SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 - For the fiscal year ended December 31, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-28538
Titanium Metals Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-5630895
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 296-5600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on Which Registered
Common Stock New York Stock Exchange
($.01 par value per share)
Securities registered pursuant to Section 12(g) of the Act:
None.
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K _ _
As of March 12, 2001, 31,827,405 shares of common stock were outstanding. The
aggregate market value of the 17 million shares of voting stock held by
nonaffiliates of Titanium Metals Corporation as of such date approximated $158
million.
Documents incorporated by reference:
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
Forward-Looking Information
The statements contained in this Annual Report on Form 10-K that are
not historical facts, including, but not limited to, statements found in the
Notes to Consolidated Financial Statements and in Item 1 - Business, Item 2 -
Properties, Item 3 - Legal Proceedings and Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations, are forward-looking
statements that represent management's beliefs and assumptions based on
currently available information. Forward-looking statements can be identified by
the use of words such as "believes," "intends," "may," "will," "looks,"
"should," "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 assurances that these expectations will prove to be correct.
Such statements by their nature involve substantial risks and uncertainties that
could significantly affect expected results. Actual future results could differ
materially from those described in such forward-looking statements, and the
Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Among the factors that could cause actual results to differ
materially are the risks and uncertainties discussed in this Annual Report,
including in those portions referenced above and those described from time to
time in the Company's other filings with the Securities and Exchange Commission
which include, but are not limited to, the cyclicality of the commercial
aerospace industry, the performance of The Boeing Company and other aerospace
manufacturers under their long-term purchase agreements with the Company, the
difficulty in forecasting demand for titanium products, global economic
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, control by certain
stockholders and possible conflicts of interest, uncertainties associated with
new product development, the supply of raw materials and services, changes in
raw material and other operating costs (including energy costs) 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.
PART I
ITEM 1: BUSINESS
General. Titanium Metals Corporation ("TIMET" or the "Company") is one
of the world's leading integrated producers of titanium sponge, melted and mill
products. The Company is the only integrated producer with major titanium
production facilities in both the United States and Europe, the world's
principal markets for titanium. The Company estimates that in 2000 it accounted
for approximately 24% of worldwide industry shipments of mill products and
approximately 10% of worldwide sponge production.
Titanium was first manufactured for commercial use in the 1950's.
Titanium's unique combination of corrosion resistance, elevated-temperature
performance and high strength-to-weight ratio makes it particularly desirable
for use in commercial and military aerospace applications in which these
qualities are essential design requirements for certain critical parts such as
wing supports and jet engine components. While aerospace applications have
historically accounted for a substantial portion of the worldwide demand for
titanium and were approximately 40% of industry mill product shipments in 2000,
the number of non-aerospace end-use markets for titanium has expanded
substantially. Today, numerous industrial uses for titanium exist, including
chemical and industrial power plants, desalination plants and pollution control
equipment. Demand for titanium is also increasing in emerging markets with such
diverse uses as offshore oil and gas production installations, geothermal
facilities, military armor, automotive and architectural applications.
TIMET's products include: titanium sponge, the basic form of titanium
metal used in processed titanium products; melted products comprised of titanium
ingot and slab, the result of melting sponge and titanium scrap, either alone or
with various other alloying elements; and forged and rolled products produced
from ingot or slab, including long products (billet and bar), flat products
(plate, sheet and strip), pipe and pipe fittings. The Company believes it is
among the lower cost producers of titanium sponge and melted products due in
part to its manufacturing expertise and technology. The titanium industry is
comprised of several manufacturers which, like the Company, produce a relatively
complete range of titanium products and a significant number of producers
worldwide that manufacture a limited range of titanium mill products. The
Company is presently the only active titanium sponge producer in the U.S.
The Company's long term strategy is to maximize the value of its core
aerospace business and, at the same time, develop new markets, applications and
products to help reduce its traditional dependence on the aerospace industry.
The Company's focus in the short-term is to return to profitability and generate
positive cash flow. To accomplish its short-term goals, the Company is
attempting to reduce costs, improve quality and streamline its overall business
and manufacturing processes as well as maximize its participation in the
increasing demand for aerospace quality titanium during this business cycle.
Industry. The titanium industry historically has derived a substantial
portion of its business from the aerospace industry. The cyclical nature of the
aerospace industry has been the principal driver of the historical fluctuations
in the performance of titanium companies. Over the past 20 years, the titanium
industry had cyclical peaks in mill product shipments in 1980, 1989 and 1997 and
cyclical lows in 1983, 1991 and 1999. During the 1996 to 1998 period, the
Company reported aggregate net income of $176 million which more than offset the
aggregate net losses of $93 million it reported during the difficult 1991 to
1995 period. The Company also reported net losses in 1999 and 2000 aggregating
$70 million. The Company currently expects to report a net loss in 2001;
however, it expects that its loss in 2001 will be substantially reduced from
2000 levels as a result of the recent upturn in its business cycle. See Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Demand for titanium reached a peak in 1997 when worldwide industry mill
product shipments reached an estimated 60,000 metric tons. Industry mill product
shipments subsequently declined approximately 5% to an estimated 57,000 metric
tons in 1998, with a further 16% decline to an estimated 48,000 metric tons in
1999 and 2000. The Company expects that worldwide industry mill product
shipments will increase in 2001 by approximately 10% to about 53,000 metric
tons. The expected increase is primarily attributable to stronger demand
resulting from an increase in forecasted aircraft build rates, as well as a
substantial decrease in the amount of excess titanium inventory throughout the
aerospace supply chain.
The present business environment is substantially different from that
in 1996 to 1998. During the second half of 1998 it became evident that the
anticipated record rates of aircraft production would not be reached, and that a
decline in overall production rates would begin earlier than forecast,
particularly in titanium-intensive wide body planes. This resulted in
considerable excess inventory throughout the supply chain. During 1999,
aerospace customers continued to focus on reducing inventories and a significant
number of the Company's aerospace customers canceled or delayed previously
scheduled orders. The aerospace supply chain is fragmented and decentralized
making it difficult to quantify excess inventories. However, customer actions
such as order delays (i.e. pushouts) and cancellations, combined with other data
provide limited visibility. During 2000, the Company experienced no significant
customer pushouts or cancellations of deliveries. Late in 2000 and early 2001,
the Company experienced an increase in orders for aerospace quality titanium
products and certain customers requested advanced delivery of existing orders
and its order backlog increased substantially. Although quantitative information
is not readily available, these factors and others lead the Company to believe
that the excess titanium inventory throughout the supply chain has been
substantially reduced and is unlikely to be a significant factor in 2001 in most
areas.
Mill product shipments to the aerospace industry in 2000 represented
about 40% of total industry demand and about 85% of the Company's annual mill
product shipments. Aerospace demand for titanium products, which includes both
jet engine components (i.e. blades, discs, rings and engine cases) and air frame
components (i.e. bulkheads, tail sections, landing gears, wing supports and
fasteners) can be broken down into commercial and military sectors. The
commercial aerospace sector has a significant influence on titanium companies,
particularly mill product producers such as TIMET. Industry shipments of mill
products to the commercial aerospace sector in 2000 accounted for approximately
85% of aerospace demand and 35% of aggregate titanium mill product demand. The
Company believes that demand for mill products for the commercial aerospace
sector will be the principal driver of the expected 10% increase in industry
mill product shipments during 2001. Demand growth for these markets and sectors
is expected to exceed the 10% aggregate growth in titanium mill product
shipments while other markets are expected to experience lesser growth.
Shipments to the commercial aerospace sector represented approximately 80% of
the Company's sales volume in 2000. Accordingly, the Company believes its sales
volume in 2001 may increase more than the expected 10% increase in titanium
industry mill product shipments.
According to The Airline Monitor, a leading aerospace publication, the
commercial airline industry reported operating income of approximately $15
billion (estimated) in 2000, compared to $13 billion in 1999 and $16 billion in
1998. According to The Airline Monitor, large commercial aircraft deliveries for
the 1996 to 2000 period peaked in 1999 with 889 aircraft including 254 wide body
aircraft. Wide body aircraft use substantially more titanium than narrow body
aircraft. Commercial aircraft deliveries are currently expected to be 905
(including 230 wide bodies) in 2001 and 825 (including 220 wide bodies) in 2002.
The demand for titanium generally precedes aircraft deliveries by about one
year, although this varies considerably by titanium product. Accordingly, the
Company's cycle historically precedes the cycle of the aircraft industry and
related deliveries. The Company can give no assurance as to the extent or
duration of the current commercial aerospace cycle or the extent to which it
will affect demand for the Company's products.
Since titanium's initial applications in the aerospace sector, the
number of end-use markets for titanium has expanded. Established industrial uses
for titanium include chemical plants, industrial power plants, desalination
plants, and pollution control equipment. Titanium is also experiencing increased
customer demand in several emerging markets with diverse uses such as offshore
oil and gas production installations, geothermal facilities, military armor, and
automotive and architectural applications. While shipments to emerging markets
represented less than 5% of the Company's sales volume in 2000, the Company
believes these emerging applications represent potential growth opportunities.
If titanium usage in these markets continues to develop, they may, over time,
reduce the industry's and the Company's dependence on the aerospace industry.
For example, titanium manufactured by the Company is being used to produce the
exhaust system for the 2001 model of the Chevrolet Corvette Z06, the first
significant titanium component selected for a production automobile. Volkswagen
is using titanium supplied by the Company in the suspension springs on the 2001
model year Lupo FSI automobile. In a separate market, the Company delivered
titanium production casing during 2000 for one of the largest geothermal wells
in the world.
Customer Agreements. The Company has long-term agreements ("LTA's")
with certain major aerospace customers, including The Boeing Company ("Boeing"),
Rolls-Royce plc, United Technologies Corporation (and related companies) and
Wyman-Gordon Company (a unit of Precision Castparts Corporation). These
agreements, which became effective in 1998 and 1999, generally provide for (i)
minimum market shares of the customers' titanium requirements (generally at
least 70%) for extended periods (nine to ten years) and (ii) fixed or
formula-determined prices generally for at least the first five years. The LTA's
were structured to provide incentives to both parties to lower TIMET's costs and
share in the savings. These contracts and others represent the core of the
Company's long-term aerospace strategy. These agreements were designed to limit
pricing volatility (both up and down) for the long-term benefit of both parties,
while providing TIMET with a solid base of aerospace volume.
The LTA with Boeing requires Boeing to purchase a minimum percentage of
its and its suppliers titanium requirements from TIMET commencing in 1999.
Although Boeing placed orders and accepted delivery of certain volumes in 1999
and 2000, the level of orders placed by Boeing in 1999 and 2000 was
significantly below the contractual volume requirements for those years. Boeing
informed the Company in 1999 that it was unwilling to commit to the contract
beyond the year 2000. The Company presently expects to receive less than the
minimum contractual order volume from Boeing in 2001.
In March 2000, the Company filed a lawsuit against Boeing in a Colorado
state court seeking damages for Boeing's repudiation and breach of the Boeing
contract. TIMET's complaint seeks damages from Boeing that TIMET believes could
be in excess of $600 million and a declaration from the court of TIMET's rights
under the contract. In June 2000, Boeing filed its answer to TIMET's complaint
denying substantially all of TIMET's allegations and making certain
counterclaims against TIMET. TIMET believes such counterclaims are without merit
and intends to vigorously defend against such claims. The litigation is in the
discovery phase, with a trial date currently set for January 2002. The Company
continues to have discussions with Boeing about possible settlement of the
matter. There can be no assurance that the Company will achieve a favorable
outcome to this litigation.
As a complement to the LTA's entered into with the Company's key
customers, the Company has also entered into agreements with certain key
suppliers that are intended to assure anticipated raw material needs to satisfy
production requirements for the Company's key customers. Certain provisions of
these contracts, such as minimum purchase commitments and prices, have been
renegotiated in the past and may be renegotiated in the future to meet changing
business conditions and to address Boeing's underperformance under its LTA.
Acquisitions and Capital Transactions During the Past Five Years. At
the beginning of 1996, the Company was 75%-owned by Tremont Corporation
("Tremont") and its operations were conducted primarily in the United States.
During 1996, the Company expanded both geographically and operationally as a
result of the acquisition of the titanium business of IMI plc, the acquisition
of certain assets from Axel Johnson Metals, Inc. and certain smaller
acquisitions in Europe.
In 1998, TIMET (i) acquired Loterios S.p.A. to increase market share in
industrial markets, and provide increased geographic sales coverage in Europe,
(ii) purchased for cash $80 million of non-voting and non-marketable preferred
securities of Special Metals Corporation, a U.S. manufacturer of wrought
nickel-based superalloys and special alloy long products, and (iii) entered into
a castings joint venture with Wyman-Gordon. In January 2000, the Company sold
its interest in the castings joint venture for $7 million and realized a gain of
$1.2 million on the sale. These transactions are more fully described in Notes
3, 4 and 5 to the Consolidated Financial Statements.
In 1998, Tremont purchased additional TIMET common stock in market
transactions. In 1999, Tremont exercised an option to purchase approximately two
million shares of the Company's common stock. At December 31, 2000, Tremont held
approximately 39% of TIMET's outstanding common stock. An additional 8% of
TIMET's outstanding common stock is owned by the Combined Master Retirement
Trust, a trust formed by Valhi, Inc. ("Valhi"), an affiliate of Tremont, to
permit the collective investment by trusts that maintain the assets of certain
employee benefit plans adopted by Valhi and related entities. See Note 15 to the
Consolidated Financial Statements.
Products and Operations. The Company is a vertically integrated
titanium producer whose products include: titanium sponge, the basic form of
titanium metal used in processed titanium products; melted products comprised of
titanium ingot and slab, the result of melting sponge and titanium scrap, either
alone or with various other alloying elements; and forged and rolled products
produced from ingot or slab, including long products (billet and bar), flat
products (plate, sheet and strip), pipe and pipe fittings. In 2000, all of
TIMET's sales were generated by the Company's integrated titanium operations
(its "Titanium melted and mill products" segment). The titanium product chain is
described below.
Titanium sponge (so called because of its appearance) is the
commercially pure, elemental form of titanium metal. The first step in sponge
production involves the chlorination of titanium-containing rutile ores, derived
from beach sand, with chlorine and coke to produce titanium tetrachloride.
Titanium tetrachloride is purified and then reacted with magnesium in a closed
system, producing titanium sponge and magnesium chloride as co-products. The
Company's titanium sponge production capacity in Henderson, Nevada, incorporates
vacuum distillation process ("VDP") technology, which removes the magnesium and
magnesium chloride residues by applying heat to the sponge mass while
maintaining vacuum in the chamber. The combination of heat and vacuum boils the
residues from the reactor mass into the condensing vessel. The titanium mass is
then mechanically pushed out of the original reactor, sheared and crushed, while
the residual magnesium chloride is electrolytically separated and recycled.
Titanium ingots and slabs are solid shapes (cylindrical and
rectangular, respectively) that weigh up to 8 metric tons in the case of ingots
and up to 16 metric tons in the case of slabs. Each is formed by melting
titanium sponge or scrap or both, usually with various other alloying elements
such as vanadium, aluminum, molybdenum, tin and zirconium. Titanium scrap is a
by-product of the forging, rolling, milling and machining operations, and
significant quantities of scrap are generated in the production process for
finished titanium products. The melting process for ingots and slabs is closely
controlled and monitored utilizing computer control systems to maintain product
quality and consistency and to meet customer specifications. Ingots and slabs
are both sold to customers and further processed into mill products.
Titanium mill products result from the forging, rolling, drawing,
welding and/or extrusion of titanium ingots or slabs into products of various
sizes and grades. These mill products include titanium billet, bar, rod, plate,
sheet, strip, pipe and pipe fittings. The Company sends certain products to
outside vendors for further processing before being shipped to customers or to
the Company's service centers. The Company's customers usually process the
Company's products for their ultimate end-use or for sale to third parties.
During the production process and following the completion of
manufacturing, the Company performs extensive testing on its products, including
sponge, ingot and mill products. Testing may involve chemical analysis,
mechanical testing and ultrasonic and x-ray testing. The inspection process is
critical to ensuring that the Company's products meet the high quality
requirements of customers, particularly in aerospace components production.
The Company is reliant on several outside processors to perform certain
rolling and finishing steps in the U.S., and certain melting, forging and
finishing steps in France. In the U.S., one of the processors that performs
these steps in relation to strip production and another as relates to plate
finishing are owned by a competitor. These processors are currently the sole
source for these services. Other processors used in the U.S. are not
competitors. In France the processor is also a joint venture partner in the
Company's 70%-owned subsidiary, TIMET Savoie. Although the Company believes that
there are other metal producers with the capability to perform these same
processing functions, arranging for alternative processors, or possibly
acquiring or installing comparable capabilities, could take several months and
any interruption in these functions could have a material and adverse effect on
the Company's business, results of operations, financial condition and cash
flows in the short term.
Raw Materials. The principal raw materials used in the production of
titanium mill products are titanium sponge, titanium scrap and alloying
elements. The Company processes rutile ore into titanium tetrachloride and
further processes the titanium tetrachloride into titanium sponge. During 2000,
approximately 25% of the Company's melted and mill product production was made
from internally produced sponge, 29% from purchased sponge, 39% from titanium
scrap and 7% from alloying elements.
The primary raw materials used in the production of titanium sponge are
titanium-containing rutile ore, chlorine, magnesium and petroleum coke.
Titanium-containing rutile ore is currently available from a number of suppliers
around the world, principally located in Australia, South Africa, India and the
United States. A majority of the Company's supply of rutile ore is currently
purchased from Australian suppliers. The Company believes the availability of
rutile ore will be adequate for the foreseeable future and does not anticipate
any interruptions of its raw material supplies, although political or economic
instability in the countries from which the Company purchases its raw materials
could materially and adversely affect availability. Although the Company
believes that the availability of rutile ore is adequate in the near-term, there
can be no assurance that the Company will not experience interruptions. Chlorine
is currently obtained from a single supplier near the Company's sponge plant.
The Company believes that this supplier is experiencing certain financial
difficulties and, accordingly, there can be no assurances the chlorine supply
from this provider may not be interrupted. The Company is in the process of
evaluating whether to make certain equipment modifications to enable it to
utilize alternative chlorine suppliers or to purchase an intermediate product
which will allow the Company to bypass the purchase of chlorine if needed.
Magnesium and petroleum coke are generally available from a number of suppliers.
Various alloying elements used in the production of titanium ingot are available
from a number of suppliers.
While the Company was one of six major worldwide producers of titanium
sponge in 2000, it cannot supply all of its needs for all grades of titanium
sponge internally and is dependent, therefore, on third parties for a
substantial portion of its sponge requirements. Titanium mill and melted
products require varying grades of sponge and/or scrap depending on the
customers' specifications and expected end use. Recently, Allegheny
Technologies, Inc. announced that it was idling its titanium sponge production
facility, making TIMET the only active U.S. producer of titanium sponge. As a
consequence, the Company believes the availability of certain grades of titanium
sponge, principally premium quality sponge, used for certain aerospace
applications currently is tight. Presently, TIMET and certain suppliers in Japan
are the only producers of premium quality sponge. Historically, the Company has
purchased sponge predominantly from producers in Japan and Kazakhstan. In 2001
the Company expects to purchase sponge principally from Japan, Kazakhstan, and
from the U.S. Defense Logistics Agency's stockpile of sponge.
TIMET has a ten year LTA for the purchase of titanium sponge produced
in Kazakhstan to support demand for both aerospace and non-aerospace
applications. The sponge contract runs through 2007, with firm pricing through
2002 (subject to certain possible adjustments and possible early termination in
2004). The contract provides for annual purchases by the Company of 6,000 to
10,000 metric tons. The Company agreed to reduced minimums of 1,000 metric tons
for 2000 and 3,000 metric tons for 2001. The Company has no other long-term
sponge supply agreements.
