TIMET Corporation Form 10-Q March 31, 2007
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
X
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended March 31, 2007
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
Commission
file number 1-14368
Titanium
Metals Corporation
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
|
13-5630895
|
(State
or other jurisdiction of incorporation or organization)
|
|
(IRS
Employer Identification No.)
|
5430
LBJ Freeway, Suite 1700, Dallas, Texas
75240-2697
|
(Address
of principal executive offices) (Zip
Code)
|
Registrant’s telephone number, including area code:
|
(972)
233-1700
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated” filer in Rule 12b-2 of the Exchange Act.
X Large accelerated filer o
Accelerated filer o
Non-accelerated filer
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o
No X
Number
of
shares of common stock outstanding on May 1, 2007: 161,977,756
TITANIUM
METALS CORPORATION
INDEX
|
Page
Number
|
|
|
PART
I.
FINANCIAL INFORMATION
|
|
|
|
Item
1. Condensed
Consolidated Financial Statements
|
|
|
|
Condensed
Consolidated Balance Sheets -
December
31, 2006; March 31, 2007 (unaudited)
|
2
|
|
|
Condensed
Consolidated Statements of Income -
Three
months ended March 31, 2006 and 2007 (unaudited)
|
4
|
|
|
Condensed
Consolidated Statements of Cash Flows -
Three
months ended March 31, 2006 and 2007 (unaudited)
|
5
|
|
|
Condensed
Consolidated Statement of Stockholder’s Equity
and
Comprehensive Income - Three months ended
March
31, 2007 (unaudited)
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
7
|
|
|
Item
2. Management’s Discussion and Analysis of Financial
Condition
and
Results of Operations
|
14
|
|
|
Item
3.
Quantitative and Qualitative Disclosures About Market Risk
|
22
|
|
|
Item
4.
Controls and Procedures
|
22
|
|
|
PART
II. OTHER
INFORMATION
|
|
|
|
Item
1. Legal Proceedings
|
23
|
|
|
Item
1A. Risk Factors
|
23
|
|
|
Item
6. Exhibits
|
23
|
Items
2,
3, 4 and 5 of Part II are omitted because there is no information to
report.
TITANIUM
METALS CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
millions, except per share data)
|
|
December
31,
|
|
March
31,
|
|
ASSETS
|
|
2006
|
|
2007
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
29.4
|
|
$
|
75.6
|
|
Accounts
and other receivables, less allowance
|
|
|
|
|
|
|
|
of
$1.4, respectively
|
|
|
213.0
|
|
|
222.9
|
|
Inventories
|
|
|
501.5
|
|
|
518.3
|
|
Refundable
income taxes
|
|
|
-
|
|
|
0.9
|
|
Prepaid
expenses and other
|
|
|
4.6
|
|
|
4.6
|
|
Deferred
income taxes
|
|
|
9.1
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
757.6
|
|
|
831.2
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
56.8
|
|
|
46.1
|
|
Property
and equipment, net
|
|
|
329.8
|
|
|
334.9
|
|
Pension
asset
|
|
|
17.9
|
|
|
19.1
|
|
Deferred
income taxes
|
|
|
3.5
|
|
|
3.3
|
|
Prepaid
expenses and other
|
|
|
51.3
|
|
|
50.5
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,216.9
|
|
$
|
1,285.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
TITANIUM
METALS CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In
millions, except per share data)
|
|
December
31,
|
|
March
31,
|
|
LIABILITIES,
MINORITY INTEREST AND
|
|
2006
|
|
2007
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
87.8
|
|
$
|
80.5
|
|
Accrued
liabilities
|
|
|
82.0
|
|
|
70.1
|
|
Customer
advances
|
|
|
18.7
|
|
|
16.4
|
|
Income
taxes payable
|
|
|
22.0
|
|
|
42.4
|
|
Deferred
income taxes
|
|
|
0.6
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
211.1
|
|
|
210.1
|
|
|
|
|
|
|
|
|
|
Accrued
OPEB cost
|
|
|
28.0
|
|
|
28.3
|
|
Accrued
pension cost
|
|
|
52.2
|
|
|
51.7
|
|
Deferred
income taxes
|
|
|
17.8
|
|
|
14.9
|
|
Other
|
|
|
7.6
|
|
|
9.5
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
316.7
|
|
|
314.5
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
21.3
|
|
|
24.7
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
Series
A Preferred Stock
|
|
|
75.0
|
|
|
73.9
|
|
Common
stock
|
|
|
1.6
|
|
|
1.6
|
|
Additional
paid-in capital
|
|
|
484.4
|
|
|
486.3
|
|
Retained
earnings
|
|
|
340.3
|
|
|
415.2
|
|
Accumulated
other comprehensive loss
|
|
|
(22.4
|
)
|
|
(31.1
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
878.9
|
|
|
945.9
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interest and stockholders’
equity
|
|
$
|
1,216.9
|
|
$
|
1,285.1
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
TITANIUM
METALS CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(In
millions, except per share data)
|
|
Three
months ended March 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
286.9
|
|
$
|
341.7
|
|
Cost
of sales
|
|
|
178.6
|
|
|
208.3
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
108.3
|
|
|
133.4
|
|
|
|
|
|
|
|
|
|
Selling,
general, administrative and development expense
|
|
|
15.3
|
|
|
17.3
|
|
Other
income, net
|
|
|
2.1
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
|
95.1
|
|
|
116.2
|
|
|
|
|
|
|
|
|
|
Other
non-operating expense, net
|
|
|
0.7
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and minority interest
|
|
|
94.4
|
|
|
116.0
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
33.2
|
|
|
36.4
|
|
Minority
interest in after-tax earnings
|
|
|
2.3
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
58.9
|
|
|
76.4
|
|
|
|
|
|
|
|
|
|
Dividends
on Series A Preferred Stock
|
|
|
2.1
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
Net
income attributable to common stockholders
|
|
$
|
56.8
|
|
$
|
75.0
|
|
|
|
|
|
|
|
|
|
Earnings
per share attributable to common stockholders:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.39
|
|
$
|
0.46
|
|
Diluted
|
|
$
|
0.32
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
|
146.1
|
|
|
161.7
|
|
Diluted
|
|
|
183.9
|
|
|
184.2
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
TITANIUM
METALS CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
millions)
|
|
Three
months ended March 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
