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 September 30, 2002
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
Commission file number 0-28538
Titanium Metals Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-5630895
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5600
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Number of shares of common stock outstanding on November 4, 2002: 31,851,938
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Forward-Looking Information
The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to,
statements found in the Notes to Consolidated Financial Statements and under the
captions "Results of Operations" and "Liquidity and Capital Resources" (both
contained in 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 Quarterly 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 aerospace manufacturers and the Company under their long-term
agreements, the renewal of certain long-term agreements, the difficulty in
forecasting demand for titanium products, global economic and political
conditions, global productive capacity for titanium, changes in product pricing
and costs, the impact of long-term contracts with vendors on the ability of the
Company to reduce or increase supply or achieve lower costs, the possibility of
labor disruptions, fluctuations in currency exchange rates, 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), possible
disruption of business or increases in the cost of doing business resulting from
war or terrorist activities, and other risks and uncertainties. Should one or
more of these risks materialize (or the consequences of such a development
worsen), or should the underlying assumptions prove incorrect, actual results
could differ materially from those forecasted or expected.
TITANIUM METALS CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 2002 (unaudited) and
December 31, 2001 2
Consolidated Statements of Operations - Three months and
nine months ended September 30, 2002 and 2001 (unaudited) 4
Consolidated Statements of Comprehensive Income (Loss) -
Three months and nine months ended September 30, 2002
and 2001 (unaudited) 6
Consolidated Statements of Cash Flows - Nine months
ended September 30, 2002 and 2001 (unaudited) 7
Consolidated Statement of Changes in Stockholders' Equity -
Nine months ended September 30, 2002 (unaudited) 9
Notes to Consolidated Financial Statements (unaudited) 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Item 3. Quantitative and Qualitative Disclosures about Market Risk 41
Item 4. Controls and Procedures 42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 43
Item 6. Exhibits and Reports on Form 8-K 43
- 1 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
ASSETS 2002 2001
--------------------- ------------------
(unaudited)
Current assets:
Cash and cash equivalents $ 4,562 $ 24,500
Accounts and other receivables, less
allowance of $3,147 and $2,739 75,044 83,347
Receivables from related parties 3,162 5,907
Refundable income taxes 980 470
Inventories 190,445 185,052
Prepaid expenses and other 4,084 9,026
Deferred income taxes 556 385
--------------------- ------------------
Total current assets 278,833 308,687
Investment in joint ventures 22,029 20,585
Preferred securities of Special Metals Corporation ("SMC") - 27,500
Property and equipment, net 258,600 275,308
Goodwill, net - 44,310
Other intangible assets, net 8,412 9,836
Deferred income taxes 42 56
Other 14,487 13,101
--------------------- ------------------
Total assets $ 582,403 $ 699,383
===================== ==================
- 2 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands except per share data)
September 30, December 31,
LIABILITIES, MINORITY INTEREST AND 2002 2001
STOCKHOLDERS' EQUITY --------------------- -------------------
(unaudited)
Current liabilities:
Notes payable $ 17,395 $ 1,522
Current maturities of long-term debt and
capital lease obligations 630 512
Accounts payable 28,693 42,821
Accrued liabilities 45,565 41,799
Customer advances 17,916 33,242
Payable to related parties 360 1,612
Income taxes 705 746
Deferred income taxes 65 106
--------------------- -------------------
Total current liabilities 111,329 122,360
Long-term debt 1,302 10,712
Capital lease obligations 9,238 8,598
Payable to related parties 644 953
Accrued OPEB cost 13,549 15,980
Accrued pension cost 22,387 23,690
Accrued environmental cost 3,262 3,262
Deferred income taxes 3,213 5,509
Accrued dividends on Convertible Preferred Securities 1,111 -
Other - 237
--------------------- -------------------
Total liabilities 166,035 191,301
--------------------- -------------------
Minority interest - Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely subordinated debt securities
("Convertible
Preferred Securities") 201,241 201,241
Other minority interest 9,561 8,727
Stockholders' equity:
Preferred stock, $.01 par value; 1,000 shares authorized,
none outstanding - -
Common stock, $.01 par value; 99,000 shares
authorized; 31,948 and 31,946 shares issued 319 319
Additional paid-in capital 350,659 350,514
Accumulated deficit (117,726) (15,841)
Accumulated other comprehensive loss (26,162) (35,274)
Treasury stock, at cost (90 shares) (1,208) (1,208)
Deferred compensation (316) (396)
--------------------- -------------------
Total stockholders' equity 205,566 298,114
--------------------- -------------------
Total liabilities and stockholders' equity $ 582,403 $ 699,383
===================== ===================
Commitments and contingencies (Note 14)
See accompanying notes to consolidated financial statements.
- 3 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands except per share data)
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- -------------- -------------- ------------
Revenues and other income:
Net sales $ 82,794 $ 126,437 $ 281,529 $ 370,479
Equity in earnings of joint ventures 342 749 1,670 1,863
Other 11,084 1,352 13,208 79,187
------------- -------------- -------------- ------------
94,220 128,538 296,407 451,529
------------- -------------- -------------- ------------
Costs and expenses:
Cost of sales 87,734 105,601 279,937 345,861
Selling, general, administrative
and development 10,714 11,562 32,508 43,473
Interest 915 722 2,388 3,316
Other 984 90 29,256 90
------------- -------------- -------------- ------------
100,347 117,975 344,089 392,740
------------- -------------- -------------- ------------
(Loss) income before income taxes,
minority interest and cumulative effect
of change in accounting principle (6,127) 10,563 (47,682) 58,789
Income tax (benefit) expense (473) 3,731 (1,312) 20,693
Minority interest - Convertible
Preferred Securities, net of tax in 2001 3,333 2,166 9,999 6,845
Other minority interest, net of tax 161 326 1,206 975
------------- -------------- -------------- ------------
(Loss) income before cumulative effect
of change in accounting principle (9,148) 4,340 (57,575) 30,276
Cumulative effect of change in
accounting principle - - (44,310) -
------------- -------------- -------------- ------------
Net (loss) income $ (9,148) $ 4,340 $ (101,885) $ 30,276
============= ============== ============== ============
See accompanying notes to consolidated financial statements.
- 4 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (CONTINUED)
(In thousands except per share data)
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- ------------- -------------
Basic (loss) earnings per share:
Before cumulative effect of change
in accounting principle $ (.29) $ .14 $ (1.83) $ .96
Cumulative effect of change in
accounting principle - - (1.40) -
-------------- ------------- -------------- -------------
Basic net (loss) income per share $ (.29) $ .14 $ (3.23) $ .96
============== ============= ============== =============
Diluted (loss) earnings per share:
Before cumulative effect of change
in accounting principle $ (.29) $ .14 $ (1.83) $ .95
Cumulative effect of change in
accounting principle - - (1.40) -
-------------- ------------- -------------- -------------
Diluted net (loss) income per share $ (.29) $ .14 $ (3.23) $ .95
============== ============= ============== =============
Weighted average shares outstanding:
Basic 31,611 31,539 31,586 31,486
Diluted 31,611 31,764 31,586 31,760
See accompanying notes to consolidated financial statements.
- 5 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)
(In thousands)
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- ------------- -------------- -------------
Net (loss) income $ (9,148) $ 4,340 $ (101,885) $ 30,276
Other comprehensive income (loss) -
currency translation adjustment 1,546 6,996 9,112 (717)
-------------- ------------- -------------- -------------
Comprehensive (loss) income $ (7,602) $ 11,336 $ (92,773) $ 29,559
============== ============= ============== =============
See accompanying notes to consolidated financial statements.
- 6 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
Nine months ended September 30,
-------------------------------------
2002 2001
----------------- ----------------
Cash flows from operating activities:
Net (loss) income $ (101,885) $ 30,276
Depreciation and amortization 27,623 30,145
Cumulative effect of change in accounting principle 44,310 -
Noncash equipment impairment charge - 10,840
Noncash impairment of SMC securities 27,500 -
Equity in earnings of joint ventures,
net of distributions (641) (1,463)
Deferred income taxes (2,813) 17,283
Other minority interest 1,206 975
Other, net 1,682 677
Change in assets and liabilities:
Receivables 12,970 (13,265)
Inventories (704) (18,230)
Prepaid expenses and other 5,038 (5,383)
Accounts payable and accrued liabilities (14,315) 14,009
Customer advances (16,639) (931)
Accrued restructuring charges (117) (470)
Income taxes (1,427) 811
Accounts with related parties, net 1,184 (273)
Accrued OPEB and pension costs (2,150) (2,548)
Accrued dividends on SMC securities - (714)
Accrued dividends on Convertible Preferred Securities - (10,043)
Other, net 528 (4,103)
----------------- ----------------
Net cash (used) provided by operating activities (18,650) 47,593
----------------- ----------------
Cash flows from investing activities:
Capital expenditures (4,765) (7,922)
Other, net - 30
----------------- ----------------
Net cash used by investing activities (4,765) (7,892)
----------------- ----------------
Cash flows from financing activities:
Indebtedness:
Borrowings 307,613 389,029
Repayments (301,877) (423,210)
Dividends paid on minority interest (1,115) -
Issuance of common stock - 513
Other, net (471) (125)
----------------- ----------------
Net cash provided (used) by financing activities 4,150 (33,793)
----------------- ----------------
Net cash (used) provided by operating,
investing and financing activities $ (19,265) $ 5,908
================= ================
See accompanying notes to consolidated financial statements.
- 7 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (CONTINUED)
(In thousands)
Nine months ended September 30,
-------------------------------------
2002 2001
----------------- ----------------
Cash and cash equivalents:
Net (decrease) increase from:
Operating, investing and financing activities $ (19,265) $ 5,908
Currency translation (673) (340)
----------------- ----------------
(19,938) 5,568
Cash at beginning of period 24,500 9,796
----------------- ----------------
Cash at end of period $ 4,562 $ 15,364
================= ================
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 1,462 $ 2,613
Convertible Preferred Securities dividends $ 9,999 $ 20,560
Income taxes, net $ 2,928 $ 2,598
Noncash investing and financing activities:
Capital lease obligations of $779 and $481 were incurred
during the nine months ended September 30, 2002 and
2001, respectively, when the Company entered into certain
leases for new equipment
See accompanying notes to consolidated financial statements.
