SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-28538
Titanium Metals Corporation
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-5630895
-------------------------------------------------- ----------------------------
(State or other jurisdiction of incorporation or (IRS Employer
organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240
------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 233-1700
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
------- ---------
Indicate by check mark whether the registrant is large accelerated filer, an
accelerated filer or a non accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large accelerated filer__ Accelerated filer X Non accelerated filer__.
Indicate by check mark whether the registrant is a shell company (as defined by
rule 12b-2 of the Exchange Act).
Yes No X
-------- --------
Number of shares of common stock outstanding on May 1, 2006: 75,522,565
Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in the Notes to Condensed Consolidated Financial Statements and
in Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A"), are forward-looking statements that represent management's
beliefs and assumptions based on currently available information.
Forward-looking statements can generally be identified by the use of words such
as "believes," "intends," "may," "will," "looks," "should," "could,"
"anticipates," "expects" or comparable terminology or by discussions of
strategies or trends. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurance that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly affect expected results. Actual future results could differ
materially from those described in such forward-looking statements, and the
Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Among the factors that could cause actual results to differ
materially are the risks and uncertainties discussed in this Quarterly Report,
including risks and uncertainties in those portions referenced above and those
described from time to time in the Company's other filings with the Securities
and Exchange Commission ("SEC") which include, but are not limited to, the
cyclicality of the commercial aerospace industry, the performance of aerospace
manufacturers and the Company under their long-term agreements, the existence or
renewal of certain long-term agreements, the difficulty in forecasting demand
for titanium products, global economic and political conditions, global
productive capacity for titanium, changes in product pricing and costs, the
impact of long-term contracts with vendors on the ability of the Company to
reduce or increase supply, the possibility of labor disruptions, fluctuations in
currency exchange rates, fluctuations in the market price of marketable
securities, control by certain stockholders and possible conflicts of interest,
uncertainties associated with new product or new market development, the
availability of raw materials and services, changes in raw material prices and
other operating costs (including energy costs), possible disruption of business
or increases in the cost of doing business resulting from terrorist activities
or global conflicts, the potential for adjustment of the Company's deferred
income tax asset valuation allowance and other risks and uncertainties. Should
one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or expected.
TITANIUM METALS CORPORATION
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - March 31, 2006 (unaudited)
and December 31, 2005 2
Condensed Consolidated Statements of Operations - Three months
ended March 31, 2006 and 2005 (unaudited) 4
Condensed Consolidated Statements of Comprehensive Income -
Three months ended March 31, 2006 and 2005 (unaudited) 5
Condensed Consolidated Statements of Cash Flows - Three months
ended March 31, 2006 and 2005 (unaudited) 6
Condensed Consolidated Statement of Changes in Stockholders'
Equity - Three months ended March 31, 2006 (unaudited) 8
Notes to Condensed Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
Item 4. Controls and Procedures 28
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 1A. Risk Factors 29
Item 6. Exhibits 29
- 1 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
ASSETS 2006 2005
-------------------- --------------------
(unaudited)
Current assets:
Cash and cash equivalents $ 11,943 $ 17,605
Restricted cash and cash equivalents 146 146
Accounts and other receivables, less
allowance of $1,678 and $1,983 190,554 142,902
Inventories 400,637 365,696
Prepaid expenses and other 4,457 4,485
Deferred income taxes 11,945 19,436
-------------------- --------------------
Total current assets 619,682 550,270
Marketable securities 46,066 46,477
Investment in joint ventures 28,607 25,978
Property and equipment, net 262,894 252,990
Deferred income taxes 7,735 8,009
Other 24,901 23,540
-------------------- --------------------
Total assets $ 989,885 $ 907,264
==================== ====================
See accompanying Notes to Condensed Consolidated Financial Statements.
- 2 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
March 31, December 31,
LIABILITIES, MINORITY INTEREST AND 2006 2005
------------------- --------------------
STOCKHOLDERS' EQUITY (unaudited)
Current liabilities:
Accounts payable $ 66,725 $ 61,457
Accrued liabilities 64,274 75,698
Customer advances 16,223 15,577
Income taxes payable 31,367 13,151
Other 1,576 967
------------------- --------------------
Total current liabilities 180,165 166,850
Long-term debt 48,791 51,359
Accrued OPEB cost 15,728 15,580
Accrued pension cost 59,139 58,450
Accrued environmental cost 1,518 1,518
Deferred income taxes 24,868 27,445
Debt payable to TIMET Capital Trust I - 5,852
Other 4,319 4,519
------------------- --------------------
Total liabilities 334,528 331,573
------------------- --------------------
Minority interest 16,198 13,523
------------------- --------------------
Stockholders' equity:
Series A Preferred Stock, $.01 par value; $149,131
liquidation preference; 4,025 shares authorized,
2,446 and 2,983 shares issued and
outstanding, respectively 108,645 132,493
Common stock, $.01 par value; 200,000 shares
authorized, 75,432 and 70,965 shares
issued, respectively 754 710
Additional paid-in capital 443,734 401,057
Retained earnings 122,800 66,179
Accumulated other comprehensive loss (36,774) (38,271)
------------------- --------------------
Total stockholders' equity 639,159 562,168
------------------- --------------------
Total liabilities, minority interest and
stockholders' equity $ 989,885 $ 907,264
=================== ====================
Commitments and contingencies (Note 13)
See accompanying Notes to Condensed Consolidated Financial Statements.
- 3 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
Three months ended March 31,
------------------------------------------
2006 2005
-------------------- ------------------
Net sales $ 286,895 $ 155,235
Cost of sales 178,575 126,280
-------------------- ------------------
Gross margin 108,320 28,955
Selling, general, administrative and development expense 15,254 12,360
Equity in earnings of joint ventures 2,258 801
Other income (expense), net (200) 1,985
-------------------- ------------------
Operating income 95,124 19,381
Interest expense 995 674
Other non-operating income (expense), net 290 743
-------------------- ------------------
Income before income taxes and minority interest 94,419 19,450
Income tax expense (benefit) 33,255 (22,879)
Minority interest in after-tax earnings 2,318 924
-------------------- ------------------
Net income 58,846 41,405
Dividends on Series A Preferred Stock 2,074 3,298
-------------------- ------------------
Net income attributable to common stockholders $ 56,772 $ 38,107
==================== ==================
Earnings per share attributable to common stockholders:
Basic $ 0.78 $ 0.60
Diluted $ 0.64 $ 0.46
Weighted average shares outstanding:
Basic 73,034 63,724
Diluted 91,939 90,620
See accompanying Notes to Condensed Consolidated Financial Statements.
- 4 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(In thousands)
Three months ended March 31,
------------------------------------------
2006 2005
-------------------- ------------------
Net income $ 58,846 $ 41,405
-------------------- ------------------
Other comprehensive income:
Currency translation adjustment, net of tax benefit of $59 and $0 1,596 (1,297)
Unrealized losses on marketable securities, net of tax
benefit of $0 and $95 (411) (177)
TIMET's share of VALTIMET SAS's unrealized net
gains on derivative financial instruments qualifying as
cash flow hedges, net of tax expense of $188 and $0 312 752
-------------------- ------------------
Total other comprehensive (loss) income 1,497 (722)
-------------------- ------------------
Comprehensive income $ 60,343 $ 40,683
==================== ==================
See accompanying Notes to Condensed Consolidated Financial Statements.