58.9
|
|
$
|
76.4
|
|
Depreciation
and amortization
|
|
|
8.3
|
|
|
8.9
|
|
Deferred
income taxes
|
|
|
5.2
|
|
|
(0.8
|
)
|
Minority
interest
|
|
|
2.3
|
|
|
3.2
|
|
Other,
net
|
|
|
(1.2
|
)
|
|
0.5
|
|
Change
in assets and liabilities:
|
|
|
|
|
|
|
|
Receivables
|
|
|
(47.5
|
)
|
|
(9.2
|
)
|
Inventories
|
|
|
(33.1
|
)
|
|
(15.7
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(4.0
|
)
|
|
(20.1
|
)
|
Income
taxes
|
|
|
24.1
|
|
|
20.0
|
|
Other,
net
|
|
|
(3.6
|
)
|
|
(3.3
|
)
|
Net
cash provided by operating activities
|
|
|
9.4
|
|
|
59.9
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(16.9
|
)
|
|
(13.3
|
)
|
Other,
net
|
|
|
(0.6
|
)
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(17.5
|
)
|
|
(13.3
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Indebtedness:
|
|
|
|
|
|
|
|
Borrowings
|
|
|
188.5
|
|
|
-
|
|
Repayments
|
|
|
(191.2
|
)
|
|
-
|
|
Dividends
paid on Series A Preferred Stock
|
|
|
(2.2
|
)
|
|
(1.4
|
)
|
Issuance
of common stock
|
|
|
7.9
|
|
|
0.4
|
|
Other,
net
|
|
|
(0.8
|
)
|
|
0.2
|
|
Net
cash provided by (used in) financing activities
|
|
|
2.2
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating, investing and
financing
activities
|
|
|
(5.9
|
)
|
|
45.8
|
|
Effect
of exchange rate changes on cash
|
|
|
0.2
|
|
|
0.4
|
|
|
|
|
(5.7
|
)
|
|
46.2
|
|
Cash
and cash equivalents at beginning of period
|
|
|
17.6
|
|
|
29.4
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
11.9
|
|
$
|
75.6
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
Cash
paid for:
|
|
|
|
|
|
|
|
Interest,
net of amounts capitalized
|
|
$
|
0.7
|
|
$
|
0.8
|
|
Income taxes, net
|
|
$
|
3.8
|
|
$
|
17.5
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
TITANIUM
METALS CORPORATION
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
AND
COMPREHENSIVE INCOME
FOR
THE THREE
MONTHS ENDED MARCH 31, 2007
(In
millions)
|
|
Common
Stock
|
|
Series
A
Preferred
Stock
|
|
Additional
Paid-in Capital
|
|
Retained
Earnings
|
|
Accumulated
Other Comprehensive Loss
|
|
Total
|
|
Comprehensive
Income
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1, 2007
|
|
$
|
1.6
|
|
$
|
75.0
|
|
$
|
484.4
|
|
$
|
340.3
|
|
$
|
(22.4
|
)
|
$
|
878.9
|
|
$
|
-
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
76.4
|
|
|
-
|
|
|
76.4
|
|
|
76.4
|
|
Other comprehensive income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(8.7
|
)
|
|
(8.7
|
)
|
|
(8.7
|
)
|
Issuance
of common stock
|
|
|
-
|
|
|
-
|
|
|
0.4
|
|
|
-
|
|
|
-
|
|
|
0.4
|
|
|
-
|
|
Conversion
of Series A
Preferred
Stock
|
|
|
-
|
|
|
(1.1
|
)
|
|
1.1
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Tax
benefit of stock options
exercised
|
|
|
-
|
|
|
-
|
|
|
0.4
|
|
|
-
|
|
|
-
|
|
|
0.4
|
|
|
-
|
|
Dividends
declared on
Series
A Preferred Stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1.4
|
)
|
|
-
|
|
|
(1.4
|
)
|
|
-
|
|
Change in Accounting - FIN
48
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(0.1
|
)
|
|
-
|
|
|
(0.1
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at March 31, 2007
|
|
$
|
1.6
|
|
$
|
73.9
|
|
$
|
486.3
|
|
$
|
415.2
|
|
$
|
(31.1
|
)
|
$
|
945.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
67.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Consolidated Financial
Statements.
Note
1 - Basis of presentation and organization
Basis
of presentation.
The
unaudited Condensed Consolidated Financial Statements contained in this
Quarterly Report have been prepared on the same basis as the audited
Consolidated Financial Statements in our Annual Report on Form 10-K for the
year
ended December 31, 2006 that we filed with the Securities and Exchange
Commission (“SEC”) on February 28, 2007 (“2006 Annual Report”), except as
disclosed below. They include the accounts of Titanium Metals Corporation and
its majority owned subsidiaries (collectively referred to as “TIMET”). Unless
otherwise indicated, references in this report to “we”, “us” or “our” refer to
TIMET and its subsidiaries, taken as a whole. All material intercompany
transactions and balances with consolidated subsidiaries have been
eliminated.
In our
opinion, we have made all necessary adjustments
(which include only normal recurring adjustments) in order to state fairly,
in
all material respects, our consolidated financial position, results of
operations and cash flows as of the dates and for the periods presented. We
have
condensed the Consolidated Balance Sheet at December 31, 2006 contained in
this
Quarterly Report as compared to our audited Consolidated Financial Statements
at
that date, and we have condensed or omitted certain information and footnote
disclosures (including those related to the Consolidated Balance Sheet at
December 31, 2006) normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of
America (“GAAP”). Our results of operations for the interim period ended March
31, 2007 may not be indicative of our operating results for the full year.
The
Condensed Consolidated Financial Statements contained in this Quarterly Report
should be read in conjunction with the 2006 Consolidated Financial Statements
contained in our 2006 Annual Report. Our first three fiscal quarters reported
are the approximate 13-week periods ending on the Saturday generally nearest
to
March 31, June 30 and September 30. Our fourth fiscal quarter and fiscal year
always end on December 31. For presentation purposes, our financial statements
and the accompanying notes have been presented as ended on March 31, June 30,
September 30 and December 31, as applicable.
Organization.
At
March 31, 2007, Contran Corporation and its subsidiaries held 32.4% of our
outstanding common stock, and the Combined Master Retirement Trust (“CMRT”), a
trust sponsored by Contran to permit the collective investment by trusts that
maintain the assets of certain employee benefit plans adopted by Contran and
certain related companies, held an additional 9.5% of our common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold
C.