Markets and Customer Base. About 55% of the Company's 2000 sales were
to customers within North America, with about 40% to European customers and the
balance to other regions. During 1999 and 2000, Precision Castparts Corporation
("PCC") acquired Wyman-Gordon Company and a forging company in the U.K. Sales to
PCC and these related entities aggregated 10% of the Company's net sales in
2000. Approximately 85% of the Company's mill product sales were used by the
Company's customers to produce parts and other materials for the aerospace
industry. Sales under the Company's LTA's with certain major aerospace customers
accounted for approximately 50% of its aerospace sales in 2000. The Company
expects that while a majority of its 2001 sales will be to the aerospace
industry, other markets will continue to represent a significant portion of
sales.
The primary market for titanium products in the commercial aerospace
industry consists of two major manufacturers of large (over 100 seats)
commercial aircraft, European Aeronautic Defence and Space Company (parent
company of the Airbus consortium) and Boeing Commercial Airplane Group, and four
major manufacturers of aircraft engines: Rolls-Royce, Pratt & Whitney (a unit of
United Technologies Corporation), General Electric and SNECMA. The Company's
sales are made both directly to these major manufacturers and to companies
(including forgers such as Wyman-Gordon) that use the Company's titanium to
produce parts and other materials for such manufacturers. If any of the major
aerospace manufacturers were to significantly reduce aircraft build rates from
those currently expected, there could be a material adverse effect, both
directly and indirectly, on the Company.
The Company's order backlog was approximately $245 million at December
31, 2000, compared to $195 million at December 31, 1999 and $350 million at
December 31, 1998. Substantially all of the 2000 year end backlog is scheduled
to be shipped during 2001. Although the Company believes that the backlog is a
reliable indicator of near-term business activity, conditions in the aerospace
industry could change and result in future cancellations or deferrals of
existing aircraft orders and materially and adversely affect the Company's
existing backlog, orders, and future financial condition and operating results.
As of December 31, 2000, the estimated firm order backlog for Boeing
and Airbus, as reported by The Airline Monitor, was 3,224 planes versus 2,943
planes at the end of 1999 and 3,095 planes at the end of 1998. The newer wide
body planes, such as the Boeing 777 and the Airbus A-330 and A-340, tend to use
a higher percentage of titanium in their frames, engines and parts (as measured
by total fly weight) than narrow body planes. "Fly weight" is the empty weight
of a finished aircraft with engines but without fuel or passengers. The Boeing
777, for example, utilizes titanium for approximately 9% of total fly weight,
compared to between 2% to 3% on the older 737, 747 and 767 models. The estimated
firm order backlog for wide body planes at year end 2000 was 751 (23% of total
backlog) compared to 679 (23% of total backlog) at the end of 1999. Although
Airbus has announced that it intends to build the new wide body A380, no orders
for the A380 were included in The Airline Monitor's backlog figures at December
31, 2000 as firm order agreements were unconfirmed. Additionally, the A380 is
still being designed, therefore, reliable estimates of titanium usage on the
A380 are not available at this time.
Through various strategic relationships, the Company seeks to gain
access to unique process technologies for the manufacture of its products and to
expand existing markets and create and develop new markets for titanium. The
Company has explored and will continue to explore strategic arrangements in the
areas of product development, production and distribution. The Company also will
continue to work with existing and potential customers to identify and develop
new or improved applications for titanium that take advantage of its unique
qualities.
Competition. The titanium metals industry is highly competitive on a
worldwide basis. Producers of mill products are located primarily in the United
States, Japan, Europe, Former Soviet Union ("FSU") and China. With the idling of
Allegheny Technologies' sponge manufacturing facility discussed above, the
Company will be one of four integrated producers in the world, with "integrated
producers" being considered as those that produce at least both sponge and
ingot. There are also a number of non-integrated producers that produce mill
products from purchased sponge, scrap or ingot.
The Company's principal competitors in aerospace markets are Allegheny
Technologies Inc., RTI International Metals, Inc. and Verkhanya Salda
Metallurgical Production Organization ("VSMPO"). These companies, along with the
Japanese producers and other companies, are also principal competitors in
industrial markets. The Company competes primarily on the basis of price,
quality of products, technical support and the availability of products to meet
customers' delivery schedules.
In the U.S. market, the increasing presence of non-U.S. participants
has become a significant competitive factor. Until 1993, imports of foreign
titanium products into the U.S. had not been significant. This was primarily
attributable to relative currency exchange rates, tariffs and, with respect to
Japan and the FSU, existing and prior duties (including antidumping duties).
However, imports of titanium sponge, scrap, and mill products, principally from
the FSU, have increased in recent years and have had a significant competitive
impact on the U.S. titanium industry. To the extent the Company has been able to
take advantage of this situation by purchasing such sponge, scrap or
intermediate mill products from such countries for use in its own operations
during recent years, the negative effect of these imports on the Company has
been somewhat mitigated.
Generally, imports into the U.S. of titanium products from countries
designated by the U.S. Government as "most favored nations" are subject to a 15%
tariff (45% for other countries). Titanium products for tariff purposes are
broadly classified as either wrought or unwrought. Wrought products include bar,
sheet, strip, plate and tubing. Unwrought products include sponge, ingot, slab
and billet. Starting in 1993, imports of titanium wrought products from Russia
were exempted from this duty under the "generalized system of preferences" or
"GSP" program designed to aid developing economies.
In 1997, GSP benefits to these products were suspended when the level
of Russian wrought products imports reached 50% of all imports of titanium
wrought products. A petition was filed in 1997 to restore duty-free status to
these products, and that petition was granted in June 1998. In addition, a
petition was also filed to bring unwrought products under the GSP program, which
would allow such products from the countries of the FSU (notably Russia and, in
the case of sponge, Kazakhstan and Ukraine) to be imported into the U.S. without
the payment of regular duties. This petition concerning unwrought products has
not been acted upon pending further investigation of the merits of such a
change. In addition to regular duties, titanium sponge imported from countries
of the FSU (Russia, Kazakhstan and Ukraine) had for many years been subject to
substantial antidumping penalties. Titanium sponge imports from Japan were also
subject to a standing antidumping order, but no penalties had been attached in
recent years. In 1998, the International Trade Commission ("ITC") revoked all
outstanding antidumping orders on titanium sponge based upon a determination
that changed circumstances in the industry did not warrant continuation of the
orders. TIMET has appealed that decision and the matter is still pending.
Further reductions in, or the complete elimination of, all or any of
these tariffs could lead to increased imports of foreign sponge, ingot, and mill
products into the U.S. and an increase in the amount of such products on the
market generally, which could adversely affect pricing for titanium sponge and
mill products and thus the business, financial condition, results of operations
and cash flows of the Company. However, the Company has, in recent years, been a
large importer of foreign titanium sponge and mill products into the U.S. To the
extent the Company remains a substantial purchaser of these products, any
adverse effects on product pricing as a result of any reduction in, or
elimination of, any of these tariffs would be partially ameliorated by the
decreased cost to the Company for these products to the extent it currently
bears the cost of the import duties.
Producers of other metal products, such as steel and aluminum, maintain
forging, rolling and finishing facilities that could be modified without
substantial expenditures to process titanium products. The Company believes,
however, that entry as a producer of titanium sponge would require a significant
capital investment and substantial technical expertise. Titanium mill products
also compete with stainless steels, nickel alloys, steel, plastics, aluminum and
composites in many applications.
Research and Development. The Company's research and development
activities are directed toward expanding the use of titanium and titanium alloys
in all market sectors. This is achieved through developments in process
technology, development of new alloys and products and enhancing the performance
of the Company's existing products. Applications for TIMET's proprietary alloys,
such as TIMETAL(R)834, TIMETAL 5111 and TIMETAL LCB, continue to develop. The
Company conducts the majority of its research and development activities at its
Henderson, Nevada laboratory, which the Company believes is one of the largest
titanium research and development centers in the world. Additional research and
development activities are performed at the Witton facility in Birmingham,
England.
Patents and Trademarks. The Company holds U.S. and non-U.S. patents
applicable to certain of its titanium alloys and manufacturing technology. The
Company continually seeks patent protection with respect to its technical base
and has occasionally entered into cross-licensing arrangements with third
parties. However, most of the titanium alloys and manufacturing technology used
by the Company do not benefit from patent or other intellectual property
protection. The Company believes that the trademarks TIMET(R) and TIMETAL(R),
which are protected by registration in the U.S. and other countries, are
significant to its business.
Employees. The historic cyclical nature of the aerospace business and
its impact on the Company's business is the principal reason that the Company
periodically implements cost reduction, reorganization and other changes that
impact the Company's employment levels. The following table shows the
significant reduction in the number of employees over the past 3 years. The 14%
reduction in employees from 1998 to 1999 was principally in response to a
reduction in market demand. During 2000, the Company reduced employment by an
additional 130 people, or approximately 6% of TIMET's worldwide workforce.
However, in the third quarter of 2000 the Company began increasing production
levels and employment at certain facilities in response to an increase in demand
for its products. During 2001, the Company expects to add approximately 100
people, principally in its manufacturing operations.
Employees at December 31,
-----------------------------------------------------------
1998 1999 2000
------------------ ---------------- -----------------
U.S. 1,715 1,490 1,333
Europe 1,025 860 887
------------------ ---------------- -----------------
Total 2,740 2,350 2,220
================== ================ =================
The Company's production and maintenance workers in Henderson, Nevada
and its production, maintenance, clerical and technical workers in Toronto, Ohio
are represented by the United Steelworkers of America ("USWA") under contracts
expiring in October 2004 and June 2002, respectively. In September 2000, the
Company entered into a new, four-year collective bargaining agreement with the
USWA representing approximately 300 hourly workers at its Henderson, Nevada
facility. Employees at the Company's other U.S. facilities are not covered by
collective bargaining agreements.
Approximately 65% of the salaried and hourly employees at the Company's
European facilities are represented by various European labor unions, generally
under annual agreements.
In March 2001, the Company was notified that certain workers at CEZUS'
plant in Ugine, France were engaged in a work slowdown related to wage and
benefit issues. CEZUS performs certain melting and forging operations on a
contract basis for TIMET Savoie. While this slowdown may adversely impact
shipments by TIMET Savoie to its customers in the near term, based upon the
Company's current understanding of the situation, the Company does not presently
anticipate that this action will have a material adverse effect on the business
or operations of the Company.
While the Company currently considers its employee relations to be
satisfactory, it is possible that there could be future work stoppages that
could materially and adversely affect the Company's business, financial
condition, results of operations or cash flows.
Regulatory and Environmental Matters. The Company's operations are
governed by various Federal, state, local and foreign environmental and worker
safety laws and regulations. In the U.S., such laws include the Occupational,
Safety and Health Act, the Clean Air Act, the Clean Water Act and the Resource
Conservation and Recovery Act. The Company uses and manufactures substantial
quantities of substances that are considered hazardous or toxic under
environmental and worker safety and health laws and regulations. In addition, at
the Company's Henderson, Nevada facility, the Company produces and uses
substantial quantities of titanium tetrachloride, a material classified as
extremely hazardous under Federal environmental laws. The Company has used such
substances throughout the history of its operations. As a result, risk of
environmental damage is inherent in the Company's operations. The Company's
operations pose a continuing risk of accidental releases of, and worker exposure
to, hazardous or toxic substances. There is also a risk that government
environmental requirements, or enforcement thereof, may become more stringent in
the future. There can be no assurances that some, or all, of the risks discussed
under this heading will not result in liabilities that would be material to the
Company's business, results of operations, financial condition or cash flows.
The Company's operations in Europe are similarly subject to foreign
laws and regulations respecting environmental and worker safety matters, which
laws have not had, and are not presently expected to have, a material adverse
effect on the business, financial condition, results of operations or cash flow
of the Company.
The Company believes that its operations are in compliance in all
material respects with applicable requirements of environmental and worker
health and safety laws. The Company's policy is to continually strive to improve
environmental, health and safety performance. From time to time, the Company may
be subject to environmental regulatory enforcement under various statutes,
resolution of which typically involves the establishment of compliance programs.
Occasionally, resolution of these matters may result in the payment of
penalties. The Company incurred capital expenditures for health, safety and
environmental compliance matters of approximately $4 million in each of 1998 and
1999 and $2.6 million in 2000. The Company's capital budget provides for
approximately $2.7 million of such expenditures in 2001. However, the imposition
of more strict standards or requirements under environmental, health or safety
laws and regulations could result in expenditures in excess of amounts estimated
to be required for such matters. See Note 16 to the Consolidated Financial
Statements - "Commitments and Contingencies - Environmental Matters," which
information is incorporated herein by reference.
ITEM 2: PROPERTIES
Set forth below is a listing of the Company's manufacturing facilities.
In addition to its U.S. sponge capacity discussed below, the Company's worldwide
melting capacity in 2001 aggregates approximately 45,000 metric tons (estimated
30% of world capacity), and its mill products capacity aggregates approximately
20,000 metric tons (estimated 16% of world capacity). Approximately 35% of
TIMET's worldwide melting capacity is represented by electron beam cold hearth
melting ("EB") furnaces, 63% by vacuum arc remelting ("VAR") furnaces and 2% by
a vacuum induction melting ("VIM") furnace.
The Company has operated its major production facilities at varying
levels of practical capacity during the past three years. In 1998, the plants
operated at 80% of practical capacity, decreasing to 55% in 1999 and increasing
to approximately 60% in 2000. In 2001, the Company's plants are expected to
operate at 70% to 75% of practical capacity. However, practical capacity and
utilization measures can vary significantly based upon the mix of products
produced. During 1998, the Company closed 2,500 metric tons of melting capacity
by permanently shutting down facilities in Verdi, Nevada and Millbury,
Massachusetts. In 1999, the Company temporarily idled its Kroll-leach process
sponge facility in Nevada due to changing market conditions for certain grades
of titanium sponge.
Annual Practical
Capacities (3) (4)
-----------------------------
Manufacturing Location Products Manufactured Melting Mill Products
----------- -----------------
(metric tons)
Henderson, Nevada(1) Sponge, Ingot 12,250 -
Morgantown, Pennsylvania(1) Slab, Ingot, Raw Materials Processing 20,000 -
Vallejo, California(2) Ingot (including non-titanium superalloys) 1,600 -
Toronto, Ohio(1) Billet, Bar, Plate, Sheet, Strip - 9,900
Witton, England(2) Ingot, Billet, Bar 8,700 8,000
Ugine, France(2) Ingot, Bar, Billet, Wire, Extrusions 2,450 2,000
Waunarlwydd (Swansea), Wales(1) Bar, Plate, Sheet - 3,900
----------------
(1) Owned facilities
(2) Leased facilities
(3) Practical capacities are variable based on production mix
(4) Practical capacities are not additive
TIMET UK's Witton, England facilities are leased pursuant to long-term
capital leases expiring in 2026. TIMET Savoie has the right to utilize portions
of Compagnie Europeene du Zirconium-CEZUS, S.A., ("CEZUS") plant in Ugine,
France pursuant to an agreement expiring in 2006.
United States Production. The Company's VDP sponge facility is expected
to operate at approximately 90% of its annual practical capacity of 8,600 metric
tons during 2001, which is up from approximately 65% in 2000. VDP sponge is used
principally as a raw material for the Company's ingot melting facilities in the
U.S. The Company has expanded the use of VDP sponge to its European facilities
and approximately 1,100 metric tons of VDP production from the Company's
Henderson facility was used in Europe during 2000, which represented
approximately 20% of the sponge consumed in the Company's European operations.
The Company expects the consumption of Henderson produced VDP sponge in its
European operations to be 25% of their sponge requirements in 2001. The raw
materials processing facilities in Morgantown primarily process scrap used as
melting feedstock, either in combination with sponge or separately.
The Company's U.S. melting facilities produce ingots and slabs both
sold to customers and used as feedstock for its mill products operations. These
melting facilities are expected to operate at approximately 75% of aggregate
capacity in 2001.
Titanium mill products are produced by TIMET in the U.S. at its forging
and rolling facility in Toronto, Ohio, which receives intermediate titanium
products principally from the Company's U.S. melting facilities. The Company's
U.S. forging and rolling facilities are expected to operate at approximately 80%
of practical capacity in 2001. Capacity utilization across the Company's product
lines varies.
European Production. TIMET UK's melting facility in Witton, England
produces VAR ingots used primarily as feedstock for its forging operations, also
in Witton. The forging operations process the ingots principally into billet
product for sale to customers or into an intermediate for further processing
into bar and plate at its facility in Waunarlwydd, Wales. U.K. melting and mill
products production in 2001 is expected to be approximately 83% and 70%,
respectively, of capacity.
Capacity of 70%-owned TIMET Savoie in Ugine, France is to a certain
extent dependent upon the level of activity in CEZUS' zirconium business, which
may from time to time provide TIMET Savoie with capacity in excess of that
contractually required to be provided by CEZUS (the 30% minority partner in
TIMET Savoie). During 2001, TIMET Savoie expects to operate close to the maximum
capacity required to be provided by CEZUS.
Sponge for melting requirements in both the U.K. and France that is not
supplied by the Company's U.S. Henderson plant, is purchased principally from
suppliers in Japan and Kazakhstan.
Distribution. The Company sells its products through its own sales force
based in the U.S. and Europe, and through independent agents worldwide. The
Company's marketing and distribution system also includes eight Company-owned
service centers (five in the U.S. and three in Europe), which sell the Company's
products on a just-in-time basis.
The Company believes that it has a competitive sales and cost advantage
arising from the location of its production plants and service centers, which
are in close proximity to major customers. These centers primarily sell
value-added and customized mill products including bar and flat-rolled sheet and
strip. The Company believes its service centers give it a competitive advantage
because of their ability to foster customer relationships, customize products to
suit specific customer requirements and respond quickly to customer needs.
ITEM 3: LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to
claims arising out of its operations in the normal course of business. See Note
16 of the Consolidated Financial Statements, which information is incorporated
herein by reference.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 2000.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
TIMET's common stock is traded on the New York Stock Exchange (symbol:
"TIE"). On March 12, 2001, the closing price of TIMET common stock was $9.30 per
share. The high and low sales prices for the Company's common stock are set
forth below.
Year ended December 31, 1999: High Low
First Quarter $ 9.88 $ 5.69
Second Quarter 12.13 5.81
Third Quarter 13.06 7.13
Fourth Quarter 6.88 4.12
Year ended December 31, 2000: High Low
First Quarter $ 5.50 $ 4.19
Second Quarter 5.00 3.13
Third Quarter 8.94 4.50
Fourth Quarter 8.19 6.00
As of March 12, 2001, there were approximately 7,500 common
shareholders of record.
Starting in the third quarter of 1999, the Company suspended payment of
the regular quarterly common stock dividend. The Company's U.S. credit facility,
which was entered into after the suspension, presently prohibits both the
payment of common stock dividends and common stock repurchases.