- 5 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Three months ended March 31,
----------------------------------------
2006 2005
------------------- ------------------
Cash flows from operating activities:
Net income $ 58,846 $ 41,405
Depreciation and amortization 8,289 7,933
Noncash impairment of equipment - 1,251
Equity in earnings of joint ventures, net of distributions (1,177) (801)
Deferred income taxes 5,165 (25,023)
Minority interest in after-tax earnings 2,318 924
Other, net 48 (369)
Change in assets and liabilities:
Receivables (47,526) (13,525)
Inventories (33,148) (23,557)
Prepaid expenses and other (901) (1,153)
Accounts payable and accrued liabilities (4,024) 5,572
Customer advances 452 25,528
Income taxes 24,139 1,322
Deferred revenue (2,820) 1,277
Accrued OPEB and pension costs 148 234
Other, net (378) 589
------------------- ------------------
Net cash provided by operating activities 9,431 21,607
------------------- ------------------
Cash flows from investing activities:
Capital expenditures (16,886) (11,143)
Change in restricted cash, net - 576
Investment in joint venture (660) -
Other - 49
------------------- ------------------
Net cash used by investing activities (17,546) (10,518)
------------------- ------------------
Cash flows from financing activities:
Indebtedness:
Borrowings 188,490 59,000
Repayments (191,222) (61,175)
Dividends paid on Series A Preferred Stock (2,225) (3,298)
Issuance of common stock 7,905 -
Other, net (702) 1,020
------------------- ------------------
Net cash provided (used) by financing activities 2,246 (4,453)
------------------- ------------------
Net cash (used) provided by operating,
investing and financing activities $ (5,869) $ 6,636
=================== ==================
See accompanying Notes to Condensed Consolidated Financial Statements.
- 6 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
(In thousands)
Three months ended March 31,
----------------------------------------
2006 2005
------------------ ------------------
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $ (5,869) $ 6,636
Currency translation 207 17
------------------ ------------------
(5,662) 6,653
Cash and cash equivalents at beginning of period 17,605 7,194
------------------ ------------------
Cash and cash equivalents at end of period $ 11,943 $ 13,847
================== ==================
Supplemental disclosures:
Cash paid for:
Interest $ 674 $ 478
Income taxes, net $ 3,844 $ 815
Noncash investing and financing activities:
Capital lease obligations incurred when the Company
entered into certain leases for new equipment $ 456 $ -
See accompanying Notes to Condensed Consolidated Financial Statements
- 7 -
TITANIUM METALS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
Three months ended March 31, 2006
(In thousands)
Accumulated
Series A Additional Other
Common Common Preferred Paid-in Retained Comprehensive
Shares Stock Stock Capital Earnings Loss Total
------ ----- ------- -------- -------- -------- --------
Balance at December 31, 2005 70,965 $710 $132,493 $401,057 $ 66,179 $(38,271) $562,168
Comprehensive income - - - - 58,846 1,497 60,343
Issuance of common stock 584 6 - 7,899 - - 7,905
Conversion of Series A
Preferred Stock and BUCS 3,883 38 (23,848) 29,481 - - 5,671
Tax benefit of stock options
exercised - - - 5,297 - - 5,297
Dividends declared on Series A
Preferred Stock - - - - (2,225) - (2,225)
------ ---- -------- -------- -------- -------- --------
Balance at March 31, 2006 75,432 $754 $108,645 $443,734 $122,800 $(36,774) $639,159
====== ==== ======== ======== ======== ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements
- 8 -
TITANIUM METALS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Organization and basis of presentation
Titanium Metals Corporation ("TIMET") is a vertically integrated producer
of titanium sponge, melted products and a variety of mill products for
aerospace, industrial, military and other applications. The accompanying
Condensed Consolidated Financial Statements include the accounts of TIMET and
its majority owned subsidiaries (collectively, the "Company"), except the TIMET
Capital Trust I (the "Capital Trust"), previously a wholly-owned finance
subsidiary that was dissolved in the first quarter of 2006. All material
intercompany transactions and balances with consolidated subsidiaries have been
eliminated. Certain prior year amounts have been reclassified to conform to the
current year presentation. The Condensed Consolidated Balance Sheet at March 31,
2006 and the Condensed Consolidated Statements of Operations, Comprehensive
Income (Loss), Changes in Stockholders' Equity and Cash Flows for the interim
periods ended March 31, 2006 and 2005, as applicable, have been prepared by the
Company without audit in accordance with accounting principles generally
accepted in the United States of America ("GAAP"). In the opinion of management,
all adjustments necessary to fairly state the consolidated financial position,
results of operations and cash flows have been made. The results of operations
for interim periods are not necessarily indicative of the operating results of a
full year or of future operations. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with GAAP have
been condensed or omitted. The Company's first three fiscal quarters reported
are the approximate 13-week periods ending on the Saturday generally nearest to
March 31, June 30 and September 30. The Company's fourth fiscal quarter and
fiscal year always end on December 31. For presentation purposes, the Company's
Condensed Consolidated Financial Statements and notes thereto have been
presented as ending on March 31, June 30, September 30 and December 31, as
applicable. The Company's Condensed Consolidated Balance Sheet as of December
31, 2005 has been derived from the Company's audited financial statements at
that date, but does not include all disclosures required by GAAP, as permitted
by regulations of the SEC. Accordingly, the accompanying Condensed Consolidated
Financial Statements should be read in conjunction with the Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2005 (the "2005 Annual Report").
- 9 -
At March 31, 2006, Valhi, Inc. and subsidiaries ("Valhi") held 37.1% of
TIMET's outstanding common stock and 0.6% of the Company's 6.75% Series A
Convertible Preferred Stock (the "Series A Preferred Stock"). At March 31, 2006,
Contran Corporation ("Contran") held, directly or through subsidiaries, 92% of
Valhi's outstanding common stock. At March 31, 2006, the Combined Master
Retirement Trust ("CMRT"), a trust sponsored by Contran to permit the collective
investment by trusts that maintain the assets of certain employee benefit plans
adopted by Contran and certain related companies, held 10.2% of the Company's
common stock. TIMET's U.S. pension plans invest in the portion of the CMRT that
does not hold TIMET common stock. Substantially all of Contran's outstanding
voting stock is held by trusts established for the benefit of certain children
and grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee, or
is held by Mr. Simmons or persons or other entities related to Mr. Simmons. In
addition, Mr. Simmons is the sole trustee of the CMRT and a member of the trust
investment committee for the CMRT. At March 31, 2006, Mr. Simmons directly owned
2.6% of TIMET's outstanding common stock and Mr. Simmons' spouse owned 65.4% of
the Company's outstanding Series A Preferred Stock and a nominal number of
shares of the Company's common stock. Consequently, Mr. Simmons may be deemed to
control each of Contran, Valhi and TIMET. Subsequent to March 31, 2006 and
through May 1, 2006, Mr. Simmons purchased an additional 50,000 shares of TIMET
common stock in open market transactions.
The Company completed a two-for-one split of its common stock effective
after the close of trading on February 16, 2006. All share and per share
disclosures for all periods presented have been adjusted to give effect to this
February 2006 stock split. On April 20, 2006, the Company announced an
additional two-for-one split of its common stock, which will be become effective
after the close of trading on May 15, 2006. Because the effective date of the
May 15, 2006 split is after the date of issuance of these Condensed Consolidated
Financial Statements, the share and per share disclosures contained in this
Quarterly Report have not been adjusted for the effects of this May 15, 2006
split. See Note 14 for pro-forma earnings per share amounts that give effect to
the May 15, 2006 stock split.