- 8 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
Nine months ended September 30, 2002
(In thousands)
Accumulated Other
Comprehensive Loss
Additional ----------------------- Total
Common Common Paid-In Accumulated Currency Pension Treasury Deferred Stockholders'
Shares Stock Capital Deficit Translation Liabilities Stock Compensation Equity
-------- -------- ---------- ------------ ----------- ----------- --------- ------------ -------------
Balance at December 31, 2001 31,856 $ 319 $ 350,514 $ (15,841) $ (14,395) $ (20,879) $ (1,208) $ (396) $ 298,114
Components of comprehensive
income (loss):
Net loss - - - (101,885) - - - - (101,885)
Change in cumulative
currency translation
adjustment - - - - 9,112 - - - 9,112
Issuance of common stock 5 - 20 - - - - - 20
Stock award cancellations (3) - (8) - - - - 8 -
Amortization of deferred
compensation - - - - - - - 205 205
Other - - 133 - - - - (133) -
-------- -------- ---------- ------------ ----------- ----------- --------- ------------ -------------
Balance at September 30, 2002 31,858 $ 319 $ 350,659 $ (117,726) $ (5,283) $ (20,879) $ (1,208) $ (316) $ 205,566
======== ======== ========== ============ =========== =========== ========= ============ =============
See accompanying notes to consolidated financial statements.
- 9 -
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1 - Organization and basis of presentation
Titanium Metals Corporation ("TIMET") is a vertically integrated producer
of titanium sponge, melted products and a variety of mill products for
aerospace, industrial and other applications. At September 30, 2002, Tremont
Corporation ("Tremont") held approximately 39% of TIMET's outstanding common
stock. At September 30, 2002, the Combined Master Retirement Trust ("CMRT"), a
trust formed by Valhi, Inc. ("Valhi") to permit the collective investment by
trusts that maintain the assets of certain employee benefit plans adopted by
Valhi and related companies, held approximately an additional 9% of TIMET's
common stock. At September 30, 2002, subsidiaries of Valhi held an aggregate of
approximately 80% of Tremont's outstanding common stock, and Contran Corporation
("Contran") 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.
The accompanying consolidated financial statements include the accounts of
TIMET and its majority-owned subsidiaries (collectively, the "Company"). All
material intercompany transactions and balances have been eliminated. The
consolidated balance sheet at September 30, 2002 and the consolidated statements
of operations, comprehensive income (loss), changes in stockholders' equity and
cash flows for the interim periods ended September 30, 2002 and 2001 have been
prepared by the Company without audit. In the opinion of management, all
adjustments necessary to present fairly 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 prior year amounts have been
reclassified to conform to the current year presentation. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. The accompanying consolidated financial statements should be read in
conjunction with the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001 (the "2001
Annual Report").
- 10 -
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections, effective April 1, 2002. SFAS No.
145, among other things, eliminated the prior requirement that all gains and
losses from the early extinguishment of debt were to be classified as an
extraordinary item. Upon adoption of SFAS No. 145, gains and losses from the
early extinguishment of debt are classified as an extraordinary item only if
they meet the "unusual and infrequent" criteria contained in Accounting
Principles Board ("APB") Opinion No. 30. In addition, upon adoption of SFAS No.
145, all gains and losses from the early extinguishment of debt that had
previously been classified as an extraordinary item are to be reassessed to
determine if they would have met the "unusual and infrequent" criteria of APB
Opinion No. 30. Any such gain or loss that would not have met the APB Opinion
No. 30 criteria is retroactively reclassified and reported as a component of
income before extraordinary items. The Company has concluded that its
previously-recognized loss from the early extinguishment of debt that occurred
during 2000 would not have met the APB Opinion No. 30 criteria for
classification as an extraordinary item and, accordingly, such
previously-reported loss will be retroactively reclassified and reported as a
component of income before extraordinary items in the applicable reporting
period.
Note 2 - Business segment information
The Company's worldwide operations are conducted through one business
segment - the production and sale of titanium melted and mill products. The
following provides supplemental segment information to the consolidated
statements of operations:
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- -------------- -------------- --------------
(In thousands)
Net sales $ 82,794 $ 126,437 $ 281,529 $ 370,479
Cost of sales 87,734 105,601 279,937 345,861
------------- -------------- -------------- --------------
Gross margin (4,940) 20,836 1,592 24,618
Selling, general, administrative
and development expense 10,714 11,562 32,508 43,473
Equity in earnings of joint ventures 342 749 1,670 1,863
Other income (expense), net 10,946 (59) 13,155 73,749
------------- -------------- -------------- --------------
Operating (loss) income (4,366) 9,964 (16,091) 56,757
General corporate income (expense):
Dividends and interest income 16 1,687 105 5,140
Impairment of investment in SMC - - (27,500) -
Currency transactions and other, net (862) (366) (1,808) 208
Interest expense 915 722 2,388 3,316
------------- -------------- -------------- --------------
(Loss) income before income taxes,
minority interest and cumulative effect
of change in accounting principle $ (6,127) $ 10,563 $ (47,682) $ 58,789
============= ============== ============== ==============
- 11 -
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- -------------- -------------- --------------
($ in thousands except selling price data)
Titanium melted and mill products:
Mill product net sales $ 62,656 $ 91,053 $ 212,940 $ 274,577
Melted product net sales 8,656 19,906 27,951 49,005
Other 11,482 15,478 40,638 46,897
------------- -------------- -------------- --------------
$ 82,794 $ 126,437 $ 281,529 $ 370,479
============= ============== ============== ==============
Mill product shipments:
Volume (metric tons) 2,005 3,015 6,825 9,245
Average price ($ per kilogram) $ 31.25 $ 30.20 $ 31.20 $ 29.70
Melted product shipments:
Volume (metric tons) 625 1,345 1,895 3,415
Average price ($ per kilogram) $ 13.85 $ 14.80 $ 14.75 $ 14.35
Note 3 - Preferred securities of SMC
On March 27, 2002, SMC and its U.S. subsidiaries filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result,
the Company undertook an assessment of its investment in SMC with the assistance
of an external valuation specialist and recorded a $27.5 million impairment
charge during the first quarter of 2002 for an other than temporary decline in
the estimated fair value of its investment in SMC. This charge reduced the
Company's carrying amount of its investment in SMC to zero.
Note 4 - Inventories
September 30, December 31,
2002 2001
--------------------- ------------------
(In thousands)
Raw materials $ 57,768 $ 43,863
Work-in-process 83,991 94,709
Finished products 62,578 54,074
Supplies 14,198 13,476
--------------------- ------------------
218,535 206,122
Less adjustment of certain inventories to LIFO basis 28,090 21,070
--------------------- ------------------
$ 190,445 $ 185,052
===================== ==================
- 12 -
Note 5 - Goodwill and intangible assets
The Company's goodwill, arising from several previous business combinations
accounted for under the purchase method, was stated net of accumulated
amortization recorded as of December 31, 2001. On January 1, 2002, the Company
adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142,
goodwill is no longer amortized on a periodic basis, but instead is subject to a
two-step impairment test to be performed on at least an annual basis.
In order to test for transitional impairment, SFAS No. 142 required the
Company to identify its reporting units and determine the carrying amount of
each reporting unit by assigning its assets and liabilities, including existing
goodwill and intangible assets, to those reporting units as of January 1, 2002.
The Company determined that it operates one reporting unit, as that term is
defined by SFAS No. 142, consisting of the Company in total. The first step of
the impairment test required the Company to determine the fair value of its
reporting unit and compare it to that reporting unit's carrying amount. This
evaluation was completed with the assistance of an external valuation specialist
and considered a combination of fair value indicators including quoted market
prices, prices of comparable businesses and discounted cash flows. The
evaluation, which was completed during the second quarter of 2002, indicated
that the Company's recorded goodwill might be impaired and required the Company
to complete the second step of the impairment test.
The second step of the impairment test, which was completed during the
third quarter of 2002, required the Company to compare the implied fair value of
its reporting unit's goodwill with the carrying amount of that goodwill. With
the assistance of the external valuation specialist utilized in the step one
testing, the Company determined the implied fair value of its goodwill was zero.
Accordingly, the Company recorded a non-cash goodwill impairment charge of $44.3
million, representing the entire balance of the Company's recorded goodwill at
January 1, 2002. There was no income tax benefit associated with this charge.
While the goodwill associated with the Company's U.S. operations is deductible
for income tax purposes, the Company does not currently recognize an income tax
benefit associated with its U.S. losses. In addition the goodwill associated
with the Company's European operations is not deductible for income tax
purposes. Pursuant to the transition requirements of SFAS No. 142, this charge
has been reported in the Company's Consolidated Statements of Operations as a
cumulative effect of a change in accounting principle as of January 1, 2002. The
effect of the change in accounting principle on the first quarter of 2002 was to
increase the Company's first quarter net loss by $44.3 million, or $1.40 per
share, to $80.4 million, or $2.55 per share. The change had no effect on the
second or third quarters of 2002.
- 13 -
The following table reflects the Company's comparative income (loss) before
the cumulative effect of the change in accounting principle and the goodwill
amortization under SFAS No. 142:
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- -------------- -------------- --------------
(In thousands except per share data)
Net (loss) income before cumulative
effect of change in accounting
principle, as reported $ (9,148) $ 4,340 $ (57,575) $ 30,276
Adjustments for:
Goodwill amortization - 1,148 - 3,453
Tax provision on amortization - (307) - (922)
------------- -------------- -------------- --------------
Adjusted net (loss) income before
cumulative effect of change in
accounting principle (9,148) 5,181 (57,575) 32,807
Cumulative effect of change in
accounting principle - - (44,310) -
------------- -------------- -------------- --------------
Adjusted net (loss) income $ (9,148) $ 5,181 $ (101,885) $ 32,807
============= ============== ============== ==============
Net (loss) income per basic share
before cumulative effect of change
in accounting principle, as reported $ (.29) $ .14 $ (1.83) $ .96
Adjustments for:
Goodwill amortization - .04 - .11
Tax provision on amortization - (.01) - (.03)
------------- -------------- -------------- --------------
Adjusted net (loss) income per basic
share before cumulative effect of
change in accounting principle (.29) .17 (1.83) 1.04
Cumulative effect of change in
accounting principle - - (1.40) -
------------- -------------- -------------- --------------
Adjusted net (loss) income per basic share $ (.29) $ .17 $ (3.23) $ 1.04
============= ============== ============== ==============
Net (loss) income per diluted share
before cumulative effect of change
in accounting principle, as reported $ (.29) $ .14 $ (1.83) $ .95
Adjustments for:
Goodwill amortization - .04 - .11
Tax provision on amortization - (.01) - (.03)
------------- -------------- -------------- --------------
Adjusted net (loss) income per diluted
share before cumulative effect of
change in accounting principle (.29) .17 (1.83) 1.03
Cumulative effect of change in
accounting principle - - (1.40) -
------------- -------------- -------------- --------------
Adjusted net (loss) income per diluted share $ (.29) $ .17 $ (3.23) $ 1.03
============= ============== ============== ==============
- 14 -
As required by SFAS No. 142, the Company has evaluated the remaining useful
lives of its intangible assets with definite lives, comprised of patents and
covenants not to compete. Based on this evaluation, the Company's patents and
covenants not to compete will continue to be amortized over their weighted
average remaining amortization periods of 3.5 and .5 years, respectively, as of
September 30, 2002. The carrying amount and accumulated amortization of the
Company's intangible assets are as follows:
September 30, 2002 December 31, 2001
---------------------------------- -------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
------------- ----------------- ------------ --------------
(In thousands)
Intangible assets:
Definite lives, subject to amortization:
Patents $ 13,740 $ 8,895 $ 13,405 $ 7,606
Covenants not to compete 8,692 8,323 8,353 7,514
Other intangible asset - pension asset(1) 3,198 - 3,198 -
------------- ----------------- ------------ --------------
$ 25,630 $ 17,218 $ 24,956 $ 15,120
============= ================= ============ ==============
----------------------------------------------------------------------------------------------------------------------
(1) Not covered by the scope of SFAS No. 142.
