SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 2
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the fiscal year ended December 31, 2003
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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
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Titanium Metals Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-5630895
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(State or other jurisdiction of (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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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Each Exchange on Which Registered
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Common Stock New York Stock Exchange
($.01 par value per share)
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K X
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
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As of June 30, 2003, 3,192,182 shares of common stock were outstanding. The
aggregate market value of the 1,479,967 shares of voting stock held by
nonaffiliates of Titanium Metals Corporation as of such date approximated $47.5
million. No shares of non-voting stock were held by nonaffiliates. As of March
2, 2004, 3,179,602 shares of common stock were outstanding.
Documents incorporated by reference:
None.
EXPLANATORY NOTE
This Amendment No. 2 on Form 10-K/A is an amendment to the Titanium Metals
Corporation (the "Company" or "TIMET") Annual Report on Form 10-K ("Annual
Report") for the year ended December 31, 2003. The purpose of the Form 10-K/A is
to replace, in its entirety, Item 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company's 2003 Annual
Report. The changes to Item 7 consist of the following: (i) a modification of
footnote 3 and the addition of footnote 4 to the Contractual Commitments table
on page 16 to provide additional information regarding such commitments, and
(ii) modifications to language in the Impairment of long-lived assets and
Valuation and impairment of securities subsections within the discussion of
Critical Accounting Policies and Estimates on pages 23 and 24. This Form 10-K/A
does not update or modify any other disclosures to reflect developments since
the original filing date or otherwise.
1
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Overview. The titanium industry derives a substantial portion of its demand
from the aerospace industry, most specifically the highly cyclical commercial
aerospace sector. The Company estimates that aggregate industry shipment volume
for titanium mill products in 2003 was derived from the following markets: 42%
from aerospace; 53% from industrial; and 5% from emerging. The commercial
aerospace sector is the principal driver of titanium consumed in the aerospace
markets, accounting for shipments of approximately 15,700 metric tons in 2003,
which represent about 78% of mill product aerospace industry shipments and about
33% of aggregate mill product industry shipments. Mill product shipments into
the military aerospace sector in 2003 were approximately 4,400 metric tons,
which represent about 22% of mill product aerospace industry shipments and about
9% of aggregate mill product shipments. The Company's business is more dependent
on aerospace demand than the overall titanium industry, as approximately 68% of
its mill product sales volume in 2003 was represented by sales to the aerospace
industry (57% commercial aerospace and 11% military aerospace).
During the third quarter of 2003, the Company and Wyman-Gordon agreed to
terminate the 1998 purchase and sale agreement associated with the formation of
the titanium castings joint venture previously owned by the two parties. The
Company agreed to pay Wyman-Gordon a total of $6.8 million in three quarterly
installments in connection with this termination, which included the termination
of certain favorable purchase terms. The Company recorded a one-time charge for
the entire $6.8 million as a reduction to sales in the third quarter of 2003.
The Company paid the first two installments aggregating $4.0 million to
Wyman-Gordon during 2003 and will pay the remaining $2.8 million in the first
quarter of 2004. Concurrently, the Company and Wyman-Gordon entered into new
long-term purchase and sale agreements covering the sale of TIMET products to
various Wyman-Gordon locations through 2008. The Company expects the new
agreements to, among other things, improve its future plant operating rates.
During 2003, the Company focused on (i) vigorously reducing costs
throughout the business, (ii) increasing capacity utilization, (iii) improving
management of working capital, especially inventory, and (iv) improving on-time
delivery and customer service. Based upon this focus, the Company was able to
realize substantial cost savings during 2003, primarily in the areas of
manufacturing and operational performance, yield improvements and selling,
general and administrative costs. While some of these savings were
non-recurring, a majority of the savings will continue and positively affect
future results.
The Company's successful cost reduction efforts and increased capacity
utilization, coupled with increased melted product sales volume, provided for
lower unit costs and decreasing book inventories during 2003, for which the
Company reduced its LIFO inventory reserve at the end of 2003 as compared to the
end of 2002. As a result, the Company reduced cost of sales by $11.4 million in
2003. This compared with an increase in the Company's LIFO inventory reserve at
the end of 2002 as compared to the end of 2001, for which the Company increased
cost of sales by $9.3 million in 2002, and with a decrease in the Company's LIFO
inventory reserve at the end of 2001 as compared to the end of 2000, for which
the Company decreased cost of sales by $5.0 million in 2001.
2
In November 1996, the Capital Trust issued $201.3 million BUCS and $6.2
million 6.625% common securities. TIMET owns all of the outstanding common
securities of the Capital Trust, and the Capital Trust is a wholly-owned
subsidiary of TIMET. The Capital Trust used the proceeds from such issuance to
purchase from the Company $207.5 million principal amount of TIMET's 6.625%
Subordinated Debentures. The sole assets of the Capital Trust are the
Subordinated Debentures. Based on the requirements of Financial Accounting
Standards Board Interpretation No. 46 Revised ("FIN 46R"), the Company
deconsolidated the Capital Trust as of December 31, 2003. Upon such
deconsolidation, the Company now reflects both its investment in the common
securities of the Capital Trust, as well as its debt payable to the Capital
Trust, separately on its Consolidated Balance Sheets. Additionally, interest
payments on the debt are reflected as interest expense and dividends on the
common securities are reflected as equity in earnings of the unconsolidated
Capital Trust on the Consolidated Statements of Operations. Under previous
accounting rules, the Company consolidated the Capital Trust, reflected a
minority interest related to the BUCS on its Consolidated Balance Sheets and
reported minority interest dividend expense on its Consolidated Statements of
Operations. All periods presented in this Annual Report have been retroactively
restated, as permitted by FIN 46R, to allow for comparability with the December
31, 2003 presentation.
Summarized financial information. The table below summarizes certain
information regarding the Company's results of operations for the past three
years. Average selling prices, as reported by the Company, are a reflection not
just of actual selling prices received by the Company, but also include other
related factors such as currency exchange rates and customer and product mix in
a given period. Consequently, changes in average selling prices from period to
period will be impacted by changes occurring not just in actual prices, but by
these other factors as well. The percentage change information presented below
represents changes from the respective prior year. See "Results of Operations -
Outlook" for further discussion of the Company's business expectations for 2004.
Year ended December 31,
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2003 2002 2001
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($ in thousands)
Net sales $ 385,304 $ 366,501 $ 486,935
Gross margin 17,030 (3,123) 39,893
Operating income (loss) 5,432 (20,849) 64,480
Gross margin percent of net sales 4% -1% 8%
Percentage change in:
Sales volume:
Melted products +97 -46 +27
Mill products - -27 +7
Average selling prices - includes changes in product mix:
Melted products -16 - +6
Mill products - +5 +4
Selling prices - excludes changes in product mix:
Melted products -12 -1 +8
Mill products in U.S. dollars -3 +4 -
Mill products in billing currencies (1) -7 +3 +2
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(1) Excludes the effect of changes in foreign currencies.
3
Based upon the terms of the Company's amended long-term agreement ("LTA")
with Boeing, the Company receives an annual $28.5 million (less $3.80 per pound
of titanium product sold to Boeing subcontractors in the preceding year)
customer advance from Boeing in January of each year related to Boeing's
purchases from TIMET for that year. This advance continues through 2007. The
terms of the amended 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. During 2003 and 2002, the Company recognized $23.1 million and $23.4
million, respectively, of other operating income relative to these take-or-pay
provisions. Had the Company not benefited from such provisions, the Company's
results would have been as follows:
Year ended December 31,
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2003 2002
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(In thousands)
Operating income (loss), as reported $ 5,432 $ (20,849)
Less Boeing take-or-pay income 23,083 23,408
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Operating loss, excluding Boeing take-or-pay $ (17,651) $ (44,257)
================= =================
Net loss, as reported $ (13,057) $ (111,530)
Less Boeing take-or-pay income 23,083 23,408
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Net loss, excluding Boeing take-or-pay $ (36,140) $ (134,938)
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Because the Boeing take-or-pay income continues only through 2007, the
Company is striving to improve its results of operations such that the Company
will generate net income exclusive of any Boeing take-or-pay income, and the
Company analyses its historical results exclusive of such income. Therefore, the
Company believes that presenting its operating loss and net loss excluding the
Boeing take-or-pay income better measures the results of its underlying
business.
2003 operations. The Company's melted product sales increased 65% from
$34.8 million during 2002 to $57.4 million during 2003 primarily due to a 97%
increase in melted product sales volume, partially offset by a 16% decrease in
melted product average selling prices. Melted products consist of ingot and slab
and are generally only sold in U.S. dollars. Melted product sales increased
principally as a result of new customer relationships, share gains and changes
in product mix. Excluding the effects of changes in product mix, melted product
selling prices decreased 12% during 2003 compared to 2002.