Simmons, of which Mr. Simmons is sole trustee, or is held by Mr. Simmons or
persons or other entities related to Mr. Simmons. In addition, Mr. Simmons
is
the sole trustee of the CMRT and a member of the trust investment committee
for
the CMRT. At March 31,
2007,
Mr. Simmons directly owned 3.2% of our outstanding common stock and Mr. Simmons’
spouse owned 94.5% of our outstanding Series A Preferred Stock and a nominal
number of shares of our common stock. Consequently, Mr. Simmons may be deemed
to
control each of Contran and us.
Recent
accounting pronouncements. On
January 1, 2007, we adopted Financial Accounting Standards Board (“FASB”)
Interpretation (“FIN”) No. 48, Accounting
for Uncertain Tax Positions.
FIN 48
clarifies when and how much of a benefit we can recognize in our consolidated
financial statements for certain positions taken in our income tax returns
under
Statement of Financial Accounting Standards (“SFAS”) 109, Accounting
for Income Taxes,
and
enhances the disclosure requirements for our income tax policies and reserves.
Among other things, FIN 48 prohibits us from recognizing the benefits of a
tax
position unless we believe it is more-likely-than-not our position will prevail
with the applicable tax authorities and limits the amount of the benefit to
the
largest amount for which we believe the likelihood of realization is greater
than 50%. FIN 48 also requires companies to accrue penalties and interest on
the
difference between tax positions taken on their tax returns and the amount
of
benefit recognized for financial reporting purposes under the new standard.
We
are required to classify any future
reserves for uncertain tax positions in a
separate current or noncurrent liability, depending on the nature of the tax
position. Our adoption of FIN 48 did not have a material impact on our
consolidated financial position or results of operations.
We
accrue
interest and penalties on unrecognized tax benefits as a component of our
provision for income taxes. At January 1, 2007 and March 31, 2007 we had no
accrued interest and penalties for our uncertain tax positions.
At
March
31, 2007 we had approximately $2.0 million accrued for uncertain tax positions,
which did not change significantly from the January 1, 2007 accrual. Of this
amount, $1.9 million was reclassified from deferred income tax liabilities,
and
the remainder was accounted for as a reduction in our retained earnings in
accordance with the transition provisions of the new standard. In addition,
the
benefit associated with approximately $0.2 million of our reserve for uncertain
tax positions at January 1, 2007 would, if recognized, affect our effective
income tax rate. We do not currently believe that the unrecognized tax benefits
will change significantly within the next twelve months.
We
file
income tax returns in various U.S. federal, state and local jurisdictions.
We
also file income tax returns in various foreign jurisdictions, principally
in
the United Kingdom, Italy, France and Germany. Our domestic income tax
returns prior to 2003 are generally considered closed to examination by
applicable tax authorities. Our foreign income tax returns are generally
considered closed to examination for years prior to 2000 (for the United
Kingdom), 2002 (for Italy), 2003 (for France) and 2002 (for
Germany).
Note
2 - Inventories
|
|
December
31, 2006
|
|
March
31, 2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
134.0
|
|
$
|
124.5
|
|
Work-in-process
|
|
|
239.4
|
|
|
245.2
|
|
Finished
products
|
|
|
90.3
|
|
|
105.9
|
|
Inventory
consigned to customers
|
|
|
20.1
|
|
|
23.3
|
|
Supplies
|
|
|
17.7
|
|
|
19.4
|
|
|
|
|
|
|
|
|
|
Total
inventories
|
|
$
|
501.5
|
|
$
|
518.3
|
|
Note
3 - Marketable securities
Our
marketable securities consist of investments in related parties. CompX
International, Inc. (“CompX”), NL Industries, Inc. (“NL”) and Kronos Worldwide,
Inc. (“Kronos”) are each majority owned subsidiaries of Contran. The aggregate
cost basis for our marketable securities is $36.9 million, and the following
table summarizes the market value of our marketable securities as of December
31, 2006 and March 31, 2007:
|
|
December
31, 2006
|
|
March
31, 2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
CompX CompX(1)
|
|
$
|
54.3
|
|
$
|
43.5
|
|
NL NL
|
|
|
2.3
|
|
|
2.4
|
|
Kronos Kronos
|
|
|
0.2
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
Total
marketable securities
|
|
$
|
56.8
|
|
$
|
46.1
|
|
Note
4 - Property and equipment
|
|
December
31, 2006
|
|
March
31, 2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
Land
and improvements
|
|
$
|
9.3
|
|
$
|
9.3
|
|
Buildings
and improvements
|
|
|
41.6
|
|
|
41.6
|
|
Information
technology systems
|
|
|
66.0
|
|
|
66.2
|
|
Manufacturing
equipment and other
|
|
|
376.2
|
|
|
383.0
|
|
Construction
in progress
|
|
|
103.4
|
|
|
108.3
|
|
|
|
|
|
|
|
|
|
Total
property and equipment
|
|
|
596.5
|
|
|
608.4
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
266.7
|
|
|
273.5
|
|
|
|
|
|
|
|
|
|
Total
property and equipment, net
|
|
$
|
329.8
|
|
$
|
334.9
|
|
Note
5 - Prepaid expenses and other noncurrent assets
|
|
December
31, 2006
|
|
March
31, 2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
Prepaid
conversion services
|
|
$
|
49.7
|
|
$
|
49.1
|
|
Other
|
|
|
1.6
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
Total
prepaid expenses and other noncurrent assets
|
|
$
|
51.3
|
|
$
|
50.5
|
|
Note
6 - Accrued liabilities
|
|
December
31, 2006
|
|
March
31, 2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
Employee
related
|
|
$
|
46.4
|
|
$
|
33.2
|
|
Deferred
revenue
|
|
|
6.9
|
|
|
6.8
|
|
Scrap
purchases
|
|
|
8.9
|
|
|
11.2
|
|
Taxes,
other than income
|
|
|
6.7
|
|
|
6.2
|
|
Other
|
|
|
13.1
|
|
|
12.7
|
|
|
|
|
|
|
|
|
|
Total
accrued liabilities
|
|
$
|
82.0
|
|
$
|
70.1
|
|
Defined
benefit pension plans.
