Titanium Metals Corporation

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Titanium Metals Corporation

1999 Broadway, Suite 4300
Denver, Colorado 80202
U.S.A.
(303) 296-5600
Fax: (303) 296-5640
Web site: http://www.timet.com

Public Company
Incorporated: 1950 as Titanium Metals Corporation of
America
Employees: 2,250
Sales: $507.1 million (1996)
Stock Exchanges: NASDAQ
SICs: 3356 Nonferrous Rolling and Drawing; 3357
Drawing & Insulating Nonferrous Wire

Titanium Metals Corporation (TIMET) is the world’s largest fully integrated producer of high quality titanium metal products, and has the largest titanium sales volume worldwide. With research, manufacturing, and distribution operations spanning the globe, the company’s activities encompass every phase of titanium manufacture and sales, including the conversion of rutile ore into sponge (the pure intermediate metal from which mill products are made), to produce ingot and slab (the result of melting sponge and titanium scrap), either alone or with various other alloying elements. Their other products include billet, bar, flat products (plate, sheet, and strip), tubular products (welded tubing and pipe), extrusions, wire, and castings. As a consequence of the metal’s unique properties of strength, lightness, and corrosion- and heat-resistance, TIMET’s position has enabled it to become the largest supplier of titanium to the aerospace and industrial markets. Aerospace accounts for almost two-thirds of TIMET’s revenues. Industrial uses for the product include chemical plants, industrial power plants, desalination plants and pollution control equipment. Additional uses range from Medical implants, golf club heads, other sporting equipment, and automotive and computer parts to offshore oil/gas production installations and geothermal facilities.

1950s: Product of the “Cold War”

In January 1950, the National Lead Company and Allegheny Ludlum Steel Corporation announced the formation of a jointly owned corporation, the Titanium Metals Corporation of America, formed for the purpose of marketing and distributing titanium. Originally headquartered in New York, the company was headed by H. C. Wildner, the vice president of National Lead. Laboratories at the National Lead Company had been producing and studying titanium for several years at its Sayresville, New Jersey plant. Allegheny Ludlum was a leading producer of stainless steel and began conducting intensive research in the areas of melting, alloying, and processing of the metal. Titanium had been recently developed as a metal prized for its noncorrosive qualities, resistance to acids, and tensile strength. A New York Times article from the period stated that “the armed forces are experimenting with titanium and call it strategic.” Strategic applications included areas within the defense department, where titanium was increasingly used for aircraft, submarine parts, jet engines, rockets, guided missiles, and chemical and pharmaceutical equipment. An engineering and construction company was hired by Titanium Metals to build the first large-scale plant for the production of metallic titanium at Henderson, Nevada, located about 15 miles from Las Vegas. The company had already leased major onsite components of the former Basic Magnesium, Inc. plant built by the government during World War II.

The Defense Department had set an annual production goal of 35,000 tons of titanium by 1956, which was later cut to 22,000 tons. In 1953 annual overall production was at 2,000 tons, sparking a senate debate over the importance of the metal in relation to the security of the country. As a replacement for stainless steel in aircraft engines, titanium was recognized as tough, 40 percent lighter in weight, and essential to supersonic, high-altitude warplanes. The chairman of the Wright aeronautical division of Curtiss-Wright Corporation told senators that if war came, his company alone would need 72,000 tons of titanium to build warplanes capable of competing with enemy aircraft, estimating that use of titanium would save from 400 to 4,000 pounds per engine, depending on aircraft size. It was feared that a drastic shortage of the metal would reduce the country to “second best” status. The Secretary of the Air Force recommended that “the Government should offer aids to potential producers of titanium at once so that they could begin increasing their output”—a position strongly supported by Senator George Malone of Nevada, who felt that the country should not have to go abroad to buy the metal ores. Most of the titanium ore processed in the U.S. was imported from Australia and India. E. R. Rowley, president of Titanium Metals, testified as a witness in the debate, conceding that “his company had tough production problems” but expressing optimism about the future.

With major production orders placed by the Air Force, fabricators expanded mill facilities in preparation, expecting to double 1955 performance levels by 1956. Titanium Metals operated at full 3,600-ton capacity during this period. Nonde-fense use of titanium increased, especially in the chemical process, pulp, paper, and electronics industries. The Japanese expanded their 1955 output, exporting most of their estimated 500 tons of sponge to the United States—double the amount from the previous year. Of interest to government and industry officials was the report, made late in 1955, that the Russians were designing sizable quantities of titanium into their advanced military aircraft, thus enhancing their travel speed.

In the manufacturing sector, Titanium Metals was recognized, along with Ludlum Steel, for developing the consumable-electrode vacuum re-melting furnace, which solved problems in the processing of titanium. The furnace was made available to the rest of the industry through a special agreement in 1957. Used for melting titanium, zirconium, and high-alloy steels, it formed metals into large homogeneous ingots exceptionally free of impurities and with improved physical properties.