ITEM 6: SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in
conjunction with the Company's Consolidated Financial Statements and Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Years Ended December 31,
-------------------------------------------------------------------------
1996(1) 1997 1998 1999 2000
($ in millions, except per share and selling price data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 507.1 $ 733.6 $ 707.7 $ 480.0 $ 426.8
Operating income (loss) 59.8 133.0 82.7 (31.4) (41.7)
Interest expense 9.0 2.0 2.9 7.1 7.7
Net income (loss) 47.6 83.0 45.8 (31.4) (38.9)
Earnings per share (2):
Basic $ 1.72 $ 2.64 $ 1.46 $ (1.00) $ (1.24)
Diluted (3) 1.72 2.49 - - -
Cash dividends per share - - .12 .12 -
BALANCE SHEET DATA:
Cash and cash equivalents $ 86.5 $ 69.0 $ 15.5 $ 20.7 $ 9.8
Total assets 703.0 793.1 953.2 883.1 759.1
Indebtedness (4) 10.5 5.0 105.6 117.4 44.9
Net Debt (7) $ - $ - $ 90.1 $ 96.7 $ 35.1
Capital lease obligations 11.6 11.2 10.3 10.1 8.8
Minority interest - Convertible
Preferred Securities 201.2 201.2 201.2 201.2 201.2
Stockholders' equity 326.2 408.9 448.4 408.1 357.5
OTHER OPERATING DATA:
Cash flows provided (used):
Operating activities $ (.7) $ 72.6 $ 76.1 $ 19.5 $ 63.3
Investing activities (131.4) (79.8) (223.2) (21.7) (4.2)
Financing activities 215.1 (9.8) 92.2 8.6 (70.7)
------------- ----------- ----------- ------------ ----------
Net provided (used) $ 83.0 $ (17.0) $ (54.9) $ 6.4 $ (11.6)
Mill product shipments (6) 12.4 15.1 14.8 11.4 11.4
Average mill product prices (6) $ 32.00 $ 35.00 $ 35.25 $ 33.00 $ 28.70
Melted product shipments (6) 6.0 7.1 3.6 2.5 3.5
Average melted product prices (6) $ 12.55 $ 15.55 $ 18.50 $ 14.20 $ 13.65
Active employees at year end 2,950 3,025 2,740 2,350 2,220
Order backlog at year end (5) $ 440.0 $ 530.0 $ 350.0 $ 195.0 $ 245.0
Capital expenditures $ 21.7 $ 66.3 $ 115.2 $ 24.8 $ 11.2
Notes
(1) Significant acquisitions accounted for by the purchase method were made
during 1996, which included the acquisitions of the titanium metals
businesses of IMI plc and affiliates, Axel Johnson Metals, Inc.
(including the remaining 50% interest in Titanium Hearth Technologies)
and a 70% interest in TIMET Savoie.
(2) Common shares used to compute earnings per share have been adjusted to
reflect the 65-for-1 split of the Company's common stock effected in
connection with TIMET's June 1996 initial public offering of common
stock.
(3) Antidilutive in 1998, 1999 and 2000.
(4) Bank and other debt including loans payable to related parties of $1.0
million in 1996.
(5) "Order backlog" is defined as firm purchase orders (which are generally
subject to cancellation by the customer upon payment of specified
charges).
(6) Shipments in thousands of metric tons; average selling prices stated
per kilogram.
(7) Net debt represents notes payable including long and short term debt,
less cash and cash equivalents.
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
General. The aerospace industry in recent history has accounted for
approximately 75% of U.S. and 40% to 50% of worldwide titanium mill product
consumption. Accordingly, the aerospace industry has a significant effect on the
overall sales and profitability of the titanium metals industry. The aerospace
industry, and consequently the titanium metals industry, is highly cyclical. The
Company estimates that worldwide industry shipments of titanium mill products
peaked in 1997 at approximately 60,000 metric tons. Industry mill product
shipments subsequently declined approximately 5% in 1998 to an estimated 57,000
metric tons; with a further 16% decline to an estimated 48,000 metric tons in
1999 and 2000. The Company expects that worldwide industry mill product
shipments will increase in 2001 by approximately 10% to about 53,000 metric
tons. The expected increase is primarily attributable to stronger demand
resulting from an increase in forecasted commercial aircraft build rates as well
as a decrease in the amount of excess titanium inventory throughout the
aerospace supply chain.
Mill product shipments to the aerospace industry in 2000 represented about
40% of total industry demand and about 85% of the Company's annual mill product
shipments. Aerospace demand for titanium products, which includes both jet
engine components (i.e. blades, discs, rings and engine cases) and air frame
components (i.e. bulkheads, tail sections, landing gears, wing supports and
fasteners) can be broken down into commercial and military sectors. The
commercial aerospace sector has a significant influence on titanium companies,
particularly mill product producers such as TIMET. Industry shipments of mill
products to the commercial aerospace sector in 2000 accounted for approximately
85% of aerospace demand and 35% of aggregate titanium mill product demand. The
Company believes that demand for mill products for the commercial aerospace
sector will be the principal driver of the expected 10% increase in industry
mill product shipments during 2001. Demand growth for these markets and sectors
is expected to exceed the 10% aggregate growth in titanium mill product
shipments while other markets are expected to experience lesser growth.
Shipments to the commercial aerospace sector represented approximately 80% of
the Company's sales volume in 2000. Accordingly, the Company believes its sales
volume in 2001 may increase more than the expected 10% increase in titanium
industry mill product shipments.
The present business environment is substantially different from that
in 1996 to 1998. During the second half of 1998 it became evident that the
anticipated record rates of aircraft production would not be reached and that a
decline in overall production rates would begin earlier than forecast,
particularly in titanium-intensive wide body planes. This resulted in
considerable excess inventory throughout the aerospace supply chain. During
1999, aerospace customers continued to focus on reducing inventories, and a
significant number of the Company's aerospace customers canceled or delayed
previously scheduled orders. The aerospace supply chain is fragmented and
decentralized making it difficult to quantify excess inventories. However,
customer actions such as order delays (i.e. pushouts) and cancellations,
combined with other data provide limited visibility.
During 2000, the Company experienced no significant customer pushouts
or cancellations of deliveries. Late in 2000 and early 2001, the Company
experienced an increase in orders for aerospace quality titanium products, and
certain customers requested advanced delivery of existing orders and its order
backlog increased substantially. Although quantitative information is not
readily available, these factors and others lead the Company to believe that the
excess titanium inventory throughout the supply chain has been substantially
reduced and is unlikely to be a significant factor in 2001 in most areas.
The Company's order backlog increased to approximately $245 million at
December 31, 2000 from $195 million at December 31, 1999 and $350 million at
December 31, 1998. Substantially all of the 2000 year end backlog is scheduled
to be shipped during 2001.
The Company announced selling price increases on new orders for certain
grades of titanium products, principally aerospace quality products, late in
2000 and early in 2001. The 2000 announced price increases ranged from 6% to 12%
while the 2001 announced price increases ranged from 7% to 15%. The price
changes were intended to reflect increases in certain manufacturing costs,
including raw materials and energy, as well as the Company's need to improve
financial performance. The price increases did not apply to certain industrial
products or to orders under LTA's and other agreements with customers that
contain specific provisions governing selling prices. Accordingly, about 40% of
the Company's annual sales are expected to be eligible for these price
increases. Several other titanium companies have also recently announced price
increases, particularly for aerospace quality titanium products. Actual selling
price increases are subject to negotiations with customers and may differ
materially from announced increases.
Outlook. The outlook section contains a number of forward looking
statements, all of which are based on current expectations. Actual results may
differ materially. See Note 16 to the Consolidated Financial Statements -
"Commitments and Contingencies" regarding commitments, contingencies, legal,
environmental, and other matters, which information is incorporated herein by
reference and may affect the Company's future results of operations and
liquidity.
Sales revenue in 2001 is expected to approximate $500 million,
reflecting the combined effects of increased sales volume, price increases on
certain products and changes in product mix. The Company expects its mill
products sales volume to increase 15% to 20% in 2001 compared to 2000 levels,
while melted product sales volume is expected to remain near 2000 levels. The
Company believes its mill products sales volume may grow more than the
forecasted 10% increase in titanium industry shipments because the proportion of
the Company's sales to the commercial aerospace sector (approximately 80% of the
Company's sales) exceeds the total industry mill product shipments to that
sector (approximately 35% of industry mill shipments). Demand growth for the
commercial aerospace sector is expected to exceed the 10% aggregate growth in
titanium industry shipments of mill products while other markets and sectors are
expected to experience lesser growth. Selling prices (expressed in U.S. dollars
using actual currency exchange rates during the respective periods) on aerospace
product shipments, while difficult to forecast, are expected to rise gradually
during 2001. However, the recently announced price increases are expected to
principally affect the second half of 2001 due to associated product lead times.
Average selling prices per kilogram, as reported by the Company, reflect the net
effects of changes in selling prices, currency exchange rates, customer and
product mix. Accordingly, average selling prices are not necessarily indicative
of any one factor.
The Company's cost of sales is affected by a number of factors
including, among others, customer and product mix, material yields, plant
operating rates, raw material costs, labor and energy costs. Restructuring,
asset impairments and other special charges have occurred in the past and may
occur in the future causing operating results to vary from expectations. See
Note 6 to the Consolidated Financial Statements.
Gross margins as a percent of sales are presently expected to increase
over the year, however, energy and other cost increases could substantially
offset expected realized selling price increases in 2001. TIMET is experiencing
increases in energy costs as a result of recent increases in natural gas and
electricity prices in the U.S. The largest portion of the cost increases are
presently associated with electrical power at the Company's Henderson, Nevada
facility where titanium sponge is produced and melted. The Company purchases
electricity from both hydro and fossil fuel sources, with hydropower being
substantially less costly. The Company purchases fossil fuel power to supplement
its electricity needs above the amount it can buy from hydro sources. As the
Company increases production rates during 2001 at its Nevada facility, more
fossil fuel power is required as a percentage of total power consumed. Energy
costs in 2000 comprised about 4% of the Company's cost of sales. Energy costs
may fluctuate substantially from period to period and may adversely affect the
Company's gross margins causing actual results to differ significantly from
expected amounts.
In March 2001, the Company was notified by one of its customers that a
product manufactured from standard grade titanium produced by the Company
contained what has been confirmed to be a tungsten inclusion. The Company
believes that the source of this tungsten was contaminated silicon purchased
from an outside vendor in 1998. The silicon was used as an alloying addition to
the titanium at the melting stage. The Company is currently investigating the
possible scope of this problem, including an evaluation of the identities of
customers who received material manufactured using this silicon and the
applications to which such material has been placed by such customers.
At the present time, the Company is aware of only a single ingot that
has been demonstrated to contain tungsten inclusions; however, further
investigation may identify other material that has been similarly affected.
Until this investigation is completed, the Company is unable to determine the
possible remedial steps that may be required and whether the Company might incur
any material liability with respect to this matter. The Company currently
believes that it is unlikely that its insurance policies will provide coverage
for any costs that may be associated with this matter. However the Company
currently intends to seek full recovery from the silicon supplier for any
liability the Company might incur in this matter, although no assurances can be
given that the Company will ultimately be able to recover all or any portion of
such amounts. At December 31, 2000, the Company had not recorded any liability
related to this matter. The amount of liability the Company may ultimately incur
related to this matter is not reasonably estimable at this time.
In March 2001, the Company was notified that certain workers at CEZUS'
plant in Ugine, France were engaged in a work slowdown related to wage and
benefit issues. CEZUS performs certain melting and forging operations on a
contract basis for TIMET Savoie. While this slowdown may adversely impact
shipments by TIMET Savoie to its customers in the near term, based upon the
Company's current understanding of the situation, the Company does not presently
anticipate that this action will have a material adverse effect on the business
or operations of the Company.
Depreciation and amortization expense for 2001 is expected to
approximate 2000 levels. The Company intends to maintain selling, general,
administrative, and development costs relatively constant as a percent of sales,
however, this is dependent on, among other things, how the business cycle
develops. Interest expense and minority interest expense on the Company's
Convertible Preferred Securities in 2001 is also expected to approximate 2000
levels for the full year. The Company's effective consolidated tax benefit rate
in 2001 should approximate the U.S. statutory rate. However, the Company
operates in several tax jurisdictions and is subject to varying income tax
rates. As a result, the geographic mix of pretax income (loss) can impact the
Company's overall effective tax rate. For financial reporting purposes, the
Company has recognized the tax benefit of substantially all of its net operating
loss carryforwards, and expects that tax benefits to be recognized during 2001
will principally be deferred income tax benefits with cash income tax payments
expected in certain foreign jurisdictions. The Company periodically reviews the
recoverability of its deferred tax assets to determine whether future
realization is more likely than not. Based on such periodic reviews, the Company
could record an additional valuation allowance related to its deferred tax
assets in the future. See Note 13 to the Consolidated Financial Statements. The
Company presently expects to report both an operating loss and a net loss in
2001; however, the Company believes the losses in 2001 will be substantially
reduced from 2000 levels.
The Company expects to generate positive cash flow from operations in
2001, but at levels substantially reduced from 2000. Receivables and inventory
levels are expected to increase in 2001 to support the anticipated increase in
sales whereas both receivables and inventories decreased in 2000. The Company
presently intends to continue to defer dividends on its Convertible Preferred
Securities during 2001. The Company may consider resuming the payment of
dividends on the Convertible Preferred Securities or purchase the securities if
the outlook for TIMET's operating results improves substantially or a favorable
result in the Boeing-related litigation is achieved, or both. Dividends on the
Company's common stock are prohibited under the Company's U.S. credit agreement.
Capital spending for 2001 is currently expected to be $15 million, covering
principally capacity enhancements, capital maintenance, and safety and
environmental projects. Net debt is expected to increase in 2001 as compared to
year end 2000 levels. At December 31, 2000, the Company had approximately $117
million of borrowing availability under its various worldwide credit agreements.
The Company believes its cash, cash flow from operations, and borrowing
availability will satisfy its expected working capital, capital expenditures and
other requirements in 2001.
Historical Operating Information.
Year ended December 31,
-------------------------------------------
1998 1999 2000
----------- ----------- ------------
($ in millions)
Net sales $707.7 $480.0 $426.8
Operating income (loss) 82.7 (31.4) (41.7)
Percent change in:
Mill product sales volume -23 -1
Mill product selling prices (1) -8 -9
Melted product sales volume -31 +39
Melted product selling prices (1) -17 -10
(1) Change expressed in U.S. dollars
Net Sales and Operating Loss - 2000 Compared to 1999. Sales of mill
products in 2000 declined 13% from $376.2 million in 1999 to $326.3 million in
2000. This decrease is due to a 9% decline in mill product selling prices
(expressed in U.S. dollars using actual foreign currency exchange rates
prevailing during the respective periods), a less than 1% decrease in sales
volume, and changes in product mix. In billing currencies (which exclude the
effects of foreign currency translation), mill product selling prices declined
7% from 1999. Melted product sales increased 33% from $35.5 million in 1999 to
$47.4 million in 2000 due to the net effects of a 39% increase in melted product
sales volume, a 10% decline in melted product selling prices and changes in
product mix. The decrease in the selling prices was principally due to greater
price competition in the Company's non-LTA business.
Early in 2000, the Company implemented a plan to address then-current
market and operating conditions, which resulted in the recognition of a net $2.8
million restructuring charge in 2000. The restructuring charge is included in
the operating loss of the "Titanium melted and mill products" segment and is
principally related to personnel severance and benefits for the approximately
170 employees terminated as part of the restructuring. Additionally, the Company
recorded net special charges of $3.5 million, consisting of $3.4 million of
equipment related impairment charges, $3.3 million of environmental remediation
charges, a special income item of $2.0 million related to the termination of the
Company's 1990 agreement to sell titanium sponge to Union Titanium Sponge
Corporation, and the $1.2 million gain on the sale of the Company's castings
joint venture.
Total cost of sales in 2000 was 99% of sales compared to 95% in 1999.
The increase in the percentage is principally the result of lower average
selling prices and a shift in product mix, partially offset by lower raw
material costs and lower operating expenses. Selling, general, administrative
and development expenses decreased 9% in 2000 compared to 1999 principally due
to the impact of the restructuring plan implemented in early 2000 as well as
reduced expenses related to the business-enterprise information system project
that was completed in early 1999 and "Year 2000" computer systems expenses which
were incurred in 1999 but not 2000.
Equity in earnings (losses) of joint ventures of the "Titanium melted
and mill products" segment in 2000 decreased by $1.4 million from 1999
principally due to the decline in earnings of Valtimet, the Company's 46%-owned
welded tube joint venture.
Sales and Operating Income - 1999 Compared to 1998. The "Titanium
melted and mill product" segment net sales in 1999 decreased 30% compared to
1998 primarily due to a 23% decrease in mill products shipment volume resulting
primarily from reduced demand in the aerospace market. Mill product selling
prices (expressed in U.S. dollars using actual foreign currency exchange rates
prevailing during the respective periods) for 1999 were approximately 8% lower
than 1998 reflecting both the price effect of long-term agreements and increased
price competition on non-LTA business. In billing currencies, mill product
selling prices declined 7% from 1998. As described in Note 9 to the Consolidated
Financial Statements, the Company produced approximately $16 million of titanium
ingots in 1999, for which the customer was billed but income recognition was
deferred. Approximately 72% of this material was shipped in 2000.
The decrease in net sales of the "Other" segment is a result of the
Company's ceasing to consolidate its castings business after July 1998. See Note
4 to the Consolidated Financial Statements.
Total cost of sales in 1999 was 95% of sales compared to 77% in 1998.
The increase in the percentage is a result of the lower selling prices, lower
production volumes, higher depreciation, and increased reserves for slow-moving
inventory. Yield, rework and deviated material costs were also higher and plant
operating rates were lower. Selling, general, administrative and developmental
expenses in 1999 were lower than 1998 in dollar terms due in large part to the
completion of the implementation of the initial phase of the Company's
business-enterprise system during the first half of 1999. These costs as a
percentage of sales, however, increased to approximately 10% primarily due to
the decline in sales.
In the fourth quarter of 1999, the Company recorded $6.8 million of
special charges consisting of $4.5 million of restructuring charges and $2.3
million of write-downs associated with the Company's investment in certain
start-up joint ventures. During the same quarter, the Company also recorded a
$4.3 million charge to cost of sales for slow-moving inventory. Approximately
half of the restructuring charges were non-cash, primarily related to the
disposition of a Germany subsidiary, with the cash component relating to the
termination of 100 people. The $4.3 million charge for slow-moving inventory and
$4.7 million of the $6.8 million of special charges are included in the
operating loss of the "Titanium melted and mill products" segment in 1999.
Operating income of the "Titanium melted and mill products" segment in 1998
included special charges of $19.5 million. Operating losses of the "Other"
segment included $4.5 million and $2.1 million of special charges in 1998 and
1999, respectively. See Note 6 to the Consolidated Financial Statements.
Equity in earnings (losses) of joint ventures of the "Titanium melted
and mill products" segment decreased by $1.3 million from 1998 principally due
to the decline in earnings of Valtimet. Equity in losses of the "Other" segment
were higher in 1999 due to the Company's recording a higher share of the losses
for a full year in 1999 as a result of increased ownership in certain of these
ventures in mid-1998.
Other Income, net. Other income, net, consists of the following:
1998 1999 2000
--------------- --------------- --------------
Dividends and interest income $ 6,303 $ 6,034 $ 6,154
General corporate income (expense), net (243) (1,246) 67
Other 799 164 2,156
--------------- --------------- --------------
$ 6,859 $ 4,952 $ 8,377
=============== =============== ==============
In 1999 and 2000, dividends and interest income consisted principally
of dividends on $80 million of non-voting preferred securities of Special Metals
Corporation, which were purchased by the Company in October 1998. In 1998, the
amount represented primarily earnings on corporate cash equivalents. General
corporate income (expense) consisted principally of currency transaction
gains/losses. In 2000, net currency losses of $1.1 million were offset by a $1.2
million gain on the sale of the Company's castings joint venture. In 2000, other
income consisted principally of $2 million received from UTSC in connection with
the termination of the sponge purchase agreement between the Company and UTSC as
more fully described in Note 15 to the Consolidated Financial Statements.