The
components of the net periodic pension expense are set forth below:
|
|
Three
months ended March 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
1.1
|
|
$
|
1.3
|
|
Interest
cost
|
|
|
3.4
|
|
|
4.2
|
|
Expected
return on plan assets
|
|
|
(4.5
|
)
|
|
(5.4
|
)
|
Amortization
of net losses
|
|
|
0.8
|
|
|
0.9
|
|
Amortization
of prior service
cost
|
|
|
0.1
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
Total
pension expense
|
|
$
|
0.9
|
|
$
|
1.1
|
|
Postretirement
benefits other than pensions (“OPEB”).
The
components of net OPEB expense are set forth below:
|
|
Three
months ended March 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
0.2
|
|
$
|
0.2
|
|
Interest
cost
|
|
|
0.4
|
|
|
0.4
|
|
Amortization
of net losses
|
|
|
0.2
|
|
|
0.2
|
|
Amortization
of prior service
cost
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
Total
OPEB expense
|
|
$
|
0.7
|
|
$
|
0.7
|
|
Note
8 - Income taxes
|
|
Three
months ended March 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
Expected
income tax expense, at 35%
|
|
$
|
33.0
|
|
$
|
40.6
|
|
Non-U.S.
tax rates
|
|
|
(0.8
|
)
|
|
(0.8
|
)
|
U.S.
state income taxes, net
|
|
|
1.7
|
|
|
2.0
|
|
Nontaxable
income
|
|
|
(0.1
|
)
|
|
(3.3
|
)
|
Domestic
manufacturing credit
|
|
|
(0.6
|
)
|
|
(1.6
|
)
|
Other,
net
|
|
|
-
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
Total
income tax expense
|
|
$
|
33.2
|
|
$
|
36.4
|
|
|
|
|
|
|
|
|
|
Note
9 - Commitments and contingencies
Environmental
matters.
We are
continuing assessment work with respect to our active plant site in Henderson,
Nevada. As of March 31, 2007, we have $1.9 million accrued representing our
estimate of the probable costs to remediate this site. We expect these accrued
expenses to be paid over the remediation period of up to thirty years. We
estimate the upper end of the range of reasonably possible costs related to
this
matter, including the current accrual, to be approximately $4.0 million.
We
accrue
liabilities related to environmental remediation obligations when estimated
future costs are probable and estimable. We evaluate and adjust our estimates
as
additional information becomes available or as circumstances change. Estimated
future costs are not discounted to their present value. In the future, if the
standards or requirements under environmental laws or regulations become more
stringent, if our testing and analysis at our operating facilities identify
additional environmental remediation, or if we determine that we are responsible
for the remediation of hazardous substance contamination at other sites, then
we
may incur additional costs in excess of our current estimates. We do not know
if
actual costs will exceed our current estimates, if additional sites or matters
will be identified which require remediation or if the estimated costs
associated with previously identified sites requiring environmental remediation
will become estimable in the future.
Legal proceedings.
From
time to time, we are involved in various employment, environmental, contractual,
intellectual property, product liability, general liability and other claims,
disputes and litigation incidental to our operations. In certain instances,
we
have insurance coverage for these items to eliminate or reduce our risk of
loss
(other than standard deductibles, which are generally $1 million or less).
We
currently believe that the outcome of these matters, individually or in the
aggregate, will not have a material adverse effect on our financial position,
results of operations or liquidity beyond the accruals for which we have already
provided. However, all such maters are subject to inherent uncertainties, and
were an unfavorable outcome to occur with respect to several of these matters
in
a given period, it is possible that it could have a material adverse impact
on
our results of operations or cash flows in that particular period.
Note
10 -
Earnings per share
Basic
earnings per share is based on the weighted average number of unrestricted
common shares outstanding during each period. Diluted earnings per share
attributable to common stockholders reflects the dilutive effect of common
stock
options, restricted stock and the assumed conversion of our Series A Preferred
Stock, if applicable. A reconciliation of the numerator and denominator used
in
the calculation of basic and diluted earnings per share is presented below:
|
|
Three
months ended March 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income attributable to common stockholders
|
|
$
|
56.8
|
|
$
|
75.0
|
|
Dividends
on Series A Preferred
Stock
|
|
|
2.1
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
Diluted
net income attributable to
common stockholders
|
|
$
|
58.9
|
|
$
|
76.4
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Average
common shares outstanding
|
|
|
146.1
|
|
|
161.7
|
|
Average
dilutive stock options and
restricted stock
|
|
|
0.8
|
|
|
0.1
|
|
Series
A Preferred Stock
|
|
|
36.5
|
|
|
22.4
|
|
Other
|
|
|
0.5
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Diluted
shares
|
|
|
183.9
|
|
|
184.2
|
|
|
|
|
|
|
|
|
|
Note
11 - Business segment information
Our
production facilities are located in the United States, United Kingdom, France
and Italy, and our products are sold throughout the world. Our Chief Executive
Officer functions as our chief operating decision maker (“CODM”), and the CODM
receives consolidated financial information about us. He makes decisions
concerning resource utilization and performance analysis on a consolidated
and
global basis. We have one reportable segment, our worldwide
“Titanium melted and mill products” segment. The
following table provides segment information supplemental to our Condensed
Consolidated Financial Statements:
|
|
Three
months ended March 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
(In
millions, except product shipment data)
|
|
|
|
|
|
|
|
|
|
Titanium
melted and mill products:
|
|
|
|
|
|
|
|
Melted
product net sales
|
|
$
|
47.2
|
|
$
|
59.1
|
|
Mill
product net sales
|
|
|
205.1
|
|
|
250.0
|
|
Other
product sales
|
|
|
34.6
|
|
|
32.6
|
|
|
|
|
|
|
|
|
|
Total
net sales
|
|
$
|
286.9
|
|
$
|
341.7
|
|
|
|
|
|
|
|
|
|
Melted
product shipments:
|
|
|
|
|
|
|
|
Volume
(metric tons)
|
|
|
1,460
|
|
|
1,330
|
|
Average
selling price (per kilogram)
|
|
$
|
32.35
|
|
$
|
44.45
|
|
|
|
|
|
|
|
|
|
Mill
product shipments:
|
|
|
|
|
|
|
|
Volume
(metric tons)
|
|
|
3,675
|
|
|
3,720
|
|
Average
selling price (per kilogram)
|
|
$
|
55.80
|
|
$
|
67.20
|
|
Item
2.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
|
AND
RESULTS OF OPERATIONS
|
The
statements contained in this Quarterly Report on Form 10-Q (“Quarterly Report”)
that are not historical facts, including, but not limited to, statements found
in Management’s Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”), are forward-looking statements that represent
management’s beliefs and assumptions based on currently available information.