A Slow Comeback in the 1960s

By the late-1950s the shift in emphasis from manned aircraft to missiles—which did not rely on engines—caused the industry to slide. The military jet engine use, upon which the titanium industry was founded, slipped to 25 percent. Objections to the use of the metal included its high cost and difficulty of fabrication. Many came to regard the one-time “miracle metal” as “the greatest fiasco in metallurgical history.” Titanium began a slow recovery by the mid-1960s due to the production of the (“top-secret”) super-fast, high-flying A-11 jet aircraft, and titanium’s drop in price to $1.32 a pound, down from $5 a pound in the 1950s. In March 1964, President Johnson disclosed the existence of the A-l 1, capable of travel at three times the speed of sound, and spoke of “the mastery of metallurgy and fabrication of titanium.” The metal had increasing applications in space and industry and became known as applicable for mill products—not merely useful as the government’s space-age metal. The only domestic producers of titanium during this period were Titanium Metals and the Reactive Metals department of the Bridgeport Brass Company.

Sales increased sharply through 1966 until 1968 when the Soviet Union was blamed for dumping titanium on the American market at prices injurious to domestic producers. Titanium Metals responded by reducing their pricing by 20 to 30 percent on sheet, strip, and plate mill products. Also blamed was the delay in the development of the supersonic jet transport aircraft to which much of their product was tied. Company officials recognized that in order to stay competitive with steel and aluminum, they would have to become more price competitive.

By 1985, after 30 years in partnership, Allegheny International, Inc. and NL Industries sold most of their titanium unit to an investors’ group. Each of the two companies initially retained 5 percent of the concern. Ninety percent of the TIMET division of the Titanium Metals Corporation was sold to Kelso & Company and top managers of the TIMET division. The proceeds of the sale were needed to reduce Allegheny debt.

Sluggish Sales in the Early 1990s

In 1990, Baroid Corporation, an oil-field services company controlled by Dallas billionaire Harold Simmons, purchased the remaining Allegheny interest in Titanium Metals for $50 million, giving it 100 percent ownership of the company. The transaction had been approved by the U.S. Bankruptcy Court where Allegheny’s Chapter 11 proceedings were underway. Baroid moved TIMET’s headquarters from Pittsburgh, Pennsylvania, to Denver, Colorado, where it would be closer to its main plant in Henderson and its aerospace customers. As a part of its restructuring plan, Baroid decided to spin off Titanium Metals into a wholly owned subsidiary. A revamping of the Henderson mill complex was underway, enabling the production of about 22 million pounds of sponge using technology developed by the Japanese. In exchange, a consortium of Japanese companies, Union Titanium Sponge Corp. (UTSC), was granted an option to receive up to a 25 percent interest in TIMET, and took delivery of part of the sponge production from TIMET’S new plant for sale primarily to users in the United States. In a breakthrough move for TIMET, The Tokyo Electric Power Company ordered 150,000 pounds of titanium condenser tubing made from the Henderson plant, and the company anticipated an increase in orders.

Company Perspectives:

Titanium Metals Corporation (TIMET) is initiating a significant change in the way it does business with its aerospace customers. These companies need more certainty when pricing their jet airframes and engines today for deliveries extending years later. TIMET plans to get much closer to a true partnering arrangement with them —making firmer commitments, redoubling its joint efforts to reduce costs and share the benefits, and providing more value by offering a broader range of services. TIMET is investing capital in innovative projects that reduce costs and improve customer service, and is improving its raw materials sourcing practices. TIMET wants to support companies developing new uses for titanium, such as computer hard disks, and plans to partner with larger companies to penetrate markets which currently use other metals, for example, auto parts. The company plans to be a major supplier of low-cost stock for the casting industry.

TIMET then came under the ownership of Tremont Corporation, principally a Denver holding company with operations conducted through its affiliates Titanium Metals Corporation (TIMET) and its affiliate, NL Industries, Inc. In an effort to expand its market, TIMET negotiated a joint venture with Axel Johnson Metals, Inc., the largest supplier of cold hearth titanium melt, forming Titanium Hearth Technologies. TIMET bought into two major potential growth areas for hearth melting (which produces “cleaner” titanium): rotating parts on aircraft engines, and the ability to directly cast net slabs of commercially pure titanium to yield cost savings for industrial-grade flat-rolled titanium. The cold-hearth process used a much greater portion of scrap, and a wider variety of scrap types in its melt than conventional vacuum arc furnaces. Through its affiliation with Axel Johnson, the venture gave TIMET greater access to aerospace and commercial markets for coldhearth products while allowing it to avoid spending the estimated $15-$20 million to install its own coldhearth furnace. During this time period $90 million was already being spent by TIMET for the construction of a vacuum distillation sponge facility in Nevada. The Pratt and Whitney division of United Technologies Corporation approved the plant’s sponge for both standard and rotor quality products—usually considered among the most critical components of an aircraft and subject to the most stringent criteria.