For the three and nine months ended September 30, 2002, the Company's
amortization expense relating to its intangible assets was $.5 million and $1.6
million, respectively. The estimated aggregate annual amortization expense for
the Company's patents and covenants not to compete for the next five fiscal
years is summarized in the table below.
Estimated annual
amortization expense
----------------------------------
(In thousands)
Year ending December 31,
2002 $ 2,062
2003 $ 1,560
2004 $ 1,392
2005 $ 947
2006 $ 677
Note 6 - Property and equipment
September 30, December 31,
2002 2001
--------------------- ------------------
(In thousands)
Land $ 6,196 $ 6,138
Buildings 37,659 36,574
Information technology systems 57,477 55,112
Manufacturing and other 314,500 300,315
Construction in progress 5,284 11,631
--------------------- ------------------
421,116 409,770
Less accumulated depreciation 162,516 134,462
--------------------- ------------------
$ 258,600 $ 275,308
===================== ==================
- 15 -
Note 7 - Other noncurrent assets
September 30, December 31,
2002 2001
--------------------- ------------------
(In thousands)
Deferred financing costs $ 7,090 $ 8,212
Notes receivable from officers 163 163
Prepaid pension cost 5,778 4,006
Refundable income taxes 1,009 -
Other 447 720
--------------------- ------------------
$ 14,487 $ 13,101
===================== ==================
Note 8 - Accrued liabilities
September 30, December 31,
2002 2001
--------------------- ------------------
(In thousands)
OPEB cost $ 4,476 $ 2,969
Pension cost 3,866 555
Incentive compensation 1,315 6,077
Severance benefits 2,092 -
Other employee benefits 14,201 14,616
Deferred income 1,396 325
Environmental costs 487 654
Restructuring costs 80 198
Tungsten costs 2,701 2,743
Taxes, other than income 6,138 4,867
Dividends on Convertible Preferred Securities (Note 11) - 1,111
Other 8,813 7,684
--------------------- ------------------
$ 45,565 $ 41,799
===================== ==================
In the third quarter of 2002, the Company implemented a program to reduce
global employment levels by approximately 300 employees or approximately 13% of
the workforce. Severance costs aggregating $2.2 million were recorded for actual
and probable terminations based upon benefit agreements and/or arrangements
applicable to the affected salaried and hourly positions. Depending upon the
terminated employees' years of service and payroll classification, severance
benefits could include continuation of pay as well as continuation of certain
health and life insurance benefits. As of September 30, 2002, $2.1 million of
these benefits were accrued and expected to be paid over the next year.
Accrued restructuring costs at September 30, 2002 consist of unpaid
severance and other benefits for terminated employees relating to the Company's
restructuring plans implemented during 1999 and 2000. During the nine months
ended September 30, 2002, the Company applied payments of $.1 million against
the accrued costs related to such restructuring plans. During the nine months
ended September 30, 2001, the Company applied payments of $.5 million against
the accrued costs related to such restructuring plans and recorded income of $.2
million related to revisions to estimates of previously established
restructuring accruals.
- 16 -
Note 9 - Customer advances
In April 2001, the Company reached a settlement of the litigation between
TIMET and The Boeing Company ("Boeing") related to the parties' long-term
agreement ("LTA") entered into in 1997. Under the terms of the LTA, as amended,
in years 2002 through 2007, Boeing advances TIMET $28.5 million annually less
$3.80 per pound of titanium product purchased by Boeing subcontractors during
the preceding year. As of September 30, 2002, approximately $12.2 million of the
customer advance was related to the Company's LTA with Boeing.
Effectively, the Company collects $3.80 less from Boeing than the LTA
selling price for each pound of titanium product sold directly to Boeing and
reduces the related customer advance recorded by the Company. For titanium
products sold to Boeing subcontractors, the Company collects the full LTA
selling price, but gives Boeing credit by reducing the next year's annual
advance by $3.80 per pound of titanium product sold to Boeing subcontractors.
The Boeing customer advance is also reduced as take-or-pay benefits are earned,
as described in Note 12.
Note 10 - Notes payable, long-term debt and capital lease obligations
September 30, December 31,
2002 2001
---------------------- ------------------
(In thousands)
Notes payable:
U.S. credit agreement $ 16,660 $ 30
European credit agreements 735 1,492
---------------------- ------------------
$ 17,395 $ 1,522
====================== ==================
Long-term debt:
Bank credit agreement - U.K. $ 1,302 $ 10,712
Other - 172
---------------------- ------------------
1,302 10,884
Less current maturities - 172
---------------------- ------------------
$ 1,302 $ 10,712
====================== ==================
Capital lease obligations $ 9,868 $ 8,938
Less current maturities 630 340
---------------------- ------------------
$ 9,238 $ 8,598
====================== ==================
- 17 -
On October 23, 2002, the Company amended its existing U.S. asset-based
revolving credit agreement, extending the maturity date to February 2006. Under
the terms of the amendment, borrowings are limited to the lesser of $90 million
or a formula-determined borrowing base derived from the value of accounts
receivable, inventory and equipment ("borrowing availability"). This facility
requires the Company's U.S. daily cash receipts to be used to reduce outstanding
borrowings, which may then be reborrowed, subject to the terms of the agreement.
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 prohibits the payment of dividends on TIMET's
Convertible Preferred Securities if "excess availability," as defined, is less
than $25 million, limits additional indebtedness, prohibits the payment of
dividends on the Company's common stock if excess availability is less than $40
million, requires compliance with certain financial covenants and contains other
covenants customary in lending transactions of this type. Excess availability is
essentially unused borrowing availability and is defined as borrowing
availability less outstanding borrowings and certain contractual commitments
such as letters of credit. Subsequent to the aforementioned amendment, excess
availability was approximately $69 million.
The Company's U.S. credit agreement allows the lender to modify the
borrowing base formulas at its discretion, subject to certain conditions. During
the second quarter of 2002, the Company's lender elected to exercise such
discretion and modified the Company's borrowing base formulas, which reduced the
amount that the Company could have borrowed against its inventory and equipment
by approximately $7 million. In the event the lender exercises such discretion
in the future, such event could have a material adverse impact on the Company's
liquidity. Borrowings outstanding under this U.S. facility are classified as a
current liability.
The Company's subsidiary, TIMET UK Limited ("TIMET UK"), has a credit
agreement that provides for borrowings limited to the lesser of (pound)30
million or a formula-determined borrowing base derived from the value of
accounts receivable, inventory and equipment ("borrowing availability"). The
credit agreement includes a revolving and term loan facility and an overdraft
facility (the "U.K. facilities"). Borrowings under the U.K. facilities can be in
various currencies including U.S. dollars, British pounds and euros, accrue
interest at rates that vary from LIBOR plus 1% to LIBOR plus 1.25% and are
collateralized by substantially all of TIMET UK's assets. The U.K. facilities
require the maintenance of certain financial ratios and amounts and other
covenants customary in lending transactions of this type. The U.K. overdraft
facility is subject to annual review in February of each year. Although no
assurances can be given, the Company expects the overdraft facility to be
renewed for a one-year period in February 2003. In the event that the overdraft
facility is not renewed, the Company believes it could refinance any outstanding
overdraft borrowings under either the revolving or term loan features of the
U.K. facilities. The U.K. facilities expire in February 2005. As of September
30, 2002, the outstanding balance of the U.K. facilities was approximately $1.3
million with unused borrowing availability of approximately $37 million.
The Company also has overdraft and other credit facilities at certain of
its other European subsidiaries. These facilities accrue interest at various
rates and are payable on demand. Unused borrowing availability as of September
30, 2002 under these facilities was approximately $13 million.
The weighted average interest rate on borrowings outstanding under the
U.S., U.K. and other European credit agreements for the three months ended
September 30, 2002 was 4.0%, 5.6% and 3.3%, respectively.
- 18 -
Note 11 - Minority interest
In October 2002, the Company exercised its right to defer future dividend
payments on its Convertible Preferred Securities for a period of up to 20
consecutive quarters. Dividends will continue to accrue at the coupon rate on
the principal and unpaid dividends. This deferral is effective beginning with
the Company's December 1, 2002 scheduled dividend payment. The Company will
consider resuming payment of dividends on the Convertible Preferred Securities
once the outlook for the Company's business improves substantially. Based on
this deferral, accrued dividends on these Convertible Preferred Securities have
been classified as long-term as of September 30, 2002. Since the Company
exercised its right to defer dividend payments, it is unable under the terms of
these securities to, among other things, pay dividends on or reacquire its
capital stock during the deferral period. However, the Company is permitted to
reacquire the Convertible Preferred Securities during the deferral period.
During the second quarter of 2002, TIMET Savoie, S.A. ("TIMET Savoie"), the
Company's 70% owned consolidated French subsidiary, paid a dividend, of which
$1.1 million was paid to Compagnie Europeene du Zirconium-CEZUS, the 30%
minority owner in TIMET Savoie.
Note 12 - Other income and other expense
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- -------------
(In thousands)
Other income:
Dividends and interest income $ 16 $ 1,717 $ 105 $ 5,268
Boeing settlement, net of legal fees - - - 73,000
Boeing take-or-pay 10,540 - 12,696 -
Foreign exchange gain (loss) 50 (365) (292) 73
Restructuring credit - - - 220
Other 478 - 699 626
-------------- -------------- -------------- -------------
$ 11,084 $ 1,352 $ 13,208 $ 79,187
============== ============== ============== =============
Other expense:
Impairment of investment in SMC (Note 3) $ - $ - $ 27,500 $ -
Surety bond guarantee (Note 14) 918 - 918 -
Other 66 90 838 90
-------------- -------------- -------------- -------------
$ 984 $ 90 $ 29,256 $ 90
============== ============== ============== =============
Pursuant to the Boeing settlement, the Company received a cash payment of
$82 million in the second quarter of 2001. The Company's 2001 results reflect
approximately $73 million (cash settlement less legal fees) as other operating
income.