Mill product sales increased 1% from $278.2 million during 2002 to $279.6
million during 2003. This increase was principally due to slight increases in
both mill product sales volume and mill product average selling prices (average
selling prices use actual product mix and foreign currency exchange rates
prevailing during the respective periods) and changes in product mix. Mill
product average selling prices were positively affected by the weakening of the
U.S. dollar compared to the British pound sterling and the euro. Mill product
selling prices expressed in U.S. dollars (using actual foreign currency exchange
rates prevailing during the respective periods) decreased 3% during 2003
compared to 2002. In billing currencies (which exclude the effects of foreign
currency translation), mill product selling prices decreased 7% during 2003
compared to 2002.
4
As previously discussed, net sales during 2003 were reduced by the $6.8
million one-time charge incurred by the Company to terminate a purchase and sale
agreement between the Company and Wyman-Gordon.
Gross margin (net sales less cost of sales) was 4% of net sales during
2003, compared to negative 1% during 2002. The improvement in gross margin was
primarily a result of the Company's continued cost reduction efforts, slightly
improved plant operating rates (from 55% during 2002 to 56% during 2003) and
favorable raw material mix. Additionally, as previously discussed, the Company
reduced its LIFO inventory reserve at the end of 2003 as compared to the end of
2002, resulting in a reduction in cost of sales by $11.4 million in 2003. This
compared with an increase in the Company's LIFO inventory reserve at the end of
2002 compared to the end of 2001, for which the Company increased cost of sales
by $9.3 million in 2002. Gross margin during 2003 was also positively impacted
by the Company's revision of its estimate of probable loss associated with the
previously reported tungsten inclusion matter. Based upon an analysis of
information pertaining to asserted and unasserted claims, the Company reduced
its accrual for pending and future customer claims, resulting in a $1.7 million
reduction in cost of sales during 2003. See Note 19 to the Consolidated
Financial Statements. Gross margin during 2003 was adversely impacted by the
$6.8 million reduction in sales relating to the termination of the Wyman-Gordon
agreement.
Selling, general, administrative and development expenses decreased 15%
from $43.0 million during 2002 to $36.4 million during 2003, principally as a
result of lower personnel and travel costs, as well as focused cost control in
other administrative areas.
Equity in earnings of joint ventures decreased 77% from $2.0 million during
2002 to $0.5 million during 2003, principally due to a decrease in the operating
results of VALTIMET, the Company's minority-owned welded tube joint venture.
Net other operating income (expense) increased 5% from income of $23.3
million during 2002 to income of $24.4 million during 2003, principally due to
gains of $0.5 million and $0.6 million related to the settlement of certain
litigation in the first quarter and fourth quarters, respectively, of 2003.
Based on actual purchases of approximately 1.4 million pounds during 2003, the
Company recognized $23.1 million of other operating income for the 6.1 million
pounds of product that Boeing did not purchase under the LTA during 2003. The
Company recognized $23.4 million of other operating income related to these
take-or-pay provisions during 2002.
2002 operations. The Company's melted product sales decreased 46% from
$64.1 million during 2001 to $34.8 million during 2002 primarily due to a 46%
decrease in melted product sales volume and changes in product mix. Melted
products consist of ingot and slab and are generally only sold in U.S. dollars.
Melted product average selling prices did not change during 2002 compared to
2001. Excluding the effects of changes in product mix, melted product selling
prices decreased 1% during 2002 compared to 2001.
Mill product sales decreased 23% from $363.3 million in 2001 to $278.2
million in 2002. This decrease was principally due to a 27% decrease in mill
product sales volume and changes in product mix. The Company's estimated sales
volume to the commercial aerospace sector declined approximately 37% during 2002
compared to 2001. Mill product average selling prices during 2002 increased 5%
compared to 2001. In billing currencies, mill product selling prices increased
3% over 2001 levels. Mill product selling prices expressed in U.S. dollars
increased 4% during 2002 compared to 2001.
5
Gross margin was negative 1% of net sales during 2002, compared to 8% in
2001. Gross margin in 2002 was most adversely impacted by the decline in
production volume and the related impact on manufacturing overhead costs, as
average plant operating rates declined from approximately 75% of capacity in
2001 to approximately 55% in 2002. Because of higher unit costs and increasing
book inventories during 2002, the Company increased its LIFO inventory reserve
at the end of 2002 as compared to the end of 2001, for which the Company
increased cost of sales by $9.3 million in 2002. This compared with a decrease
in the Company's LIFO inventory reserve at the end of 2001 compared to the end
of 2000, for which the Company decreased cost of sales by $5.0 million in 2001.
In addition, the Company recorded certain provisions for excess and slow moving
inventories during 2002 that, due to business conditions existing during 2002
(including a number of customer order cancellations) were approximately $5.3
million greater than in 2001. The Company also incurred severance costs of
approximately $1.7 million related to global workforce reductions undertaken
throughout 2002. Gross margin during 2001 was adversely impacted by $3.3 million
of estimated costs related to the tungsten inclusion matter described above and
$10.8 million of equipment impairment charges. Gross margin during 2001 was also
adversely impacted by goodwill amortization of $4.6 million, as effective
January 1, 2002 the Company ceased amortization of its goodwill. See Note 7 to
the Consolidated Financial Statements.
Selling, general, administrative and development expenses decreased 17%
from $51.8 million during 2001 to $43.0 million during 2002, principally due to
the inclusion of a one-time payment of $6.2 million of incentive compensation
related to the Boeing settlement in 2001 (discussed in "2001 operations") and
lower personnel related costs in 2002, partially offset by higher selling and
marketing costs in 2002.
Equity in earnings of joint ventures decreased 21% from $2.5 million during
2001 to $2.0 million during 2002 principally due to a decrease in the earnings
of VALTIMET.
Net other operating income (expense) decreased 68% from income of $73.6
million during 2001 to income of $23.3 million during 2002. The decrease was due
to the Company's settlement of litigation with Boeing whereby the Company
recognized $73.0 million of income during 2001, partially offset by the $23.4
million of income the Company recognized under the take-or-pay provisions of its
LTA with Boeing for the 6.2 million pounds of titanium product that Boeing did
not purchase under the LTA during 2002. See Note 15 to the Consolidated
Financial Statements.
Non-operating income (expense).
Year ended December 31,
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2003 2002 2001
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(In thousands)
Interest expense on bank debt $ (2,017) $ (3,381) $ (4,060)
Interest expense on debt payable to the Capital Trust (14,402) (13,763) (14,273)
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$ (16,419) $ (17,144) $ (18,333)
=============== ================ ===============
Dividends and interest income $ 383 $ 118 $ 5,460
Equity in earnings of common
securities of the Capital Trust 432 413 423
SMC impairment charge - (27,500) (61,519)
Surety bond guarantee (449) (1,575) -
Foreign exchange (loss) gain (189) (587) 92
Other income (expense), net (471) (762) 18
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$ (294) $ (29,893) $ (55,526)
=============== ================ ===============
6
Interest expense on bank debt for 2003 decreased 40% compared to 2002,
primarily due to lower average outstanding borrowings, as the Company generated
positive cash flow from operations and was able to reduce its bank borrowings to
zero by year-end 2003. Interest expense on bank debt for 2002 decreased 17%
compared to 2001 primarily due to lower average outstanding borrowings and lower
interest rates during 2002.
Annual interest expense on the Company's Subordinated Debentures payable to
the Capital Trust approximates $13.7 million, exclusive of any accrued interest
on deferred interest payments. In October 2002, the Company exercised its right
to defer future interest payments on this debt effective with the Company's
December 1, 2002 scheduled interest payment. Interest continues to accrue at the
6.625% coupon rate on the principal and unpaid interest and has been classified
as long-term in the Consolidated Financial Statements. The Company's Board of
Directors will consider resuming payment of interest on this debt once the
longer-term outlook for the Company's business improves substantially. In April
2000, the Company also exercised its right to defer future interest payments on
this debt. On June 1, 2001, the Company resumed those interest payments and paid
all previously deferred interest payments. See Note 12 to the Consolidated
Financial Statements.
Dividends and interest income during 2003 and 2002 consisted solely of
interest income earned on cash and cash equivalents. Dividends and interest
income in 2001 consisted principally of dividends on the Company's investment in
$80 million non-voting convertible preferred securities of SMC. As previously
reported, the Company assessed its investment in the SMC securities during the
fourth quarter of 2001 and recorded a $61.5 million impairment charge to reduce
the carrying amount of this investment, including accrued dividends and
interest, to an estimated fair value of $27.5 million as of December 31, 2001.
In March 2002, SMC and its U.S. subsidiaries filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result, the
Company undertook a further assessment of its investment and subsequently
recorded a $27.5 million impairment charge during the first quarter of 2002,
which reduced the Company's carrying amount of its investment in the SMC
securities to zero. Under the terms of SMC's Second Amended Joint Plan of
Reorganization, which was approved by the Bankruptcy Court on November 26, 2003,
the convertible preferred securities were cancelled. Although the Company does
have certain rights as an unsecured creditor under the SMC Plan of
Reorganization related to the unpaid dividends, the Company does not believe
that it will recover any material amount from this investment.