Forward-looking statements can generally be identified by the use of words
such
as “believes,” “intends,” “may,” “will,” “looks,” “should,” “could,”
“anticipates,” “expects” or comparable terminology or by discussions of
strategies or trends. Although we believe that the expectations reflected in
such forward-looking statements are reasonable, we do not know if these
expectations will prove to be correct. Such statements by their nature involve
substantial risks and uncertainties that could significantly affect expected
results. Actual future results could differ materially from those described
in
such forward-looking statements, and we disclaim any intention or obligation
to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Among the factors that could cause
actual results to differ materially are the risks and uncertainties discussed
in
this Quarterly Report, including risks and uncertainties in those portions
referenced above and those described from time to time in our other filings
with
the SEC which include, but are not limited to:
·
the
cyclicality of the commercial aerospace industry;
·
the
performance of aerospace manufacturers and us under our long-term
agreements;
·
the
existence or renewal of certain long-term agreements;
·
the
difficulty in forecasting demand for titanium products;
·
global
economic and political conditions;
·
global
production capacity for titanium;
·
changes
in product pricing and costs;
|
·
|
the
impact of long-term contracts with vendors on our ability to reduce
or
increase supply;
|
·
the
possibility of labor disruptions;
·
fluctuations
in currency exchange rates;
·
fluctuations
in the market price of marketable securities;
·
uncertainties
associated with new product or new market development;
·
the
availability of raw materials and services;
·
changes
in raw material prices and other operating costs (including energy
costs);
|
·
|
possible
disruption of business or increases in the cost of doing business
resulting from terrorist activities or global
conflicts;
|
·
competitive
products and strategies; and
·
other
risks and uncertainties.
Should
one or more of these risks materialize (or the consequences of such a
development worsen), or should the underlying assumptions prove incorrect,
actual results could differ materially from those forecasted or
expected.
SUMMARY
General
overview. We
are
a
vertically integrated producer of titanium sponge, melted products and a variety
of mill products for commercial aerospace, military, industrial and other
applications. We are one of the world’s leading producers of titanium melted
products (ingot, electrodes and slab) and mill products (billet, bar, sheet
and
strip). We are the only producer with major titanium production facilities
in
both the U.S. and Europe, the world’s principal markets for
titanium.
The
following discussion and analysis should be read in conjunction with our
Condensed Consolidated Financial Statements and related notes included elsewhere
in this Quarterly Report and with our Consolidated Financial Statements and
the
information under the heading “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” which are included in our 2006 Annual
Report.
Recent
developments.
Effective January 1, 2007, we entered into a ten-year titanium supply agreement
with Rolls-Royce Corporation (“Rolls-Royce”), which provides for our supply of
titanium products to Rolls-Royce for gas turbine engine production through
2016.
This long-term agreement (“LTA”) replaced our previous LTA with Rolls Royce. The
LTA includes certain volume purchase and supply requirements by the parties
and
provides for future price adjustments. The LTA also provides us with a sustained
backlog and provides Rolls-Royce with a certain supply and consistent quality
of
titanium products. Under the new LTA, we will continue to be the primary
supplier of Rolls-Royce’s titanium requirements for its gas turbine
engines.
RESULTS
OF OPERATIONS
Quarter
ended March 31, 2006 compared to quarter ended March 31,
2007
Summarized
financial information.
The
following table summarizes certain information regarding our results of
operations for the three months ended March 31, 2006 and 2007. Our reported
average selling prices are a reflection of actual selling prices we received
after the effects of currency exchange rates, customer and product mix, and
other related factors realized throughout a given period. Consequently, changes
in average selling prices from period to period will be impacted by changes
in
actual prices and these other factors.
|
|
Three
months ended March 31,
|
|
|
|
2006
|
|
%
of Total Net Sales
|
|
2007
|
|
%
of Total Net Sales
|
|
|
|
(In
millions, except product shipment data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Melted
products
|
|
$
|
47.2
|
|
|
17
|
%
|
$
|
59.1
|
|
|
17
|
%
|
Mill
products
|
|
|
205.1
|
|
|
71
|
%
|
|
250.0
|
|
|
73
|
%
|
Other
products
|
|
|
34.6
|
|
|
12
|
%
|
|
32.6
|
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
net sales
|
|
|
286.9
|
|
|
100
|
%
|
|
341.7
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
(178.6
|
)
|
|
62
|
%
|
|
(208.3
|
)
|
|
61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
108.3
|
|
|
38
|
%
|
|
133.4
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general, administrative and development
expense
|
|
|
(15.3
|
)
|
|
5
|
%
|
|
(17.3
|
)
|
|
5
|
%
|
Other
income, net
|
|
|
2.1
|
|
|
-
|
|
|
0.1
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
95.1
|
|
|
33
|
%
|
$
|
116.2
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Melted
product shipments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
(metric tons)
|
|
|
1,460
|
|
|
|
|
|
1,330
|
|
|
|
|
Average
selling price (per kilogram)
|
|
$
|
32.35
|
|
|
|
|
$
|
44.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mill
product shipments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume
(metric tons)
|
|
|
3,675
|
|
|
|
|
|
3,720
|
|
|
|
|
Average
selling price (per kilogram)
|
|
$
|
55.80
|
|
|
|
|
$
|
67.20
|
|
|
|
|
Net
sales.
We
experienced significant sales growth during the first quarter of 2007 compared
to the first quarter of 2006, as net sales increased 19% to $341.7 million.
We,
and the industry as a whole, have benefited significantly from continued strong
demand for titanium across all major industry market sectors that has driven
melted and mill titanium prices to record levels. As a result of these market
factors, average selling prices for melted and mill products increased 37%
and
20%, respectively, in the first quarter of 2007 compared to the same period
in
2006. While our combined volume of melted and mill product shipments during
the
first quarter of 2007 approximated the prior year volumes, market demands
resulted in a shift of our product mix toward an increased level of mill
products, including a higher mix of aerospace plate and sheet products which
require additional processing and resources as compared to melted products,
but
which also command higher sales prices.
