agreements that will somewhat limit our ability to pass on all of our
increased raw material costs. However, we expect that the impact of higher
average selling prices for melted and mill products in 2006 will more than
offset such increased raw materials costs, as has been the case for the first
half of 2006.
In July 2006, The Airline Monitor, a leading aerospace publication, issued
its semi-annual forecast for commercial aircraft deliveries. This forecast
delays the expected delivery timeline for approximately one percent of the
planes previously forecasted for delivery in 2006 and 2007. However, with an
increase in expected deliveries from 2008 through 2010, this forecast confirms
the previously projected trend of increasing large commercial aircraft
deliveries in the five years ending in 2010, and the current estimate of 3,800
delivered aircraft exceeds previous five-year estimates by 80 planes. The
current estimate of large commercial aircraft deliveries through 2010 includes
210 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 our belief that the titanium industry
is in the early stages of the business cycle and that current industry-wide
demand trends will likely continue beyond 2006.
Our backlog at June 30, 2006 was $860 million, compared to $870 million at
December 31, 2005 and $580 million at June 30, 2005. Our backlog has somewhat
decreased from December 31, 2005 as discussions regarding volumes and pricing
for 2007 orders continue with certain customers, and as a result, our backlog
does not yet reflect orders that we expect to acknowledge during the third and
fourth quarters of 2006.
- 26 -
Cost of sales is affected by a number of factors including customer and
product mix, material yields, plant operating rates, raw material costs, labor
costs and energy costs. Raw material costs, which include sponge, scrap and
alloys, represent the largest portion of our manufacturing cost structure, and,
as previously discussed, continued cost increases for certain raw materials have
occurred during the first half of 2006 and are expected to continue throughout
the remainder of 2006. Scrap and other certain raw material costs have continued
to rise, and increased energy costs also continue to have a negative impact on
gross margin. We currently expect production volumes to remain at current levels
for the remainder of 2006, with overall capacity utilization expected to
approximate 90% of practical capacity for the full year 2006 (as compared to 80%
in 2005). However, practical capacity utilization measures can vary
significantly based on product mix.
Based on the foregoing, we anticipate our full year 2006 net sales revenue
to range from $1.1 billion to $1.2 billion and our full year 2006 operating
income to range from $325 million to $350 million.
LIQUIDITY AND CAPITAL RESOURCES
Our consolidated cash flows for the six months ended June 30, 2006 and 2005
are summarized below. The following discussion should be read in conjunction
with our Condensed Consolidated Financial Statements and notes thereto.
Six months ended June 30,
--------------------------------------------
2006 2005
-------------------- --------------------
Cash provided by (used in):
Operating activities $ 22,897 $ 9,853
Investing activities (35,564) (27,200)
Financing activities 7,951 15,779
-------------------- --------------------
Net cash used in operating, investing and
financing activities $ (4,716) $ (1,568)
==================== ====================
Operating activities. Cash flow from operations is considered a primary
source of our liquidity. Changes in titanium pricing, production volume and
customer demand, among other things, could significantly affect our liquidity.
The increase in cash provided by operating activities was driven by the
increase in net income which increased by $36.7 million to $115.0 million for
the six months ended June 30, 2006, compared to net income of $78.3 million for
the six months ended June 30, 2005.
The increase in net income was offset by a decrease in cash provided by
working capital. Accounts receivable increased during the first six months of
2006 and 2005 primarily as a result of increased sales. Inventories increased
during the first six months of 2006 and 2005 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.
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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 2006, we made cash payments of approximately $20 million
to employees related to amounts earned during 2005 under our incentive based
compensation plans compared to approximately $13 million paid in 2005 related to
amounts earned during 2004.
The increase in customer advances during the first six months of 2005
primarily reflects our receipt of a $27.9 million advance from Boeing in January
2005, partially offset by the application against customer purchases. Under our
previous long-term agreement ("LTA") with Boeing, we received an annual $28.5
million (less $3.80 per pound of titanium product sold to Boeing subcontractors
in the preceding year) customer advance from Boeing in January of each year
related to Boeing purchases from us for that year. Effective July 1, 2005, we
entered into a new LTA with Boeing, pursuant to which, beginning in 2006, the
take-or-pay provisions under the previous LTA were replaced with an annual
makeup payment early in the following year in the event Boeing purchases less
than its annual commitment in any year. Accordingly, Boeing was not required to
make an advance payment in January 2006.
