Timet projects continued losses

Tuesday, Feb. 5, 2002 | 11:07 a.m.

SUN STAFF AND WIRE REPORT

Titanium Metals Corp. of Denver, operator of a large plant near Henderson, reported losses for its fourth quarter Monday and said the losses will continue this year because of weakened demand attributed to the terrorism of Sept. 11.

Timet said that before special items it lost $2.9 million or 9 cents per share in the fourth quarter vs. a loss before special items in the year-ago quarter of $7.7 million or 24 cents per share.

After charges, the loss was $72 million or $2.28 vs. a loss of $6.4 million or 20 cents in the year-ago quarter.

Chief Executive J. Landis Martin said sales volumes in 2002 will likely decline 15 percent to 20 percent from 2001 because of reduced commercial aircraft production rates and excess inventories.

He projected a loss before special items of $35 million to $40 million in 2002.

Timet stock fell 7 percent or 25 cents on the news Monday to close at $3.30.

The Denver firm, a supplier of lightweight titanium for jet engine parts, was riding a rebound in the airline sector just seven months ago. Sales were up and shares nearly reached a three-year high.

Then came cracks in the economy, followed by Sept. 11.

Now Titanium Metals finds itself in an uncomfortably familiar position -- battling out of a steep business downturn. New orders for jet engines are down 20 percent to 30 percent since the terrorist attacks, with a similar decline expected in the company's sales.

Since its initial public offering in 1996, and during much of its 50-year history, the firm alternately has thrived and suffered with the fortunes of aviation.

But under a new initiative, Titanium Metals is looking to diversify its operations and smooth its financial highs and lows.

Timet, the company's nickname, recently launched a new division to supply titanium parts for the auto industry.

"Clearly, we're in a cyclical business," said Mark Wallace, chief financial officer. "Now we're looking for ways to make more of our business less dependent on aerospace."

For the past 10 years, Timet has supplied titanium for race cars and motorcycles, where lighter-weight parts can make a difference in racing performance.

But that segment accounts for less than 1 percent of sales. Timet's business has continued to focus on jet engines and aircraft frames, which provide about 80 percent of revenues.

Titanium, made from ore found in common beach sand, is as strong as steel but 40 percent lighter.

Timet buys the ore from outside suppliers, then processes it initially into popcorn-sized nuggets called "sponge." The sponge is melted into huge, 3-by-12-foot ingots weighing 10,000 to 14,000 pounds, then is milled into sheets, strips, bars and rods for industrial use.

If Timet can sell mass-production automakers on titanium's virtues -- light weight, high strength and corrosion resistance -- a big market could develop.

Analyst Christopher Olin of Cleveland-based Midwest Research said "meaningful acceptance" of titanium by the auto industry may be five years in the future.

"The cost of titanium is far too expensive for the Big Three (automakers) to begin accepting the material on all of the automotive models, but we see tremendous opportunities within the luxury and sporting vehicles," Olin said.

Titanium Metals has made progress in auto parts during the past year, landing a deal to supply titanium exhaust systems for Chevrolet's Corvette Z06 and suspension springs for the Volkswagen FSI, a model sold primarily in Europe.

"We look at every type of material and weigh the benefits and challenges of each," said Mike Holly, a metals engineering specialist with General Motors. "Titanium offers an attractive combination of mechanical properties, corrosion resistance and low density for several automotive applications."

He said that in addition to the Corvette's exhaust system, GM is investigating the use of titanium for suspension springs, valve springs and other parts. But cost is a factor.

According to GM, the Corvette's titanium exhaust system is three times more expensive than a conventional, stainless steel version. Titanium springs are even more costly -- eight times more than their regular counterparts.

Automotive inroads have not pushed up Timet's stock. Shares fell 41 percent last year, including a shattering 75 percent drop in four days following the September terrorist attacks. Shares hit a low of $2.50 on Sept. 20.

Analyst Alexander Latzer of Merrill Lynch in New York said the share price reflects the drop in new aircraft orders and the falloff in travel. But he said Timet may be poised for a rebound because some of its aerospace sales are tied to long-term contracts that won't be affected by the aviation-industry slowdown.

In the meantime, Titanium Metals has laid off 50 employees out of its workforce of 2,400. Production has been cut by 40 percent at a plant near Henderson and by 20 percent at a facility in Morgantown, Pa.

Timet hopes to expand small markets for titanium in oil and gas drilling rigs and in military armor.

Company officials said a potentially large use of titanium could develop if military planners devote more funding to rapid deployment forces, where lighter-weight vehicles and equipment would have advantages.

Developing markets also exist in sporting equipment such as golf-club shafts, eyeglass frames and jewelry.

In a recent quarterly filing with the Securities and Exchange Commission, Timet said its 2001 losses were at least partially offset by a one-time gain of $82 million from a lawsuit settlement last year with customer Boeing over a purchase-contract dispute.

Besides making the cash payment, Boeing agreed to buy up to 7.5 million pounds of titanium products annually from Timet.

That provision may help Titanium Metals survive the current cyclical downturn, said Merrill Lynch analyst Latzer.

"The company's financial position is much improved from the previous cycle, and it has favorably renegotiated its long-term supply agreement with Boeing," Latzer said in a recent research report.

"Accordingly, we reiterate our 'accumulate' rating for those investors interested in a pure play on titanium metal well in advance of some improvement in commercial aerospace fundamentals."

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