TIMET is the primary obligor on two $1.5 million 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. 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 2002, TIMET received notices that
the issuers of the bonds were required to make payments on one of the bonds with
respect to certain of these claims and were requesting reimbursement from TIMET.
Based upon loss projections, the Company accrued $0.9 million in the third
quarter of 2002 and $0.7 million (including $0.1 million in legal fees
reimbursable to the issuer of the bonds) in the fourth quarter of 2002 for this
bond as other non-operating expense. Through December 31, 2003, TIMET has
reimbursed the issuer approximately $0.8 million under this bond and $0.8
million remains accrued for future payments. During 2003, TIMET received notice
that certain claimants had submitted claims under the second bond. Accordingly,
the Company accrued $50,000 for this bond in the third quarter of 2003 and an
additional $0.4 million for this bond in the fourth quarter of 2003 as other
non-operating expense. As of December 31, 2003, payments under the second bond
have been less than $0.1 million, and $0.4 million remains accrued for future
payments. TIMET may revise its estimated liability under these bonds in the
future as additional facts become known or claims develop.
7
Income taxes. Based on the Company's recent history of U.S. losses, its
near-term outlook and management's evaluation of available tax planning
strategies, in the fourth quarter of 2001 the Company concluded that realization
of its previously recorded U.S. deferred tax assets did not continue to meet the
"more-likely-than-not" recognition criteria and increased its U.S. deferred tax
valuation allowance by $35.5 million. Additionally, the Company determined that
it would not recognize a deferred tax benefit related to either future U.S.
losses or future increases in U.S. minimum pension liabilities continuing for an
uncertain period of time. Accordingly, the Company increased its U.S. deferred
tax valuation allowance by $40.2 million in 2002 and by $0.2 million in 2003.
During the fourth quarter of 2002, the Company was required to record a
charge to other comprehensive loss to reflect an increase in its U.K. minimum
pension liability. The related tax effect of this charge resulted in the
Company's shifting from a net deferred tax liability position to a net deferred
tax asset position. Based on the Company's recent history of U.K. losses, its
near-term outlook and management's evaluation of available tax planning
strategies, the Company determined that it would not recognize this deferred tax
asset because it did not meet the "more-likely-than-not" recognition criteria
and recorded a U.K. deferred tax asset valuation allowance of $7.2 million
through other comprehensive income. Additionally, the Company determined that it
would not recognize deferred tax benefits related either to future U.K. losses
or future increases in U.K. minimum pension liabilities for an uncertain period
of time. Accordingly, the Company increased its U.K. deferred tax valuation
allowance by $5.5 million in 2003.
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
provisions of the JCWA Act, which liberalized certain net operating loss and
alternative minimum tax restrictions. As a result, the Company recognized $1.8
million of refundable U.S. income taxes during the first quarter of 2002. The
Company received $0.8 million of this refund in the fourth quarter of 2002 and
the remaining $1.0 million in the third quarter of 2003.
See also Note 16 to the Consolidated Financial Statements.
Minority interest. Minority interest relates primarily to the 30% interest
in TIMET Savoie held by CEZUS. See Note 13 to the Consolidated Financial
Statements.
Cumulative effect of change in accounting principle. On January 1, 2003,
the Company adopted Statement of Financial Accounting Standards ("SFAS") No.
143, Accounting for Asset Retirement Obligations, and recognized (i) an asset
retirement cost capitalized as an increase to the carrying value of its
property, plant and equipment of approximately $0.2 million, (ii) accumulated
depreciation on such capitalized cost of approximately $0.1 million and (iii) a
liability for the asset retirement obligation of approximately $0.3 million. The
asset retirement obligation recognized relates primarily to landfill closure and
leasehold restoration costs.
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, and 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.
See further discussion regarding the Company's adoption of these accounting
principles in Notes 2 and 7 to the Consolidated Financial Statements.
8
European operations. The Company has substantial operations and assets
located in Europe, principally in the United Kingdom, France and Italy. Titanium
is sold worldwide, and many similar factors influence the Company's U.S. and
European operations. Approximately 42% of the Company's sales revenue originated
in Europe in 2003, of which approximately 64% was denominated in the British
pound sterling or the euro. Certain purchases of raw materials, principally
titanium sponge and alloys, for the Company's European operations are
denominated in U.S. dollars, while labor and other production costs are
primarily denominated in local currencies. The functional currencies of the
Company's European subsidiaries are those of their respective countries, and the
European subsidiaries are subject to exchange rate fluctuations that may impact
reported earnings and may affect the comparability of period-to-period operating
results. Borrowings of the Company's European operations may be in U.S. dollars
or in functional currencies. The Company's export sales from the U.S. are
denominated in U.S. dollars and as such are not subject to currency exchange
rate fluctuations.
The Company does not use currency contracts to hedge its currency
exposures. Net currency transaction gains/losses included in results of
operations were losses of $0.2 million in 2003 and $0.6 million in 2002 and a
gain of $0.1 million in 2001. At December 31, 2003, consolidated assets and
liabilities denominated in currencies other than functional currencies were
approximately $26.5 million and $41.7 million, respectively, consisting
primarily of U.S. dollar cash, accounts receivable and accounts payable.
Related party transactions. The Company is a party to certain transactions
with related parties. See Note 18 to the Consolidated Financial Statements.
Supplemental information. The Company completed a reverse split of its
common stock (one share of post-split common stock for each outstanding ten
shares of pre-split common stock) effective after the close of trading on
February 14, 2003. All share and per share disclosures for all periods presented
in this MD&A have been adjusted to give effect to the reverse stock split.
Outlook. The Outlook section contains a number of forward-looking
statements, all of which are based on current expectations and exclude the
effect of potential future charges related to restructurings, asset impairments,
valuation allowances, changes in accounting principles and similar items, unless
otherwise noted. Undue reliance should not be placed on these statements, as
more fully discussed in the "Forward-Looking Information" statement of this
Annual Report. Actual results may differ materially. See also Notes to the
Consolidated Financial Statements regarding commitments, contingencies, legal
matters, environmental matters and other matters, including new accounting
principles, which could materially affect the Company's future business, results
of operations, financial position and liquidity.
The cyclical nature of the aerospace industry has been the principal driver
of the historical fluctuations in the performance of most titanium companies.
Over the past 20 years, the titanium industry had cyclical peaks in mill product
shipments in 1989, 1997 and 2001 and cyclical lows in 1983, 1991 and 1999.
Demand for titanium reached its highest level in 1997 when industry mill product
shipments reached approximately 60,000 metric tons. However, since that peak,
industry mill product shipments have fluctuated significantly, primarily due to
a continued change in demand for titanium from the commercial aerospace sector.
In 2002, industry shipments approximated 50,000 metric tons, and in 2003 the
Company estimates industry shipments approximated 48,000 metric tons. The
Company currently expects total industry mill product shipments in 2004 will
increase from 2003 levels to at least 51,000 metric tons.
9
Although the commercial airline industry continues to face significant
challenges, recent economic data show signs of an improving business environment
in that sector. According to The Airline Monitor, the worldwide commercial
airline industry reported an estimated operating loss of approximately $3.5
billion in 2003, compared to a $7.3 billion loss in 2002 and an $11.7 billion
loss in 2001. The Airline Monitor is currently forecasting operating income of
approximately $6.3 billion for the industry in 2004. Furthermore, global airline
passenger traffic returned to pre-September 11, 2001 levels in November of 2003.
Although these appear to be positive signs, the Company currently believes that
industry mill product shipments into the commercial aerospace sector will be
somewhat flat in 2004 and show a modest upturn in 2005.
The Airline Monitor traditionally issues forecasts for commercial aircraft
deliveries each January and July. According to The Airline Monitor, large
commercial aircraft deliveries totaled 579 (including 154 wide bodies) in 2003.
The Airline Monitor's most recently issued forecast (January 2004) calls for 575
deliveries in 2004, 540 deliveries in 2005 and 510 deliveries in 2006. Relative
to 2003, these forecasted delivery rates represent anticipated declines of about
1% in 2004, 7% in 2005 and 12% in 2006. From 2007 through 2011, The Airline
Monitor calls for a continued increase each year in large commercial aircraft
deliveries, with forecasted deliveries of 620 aircraft in 2008, exceeding 2003
levels. Deliveries of titanium generally precede aircraft deliveries by about
one year, although this varies considerably by titanium product. This correlates
to the Company's cycle, which historically precedes the cycle of the aircraft
industry and related deliveries.