We utilized the remainder of our U.S. net operating loss carryforward
during the first quarter of 2006, which loss carryforward only partially offset
the U.S. current tax provision for the six months ended June 30, 2006. As a
result, our provision for income taxes includes a provision for current income
taxes of approximately $57.4 million (including a provision for U.S. taxes of
approximately $39.5 million). We also recognized a current income tax benefit in
the first six months of 2006 of $9.6 million related to the tax benefit from the
exercise of stock options. Such income tax benefit is recognized as a direct
increase in additional paid-in capital, in accordance with GAAP. We made
aggregate cash payments for income taxes of $50.5 million in the first half of
2006 compared to $3.7 million in the first half of 2005. As a result, our income
taxes payable decreased from $13.2 million at December 31, 2005 to $10.5 million
at June 30, 2006. See also "Results of Operations - Income taxes" for further
discussion of income taxes.
Investing activities. Our capital expenditures were $34.9 million for the
six months ended June 30, 2006, compared to $26.8 million for the comparable
period in 2005. The 2006 amount includes expenditures related to our sponge
plant expansion in Henderson, Nevada and our new electron beam cold hearth melt
furnace at our facility in Morgantown, Pennsylvania. The 2005 amount includes
expenditures related to construction on our now completed water conservation
facility located in Henderson, Nevada as well as the expansion of our sponge
plant.
Financing activities. Cash provided during the six months ended June 30,
2006 related primarily to $10.6 million of proceeds from the issuance of common
stock upon exercise of options and the related tax benefit of $9.6 million.
These cash inflows were partially offset by our net debt repayments of $4.2
million, dividends paid on our Series A Preferred Stock of $4.3 million and
dividends paid to CEZUS of $3.0 million during the first six months of 2006.
Cash provided during the six months ended June 30, 2005 related primarily
to our net borrowings of $23.5 million used in part to fund the ongoing
construction projects and support the increase in inventory levels required to
meet anticipated customer demand. Additionally, we received $1.1 million of cash
from the issuance of common stock related to the exercise of certain employee
stock options during the 2005 period. These cash inflows during the first half
of 2005 were partially offset by our dividends paid on our Series A Preferred
Stock of $6.6 million and dividends paid to CEZUS of $2.2 million.
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During the first quarter of 2006, 113,467 of our BUCS that were outstanding
at December 31, 2005 were converted into an aggregate of 0.6 million shares of
our common stock, and during the first six months of 2006, 1.3 million shares of
our Series A Preferred Stock were converted into an aggregate of 16.9 million
shares of our common stock. The cash impact from these transactions was nominal.
Borrowing arrangements. On February 17, 2006, we entered into a new $175
million long-term credit agreement, replacing our previous U.S credit agreement,
which was terminated on that date. The U.S. credit agreement is secured
primarily by our U.S. accounts receivable, inventory, personal property,
intangible assets, a pledge of 65% of TIMET UK's common stock and a negative
pledge on U.S. fixed assets, and matures in February 2011. Borrowings under the
U.S. credit agreement accrue interest at the U.S. prime rate or varying
LIBOR-based rates based on a quarterly ratio of outstanding debt to EBITDA as
defined by the agreement. The U.S. credit agreement also provides for the
issuance of up to $10 million of letters of credit.
The U.S. credit agreement contains certain restrictive covenants that,
among other things, limit or restrict our ability to incur debt, incur liens,
make investments, make capital expenditures or pay dividends. The U.S. credit
agreement also requires compliance with certain financial covenants, including a
minimum tangible net worth covenant, a fixed charge coverage ratio and a
leverage ratio, and contains other covenants customary in lending transactions
of this type including cross-default provisions with respect to our other debt
and obligations. Borrowings under the U.S. credit agreement are limited to the
lesser of $175 million or a formula-determined amount based upon U.S. accounts
receivable, inventory and fixed assets (subject to pledging fixed assets). The
formula-determined amount only applies if borrowings exceed 60% of the
commitment amount or the leverage ratio exceeds a certain level, but based on
our outstanding borrowings and leverage ratio at June 30, 2006, the
formula-determined borrowing ceiling was not applicable at June 30, 2006. We
were in compliance with all such covenants during the six months ended June 30,
2006.