European Operations. The Company has substantial operations and assets
located in Europe, principally the United Kingdom, with smaller operations in
France, Italy and Germany. Titanium is a worldwide market and the factors
influencing the Company's U.S. and European operations are substantially the
same.
Approximately 60% of the Company's European sales are denominated in
currencies other than the U.S. dollar, principally the British pound and
European currencies tied to the euro. Certain purchases of raw materials,
principally titanium sponge and alloys, for the Company's European operations
are denominated in U.S. dollars, while labor and other production costs are
primarily denominated in local currencies. The functional currencies of the
Company's European subsidiaries are those of their respective countries; thus,
the U.S. dollar value of these subsidiaries' sales and costs denominated in
currencies other than their functional currency, including sales and costs
denominated in U.S. dollars, are subject to exchange rate fluctuations which may
impact reported earnings and may affect the comparability of period-to-period
operating results. Borrowings of the Company's European operations may be in
U.S. dollars or in functional currencies. The Company's export sales from the
U.S. are denominated in U.S. dollars and as such are not subject to currency
exchange rate fluctuations.
The Company does not use currency contracts to hedge its currency
exposures. Net currency transaction gains/losses included in earnings were
losses of $1.2 million and $1.1 million in 1999 and 2000, respectively, and a
$.4 million gain in 1998. At December 31, 2000, consolidated assets and
liabilities denominated in currencies other than functional currencies were
approximately $21 million and $19 million, respectively, consisting primarily of
U. S. dollar cash, accounts receivable, accounts payable and borrowings.
Exchange rates among 11 European currencies (including the French franc, Italian
lira and German mark, but excluding the British pound) became fixed relative to
each other as a result of the implementation of the euro effective in 1999.
Costs associated with modifications of systems to handle euro-denominated
transactions are not expected to be significant.
Interest Expense. Interest expense for 2000 increased over 1999 due to
the net effect of increased interest rates related to U.S. credit facilities
entered into in early 2000, lower average borrowings outstanding during the year
and a lower level of capitalized interest. Interest expense for 1999 more than
doubled from the levels of 1998 primarily due to higher levels of average debt
and increased interest rates. Also contributing to the higher comparative
interest expense was a lower level of interest capitalized in 1999 compared to
1998 as major capital projects were completed.
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 (loss) can impact the Company's overall effective tax rate. For financial
reporting purposes, the Company has recognized the tax benefit of substantially
all of its net operating loss carryforwards and expects that tax benefits to be
recognized during 2001 will be deferred income tax benefits. The Company expects
to make cash income tax payments in certain foreign jurisdictions in 2001. See
Note 13 to the Consolidated Financial Statements.
Minority Interest. Annual dividend expense related to the Company's
6.625% Convertible Preferred Securities approximates $13 million and is reported
as minority interest net of allocable income taxes. Other minority interest
relates primarily to the 30% interest in TIMET Savoie held by CEZUS.
Extraordinary Item. During 2000, the deferred financing costs associated
with the Company's prior U.S. credit facility were written off and reflected as
an extraordinary item of $.9 million after taxes in the Consolidated Statements
of Operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows provided by operating, investing
and financing activities for each of the past three years are presented below.
Year ended December 31,
----------------------------------------------------
1998 1999 2000
--------------- -------------- ---------------
(In thousands)
Cash provided (used) by:
Operating activities:
Excluding changes in assets and liabilities $108,660 $ 23,958 $ (4,119)
Changes in assets and liabilities (32,543) (4,415) 67,447
--------------- -------------- ---------------
76,117 19,543 63,328
Investing activities (223,215) (21,663) (4,218)
Financing activities 92,232 8,563 (70,678)
--------------- -------------- ---------------
Net cash provided (used) by operating,
investing and financing activities $(54,866) $ 6,443 $(11,568)
=============== ============== ===============
Operating Activities. Cash provided by operating activities was
approximately $63 million in 2000, $19 million in 1999 and $76 million in 1998.
Cash provided by operating activities, excluding changes in assets and
liabilities, during the past three years generally follows the trend in
operating results. Changes in assets and liabilities reflect the timing of
purchases, production and sales, and can vary significantly from period to
period. Accounts receivable provided cash in 1998, 1999 and 2000 reflecting the
decrease in sales levels as well as an improvement, particularly in 2000, in
collections as reflected by a decrease in the average number of days that
receivables are outstanding. The significant reduction in receivables in 2000
was also attributable to $16 million of customer payments received in the first
quarter of 2000 related to a bill-and-hold arrangement near the end of 1999. See
Note 9 to the Consolidated Financial Statements.
Inventories increased significantly in 1998, reflecting material
purchases and production rates that were based on expected sales levels higher
than the actual sales level turned out to be. The Company reduced inventories
during 1999 and 2000 as excess raw materials and other inventory items were
consumed and inventory reduction and control efforts were put in place.
Changes in net current income taxes payable decreased in 1998 in part
due to the delayed timing of cash payments for taxes in Europe relative to
earnings. In 1999, income taxes payable decreased as the 1999 losses were
carried back to recover a portion of prior years' taxes paid. Changes in income
taxes in 2000 primarily reflects net tax refunds of $8 million. Changes in
accounts with related parties resulted primarily from relative changes in
receivable levels with joint ventures in 1998, 1999 and 2000.
In April 2000, the Company exercised its right to defer future dividend
payments on its outstanding 6.625% Convertible Preferred Securities for a period
of 10 quarters (subject to possible further extension for up to an additional 10
quarters), although interest continues to accrue at the coupon rate on the
principal and unpaid dividends. Changes in accrued dividends on Convertible
Preferred Securities reflects accrued but unpaid dividends.
Restructuring and other special items are described in Note 6 to the
Consolidated Financial Statements.
Investing Activities. The Company's capital expenditures were $11 million
in 2000, down from $25 million in 1999 and $115 million in 1998. Capital
spending for 2000 was principally for capacity enhancements, capital
maintenance, and safety and environmental projects. Capital expenditures in 1999
were primarily related to the expansion of forging capacity at the Toronto, Ohio
facility, the installation of the business-enterprise system in Europe and
various environmental and other projects. About one-half of capital expenditures
during 1998 related to capacity expansion projects associated with long-term
customer agreements.
Approximately 10% of the Company's capital spending in 1999 related to
the major business-enterprise information systems and information technology
project implemented at various sites throughout the Company. Approximately
one-fourth of the 1998 capital spending related to this project. The new system
was implemented in stages in the U.S. during 1998, with initial implementation
substantially completed with the rollout to the U.K. in February 1999. Certain
costs associated with the business-enterprise information systems project,
including training and reengineering, were expensed as incurred.
Cash used for business acquisitions and joint ventures in 1998 related
primarily to the Loterios and Wyman-Gordon transactions more fully described in
Notes 3 and 4 to the Consolidated Financial Statements.
Proceeds from sale of joint venture in 2000 represents the proceeds
from the Company's sale to Wyman-Gordon of the Company's 20% interest in
Wyman-Gordon Titanium Castings, LLC. This transaction is more fully described in
Note 4 to the Consolidated Financial Statements.
In October 1998, the Company purchased for cash $80 million of Special
Metals Corporation 6.625% convertible preferred stock (the "SMC Preferred
Stock") in conjunction with, and concurrent with, SMC's acquisition of the Inco
Alloys International high performance nickel alloys business unit of Inco
Limited ("Inco"). Dividends on the SMC Preferred Stock had previously been
deferred by SMC due to limitations imposed by SMC's bank credit agreements.
During 2000, TIMET received three quarterly dividends from SMC and received a
fourth dividend in January 2001; however, there can be no assurances that TIMET
will continue to receive regular quarterly dividends. SMC has filed a lawsuit
against Inco alleging that Inco made fraudulent misrepresentations in connection
with SMC's acquisition, which action is still pending.
Financing Activities. At December 31, 2000, the Company's net debt was
approximately $35.1 million ($44.9 million of notes payable and debt,
principally borrowings under the Company's U.S. and U.K. credit agreements less
$9.8 million of cash and equivalents). At December 31, 2000, the Company had
about $117 million of borrowing availability under its various worldwide credit
agreements.
Early in 2000, the Company completed a $125 million, three-year
U.S.-based revolving credit agreement replacing its previous U.S. bank credit
facility. Borrowings under the credit agreement are limited to a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and equipment. The credit agreement limits additional indebtedness,
prohibits the payment of common stock dividends, and contains other covenants
customary in lending transactions of this type. The Company also increased its
U.K. credit agreement from (pound)18 million ($29 million) to (pound)30 million
($48 million) with its existing U.K. lender in 2000. The Company believes that
its U.S. and U.K. credit facilities will provide it with the liquidity necessary
for current market and operating conditions.
Net repayments of $70 million in 2000 reflect reductions of outstanding
borrowings principally in the U.S. resulting from collection of receivables,
reduction in inventories, tax refunds, the sale of the Company's casting joint
venture and deferral of dividend payments on the Company's Convertible Preferred
Securities. Net borrowings of $13 million in 1999 and $97 million in 1998 were
primarily to fund capital expenditures and the 1998 Loterios acquisition.
In November 1999, the Company's Board of Directors voted to suspend the
regular quarterly dividend on its common stock in view of, among other things,
the continuing weakness in overall market demand for titanium metal products.
The Company's U.S. credit agreement, entered into in early 2000, after such
suspension, prohibits the payment of dividends on the Company's common stock and
the repurchase of common shares.
The Company's Convertible Preferred Securities do not require principal
amortization, and TIMET has the right to defer dividend payments for one or more
periods of up to 20 consecutive quarters for each period. In April 2000, the
Company exercised its right to defer future dividend payments on these
securities for a period of 10 quarters (subject to possible further extension
for up to an additional 10 quarters), although interest will continue to accrue
at the coupon rate on the principal and unpaid dividends. The Company may
consider resuming payment of dividends on the Convertible Preferred Securities
or purchase the securities if the outlook for TIMET's results from operations
improves substantially or a favorable result in the Boeing-related litigation is
achieved, or both. As of December 31, 2000, accrued dividends on the Company's
Convertible Securities are reflected as noncurrent liabilities in the
consolidated balance sheet.
The Company periodically evaluates its liquidity requirements, capital
needs and availability of resources in view of, among other things, its
alternative uses of capital, its debt service requirements, the cost of debt and
equity capital, and estimated future operating cash flows. As a result of this
process, the Company has in the past and, in light of its current outlook, may
in the future seek to raise additional capital, modify its common and preferred
dividend policies, restructure ownership interests, incur, refinance or
restructure indebtedness, repurchase shares of capital stock, sell assets, or
take a combination of such steps or other steps to increase or manage its
liquidity and capital resources.
In the normal course of business, the Company investigates, evaluates,
discusses and engages in acquisition, joint venture, strategic relationship and
other business combination opportunities in the titanium, specialty metal and
related industries. In the event of any future acquisition or joint venture
opportunities, the Company may consider using then-available liquidity, issuing
equity securities or incurring additional indebtedness.
Environmental Matters.
See Item 1 - "Business--Regulatory and Environmental Matters" and Note
16 to the Consolidated Financial Statements for a discussion of environmental
matters.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The Company is exposed to market risk from changes in foreign
currency exchange rates and interest rates. The Company typically does not enter
into interest rate swaps or other types of contracts in order to manage its
interest rate market risk and typically does not enter into currency forward
contracts to manage its foreign exchange market risk associated with
receivables, payables and indebtedness denominated in a currency other than the
functional currency of the particular entity.
Interest Rates. The Company is exposed to market risk from changes in
interest rates related to indebtedness. At December 31, 2000 substantially all
of the Company's indebtedness was denominated in U.S. dollars or the British
pound sterling and bore interest at variable rates, primarily related to spreads
over LIBOR, as summarized below.
Contractual maturity date (1)
--------------------------------------------------------------------- Interest
2001 2002 2003 2004 2005 rate (2)
----------- ---------- ----------- ---------- ----------- ------------
(In millions)
Variable rate debt:
U. S. dollars $ 22.1 $ - $ 5.4 $ - $ - 8.70%
British pounds 1.5 1.5 1.5 1.5 8.9 7.85%
Italian lira 1.8 .2 - - - 5.60%
French francs .5 - - - - 6.60%
(1) Non-U. S. dollar denominated amounts are translated at year-end rates of exchange.
(2) Weighted average.
At December 31, 1999, substantially all of the Company's outstanding
indebtedness consisted of U.S. dollar-denominated variable rate debt.
Foreign Currency Exchange Rates. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of its
international operations. See Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations -Results of Operations - European
Operations," which information is incorporated herein by reference.
Other. The Company holds $80 million of preferred securities that are
not publicly traded, are accounted for by the cost method and are considered
"held-to-maturity" securities. See Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources - Investing Activities" and Note 5 to the Consolidated
Financial Statements.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in a separate
section of this Annual Report. See "Index of Financial Statements and Schedules"
on page F.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
TIMET's definitive proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of the
fiscal year covered by this Annual Report (the "TIMET Proxy Statement").
ITEM 11: EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the TIMET Proxy Statement.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the TIMET Proxy Statement.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the TIMET Proxy Statement. See also Note 15 to the Consolidated Financial
Statements.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
The consolidated financial statements and schedules listed by
the Registrant on the accompanying Index of Financial Statements and Schedules
(see page F) are filed as part of this Annual Report.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended December 31, 2000 and the months
of January and February 2001:
Date of Report Items Reported
------------------------------------- ----------------------------------
October 2, 2000 - 5 and 7
October 19, 2000 - 5 and 7
January 11, 2001 - 5 and 7
January 12, 2001 - 5 and 7
January 29, 2001 - 5 and 7
(c) Exhibits
Included as exhibits are the items listed in the Exhibit
Index. TIMET will furnish a copy of any of the exhibits listed below upon
payment of $4.00 per exhibit to cover the costs to TIMET of furnishing the
exhibits. Instruments defining the rights of holders of long-term debt issues
which do not exceed 10% of consolidated total assets will be furnished to the
Commission upon request.
Item No. Exhibit Index
3.1 Amended and Restated Certificate of Incorporation of Titanium
Metals Corporation, incorporated by reference to Exhibit 3.1
to Titanium Metals Corporation's Registration Statement on
Form S-1 (No. 333-2940).
3.2 Bylaws of Titanium Metals Corporation as Amended and
Restated, dated February 23, 1999, incorporated by reference
to Exhibit 3.2 to Titanium Metals Corporation's Annual Report
on Form 10-K (No. 1-14368) for the year ended
December 31, 1998.
4.1 Certificate of Trust of TIMET Capital Trust I, dated
November 13, 1996, incorporated by reference to Exhibit 4.1
to Titanium Metals Corporation's Current Report on Form 8-K
filed with the Commission on December 5, 1996.
4.2 Amended and Restated Declaration of Trust of TIMET Capital
Trust I, dated as of November 20, 1996, among Titanium Metals
Corporation, as Sponsor, the Chase Manhattan Bank, as
Property Trustee, Chase Manhattan Bank (Delaware), as
Delaware Trustee and Joseph S. Compofelice, Robert E.
Musgraves and Mark A. Wallace, as Regular Trustees,
incorporated by reference to Exhibit 4.2 to the Registrant's
Current Report on Form 8-K filed with the Commission on
December 5, 1996.
4.3 Indenture for the 6 5/8% Convertible Junior Subordinated
Debentures, dated as of November 20, 1996, among Titanium
Metals Corporation and The Chase Manhattan Bank, as Trustee,
incorporated by reference to Exhibit 4.3 to the Registrant's
Current Report on Form 8-K filed with the Commission on
December 5, 1996.
4.4 Form of 6 5/8% Convertible Preferred Securities (included in
Exhibit 4.2 above), incorporated by reference to Exhibit 4.4
to the Registrant's Current Report on Form 8-K filed with
the Commission on December 5, 1996.
4.5 Form of 6 5/8% Convertible Junior Subordinated Debentures
(included in Exhibit 4.3 above), incorporated by reference
to Exhibit 4.6 to the Registrant's Current Report on Form 8-K
filed with the Commission on December 5, 1996.
4.6 Form of 6 5/8% Trust Common Securities (included in
Exhibit 4.2 above), incorporated by reference to Exhibit 4.5
to the Registrant's Current Report on Form 8-K filed with
the Commission on December 5, 1996.
4.7 Convertible Preferred Securities Guarantee, dated as of
November 20, 1996, between Titanium Metals Corporation, as
Guarantor, and The Chase Manhattan Bank, as Guarantee
Trustee, incorporated by Reference to Exhibit 4.7 to the
Registrant's Current Report on Form 8-K filed with the
Commission on December 5, 1996.
9.1 Shareholders' Agreement, dated February 15, 1996, among
Titanium Metals Corporation, Tremont Corporation, IMI plc,
IMI Kynoch Ltd., and IMI Americas, Inc., incorporated by
reference to Exhibit 2.2 to Tremont Corporation's Current
Report on Form 8-K (No. 1-10126) filed with the Commission
on March 1, 1996.
9.2 Amendment to the Shareholders' Agreement, dated
March 29, 1996, among Titanium Metals Corporation,
Tremont Corporation, IMI plc, IMI Kynoch Ltd., and
IMI Americas, Inc., incorporated by reference to Exhibit
10.30 to Tremont Corporation's Annual Report on Form 10-K
(No. 1-10126) for the year ended December 31, 1995.
10.1 Lease Agreement, dated January 1, 1996, between Holford
Estates Ltd. and IMI Titanium Ltd. related to the building
known as Titanium Number 2 Plant at Witton, England,
incorporated by reference to Exhibit 10.23 to Tremont
Corporation's Annual Report on Form 10-K (No. 1-10126) for
the year ended December 31, 1995.
10.2 Purchase Agreement, dated November 20, 1996, between Titanium
Metals Corporation, TIMET Capital Trust I, Salomon Brothers
Inc, Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley & Co. Incorporated, as Initial Purchasers,
incorporated by reference to Exhibit 99.1 to the Registrant's
Current Report on Form 8-K filed with the Commission on
December 5, 1996.
10.3 Registration Agreement, dated November 20, 1996, between
TIMET Capital Trust I and Salomon Brothers Inc, as
Representative of the Initial Purchasers, incorporated by
reference to Exhibit 99.2 to the Registrant's Current Report
on Form 8-K filed with the Commission on December 5, 1996.
10.4 Loan and Security Agreement by and among Congress Financial
Corporation (Southwest) as Lender and Titanium Metals
Corporation and Titanium Hearth Technologies, Inc. as
borrowers, dated February 25, 2000, incorporated by reference
to Exhibit 10.12 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999.
10.5 Investment Agreement dated July 9, 1998, between Titanium
Metals Corporation, TIMET Finance Management Company and
Special Metals Corporation, incorporated by reference to
Exhibit 10.1 to the Registrant's Current Report on Form 8-K
dated July 9, 1998.
10.6 Amendment to Investment Agreement, dated October 28, 1998,
among Titanium Metals Corporation, TIMET Finance Management
Company and Special Metals Corporation, incorporated by
reference to Exhibit 10.4 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.
10.7 Registration Rights Agreement, dated October 28, 1998,
between TIMET Finance Management Company and Special Metals
Corporation, incorporated by reference to Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.
10.8 Certificate of Designations for the Special Metals
Corporation Series A Preferred Stock, filed on October 28,
1998, with the Secretary of State of Delaware, incorporated
by reference to Exhibit 4.5 of a Current Report on Form 8-K
dated October 28, 1998, filed by Special Metals Corporation
(No. 000-22029).