- 19 -
The terms of the amended Boeing LTA allow Boeing to purchase up to 7.5
million pounds of titanium product annually from TIMET through 2007, but limit
TIMET's maximum quarterly volume obligation to 3.0 million pounds. The LTA is
structured as a take-or-pay agreement such that, beginning in calendar year
2002, Boeing forfeits $3.80 per pound of its advance payment in the event that
its orders for delivery are less than 7.5 million pounds in any given calendar
year. The Company recognizes income to the extent Boeing's year-to-date orders
for delivery plus TIMET's maximum quarterly volume obligations for the remainder
of the year total less than 7.5 million pounds. This income is recognized as
other operating income and is not included in sales revenue, sales volume or
gross margin. Based on actual purchases of approximately 1.2 million pounds
through September 30, 2002 (.9 million pounds through the second quarter 2002
and .3 million pounds in the third quarter 2002) and the Company's contractual
maximum volume obligation of 3.0 million pounds for the remainder of the year,
the Company recognized $10.5 million of income in the third quarter of 2002
($12.7 million for the nine months ended September 30, 2002) related to the
take-or-pay provisions for 3.3 million pounds that the Company is no longer
obligated to provide under the LTA in 2002. Recognition of the take-or-pay
income reduces the Boeing customer advance as described in Note 9.
Note 13 - Income taxes
Nine months ended
September 30,
----------------------------------------
2002 2001
------------------ ------------------
(In thousands)
Expected income tax (benefit) expense, at 35% $ (16,689) $ 20,577
Non-U.S. tax rates 823 407
U.S. state income taxes, net 186 1,092
Extraterritorial income exclusion (280) (346)
Dividends received deduction - (974)
Change in valuation allowance:
Effect of change in tax law (1,797) -
Adjustment of deferred tax valuation allowance 16,367 (103)
Other, net 78 40
------------------ ------------------
$ (1,312) $ 20,693
================== ==================
During the first quarter of 2002, the Job Creation and Worker Assistance
Act of 2002 (the "JCWA Act") was signed into law. The Company benefits from
certain provisions of the JCWA Act, which liberalized certain net operating loss
("NOL") and alternative minimum tax ("AMT") restrictions. Prior to the law
change, NOLs could be carried back two years and forward 20 years. The JCWA Act
increases the carryback period for losses generated in 2001 and 2002 to five
years with no change to the carryforward period. In addition, losses generated
in 2001 and 2002 can be carried back and offset against 100% of a taxpayer's
alternative minimum taxable income ("AMTI"). Prior to the law change, an NOL
could offset no more than 90% of a taxpayer's AMTI. The suspension of the 90%
limitation is also applicable to NOLs carried forward into 2001 and 2002. Based
on these changes, the Company recognized $1.8 million of refundable U.S. income
taxes during the first quarter of 2002.
- 20 -
At September 30, 2002, the Company had, for U.S. federal income tax
purposes, NOL carryforwards of approximately $100 million that expire between
2020 and 2022. At September 30, 2002, the Company had AMT credit carryforwards
of approximately $4 million, which can be utilized to offset regular income
taxes payable in future years. The AMT credit carryforward has an indefinite
carryforward period. At September 30, 2002, the Company had the equivalent of a
$15 million NOL carryforward in the United Kingdom and a $2 million NOL
carryforward in Germany, both of which have indefinite carryforward periods.
Note 14 - Commitments and contingencies
For additional information concerning certain legal proceedings and
contingencies related to the Company, see (i) Part I, Item 2 - Management's
Discussion and Analysis of Financial Condition and Results of Operations and
(ii) the 2001 Annual Report on Form 10K.
Long-term agreements. The Company has LTAs with certain major aerospace
customers, including, but not limited to, Boeing, Rolls-Royce plc, United
Technologies Corporation (Pratt & Whitney and related companies) and
Wyman-Gordon Company (a unit of Precision Castparts Corporation). These
agreements initially became effective in 1998 and 1999 and expire in 2007
through 2008, subject to certain conditions. The LTAs generally provide for (i)
minimum market shares of the customers' titanium requirements or firm annual
volume commitments and (ii) fixed or formula-determined prices generally for at
least the first five years. Generally, the LTAs require the Company's service
and product performance to meet specified criteria and contain a number of other
terms and conditions customary in transactions of these types. In certain events
of nonperformance by the Company, the LTAs may be terminated early.
Additionally, under a group of related LTAs (which group represents
approximately 15% of the Company's 2001 sales revenue) which currently have
fixed prices that convert to formula-derived prices in 2004, the customer may
terminate the agreement as of the end of 2003 if the effect of the initiation of
formula-derived pricing would cause such customer "material harm." If any of
such agreements were to be terminated by the customer on this basis, it is
possible that some portion of the business represented by that LTA would
continue on a non-LTA basis. However, the termination of one or more of such
agreements by the customer in such circumstances could result in a material and
adverse effect on the Company's business, results of operations, consolidated
financial condition or liquidity.
During 2001, the Company recorded a charge of $3.0 million relating to a
titanium sponge supplier's agreement to renegotiate certain components,
including minimum purchase commitments for 1999 through 2001, of an LTA entered
into in 1997. As of September 30, 2002 and December 31, 2001, $1.9 and $2.0 of
this amount remained accrued and unpaid, respectively. In September 2002, the
Company entered into a new LTA with this supplier, effective from January 1,
2002 through December 31, 2007. This new LTA replaced and superceded the 1997
LTA. The new LTA requires minimum annual purchases by the Company of
approximately $10 million.
- 21 -
Environmental matters. In 1999, 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") entered into a
series of agreements with BMI and certain related companies pursuant to which,
among other things, BMI assumed responsibility for the conduct of soils
remediation activities on the properties described, including the responsibility
to complete all outstanding requirements pertaining to such activities under
existing consent agreements with the Nevada Division of Environmental
Protection. 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 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 agreed to contribute 50% of the cost in excess of $15.9 million, up to
a maximum payment by TIMET of $2 million). 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 BMI Complex and the TIMET Pond
Property.
The Company is continuing assessment work with respect to its own active
plant site. During 2000, a preliminary study was completed 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). The Company accrued $3.3 million in 2000 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.
At September 30, 2002, the Company had accrued an aggregate of $3.7 million
for environmental matters, including those discussed above. The Company records
liabilities related to environmental remediation obligations when estimated
losses, including estimated legal fees, are probable and reasonably estimable.
Such accruals are adjusted as further information becomes available or
circumstances change. Estimated losses 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, as amended,
alleges that several female employees at the Company's Henderson, Nevada plant
were the subject of sexual harassment and retaliation. The Company is vigorously
defending this action and has filed a motion for summary judgment. Such motion
has not yet been acted on by the court.
- 22 -
At September 30, 2002, the Company had accrued an aggregate of $.6 million
for expected costs related to various legal proceedings, including the above.
The Company records liabilities related to legal proceedings when estimated
losses, including estimated legal fees, 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. TIMET is the primary obligor on two workers' compensation bonds
issued on behalf of a former subsidiary, Freedom Forge Corporation ("Freedom
Forge"), which TIMET sold in 1989. The bonds were provided as part of the
conditions imposed on Freedom Forge in order to self-insure its workers'
compensation obligations. Each of the bonds has a maximum obligation of $1.5
million. Freedom Forge filed for Chapter 11 bankruptcy protection on July 13,
2001, and discontinued payment on the underlying workers' compensation claims in
November 2001. During the third quarter of 2002, TIMET received notices that the
issuers of the bonds have been required to make payments on one of the bonds in
respect to certain of these claims and have requested reimbursement from TIMET
for claims paid through September 17, 2002 in the amount of approximately $.3
million, which TIMET has recorded in accounts payable at September 30, 2002. In
addition, TIMET may be liable for up to an additional $1.2 million on this bond
if further claims are filed. Based upon current loss projections, TIMET
anticipates payouts of at least an additional $.6 million under this bond and
has recorded such amount in accrued liabilities at September 30, 2002. All costs
under this bond have been recorded as other non-operating expenses. At this time
the Company understands that no claims have been paid under the second bond, and
no such payments are currently anticipated. Accordingly, no accrual has been
recorded for potential claims that could be filed under the second bond. TIMET
may revise its estimated liability under these bonds in the future.
- 23 -
In March 2001, the Company was notified by one of its customers that a
product the customer manufactured from standard grade titanium produced by the
Company contained what has been confirmed to be a tungsten inclusion. At the
present time, the Company is aware of six standard grade ingots that have been
demonstrated to contain tungsten inclusions. Based upon the Company's assessment
of possible losses, TIMET recorded an aggregate charge to cost of sales for this
matter of $3.3 million during 2001 (of which $2.8 million was recorded in the
second quarter of 2001). During 2001, the Company charged $.3 million against
this accrual to write down its remaining on-hand inventory and made $.3 million
in settlement payments, resulting in a $2.7 million accrual as of December 31,
2001 for potential future claims. During 2002, the Company has made settlement
payments aggregating $.2 million. Additionally, the Company revised its estimate
of the most likely amount of loss to be incurred, resulting in a charge of $.2
million to cost of sales in the second quarter of 2002. As of September 30,
2002, $2.7 million is accrued for pending and potential future claims. This
amount represents the Company's best estimate of the most likely amount of loss
to be incurred. This amount does not represent the maximum possible loss, which
is not possible for the Company to estimate at this time, and may be
periodically revised in the future as more facts become known. As of September
30, 2002, the Company has received claims aggregating approximately $5 million
and has made settlement payments aggregating $.5 million. Pending claims are
being investigated and negotiated. The Company believes that certain claims are
without merit or can be settled for less than the amount of the original claim.
There is no assurance that all potential claims have yet been submitted to the
Company. The Company has filed suit seeking full recovery from its silicon
supplier for any liability the Company might incur, although no assurances can
be given that the Company will ultimately be able to recover all or any portion
of such amounts. The Company has not recorded any recoveries related to this
matter as of September 30, 2002.