Under our U.K. 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 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 during the six months ended June 30, 2006.
As of June 30, 2006, we had outstanding borrowings of $45.2 million under
our U.S. credit agreement and $3.3 million under our U.K. credit facility. As of
June 30, 2006, the weighted average interest rates on borrowings outstanding
under our U.S. and U.K. credit facilities were 6.1% and 5.6%, respectively.
As of June 30, 2006, we had $4.1 million of letters of credit outstanding
under our U.S. credit facility required by various utilities and government
entities for performance and insurance guarantees, and we had $3.7 million of
letters of credit outstanding under our European credit facilities as collateral
under certain inventory purchase contracts. These letters of credit reduce our
borrowing availability under our credit facilities. Aggregate unused borrowing
availability under our U.S. and U.K. credit facilities was approximately $164
million as of June 30, 2006. We also have overdraft and other credit facilities
at certain of our other European subsidiaries, with aggregate unused borrowing
availability of $15.7 million at June 30, 2006.
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Future cash requirements
Liquidity. Our primary source of liquidity on an on-going basis is our cash
flows from operating activities and borrowings under various credit facilities.
We generally use these amounts to (i) fund capital expenditures, (ii) repay
indebtedness incurred primarily for working capital purposes and (iii) provide
for the payment of dividends. From time-to-time we will incur indebtedness,
generally to (i) fund short-term working capital needs, (ii) refinance existing
indebtedness, (iii) make investments in marketable and other securities
(including the acquisition of securities issued by our subsidiaries and
affiliates) or (iv) fund major capital expenditures or the acquisition of other
assets outside the ordinary course of business.
We routinely evaluate our liquidity requirements, capital needs and
availability of resources in view of, among other things, our 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, we have in
the past, or in light of our current outlook, may in the future, seek to raise
additional capital, modify our common and preferred dividend policies,
restructure ownership interests, incur, refinance or restructure indebtedness,
repurchase shares of common stock, purchase or redeem Series A Preferred Stock,
sell assets, or take a combination of such steps or other steps to increase or
manage our liquidity and capital resources. In the normal course of business, we
investigate, evaluate, discuss and engage 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, we may consider using then-available
liquidity, issuing equity securities or incurring additional indebtedness.
Based upon our expectations of our operating performance, and the
anticipated demands on our cash resources we expect to have sufficient liquidity
to meet our short-term obligations (defined as the twelve-month period ending
June 30, 2007) and our long-term obligations (defined as the five-year period
ending December 31, 2010, our time period for long-term budgeting). If actual
developments differ from our expectations, our liquidity could be adversely
affected.
At June 30, 2006, we had credit available under existing U.S and European
credit facilities of $179.7 million, and we had an aggregate of $13.9 million of
restricted and unrestricted cash and cash equivalents.
Capital expenditures. We intend to invest a total of approximately $110
million to $120 million for capital expenditures during 2006. Capital
expenditures are primarily for improvements and upgrades to existing facilities,
including expansions of sponge and melting capacity, and other additions of
plant machinery and equipment. We have spent $34.9 million on capital
expenditures through June 30, 2006.
In May 2005, we announced our plans to expand our existing titanium sponge
facility in Nevada. This expansion, which we currently expect to complete by the
end of 2006, will provide the capacity to produce an additional 4,000 metric
tons of sponge annually, an increase of approximately 47% over the current
sponge production capacity levels at our Nevada facility.
In April 2006, we announced our plans for the expansion of our electron
beam cold hearth melt capacity in Pennsylvania. This expansion, which we
currently expect to complete by early 2008, will have, depending on product mix,
the capacity to produce an additional 8,500 metric tons of melted products, an
increase of approximately 54% over the current production capacity levels at our
Pennsylvania facility.
- 30 -
We continue to evaluate additional opportunities to expand our production
capacity including capital projects, acquisitions or other investments which, if
consummated, any required funding would be provided by borrowings under our U.S.
or European credit facilities.