On January 1, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS No.
123R"), which replaced SFAS No. 123 and superseded APB No. 25. SFAS No. 123R
requires the measurement of all employee share-based payments to employees,
including grants of employee stock options, to be recognized in the financial
statements based on their fair values. Under SFAS No. 123R, the pro forma
disclosures previously permitted under SFAS No. 123 are no longer an alternative
to financial statement recognition. Under the transition alternatives permitted
under SFAS No. 123R, the Company will apply the new standard to any new awards
granted on or after January 1, 2006, and to all awards existing as of December
31, 2005 which are subsequently modified, repurchased or cancelled.
Additionally, as of January 1, 2006, the Company would be required to recognize
compensation cost previously measured under SFAS No. 123 for the portion of any
non-vested award existing as of December 31, 2005 over the remaining vesting
period. The Company's adoption of SFAS No. 123R as of January 1, 2006 did not
have a material effect on the Company's financial position or results of
operations, as all of TIMET's outstanding options were fully vested as of such
date. If the Company were to grant a significant number of options or modify,
repurchase or cancel existing options in the future, the Company could recognize
material amounts of compensation cost related to such options in its condensed
consolidated financial statements. If the Company had accounted for its
stock-based employee compensation related to stock options in accordance with
the fair value-based recognition provisions of SFAS No. 123 for all awards
granted subsequent to January 1, 1995, there would have been no material effect
on the Company's reported net income, and related per share amounts, in the
first quarter of 2005.
- 10 -
Also upon adoption of SFAS No. 123R, the cash income tax benefit resulting
from the exercise of stock options in excess of the cumulative income tax
benefit related to such options previously recognized for GAAP financial
reporting purposes in the Company's condensed consolidated statements of income,
if any, will be reflected as a cash inflow from financing activities in the
Company's condensed consolidated statements of cash flows, and the Company's
cash flows from operating activities will reflect the effect of cash paid for
income taxes exclusive of such cash income tax benefit. The aggregate amount of
such income tax benefits recognized as a component of other net cash flows from
financing activities was less than $0.1 million in the first quarter of 2006.
SFAS No. 123R also requires certain expanded disclosures regarding the
Company's stock options, and such expanded disclosures were provided in the 2005
Annual Report.
Note 2 - Inventories
March 31, December 31,
2006 2005
--------------------- -------------------
(In thousands)
Raw materials $ 102,986 $ 89,956
Work-in-process 195,722 169,856
Finished products 65,556 73,395
Inventory consigned to customers 20,129 20,000
Supplies 16,244 12,489
--------------------- -------------------
$ 400,637 $ 365,696
===================== ===================
On January 1, 2006, the Company adopted SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4. SFAS No. 151 clarifies the types of costs
that should be expensed rather than capitalized as inventory. This statement
also clarifies the circumstances under which fixed overhead costs associated
with operating facilities involved in inventory processing should be
capitalized. The Company's adoption of SFAS No. 151 did not have a material
impact on its consolidated financial position or results of operations as the
Company's existing production cost accounting already conforms to the
requirements of SFAS No. 151.
Note 3 - Marketable securities
The following table summarizes the Company's marketable securities as of
March 31, 2006 and December 31, 2005:
March 31, 2006 December 31, 2005
----------------------------- --------------------------------
Market Market
Marketable security Shares value Shares value
------------------------------------------------ ------------ ------------- -------------- --------------
($ in thousands)
CompX International, Inc. ("CompX") (1) 2,696,420 $ 43,547 2,696,420 $ 43,197
NL Industries, Inc. ("NL") 222,100 2,361 222,100 3,129
Kronos Worldwide, Inc. ("Kronos") 5,203 158 5,203 151
------------- --------------
$ 46,066 $ 46,477
============= ==============
-----------------------------------------------------------------------------------------------------------------------
(1) The Company directly held 483,600 shares of CompX as of March 31, 2006 and December 31, 2005. The remaining
2,212,820 shares are held by CompX Group Inc. ("CGI").
- 11 -
As of March 31, 2006 and December 31, 2005, the Company's aggregate cost
basis of its marketable securities was $36.9 million. For the three months ended
March 31, 2006 and 2005, the Company recognized $0.4 million and $0.2 million
(net of taxes) of unrealized losses in stockholders' equity, as a component of
other comprehensive income (loss).
During the first quarter of 2006, CompX, NL and Kronos each paid cash
dividends on their common stock. During the first quarter of 2005, CompX and
Kronos paid cash dividends on its common stock and NL paid dividends on its
common stock in the form of shares of Kronos common stock.
Note 4 - Property and equipment
March 31, 2006 December 31, 2005
-------------------- ------------------
(In thousands)
Land and improvements $ 8,933 $ 8,922
Buildings and improvements 36,853 37,259
Information technology systems 63,034 61,175
Manufacturing equipment and other 355,287 348,080
Construction in progress 39,356 31,488
-------------------- ------------------
503,463 486,924
Less accumulated depreciation 240,569 233,934
-------------------- ------------------
$ 262,894 $ 252,990
==================== ==================
Note 5 - Other noncurrent assets
March 31, December 31,
2006 2005
-------------------- ------------------
(In thousands)
Prepaid pension cost $ 23,563 $ 22,337
Deferred financing costs 716 177
Investment in common securities of the Capital Trust - 180
Intangible assets, net 464 683
Other 158 163
-------------------- ------------------
$ 24,901 $ 23,540
==================== ==================
During the first quarter of 2006, the Company incurred $0.7 million of
deferred financing costs related to a new U.S. credit agreement (see Note 7).
Such financing costs are being amortized over the five-year term of the credit
agreement. See Note 8 with regard to the investment in common securities of the
Capital Trust.
- 12 -
Note 6 - Accrued liabilities
March 31, December 31,
2006 2005
--------------------- ------------------
(In thousands)
OPEB cost $ 2,761 $ 2,181
Pension cost 5,416 5,353
Payroll and vacation 4,604 6,227
Incentive compensation 8,897 20,091
Other employee benefits 10,909 9,938
Deferred revenue 11,708 14,525
Environmental costs 1,463 1,718
Taxes, other than income 7,817 5,318
Other 10,699 10,347
--------------------- ------------------
$ 64,274 $ 75,698
===================== ==================
Note 7 - Bank debt
On February 17, 2006, the Company entered into a new $175 million long-term
credit agreement, replacing its previous U.S credit agreement, which was
terminated on that date. As of March 31, 2006, the Company had outstanding
borrowings of $40.3 million under its U.S. credit agreement and $8.5 million
under its U.K. credit facilities. As of March 31, 2006, the weighted average
interest rate on borrowings outstanding under the Company's U.S. credit
agreement and the Company's U.K. credit facilities was 5.9% and 5.6%,
respectively. Aggregate unused borrowing availability under the Company's U.S.
and European credit facilities was approximately $176 million as of March 31,
2006.
Note 8 - Capital Trust
On March 3, 2006, the Company called all of its outstanding 6.625%
mandatorily redeemable convertible preferred securities, beneficial unsecured
convertible securities ("BUCS") for redemption. The redemption price equaled
100.6625% of the $50.00 liquidation amount per BUCS, or $50.3313, plus accrued
distributions to the March 24, 2006 redemption date of the BUCS of $0.2116 per
BUCS. Subsequent to March 3, 2006 and through March 20, 2006, 113,400 of the
113,467 outstanding BUCS were converted into 303,678 shares of TIMET common
stock. On March 24, 2006, the Company redeemed the remaining 67 BUCS for cash.