Although the current business environment continues to make it difficult to
predict future performance, the Company expects sales revenue in 2004 to
increase to between $425 million and $445 million, reflecting the combined
effects of increases in sales volume and market share and relative weakness of
the U.S. dollar as compared to the British pound sterling and the euro,
partially offset by customer and product mix. Mill product sales volume, which
was 8,875 metric tons in 2003, is expected to increase to between 10,300 and
10,500 metric tons in 2004. Melted product sales volume, which was 4,725 metric
tons in 2003, is expected to increase to between 4,800 and 5,000 metric tons in
2004. The Company expects between 55% and 60% of its 2004 mill and melted
product sales volume will be derived from the commercial aerospace sector (which
would be a slight decrease from 2003), with the balance from military aerospace,
industrial and emerging markets. The expected increase in sales volume in 2004
is principally driven by an anticipated increase in sales volume to industrial
and emerging markets.
Additionally, the Company's backlog of unfilled orders was approximately
$180 million at December 31, 2003, compared to $165 million at December 31, 2002
and $225 million at December 31, 2001. Substantially the entire 2003 year-end
backlog is scheduled for shipment during 2004. The Company's order backlog may
not be a reliable indicator of future business activity.
The Company's cost of sales is affected by a number of factors including
customer and product mix, material yields, plant operating rates, raw material
costs, labor costs and energy costs. Raw material costs represent the largest
portion of the Company's manufacturing cost structure. The Company has recently
been experiencing higher raw material prices due to a tightening in raw material
availability, especially in the scrap markets. The Company also expects an
increase in energy costs in 2004.
The Company expects to manufacture a significant portion of its titanium
sponge requirements in 2004. The unit cost of titanium sponge manufactured at
TIMET's Henderson, Nevada facility is expected to decrease relative to 2003, due
primarily to higher sponge plant operating rates as the plant moves to full
capacity by the third quarter of 2004. The Company expects the aggregate cost of
purchased sponge and scrap to increase during 2004.
10
The Company expects production volumes to increase in 2004, increasing
overall capacity utilization to between 60% and 65% in 2004 (as compared to 56%
in 2003). However, practical capacity utilization measures can vary
significantly based on product mix. The Company continues to identify areas for
potential cost savings, in addition to the savings realized in 2003, and expects
gross margin in 2004 to range from 6% to 8% of net sales.
Selling, general, administrative and development expenses in 2004 should
approximate $35 million.
The Company anticipates that it will receive orders from Boeing for about
1.5 million pounds of product during 2004. At this projected order level, the
Company expects to recognize about $23 million of operating income in 2004 under
the Boeing LTA's take-or-pay provisions.
The current outlook is for 2004 operating income of between $14 million and
$24 million, which includes the effect of a $1.9 million reduction in the
Company's vacation accrual for U.S. employees effective January 1, 2004 (see
Note 9 to the Consolidated Financial Statements). Excluding the Boeing
take-or-pay income, the Company currently expects operating results in 2004 to
range between operating income of $1 million and operating loss of $9 million.
In 2004, interest expense on the Company's Subordinated Debentures held by
the Capital Trust should approximate $15.4 million, including additional
interest costs related to the deferral of the interest payments on the
Subordinated Debentures. The Company's Board of Directors will consider resuming
interest payments on the Subordinated Debentures once the longer-term outlook
for the Company's business improves substantially.
The Company currently expects its 2004 bottom line to range between a net
loss of $3 million and net income of $7 million. Excluding the Boeing
take-or-pay income, the Company currently expects a net loss in 2004 of between
$16 million and $26 million.
The Company expects to generate $25 million to $35 million in cash flows
from operations during 2004, partially driven by the continued deferral of the
interest payments on the Subordinated Debentures. Capital expenditures during
2004 are expected to approximate $16 million. The increase over 2003 relates
primarily to capital needs relative to the increase in sponge production at
TIMET's Henderson, Nevada facility. Depreciation and amortization should
approximate $32 million in 2004. The Company currently expects to make
contributions of approximately $11.5 million to its defined benefit pension
plans during 2004 and expects its pension expense to approximate $8 million in
2004.
The year-on-year improvements in sales and operating income reflect
achievements in many areas, most specifically with regard to vigorous cost and
inventory reduction efforts, and the Company will continue its focus on reducing
costs in 2004. The Company remains cautiously optimistic that the commercial
aerospace industry has begun to improve and feels that with its strong balance
sheet and improved cost structure, the Company is well positioned to maximize
profitability during any upturn. Additionally, solid growth is expected from
sales into the industrial and emerging markets during 2004, two areas in which
the Company's business is continuing to diversify.
11
Non-GAAP financial measures. In an effort to provide investors with
information in addition to the Company's results as determined by accounting
principles generally accepted in the United States of America ("GAAP"), the
Company has provided the following non-GAAP financial disclosures that it
believes may provide useful information to investors:
o The Company discloses percentage changes in its mill and melted
product selling prices in U.S. dollars, which have been adjusted to
exclude the effects of changes in product mix. The Company believes
such disclosure provides useful information to investors by allowing
them to analyze such changes without the impact of changes in product
mix, thereby facilitating period-to-period comparisons of the relative
changes in average selling prices. Depending on the composition of
changes in product mix, the percentage change in selling prices
excluding the effect of changes in product mix can be higher or lower
than such percentage change would be using the actual product mix
prevailing during the respective periods;
o In addition to disclosing percentage changes in its mill product
selling prices adjusted to exclude the effects of changes in product
mix, the Company also discloses such percentage changes in billing
currencies, which have been further adjusted to exclude the effects of
changes in foreign currency exchange rates. The Company believes such
disclosure provides useful information to investors by allowing them
to analyze such changes without the impact of changes in foreign
currency exchange rates, thereby facilitating period-to-period
comparisons of the relative changes in average selling prices in the
various actual billing currencies. Generally, when the U.S. dollar
strengthens (weakens) against other currencies, the percentage change
in selling prices in billing currencies will be higher (lower) than
such percentage changes would be using actual exchange rates
prevailing during the respective periods; and
o The Company discloses operating income and net income excluding the
impact of the Boeing take-or-pay income. The Company believes this
provides investors with useful information to better analyze the
Company's business and possible future earnings during periods after
December 31, 2007, at which time the Company will no longer receive
the positive effects of the take-or-pay income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows for each of the past three years are
presented below. The following should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto.
Year ended December 31,
------------------------------------------------------
2003 2002 2001
--------------- ---------------- ---------------
(In thousands)
Cash provided (used) by:
Operating activities $ 65,821 $ (13,595) $ 62,574
Investing activities (14,534) (7,467) (16,093)
Financing activities (22,068) 3,523 (31,358)
--------------- ---------------- ---------------
Net cash provided (used) by operating,
investing and financing activities $ 29,219 $ (17,539) $ 15,123
=============== ================ ===============
12
Operating activities. The titanium industry historically has derived a
substantial portion of its business from the aerospace industry. The aerospace
industry is cyclical, and changes in economic conditions within the aerospace
industry significantly impact the Company's earnings and operating cash flows.
Cash flow from operations has been a primary source of the Company's liquidity.
Changes in titanium pricing, production volume and customer demand, among other
things, could significantly affect the Company's liquidity.
Certain items included in the determination of net loss have an impact on
cash flows from operating activities, but the impact of such items on cash may
differ from their impact on net loss. For example, pension expense and OPEB
expense will generally differ from the outflows of cash for payment of such
benefits. In addition, relative changes in assets and liabilities generally
result from the timing of production, sales and purchases. Such relative changes
can significantly impact the comparability of cash flow from operations from
period to period, as the income statement impact of such items may occur in a
different period than that in which the underlying cash transaction occurs. For
example, raw materials may be purchased in one period, but the cash payment for
such raw materials may occur in a subsequent period. Similarly, inventory may be
sold in one period, but the cash collection of the receivable may occur in a
subsequent period.
Net loss decreased from $111.5 million for the year ended December 31,
2002, to $13.1 million for the year ended December 31, 2003. See "Results of
Operations - Cumulative effect of change in accounting principle" and Note 7 to
the Consolidated Financial Statements for discussion of the Company's adoption
of SFAS No. 142 and the related effect on net loss for the year ended December
31, 2002. See "Results of Operations - Non-operating income (expense)" and Note
5 to the Consolidated Financial Statements for discussion of the Company's
impairment of its investment in SMC securities and its effect on net loss for
the years ended December 31, 2002 and 2001.
Accounts receivable decreased during 2003 primarily due to improved
collection efforts with the Company's customers, which resulted in a 13-day
decrease in days sales outstanding ("DSO"), from 75 days at year-end 2002 to 62
days at year-end 2003, partially offset by the weakening of the U.S. dollar
compared to the British pound sterling and the euro. Accounts receivable
decreased significantly during 2002 primarily as a result of reduced sales,
partially offset by an increase in DSO as certain customers extended their
payment terms to the Company in response to unfavorable economic conditions.
Accounts receivable increased in 2001 principally as a result of increased
sales.
Inventories decreased during 2003 due to the Company's concentrated focus
on inventory reduction during 2003. Inventories decreased during 2002 primarily
as a result of reduced production in the fourth quarter of 2002 and an increase
in the Company's reserves for excess inventories, which the Company recorded in
response to decreased demand for its products and other changes in business
conditions. Inventories increased in 2001, reflecting material purchases and
production rates that were based on expected sales levels higher than actual
sales levels achieved. Due to the impact of the September 11, 2001 terrorist
attacks, a number of customer order deferrals and cancellations were received
late in 2001, contributing to the inventory increase.