Other
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. We continuously
consider, review and evaluate such transactions, and understand 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 we might be a party to one or more such transactions in the
future.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, including foreign currency exchange rates,
interest rates and security prices. There have been no material changes in these
market risks since we filed our 2005 Annual Report, and we refer you to the
report for a complete description of these risks.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. We maintain a system of
disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by Rule 13a-15(e) of the Securities Exchange Act of 1934
(the "Exchange Act"), as amended, means controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that
we file or submit to the SEC under 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 us in the reports that we file or submit to the SEC under the
Exchange Act is accumulated and communicated to our management, including our
principal executive officer and our principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Steven L. Watson, our Chief Executive
Officer, and Bobby D. O'Brien, our Executive Vice President and Chief Financial
Officer, have evaluated our disclosure controls and procedures as of June 30,
2006. Based upon their evaluation, and as a result of the material weaknesses
identified in the 2005 Annual Report, these executive officers have concluded
that our disclosure controls and procedures are not effective as of June 30,
2006. We have performed additional procedures in completing these Condensed
Consolidated Financial Statements as of and for the quarter ended June 30, 2006
to ensure that the disclosures included were fairly presented in all material
respects in accordance with GAAP.
- 31 -
Scope of management's report on internal control over financial reporting.
We also maintain internal control over financial reporting. The term "internal
control over financial reporting," as defined by rule 13a-15(f) of the Exchange
Act, means a process designed by, or under the supervision of, our principal
executive and principal financial officers, or persons performing similar
functions, and effected by our 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 our
assets;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that our receipts and expenditures are being made only
in accordance with authorizations of our management and directors; and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition our assets that could
have a material effect on our Consolidated Financial Statements.
Changes in internal control over financial reporting. There has been no
change to our internal control over financial reporting during the quarter ended
June 30, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting, except as
specifically discussed below. We are in the process of remediating the three
material weaknesses discussed in our 2005 Annual Report and continue to work
toward completion of such remediation by or before December 31, 2006. To date,
we have completed the following remediation activities:
o We are in the process of hiring additional accounting and finance
personnel, and to the extent necessary, critical functions or
processes have been augmented by or transitioned to the additional
associates;
o We have implemented additional levels of manual review and
authorization of journal entries at all of our significant locations.
We will also further explore our IT solution options in the third
quarter of 2006; and
o We have continued to update certain key accounting policies and
procedures and will continue to prioritize the preparation and
distribution of such key policies and procedures throughout the
remainder of 2006.
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PART II. - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Refer to Note 11 of the Condensed Consolidated Financial Statements and to
our 2005 Annual Report for descriptions of certain previously reported legal
proceedings.
Item 1A. RISK FACTORS
There have been no material changes in the first six months of 2006 with
respect to our risk factors presented in Item 1A. in our 2005 Annual Report on
Form 10-K.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our 2006 Annual Meeting of Shareholders on May 23, 2006. Keith R.
Coogan, Norman N. Green, Glenn R. Simmons, Harold C. Simmons, Thomas P.
Stafford, Steven L. Watson and Paul J. Zucconi were elected as directors, each
receiving votes "For" their election of at least 65.8 million of the 69.7
million common shares eligible to vote at the Annual Meeting.
Item 6. EXHIBITS
10.1* Titanium Metals Corporation Amended and Restated 1996
Non-Employee Director Compensation Plan, as amended and restated
effective May 23, 2006.
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.
* Management contract, compensatory plan or arrangement.
Note: We have retained a signed original of any exhibit listed
above that contains signatures, and we will provide any such
exhibit to the SEC or its staff upon request. Such request
should be directed to the attention of our Corporate
Secretary at our corporate offices located at 5430 LBJ
Freeway, Suite 1700, Dallas, Texas 75240.
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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 4, 2006 By /s/ Bobby D. O'Brien
------------------------------------
Bobby D. O'Brien
Executive Vice President and
Chief Financial Officer
Date: August 4, 2006 By /s/ Scott E. Sullivan
------------------------------------
Scott E. Sullivan
Vice President and Controller
Principal Accounting Officer
- 34 -