As a consequence of uncertainties surrounding both the titanium and
commercial aerospace industries and broader economic conditions, the Company
believes assessments of long-lived asset recoverability, as required under SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that
may result in charges for asset impairments could occur in the fourth quarter of
2002. Generally, when events or changes in circumstances indicate that the
carrying amount of long-lived assets, including property and equipment, may not
be recoverable, the Company prepares an evaluation comparing the carrying amount
of the assets to the undiscounted expected future cash flows of the assets or
asset group. If this comparison indicates that the carrying amount is not
recoverable, the amount of the impairment would typically be calculated using
discounted expected future cash flows or appraised values. All relevant factors
are considered in determining whether an impairment exists and charges for asset
impairments, if any, are recorded when reasonably estimable. Such potential
future charges, if any, could be material.
The Company is involved in various environmental, contractual, product
liability and other claims, disputes and litigation incidental to its business
including those discussed above. While management, including internal counsel,
currently believes that the outcome of these matters, individually and in the
aggregate, will not have a material adverse effect on the Company's financial
position, liquidity or overall trends in results of operations, all such matters
are subject to inherent uncertainties. Were an unfavorable outcome to occur in
any given period, it is possible that it could have a material adverse impact on
the results of operations or cash flows in a particular period.
- 24 -
Note 15 - Earnings (loss) per share
Basic earnings (loss) per share is based on the weighted average number of
unrestricted common shares outstanding during each period. Diluted earnings
(loss) per share reflect the dilutive effect of common stock options, restricted
stock and the assumed conversion of the Convertible Preferred Securities, if
applicable. The assumed conversion of the Convertible Preferred Securities was
omitted from the diluted earnings (loss) per share calculation for the three and
nine months ended September 30, 2002 and for the nine months ended September 30,
2001 because the effect was antidilutive. Had the Convertible Preferred
Securities not been antidilutive, diluted losses would have been decreased by
$3.3 million and $10.0 million for the three and nine months ended September 30,
2002, respectively and by $2.1 million and $6.8 million for the three and nine
months ended September 30, 2001. Diluted average shares outstanding would have
been increased by 5.4 million shares for each of these periods. Stock options
and restricted shares omitted from the calculation because they were
antidilutive approximated 1.5 million for the three and nine months ended
September 30, 2002. A reconciliation of the numerator and denominator used in
the calculation of basic and diluted earnings per share is presented below.
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
-------------- ------------- -------------- -------------
(In thousands) (In thousands)
Numerator:
Net (loss) income $ (9,148) $ 4,340 $ (101,885) $ 30,276
============== ============= ============== =============
Denominator:
Average common shares outstanding 31,611 31,539 31,586 31,486
Average dilutive stock options and
restricted shares - 225 - 274
-------------- ------------- -------------- -------------
Diluted shares 31,611 31,764 31,586 31,760
============== ============= ============== =============
Note 16 - Accounting principles not yet adopted
In 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations. Under SFAS No. 143, the fair value
of a liability for an asset retirement obligation covered under the scope of
SFAS No. 143 would be recognized in the period in which the liability is
incurred, with an offsetting increase in the carrying amount of the related
long-lived asset. Over time, the liability would be accreted to its present
value, and the capitalized cost would be depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity would either settle
the obligation for its recorded amount or incur a gain or loss upon settlement.
The Company is still studying this standard to determine, among other things,
whether it has any asset retirement obligations that are covered under the scope
of SFAS No. 143, and the effect, if any, to the Company of adopting this
standard has not yet been determined. The Company will implement SFAS No. 143 no
later than January 1, 2003.
- 25 -
The Company will adopt SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, no later than January 1, 2003 for exit or disposal
activities initiated on or after the date of adoption. Under SFAS No. 146, costs
associated with exit activities, as defined, that are covered by the scope of
SFAS No. 146 are recognized and measured initially at fair value, generally in
the period in which the liability is incurred. SFAS No. 146 eliminates the
definition and requirement for recognition of exit costs in Emerging Issues Task
Force Issue No. 94-3 where a liability for an exit cost was recognized at the
date of an entity's commitment to an exit plan. Costs covered by the scope of
SFAS No. 146 include termination benefits provided to employees, costs to
consolidate facilities or relocate employees, and costs to terminate contracts
(other than a capital lease). The Company currently believes the adoption of
this standard will have no material effect on the Company's results of
operations, consolidated financial position or liquidity.
- 26 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes certain components of the Company's results
for the three and nine-month periods ended September 30, 2002 and 2001. The
discussion that follows regarding the Company's results frequently refers to
segment information that is presented in Note 2 to the Consolidated Financial
Statements and should be read in conjunction with that information and
information contained in the Outlook section and elsewhere. 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. In the following discussion, the Company has attempted to adjust for the
effects of changes in mix when referring to the percentage change in selling
prices from period to period.
Three months ended Nine months ended
September 30, September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
-------------- -------------- -------------- --------------
($ in thousands) ($ in thousands)
Net sales $ 82,794 $ 126,437 $ 281,529 $ 370,479
Gross margin (4,940) 20,836 1,592 24,618
Operating (loss) income (4,366) 9,964 (16,091) 56,757
Percent of net sales:
Gross margin -6% 16% 1% 7%
Percent change in:
Mill product sales volume -33 -26
Mill product selling prices (1) -1 +4
Melted product sales volume -54 -45
Melted product selling prices (1) -5 +2
----------------------------------------------------------------------------------------------------------------------
(1) Change expressed in billing currencies and mix adjusted.
Third quarter of 2002 compared to third quarter of 2001. Sales of $82.8
million in the third quarter of 2002 were 35% lower than the year-ago period due
principally to the net effects of a 33% decrease in mill product volume, a 54%
decrease in melted product volume and changes in customer and product mix. The
Company's estimated shipment volume to the commercial aerospace sector declined
approximately 40% during the third quarter of 2002 compared to the third quarter
of 2001. Mill product selling prices increased 2% (expressed in U.S. dollars
using actual foreign currency exchange rates prevailing during the period) while
melted product selling prices decreased 5%. In billing currencies (which exclude
the effects of foreign currency translation), mill product selling prices
decreased 1% from the year ago period.
- 27 -
Gross margin (net sales less cost of sales) was negative 6% of sales for
the third quarter of 2002 compared to 16% in the year-ago period. Gross margin
was significantly affected by the decline in sales volume and the impact of
lower plant operating rates. As the Company reduces production volume in
response to reduced order demand, certain manufacturing overhead costs decrease
at a slower rate and to a lesser extent than production volume changes,
generally resulting in higher costs relative to production levels. Average plant
operating rates declined from approximately 85% of capacity in the 2001 period
compared to 45% in the 2002 period. Due to present business conditions,
including a number of customer order cancellations, the Company recorded
provisions for excess inventories of approximately $3.0 million in the 2002
period compared to approximately $.3 million in the 2001 period. Severance
costs of approximately $2.2 million related to the Company's third quarter 2002
program to reduce global employment levels by 300 people or approximately 13% of
the workforce were substantially offset by a revision of the Company's
previously estimated incentive compensation for 2002. The 2001 period was
adversely impacted by goodwill amortization of $1.1 million. As required by SFAS
No. 142, and effective January 1, 2002, the Company no longer amortizes its
goodwill on a periodic basis. See Note 5 to the Consolidated Financial
Statements.
Selling, general, administrative and development expenses during the third
quarter of 2002 decreased by approximately 7% from year-ago levels, principally
as a result of lower personnel related costs.
Equity in earnings of joint ventures during the third quarter of 2002 was
$.4 million lower than the year-ago period principally due to a decrease in
earnings of VALTIMET, the Company's minority-owned welded tube joint venture.
Other income (expense), net during the third quarter of 2002 was $11.0
million higher than the year-ago period principally due to $10.5 million of
other income recognized related to the take-or-pay provisions of the Boeing LTA
entered into in 1997 and as subsequently amended. The terms of the amended
Boeing LTA allow Boeing to purchase up to 7.5 million pounds of titanium product
annually from TIMET in years 2002 through 2007, but limit TIMET's maximum
quarterly volume obligation to 3.0 million pounds. The Company recognizes income
to the extent Boeing's year-to-date orders for delivery plus TIMET's maximum
quarterly volume obligations for the remainder of the year total less than 7.5
million pounds. This income is recognized as other operating income and is not
included in sales revenue, sales volume or gross margin. Based on actual
purchases of approximately 1.2 million pounds through September 30, 2002 (.9
million pounds through the second quarter 2002 and .3 million pounds in the
third quarter 2002) and the Company's contractual maximum volume obligation of
3.0 million pounds for the remainder of the year, the Company recognized $10.5
million of other income in the third quarter of 2002 related to the take-or-pay
provisions for the 3.3 million pounds of material that the Company is no longer
obligated to provide under the LTA in 2002.
First nine months of 2002 compared to first nine months of 2001. Sales of
$281.5 million for the nine months ended September 30, 2002 were 24% lower than
the year-ago period due principally to the net effects of a 26% decrease in mill
product volume, a 45% decrease in melted product volume and changes in customer
and product mix. The Company's estimated shipment volume to the commercial
aerospace sector declined approximately 35% during the nine months ended
September 30, 2002 compared to the nine months ended September 30, 2001. Mill
product selling prices increased 5% (expressed in U.S. dollars using actual
foreign currency exchange rates prevailing during the period) while melted
product selling prices increased 2%. In billing currencies (which exclude the
effects of foreign currency translation), mill product selling prices increased
4% from the year ago period; however, both mill and melted product market
selling prices on new orders have been trending downward during 2002.
- 28 -
Gross margin was 1% of sales for the nine months ended September 30, 2002
compared to 7% in the year-ago period. Gross margin was significantly affected
by the decline in sales volume and the impact of lower plant operating rates.
Average plant operating rates declined from approximately 75% of capacity in the
2001 period compared to approximately 55% in the 2002 period. Due to business
conditions during 2002, including a number of customer order cancellations, the
Company recorded provisions for excess inventories of approximately $3.3 million
in the 2002 period compared to approximately $1.6 million in the 2001 period.
Severance costs of approximately $3.0 million related to global workforce
reductions undertaken throughout 2002 were recorded during the nine months ended
September 30, 2002. Gross margin for the nine months ended September 30, 2001
was adversely impacted by $10.8 million of equipment impairment charges and $3.8
million of estimated costs related to the tungsten matter described below. The
2001 period was also adversely impacted by goodwill amortization of $3.5
million. As required by SFAS No. 142, effective January 1, 2002, the Company no
longer amortizes its goodwill on a periodic basis. See Note 5 to the
Consolidated Financial Statements.