10.9 Intercorporate Services Agreement between Titanium Metals
Corporation and Tremont Corporation, effective as of January
1, 2000, incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000.
10.10 Intercorporate Services Agreement between Titanium Metals
Corporation and NL Industries, Inc. effective as of January
1, 2000, incorporated by reference to Exhibit 10.4 to a
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000 filed by NL Industries, Inc. (No. 1-640).
10.11* 1996 Long Term Performance Incentive Plan of Titanium
Metals Corporation, incorporated by reference to Exhibit
10.19 to Titanium Metals Corporation's Amendment No. 1 to
Registration Statement on Form S-1 (No.333-18829).
10.12* Titanium Metals Corporation Amended and Restated 1996
Non-Employee Director Compensation Plan, as amended and
restated effective February 28, 2001.
10.13* Senior Executive Cash Incentive Plan, incorporated by
reference to Appendix B to Titanium Metals Corporation's
proxy statement included as part of a statement on Schedule
14A dated April 17, 1997.
10.14* Executive Severance Policy, as amended and restated effective
May 17, 2000, incorporated by reference to Exhibit 10.3
to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000.
10.15* Severance Agreement between Titanium Metals Corporation and
Andrew R. Dixey dated February 25, 2000, incorporated by
reference to Exhibit 10.19 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1999.
10.16* Executive Agreement dated as of September 27, 1996, between
Titanium Hearth Technologies, Inc. and Charles H.
Entrekin, Jr., incorporated by reference to Exhibit 10.22
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1999.
10.17* Titanium Metals Corporation Executive Stock Ownership Loan
Plan, as amended and restated effective February 28, 2001.
10.18* Form of Loan and Pledge Agreement by and between Titanium
Metals Corporation and individual TIMET executives under the
Corporation's Executive Stock Ownership Loan Program.
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
99.1 Complaint and Jury Demand filed by Titanium Metals
Corporation against The Boeing Company in District Court,
City and County of Denver, State of Colorado, on March 21,
2000, Case No. 00CV1402, including Exhibit A, Purchase and
Sale Agreement (for titanium products) dated as of November
5, 1997 by and between The Boeing Company, acting through its
division, Boeing Commercial Airplane Group, and Titanium
Metals Corporation, incorporated by reference to Exhibit 99.2
to the Registrant's Current Report on Form 8-K dated March
22, 2000.
* Management contract, compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TITANIUM METALS CORPORATION
(Registrant)
By /s/ J. Landis Martin
J. Landis Martin, March 20, 2001
(Chairman of the Board, President
and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
/s/ J. Landis Martin /s/ Steven L. Watson
J. Landis Martin, March 20, 2001 Steven L. Watson, March 20, 2001
(Chairman of the Board, President (Director)
and Chief Executive Officer)
/s/ Edward C. Hutcheson, Jr. /s/ Thomas P. Stafford
Edward C. Hutcheson, Jr., March 20, 2001 Thomas P. Stafford, March 20, 2001
(Director) (Director)
/s/ Glenn R. Simmons /s/ Mark A. Wallace
Glenn R. Simmons, March 20, 2001 Mark A. Wallace, March 20, 2001
(Director) (Executive Vice President and
Chief Financial Officer)
/s/ JoAnne A. Nadalin
JoAnne A. Nadalin, March 20, 2001
Vice President and Corporate Controller
(Principal Accounting Officer)
TITANIUM METALS CORPORATION
ANNUAL REPORT ON FORM 10-K
ITEMS 8, 14(a) and 14(d)
INDEX OF FINANCIAL STATEMENTS AND SCHEDULES
Page
Financial Statements
Report of Independent Accountants F-1
Consolidated Balance Sheets - December 31, 1999 and 2000 F-2/F-3
Consolidated Statements of Operations - Years ended
December 31, 1998, 1999 and 2000 F-4
Consolidated Statements of Comprehensive Income - Years ended
December 31, 1998, 1999 and 2000 F-5
Consolidated Statements of Cash Flows - Years ended
December 31, 1998, 1999 and 2000 F-6/F-7
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1998, 1999 and 2000 F-8
Notes to Consolidated Financial Statements F-9/F-35
Financial Statement Schedules
Report of Independent Accountants S-1
Schedule II - Valuation and qualifying accounts S-2
F
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Titanium Metals Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of comprehensive income, of
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Titanium Metals Corporation and Subsidiaries as of
December 31, 1999 and 2000 and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Denver, Colorado
January 29, 2001
F-1
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 2000
(In thousands, except per share data)
ASSETS 1999 2000
-------------- ---------------
Current assets:
Cash and cash equivalents $20,671 $ 9,796
Accounts and other receivables, less
allowance of $3,330 and $2,927 106,204 75,913
Receivable from related parties 4,071 5,029
Refundable income taxes 10,651 637
Inventories 191,535 148,384
Prepaid expenses and other 7,177 8,049
Deferred income taxes 2,250 397
-------------- ---------------
Total current assets 342,559 248,205
-------------- ---------------
Other assets:
Investment in joint ventures 26,938 18,136
Preferred securities 80,000 80,000
Accrued dividends on preferred securities 6,530 8,136
Goodwill 54,789 49,305
Other intangible assets 16,326 13,258
Deferred income taxes 9,600 27,820
Other 12,598 12,156
-------------- ---------------
Total other assets 206,781 208,811
-------------- ---------------
Property and equipment:
Land 6,230 6,158
Buildings 38,177 37,593
Information technology systems 55,877 54,426
Manufacturing and other 317,792 305,856
Construction in progress 8,121 8,811
-------------- ---------------
426,197 412,844
Less accumulated depreciation 92,432 110,714
-------------- ---------------
Net property and equipment 333,765 302,130
-------------- ---------------
$883,105 $759,146
============== ===============
See accompanying notes to consolidated financial statements.
F-2
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 1999 and 2000
(In thousands, except per share data)
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY 1999 2000
-------------- ---------------
Current liabilities:
Notes payable $ 9,635 $ 24,112
Current maturities of long-term debt and
capital lease obligations 85,679 2,011
Accounts payable 48,679 50,456
Accrued liabilities 42,879 36,180
Payable to related parties 1,984 1,099
Income taxes 516 852
Deferred income taxes 5,049 1,132
-------------- ---------------
Total current liabilities 194,421 115,842
-------------- ---------------
Noncurrent liabilities:
Long-term debt 22,425 18,953
Capital lease obligations 9,776 8,642
Payable to related parties 1,332 1,332
Accrued OPEB cost 19,961 18,219
Accrued pension cost 5,634 5,361
Accrued environmental cost - 3,262
Deferred income taxes 12,950 9,655
Accrued dividends on Convertible Preferred Securities - 11,154
Other - 117
-------------- ---------------
-------------- ---------------
Total noncurrent liabilities 72,078 76,695
-------------- ---------------
Minority interest - Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debt securities ("Convertible Preferred Securities") 201,250 201,250
Other minority interest 7,275 7,844
Stockholders' equity:
Preferred stock $.01 par value; 1,000 shares authorized,
none outstanding - -
Common stock, $.01 par value; 99,000 shares authorized,
31,461 and 31,907 shares issued, respectively 315 319
Additional paid-in capital 347,984 350,078
Retained earnings 64,827 25,925
Accumulated other comprehensive income (loss) (3,837) (16,408)
Treasury stock, at cost (90 shares) (1,208) (1,208)
Deferred compensation - (1,191)
-------------- ---------------
-------------- ---------------
Total stockholders' equity 408,081 357,515
-------------- ---------------
$883,105 $759,146
============== ===============
Commitments and contingencies (Note 16)
See accompanying notes to consolidated financial statements.
F-3
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1998, 1999 and 2000
(In thousands, except per share data)
1998 1999 2000
--------------- --------------- ---------------
Revenues and other income:
Net sales $707,677 $480,029 $426,798
Equity in earnings (losses) of joint ventures 351 (1,709) (865)
Other, net 6,859 4,952 8,377
--------------- --------------- ---------------
714,887 483,272 434,310
--------------- --------------- ---------------
Costs and expenses:
Cost of sales 542,285 454,506 422,917
Selling, general, administrative and development 59,837 48,577 44,017
Special charges 24,000 6,834 2,805
Interest 2,916 7,093 7,704
--------------- --------------- ---------------
629,038 517,010 477,443
--------------- --------------- ---------------
Income (loss) before income taxes, minority interest
and extraordinary item 85,849 (33,738) (43,133)
Income tax expense (benefit) 29,197 (12,021) (15,097)
Minority interest - Convertible Preferred Securities, net of tax 8,840 8,667 8,710
Other minority interest, net of tax 2,060 1,006 1,283
--------------- --------------- ---------------
Income (loss) before extraordinary item 45,752 (31,390) (38,029)
Extraordinary item, early extinguishment of debt, net of tax - - (873)
--------------- --------------- ---------------
Net income (loss) $ 45,752 $ (31,390) $(38,902)
=============== =============== ===============
Basic and diluted earnings (loss) per share:
Before extraordinary item $ 1.46 $ (1.00) $ (1.21)
Extraordinary item - - (.03)
--------------- --------------- ---------------
$ 1.46 $ (1.00) $ (1.24)
=============== =============== ===============
Weighted average shares outstanding 31,435 31,371 31,373
See accompanying notes to consolidated financial statements.
F-4
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 1998, 1999 and 2000
(In thousands)
1998 1999 2000
--------------- --------------- --------------
Net income (loss) $ 45,752 $ (31,390) $ (38,902)
Other comprehensive income (loss):
Currency translation adjustment 1,692 (5,637) (10,883)
Pension liabilities adjustment, net of tax of
$2,300, $(260), and $909 in 1998, 1999 and
2000, respectively (4,283) 483 (1,688)
--------------- --------------- --------------
(2,591) (5,154) (12,571)
--------------- --------------- --------------
Comprehensive income (loss) $ 43,161 $ (36,544) $ (51,473)
=============== =============== ==============
See accompanying notes to consolidated financial statements.
F-5
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1999 and 2000
(In thousands)
1998 1999 2000
-------------- --------------- ---------------
Cash flows from operating activities:
Net income (loss) $ 45,752 $(31,390) $(38,902)
Depreciation and amortization 32,514 42,693 41,942
Noncash restructuring charge - - 245
Noncash special charges 15,425 3,936 6,729
Gain on sale of castings joint venture - - (1,205)
Extraordinary loss on early extinguishment of debt, net - - 873
Earnings of joint ventures, net of dividends
received 170 3,730 1,710
Deferred income taxes 13,172 (464) (17,245)
Other minority interest 2,060 1,006 1,283
Other, net (433) 4,447 451
Change in assets and liabilities, net of acquisitions:
Receivables 37,454 17,406 25,273
Inventories (62,990) 23,598 37,026
Prepaid expenses and other 2,539 3,137 (452)
Accounts payable and accrued liabilities (7,723) (24,151) (1,837)
Accrued restructuring charges 6,727 (5,042) (974)
Income taxes (12,213) (16,220) 10,386
Accounts with related parties, net 9,650 2,409 (1,791)
Accrued OPEB and pension costs (1,774) (411) (4,256)
Accrued dividends on preferred securities (890) (5,640) (1,606)
Accrued dividends on Convertible Preferred
Securities - - 10,043
Other, net (3,323) 499 (4,365)
-------------- --------------- ---------------
Net cash provided by operating activities 76,117 19,543 63,328
-------------- --------------- ---------------
Cash flows from investing activities:
Capital expenditures (115,155) (24,772) (11,182)
Business acquisitions and joint ventures (27,413) - -
Proceeds from sale of joint venture - - 7,000
Purchase of preferred securities (80,000) - -
Disposition of fixed assets - 2,900 38
Other, net (647) 209 (74)
-------------- --------------- ---------------
Net cash used by investing activities (223,215) (21,663) (4,218)
-------------- --------------- ---------------
Cash flows from financing activities:
Indebtedness:
Borrowings 153,765 111,900 364,214
Repayments (56,670) (99,284) (434,257)
Dividends paid (3,772) (3,764) -
Treasury stock purchased (1,208) - -
Other, net 117 (289) (635)
-------------- --------------- ---------------
Net cash provided (used) by financing activities 92,232 8,563 (70,678)
-------------- --------------- ---------------
$(54,866) $ 6,443 $(11,568)
============== =============== ===============
See accompanying notes to consolidated financial statements.
F-6
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 1998, 1999 and 2000
(In thousands)
1998 1999 2000
-------------- --------------- --------------
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $(54,866) $ 6,443 $(11,568)
Cash acquired 1,187 - -
Currency translation 186 (1,236) 693
-------------- --------------- --------------
(53,493) 5,207 (10,875)
Balance at beginning of year 68,957 15,464 20,671
-------------- --------------- --------------
Balance at end of year $ 15,464 $ 20,671 $ 9,796
============== =============== ==============
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 2,215 $ 6,669 $ 7,642
Convertible Preferred Securities dividends 13,332 13,332 3,333
Income taxes (refunds), net 23,737 148 (8,238)
Business acquisitions and joint ventures:
Cash acquired $ 1,187 $ - $ -
Receivables 6,574 - -
Inventories 15,352 - -
Property, equipment and other 21,765 - -
Investments in joint ventures 8,460 - -
Goodwill and other intangibles 8,566 - -
Liabilities assumed (18,117) - -
-------------- --------------- --------------
43,787 - -
Less noncash consideration, principally
property and equipment (16,374) - -
-------------- --------------- --------------
Cash paid $ 27,413 $ - $ -
============== =============== ==============
See accompanying notes to consolidated financial statements.
F-7
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1999 and 2000
(In thousands)
Accumulated Other
Additional Comprehensive Income (Loss)
-------------------------
Common Common Paid-in Retained Currency Pension Treasury Deferred
Shares Stock Capital Earnings Translation Liabilities Stock Compensation Total
-------- -------- ----------- --------- ------------ ----------- -------- ----------- ---------
Balance at December 31, 1997 31,458 $ 315 $ 346,723 $ 58,001 $ 3,908 $ - $ - $ - $408,947
Comprehensive income - - - 45,752 1,692 (4,283) - - 43,161
Dividends paid ($.12 per share) - - - (3,772) - - - - (3,772)
Treasury stock purchases (90) - - - - - (1,208) - (1,208)
Other, net 1 - 1,249 - - - - - 1,249
-------- -------- ----------- --------- ------------ ----------- -------- ---------- ---------
Balance at December 31, 1998 31,369 315 347,972 99,981 5,600 (4,283) (1,208) - 448,377
Comprehensive income (loss) - - - (31,390) (5,637) 483 - - (36,544)
Dividends paid ($.12 per share) - - - (3,764) - - - - (3,764)
Other, net 2 - 12 - - - - - 12
-------- -------- ----------- --------- ------------ ----------- -------- ---------- ---------
Balance at December 31, 1999 31,371 315 347,984 64,827 (37) (3,800) (1,208) - 408,081
Comprehensive income (loss) - - - (38,902) (10,883) (1,688) - - (51,473)
Long-term incentive plan
stock awards 444 4 1,936 - - - - (1,940) -
Amortization of deferred
compensation - - - - - - - 749 749
Other 2 - 158 - - - - - 158
-------- -------- ----------- --------- ------------ ----------- -------- ----------- ---------
Balance at December 31, 2000 31,817 $ 319 $ 350,078 $ 25,925 $ (10,920) $ (5,488) $(1,208) $ (1,191) $357,515
======== ======== =========== ========= ============ =========== ======== =========== =========
See accompanying notes to consolidated financial statements.
F-8
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
Principles of consolidation. The accompanying consolidated financial
statements include the accounts of Titanium Metals Corporation ("TIMET") and its
majority-owned subsidiaries (collectively, the "Company"). All material
intercompany accounts and balances have been eliminated. Certain prior year
amounts have been reclassified to conform to the current year presentation.
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amount of revenues and expenses
during the reporting period. Estimates are used in accounting for, among other
things, allowances for uncollectible accounts, inventory allowances,
self-insurance accruals, restructuring accruals and environmental accruals.
Actual results may, in some instances, differ from previously estimated amounts.
Estimates and assumptions are reviewed periodically, and the effects of
revisions are reflected in the consolidated financial statements in the period
they are determined to be necessary.
Translation of foreign currencies. Assets and liabilities of
subsidiaries whose functional currency is deemed to be other than the U.S.
dollar are translated at year end rates of exchange and revenues and expenses
are translated at average exchange rates prevailing during the year. Resulting
translation adjustments are accumulated in the currency translation adjustments
component of other comprehensive income (loss). Currency transaction gains and
losses are recognized in income currently and were a net gain of $.4 million in
1998, and net losses of $1.2 million in 1999 and $1.1 million in 2000.
Revenue recognition. Revenue generally is recognized when products have
been shipped and title and the risks and rewards of ownership passes to the
customer. The Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition" in December 1999. SAB 101, as
amended, summarizes certain of the SEC's views in applying generally accepted
accounting principles to revenue recognition in financial statements, and the
Company was required to comply with SAB 101 in 2000. The impact of complying
with SAB 101 was not material.
Inventories and cost of sales. Inventories are stated at the lower of
cost or market. Approximately one-half of inventories are costed using the
last-in, first-out ("LIFO") method with the remainder primarily stated using an
average cost method.
Cash and cash equivalents. Cash equivalents include highly liquid
investments with original maturities of three months or less.
Other investments. Investments in 20% to 50%-owned joint ventures are
accounted for by the equity method. Differences between the Company's investment
in joint ventures and its proportionate share of the joint ventures' reported
equity are amortized over not more than 15 years. Nonmarketable preferred
securities are accounted for by the cost method and are considered to be
"held-to-maturity" securities.
F-9
Intangible assets and amortization. Goodwill, representing the excess
of cost over the fair value of individual net assets acquired in business
combinations accounted for by the purchase method, is amortized using the
straight-line method over 15 years and is stated net of accumulated amortization
of $15.2 million and $19.7 million at December 31, 1999 and 2000, respectively.
Patents and other intangible assets, except intangible pension assets, are
amortized using the straight-line method over the periods expected to be
benefited, generally nine years.
Property, equipment, depreciation and amortization. Property and
equipment are stated at cost. Maintenance, repairs and minor renewals are
expensed; major improvements are capitalized. Interest costs related to major,
long-term capital projects are capitalized as a component of construction costs
and were $2.6 million in 1998, $1.3 million in 1999 and $1.0 million in 2000. In
accordance with SOP 98-1, "Accounting for Costs of Computer Software Developed
or Obtained for Internal Use," the Company capitalized certain computer software
costs in 1998 and 1999 associated with its implementation of certain information
technology systems.
Depreciation is computed principally on the straight-line method over
the estimated useful lives of 15 to 40 years for buildings and three to 25 years
for machinery and equipment. Capitalized software costs are amortized over the
software's estimated useful life, generally three to five years.
Long-lived assets. When events or changes in circumstances indicate
that the carrying amount of long-lived assets, including goodwill or other
intangible assets, may not be recoverable, an evaluation is performed to
determine if an impairment exists. The Company compares the carrying amount of
the assets to the undiscounted expected future cash flows. If this comparison
indicates that an impairment exists, the amount of the impairment would
typically be calculated using discounted expected future cash flows. All
relevant factors are considered in determining whether impairment exists.
Stock-based compensation. The Company has elected the disclosure
alternative prescribed by Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation," and to account for the
Company's stock-based employee compensation in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees" and its various interpretations. Under APB No. 25, no compensation
cost is generally recognized for fixed stock options for which the exercise
price is not less than the market price of the Company's common stock on the
grant date.