In April 2001, the Company reached a settlement of the litigation between
TIMET and Boeing. Pursuant to the settlement, the Company received a cash
payment of $82 million ($73 million net of legal fees) and in December 2001
received a $28.5 million customer advance from Boeing related to fiscal 2002
purchases. This advance was reduced to $0.8 million at the end of 2002 as a
result of shipments and orders from Boeing as well as the recognition of
take-or-pay income. The Company received a $27.9 million advance for 2004 in
January 2004. Through 2007 the Company will receive a similar annual advance in
January of the year to which the advance is related. See Notes 9 and 10 to the
Consolidated Financial Statements.
13
Dividends for the period October 1998 through December 1999 on the
Company's investment in SMC 6.625% convertible preferred securities were
deferred by SMC. In April 2000, SMC resumed current dividend payments of $1.3
million each quarter; however, dividends and interest in arrears were not paid.
On October 11, 2001, the Company was notified by SMC of SMC's intention to again
defer the payment of dividends effective with the dividend due on October 28,
2001. As previously discussed, the Company recorded an impairment charge of
$61.5 million related to these securities, including accrued dividends and
interest, in the fourth quarter of 2001 and ceased accruing dividend income on
these securities at that time. Additionally, the Company recorded a charge of
$27.5 million related to these securities in the first quarter of 2002 that
reduced the carrying amount of these securities to zero. See Note 5 to the
Consolidated Financial Statements.
The Company did not record any deferred income tax benefits related to its
U.S. or U.K. losses during 2003. Deferred income tax benefits recognized in 2003
primarily relate to increases in net deferred income tax assets of the Company's
French and Italian subsidiaries. The Company did not record any deferred income
tax benefits related to its U.S. losses during 2002. Deferred income tax
benefits recognized in 2002 primarily relate to increases in net deferred income
tax assets of the Company's European subsidiaries. Deferred income taxes in 2001
were primarily due to an increase in the Company's U.S. deferred tax asset
valuation allowance to offset previously recorded tax benefits that did not meet
the "more-likely-than-not" recognition criteria. See Note 16 to the Consolidated
Financial Statements.
As more fully discussed in "Results of Operations - Non-operating income
(expense)," in October 2002 the Company exercised its right to defer future
interest payments on its Subordinated Debentures held by the Capital Trust,
effective beginning with the Company's December 1, 2002 scheduled interest
payment, although interest continues to accrue at the coupon rate on the
principal and unpaid interest. In April 2000, the Company similarly exercised
its right to defer future interest payments, and in the second quarter of 2001,
as noted above, a portion of the Boeing settlement funds was used to pay the
previously deferred aggregate interest of $14.3 million and resume the regularly
scheduled interest payments. Changes in accrued interest payable to the Capital
Trust reflect this activity.
Investing activities. The Company's capital expenditures were $12.5 million
in 2003, $7.8 million in 2002 and $16.1 million in 2001, principally for
replacement of machinery and equipment and for capacity maintenance. During the
fourth quarter of 2003, the Company deposited funds into certificates of deposit
and other interest bearing accounts as collateral for certain Company
obligations in lieu of entering into letters of credit. These deposits, which
are restricted as to the Company's use, provide the Company with interest income
as opposed to interest expense incurred through the use of letters of credit.
Financing activities. Cash used during 2003 related primarily to the
Company's $19.3 million of net repayments on its outstanding borrowings upon the
Company's receipt of the $27.7 million Boeing advance in January 2003.
Additionally, TIMET Savoie made a $1.9 million dividend payment to CEZUS during
2003. Cash provided during 2002 related primarily to net borrowings of $6.3
million necessary to fulfill the Company's working capital needs. Additionally,
TIMET Savoie made a $1.1 million dividend payment to CEZUS during 2002. The
Company incurred approximately $1.1 million in financing costs in conjunction
with the Company's amendment of its U.S. revolving credit agreement in 2002.
These costs are deferred and amortized over the life of the agreement, which
matures in February 2006. See further discussion below in "Liquidity and Capital
Resources - Borrowing arrangements." Cash used during 2001 related primarily to
net repayments of $31.7 million of indebtedness at the time of the Company's
litigation settlement with Boeing.
14
Borrowing arrangements. Under the terms of the Company's U.S. asset-based
revolving credit agreement, which matures in February 2006, borrowings are
limited to the lesser of $105 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 distributions in respect of the Capital
Trust's BUCS 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. The Company was in compliance in
all material respects with all covenants for all periods during the years ended
December 31, 2003 and 2002. Excess availability is defined as borrowing
availability less outstanding borrowings and certain contractual commitments
such as letters of credit. At December 31, 2003, excess availability was
approximately $82 million. There were no outstanding borrowings under the U.S.
credit agreement as of December 31, 2003. The weighted average interest rate on
borrowings outstanding under this credit agreement as of December 31, 2002 was
3.7%.
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 were to exercise this
discretion again 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)22.5 million or a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and property, plant and equipment ("borrowing availability"). The
credit agreement includes revolving and term loan facilities and an overdraft
facility (the "U.K. Facilities") and matures in December 2005. Borrowings under
the U.K. Facilities can be in various currencies including U.S. dollars, British
pounds sterling and euros. Borrowings 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. TIMET UK was in compliance in all material respects
with all covenants for all periods during the years ended December 31, 2003 and
2002. The U.K. overdraft facility is subject to annual review in December of
each year. 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. Facilities. The overdraft
facility was reviewed and renewed in December 2003. During the second quarter of
2003, TIMET UK received an interest-bearing intercompany loan from a U.S.
subsidiary of the Company enabling TIMET UK to reduce its long-term borrowings
under the U.K. Facilities to zero. Unused borrowing availability at December 31,
2003 under the U.K. Facilities was approximately $40 million. There were no
borrowings outstanding under the U.K. Facilities as of December 31, 2003. The
weighted average interest rate on borrowings outstanding under the U.K.
Facilities as of December 31, 2002 was 4.6%.
15
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 at December 31,
2003 under these facilities was approximately $20 million. There were no
borrowings outstanding under the other European facilities as of December 31,
2003. The weighted average interest rate on borrowings outstanding under these
credit agreements as of December 31, 2002 was 3.7%.
Although excess availability under TIMET's U.S. credit agreement remains
above $40 million, no dividends were paid by TIMET on its common stock during
2003, 2002 or 2001. TIMET does not anticipate paying dividends on its common
stock during 2004 and, as previously discussed, is not permitted to pay such
dividends while deferring interest payments on the Subordinated Debentures held
by the Capital Trust.
Contractual commitments. As more fully described in Notes 11, 12, 18 and 19
to the Consolidated Financial Statements, the Company was a party to various
debt, lease and other agreements at December 31, 2003 that contractually and
unconditionally commit the Company to pay certain amounts in the future. The
following table summarizes such contractual commitments that are unconditional
both in terms of timing and amount by the type and date of payment.
Unconditional Payment Due Date
--------------------------------------------------------------------------
2005/ 2007/ 2009 &
2004 2006 2008 After Total
---------- ------------ ------------ ------------ ------------
Contractual Commitment (In thousands)
-----------------------------------
Capital leases (1) $ 524 $ 358 $ 424 $ 8,984 $ 10,290
Operating leases 2,724 2,720 585 339 6,368
Debt payable to Capital Trust (and accrued
interest thereon) (2) - - 19,003 207,465 226,468
Purchase obligations (3) 36,843 20,303 10,103 - 67,249
Other contractual obligations (4) 10,067 11,088 1,063 576 22,794
---------- ------------ ------------ ------------ ------------
$ 50,158 $ 34,469 $ 31,178 $ 217,364 $ 333,169
========== ============ ============ ============ ============
-----------------------------------------------------------------------------------------------------------------------
(1) Excludes interest payments due under the capital lease agreements.
Inclusive of these interest payments, the total contractual commitment is
$24.0 million ($1.5 million in 2004, $2.2 million in 2005/2006, $2.2
million in 2007/2008 and $18.1 million in 2009 and thereafter).
(2) Represents the Company's Subordinated Debentures purchased by the Capital
Trust from TIMET in connection with the Capital Trust's issuance of the
BUCS and total interest accrued on the Subordinated Debentures at December
31, 2003. Under the Indenture related to the Subordinated Debentures, the
currently deferred interest payments may continue to be contractually
deferred until December 1, 2007.
(3) Based on an average price and an assumed constant mix of products
purchased, where appropriate. These obligations generally relate to the
purchase of raw materials, primarily titanium sponge, pursuant to an LTA
and various open orders. All open orders are for delivery in 2004, and the
LTA expires on December 31, 2007. The LTA does not contain a renewal
provision; however, the Company may choose to enter into a new agreement to
replace the current LTA in the future.