Cost
of sales.
Our
cost of sales increased $29.7 million, or 17%, in the first quarter of 2007
as
compared to the first quarter of 2006 due to an increase in certain
raw material costs, including titanium sponge, and higher production costs
associated with our shift in product mix to a greater percentage of mill
products, including a higher mix of aerospace plate and sheet products. The
higher cost of sponge in 2007 is partially due to our utilization in the first
quarter of 2006 of lower-cost sponge previously purchased from the U.S. Defense
Logistics Agency (“DLA”) stockpile. Our
cost
of sales was favorably impacted by our increased production levels, as our
overall plant operating rates improved to 95% in the first quarter of 2007
compared to 88% in the first quarter of 2006. Despite the increased cost
associated with our higher raw material and production costs, cost of sales
as a
percentage of sales decreased slightly, as the favorable effect of higher
average selling prices and our improved plant operating rates more than offset
the effect of higher raw material and production costs.
Gross
margin.
During
the first quarter of 2007, our gross margin increased 23% to $133.4 million
as
compared to the same period in 2006. Our gross margin percentage increased
from
38% in the first quarter of 2006 to 39% in the first quarter of 2007. Our
improved profitability was generally
driven by the increase in sales prices for our products and improved plant
operating rates, which more than offset the effect of our increased raw material
and production costs.
Operating
income.
Our
operating income for the first quarter of 2007 increased 22% to $116.2 million
compared to the same period in 2006, and our operating income percentage
increased from 33% in the first quarter of 2006 to 34% in the first quarter
of
2007. The increase in operating income is driven primarily by an increase in
gross margin which is somewhat offset by increases in selling, general,
administrative and development expense associated with the expansion of our
business and a decrease in other operating income as a result of the December
2006 sale of our interest in VALTIMET SAS, which had contributed $2.3 million
of
equity in earnings to other operating income during the first quarter of
2006.
Income
taxes. We
incurred income tax expense of $33.2 million in the first quarter of 2006
compared to $36.4 million in the first quarter of 2007. We operate in several
tax jurisdictions and, as a result, the geographic mix of our pre-tax income
or
loss can impact our overall effective tax rate. Our effective income tax rate
for the first quarter of 2006 did not vary significantly from the U.S. statutory
rate. Our effective income tax rate for the first quarter of 2007 was lower
than
the U.S. statutory rate primarily due to a change in the mix of our pre-tax
earnings, with a higher percentage of earnings in lower tax rate jurisdictions
in 2007. We currently expect that our effective tax rate for the remainder
of
2007 will continue to be lower than our effective tax rate for the comparable
2006 periods. See Note 8 to the Condensed Consolidated Financial Statements
for
a tabular reconciliation of our statutory income tax expense to our actual
tax
expense.
European
operations
We
have
substantial operations located in the United Kingdom, France and Italy.
Approximately 36% of our sales originated in Europe for the three months ended
March 31, 2007, of which approximately 56% were denominated in the British
pound
sterling or the euro. Certain purchases of raw materials, principally titanium
sponge and alloys, for our European operations are denominated in U.S. dollars,
while labor and other production costs are primarily denominated in local
currencies. The functional currencies of our European subsidiaries are those
of
their respective countries, and the European subsidiaries are subject to
exchange rate fluctuations that may impact reported earnings and may affect
the
comparability of period-to-period operating results. Borrowings of our European
operations may be in U.S. dollars or in functional currencies. Our export sales
from the U.S. are denominated in U.S. dollars and are not subject to currency
exchange rate fluctuations.
We
do not
use currency contracts to hedge our currency exposures. At March 31, 2007,
consolidated assets and liabilities denominated in currencies other than
functional currencies were approximately $98.7 million and $66.9 million,
respectively, consisting primarily of U.S. dollar cash, accounts receivable
and
accounts payable.
Outlook
We
achieved record quarterly levels for net sales and operating income in the
first
quarter of 2007. These strong operating results were largely driven by increased
demand in all market sectors (commercial aerospace, industrial, military and
other emerging markets), as well as cost efficiency benefits from improved
production levels. The current and long term outlook for continued strength
in
demand also contributed to improved selling prices for both melted and mill
products. Our backlog at March 31, 2007 was $1.0 billion, compared to $1.1
billion at December 31, 2006. During the last four years our net sales have
grown at an annual growth rate of 36%, and our production levels reached 95%
of
practical capacity during the first quarter of 2007. With our plant production
levels near practical capacity, our ability to grow net sales by additional
volume will be somewhat limited until our planned and future capacity expansion
projects become operational. We have initiated several strategic capital
improvement projects at new and existing facilities that will add capacity
to
capitalize on the anticipated increase in demand including:
|
·
|
In
May 2005, we announced our plans to expand our existing titanium
sponge
facility in Henderson, Nevada. This expansion will provide the
capacity to
produce an additional 4,000 metric tons of sponge annually, an
increase of
approximately 47% over the current sponge production capacity levels
at
our Nevada facility. The expansion is now completed, and commercial
production commenced in April 2007. We expect to be operating at
full
annual capacity of 12,600 metric tons by the end of the third quarter
of
2007.
|
|
·
|
In
April 2006, we announced our plans for the expansion of our electron beam
cold hearth melt capacity in Morgantown, Pennsylvania. This expansion,
which we currently expect to complete by early 2008, will have
the
capacity to produce up to an additional 8,500 metric tons of melted
products, an increase of approximately 54% over the current production
capacity levels at our facility.
|
|
·
|
Under
our conversion services agreement with Haynes International, Inc.,
we have
access to a dedicated annual rolling capacity of 4,500 metric tons
at
Haynes’ facility, and we have the option of increasing the output capacity
to 9,000 metric tons. This agreement provides us with a long-term
secure
source for processing flat products, resulting in a significant
increase
in our existing mill product conversion capabilities which allows
us to
provide assurance to our customers of our long-term ability to
meet their
needs.
|
|
·
|
In
March 2007, we commenced design and engineering efforts for the
construction of a new premium-grade titanium sponge facility. The
new
facility could initially provide an
additional 10,000 to 20,000 metric tons of capacity to be built
in phases
at a site to be determined during 2007. This additional productive
capacity will allow us to maintain the
certainty, quality and reliability of supply of this critical raw
material
for all titanium products. We currently anticipate the new sponge
facility
will be operational as early as
the end of 2009.
|
We
expect
that industry-wide demand trends will continue for the foreseeable future.