Employee benefit plans. Accounting and funding policies for retirement
plans and postretirement benefits other than pensions ("OPEB") are described in
Note 14.
Research and development. Research and development expense was $3.4 million
in 1998, $2.5 million in 1999 and $2.6 million in 2000.
Advertising costs. Advertising costs, which are not significant, are
expensed as incurred.
Self Insurance. The Company is self insured for certain losses relating
to workers compensation claims, employee medical benefits, environmental,
product and other liabilities. The Company maintains certain stop loss and other
insurance to reduce its exposure and provides accruals for estimates of known
liabilities and incurred but not reported claims. See Note 16.
F-10
Income taxes. Deferred income tax assets and liabilities are recognized
for the expected future tax consequences of temporary differences between the
income tax and financial reporting carrying amounts of assets and liabilities,
including investments in subsidiaries not included in TIMET's consolidated U.S.
tax group. The company periodically reviews its deferred tax assets to determine
if future realization is more likely than not and a change in the valuation
allowance is recorded in the period it is determined to be necessary. See Note
13.
Fair value of financial instruments. Carrying amounts of certain of the
Company's financial instruments including, among others, cash and cash
equivalents, accounts receivable, accrued compensation, and other accrued
liabilities approximate fair value because of their short maturities. The
Company's bank debt reprices with changes in market interest rates and,
accordingly, the carrying amount of such debt is believed to approximate market
value.
The Company's preferred securities are not marketable and, accordingly,
quoted market prices are unavailable. The Company believes the carrying amount
of these securities to be recoverable and, therefore, the preferred securities
are recorded in the consolidated financial statements at cost. The Company has
estimated the fair value of its preferred securities, using discounted cash
flow, to approximate $80 million. The Company periodically reviews the
recoverability of its investment in the securities. In the event that TIMET
determines in the future that its investment in the securities is not
recoverable, then the Company would report an appropriate write down at that
time.
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 reflects the dilutive effect of common stock options,
restricted stock and the assumed conversion of the Convertible Preferred
Securities, if applicable. See Note 18.
New accounting principles not yet adopted. The Company will adopt SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, effective January 1, 2001. Under SFAS No. 133, all derivatives will be
recognized as either assets or liabilities and measured at fair value. The
accounting for changes in fair value of derivatives will depend upon the
intended use of the derivative, and such changes will be recognized either in
net income or other comprehensive income. As permitted by the transition
requirements of SFAS No. 133, as amended, the Company will exempt from the scope
of SFAS No. 133 all host contracts containing embedded derivatives which were
issued or acquired prior to January 1, 1999. The Company was not a party to any
significant derivative or hedging instrument covered by SFAS No. 133 at December
31, 2000. The adoption of SFAS No. 133 will not have a material effect on the
Company's consolidated financial position, liquidity or results of operations.
Note 2 - Segment information:
The Company is a vertically integrated producer of titanium sponge,
melted products (ingot and slab) and a variety of mill products for aerospace,
industrial and other applications. The Company's production facilities are
located principally in the United States, United Kingdom and France, and its
products are sold throughout the world. These worldwide integrated activities
comprise the Company's principal segment, "Titanium melted and mill products."
In 1998, the "Other" segment consisted primarily of the Company's
titanium castings operations, which were combined in a joint venture during 1998
and subsequently sold in January 2000 (see Note 4). In 1999, the "Other" segment
consisted of the Company's nonintegrated joint ventures, which investments have
been either sold or charged off due to an asset impairment.
F-11
Sales, operating income (loss), inventory and receivables are the key
management measures used to evaluate segment performance. Segment operating
income is defined as income before income taxes, minority interest and interest
expense, exclusive of certain general corporate income and expense items
(including dividends and interest income). Operating income (loss) of the
"Titanium melted and mill products" segment includes restructuring charges of
$19.5 million, $4.7 million and $2.8 million in 1998, 1999 and 2000,
respectively. In 2000, the operating loss of this segment included special and
restructuring items of $9.5 million, consisting of $2.8 million of restructuring
charges, referred to above, $3.4 million of equipment-related impairment charges
and $3.3 million of environmental remediation charges. Operating loss of this
segment in 2000 also includes a special income item of $2.0 million related to
the fourth quarter termination of the Company's 1990 agreement to sell titanium
sponge to Union Titanium Sponge Corporation ("UTSC"). See Note 15. Operating
income of the "Other" segment includes restructuring charges of $4.5 million in
1998. In 1999, operating income of this segment includes $2.3 million of special
charges associated with the write downs of the Company's investment in certain
start up joint ventures and a $.2 million credit for the reduction of a prior
year restructuring charge. Restructuring and other special charges are more
fully described in Note 6.
F-12
Years Ended December 31,
----------------------------------------------------
1998 1999 2000
-------------- --------------- ----------------
(In thousands)
Operating Segments:
Net sales:
Titanium melted and mill products $688,008 $480,029 $426,798
Other 22,605 - -
Eliminations (2,936) - -
---------------- ---------------- ----------------
$707,677 $480,029 $426,798
================ =============== ================
Titanium melted and mill products:
Mill product net sales $521,700 $376,200 $326,319
Melted product net sales 66,785 35,500 47,366
Other 99,523 68,329 53,113
---------------- --------------- ----------------
$688,008 $480,029 $426,798
================ =============== ================
Mill product shipments:
Volume (metric tons) 14,800 11,400 11,370
Average price ($ per Kilogram) $ 35.25 $ 33.00 $ 28.70
Melted product shipments:
Volume (metric tons) 3,610 2,500 3,470
Average price ($ per Kilogram) $ 18.50 $ 14.20 $ 13.65
Operating income (loss):
Titanium melted and mill products $ 87,341 $(27,746) $(41,715)
Other (4,636) (3,687) 65
--------------- ----------------- ----------------
82,705 (31,433) (41,650)
Dividends and interest income 6,303 6,034 6,154
General corporate income (expense), net (243) (1,246) 67
Interest expense (2,916) (7,093) (7,704)
--------------- ----------------- -----------------
Income (loss) before income taxes, minority
Interest and extraordinary item $ 85,849 $(33,738) $(43,133)
================ =============== ================
Depreciation and amortization:
Titanium melted and mill products $ 31,602 $ 42,693 $ 41,942
Other 912 - -
---------------- -------------- ----------------
$ 32,514 $ 42,693 $ 41,942
================ ============== ================
Capital expenditures:
Titanium melted and mill products $115,103 $ 24,771 $ 11,182
Other 52 1 -
---------------- -------------- ----------------
$115,155 $ 24,772 $ 11,182
================ ============== ================
F-13
Years Ended December 31,
1998 1999 2000
---------------- -------------- ----------------
(In thousands)
Inventories:
Titanium melted and mill products $225,803 $191,599 $148,384
Other 141 - -
Eliminations (64) (64) -
---------------- -------------- ----------------
$225,880 $191,535 $148,384
================ ============== ================
Accounts receivable:
Titanium melted and mill products $124,542 $105,654 $ 75,913
Other 1,556 550 -
---------------- -------------- ----------------
$126,098 $106,204 $ 75,913
================ ============== ================
Investment in joint ventures:
Titanium melted and mill products $ 22,044 $ 21,143 $ 18,136
Other 10,589 5,795 -
---------------- -------------- ----------------
$ 32,633 $ 26,938 $ 18,136
================ ============== ================
Equity in earnings (losses) of joint ventures:
Titanium melted and mill products $ 1,869 $ 549 $ (865)
Other (1,518) (2,258) -
---------------- -------------- ----------------
$ 351 $(1,709) $ (865)
================ ============== ================
Geographic segments:
Net sales - point of origin:
United States $465,519 $365,652 $345,370
United Kingdom 217,709 160,765 139,599
Other Europe 109,347 89,433 74,432
Eliminations (84,898) (135,821) (132,603)
---------------- --------------- ----------------
$707,677 $480,029 $426,798
================ =============== ================
Net sales - point of destination:
United States $354,001 $239,797 $234,350
Europe 290,988 203,858 163,661
Other 62,688 36,374 28,787
---------------- --------------- ----------------
$707,677 $480,029 $426,798
================ =============== ================
Operating income (loss):
United States $ 45,760 $(31,636) $(44,077)
Europe 36,945 203 2,427
---------------- --------------- ----------------
$ 82,705 $(31,433) $ (41,650)
================ =============== ================
Long-lived assets - property and equipment, net:
United States $264,856 $246,744 $227,994
United Kingdom 78,731 81,607 69,212
Other Europe 7,636 5,414 4,924
---------------- --------------- ----------------
$351,223 $333,765 $302,130
================ =============== ================
Export sales from U.S. based operations approximated $81 million in 1998, $65
million in 1999 and $50 million in 2000.
F-14
Geographic segment operating income of the U.S. includes special and
restructuring charges in 1998, 1999 and 2000 of $14.5 million, $3.2 million and
$2.1 million, respectively. Operating income of the Europe segment in 1998, 1999
and 2000 includes special charges of $9.5 million, $3.6 million and $.7 million,
respectively.
Note 3 - Business combinations:
In April 1998, the Company acquired Loterios S.p.A., a producer and
distributor, based in Italy, of titanium pipe and fittings, primarily to the
offshore oil and gas drilling and production markets. The cost of the Loterios
acquisition, accounted for by the purchase method, was approximately $19 million
in cash. No additional consideration is payable in connection with the
acquisition. The results of Loterios' operations have been reflected in the
consolidated financial statements from the date of acquisition. Net sales in
1998 subsequent to the acquisition approximated $23 million.
Note 4 - Joint ventures:
December 31,
--------------------------------
1999 2000
-------------- --------------
(In thousands)
Joint ventures:
ValTimet $20,863 $17,719
Wyman-Gordon Titanium Castings 5,795 -
Other 280 417
-------------- --------------
$26,938 $18,136
============== ==============
ValTimet, is a manufacturer of stainless steel, copper, nickel and
welded titanium tubing with operations in the United States, France and China.
At December 31, 2000, ValTimet was owned 46% by TIMET and 54% by Valinox Welded,
a French manufacturer of welded tubing. During the years ended December 31,
1998, 1999 and 2000, ValTimet reported sales of approximately $119 million, $71
million and $67 million, respectively, and net income of $4.1 million, net
income of $.5 million and a net loss of $2.0 million, respectively. At year end
1999 and 2000, ValTimet reported total assets of $57.8 million and $52.4 million
and equity of $29.9 million and $25.5 million, respectively. At December 31,
2000 the unamortized net difference between the Company's carrying amount of its
investment in ValTimet and its proportionate share of ValTimet's net assets was
approximately $6 million. The net difference is principally attributable to
goodwill and is being amortized over 15 years.
In 1998, the Company completed a series of strategic transactions with
Wyman-Gordon Company. The principal components were: (i) the Company exchanged
certain of its titanium castings assets and $5 million in cash for
Wyman-Gordon's Millbury, Massachusetts vacuum arc remelting facility, which
produced titanium ingot; (ii) Wyman-Gordon and the Company combined their
respective titanium castings businesses into a new joint venture, Wyman-Gordon
Titanium Castings LLC, 80% owned by Wyman-Gordon and 20% by the Company; and
(iii) the Company and Wyman-Gordon entered into a contract pursuant to which the
Company expects to be the principal supplier of titanium material to
Wyman-Gordon through 2007. The Company accounted for the castings
business/melting facility transaction at fair value, which approximated the $18
million net carrying value of the assets exchanged, and, accordingly, recognized
no gain on the transaction. The Company accounted for its interest in the
castings joint venture by the equity method. Early in 2000, the Company sold its
interest in the castings joint venture to Wyman-Gordon for approximately $7
million and recorded a pretax gain of approximately $1.2 million.
F-15
TIMET's strategy for developing new markets and uses for titanium has
included providing funds to third parties to potentially prove out new uses of
titanium. Other joint ventures consist principally of such investments. During
the fourth quarter 1999, the Company recorded a $2.3 million charge to earnings
for the write-down associated with an impairment of the Company's investment in
certain start-up joint ventures.
Note 5 - Preferred securities:
In October 1998, the Company purchased for cash $80 million of non-voting
preferred securities of Special Metals Corporation ("SMC"), a U.S. manufacturer
of wrought nickel-based superalloys and special alloy long products. The
investment was made in conjunction with, and concurrent with, the acquisition by
SMC of the Inco Alloys International unit of Inco, Ltd. The preferred securities
accrue dividends at the annual rate of 6.625%, are mandatorily redeemable in
April 2006 and are convertible into SMC common stock at $16.50 per share.
Dividends on the preferred securities had previously been deferred by SMC due to
limitations imposed by SMC's bank credit agreements. Aggregate accrued dividends
were $6.5 million and $8.1 million at December 31, 1999 and 2000, respectively.
During 2000, SMC resumed the payment of dividends and the Company received three
quarterly dividends aggregating $4.0 million. In January 2001, the Company
received an additional dividend payment of $1.3 million; however, there can be
no assurances that TIMET will continue to receive regular quarterly dividends
during the remainder of 2001.
The SMC preferred securities are not marketable and, accordingly,
quoted market prices are unavailable. The Company believes the carrying amount
of these securities to be recoverable and, therefore, the preferred securities
are recorded in the consolidated financial statements at cost. The Company has
estimated the fair value of its preferred securities, using discounted cash
flow, to approximate $80 million. The Company periodically reviews the
recoverability of its investment in the securities. In the event that TIMET
determines in the future that its investment in SMC is not recoverable, then the
Company would report an appropriate writedown at that time.
F-16
Note 6 - Restructuring and other special charges:
During the 1998 to 2000 period, the Company implemented plans designed
to address then current market and operating conditions, which resulted in
recognizing $24 million, $4.5 million and $2.8 million of restructuring charges
in 1998, 1999 and 2000, respectively. The 1998 and 1999 plans included the
permanent closure or disposition of four plants, permanent or temporary closure
of three other plants and termination of an aggregate of 700 people, or
approximately 23% of TIMET's worldwide workforce prior to such restructuring.
During 2000, the Company terminated approximately 170 people, primarily in its
manufacturing operations, as part of its restructuring plans. In 2000, the
Company recorded $2.8 million of net restructuring charges, principally related
to personnel severance and benefits for terminated employees. The components of
the 1998, 1999 and 2000 restructuring charges are summarized below.
1998 1999 2000
--------------------- ----------------------- ------------------------
Segment Segment Segment
--------------------- ----------------------- ------------------------
Titanium Titanium Titanium
Melted Melted Melted
and Mill and Mill and Mill
Products Other Products Other Products Other
---------- ------- ----------- -------- ------------ ---------
(In millions)
Property and equipment $ 7.1 $ 2.6 $ .3 $ - $ .3 $ -
Disposition of German subsidiary - - 2.0 - .1 -
Pension and OPEB costs, net 5.7 - (.1) - - -
Personnel severance and benefits 5.3 .5 2.5 - 2.6 -
Other exit costs, principally
related to leased facilities 1.4 1.4 - (.2) (.2) -
---------- ------- ----------- -------- ------------ ---------
$ 19.5 $ 4.5 $ 4.7 $(.2) $ 2.8 $ -
========== ======= =========== ======== ============ =========
Substantially all of the property and equipment charges relate to items
sold, scrapped or abandoned. Depreciation of equipment temporarily idled but not
impaired was not suspended. The disposition of the German subsidiary was
completed in the second quarter of 2000. The pension and OPEB costs relate to
actuarial valuations of accelerated defined benefits of employees terminated and
curtailment of pension and OPEB liabilities.
At December 31, 2000, accrued restructuring costs consist primarily of
unpaid personnel severance and benefits. During 2000, payments of $.2 million,
$.7 million and $2.6 million were applied against the accrued costs related to
the 1998, 1999 and 2000 plans, respectively. The majority of the accrued costs
at December 31, 2000, are expected to be paid by mid-2001.
Additionally, in 1999, the Company recorded a $2.3 million special
charge to earnings associated with the write-downs of the Company's investment
in certain start-up joint ventures. During 2000, the Company recorded net
special charges of $3.5 million, consisting of $3.4 million of equipment related
impairment charges; $3.3 million of environmental remediation charges; a special
income item of $2.0 million related to the termination of the Company's 1990
agreement to sell titanium sponge to Union Titanium Sponge Corporation; and the
$1.2 million gain on the sale of the Company's castings joint venture.
F-17
Note 7 - Inventories:
December 31,
---------------------------------
1999 2000
-------------- ---------------
(In thousands)
Raw materials $ 45,004 $ 31,127
Work-in-process 69,809 74,631
Finished products 83,893 53,685
Supplies 18,329 14,991
-------------- ---------------
217,035 174,434
Less adjustment of certain
inventories to LIFO basis 25,500 26,050
-------------- ---------------
$191,535 $148,384
============== ===============
Note 8 - Intangible and other noncurrent assets:
December 31,
---------------------------------
1999 2000
-------------- ---------------
(In thousands)
Intangible assets:
Patents $ 13,934 $ 13,521
Covenants not to compete 8,881 8,500
-------------- ---------------
22,815 22,021
Less accumulated amortization 9,679 12,452
-------------- ---------------
13,136 9,569
Intangible pension assets 3,190 3,689
-------------- ---------------
$ 16,326 $ 13,258
============== ===============
Other noncurrent assets:
Deferred financing costs $ 9,417 $ 9,194
Notes receivable from officers 489 544
Prepaid pension cost - 1,359
Other 2,692 1,059
-------------- ---------------
$ 12,598 $ 12,156
============== ===============
F-18
Note 9 - Accrued liabilities:
December 31,
-------------------------------
1999 2000
-------------- -------------
(In thousands)
OPEB cost $ 3,269 $ 3,129
Pension cost 1,287 1,251
Other employee benefits 14,375 15,120
Deferred income 9,295 2,558
Environmental costs 1,238 818
Restructuring costs 1,490 1,012
Taxes, other than income 1,598 3,593
Accrued dividends on Convertible Preferred Securities 1,111 -
Other 9,216 8,699
-------------- -------------
$42,879 $36,180
============== =============
In 1999, the Company had customer orders for approximately $16 million
of titanium ingot for which the customer had not yet determined the final mill
product specifications. At the customer's request, the Company manufactured the
ingots and stored the material at the Company's facilities. As agreed with the
customer, the customer was billed for and took title to the ingots in 1999,
however, the Company retained an obligation to convert the ingots into mill
products in the future. Accordingly, the revenue and cost of sales on this
product were not recognized in 1999. During 2000, approximately 72% of the
ingots were converted and shipped, with the remaining material expected to be
shipped in 2001. At December 31, 2000, pretax income of approximately $2.6
million from the remaining material stored at the Company's facilities has been
deferred until the related sale is recorded.
Note 10 - Notes payable, long-term debt and capital lease obligations:
December 31,
--------------------------------
1999 2000
-------------- --------------
(In thousands)
Notes payable:
U.S. credit agreement $ - $19,893
European credit agreements 9,635 4,219
-------------- --------------
$ 9,635 $24,112
============== ==============
Long-term debt:
Bank credit agreement - U.S. $85,000 $ -
Bank credit agreement - U.K. 21,867 20,263
Other 922 514
-------------- --------------
107,789 20,777
Less current maturities 85,364 1,824
-------------- --------------
$22,425 $18,953
============== ==============
Capital lease obligations $10,091 $ 8,829
Less current maturities 315 187
-------------- --------------
$ 9,776 $ 8,642
============== ==============
Long-term bank credit agreements. In 2000, the Company completed a new
$125 million, three-year U.S. revolving credit agreement replacing its previous
U.S. bank credit facility. Borrowings under this facility are limited to a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and equipment. This facility requires the Company's U.S. daily cash
receipts to be used to reduce the outstanding borrowings. Interest generally
accrues at rates that vary from LIBOR plus 2% to LIBOR plus 2.5%. Borrowings are
collateralized by substantially all of the Company's U.S. assets. The credit
agreement limits additional indebtedness, prohibits the payment of common stock
dividends, and contains other covenants customary in lending transactions of
this type. In addition, the credit agreement prohibits the payment of dividends
on TIMET's Convertible Preferred Securities if "excess availability," as
determined under the agreement, is less than $25 million. At December 31, 2000,
the excess availability, as defined, was $83 million. Borrowings outstanding
under this U.S. facility are classified as a current liability.