In March 2001, the Company was notified by one of its customers that a
product the customer manufactured from standard grade titanium produced by the
Company contained what has been confirmed to be a tungsten inclusion. At the
present time, the Company is aware of six standard grade ingots that have been
demonstrated to contain tungsten inclusions. Based upon the Company's assessment
of possible losses, TIMET recorded an aggregate charge to cost of sales for this
matter of $3.3 million during 2001. During 2001, the Company charged $.3 million
against this accrual to write down its remaining on-hand inventory and made $.3
million in settlement payments, resulting in a $2.7 million accrual as of
December 31, 2001 for potential future claims. During 2002, the Company has made
settlement payments aggregating $.2 million. Additionally, the Company has
revised its estimate of the most likely amount of loss to be incurred, resulting
in a charge of $.2 million to cost of sales in the second quarter of 2002. As of
September 30, 2002, $2.7 million is accrued for pending and potential future
claims. This amount represents the Company's best estimate of the most likely
amount of loss to be incurred. This amount does not represent the maximum
possible loss, which is not possible for the Company to estimate at this time,
and may be periodically revised in the future as more facts become known. As of
September 30, 2002 the Company has received claims aggregating approximately $5
million and has made settlement payments aggregating $.5 million. Pending claims
are being investigated and negotiated. The Company believes that certain claims
are without merit or can be settled for less than the amount of the original
claim. There is no assurance that all potential claims have yet been submitted
to the Company. The Company has filed suit seeking full recovery from its
silicon supplier for any liability the Company might incur, although no
assurances can be given that the Company will ultimately be able to recover all
or any portion of such amounts. The Company has not recorded any recoveries
related to this matter as of September 30, 2002.
During the second quarter of 2001, the Company determined that an
impairment of the carrying amount of certain long-lived assets located at its
Millbury, Massachusetts facility had occurred. Accordingly, the Company recorded
a $10.8 million pretax impairment charge to cost of sales in the second quarter
of 2001, representing the difference between the assets' previous carrying
amount and their estimated fair values, based on a third-party appraisal.
Selling, general, administrative and development expenses for the nine
months ended September 30, 2002 decreased by approximately 2% from year-ago
levels (excluding $10.3 million of incentive compensation related to the Boeing
settlement in the 2001 period), principally as a result of lower personnel
related costs, partially offset by higher selling and marketing costs.
- 29 -
Equity in earnings of joint ventures during the nine months ended September
30, 2002 was $.2 million lower than the year ago period principally due to a
decrease in earnings of VALTIMET.
Other income (expense), net during the nine months ended September 30, 2002
was $60.6 million lower than the year-ago period principally due to the
recognition of $73.0 million of income in the 2001 period related to settlement
of the litigation between TIMET and Boeing related to the parties' LTA entered
into in 1997. During the nine months ended September 30, 2002, the Company
recognized $12.7 million of other income related to the take-or-pay provisions
of the Boeing LTA, as amended.
General corporate income (expense). General corporate income (expense) for
the three and nine months ended September 30, 2001 includes interest income and
dividend income on $80 million of non-voting preferred securities of Special
Metals Corporation ("SMC"), which accrued at an annual rate of 6.625%. No
interest income or dividend income relating to these securities was recognized
during the three and nine months ended September 30, 2002. On March 27, 2002,
SMC and its U.S. subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. As a result, the Company undertook an
assessment of its investment in SMC with the assistance of an external valuation
specialist and recorded a $27.5 million impairment charge during the first
quarter of 2002 for an other than temporary decline in the estimated fair value
of its investment in SMC. This charge reduced the Company's carrying amount of
its investment in SMC to zero. See Note 3 to the Consolidated Financial
Statements.
TIMET is the primary obligor on two workers' compensation bonds issued on
behalf of a former subsidiary, Freedom Forge Corporation ("Freedom Forge"),
which TIMET sold in 1989. The bonds were provided as part of the conditions
imposed on Freedom Forge in order to self-insure its workers' compensation
obligations. Each of the bonds has a maximum obligation of $1.5 million. Freedom
Forge filed for Chapter 11 bankruptcy protection on July 13, 2001, and
discontinued payment on the underlying workers' compensation claims in November
2001. During the third quarter of 2002, TIMET received notices that the issuers
of the bonds have been required to make payments on one of the bonds in respect
to certain of these claims and have requested reimbursement from TIMET for
claims paid through September 17, 2002 in the amount of approximately $.3
million, which TIMET has recorded in accounts payable at September 30, 2002. In
addition, TIMET may be liable for up to an additional $1.2 million on this bond
if further claims are filed. Based upon current loss projections, TIMET
anticipates payouts of at least an additional $.6 million under this bond and
has recorded such amount in accrued liabilities at September 30, 2002. All costs
under this bond have been recorded as general corporate expenses. At this time
the Company understands that no claims have been paid under the second bond, and
no such payments are currently anticipated. Accordingly, no accrual has been
recorded for potential claims that could be filed under the second bond. TIMET
may revise its estimated liability under these bonds in the future.
Interest expense. Interest expense during the three months ended September
30, 2002 was higher than in the comparable period in 2001, primarily due to
higher average debt levels partially offset by lower interest rates during the
2002 period. Interest expense during the nine months ended September 30, 2002
was lower than in the comparable period in 2001, primarily due to lower average
debt levels and lower interest rates during the 2002 period.
- 30 -
Income taxes. During the first quarter of 2002, the Job Creation and Worker
Assistance Act of 2002 (the "JCWA Act") was signed into law. The Company
benefits from certain provisions of the JCWA Act, which liberalized certain net
operating loss ("NOL") and alternative minimum tax restrictions. Prior to the
law change, NOLs could be carried back two years and forward 20 years. The JCWA
Act increases the carryback period for losses generated in 2001 and 2002 to five
years with no change to the carryforward period. In addition, losses generated
in 2001 and 2002 can be carried back and offset against 100% of a taxpayer's
alternative minimum taxable income ("AMTI"). Prior to the law change, an NOL
could offset no more than 90% of a taxpayer's AMTI. The suspension of the 90%
limitation is also applicable to NOLs carried forward into 2001 and 2002. Based
on these changes, the Company recognized $1.8 million of refundable U.S. income
taxes during the first quarter of 2002.
The Company operates in several tax jurisdictions and is subject to varying
income tax rates. As a result, the geographic mix of pretax income can impact
the Company's overall effective tax rate. The Company's income tax rate
approximated the U.S. statutory rate during the three and nine months ended
September 30, 2001. For the three and nine months ended September 30, 2002, the
Company's income tax rate varied from the U.S. statutory rate primarily due to
an increase in the deferred tax valuation allowance related to the Company's tax
attributes that did not meet the "more-likely-than-not" recognition criteria
during that period. See Note 13 to the Consolidated Financial Statements.
Minority interest. Dividend expense related to the Company's 6.625%
Convertible Preferred Securities approximates $3.3 million per quarter and is
reported as minority interest. For the three and nine months ended September 30,
2001, this expense was recorded net of allocable income taxes; however, as a
result of the Company's decision to increase its deferred tax valuation
allowance, this expense was reported pre-tax for the three and nine months ended
September 30, 2002. In addition, during the nine months ended September 30,
2001, the Company recorded an additional $.5 million of pretax dividend expense
related to dividends in arrears. Other minority interest relates primarily to
the 30% interest in TIMET Savoie, S.A. held by Compagnie Europeene du
Zirconium-CEZUS, S.A. ("CEZUS").
Cumulative effect of change in accounting principle. On January 1, 2002,
the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. Under
SFAS No. 142, goodwill is no longer amortized on a periodic basis, but instead
is subject to a two-step impairment test to be performed on at least an annual
basis. In order to test for transitional impairment, SFAS No. 142 required the
Company to identify its reporting units and determine the carrying amount of
each reporting unit by assigning its assets and liabilities, including existing
goodwill and intangible assets, to those reporting units as of January 1, 2002.
The Company determined that it operates one reporting unit, as that term is
defined by SFAS No. 142, consisting of the Company in total. The first step of
the impairment test required the Company to determine the fair value of its
reporting unit and compare it to that reporting unit's carrying amount. This
evaluation was completed with the assistance of an external valuation specialist
and considered a combination of fair value indicators including quoted market
prices, prices of comparable businesses and discounted cash flows. The
evaluation, which was completed during the second quarter of 2002, indicated
that the Company's recorded goodwill might be impaired and required the Company
to complete the second step of the impairment test.
- 31 -
The second step of the impairment test, which was completed during the
third quarter of 2002, required the Company to compare the implied fair value of
its reporting unit's goodwill with the carrying amount of that goodwill. With
the assistance of the external valuation specialist utilized in the step one
testing, the Company determined the implied fair value of its goodwill was zero.
Accordingly, the Company recorded a non-cash goodwill impairment charge of $44.3
million, representing the entire balance of the Company's recorded goodwill at
January 1, 2002. There was no income tax benefit associated with this charge.
While the goodwill associated with the Company's U.S. operations is deductible
for income tax purposes, the Company does not currently recognize an income tax
benefit associated with its U.S. losses. In addition the goodwill associated
with the Company's European operations is not deductible for income tax
purposes. Pursuant to the transition requirements of SFAS No. 142, this charge
has been reported in the Company's Consolidated Statements of Operations as a
cumulative effect of a change in accounting principle as of January 1, 2002. The
effect of the change in accounting principle on the first quarter of 2002 was to
increase the Company's first quarter net loss by $44.3 million, or $1.40 per
share, to $80.4 million, or $2.55 per share. The change had no effect on the
second or third quarters of 2002.
Supplemental information. Approximately 43% of the Company's sales
originated in Europe for the nine months ended September 30, 2002, of which
approximately 60% were denominated in currencies other than the U.S. dollar,
principally the British pound and 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 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 as such are not subject to currency
exchange rate fluctuations.
The Company does not use currency contracts to hedge its currency
exposures. At September 30, 2002, consolidated assets and liabilities
denominated in currencies other than functional currencies were approximately
$28.5 million and $32.2 million, respectively, consisting primarily of U.S.
dollar cash, accounts receivable, accounts payable and borrowings.
In July 2002, the Company successfully negotiated new three-year labor
agreements with its labor unions at its Toronto, Ohio facility.
Outlook. The Outlook section contains a number of forward-looking
statements, all of which are based on current expectations, and exclude the
potential effect of special and other charges related to restructurings, asset
impairments, valuation allowances, changes in accounting principles and similar
items, unless otherwise noted. Undue reliance should not be placed on
forward-looking statements. Actual results may differ materially. See Notes 1,
12, 14 and 16 to the Consolidated Financial Statements regarding commitments,
contingencies, legal, environmental and other matters, which could materially
affect the Company's future business, results of operations, consolidated
financial position and liquidity.