Subsequently, the Capital Trust was dissolved and, accordingly, the Company's
investment in the common securities of the Capital Trust as of March 31, 2006 is
zero.
Note 9 - Stockholders' equity
During the first quarter of 2006, certain holders of the Company's Series A
Preferred Stock converted an aggregate of 536,890 shares of the Series A
Preferred Stock into 3,579,258 shares of TIMET's common stock. As of March 31,
2006, 2,445,723 shares of Series A Preferred Stock remain outstanding.
Subsequent to March 31, 2006 and through May 1, 2006, an additional 2,014 shares
of Series A Preferred Stock were converted into 13,425 shares of TIMET common
stock.
- 13 -
Note 10 - Other income (expense)
Three months ended March 31,
2006 2005
------------------ ------------------
(In thousands)
Other operating income (expense):
Settlement of customer claim $ - $ 1,800
Other, net (200) 185
------------------ ------------------
$ (200) $ 1,985
================== ==================
Other non-operating income (expense):
Dividends and interest $ 744 $ 487
Equity in earnings of common
securities of the Capital Trust 2 103
Foreign exchange (loss) gain, net (391) 260
Other, net (65) (107)
------------------ ------------------
$ 290 $ 743
================== ==================
Note 11 - Income taxes
Three months ended March 31,
-----------------------------------------
2006 2005
------------------ -------------------
(In thousands)
Expected income tax expense (benefit), at 35% $ 33,046 $ 6,808
Non-U.S. tax rates (771) (315)
Incremental tax on earnings of non-U.S. group affiliates 66 -
U.S. state income taxes, net 1,658 315
Dividends received deduction (116) (107)
Nontaxable income (98) (53)
Adjustment of deferred income tax asset
valuation allowance - (29,896)
Domestic manufacturing credit (556) -
Other, net 26 369
------------------ -------------------
$ 33,255 $ (22,879)
================== ===================
As of March 31, 2006, the Company had, for U.S. federal income tax
purposes, a capital loss carryforward of $73 million that expires in 2008. The
Company has recognized a deferred income tax asset valuation allowance for the
majority of such capital loss carryforward.
In October 2004, The American Jobs Creation Act of 2004 was enacted into
law. The new law provides for a special deduction from U.S. taxable income equal
to a specified percentage of a U.S. company's qualified income from domestic
manufacturing activities (as defined). Due to the utilization of existing net
operating losses ("NOLs"), the Company's provision for income taxes for the
first quarter of 2006 includes a tax benefit of $0.6 million related to such
special deduction and no tax benefit on the Company's income tax provision
during the first quarter of 2005.
- 14 -
Note 12 - Employee benefits
Defined benefit pension plans. The components of the net periodic pension
expense are set forth below:
Three months ended March 31,
-----------------------------------------
2006 2005
------------------ -------------------
(In thousands)
Service cost $ 1,097 $ 957
Interest cost 3,368 3,490
Expected return on plan assets (4,484) (3,791)
Amortization of net losses 788 1,225
Amortization of unrecognized prior service cost 139 139
------------------ -------------------
Net periodic pension expense $ 908 $ 2,020
================== ===================
Through March 31, 2006, the Company has made $2.0 million of cash
contributions to its U.K. defined benefit pension plan in 2006, and the Company
currently expects to make additional cash contributions of approximately $6.2
million to its U.K. defined benefit pension plan and $0.4 million to its U.S.
defined benefit pension plan during the remainder of 2006.
Postretirement benefits other than pensions. The components of net periodic
OPEB expense are set forth below:
Three months ended March 31,
-----------------------------------------
2006 2005
------------------ -------------------
(In thousands)
Service cost $ 175 $ 171
Interest cost 409 467
Amortization of unrecognized prior service cost (116) (116)
Amortization of net losses 233 324
------------------ -------------------
Net periodic OPEB expense $ 701 $ 846
================== ===================
Note 13 - Commitments and contingencies
Environmental matters. The Company is continuing assessment work with
respect to its active plant site in Henderson, Nevada. The Company currently has
$2.3 million accrued based on the undiscounted cost estimates of the probable
costs for remediation of this site related to specific future remediation costs.
The Company expects these accrued expenses to be paid over a period of up to
thirty years.
- 15 -
At March 31, 2006, the Company had accrued an aggregate of approximately
$3.0 million for environmental matters, including those discussed above. The
upper end of the range of reasonably possible costs to remediate these matters
is approximately $5.2 million. The Company records liabilities related to
environmental remediation obligations when estimated future costs are probable
and reasonably estimable. Such accruals are evaluated and adjusted as further
information becomes available or circumstances change. Estimated future costs
are not discounted to their present value. It is not possible to estimate the
range of costs for certain sites. The imposition of more stringent standards or
requirements under environmental laws or regulations, the results of future
testing and analysis undertaken by the Company at its operating facilities, or a
determination that the Company is potentially responsible for the release of
hazardous substances at other sites, could result in costs in excess of amounts
currently estimated to be required for such matters. No assurance can be given
that actual costs will not exceed accrued amounts or that costs will not be
incurred with respect to sites as to which no problem is currently known or
where no estimate can presently be made. Further, there can be no assurance that
additional environmental matters will not arise in the future.
Legal proceedings. The Company records liabilities related to legal
proceedings when estimated costs are probable and reasonably estimable. Such
accruals are adjusted as further information becomes available or circumstances
change. Estimated future costs are not discounted to their present value. It is
not possible to estimate the range of costs for certain matters. No assurance
can be given that actual costs will not exceed accrued amounts or that costs
will not be incurred with respect to matters as to which no problem is currently
known or where no estimate can presently be made. Further, there can be no
assurance that additional legal proceedings will not arise in the future.
Other. The Company has entered into letters of credit to collateralize (i)
potential workers' compensation claims in Ohio and Nevada and (ii) future usage
of electricity in Nevada. As of March 31, 2006, the outstanding amounts for such
letters of credit, which reduce the Company's excess availability under its U.S.
credit agreement, were $2.0 million and $2.1 million, respectively.
Additionally, the Company has entered into a letter of credit to collateralize
various business obligations, which has reduced the Company's excess
availability under its other European credit facilities by approximately $2.7
million.
The Company is involved in various employment, environmental, contractual,
product liability and other claims, disputes and litigation incidental to its
business including those discussed above. In several instances, the Company
believes it has insurance coverage to eliminate any risk of loss (other than
standard deductibles, which generally are less than $1 million). The Company
currently believes that the outcome of these matters, individually and in the
aggregate, will not have a material adverse effect on the Company's financial
position, liquidity or overall trends in results of operations. However, all
such matters are subject to inherent uncertainties, and were an unfavorable
outcome to occur with respect to several of these matters in a given period, it
is possible that it could have a material adverse impact on the results of
operations or cash flows in that particular period. In cases where these
employment, environmental, contractual, product liability, general liability and
other claims, disputes and litigation involve matters that the Company has
concluded the risk of loss is not probable, but is more than remote, the Company
believes the range of loss, to the extent the Company is able to reasonably
estimate a range of loss, would be limited at the high end to the Company's
standard insurance deductibles.
See the 2005 Annual Report for additional information concerning certain
legal and environmental matters, commitments and contingencies.