During 2000, the Company's U.K. subsidiary increased its U.K. credit
agreement from(pound)18 million ($29 million) to(pound)30 million ($48 million)
with its existing U.K. lender. Borrowings under the U.K. facility accrue
interest at rates that vary from LIBOR plus 1% to LIBOR plus 1.25% and
borrowings are collateralized by accounts receivable, inventories, buildings and
equipment of the U.K. subsidiary. This facility also contains covenants
customary in lending transactions of this type.
Borrowings under the above U.S. and U.K. credit agreements at closing were
used to repay the $58 million in then-outstanding borrowings under the Company's
prior U.S. credit agreement, which was terminated. In 2000, the deferred
financing costs associated with the previous U.S. facility were written off and
reflected as an extraordinary item of $.9 million after taxes, or $.03 per
share.
The weighted average interest rate on borrowings outstanding under the U.S.
and U.K. credit agreements at December 31, 2000 was 9.1% and 7.4%, respectively.
As of December 31, 2000, the Company had approximately $117 million of unused
borrowing availability under its U.S. and European credit agreements.
Capital lease obligations. Certain of the Company's U.K. production
facilities are under thirty year leases expiring in 2026. The U.K. rentals are
subject to adjustment every five years based on changes in certain published
price indices. TIMET has guaranteed TIMET UK's obligations under its leases. The
Company's French subsidiary leases certain machinery and equipment from
Compagnie Europeenne du Zirconium-CEZUS, S.A. ("CEZUS") (the 30% minority
shareholder) under a ten year agreement expiring in 2006. Assets held under
capital leases included in buildings were $9.4 million and $8.7 million, and
assets included in equipment were $1.3 million and $1.0 million at December 31,
1999 and 2000, respectively. The related aggregate accumulated depreciation was
$1.7 million and $1.9 million at December 31, 1999 and 2000, respectively.
Aggregate maturities of long-term debt and capital lease obligations:
Capital Long-term
Leases Debt
---------------- ----------------
(In thousands)
Years ending December 31,
2001 $ 984 $ 1,824
2002 978 1,669
2003 978 6,856
2004 978 1,490
2005 978 8,938
2006 and thereafter 17,693 -
Less amounts representing interest (13,760) -
---------------- ----------------
$ 8,829 $20,777
================ ================
Note 11 - Minority interest:
Convertible Preferred Securities. In November 1996, TIMET Capital Trust
I (the "Trust"), a wholly-owned subsidiary of TIMET, issued $201 million of
6.625% Company-obligated mandatorily redeemable preferred securities and $6
million of common securities. TIMET holds all of the outstanding common
securities of the Trust. The Trust used the proceeds from such issuance to
purchase from the Company $207 million principal amount of TIMET's 6.625%
convertible junior subordinated debentures due 2026 (the "Subordinated
Debentures"). TIMET's guarantee of payment of the Convertible Preferred
Securities (in accordance with the terms thereof) and its obligations under the
Trust documents constitute, in the aggregate, a full and unconditional guarantee
by the Company of the Trust's obligations under the Convertible Preferred
Securities. The sole assets of the Trust are the Subordinated Debentures. The
Convertible Preferred Securities represent undivided beneficial ownership
interests in the Trust, are entitled to cumulative preferred distributions from
the Trust of 6.625% per annum, compounded quarterly, and are convertible, at the
option of the holder, into TIMET common stock at the rate of 1.339 shares of
common stock per Convertible Preferred Security (an equivalent price of $37.34
per share), for an aggregate of approximately 5.4 million common shares if fully
converted.
The Convertible Preferred Securities mature December 2026 and do not
require principal amortization. The Convertible Preferred Securities are
redeemable at the Company's option, currently at approximately 104% of the
principal amount declining to 100% subsequent to December 2006. The Company's
U.S. credit agreement prohibits the payment of dividends on these securities if
"excess availability," as determined under the agreement, is less than $25
million. In April 2000, the Company exercised its right to defer future dividend
payments on the Convertible Preferred Securities for a period of 10 quarters
(subject to possible further extension for up to an additional 10 quarters),
although interest will continue to accrue at the coupon rate on the principal
and unpaid dividends. The Company may consider resuming payment of dividends on
the Convertible Preferred Securities or purchase the securities if the outlook
for TIMET's results from operations improves substantially or a favorable result
in the Boeing-related litigation is achieved, or both. Since the Company
exercised its right to defer dividend payments, it is unable to, among other
things, pay dividends on or reacquire its capital stock during the deferral
period. The fair value of the Convertible Preferred Securities based on limited
market prices was approximately $57 million at December 31, 2000.
Dividends on the Convertible Preferred Securities are reported in the
Consolidated Statements of Operations as minority interest, net of allocable
income tax benefit. Accrued dividends on the Convertible Preferred Securities
are reflected as noncurrent liabilities in the consolidated balance sheet at
December 31, 2000.
Other. Other minority interest relates principally to TIMET Savoie, a
70% owned consolidated French subsidiary. The Company has the right to purchase
from CEZUS, the holder of the remaining 30% interest, its interest in TIMET
Savoie for 30% of TIMET Savoie's equity determined under French accounting
principles ($26.4 million at December 31, 2000,), which amount is recorded as
minority interest. CEZUS has the right to sell its interest in TIMET Savoie to
the Company for 30% of TIMET Savoie's registered capital ($2.3 million at
December 31, 2000).
Note 12 - Stockholders' equity:
Preferred stock. The Company is authorized to issue one million shares
of preferred stock. The rights of preferred stock as to, among other things,
dividends, liquidation, redemption, conversions, and voting rights are
determined by the Board of Directors.
Common stock. The Company's U.S. credit agreement prohibits the payment of
common stock dividends (see Note 10).
Restricted stock and common stock options. The Company's 1996 Long-Term
Performance Incentive Plan (the "Incentive Plan") provides for the discretionary
grant of restricted common stock, stock options, stock appreciation rights and
other incentive compensation to officers and other key employees of the Company.
Options generally vest over five years and expire ten years from date of grant.
During 2000, the Company awarded 467,500 shares of TIMET restricted common
stock, under the Incentive Plan, to certain officers and employees. The
restrictions on the stock grants lapse ratably on an annual basis over a
five-year period. Since holders of restricted stock have all of the rights of
other common stockholders, subject to forfeiture unless certain periods of
employment are completed, all such shares of restricted stock are considered to
be currently issued and outstanding. During 2000, 24,000 shares of restricted
stock were forfeited. The market value of the restricted stock awards was
approximately $2 million on the date of grant ($4.375 per share), and this
amount has been recorded as deferred compensation, a separate component of
stockholders' equity. The Company amortizes deferred compensation to expense on
a straight-line basis for each tranche of the award over the period during which
the restrictions lapse. Compensation expense recognized by the Company related
to restricted stock awards was nil in 1998 and 1999 and $.7 million in 2000.
Additionally, a separate plan (the "Director Plan") provides for annual
grants to eligible nonemployee directors of options to purchase 5,000 shares of
the Company's common stock (1,500 prior to 1999) at a price equal to the market
price on the date of grant and to receive, as partial payment of director fees,
annual grants of 1,000 shares of common stock (500 shares prior to 2001).
Options granted to eligible directors vest in one year and expire ten years from
date of grant (five year expiration for grants prior to 1998).
The weighted average remaining life of options outstanding at December
31, 2000 was 7.2 years (1999 - 7.9 years). At December 31, 1998, 1999 and 2000
options to purchase approximately 199,000, 431,000 and 662,000 shares,
respectively, were exercisable at average exercise prices of $25.89, $25.85 and
$25.75, respectively. Options to purchase 331,000 shares become exercisable in
2001. At December 31, 2000, approximately 1.1 million shares and 2,350 shares
were available for future grant under the Incentive Plan and the Director Plan,
respectively. In February 2001, the Director Plan was amended to authorize an
additional 200,000 shares for future grants under such plan.
The following table summarizes information about the Company's stock
options.
Amount
payable Weighted
Exercise upon Weighted average fair
price per exercise average value at
Shares share (thousands) exercise price grant date
----------- -------------- -------------- --------------- ---------------
Outstanding at December 31, 1997 820,000 $23.00-$34.00 $22,370 $27.28
Granted:
At market 320,900 26.13-29.31 9,392 29.27 $14.08
Above market 142,000 32.31-35.31 4,802 33.81 12.79
Canceled (65,200) 23.00-35.31 (1,878) 28.80
----------- -------------- -------------- ---------------
Outstanding at December 31, 1998 1,217,700 23.00-35.31 34,686 28.48
Granted:
At market 433,000 7.38-7.97 3,445 7.96 $ 3.98
Above market 206,000 8.97-9.97 1,951 9.47 3.59
Canceled (118,500) 7.97-35.31 (3,023) 25.51
----------- -------------- -------------- ---------------
Outstanding at December 31, 1999 1,738,200 7.38-35.31 37,059 21.32
Granted:
At market 25,000 3.94 98 3.94 $ 1.99
Above market 250,000 7.00-11.00 2,150 8.60 1.53
Canceled (361,700) 7.97-35.31 (7,285) 20.14
----------- -------------- -------------- ---------------
Outstanding at December 31, 2000 1,651,500 $3.94-$35.31 $32,022 $19.39
=========== ============== ============== ===============
Weighted average fair values of options at grant date were estimated
using the Black-Scholes model and assumptions listed below.
Assumptions at date of grant: 1998 1999 2000
-------------- --------------- --------------
Expected life (years) 6 6 6
Risk-free interest rate 5.56% 5.14% 4.95%
Volatility 40% 45% 45%
Dividend yield 0% 0% 0%
Had stock-based compensation cost been determined based on the
estimated fair values of options granted and recognized as compensation expense
over the vesting period of the grants in accordance with SFAS No. 123, the
Company's net income and earnings per share would have been reduced in 1998 by
$3.5 million and $.11 per share, respectively, in 1999 by $3.1 million and $.10
per share, respectively, and in 2000 by $2.0 million and $.06 per share,
respectively.
Note 13 - Income taxes:
Summarized below are (i) the components of income (loss) before income
taxes and minority interest ("pretax income (loss)"), (ii) the difference
between the income tax expense (benefit) attributable to pretax income (loss)
and the amounts that would be expected using the U.S. federal statutory income
tax rate of 35%, (iii) the components of the income tax expense (benefit)
attributable to pretax income (loss), and (iv) the components of the
comprehensive tax provision (benefit).
Years Ended December 31,
--------------------------------------------------
1998 1999 2000
-------------- -------------- --------------
(In thousands)
Pretax income (loss):
U.S. $ 51,090 $ (30,485) $ (42,830)
Non-U.S. 34,759 (3,253) (303)
-------------- -------------- --------------
$ 85,849 $ (33,738) $ (43,133)
============== ============== ==============
Expected income tax expense (benefit), at 35% $ 30,047 $ (11,809) $ (15,097)
Non-U.S. tax rates 41 893 1,121
U.S. state income taxes, net 472 (1,705) 8
Dividends received deduction (218) (1,382) (1,367)
Export sales credit (979) - -
Adjustment of deferred tax valuation allowance - 1,869 49
Other, net (166) 113 189
-------------- -------------- --------------
$ 29,197 $ (12,021) $ (15,097)
============== ============== ==============
Income tax expense (benefit):
Current income taxes (benefit):
U.S. $ 4,617 $ (11,225) $ (548)
Non-U.S. 11,408 (332) 2,696
-------------- -------------- --------------
16,025 (11,557) 2,148
-------------- -------------- --------------
Deferred income taxes (benefit):
U.S. 12,374 (1,850) (15,612)
Non-U.S. 798 1,386 (1,633)
-------------- -------------- --------------
13,172 (464) (17,245)
-------------- -------------- --------------
$ 29,197 $ (12,021) $ (15,097)
============== ============== ==============
Comprehensive tax provision (benefit) allocable to:
Pretax income (loss) $ 29,197 $ (12,021) $ (15,097)
Minority interest - Convertible Preferred Securities (4,703) (4,666) (4,675)
Extraordinary item - - (470)
Stockholders' equity, including amounts allocated
to other comprehensive income (3,520) (55) (798)
-------------- -------------- --------------
$ 20,974 $ (16,742) $ (21,040)
============== ============== ==============
December 31,
---------------------------------------------------------
1999 2000
-------------------------- ---------------------------
Assets Liabilities Assets Liabilities
---------- ------------ ---------- -------------
(In millions)
Temporary differences relating to net assets:
Inventories $ .2 $ (5.5) $ .4 $ (5.2)
Property and equipment, including software - (30.7) - (30.0)
Accrued OPEB cost 11.3 - 9.7 -
Accrued liabilities and other deductible differences 17.3 - 12.3 -
Other taxable differences - (9.8) - (8.2)
Tax loss and credit carryforwards 13.1 - 40.4 -
Valuation allowance (1.9) - (1.9) -
---------- ------------ ---------- -------------
Gross deferred tax assets (liabilities) 40.0 (46.0) 60.9 (43.4)
Netting (28.1) 28.1 (32.7) 32.7
---------- ------------ ---------- -------------
Total deferred taxes 11.9 (17.9) 28.2 (10.7)
Less current deferred taxes 2.3 (5.0) .4 (1.1)
---------- ------------ ---------- -------------
Net noncurrent deferred taxes $ 9.6 $(12.9) $27.8 $ (9.6)
========== ============ ========== =============
The 1999 increase in the valuation allowance of $1.9 million offset
deferred taxes related to certain capital losses and certain non-U.S. losses
that did not meet the "more likely than not" recognition criteria. There were no
material increases to the Company's valuation allowance during 2000.
At December 31, 2000, the Company had, for U.S. federal income tax
purposes, net operating loss carryforwards ("NOLs") of approximately $89.1
million, $6.8 million which expire in 2010, $19.9 million which expire in 2019
and $62.4 million which expire in 2020. At December 31, 2000, the Company had
alternative minimum tax ("AMT") credit carryforwards of approximately $4.8
million, which can be utilized to offset regular income taxes payable in future
years. The AMT credit carryforward has an indefinite carryforward period. At
December 31, 2000, the Company had the equivalent of an $8.1 million NOL in the
United Kingdom and a $2.2 million NOL in Germany, both of which have indefinite
carryforward periods.
Note 14 - Employee benefit plans:
Variable compensation plans. The majority of the Company's total
worldwide employees, including a significant portion of its domestic hourly
employees, participate in compensation programs which provide for variable
compensation based upon the financial performance of the Company and, in certain
circumstances, the individual performance of the employee. The cost of these
plans was $6 million, $1 million and $.9 million in 1998, 1999 and 2000,
respectively.
Defined contribution plans. All of the Company's domestic hourly and
salaried employees (60% of total worldwide employees at December 31, 2000) are
eligible to participate in contributory savings plans with partial matching
employer contributions. Company matching contributions are based on Company
profitability for approximately 80% of eligible employees. Approximately 42% of
the Company's total employees at December 31, 2000 also participate in a defined
contribution pension plan with contributions based upon a fixed percentage of
the employee's eligible earnings. The cost of these pension and savings plans
approximated $3 million in 1998 and $2 million in each of 1999 and 2000.
Defined benefit pension plans. The Company maintains contributory and
noncontributory defined benefit pension plans covering the majority of its
European employees and a minority of its domestic workforce. Defined pension
benefits are generally based on years of service and compensation, and the
related expense is based upon independent actuarial valuations. The Company's
funding policy for U.S. plans is to contribute annually amounts satisfying the
funding requirements of the Employee Retirement Income Security Act of 1974, as
amended. Non-U.S. defined benefit pension plans are funded in accordance with
applicable statutory requirements. The U.S. defined benefit pension plans were
closed to new participants prior to 1996 and, in some cases, benefit levels have
been frozen. The U.K. defined benefit plan was closed to new participants in
1996.
The rates used in determining the actuarial present value of benefit
obligations at December 31, 2000 were: (i) discount rates - 6% to 7.25% (1999 -
6% to 7.5%), and (ii) rates of increase in future compensation levels - 2% to 3%
(1999 - 3%). The expected long-term rates of return on assets used were 6% to 9%
(1999 - 7.5% to 9%). The benefit obligations are sensitive to changes in these
estimated rates and actual results may differ from the obligations noted below.
At December 31, 2000, the assets of the plans are primarily comprised of
government obligations, corporate stocks and bonds. The funded status of the
Company's defined benefit pension plans is set forth below.
Years Ended December 31,
---------------------------------
1999 2000
-------------- ---------------
(In thousands)
Change in projected benefit obligations:
Balance at beginning of year $ 152,292 $ 148,688
Service cost 4,053 3,768
Interest cost 8,939 9,182
Plan amendments 977 917
Curtailment gain (103) (38)
Actuarial loss (gain) (5,353) 6,700
Benefits paid (8,917) (8,528)
Change in currency exchange rates (3,200) (7,409)
-------------- ---------------
Balance at end of year $ 148,688 $ 153,280
============== ===============
Change in plan assets:
Fair value at beginning of year $133,100 $156,636
Actual return on plan assets 28,516 3,099
Employer contribution 5,534 5,936
Plan participants' contributions 811 759
Benefits paid (8,917) (8,528)
Change in currency exchange rates (2,408) (8,215)
-------------- ---------------
Fair value at end of year $156,636 $149,687
============== ===============
Funded status:
Plan assets over (under) projected benefit obligations $ 7,948 $ (3,593)
Unrecognized:
Actuarial loss (gain) (9,029) 6,777
Prior service cost 3,190 3,689
-------------- ---------------
Total prepaid (accrued) pension cost $ 2,109 $ 6,873
============== ===============
Amounts recognized in balance sheet:
Intangible pension asset $ 3,190 3,689
Noncurrent prepaid pension cost - 1,359
Current pension liability (1,287) (1,251)
Noncurrent pension liability (5,634) (5,361)
Accumulated other comprehensive income 5,840 8,437
-------------- ---------------
$ 2,109 $ 6,873
============== ===============
Selected information related to the Company's defined benefit
pension plans that have accumulated benefit obligations in excess of fair value
of plan assets is presented below.
December 31,
---------------------------------
1999 2000
-------------- ---------------
(In thousands)
Projected benefit obligation $59,129 $63,611
Accumulated benefit obligation 59,129 63,361
Fair value of plan assets 54,154 57,242
The components of the net periodic defined benefit pension cost are set
forth below.
Years Ended December 31,
------------------------------------------------------
1998 1999 2000
----------------- -------------- --------------
(In thousands)
Service cost benefits earned $ 5,462 $ 4,053 $ 3,768
Interest cost on projected benefit obligations 9,519 8,939 9,182
Expected return on plan assets (12,247) (10,650) (11,907)
Net amortization (2,030) 120 342
----------------- -------------- --------------
Net pension expense $ 704 $ 2,462 $ 1,385
================= ============== ==============
Postretirement benefits other than pensions. The Company provides
certain postretirement health care and life insurance benefits to certain of its
domestic retired employees. The Company funds such benefits as they are
incurred, net of any contributions by the retirees. Under plans currently in
effect, a majority of TIMET's active domestic employees would become eligible
for these benefits if they reach normal retirement age while working for TIMET.