- 32 -
The economic slowdown that began during 2001 in the economies of the U.S.
and other regions of the world combined with the events of September 11, 2001
have resulted in the major commercial airframe and jet engine manufacturers
substantially reducing their forecast of future engine and aircraft deliveries
and their production levels in 2002. The Company expects that aggregate industry
mill product shipments will decrease in 2002 by approximately 18%, from its
revised estimate of 55,000 metric tons in 2001 to an estimated 45,000 metric
tons, and that demand for mill products for the commercial aerospace sector
could decline by up to 40% in 2002, primarily due to a combination of reduced
aircraft production rates and excess inventory accumulated throughout the
aerospace supply chain. Excess inventory accumulation typically leads to order
demand for titanium products falling below actual consumption.
The Airline Monitor, a leading aerospace publication, traditionally issues
forecasts for commercial aircraft deliveries each January and July. The Airline
Monitor's most recently issued forecast, July 2002, for deliveries of large
commercial aircraft is for 675 in 2002, 595 in 2003, 525 in 2004, 495 in 2005,
565 in 2006 and 685 in 2007. The demand for titanium generally precedes aircraft
deliveries by about one year and can be significantly affected by both excess
inventory accumulation and its subsequent absorption. Based on The Airline
Monitor's July 2002 forecast and the Company's projected changes in supply chain
inventory levels, the Company anticipates a cyclical trough in titanium demand
may occur in 2003 with a gradual recovery beginning thereafter. However, adverse
world events, including terrorist activities and conflicts in the Middle East,
Iraq or elsewhere, could have a significant adverse impact on the financial
health of commercial airlines and economic growth in the U.S. and other regions
of the world. Any such events, which are not contemplated in the Company's
outlook, could prolong and exacerbate the current commercial aerospace downturn
and have broader economic consequences.
The Company's backlog of unfilled orders was approximately $165 million at
September 2002, compared to $145 million at June 2002 and $315 million at
September 2001. Substantially all of the September 2002 backlog is scheduled to
be shipped within the next 12 months. However, the Company's order backlog may
not be a reliable indicator of future business activity. Since September 11,
2001, the Company has received a number of deferrals and cancellations of
previously scheduled orders and believes such requests will continue throughout
2002.
Although the current business environment makes it difficult to predict the
Company's future financial performance, the Company expects its sales revenue
for the full year 2002 to range from $360 million to $370 million, reflecting
the combined effects of decreases in sales volume, softening of market selling
prices and changes in customer and product mix. Compared to 2001, mill product
sales volume is expected to decline about 25% to about 9,000 metric tons. Melted
product sales volume is expected to decline 40% to about 2,600 metric tons. The
reduction of overall sales volume in 2002 is principally driven by the
anticipated decline of 40% in commercial aerospace sales volume compared to
2001, partly offset by sales volume growth to other markets. The Company expects
market selling prices on new orders to continue to soften throughout the fourth
quarter of 2002. The Company's forecast anticipates that Boeing will purchase
about 1.4 million pounds of product under the LTA in 2002. At that level, the
Company expects to recognize about $23 million of income under the Boeing
agreement's take or pay provisions for the full year 2002. Those earnings are
included in operating income, but are not included in sales revenue, sales
volume or gross margin.
- 33 -
The Company currently anticipates gross margin as a percent of sales for
the full year 2002 will be between negative 1% and negative 4%. Selling,
general, administrative and development expense should be approximately $43
million. Interest expense should approximate $4 million. The Company's
consolidated effective book tax rate is expected to be about 5%, but could vary
significantly with the geographic mix of income. Minority interest on the
Company's Convertible Preferred Securities should approximate $13 million. The
Company presently expects an operating loss of $25 million to $30 million and a
net loss before the cumulative effect of changes in accounting principle and the
previously reported impairment charge related to SMC of $45 million to $50
million in 2002.
The Company expects cash flow from operations in 2002 to be approximately
negative $25 million. This is influenced by the effect in 2002 of the $28.5
million cash advance that the Company received from Boeing in December 2001 that
related to contract year 2002. That receipt created a customer advance for the
same amount at year-end 2001. The customer advance is being reduced during 2002
as product shipments are made and as the take-or-pay benefits are earned. The
advance for calendar year 2003 will not be received until early in 2003. Cash
flow from operations in the near-term is also expected to be affected by
increased payments to fund employee retirement benefits resulting from decreases
in the value of underlying plan assets and early retirements, the deferral of
dividend payments on the Company's Convertible Preferred Securities and
reductions of inventory levels. Capital expenditures for 2002 are expected to be
approximately $9 million. Depreciation and amortization should approximate $37
million.
For the fourth quarter of 2002, the Company expects sales revenue to range
between $75 million and $85 million. Mill product sales volume is expected to be
about 2,200 metric tons and melted product sales volume should be about 700
metric tons. Gross margin as a percent of sales in the fourth quarter is
expected to range between negative 6% and negative 12%. Selling, general,
administrative and development expense in the fourth quarter should be about $10
million. The Company expects to recognize an additional $10 million of operating
income related to the take-or-pay provisions of the amended Boeing LTA during
the fourth quarter. Interest expense should approximate $1 million while
minority interest on the Company's Convertible Preferred Securities should
approximate $3.3 million. With these estimates, the Company expects an operating
loss in the fourth quarter of 2002 of between $5 million and $10 million, and a
net loss of between $10 million and $15 million.
The Company's outlook for 2003 is for a continuing difficult business
environment reflecting the severe downturn in the commercial aerospace industry
and sluggish economy. The commercial aerospace sector is the major source of
demand for the Company's products. Although workforce reduction actions in 2002
are expected to result in annual savings between $12 million and $15 million,
early expectations are that the Company's sales revenue and financial results
during 2003 may be similar to 2002. However, the Company is conscious of the
meaningful risks posed by the continuing war on terrorism, and potential
conflicts in the Middle East, Iraq and elsewhere. These and other adverse world
events could prolong and exacerbate the current commercial aerospace downturn
and have broader economic consequences.
- 34 -
As a consequence of uncertainties surrounding both the titanium and
commercial aerospace industries and broader economic conditions, the Company
believes assessments of long-lived asset recoverability, as required under SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that
may result in charges for asset impairments could occur in the fourth quarter of
2002. Generally, when events or changes in circumstances indicate that the
carrying amount of long-lived assets, including property and equipment, may not
be recoverable, the Company prepares an evaluation comparing the carrying amount
of the assets to the undiscounted expected future cash flows of the assets or
asset group. If this comparison indicates that the carrying amount is not
recoverable, the amount of the impairment would typically be calculated using
discounted expected future cash flows or appraised values. All relevant factors
are considered in determining whether an impairment exists and charges for asset
impairments, if any, are recorded when reasonably estimable. Such potential
future charges, if any, could be material.
In 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations. Under SFAS No. 143, the fair value
of a liability for an asset retirement obligation covered under the scope of
SFAS No. 143 would be recognized in the period in which the liability is
incurred, with an offsetting increase in the carrying amount of the related
long-lived asset. Over time, the liability would be accreted to its present
value, and the capitalized cost would be depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity would either settle
the obligation for its recorded amount or incur a gain or loss upon settlement.
The Company is still studying this standard to determine, among other things,
whether it has any asset retirement obligations that are covered under the scope
of SFAS No. 143, and the effect, if any, to the Company of adopting this
standard has not yet been determined. The Company will implement SFAS No. 143 no
later than January 1, 2003.
The Company will adopt SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, no later than January 1, 2003 for exit or disposal
activities initiated on or after the date of adoption. Under SFAS No. 146, costs
associated with exit activities, as defined, that are covered by the scope of
SFAS No. 146 are recognized and measured initially at fair value, generally in
the period in which the liability is incurred. SFAS No. 146 eliminates the
definition and requirement for recognition of exit costs in Emerging Issues Task
Force Issue No. 94-3 where a liability for an exit cost was recognized at the
date of an entity's commitment to an exit plan. Costs covered by the scope of
SFAS No. 146 include termination benefits provided to employees, costs to
consolidate facilities or relocate employees, and costs to terminate contracts
(other than a capital lease). The Company currently believes the adoption of
this standard will have no material effect on the Company's results of
operations, consolidated financial position or liquidity.
- 35 -
Future results of operations and other forward-looking statements contained
in this Outlook involve a number of substantial risks and uncertainties that
could significantly affect expected results. Actual 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. Among the factors that could cause actual results to
differ materially are the risks and uncertainties discussed in this Quarterly
Report 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 LTAs, the
renewal of certain LTAs, the difficulty in forecasting demand for titanium
products, global economic and political conditions, global productive capacity
for titanium, changes in product pricing and costs, the impact of long-term
contracts with vendors on the ability of the Company to reduce or increase
supply or achieve lower costs, the possibility of labor disruptions,
fluctuations in currency exchange rates, 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), possible disruption of
business or increases in the cost of doing business resulting from war or
terrorist activities 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.
- 36 -
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows provided by operating, investing and
financing activities are presented below. The following discussion should be
read in conjunction with the Consolidated Financial Statements and information
contained in the Outlook section and elsewhere.
Nine months ended
September 30,
------------------------------------------
2002 2001
------------------- -------------------
(In thousands)
Cash provided (used) by:
Operating activities:
Excluding changes in assets and liabilities $ (3,018) $ 88,733
Changes in assets and liabilities (15,632) (41,140)
------------------- -------------------
(18,650) 47,593
Investing activities (4,765) (7,892)
Financing activities 4,150 (33,793)
------------------- -------------------
Net cash provided (used) by operating,
investing and financing activities $ (19,265) $ 5,908
=================== ===================
Operating activities. Cash used by operating activities, excluding changes
in assets and liabilities, generally followed the trend in operating results.
Changes in assets and liabilities reflect primarily the timing of purchases,
production and sales and can vary significantly from period to period. Accounts
receivable decreased during the nine months of 2002 primarily as a result of
reduced sales, which was somewhat offset by an increase in days sales
outstanding as certain customers extended their payment terms to the Company.
Receivables from related parties decreased in the first nine months of 2002
primarily as a result of cash received from Tremont through an intercorporate
services agreement and from a reduction in sales to VALTIMET. Inventories
increased in the first nine months of 2002 as a result of production begun by
the Company prior to certain customer cancellations and push-outs related to the
recent downturn in the commercial aerospace market, the timing of certain raw
material purchases and the accelerated production of certain orders as part of
the Company's contingency planning for a possible labor disruption at its
Toronto plant. This increase was partially offset by an increase in the
Company's LIFO reserve and increases in reserves for excess inventories which
the Company recorded in response to decreased demand for its products and other
changes in business conditions. The Company expects inventory levels to decline
during the fourth quarter of 2002. Prepaid expenses and other current assets
decreased in the first nine months of 2002 due to the receipt of raw materials
for which the Company had made advance payments during 2001 and the ongoing
usage of other prepaid assets.