- 16 -
Note 14 - Earnings per share
Basic earnings per share is based on the weighted average number of
unrestricted common shares outstanding during each period. Diluted earnings per
share attributable to common stockholders reflects the dilutive effect of common
stock options, restricted stock and the assumed conversion of the BUCS and the
Series A Preferred Stock, if applicable. A reconciliation of the numerator and
denominator used in the calculation of basic and diluted earnings per share is
presented below.
Three months ended March 31,
----------------------------------------
2006 2005
------------------ ------------------
(In thousands)
Numerator:
Net income attributable to common stockholders $ 56,772 $ 38,107
Interest expense on BUCS (net of tax) 53 97
Dividends on Series A Preferred Stock 2,074 3,298
------------------ ------------------
Diluted net income attributable to common stockholders $ 58,899 $ 41,502
================== ==================
Denominator:
Average common shares outstanding 73,034 63,724
Average dilutive stock options and restricted stock 403 528
BUCS 270 308
Series A Preferred Stock 18,232 26,060
------------------ ------------------
Diluted shares 91,939 90,620
================== ==================
Stock options to purchase 1,012,160 shares during the three months ended
March 31, 2005 were excluded from the calculation of diluted earnings per share
because the exercise price for such options was greater than the average market
price of the common shares and such options were therefore antidilutive during
the respective period. As of March 31, 2006, net income attributable to common
stockholders included $0.7 million ($0.28 per outstanding share) of undeclared
dividends on the Company's Series A Preferred Stock.
The table below provides pro-forma earnings per share information to
reflect the effects of the Company's two-for-one stock split, which will become
effective after the close of business on May 15, 2006:
Pro forma - three months
ended March 31,
----------------------------------------
2006 2005
------------------ ------------------
Earnings per share attributable to common stockholders:
Basic $ 0.39 $ 0.30
Diluted $ 0.32 $ 0.23
Weighted average shares outstanding (in thousands):
Basic 146,068 127,448
Diluted 183,878 181,240
- 17 -
Note 15 - Business segment information
The Company's production facilities are located in the U.S., U.K., France
and Italy, and its products are sold throughout the world. The Company's Chief
Executive Officer is the Company's chief operating decision maker ("CODM") as
that term is defined in SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The CODM receives financial information
about TIMET from which he makes decisions concerning resource utilization and
performance analysis only on a global, consolidated basis. Based upon this level
of decision-making, the Company currently has one segment, its worldwide
"Titanium melted and mill products" segment. Sales, gross margin, operating
income, inventory and receivables are the key management measures used to
evaluate segment performance. The following table provides segment information
supplemental to the Company's Condensed Consolidated Financial Statements:
Three months ended March 31,
-------------------------------------------
2006 2005
------------------- --------------------
($ in thousands, except product shipment
data)
Titanium melted and mill products:
Melted product net sales $ 47,231 $ 22,074
Mill product net sales 205,065 113,925
Other product sales 34,599 19,236
------------------- --------------------
$ 286,895 $ 155,235
=================== ====================
Melted product shipments:
Volume (metric tons) 1,460 1,415
Average selling price ($ per kilogram) $ 32.35 $ 15.60
Mill product shipments:
Volume (metric tons) 3,675 3,100
Average selling price ($ per kilogram) $ 55.80 $ 36.75
Note 16 - Accounting principles not yet adopted
In September 2005, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue 04-13, Accounting for Purchases and Sales of Inventory with
the Same Counterparty ("EITF 04-13"). The FASB Task Force concluded that
inventory purchases and sales transactions with the same counterparty should be
combined for accounting purposes if they were entered into in contemplation of
each other. The EITF provided indicators to be considered for purposes of
determining whether such transactions are entered into in contemplation of each
other. Guidance was also provided on the circumstances under which nonmonetary
exchanges of inventory within the same line of business should be recognized at
fair value. EITF 04-13 will be effective in reporting periods beginning after
March 15, 2006. The Company has not yet determined the impact, if any, the
adoption of EITF 04-13 will have on its consolidated financial position or
results of operations.
- 18 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Summarized financial information. The following table summarizes certain
information regarding the Company's results of operations for the three months
ended March 31, 2006 and 2005. Average selling prices, as reported by the
Company, are a reflection of not just actual selling prices received by the
Company, but also include other related factors such as currency exchange rates
and customer and product mix during a given period. Consequently, changes in
average selling prices from period to period will be impacted by changes
occurring not just in actual prices, but by these other factors as well. The
percentage change information presented below represents changes from the
respective prior year period. See "Results of Operations - Outlook" for further
discussion of the Company's business expectations for the remainder of 2006.
Three months ended March 31,
------------------------------------------
2006 2005
-------------------- ------------------
($ in thousands, except product shipment
data)
Net sales:
Melted products $ 47,231 $ 22,074
Mill products 205,065 113,925
Other products 34,599 19,236
-------------------- ------------------
Net sales $ 286,895 $ 155,235
Gross margin $ 108,320 $ 28,955
Gross margin percent of net sales 38% 19%
Melted product shipments:
Volume (metric tons)
1,460 1,415
Average selling price ($ per kilogram) $ 32.35 $ 15.60
Mill product shipments:
Volume (metric tons)
3,675 3,100
Average selling price ($ per kilogram) $ 55.80 $ 36.75
Percentage change in:
Sales volume:
Melted products +3 -
Mill products +19 +6
Average selling prices:
Melted products +107 +27
Mill products +52 +19
Selling prices - excludes changes in product mix:
Melted products +108 +17
Mill products in U.S. dollars +42 +15
Mill products in billing currencies (1) +44 +13
---------------------------------------------------------------------------------------------------------------
(1) Excludes the effect of changes in foreign currencies.
- 19 -
First quarter of 2006 compared to first quarter of 2005. Melted product
sales increased 114% and mill product sales increased 80% during the first
quarter of 2006 compared to the year ago period, primarily due to significant
increases in average selling prices for both melted and mill products. Average
selling prices use actual customer and product mix and foreign currency exchange
rates prevailing during the respective periods. The Company's melted products
are generally sold only in U.S. dollars. Average selling prices for both melted
and mill products were positively affected by current market conditions and
changes in customer and product mix. Mill product average selling prices were
negatively affected by the strengthening of the U.S. dollar compared to both the
British pound sterling and the euro.
In addition to average selling price increases, the first quarter of 2006
was positively impacted by increases in mill product sales volume and melted
product sales volume as compared to the year-ago period, driven by increased
demand across all market sectors.
Gross margin increased during the first quarter of 2006 compared to the
year ago period primarily due to increased selling prices and improved plant
operating rates (from 80% in the first quarter of 2005 to 88% in the first
quarter of 2006), offset in part by higher costs for raw materials and energy.
Gross margin during the 2006 period includes an additional $7.1 million
resulting primarily from the sale of other non-mill products as compared to the
2005 period. In addition, gross margin during the 2005 period was negatively
affected by a $1.2 million noncash impairment charge related to the Company's
abandonment of certain manufacturing equipment.
Selling, general, administrative and development expenses increased from
$12.4 million during the first quarter of 2005 to $15.3 million during the first
quarter of 2006, principally as a result of increased personnel and travel
costs.
The Company recognized equity in earnings of joint ventures of $2.3 million
during the first quarter of 2006, compared to $0.8 million during the first
quarter of 2005. This change was principally due to an increase in the operating
results of VALTIMET, the Company's minority-owned welded tube joint venture, as
VALTIMET has benefited from both stronger demand and increased pricing in the
industrial tubing market.