These plans have been revised to discontinue employer-paid health care coverage
for future retirees once they become Medicare-eligible.
The components of the periodic OPEB cost and change in the accumulated
OPEB obligations are set forth below. The plan is unfunded and contributions to
the plan during the year equal benefits paid. The rates used in determining the
actuarial present value of the accumulated OPEB obligations at December 31, 2000
were: (i) discount rate - 7.25% (1999 - 7.5%), (ii) rate of increase in health
care costs for the following period - 8.9% (1999 - 9.2%) and (iii) ultimate
health care trend rate (achieved in 2016) - 6.0% (1999 - 6.0 %). If the health
care cost trend rate was increased by one percentage point for each year, OPEB
expense would have increased approximately $.2 million in 2000, and the
actuarial present value of accumulated OPEB obligations at December 31, 2000
would have increased approximately $2.7 million. A one percentage point decrease
would have a similar, but opposite, effect. The accrued OPEB cost is sensitive
to changes in these estimated rates and actual results may differ from the
obligations noted below.
December 31,
-------------------------------
1999 2000
------------- -------------
(In thousands)
Actuarial present value of accumulated OPEB obligations:
Balance at beginning of year $ 22,637 $ 24,186
Service cost 252 176
Interest cost 1,577 1,709
Amendments - 364
Actuarial loss 3,754 402
Curtailment gain (115) (443)
Benefits paid, net of participant contributions (3,919) (3,637)
------------- -------------
Balance at end of year 24,186 22,757
Unrecognized net actuarial loss (3,411) (3,056)
Unrecognized prior service credits 2,455 1,647
------------- -------------
Total accrued OPEB cost 23,230 21,348
Less current portion 3,269 3,129
------------- -------------
Noncurrent accrued OPEB cost $ 19,961 $ 18,219
============= =============
Years Ended December 31,
--------------------------------------------
1998 1999 2000
----------- ------------ ------------
(In thousands)
Service cost benefits earned $ 326 $ 252 $ 176
Interest cost on accumulated OPEB obligations 1,553 1,577 1,709
Curtailment gain - (115) (443)
Net amortization and deferrals (550) (364) (324)
----------- ------------ ------------
Net OPEB expense $1,329 $1,350 $1,118
=========== ============ ============
Note 15 - Related party transactions:
During 1998 and 1999, Tremont purchased shares of the Company's common
stock in market or private transactions, which increased its ownership of TIMET
common stock to 39% at December 31, 2000. During 1999, the Combined Master
Retirement Trust ("CMRT"), a trust formed by Valhi, Inc. to permit the
collective investment by trusts that maintain the assets of certain employee
benefit plans adopted by Valhi and related companies, purchased shares of TIMET
common stock in market transactions. At December 31, 2000, the CMRT held 8% of
TIMET's common stock. At December 31, 2000, subsidiaries of Valhi held an
aggregate of approximately 80% of Tremont's outstanding common stock, and
Contran Corporation held, directly or through subsidiaries, approximately 93% 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. In
addition, Mr. Simmons is the sole trustee of the CMRT and a member of the trust
investment committee for the CMRT. Mr. Simmons may be deemed to control each of
Contran, Valhi, Tremont and TIMET.
Corporations that may be deemed to be controlled by or affiliated with
Mr. Simmons sometimes engage in (i) intercorporate transactions with related
companies 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, and understands that
Contran, Tremont 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.
It is the policy of the Company to engage in transactions with related
parties on terms which are, in the opinion of the Company, no less favorable to
the Company than could be obtained from unrelated parties.
TIMET supplies titanium strip product to ValTimet under a long-term
contract as the preferred supplier and supplied casting ingot to Wyman-Gordon
Titanium Castings. Sales to these joint ventures were $40 million in 1998, $19
million in 1999 and $22 million in 2000. Receivables from related parties at
December 31, 1999 relate principally to sales to these joint ventures, and
principally from ValTimet at December 31, 2000. Early in 2000, TIMET sold its
interest in the castings joint venture at a gain of $1.2 million.
In connection with the construction and financing of TIMET's vacuum
distillation process ("VDP") titanium sponge plant, UTSC licensed certain
technology to TIMET in exchange for the right to acquire up to 20% of TIMET's
annual production capacity of VDP sponge at agreed-upon prices through early
1997 and higher formula-determined prices thereafter through 2008. The agreement
also obligated UTSC to pay certain amounts in the event that UTSC purchases were
below contractual volume minimums. In the fourth quarter of 2000, UTSC paid
TIMET $2.0 million, which was included in other operating income, in connection
with the termination of this agreement.
The Company has an intercorporate services agreement with Tremont
whereby the Company provides certain management, financial and other services to
Tremont for approximately $.4 million, $.2 million and $.3 million in 1998, 1999
and 2000, respectively, subject to renewal for future years.
The Company has an intercorporate services agreement with NL
Industries, Inc., a majority-owned subsidiary of Valhi. Under the terms of the
agreement, NL provides certain management, financial and other services to TIMET
for approximately $.3 million in each of 1998, 1999 and 2000.
The Company extends market-rate loans to certain officers pursuant to a
Board-approved program to facilitate the purchase of Company stock and its
Convertible Preferred Securities and to pay applicable taxes on shares of
restricted Company stock as such shares vest. The loans are generally payable in
five annual installments beginning six years from date of loan and bear interest
at a rate tied to the Company's borrowing rate, payable quarterly. For certain
executive officers whose positions have been eliminated, the Board has approved
the deferral of interest (to be added to principal quarterly) and principal
payments for a period of up to five years commencing on the date of each such
officer's severance. At December 31, 2000, the outstanding balance of officer
notes receivable was approximately $.5 million.
EWI RE, Inc. arranges for and brokers certain of the Company's
insurance policies. Parties related to Contran own all of the outstanding common
stock of EWI. Through December 31, 2000, a son-in-law of Harold C. Simmons
managed the operations of EWI. Subsequent to December 31, 2000, such son-in-law
provides advisory services to EWI as requested by EWI. Consistent with insurance
industry practices, EWI receives a commission from the insurance underwriters
for the policies that it arranges or brokers. The Company paid an aggregate of
approximately $1.8 million, $2.0 million and $2.4 million for such policies in
1998, 1999 and 2000, respectively, which amount principally included premiums
for the insurance policies paid to third parties, but also included commissions
paid to EWI. In the Company's opinion, the premiums paid for these insurance
policies are reasonable and similar to those the Company could have obtained
through an unrelated insurance broker. The Company expects that these
relationships with EWI will continue in 2001.
Note 16 - Commitments and contingencies:
Long-term agreements. The Company entered into long-term agreements
("LTA's") in 1997, 1998 and 1999 with certain major aerospace customers,
including Boeing, Rolls-Royce plc, United Technologies Corporation (and related
companies) and Wyman-Gordon Company, pursuant to which the Company expects to be
a major supplier of titanium products to these customers. These agreements
generally provide for (i) minimum market shares of the customers' titanium
requirements (generally at least 70%) for extended periods (nine to ten years)
and (ii) fixed or formula-determined prices generally for at least the first
five years.
The LTA with Boeing requires Boeing to purchase a minimum percentage of
its and its suppliers titanium requirements from TIMET commencing in 1999.
Although Boeing placed orders and accepted delivery of certain volumes in 1999
and 2000, the level of orders was significantly below the contractual volume
requirements for those years. Boeing informed the Company in 1999 that it was
unwilling to commit to the contract beyond the year 2000. The Company presently
expects to receive less than the minimum contractual order volume from Boeing in
2001.
In March 2000, the Company filed a lawsuit against Boeing in a Colorado
state court seeking damages for Boeing's repudiation and breach of the Boeing
contract. TIMET's complaint seeks damages from Boeing that TIMET believes are in
excess of $600 million and a declaration from the court of TIMET's rights under
the contract. In June 2000, Boeing filed its answer to TIMET's complaint denying
substantially all of TIMET's allegations and making certain counterclaims
against TIMET. TIMET believes such counterclaims are without merit and intends
to vigorously defend against such claims. The litigation is in the discovery
phase with a trial date currently set for January 2002. The Company continues to
have discussions with Boeing about possible settlement of the matter. There can
be no assurance that the Company will achieve a favorable outcome to this
litigation.
The Wyman-Gordon LTA was amended effective August 1, 2000 extending the
term of the contract to December 31, 2008 (for certain products). Under
certain conditions, the contract may be further extended.
The Company has a 1997 LTA for the purchase of titanium sponge. The
sponge contract runs through 2007, with firm pricing through 2002 (subject to
certain possible adjustments and possible early termination in 2004). This
contract provides for annual purchases by the Company of 6,000 to 10,000 metric
tons. The parties agreed to reduced minimums of 1,000 metric tons for 2000 and
of 3,000 metric tons for 2001. The Company has no other long-term supply
agreements.
Concentration of credit and other risks. Substantially all of the
Company's sales and operating income are derived from operations based in the
U.S., the U.K. and France. The majority of the Company's sales are to customers
in the aerospace industry (including airframe and engine construction). As
described above, the Company has LTA's with certain major aerospace customers,
including Boeing, Rolls-Royce plc, United Technologies Corporation (and related
companies) and Wyman-Gordon Company. These agreements and others accounted for
approximately 44% and 50% of aerospace revenues in 1999 and 2000, respectively.
During 1999 and 2000, Precision Castparts Corporation ("PCC") acquired
Wyman-Gordon Company and a forging company in the U.K. Sales to PCC and related
entities aggregated approximately 10% of the Company's net sales for 2000. The
Company's ten largest customers accounted for about 40% of net sales in 1998,
about 30% of net sales in 1999 and about 50% of sales in 2000. Such
concentration of customers may impact the Company's overall exposure to credit
and other risks, either positively or negatively, in that such customers may be
similarly affected by economic or other conditions.
Operating leases. The Company leases certain manufacturing and office
facilities and various equipment. Most of the leases contain purchase and/or
various term renewal options at fair market and fair rental values,
respectively. In most cases management expects that, in the normal course of
business, leases will be renewed or replaced by other leases. Net rent expense
was approximately $5.0 million in 1998, $5.9 million in 1999 and $6.6 million in
2000.
At December 31, 2000, future minimum payments under noncancellable
operating leases having an initial or remaining term in excess of one year were
as follows:
Amount
-------------------
(In thousands)
Years ending December 31,
2001 $ 4,631
2002 2,222
2003 1,587
2004 242
2005 117
2006 and thereafter 459
-------------------
$ 9,258
===================
Environmental matters.
BMI Complex. In the early 1990s, TIMET and certain other companies (the
"Steering Committee Companies") that currently have or formerly had operations
within a Henderson, Nevada industrial complex (the "BMI Complex") began
environmental assessments of the BMI Complex and each of the individual company
sites located within the BMI Complex pursuant to a series of consent agreements
entered into with the Nevada Division of Environmental Protection ("NDEP"). Most
of this assessment work has now been completed, although some of the assessment
work with respect to TIMET's property is continuing. In 1999, TIMET entered into
a series of agreements with Basic Management, Inc. (together with its
subsidiaries, "BMI") and, in certain cases, other Steering Committee Companies,
pursuant to which, among other things, BMI assumed responsibility for the
conduct of soils remediation activities on the properties described, including,
subject to final NDEP approval, the responsibility to complete all outstanding
requirements under the consent agreements with NDEP insofar as they relate to
the investigation and remediation of soils conditions on such properties. BMI
also agreed to indemnify TIMET and the other Steering Committee Companies
against certain future liabilities associated with any soils contamination on
such properties. The Company contributed $2.8 million to the cost of this
remediation (which payment was charged against accrued liabilities). The Company
also agreed to convey to BMI, at no additional cost, certain lands owned by the
Company adjacent to its plant site (the "TIMET Pond Property") upon payment by
BMI of the cost to design, purchase, and install the technology and equipment
necessary to allow the Company to stop discharging liquid and solid effluents
and co-products onto the TIMET Pond Property (BMI will pay 100% of the first
$15.9 million cost for this project, and TIMET will contribute 50% of the cost
in excess of $15.9 million, up to a maximum payment by TIMET of $2 million; the
Company does not currently expect to incur any cost in connection with this
project). The Company, BMI and the other Steering Committee Companies are
continuing investigation with respect to certain additional issues associated
with the properties described above, including any possible groundwater issues
at the TIMET Pond Property.
The Company is continuing assessment work with respect to its own
active plant site. A preliminary study of certain groundwater remediation issues
at the Company's Henderson operations and other Company sites within the BMI
Complex (which sites do not include the above discussed TIMET Pond Property) was
completed during 2000. The Company accrued $3.3 million based on the
undiscounted cost estimates set forth in the study. These expenses are expected
to be paid over a period of up to thirty years.
Henderson facility. In April 1998, the U. S. Environmental Protection
Agency ("EPA") filed a civil action against TIMET (United States of America v.
Titanium Metals Corporation; Civil Action No. CV-S-98-682-HDM (RLH), U. S.
District Court, District of Nevada) in connection with an earlier notice of
violation alleging that TIMET violated several provisions of the Clean Air Act
in connection with the start-up and operation of certain environmental equipment
at TIMET's Henderson, Nevada facility during the early to mid-1990s. A
settlement agreement in this case was approved by the court in February 2000,
pursuant to which TIMET will make cash payments totaling approximately $.4
million from 2000 through 2002, of which $.2 million is remaining at December
31, 2000. During 2000, TIMET completed the agreed-upon additional monitoring and
emissions controls at a capital cost of approximately $1.4 million.
At December 31, 2000, the Company had accrued an aggregate of
approximately $4 million primarily for environmental matters, including those
discussed above. The Company records liabilities related to environmental
remediation obligations when estimated future expenditures are probable and
reasonably estimable. Such accruals are adjusted as further information becomes
available or circumstances change. Estimated future expenditures 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 expenditures 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.
In September 2000, the Company was named in an action filed by the
U.S. Equal Employment Opportunity Commission in Federal District Court in Las
Vegas, Nevada (U.S. Equal Employment Opportunity Commission v. Titanium Metals
Corporation, CV-S-00-1172DWH-RJJ). The complaint alleges that several female
employees at the Company's Henderson, Nevada plant were the subject of sexual
harassment. The Company intends to vigorously defend this action, but in any
event does not presently anticipate that any adverse outcome in this case would
be material to TIMET's consolidated financial position, results of operations or
liquidity.
Other.
In March 2001, the Company was notified by one of its customers that a
product manufactured from standard grade titanium produced by the Company
contained what has been confirmed to be a tungsten inclusion. The Company
believes that the source of this tungsten was contaminated silicon purchased
from an outside vendor in 1998. The silicon was used as an alloying addition to
the titanium at the melting stage. The Company is currently investigating the
possible scope of this problem, including and evaluation of the identities of
customers who received material manufactured using this silicon and the
applications to which such material has been placed by such customers.
At the present time, the Company is aware of only a single ingot that
has been demonstrated to contain tungsten inclusions; however, further
investigation may identify other material that has been similarly affected.
Until this investigation is completed, the Company is unable to determine the
possible remedial steps that may be required and whether the Company might incur
any material liability with respect to this matter. The Company currently
believes that it is unlikely that its insurance policies will provide coverage
for any costs that may be associated with this matter. However, the Company
currently intends to seek full recovery from the silicon supplier for any
liability the Company might incur in this matter, although no assurances can be
given that the Company will ultimately be able to recover all or any portion of
such amounts. At December 31, 2000, the Company had not recorded any liability
related to this matter. The amount of liability the Company may ultimately incur
related to this matter is not reasonably estimable at this time.
The Company is involved in various other environmental, contractual,
product liability and other claims, disputes and litigation incidental to its
business.
The Company currently believes the disposition of all claims and
disputes, individually or in the aggregate, should not have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
Note 17 - Quarterly results of operations (unaudited):
Quarters ended
--------------------------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
---------------- ------------- -------------- -------------
(In millions, except per share data)
Year ended December 31, 2000:
Net sales $ 104.7 $ 108.8 $ 106.8 $ 106.5
Operating loss (18.4) (9.5) (7.7) (6.2)
Net income loss (15.1) (9.5) (7.9) (6.4)
Basic and diluted loss per share:
Before extraordinary item $ (.45) $ (.30) $ (.25) $ (.20)
Extraordinary item (.03) - - -
---------------- ------------- -------------- -------------
$ (.48) $ (.30) $ (.25) $ (.20)
================ ============= ============== =============
Year ended December 31, 1999:
Net sales $ 134.1 $ 127.6 $ 112.7 $ 105.5
Operating income (loss) (1.4) 1.0 (7.8) (23.2)
Net loss (3.9) (2.5) (7.5) (17.5)
Basic and diluted loss per share $ (.12) $ (.08) $ (.24) $ (.56)
Due to the timing of the issuance and repurchase of common stock and
rounding in calculations, the sum of quarterly earnings per share may be
different than earnings per share for the full year.
Note 18 - Earnings per share:
In 1998, 1999 and 2000, the effect of the assumed conversion of the
Convertible Preferred Securities was antidilutive. Had the Convertible Preferred
Securities not been antidilutive, diluted income would have been increased by
$8.8 million in 1998 and $8.7 million in each of 1999 and 2000, and diluted
shares would have been increased by the 5.4 million shares in each of 1998, 1999
and 2000 issuable upon conversion. Dilutive stock options of 22,000 in 1999 and
88,000 in 2000 were excluded from the calculation of diluted earnings per share
because their effect would have been antidilutive due to the losses in those
years. Stock options and restricted stock omitted from the denominator because
they were antidilutive approximated 1.2 million in 1998, 1.7 million in 1999 and
2.1 million in 2000.
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of Titanium Metals Corporation:
Our audits of the consolidated financial statements referred to in our
report dated January 29, 2001, appearing in this 2000 Annual Report on Form 10-K
also included an audit of the financial statement schedule listed in the Index
on page F of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Denver, Colorado
January 29, 2001
S-1
TITANIUM METALS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
charged
Balance at (credited) to Balance
beginning costs and at end
Description of year expenses Deductions Other of year
---------------------------------------- -------------- ---------------- ---------------- ----------- ------------
Year ended December 31, 2000:
Allowance for doubtful accounts $ 3,330 $ 185 $ (365)(a) $ (223) $ 2,927
============== ================ =============== =========== ============
Valuation allowance for deferred
income taxes $ 1,869 $ 49 $ - $ - $ 1,918
============== ================ =============== =========== ============
Reserve for excess and slow
moving inventories $ 14,518 $ 2,305 $ (1,635) $ (774) $ 14,414
============== ================ =============== =========== ============
Year ended December 31, 1999:
Allowance for doubtful accounts $ 1,932 $ 1,628 $ (230)(a) $ - $ 3,330
============== ================ =============== =========== ============
Valuation allowance for deferred
income taxes $ - $ 1,869 $ - $ - $ 1,869
============== ================ =============== =========== ============
Reserve for excess and slow
moving inventories $ 6,520 $ 5,077 $ (406) $ 3,327 (b) $ 14,518
============== ================ =============== =========== ============
Year ended December 31, 1998:
Allowance for doubtful accounts $ 2,218 $ 39 $ (325)(a) $ - $ 1,932
============== ================ =============== =========== ============
Valuation allowance for deferred
income taxes $ 373 $ - $ (373) $ - $ -
============== ================ =============== =========== ============
Reserve for excess and slow
moving inventories $ 6,292 $ 228 $ - $ - $ 6,520
============== ================ =============== =========== ============
Notes
------------------
(a) Amounts written off, less recoveries.
(b) Adjustment for slow moving inventory previously carried at zero value.
S-2