We
currently expect to maintain our overall capacity utilization at approximately
95% of practical capacity for the remainder of 2007. However, practical capacity
utilization measures can vary significantly based on product mix. We intend
to
continue to explore other opportunities to expand our existing production
and
conversion capacities, through internal expansion and long-term third party
arrangements, as well as potential joint ventures and acquisitions. We expect
our ongoing expansion projects as well as the other alternatives that we
are
evaluating to provide a significant increase in existing production
capabilities, and we remain committed to our ongoing efforts to capitalize
on
opportunities to expand our market presence.
Our
cost
of sales is affected by a number of factors including customer and product
mix,
material yields, plant operating rates, raw material costs, labor costs and
energy costs. Raw material costs, which include sponge, scrap and alloys,
represent the largest portion of our manufacturing cost structure. We expect
the
availability of certain raw materials to remain tight in the near term and
improve as announced capacity expansion throughout the industry becomes
operational. Consequently, we expect prices for these raw materials to remain
relatively high in 2007, and we are unable to predict the extent to which these
market driven costs will impact our future results of operations. In addition,
we have certain long-term customer agreements that will somewhat limit our
ability to pass on all of our increased raw material costs.
LIQUIDITY
AND CAPITAL RESOURCES
Our
consolidated cash flows for the three months ended March 31, 2006 and 2007
are
presented below. The following should be read in conjunction with our Condensed
Consolidated Financial Statements and notes thereto.
|
|
Three
months ended March 31,
|
|
|
|
2006
|
|
2007
|
|
|
|
(In
millions)
|
|
|
|
|
|
|
|
|
|
Cash
(used in) provided by:
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
9.4
|
|
$
|
59.9
|
|
Investing
activities
|
|
|
(17.5
|
)
|
|
(13.3
|
)
|
Financing
activities
|
|
|
2.2
|
|
|
(0.8
|
)
|
|
|
|
|
|
|
|
|
Net
cash (used in) provided by operating, investing
|
|
|
|
|
|
|
|
and
financing activities
|
|
$
|
(5.9
|
)
|
$
|
45.8
|
|
Operating
activities. Cash
flow
from operations is considered a primary source of our liquidity. Changes in
titanium pricing, production volume and customer demand, among other things,
could significantly affect our liquidity. The increase in cash provided by
operating activities was driven by the increase in net income, which increased
from $58.9 million in the first three months of 2006 to $76.4 million in the
first three months of 2007.
Cash
provided by operating activities was $9.4 million for the first three months
of
2006 compared to $59.9 million for the first three months of 2007. The $50.5
million increase was due primarily to the net effects of the following
items:
|
·
|
higher
operating income of $21.1 million in
2007;
|
|
·
|
lower
net cash used by changes in receivables, inventories, payables
and accrued
liabilities of $39.6 million in 2007 in response to changing working
capital requirements; and
|
|
·
|
higher
net cash paid for income taxes in 2007 of $13.7 million due to the
utilization of the remainder of our U.S. net operating loss carryforward
in 2006.
|
Investing
activities.
Cash
flows used in our investing activities changed from $17.5 million in the first
three months of 2006 to $13.3 million in 2007 due to capital expenditures.
Both
2006 and 2007 amounts include expenditures related to our sponge plant expansion
in Henderson, Nevada, which commenced commercial production in April 2007,
and
our new electron beam cold hearth melt furnace at our facility in Morgantown,
Pennsylvania, which we expect to complete by early 2008.
Financing
activities.
We had
net repayments of $2.7 million in the first three months of 2006 under our
U.S.
and U.K. bank credit facilities compared to no debt activity during the first
quarter of 2007. Other significant items included in our cash flows from
financing activities included:
|
·
|
dividends
paid on our Series A Preferred Stock of $2.2 million in the first
quarter
of 2006 compared to $1.4 million in the first quarter of 2007
and
|
|
·
|
proceeds
from the issuance of our common stock upon exercise of stock options
of
$7.9 million in the first quarter of 2006 and $0.4 million in the
first
quarter of 2007.
|
Future
cash requirements
Liquidity.
Our
primary source of liquidity on an on-going basis is our cash flows from
operating activities and borrowings under various credit facilities. We
generally use these amounts to (i) fund capital expenditures, (ii) repay
indebtedness incurred primarily for working capital purposes and (iii) provide
for the payment of dividends. From time-to-time we will incur indebtedness,
generally to (i) fund short-term working capital needs, (ii) refinance existing
indebtedness, (iii) make investments in marketable and other securities
(including the acquisition of securities issued by our subsidiaries and
affiliates) or (iv) fund major capital expenditures or the acquisition of other
assets outside the ordinary course of business.
We
routinely evaluate our liquidity requirements, capital needs and availability
of
resources in view of, among other things, our alternative uses of capital,
debt
service requirements, the cost of debt and equity capital and estimated future
operating cash flows. As a result of this process, we have in the past, or
in
light of our current outlook, may in the future, seek to raise additional
capital, modify our common and preferred dividend policies, restructure
ownership interests, incur, refinance or restructure indebtedness, repurchase
shares of common stock, purchase or redeem Series A Preferred Stock, sell
assets, or take a combination of such steps or other steps to increase or manage
our liquidity and capital resources. In the normal course of business, we
investigate, evaluate, discuss and engage in acquisition, joint venture,
strategic relationship and other business combination opportunities in the
titanium, specialty metal and other industries. In the event of any future
acquisition or joint venture opportunities, we may consider using then-available
liquidity, issuing equity securities or incurring additional
indebtedness.
At
March
31, 2007, we had credit available under existing U.S. and European credit
facilities of $229.0 million, and we had an aggregate of $75.6 million of cash
and cash equivalents. Our U.S. credit facility matures in February 2011, and
our
U.K. credit facility matures in April 2008. Based upon our expectations of
our
operating performance, anticipated demands on our cash resources, borrowing
availability under our existing credit facilities and anticipated borrowing
availability after the maturity of these credit facilities, we expect to have
sufficient liquidity to meet our short-term obligations (defined as the next
twelve-month period) and our long-term obligations, including our planned
capacity expansion projects, some of which are discussed below. If actual
developments differ from our expectations, our liquidity could be adversely
affected.
Capital
expenditures.