(4) These obligations consist primarily of contractual operating fees paid to
CEZUS for use of a portion of its Ugine, France plant pursuant to an
agreement expiring in 2006 (as described in Item 2: Properties), energy
purchase obligations with Basic Management, Inc. which expire in 2010 (as
described in Note 18 to the Consolidated Financial Statements), the
remaining obligation to Wyman-Gordon due in 2004 relating to the
termination of the agreement (as described previously in this MD&A) and an
obligation to Contran Corporation ("Contran") under an intercorporate
services agreement ("ISA") for 2004 (as described in Note 18 to the
Consolidated Financial Statements). The Company expects annually to enter
into an ISA with Contran subsequent to 2004.
16
The Company has excluded any potential commitment for funding of retirement
and postretirement benefit plans from this table. However, such potential future
contributions are discussed below, as appropriate, in "Liquidity and Capital
Resources - Defined benefit pension plans" and "Liquidity and Capital Resources
- Postretirement benefit plans other than pensions."
Off-balance sheet arrangements. As more fully discussed in "Results of
Operations - Non-operating income (expense)," the Company is the primary obligor
on two $1.5 million workers' compensation bonds issued on behalf of Freedom
Forge. The Company has fully expensed the obligation under one of the bonds, but
based upon current claims analysis, the Company has only expensed $0.5 million
on the other bond, although it is potentially obligated for the remaining $1.0
million.
Defined benefit pension plans. As of December 31, 2003, the Company
maintains three defined benefit pension plans - one each in the U.S., the U.K.
and France. Prior to December 31, 2003, the U.S. maintained two plans, which
were merged as of that date. The majority of the discussion below relates to the
U.S. and U.K. plans, as the French plan is not material to the Company's
Consolidated Balance Sheets, Statements of Operations or Statements of Cash
Flows.
The Company recorded consolidated pension expense of $8.9 million, $4.9
million and $1.4 million for the years ended December 31, 2003, 2002 and 2001,
respectively. Pension expense for these periods was calculated based upon a
number of actuarial assumptions, most significant of which are the discount rate
and the expected long-term rate of return.
The discount rate the Company utilizes for determining pension expense and
pension obligations is based on a review of long-term bonds (10 to 15 year
maturities) that receive one of the two highest ratings given by recognized
rating agencies (generally Merrill Lynch, Moody's, Solomon Smith Barney and UBS
Warburg) as well as composite indices provided by the Company's actuaries.
Changes in the Company's discount rate over the past three years reflect the
decline in such bond rates during that period. The Company establishes a rate
that is used to determine obligations as of the year-end date and expense for
the subsequent year. The Company used the following discount rate assumptions
for its pension plans:
Discount rates used for:
------------------------------------------------------------------------------------------------
Obligation at Obligation at Obligation at
December 31, 2003 December 31, 2002 December 31, 2001
and expense in 2004 and expense in 2003 and expense in 2002
------------------------------ ------------------------------ ---------------------------
U.S. Plan(s) 6.00% 6.25% 7.00%
U.K. Plan 5.50% 5.70% 6.00%
In developing the Company's expected long-term rate of return assumptions,
the Company evaluates historical market rates of return and input from its
actuaries, including a review of asset class return expectations as well as
long-term inflation assumptions. Projected returns are based on broad equity
(large cap, small cap and international) and bond (corporate and government)
indices as well as anticipation that the plans' active investment managers will
generate premiums above the standard market projections. The Company used the
following long-term rate of return assumptions for its pension plans:
Long-term rates of return used for:
------------------------------------------------------------------------------------------------
Obligation at Obligation at Obligation at
December 31, 2003 December 31, 2002 December 31, 2001
and expense in 2004 and expense in 2003 and expense in 2002
------------------------------ ------------------------------ ---------------------------
U.S. Plan(s) 10.00% 8.50% 9.00%
U.K. Plan 7.10% 6.70% 7.50%
17
Lowering the expected long-term rate of return on the Company's U.S. plans'
assets by 0.25% (from 8.50% to 8.25%) would have increased 2003 pension expense
by approximately $0.1 million, and lowering the discount rate assumption by
0.25% (from 6.25% to 6.00%) would similarly have increased the Company's U.S.
plans' 2003 pension expense by approximately $0.1 million. Lowering the expected
long-term rate of return on the Company's U.K. plan's assets by 0.25% (from
7.10% to 6.85%) would have increased 2003 pension expense by approximately $0.5
million, and lowering the discount rate assumption by 0.25% (from 5.70% to
5.45%) would have increased the Company's U.K. plan's 2003 pension expense by
approximately $0.2 million.
Based on continued market declines and losses on the plan assets during
2002, as well as future projected asset mix, the Company reduced its assumed
long-term rate of return for 2003 to 8.50% for its U.S. plans and 6.70% for its
U.K. plan. The Company's future expected long-term rate of return on plan assets
for its U.S. and U.K. plans at December 31, 2002 was based on an asset
allocation assumption of 50% equity securities and 50% fixed income securities.
However, because of market fluctuations and prior funding strategies, actual
asset allocation as of December 31, 2002 was 40% equity securities, 57% fixed
income securities and 3% cash for the U.S. plans and 85% equity securities, 12%
fixed income securities and 3% cash for the U.K. plan.
During the second quarter of 2003, the Company transferred all of its U.S.
plans' assets into the Combined Master Retirement Trust ("CMRT"). The CMRT is a
collective investment trust established by Valhi to permit the collective
investment by certain master trusts which fund certain employee benefits plans
sponsored by Valhi and certain related companies. The CMRT held 9.0% of TIMET
common stock at December 31, 2003; however, the Company's plan assets are
invested only in a portion of the CMRT that does not hold TIMET common stock. At
December 31, 2003, Valhi and related entities or persons held approximately
49.8% of TIMET's outstanding common stock and approximately 40.1% of the Capital
Trust's outstanding BUCS (which are convertible into TIMET common stock). Harold
C. Simmons, Chairman of the Board of Directors for Valhi, is the sole trustee of
the CMRT and a member of the trust investment committee for the CMRT.
The CMRT's long-term investment objective is to provide a rate of return
exceeding a composite of broad market equity and fixed income indices (including
the S&P 500 and certain Russell indices) utilizing both third-party investment
managers as well as investments directed by Mr. Simmons. During the 16-year
history of the CMRT from inception (in 1987) through December 31, 2003, the
average annual rate of return earned by the CMRT, as calculated based on the
average percentage change in the CMRT's net asset value per CMRT unit for each
applicable year, was 12.7%. The CMRT earned an annual return of 38.4% in 2003,
and the CMRT's last 5-year and 10-year average annual returns were 10.1% and
11.1%, respectively. The CMRT's annual rates of return from inception through
December 31, 2003 have varied from a high of a 42.2% return (in 1998) to a low
of a 20.7% loss (in 1990). During that same period, the S&P 500's annual rates
of return have varied from a high of a 34.1% return (in 1995) to a low of a
23.4% loss (in 2002). The Company believes that such historical volatility is a
reasonable indicator of future levels of volatility, and a higher level of
volatility is consistent with a higher level of risk in the asset mix and a
higher level of expected return over the long-term.
18
At December 31, 2003, the CMRT's asset mix (based on an aggregate asset
value of $502 million) was 62.6% U.S. equity securities, 6.8% foreign equity
securities, 23.6% debt securities and 7.0% cash and other. The CMRT`s trustee
and investment committee actively manage the investments within the CMRT. Such
parties have in the past, and may again in the future, periodically change the
relative asset mix based upon, among other things, advice they receive from
third-party advisors and their expectation as to what asset mix will generate
the greatest overall return. Based on the above, the Company increased its
long-term rate of return assumption to 10.0% for December 31, 2003 pension
obligations and for 2004 pension expense for its U.S. plan.
Based on various factors, including improved economic and market
conditions, gains on the plan assets during 2003 and projected asset mix, the
Company increased its assumed long-term rate of return for December 31, 2003
pension obligations and for 2004 pension expense to 7.10% for its U.K. plan.
Because of market fluctuations and prior funding strategies, actual asset
allocation as of December 31, 2003 was 92% equity securities and 8% fixed income
securities for the U.K. plan. During 2003, the trustees for the U.K. plan
selected a new investment advisor (effective in 2004) for the U.K. plan and
modified its asset allocation goals. As such, the Company's future expected
long-term rate of return on plan assets for its U.K. plan is based on an asset
allocation assumption of 80% equity securities and 20% fixed income securities
by the end of 2005 and 60% equity securities and 40% fixed income securities by
the end of 2007. The Company believes that the plans' long-term asset allocation
on average will approximate the ultimate assumed 60/40 allocation, as all
current contributions to the plan are invested wholly in fixed income securities
in order to gradually effect the shift.
Although the expected rate of return is a long-term measure, the Company
will continue to evaluate its expected rate of return, at least annually, and
will adjust it as considered necessary.