Net other income (expense) decreased during the first quarter of 2006
compared to the year ago period, primarily related to the settlement of a
one-time $1.8 million customer claim recognized during the first quarter of
2005.
Non-operating income (expense).
Three months ended March 31,
---------------------------------------
2006 2005
------------------ -----------------
(In thousands)
Interest expense on debt payable to the Capital Trust $ (240) $ (199)
Interest expense on bank debt and capital leases (755) (475)
------------------ -----------------
$ (995) $ (674)
================== =================
Dividend and interest income $ 744 $ 487
Equity in earnings of common securities of the Capital Trust 2 103
Foreign exchange gains (391) 260
Other, net (65) (107)
------------------ -----------------
$ 290 $ 743
================== =================
- 20 -
Interest expense on bank debt and capital leases was higher in the 2006
period due to higher average outstanding debt levels as well as higher average
interest rates, as compared to the 2005 period. Dividends and interest income
consists of dividends received on the Company's investments in marketable
securities and interest income earned on cash and cash equivalents.
Income taxes. The Company operates in several tax jurisdictions and is
subject to varying income tax rates. As a result, the geographic mix of pretax
income or loss can impact the Company's overall effective tax rate. For the
three months ended March 31, 2006, the Company's income tax rate did not vary
significantly from the U.S. statutory rate. For the three months ended March 31,
2005, the Company's income tax rate varied from the U.S. statutory rate
primarily due to changes in the deferred income tax valuation allowance related
to the Company's tax attributes with respect to the "more-likely-than-not"
recognition criteria during those periods. See Note 11 to the Condensed
Consolidated Financial Statements and the 2005 Annual Report.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law provides for a special deduction from U.S. taxable income equal
to a specified percentage of a U.S. company's qualified income from domestic
manufacturing activities (as defined). Due to the utilization of existing NOLs,
the Company's provision for income taxes for the first quarter of 2006 includes
a tax benefit of $0.6 million related to such special deduction and no tax
benefit on the Company's income tax provision during the first quarter of 2005.
Dividends on Series A Preferred Stock. Shares of the Company's Series A
Preferred Stock are convertible, at any time, at the option of the holder
thereof, into six and two-thirds shares of the Company's common stock, subject
to adjustment in certain events. The Series A Preferred Stock is not mandatorily
redeemable, but is redeemable at the option of the Company under certain
circumstances. When, as and if declared by the Company's board of directors,
holders of the Series A Preferred Stock are entitled to receive cumulative cash
dividends at the rate of 6.75% of the $50 per share liquidation preference per
annum per share (equivalent to $3.375 per annum per share). The Company paid
dividends of $2.2 million and $3.3 million to holders of the Series A Preferred
Stock during the three months ended March 31, 2006 and 2005, respectively.
European operations. The Company has substantial operations located in
Europe, principally the U.K., France and Italy. Approximately 33% of the
Company's sales originated in Europe for the three months ended March 31, 2006,
of which approximately 52% were denominated in the British pound sterling or the
euro. Certain purchases of raw materials, principally titanium sponge and
alloys, for the Company's European operations are denominated in U.S. dollars,
while labor and other production costs are primarily denominated in local
currencies. The functional currencies of the Company's European subsidiaries are
those of their respective countries, and the European subsidiaries are subject
to exchange rate fluctuations that may impact reported earnings and may affect
the comparability of period-to-period operating results. Borrowings of the
Company's European operations may be in U.S. dollars or in functional
currencies. The Company's export sales from the U.S. are denominated in U.S.
dollars and are not subject to currency exchange rate fluctuations.
- 21 -
The Company does not use currency contracts to hedge its currency
exposures. Net currency transaction gains/losses included in the Company's
results of operations were a loss of $0.4 million during the three months ended
March 31, 2006 and a gain of $0.3 million during the three months ended March
31, 2005. At March 31, 2006, consolidated assets and liabilities denominated in
currencies other than functional currencies were approximately $41.8 million and
$32.6 million, respectively, consisting primarily of U.S. dollar cash, accounts
receivable and accounts payable.
VALTIMET has entered into certain derivative financial instruments that
qualify as cash flow hedges. The Company's pro-rata share of VALTIMET's
unrealized net gains on such derivative financial instruments is included as a
component of other comprehensive income.
Outlook. The "Outlook" section contains a number of forward-looking
statements, all of which are based, unless otherwise noted, on current
expectations and exclude the effect of potential future charges related to
restructurings, asset impairments, valuation allowances, changes in accounting
principles and similar items. Undue reliance should not be placed on these
statements, as more fully discussed in the "Forward-Looking Information"
statement of this Quarterly Report. Actual results may differ materially. See
also Notes to the Condensed Consolidated Financial Statements regarding
commitments, contingencies, legal matters, environmental matters and other
matters, including new accounting principles, which could materially affect the
Company's future business, results of operations, financial position and
liquidity.
The Company's backlog at the end of March 2006 was $925 million, a $55
million (6%) increase over the $870 million backlog at the end of December 2005
and a $435 million (89%) increase over the $490 million backlog at the end of
March 2005.
The Company currently expects its full year 2006 sales revenue to range
from $1.1 billion to $1.2 billion, a $100 million increase from the prior
forecast, primarily due to higher average selling prices.
The Company's cost of sales is affected by a number of factors including
customer and product mix, material yields, plant operating rates, raw material
costs, labor and energy costs. Raw material costs, which include sponge, scrap
and alloys, represent the largest portion of the Company's manufacturing cost
structure, and the Company currently expects it will continue to experience
increases in raw material costs during 2006.
The Company now expects operating income for 2006 to increase $40 million
from previous guidance to between $297 million and $322 million, primarily
related to the effects of the higher average selling prices, offset in part by
higher raw material costs.
- 22 -
Non-GAAP financial measures. In an effort to provide investors with
information in addition to the Company's results as determined by GAAP, the
Company has provided the following non-GAAP financial disclosures that it
believes may provide useful information to investors:
o The Company discloses percentage changes in its melted and mill
product selling prices in U.S. dollars, which have been adjusted to
exclude the effects of changes in product mix. The Company believes
such disclosure provides useful information to investors by allowing
them to analyze such changes without the impact of changes in product
mix, thereby facilitating period-to-period comparisons of the relative
changes in average selling prices. Depending on the composition of
changes in product mix, the percentage change in selling prices
excluding the effect of changes in product mix can be higher or lower
than such percentage change would be using the actual product mix
prevailing during the respective periods; and
o In addition to disclosing percentage changes in its mill product
selling prices adjusted to exclude the effects of changes in product
mix, the Company also discloses such percentage changes in billing
currencies, which have been further adjusted to exclude the effects of
changes in foreign currency exchange rates. The Company believes such
disclosure provides useful information to investors by allowing them
to analyze such changes without the impact of changes in foreign
currency exchange rates, thereby facilitating period-to-period
comparisons of the relative changes in average selling prices in the
various actual billing currencies. Generally, when the U.S. dollar
strengthens (weakens) against other currencies, the percentage change
in selling prices in billing currencies will be higher (lower) than
such percentage changes would be using actual exchange rates
prevailing during the respective periods.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows for the three months ended March 31,
2006 and 2005 are presented below. The following discussion should be read in
conjunction with the Company's Condensed Consolidated Financial Statements and
Notes thereto.