- 37 -
In October 2002, the Company exercised its right to defer future dividend
payments on its Convertible Preferred Securities for a period of up to 20
consecutive quarters. Dividends will continue to accrue at the coupon rate on
the principal and unpaid dividends. This deferral is effective beginning with
the Company's December 1, 2002 scheduled dividend payment. The Company may
consider resuming payment of dividends on the Convertible Preferred Securities
once the outlook for the Company's business improves substantially. Since the
Company exercised its right to defer dividend payments, it is unable under the
terms of these securities to, among other things, pay dividends on or reacquire
its capital stock during the deferral period. However, the Company is permitted
to reacquire the Convertible Preferred Securities during the deferral period.
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 materials purchases. Changes in customer advances reflect the
application of customer purchases and the recognition of Boeing-related
take-or-pay income during the first nine months of 2002. Under the terms of the
amended Boeing LTA, in years 2002 through 2007, Boeing advances TIMET $28.5
million annually, less $3.80 per pound of titanium product purchased by Boeing
subcontractors during the preceding year. Effectively, the Company collects
$3.80 less from Boeing than the LTA selling price for each pound of titanium
product sold directly to Boeing, which reduces the related customer advance
recorded by the Company. For titanium products sold to Boeing subcontractors,
the Company collects the full LTA selling price, but gives Boeing credit by
reducing the next year's annual advance by $3.80 per pound of titanium product
sold to Boeing subcontractors. The Company currently estimates that the
reduction against the 2003 advance from Boeing will be less than $1 million. The
LTA is structured as a take-or-pay agreement such that, beginning in calendar
year 2002, Boeing forfeits $3.80 per pound in the event that its orders for
delivery are less than 7.5 million pounds in any given calendar year. The Boeing
customer advance was reduced by $16.3 million ($3.6 million from purchases
directly by Boeing and $12.7 million from recognition of take-or-pay income) to
$12.2 million during the first nine months of 2002.
On March 27, 2002, SMC and its U.S. subsidiaries filed voluntary petitions
for reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result,
the Company, with the assistance of an external valuation specialist, undertook
a further assessment of its investment in SMC and recorded an additional $27.5
million impairment charge during the first quarter of 2002 to general corporate
expense for an other than temporary decline in the fair value of its investment
in SMC, reducing the Company's carrying amount of its investment in SMC to zero.
Investing activities. The Company's capital expenditures were $4.8 million
for the nine months ended September 30, 2002 compared to $7.9 million for the
same period in 2001, principally for capacity enhancements, capital maintenance,
and safety and environmental projects.
Financing activities. Net borrowings of $5.7 million during the nine months
ended September 30, 2002 are primarily attributable to increases in working
capital (exclusive of cash). Net repayments in the 2001 period were primarily
attributable to the Company's litigation settlement with Boeing. The Company
also made a $1.1 million dividend payment to CEZUS in the second quarter of
2002.
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Borrowing arrangements. At September 30, 2002, the Company's net debt (cash
and cash equivalents less indebtedness, excluding capital lease obligations,
Convertible Preferred Securities and deferred dividends thereon) was
approximately $14.1 million, consisting of $4.6 million of cash and equivalents
and $18.7 million of debt (principally borrowings under the Company's U.S. and
U.K. credit agreements). This compares to a net cash position of $12.1 million
as of December 31, 2001. During January 2003, the Company expects to receive
approximately $27.5 million from Boeing under the terms of the parties' amended
LTA, which is expected to be used to reduce outstanding borrowings under the
Company's credit agreements.
On October 23, 2002, the Company amended its existing U.S. asset-based
revolving credit agreement, extending the maturity date to February 2006. Under
the terms of the amendment, borrowings are limited to the lesser of $90 million
or a formula-determined borrowing base derived from the value of accounts
receivable, inventory and equipment ("borrowing availability"). This facility
requires the Company's U.S. daily cash receipts to be used to reduce outstanding
borrowings, which may then be reborrowed, subject to the terms of the agreement.
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 prohibits the payment of dividends on TIMET's
Convertible Preferred Securities if "excess availability," as defined, is less
than $25 million, limits additional indebtedness, prohibits the payment of
dividends on the Company's common stock if excess availability is less than $40
million, requires compliance with certain financial covenants and contains other
covenants customary in lending transactions of this type. Excess availability is
essentially unused borrowing availability and is defined as borrowing
availability less outstanding borrowings and certain contractual commitments
such as letters of credit. Subsequent to the aforementioned amendment, excess
availability was approximately $69 million.
The Company's U.S. credit agreement allows the lender to modify the
borrowing base formulas at its discretion, subject to certain conditions. During
the second quarter of 2002, the Company's lender elected to exercise such
discretion and modified the Company's borrowing base formulas, which reduced the
amount that the Company could have borrowed against its inventory and equipment
by approximately $7 million. In the event the lender exercises such discretion
in the future, such event could have a material adverse impact on the Company's
liquidity. Borrowings outstanding under this U.S. facility are classified as a
current liability.
The Company's subsidiary, TIMET UK, has a credit agreement that provides
for borrowings limited to the lesser of (pound)30 million or a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and equipment ("borrowing availability"). The credit agreement
includes a revolving and term loan facility and an overdraft facility (the "U.K.
facilities"). Borrowings under the U.K. facilities can be in various currencies
including U.S. dollars, British pounds and euros, accrue interest at rates that
vary from LIBOR plus 1% to LIBOR plus 1.25% and are collateralized by
substantially all of TIMET UK's assets. The U.K. facilities require the
maintenance of certain financial ratios and amounts and other covenants
customary in lending transactions of this type. The U.K. overdraft facility is
subject to annual review in February of each year. Although no assurance can be
given, the Company expects the overdraft facility to be renewed for a one-year
period in February 2003. In the event the overdraft facility is not renewed, the
Company believes it could refinance any outstanding overdraft borrowings under
either the revolving or term loan features of the U.K. facility. The U.K.
facilities expire in February 2005. As of September 30, 2002, the outstanding
balance of the U.K. facilities was approximately $1.3 million with unused
borrowing availability of approximately $37 million.
- 39 -
The Company also has overdraft and other credit facilities at certain of
its other European subsidiaries. These facilities accrue interest at various
rates and are payable on demand. Unused borrowing availability as of September
30, 2002 under these facilities was approximately $13 million.
Although excess availability under TIMET's U.S. credit agreement remains
above $40 million, no dividends were paid by TIMET during the nine-month periods
ended September 30, 2002 and 2001.
Legal and environmental matters. See Note 14 to the Consolidated Financial
Statements for additional discussion of environmental and legal matters.
Other. On September 9, 2002, Moody's Investor Service lowered its rating on
the Company's Convertible Preferred Securities to Caa2 from B3. On September 10,
2002, Standard & Poor's Ratings Services ("S&P") lowered its rating on the
Company's Convertible Preferred Securities to CCC- from CCC, and subsequently on
October 29, 2002, S&P again lowered its rating to C from CCC-. S&P has further
indicated that it will lower its credit rating on these securities to D after
the dividend payment due on December 1, 2002 is actually deferred. The Company's
ability to obtain additional capital in the future could be negatively affected
by these rating actions.
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, 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
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.
- 40 -
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The Company is exposed to market risk from changes in foreign
currency exchange rates, interest rates and commodity prices. 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. Information regarding the Company's market risk relating to
interest rate volatility was disclosed in the Company's 2001 Annual Report and
should be read in conjunction with this interim financial information. Since
December 31, 2001, there has been no significant change in the nature of the
Company's exposure to market risks.
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 2 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Commodity prices. The Company is exposed to market risk arising from
changes in commodity prices as a result of its long-term purchase and supply
agreements with certain suppliers and customers. These agreements, which offer
various fixed or formula-determined pricing arrangements, effectively obligate
the Company to bear (i) the risk of increased raw material and other costs to
the Company which cannot be passed on to the Company's customers through
increased titanium product prices (in whole or in part) or (ii) the risk of
decreasing raw material costs to the Company's suppliers which are not passed on
to the Company in the form of lower raw material prices.
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Item 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that the Company files or submits to the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it files
or submits to the SEC under the Exchange Act is accumulated and communicated to
the Company's management, including its principal executive officer and its
principal financial officer, as appropriate to allow timely decisions to be made
regarding required disclosure. Both J. Landis Martin, the Company's Chief
Executive Officer, and Mark A. Wallace, the Company's Chief Financial Officer,
have evaluated the Company's disclosure controls and procedures as of a date
within 90 days of the filing of this Form 10-Q. Based upon their evaluation,
these executive officers have concluded that the Company's disclosure controls
and procedures are effective as of the date of such evaluation.
The Company also maintains a system of internal controls. The term
"internal controls," as defined by the American Institute of Certified Public
Accountants' Codification of Statement on Auditing Standards, AU Section 319,
means controls and other procedures designed to provide reasonable assurance
regarding the achievement of objectives in the reliability of the Company's
financial reporting, the effectiveness and efficiency of the Company's
operations and the Company's compliance with applicable laws and regulations.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date of their last evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Note 14 of the Consolidated Financial Statements which
information is incorporated herein by reference and to the Company's 2001 Annual
Report for descriptions of certain previously reported legal proceedings.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Amendment No. 2 to 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
October 23, 2002.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K filed by the Registrant for the quarter ended September
30, 2002 and through November 7, 2002:
Date of Report Items Reported
------------------------------ ------------------------------
July 9, 2002 5 and 7
November 4, 2002 5 and 7
November 4, 2002 5 and 7
- 43 -
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
--------------------------------------------
(Registrant)
Date: November 7, 2002 By /s/ Mark A. Wallace
--------------------------------------------
Mark A. Wallace
Executive Vice President and
Chief Financial Officer
Date: November 7, 2002 By /s/ JoAnne A. Nadalin
--------------------------------------------
JoAnne A. Nadalin
Vice President, Corporate Controller and
Principal Accounting Officer
- 44 -
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, J. Landis Martin, Chairman of the Board, President and Chief Executive
Officer of Titanium Metals Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Titanium Metals
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
- 45 -
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 7, 2002
/s/ J. Landis Martin
J. Landis Martin
Chairman of the Board, President
and Chief Executive Officer
- 46 -
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mark A. Wallace, Executive Vice President and Chief Financial Officer of
Titanium Metals Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Titanium Metals
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
- 47 -
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 7, 2002
/s/ Mark A. Wallace
Mark A. Wallace
Executive Vice President and Chief Financial Officer
- 48 -