Among other things, the Company bases its determination of pension expense
for all plans on the fair value of plan assets. The expected return on the fair
value of the plan assets, determined based on the expected long-term rate of
return, is a component of pension expense. This methodology further recognizes
actual investment gains or losses (i.e., the difference between the expected and
actual returns based on the market value of assets) in pension expense through
amortization in future periods based upon the expected average remaining service
life of the plan participants. Unrealized gains or losses may impact future
periods to the extent the accumulated gains or losses are outside the "corridor"
as defined by SFAS No. 87.
Based on an expected rate of return on plan assets of 10.00%, a discount
rate of 6.00% and various other assumptions, the Company estimates that its U.S.
plan will have pension expense of approximately $0.3 million in 2004 and pension
income of approximately $0.3 million in 2005 and $0.6 million in 2006. A 0.25%
increase (decrease) in the discount rate would decrease (increase) projected
pension expense by approximately $0.1 million in 2004 and increase (decease)
projected pension income by approximately $0.1 million in 2005 and 2006. A 0.5%
increase (decrease) in the long-term rate of return would decrease (increase)
projected pension expense by approximately $0.3 million in 2004 and increase
(decrease) projected pension income by approximately $0.3 million in 2005 and
approximately $0.4 million in 2006.
19
Based on an expected rate of return on plan assets of 7.10%, a discount
rate of 5.50% and various other assumptions (including an exchange rate of
$1.75/(pound)1.00), the Company estimates that pension expense for its U.K. plan
will approximate $7.5 million in 2004, $6.9 million in 2005 and $6.4 million in
2006. A 0.25% increase (decrease) in the discount rate would decrease (increase)
projected pension expense by approximately $0.8 million in 2004 and $0.7 million
in 2005 and 2006. A 0.25% increase (decrease) in the long-term rate of return
would decrease (increase) projected pension expense by approximately $0.2
million in 2004, $0.3 million in 2005 and $0.4 million in 2006.
Actual future pension expense will depend on actual future investment
performance, changes in future discount rates and various other factors related
to the populations participating in the Company's pension plans.
The Company made cash contributions of approximately $4.4 million in 2003,
$1.2 million in 2002 and $2.7 million in 2001 to the U.S. plans and cash
contributions of approximately $7.3 million in 2003, $6.1 million in 2002 and
$3.6 million in 2001 to the U.K. plan. Based upon the current underfunded status
of the plans and the actuarial assumptions being used for 2004, the Company
believes that it will be required to make the following cash contributions
(exclusive of any required employee contributions) over the next five years:
Projected cash contributions
-----------------------------------------------------------
U.S. Plan U.K.Plan Total
---------------- ----------------- -----------------
(In millions)
Year ending December 31,
2004 $ 4.1 $ 7.4 $ 11.5
2005 $ 3.2 $ 7.7 $ 10.9
2006 $ 1.8 $ 7.9 $ 9.7
2007 $ 0.6 $ 8.2 $ 8.8
2008 $ 0.1 $ 8.4 $ 8.5
The value of the plans' assets has fluctuated dramatically over the past
three years based mainly on performance of the plans' equity securities. The
U.S. plans' assets were $60.7 million, $48.2 million and $56.5 million at
December 31, 2003, 2002 and 2001, respectively, and the U.K. plan's assets were
$97.8 million, $69.8 million and $79.0 million at December 31, 2003, 2002 and
2001, respectively.
The combination of actual investment returns and changing discount rates
has a significant effect on the Company's funded plan status (plan assets
compared to projected benefit obligations). In 2003, the effect of positive
investment returns was only partially offset by the decline in the discount
rate, thereby reducing the underfunded status of the U.S. plan to $10.1 million
at December 31, 2003. In 2003, the effect of positive investment returns in the
U.K. plan was more than offset by the decline in the discount rate and the
effect of the weakening dollar compared to the British pound sterling, thereby
increasing the underfunded status of the U.K. plan to $53.6 million at December
31, 2003. The U.S. and U.K. plans were underfunded by $21.3 million and $46.7
million, respectively, at December 31, 2002. Based upon the change in the funded
status of the plans during 2003, the Company was required to record a net
additional minimum pension liability credit (net of tax) to equity of $1.1
million, reflecting additional comprehensive income of $8.4 million for the U.S.
plan and additional comprehensive loss of $7.3 million related to the U.K. plan.
20
Postretirement benefit plans other than pensions. The Company provides
limited postretirement healthcare and life insurance ("OPEB") benefits to a
portion of its U.S. employees upon retirement. The Company funds such OPEB
benefits as they are incurred, net of any retiree contributions. The Company
paid OPEB benefits, net of retiree contributions, in the amount of $3.1 million,
$4.6 million and $4.0 million during 2003, 2002 and 2001, respectively.
The Company recorded consolidated OPEB expense of $2.7 million, $2.9
million and $1.8 million for the years ended December 31, 2003, 2002 and 2001,
respectively. OPEB expense for these periods was calculated based upon a number
of actuarial assumptions, most significant of which are the discount rate and
the expected long-term health care trend rate.
The discount rate the Company utilizes for determining OPEB expense and
OPEB obligations is the same as that used for the Company's U.S. pension plans.
Lowering the discount rate assumption by 0.25% (from 6.25% to 6.00%) would have
increased the Company's 2003 OPEB expense by less than $0.1 million.
The Company estimates the expected long-term health care trend rate based
upon input from specialists in this area, as provided by the Company's
actuaries. In estimating the health care trend rate, the Company considers
industry trends, the Company's actual healthcare cost experience and the
Company's future benefit structure. For 2003, the Company used a beginning
health care trend rate of 11.35%, which is projected to reduce to an ultimate
rate of 4.25% in 2010. If the health care trend rate changed by 1.00% for each
year, OPEB expense would have increased/decreased by approximately $0.3 million
in 2003.
For 2004, the Company is using a beginning health care trend rate of
10.35%, which is projected to reduce to an ultimate rate of 4.00% in 2010.
Based on a discount rate of 6.00%, a health care trend rate as discussed
above and various other assumptions, the Company estimates that OPEB expense
will approximate $2.6 million in 2004, $2.4 million in 2005 and $2.3 million in
2006. A 0.25% increase (decrease) in the discount rate would decrease (increase)
projected OPEB expense by less than $0.1 million in 2004, 2005 and 2006. A 1.0%
increase (decrease) in the health care trend rate for each year would increase
(decrease) the projected service and interest cost components of OPEB expense by
approximately $0.2 million in 2004, 2005 and 2006.
Environmental matters. See "Business - Regulatory and environmental
matters" in Item 1 and Note 19 to the Consolidated Financial Statements for a
discussion of environmental matters.
Other. The Company periodically evaluates its liquidity requirements,
capital needs and availability of resources in view of, among other things, its
alternative uses of capital, debt service requirements, the cost of debt and
equity capital and estimated future operating cash flows. As a result of this
process, the Company has in the past, or in light of its current outlook, may in
the future, seek to raise additional capital, modify its common and preferred
dividend policies, restructure ownership interests, incur, refinance or
restructure indebtedness, repurchase shares of common stock, purchase BUCS, 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.
21
Corporations that may be deemed to be controlled by or affiliated with
Harold C. Simmons sometimes engage in (i) intercorporate transactions such as
guarantees, management and expense sharing arrangements, shared fee
arrangements, joint ventures, partnerships, loans, options, advances of funds on
open account, and sales, leases and exchanges of assets, including securities
issued by both related and unrelated parties, and (ii) common investment and
acquisition strategies, business combinations, reorganizations,
recapitalizations, securities repurchases, and purchases and sales (and other
acquisitions and dispositions) of subsidiaries, divisions or other business
units, which transactions have involved both related and unrelated parties and
have included transactions which resulted in the acquisition by one related
party of a publicly-held minority equity interest in another related party. The
Company continuously considers, reviews and evaluates such transactions, and
understands that Contran Corporation, Valhi and related entities consider,
review and evaluate such transactions. Depending upon the business, tax and
other objectives then relevant, it is possible that the Company might be a party
to one or more such transactions in the future.
As of March 2, 2004, the Company had acquired 1,140,900 shares of CompX
International, Inc. ("CompX") Class A common stock (the "Class A Shares,"
representing approximately 22.3% of the outstanding Class A Shares) for $11.1
million in open market or privately-negotiated transactions with unaffiliated
parties. Persons or entities related to Harold C. Simmons other than TIMET hold
an additional 476,300 of the Class A Shares and 100% of the 10,000,000
outstanding shares of CompX Class B common stock (the "Class B Shares"). As
reported in the Schedule 13D filed with the SEC on March 2, 2004, depending upon
the Company's evaluation of the business and prospects of CompX, and upon future
developments (including, but not limited to, performance of the Class A Shares
in the market, availability of funds, alternative uses of funds, and money,
stock market and general economic conditions), TIMET may from time to time
purchase, dispose of, or cease buying or selling Class A Shares. The Class A
Shares held by TIMET, as of March 2, 2004, represented approximately 7.5% of the
aggregate number of outstanding Class A Shares and Class B Shares.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the Company to
make estimates and judgments, and select from a range of possible estimates and
assumptions, that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reported
period. On an on-going basis, the Company evaluates its estimates, including
those related to allowances for uncollectible accounts receivable, inventory
allowances, asset lives, impairments of investments in preferred securities and
investments accounted for by the equity method, the recoverability of other
long-lived assets, including property and equipment, goodwill and other
intangible assets, pension and other post-retirement benefit obligations and the
related underlying actuarial assumptions, the realization of deferred income tax
assets, and accruals for asset retirement obligations, environmental
remediation, litigation, income tax and other contingencies. The Company bases
its estimates and judgments, to varying degrees, on historical experience,
advice of external specialists and various other factors it believes to be
prudent under the circumstances. Actual results may differ from previously
estimated amounts and such estimates, assumptions and judgments are regularly
subject to revision.