Three months ended March 31,
--------------------------------------------
2006 2005
-------------------- --------------------
(In thousands)
Cash (used) provided by:
Operating activities $ 9,431 $ 21,607
Investing activities (17,546) (10,518)
Financing activities 2,246 (4,453)
-------------------- --------------------
Net cash (used) provided by operating,
investing and financing activities $ (5,869) $ 6,636
==================== ====================
Operating activities. The titanium industry historically has derived a
substantial portion of its business from the aerospace industry. The aerospace
industry is cyclical, and changes in economic conditions within the aerospace
industry significantly impact the Company's earnings and operating cash flows.
Cash flow from operations is considered a primary source of the Company's
liquidity. Changes in titanium pricing, production volume and customer demand,
among other things, could significantly affect the Company's liquidity.
- 23 -
Certain items included in the determination of net income (loss) have an
impact on cash flows from operating activities, but the impact of such items on
cash may differ from their impact on net income. For example, pension expense
and OPEB expense will generally differ from the outflows of cash for payment of
such benefits. In addition, relative changes in assets and liabilities generally
result from the timing of production, sales and purchases. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period than that in which the underlying cash transaction occurs. For
example, raw materials may be purchased in one period, but the cash payment for
such raw materials may occur in a subsequent period. Similarly, inventory may be
sold in one period, but the cash collection of the receivable may occur in a
subsequent period.
Net income was $58.8 million for the three months ended March 31, 2006,
compared to $41.4 million for the three months ended March 31, 2005.
Accounts receivable increased during the first three months of 2006 and
2005 primarily as a result of increased sales. Inventories increased during the
first three months of 2006 and 2005 as a result of the effects of increased raw
material costs, as well as increased capacity utilization and related inventory
build in order to meet expected customer demand.
Changes in accounts payable and accrued liabilities reflect, among other
things, the timing of payments to suppliers of titanium sponge, titanium scrap
and other raw material purchases. Additionally, accrued liabilities decreased
during the first three months of 2006 in part to the Company's payment of
previously accrued incentive compensation payments related to services its
employees performed during 2005. Accrued liabilities increased during the first
three months of 2005 in part due to a $1.6 million increase in the Company's
accrual for incentive compensation payments, which were paid during the second
quarter of 2005.
The increase in customer advances during the first three months of 2005
primarily reflects the Company's receipt of a $27.9 million advance from The
Boeing Company ("Boeing") in January 2005, partially offset by the application
of customer purchases. Under the Company's previous long-term agreement ("LTA")
with Boeing, the Company received an annual $28.5 million (less $3.80 per pound
of titanium product sold to Boeing subcontractors in the preceding year)
customer advance from Boeing in January of each year related to Boeing purchases
from TIMET for that year. Effective July 1, 2005, the Company entered into a new
LTA with Boeing, pursuant to which, beginning in 2006, the take-or-pay
provisions under the previous LTA were replaced with an annual makeup payment
early in the following year in the event Boeing purchases less than its annual
commitment in any year. Accordingly, there was no customer advance required to
be paid by Boeing in January 2006.
- 24 -
The Company utilized the remainder of its U.S. net operating loss
carryforward during the first quarter of 2006, which loss carryforward only
partially offset the first quarter U.S. current tax provision. As a result, the
Company's provision for income taxes includes a provision for current income
taxes of approximately $28.1 million (including a provision for U.S. taxes of
approximately $19.3 million). The Company also recognized a current income tax
benefit in the first quarter of 2006 of $5.3 million related to the tax benefit
from the exercise of stock options. Such income tax benefit is recognized as a
direct increase in additional paid-in capital, in accordance with GAAP. The
Company made cash payments for income taxes of $3.8 million in the first quarter
of 2006. As a result, the Company's net income taxes payable increased from
$12.2 million at December 31, 2005 to $31.4 million at March 31, 2006. Because
the Company fully utilized its U.S. net operating loss carryforward during the
first quarter of 2006 and the first quarter payments do not include US estimated
payments for 2006, the Company expects its cash paid for income taxes during the
remainder of 2006 will be significantly higher than the $3.8 million paid during
the first quarter of the year. See also "Results of Operations - Income taxes"
for further discussion of income taxes.
Investing activities. The Company's capital expenditures were $16.9 million
for the three months ended March 31, 2006, compared to $11.1 million for the
comparable period in 2005, principally for replacement of machinery and
equipment and for capacity maintenance. The 2006 amount includes $6.3 million
related to the Company's sponge plant expansion in Henderson, Nevada and $1.1
million related to the Company's new electron beam cold hearth melt furnace at
its facility in Morgantown, Pennsylvania. The 2005 amount includes $6.6 million
related to construction in progress on the Company's water conservation facility
in Henderson, Nevada.
Financing activities. Cash provided during the three months ended March 31,
2006 related primarily to $7.9 million of proceeds from the issuance of common
stock upon exercise of options, partially offset by the Company's net debt
repayments of $2.7 million and $2.2 million of dividends paid on the Company's
Series A Preferred Stock. Cash used during the three months ended March 31, 2005
related primarily to the Company's net debt repayments of $2.2 million and the
payment of $3.3 million of dividends on the Company's Series A Preferred Stock.
Additionally, the Company received $1.0 million of cash from the issuance of
common stock related to the exercise of certain employee stock options during
the 2005 period.
During the first quarter of 2006, 113,400 of the Company's BUCS that were
outstanding at December 31, 2005 were converted into an aggregate of 303,678
shares of the Company's common stock, and 536,890 shares of the Company's Series
A Preferred Stock were converted into an aggregate of 3,579,258 shares of the
Company's common stock. In addition, 67 BUCS were redeemed for cash by the
Company for an aggregate cost of $3 thousand. Other than such redemption of the
BUCS, there was no cash impact to these transactions. See Notes 8 and 9 to the
Condensed Consolidated Financial Statements.
Borrowing arrangements. On February 17, 2006, the Company entered into a
new $175 million long-term credit agreement, replacing its previous U.S credit
agreement, which was terminated on that date. The U.S. credit agreement is
secured primarily by the Company's U.S. accounts receivable, inventory, personal
property, intangible assets, a pledge of 65% of TIMET UK's common stock and a
negative pledge on U.S. fixed assets, and matures in February 2011. Borrowings
under the U.S. credit agreement accrue interest at the U.S. prime rate or
varying LIBOR-based rates based on a quarterly ratio of outstanding debt to
EBITDA as defined by the agreement. The U.S. credit agreement also provides for
the issuance of up to $10 million of letters of credit.
- 25 -
The new U.S. credit agreement contains certain restrictive covenants that,
among other things, limit or restrict the ability of the Company to incur debt,
incur liens, make investments, make capital expenditures or pay dividends. The
new U.S. credit agreement also requires compliance with certain financial
covenants, including a minimum tangible net worth covenant, a fixed charge
coverage ratio and a leverage ratio, and contains other covenants customary in
lending transactions of this type including cross-default provisions with
respect to other debt and obligations of the Company. Borrowings under the new
U.S. credit agreement are limited to the lesser of $175 million or a
formula-determined amount based upon U.S. accounts receivable, inventory and
fixed assets (subject to pledging fixed assets). Such formula-determined amount
only applies if borrowings exceed 60% of the commitment amount or the leverage
ratio exceeds a certain limitation. The Company was in compliance with all such
covenants during the quarter ended March 31, 2006.