We
intend to invest a total of approximately $150 million to $200 million for
capital expenditures during 2007, primarily for improvements and upgrades to
existing productive capacity, including expansions of existing sponge and
melting capacity, building new sponge capacity and other additions of plant
machinery and equipment. We have spent $13.3 million on capital expenditures
as
of March 31, 2007.
In
May
2005, we announced our plans to expand our existing titanium sponge facility
in
Nevada. This expansion, which became operational in April 2007, will provide
the
capacity to produce an additional 4,000 metric tons of sponge annually, an
increase of approximately 47% over the current sponge production capacity levels
at our Nevada facility.
In
April
2006, we announced our plans for the expansion of our electron beam cold hearth
melt capacity in Pennsylvania. This expansion, which we currently expect to
complete by early 2008, will have, depending on product mix, the capacity to
produce an additional 8,500 metric tons of melted products, an increase of
approximately 54% over the current production capacity levels at our
Pennsylvania facility.
As
previously discussed, in March 2007, we announced our plans for the construction
of a new premium grade titanium sponge facility. The planning and
pre-construction phases of the project will ramp up over the course of the
next
several quarters, and construction is expected to commence by the end of
2007.
We
continue to evaluate additional opportunities to expand our production capacity
including capital projects, acquisitions or other investments which, if
consummated, would be funded by our cash reserves or by borrowings under our
U.S. or European credit facilities.
Contractual
commitments.
Other
than fixed asset and raw material purchase orders entered into in the normal
course of business, there have been no material changes to our contractual
commitments discussed in our 2006 Annual Report.
Off-balance
sheet arrangements.
Other
than letters of credit and operating leases entered into in the normal course
of
business, there have been no material changes to our off-balance sheet
arrangements discussed in our 2006 Annual Report.
Recent
accounting pronouncements.
See
Note 1 to Condensed Consolidated Financial Statements.
Critical
accounting policies.
For a
discussion of our critical accounting policies, refer to Part I, Item 7 -
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Critical
Accounting Policies and Estimates”
in
our
2006 Annual Report. There have been no changes in our critical accounting
policies during the first three months of 2007.
Affiliate
transactions.
Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (i) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account,
and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties, and (ii) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. We continuously
consider, review and evaluate such transactions, and understand that Contran
and
related entities consider, review and evaluate such transactions. Depending
upon
the business, tax and other objectives then relevant, it is possible that we
might be a party to one or more such transactions in the future.
Item
3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
are
exposed to market risk, including foreign currency exchange rates, commodity
prices and security prices. There have been no material changes in these market
risks since we filed our 2006 Annual Report, and we refer you to the report
for
a complete description of these risks.
Item
4. CONTROLS
AND PROCEDURES
Evaluation
of disclosure controls and procedures.
We
maintain
a system of disclosure controls and procedures. The term "disclosure controls
and procedures," as defined by Rule 13a-15(e) of the Securities Exchange Act
of
1934, as amended (the “Exchange Act”), means controls and other procedures that
are designed to ensure that information required to be disclosed in the reports
that we file or submit to the SEC under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules
and
forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed
by
us in the reports that we file or submit to the SEC under the Exchange Act
is
accumulated and communicated to our management, including our principal
executive officer and our principal financial officer, or persons performing
similar functions, as appropriate to allow timely decisions to be made regarding
required disclosure. Steven L. Watson, our Chief Executive Officer, and Bobby
D.
O’Brien, our Chief Financial Officer, have evaluated the design and operating
effectiveness of our disclosure controls and procedures as of March 31, 2007.
Based upon their evaluation, these executive officers have concluded that our
disclosure controls and procedures were effective as of March 31, 2007.
Scope
of management’s report on internal control over financial
reporting.
We also
maintain internal control over financial reporting. The term "internal control
over financial reporting," as defined by rule 13a-15(f) of the Exchange Act,
means a process designed by, or under the supervision of, our principal
executive and principal financial officers, or persons performing similar
functions, and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with GAAP, and includes those policies and procedures
that:
|
·
|
Pertain
to the maintenance of records that in reasonable detail accurately
and
fairly reflect the transactions and dispositions of our
assets;
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with GAAP,
and that our
receipts and expenditures are being made only in accordance
with
authorizations of our management and directors; and
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition our assets that could
have a
material effect on our Consolidated Financial
Statements.
|
Changes
in internal control over financial reporting.
There
has
been no change to our internal control over financial reporting during the
quarter ended March 31, 2007 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART
II. - OTHER INFORMATION
Item
1. LEGAL
PROCEEDINGS
Refer
to
Note 9 of the Condensed Consolidated Financial Statements and to our 2006 Annual
Report for descriptions of certain previously reported legal
proceedings.
Item
1A. RISK
FACTORS
There
have been no material changes in the first quarter of 2007 with respect to
our
risk factors presented in Item 1A. in our 2006 Annual Report on Form 10-K.
Item
6. EXHIBITS
|
|
|
10.1**
|
|
Agreement
for the Purchase and Supply of Materials between Titanium Metals
Corporation and certain subsidiaries and Rolls-Royce plc and certain
subsidiaries effective January 1, 2007
|
|
|
|
31.1
|
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
31.2
|
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.1
|
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
**
Portions of the exhibit have been omitted pursuant to a request for
confidential treatment.
|
|
Note:
|
We
have retained a signed original of any exhibit listed above that
contains
signatures, and we will provide any such exhibit to the SEC or its
staff
upon request. Such request should be directed to the attention of
our
Corporate Secretary at our corporate offices located at 5430 LBJ
Freeway,
Suite 1700, Dallas, Texas 75240.
|
SIGNATURES
Pursuant
to
the requirements of the Securities Exchange Act of 1934, the registrant has
duly
caused this report to be signed on its behalf by the undersigned thereunto
duly
authorized.
|
|
TITANIUM
METALS CORPORATION
|
|
|
|
|
|
|
|
|
|
Date:
May 7, 2007
|
By
|
/s/
Bobby D. O’Brien
|
|
|
Bobby
D. O’Brien
|
|
|
Executive
Vice President and
Chief
Financial Officer
|
|
|
|
|
|
|
Date:
May 7, 2007
|
By
|
/s/
Scott E. Sullivan
|
|
|
Scott
E. Sullivan
|
|
|
Vice
President and Controller
Principal
Accounting Officer
|