22
The policies and estimates discussed below are considered by management to
be critical to an understanding of the Company's financial statements because
their application requires the most significant judgments from management in
estimating matters for financial reporting that are inherently uncertain. See
Notes to the Consolidated Financial Statements for additional information on
these policies and estimates, as well as discussion of additional accounting
policies and estimates.
Inventory allowances. The Company values approximately one-half of its
inventory using the LIFO method with the remainder stated primarily using an
average cost method. The Company periodically reviews its inventory for
estimated obsolescence or unmarketable inventory and records any write-down
equal to the difference between the cost of inventory and its estimated net
realizable value based upon assumptions about alternative uses, market
conditions and other factors.
Impairment of long-lived assets. Generally, when events or changes in
circumstances indicate that the carrying amount of long-lived assets, including
property and equipment, goodwill and other intangible assets, may not be
recoverable, the Company undertakes an evaluation of the assets or asset group.
If this evaluation indicates that the carrying amount of the asset or asset
group 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. In
2003, no such events or circumstances indicated the need to perform such
evaluation.
During the fourth quarter of 2002, the Company completed an entity-wide
impairment assessment in response to continued poor conditions in the commercial
aerospace market. In order to complete this assessment, the Company identified
its lowest level of identifiable cash flows, resulting in the identification of
four asset groups - U.S., U.K., France and Italy. Of these asset groups, Italy
is not reliant on sales into the commercial aerospace market and therefore an
analysis of the potential impairment of this asset group was not considered
necessary. Only the U.S., U.K. and France asset groups were evaluated, and the
result of this assessment led the Company to conclude that there was no
impairment related to the long-lived assets in these three asset groups tested,
as the undiscounted cash flows exceeded the net carrying value of the applicable
net assets in each of the three asset groups. Although management utilizes
certain external information sources such as The Airline Monitor as the basis
for aerospace sales volume projections, significant management judgment is
required in estimating other factors that are material to future cash flows
including, but not limited to, customer demand, the Company's market position,
selling prices, competitive forces and manufacturing costs. Future cash flows
are inherently uncertain, and there can be no assurance that the Company will
achieve the future cash flows reflected in its projections.
The Company also completed an impairment assessment of its goodwill and
intangible assets upon its adoption of SFAS No. 142 in 2002, as discussed in
"Results of Operations - Cumulative effect of change in accounting principle"
and Note 7 to the Consolidated Financial Statements. Management judgment was
required in order to identify the Company's reporting units, 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, and determine the implied fair value of its goodwill. This
evaluation considered, among other things, a combination of fair value
indicators including quoted market prices, prices of comparable businesses and
discounted projected cash flows based upon Company forecasts, which considered
information obtained from review of The Airline Monitor and from discussions
with the Company's customers throughout the first half of 2002, both of which
assisted the Company in better estimating the impact of the September 11, 2001
terrorist attacks on its business. As a result of this information, step one of
23
the impairment evaluation completed in the second quarter of 2002 indicated that
the Company's recorded goodwill might be impaired, which obligated the Company
to complete the second step of the impairment test. Based on the results of the
second step of the impairment test completed during the third quarter of 2002,
which indicated the Company's goodwill was impaired, 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.
The Company also reviewed its goodwill for impairment as of December 31,
2001. However, such analysis was based upon prior GAAP, under which goodwill was
deemed impaired only if the applicable estimated future undiscounted cash flows
were insufficient to recover the carrying value of the goodwill and other
long-lived assets. Based upon the information then available to the Company,
including information from The Airline Monitor and the Company's customers, the
Company concluded its goodwill was not impaired as of December 31, 2001. The
Company had more information to help it estimate the impact of the September 11,
2001 terrorist attacks on its business when it evaluated its goodwill for
impairment upon adoption of SFAS No. 142 than when it evaluated its goodwill for
impairment as of December 31, 2001 under prior GAAP. Therefore, the goodwill
impairment recognized in 2002 resulted in part from these revised forecasts and
in part from a change in methodology of assessing impairment upon the adoption
of SFAS No. 142.
Valuation and impairment of securities. In accordance with SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the Company
evaluates its investments in debt and equity securities whenever events or
conditions occur to indicate that the fair value of such investments has
declined below their carrying amounts. If the decline in fair value is judged to
be other than temporary, the carrying amount of the security is written down to
fair value.
In response to certain events previously described in this MD&A, the
Company undertook assessments of its investment in SMC in the fourth quarter of
2001 and the first quarter of 2002. Those assessments indicated that it was
unlikely that the Company would recover its then existing carrying amount of the
SMC securities in accordance with the securities' contractual terms and that an
other than temporary decline in the fair value of its investment had occurred.
Accordingly, the Company recorded impairment charges of $61.5 million in the
fourth quarter of 2001 and $27.5 million in the first quarter of 2002. The
securities were not publicly traded and, accordingly, quoted market prices were
unavailable. The estimate of fair value required significant judgment and
considered a number of factors including, but not limited to, the financial
health and prospects of SMC and market yields of comparable securities.
Deferred income tax valuation allowances. Under SFAS No. 109, Accounting
for Income Taxes, and related guidance, the Company is required to record a
valuation allowance if realization of deferred tax assets is not
"more-likely-than-not." Substantial weight must be given to recent historical
results and near-term projections, and management must assess the availability
of tax planning strategies that might impact either the need for, or amount of,
any valuation allowance.
24
As more fully discussed in "Results of Operations - Income taxes," the
Company has concluded that realization of its previously recorded U.S. and U.K.
deferred tax assets does not meet the "more-likely-than-not" recognition
criteria. Additionally, the Company has determined that it will not recognize
deferred tax benefits related to future U.S. or U.K. losses or future increases
in the U.S. or U.K. minimum pension liabilities continuing for an uncertain
period of time. Accordingly, the Company increased its deferred tax valuation
allowance in 2001 through 2003 to offset deferred tax benefits related to net
U.S. deferred tax assets and in 2002 and 2003 to offset deferred tax benefits
related to net U.K. deferred tax assets.
Regular reviews of the "more-likely-than-not" criteria and availability of
tax planning strategies will continue to require significant management
judgment.
Pension and OPEB expenses and obligations. The Company's pension and OPEB
expenses and obligations are calculated based on several estimates, including
discount rates, expected rates of returns on plan assets and expected health
care trend rates. The Company reviews these rates annually with the assistance
of its actuaries. See further discussion of the factors considered and potential
effect of these estimates in "Liquidity and Capital Resources - Defined benefit
pension plans" and "Liquidity and Capital Resources - Postretirement benefit
plans other than pensions."
Revenue recognition. Sales revenue is generally recognized when the Company
has certified that its product meets the related customer specifications, the
product has been shipped, and title and substantially all the risks and rewards
of ownership have passed to the customer. Payments received from customers in
advance of these criteria being met are recorded as customer advances until
earned. Amounts charged to customers for shipping and handling are included in
net sales. Sales revenue is stated net of price and early payment discounts.
Other loss contingencies. Accruals for estimated loss contingencies,
including, but not limited to, product-related liabilities, environmental
remediation and litigation, are recorded when it is probable that a liability
has been incurred and the amount of the loss can be reasonably estimated.
Disclosure is made when there is a reasonable possibility that a loss may have
been incurred. Contingent liabilities are often resolved over long time periods.
Estimating probable losses often requires analysis of various projections that
are dependent upon the future outcome of multiple factors, including costs, the
findings of investigations and actions by the Company and third parties.
ITEM 15: EXHIBITS
(c) Exhibits:
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
Note:The Company has retained a signed original of any exhibit listed
above that contains signatures, and the Company will provide any such
exhibit to the SEC or its staff upon request. Such request should be
directed to the attention of the Company's Corporate Secretary at the
Company's corporate offices located at 1999 Broadway, Suite 4300,
Denver, Colorado 80202.
25
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TITANIUM METALS CORPORATION
(Registrant)
By /s/ J. Landis Martin
--------------------------------
J. Landis Martin, June 4, 2004
Chairman of the Board, President
and Chief Executive Officer
26