Under the Company's U.K. facility, TIMET UK may borrow up to (pound)22.5
million, subject to a formula-determined borrowing base derived from the value
of accounts receivable, inventory and property, plant and equipment. Borrowings
under the U.K. facility can be in various currencies, including U.S. dollars,
British pounds sterling and euros and are collateralized by substantially all of
TIMET UK's assets. Interest on outstanding borrowings generally accrues at rates
that vary from 1.125% to 1.375% above the lender's published base rate. The U.K.
facility also contains financial ratios and covenants customary in lending
transactions of this type, including a minimum net worth covenant. TIMET UK was
in compliance with all covenants during the quarter ended March 31, 2006.
As of March 31, 2006, the Company had outstanding borrowings of $40.3
million under its U.S. credit agreement and $8.5 million under its U.K. credit
facilities. As of March 31, 2006, the weighted average interest rate on
borrowings outstanding under the Company's U.S. credit agreement and the
Company's U.K. credit facilities was 5.9% and 5.6%, respectively. Aggregate
unused borrowing availability under the Company's U.S. and U.K. credit
facilities was approximately $161 million as of March 31, 2006.
The Company also has overdraft and other credit facilities at certain of
its other European subsidiaries, with aggregate unused borrowing availability of
$15 million at March 31, 2006. At March 31, 2006, approximately $2.7 million of
letters of credit had been issued under these facilities and there were no
outstanding borrowings.
No dividends were paid by TIMET on its common stock during the three months
ended March 31, 2006 or 2005. During the quarters ended March 31, 2006 and 2005,
the TIMET paid $2.2 million and $3.3 million in dividends, respectively, on its
Series A Preferred Stock.
Legal and environmental matters. See Note 13 to the Condensed Consolidated
Financial Statements for discussion of legal and environmental matters,
commitments and contingencies.
- 26 -
Other. The Company periodically evaluates its liquidity requirements,
capital needs and availability of resources in view of, among other things, its
alternative uses of capital, debt service requirements, the cost of debt and
equity capital and estimated future operating cash flows. As a result of this
process, the Company has in the past, or in light of its current outlook, may in
the future, seek to raise additional capital, modify its common and preferred
dividend policies, restructure ownership interests, incur, refinance or
restructure indebtedness, repurchase shares of common stock, purchase or redeem
Series A Preferred Stock, sell assets, or take a combination of such steps or
other steps to increase or manage its liquidity and capital resources. In the
normal course of business, the Company investigates, evaluates, discusses and
engages in acquisition, joint venture, strategic relationship and other business
combination opportunities in the titanium, specialty metal and other industries.
In the event of any future acquisition or joint venture opportunities, the
Company may consider using then-available liquidity, issuing equity securities
or incurring additional indebtedness.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (i) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties, and (ii) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. The Company
continuously considers, reviews and evaluates such transactions, and understands
that Contran, Valhi and related entities consider, review and evaluate such
transactions. Depending upon the business, tax and other objectives then
relevant, it is possible that the Company might be a party to one or more such
transactions in the future.
The Company completed a two-for-one split of its common stock effective
after the close of trading on February 16, 2006. All share and per share
disclosures for all periods presented have been adjusted to give effect to this
February 2006 stock split. On April 20, 2006, the Company announced an
additional two-for-one split of its common stock, which will be become effective
after the close of trading on May 15, 2006. Because the effective date of the
May 15, 2006 split is after the date of issuance of these condensed consolidated
financial statements, the share and per share disclosures contained in this
Quarterly Report have not been adjusted for the effects of this May 15, 2006
split. See Note 14 to the Condensed Consolidated Financial Statements for
pro-forma earnings per share amounts that give effect to the May 15, 2006 stock
split.
- 27 -
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's market risks, refer to the Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk," in the 2005 Annual
Report. There have been no material changes to the information provided that
would require additional information with respect to the three months ended
March 31, 2006.
Item 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. The Company maintains a
system of disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by Rule 13a-15(e) of the Securities Exchange Act of 1934
(the "Exchange Act"), as amended, means controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that
the Company files or submits to the SEC under the Exchange Act, is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by the Company in the reports that it files or submits to the
SEC under the Exchange Act is accumulated and communicated to the Company's
management, including its principal executive officer and its principal
financial officer, or persons performing similar functions, as appropriate to
allow timely decisions to be made regarding required disclosure. Each of Steven
L. Watson, the Company's Chief Executive Officer, and Bruce P. Inglis, the
Company's Vice President Finance, have evaluated the Company's disclosure
controls and procedures as of March 31, 2006. Based upon their evaluation, and
as a result of the material weaknesses identified in the 2005 Annual Report,
these executive officers have concluded that the Company's disclosure controls
and procedures are not effective as of March 31, 2006. The Company has performed
additional procedures in completing these Condensed Consolidated Financial
Statements as of and for the quarter ended March 31, 2006 to ensure that the
disclosures included were fairly presented in all material respects in
accordance with GAAP.
Scope of management's report on internal control over financial reporting.
The Company also maintains internal control over financial reporting. The term
"internal control over financial reporting," as defined by rule 13a-15(f) of the
Exchange Act, means a process designed by, or under the supervision of, the
Company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the Company's board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP, and includes those policies and
procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and
directors of the Company; and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the Company's Consolidated
Financial Statements.
- 28 -
Changes in internal control over financial reporting. There has been no
change to the Company's internal control over financial reporting during the
quarter ended March 31, 2006 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting. The Company is in the process of remediating the three material
weaknesses discussed in its 2005 Annual Report and continues to work toward
completion of such remediation by or before December 31, 2006. To date, the
Company has completed the following remediation activities:
o The Company has begun the process of hiring additional accounting and
finance personnel;
o The Company has begun to implement additional levels of manual review
and authorization of journal entries at the majority of its
significant locations, with the expectation that the remainder of its
locations will have most of these additional controls in place by the
end of the second quarter of 2006. The Company will also begin to
further explore its IT solution options in the second quarter of 2006;
and
o The Company has continued to update certain key accounting policies
and procedures and will continue to prioritize the preparation and
distribution of such key policies and procedures throughout the
remainder of 2006.
PART II. - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Note 13 of the Condensed Consolidated Financial
Statements, which information is incorporated herein by reference, and to the
Company's 2005 Annual Report for descriptions of certain previously reported
legal proceedings.
Item 1A. RISK FACTORS
For a discussion of the risk factors related to the Company's businesses,
refer to Item 1A, "Risk Factors," in the 2005 Annual Report. There have been no
material changes to such risk factors during the three months ended March 31,
2006.
Item 6. EXHIBITS
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
Note: The Company has retained a signed original of any exhibit listed
above that contains signatures, and the Company will provide any
such exhibit to the SEC or its staff upon request. Such request
should be directed to the attention of the Company's Corporate
Secretary at the Company's corporate offices located at 5430 LBJ
Freeway, Suite 1700, Dallas, Texas 75240.
- 29 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TITANIUM METALS CORPORATION
----------------------------------------------------
Date: May 4, 2006 By /s/ Steven L. Watson
----------------------------------------------------
Steven L. Watson
Vice Chairman of the Board and Chief Executive
Officer
Date: May 4, 2006 By /s/ Bruce P. Inglis
----------------------------------------------------
Bruce P. Inglis
Vice President Finance
Principal Financial Officer
Date: May 4, 2006 By /s/ Scott E. Sullivan
----------------------------------------------------
Scott E. Sullivan
Vice President and Controller
Principal Accounting Officer
- 30 -