The 1990s: A Manufacturing Overhaul

A third-quarter $2.2 million TIMET operating loss, following an $8.5 million loss in the first nine months of 1992 was reported by Tremont Corp., TIMET’s parent company. A Tremont official told Frank Haflich of American Metal Market that “overall market demand for titanium products used in the military and commercial aerospace industries and certain other industrial markets remains at historically depressed levels.” Diminishing Cold War tensions and the flood of cheap titanium from the Commonwealth of Independent States took its toll on the industry. From 1991 through half of 1995 the three major U.S. titanium producers suffered substantial losses. TIMET’s losses were aggravated by the financial and productivity repercussions of a 12-month strike at its Henderson sponge plant, and a three-month strike at its Toronto, Ohio rolling and finishing operation. TIMET’s president and CEO, Kirby C. Adams, who served since 1989, was replaced by J. Landis Martin, chairman and president of Tremont Corp. The company hoped to operate from a more shareholder, profit-driven perspective. Martin told Cathy Zavodni of American Metal Market that traditionally, titanium has been a “market share, volume-driven business,” but this approach “has never worked for anyone, especially in down cycles.” The company continued to focus on the specialized, value-added products that traditionally delivered high product margins, while de-emphasizing low-grade products. Martin vowed to speed up the manufacturing overhaul initiated by Adams, including improving yields, cycle times, and on-time deliveries, which became problematic following the labor strikes. The company also planned to cultivate nonaerospace markets such as industrial powerplants, pollution-control equipment, and offshore oil installations, to name a few.

Expansion and Diversification in the Late 1990s

In early 1996, IMI Pic of Great Britain and Tremont Corporation reported that their titanium businesses had merged and would operate under the name Titanium Metals Corporation (TIMET), with Tremont owning 46.5 percent, IMI owning 38 percent, and United Titanium Sponge Corporation of Japan owning 15.5 percent.

TIMET gained an overall annual production capacity in excess of 40 million pounds when it acquired the business of Cie. Europene du Zirconium (Cezus), France’s largest producer of titanium, in 1996. The French operation, re-named TIMET Savoie SA, produces large, premium-grade aircraft alloy billet. It also produces bar and some seamless tubing and fastener stock. TIMET then bought substantially all of the assets of Axel Johnson Metals Inc., a titanium and special metals company, for $90 million. The acquisition included a 50 percent partnership interest in Titanium Hearth Technologies, an electron-beam cold-hearth melting technology company of which TIMET already owned the other half. The acquisition of Axel Johnson gave TIMET access to the secondary market of scrap feedstock—one of the few areas where the company was lagging behind its major rivals.

A significant increase in earnings occurred in 1996 driven by price and volume increases in both commercial and aerospace markets. Aided by a $10 million tax benefit, earnings had soared tenfold in the final quarter. TIMET’s year-end backlog of $440 million had nearly doubled from a year earlier. Once again, strong demand from the aerospace industry strained the abilities of producers to keep pace. It was estimated that the commercial aerospace demand would not peak until the year 2002. TIMET made a 1997, $5 million maximum, investment agreement with Titanium Memory Systems, to fund the development and production of a titanium substrate using Titanium Memory’s proprietary technology. The substrate is intended for use in computer hard disk drives, undergoing testing by disk drive manufacturers and producers of magnetic media. The metal’s properties offer advantages over aluminum and glass which are especially important to the portable computer market. Under their agreement, TIMET is the primary supplier of titanium to the company, and will acquire 20 percent of Titanium Memory. TIMET also announced agreements with Valinox Welded, a world-class specialist in the market for welded tubing products, to form a joint venture, Valtimet, to own and operate the welded tubing operations of both parties. TIMET owns 46 percent of Valtimet, which manufactures welded tubing made primarily of stainless steel and titanium in France and in China through its majority-controlled subsidiary. The transaction allows TIMET to be the key long-term supplier of titanium strip product to the joint venture and to expand uses for titanium via Valinox Welded’s expertise and strong reputation in the field.

With 1997 first-quarter sales at $181.4, up 29 percent from 1996, in July the company reported closing on a new $200 million, five-year secured revolving credit facility with a group of lenders led by Bankers Trust Company, as administrative agent, and Corestates Bank, N.A. and Sanwa Business Credit Corporation, as co-agents. The facility replaces the previous $105 million secured facility with Congress Financial Corporation—not scheduled to terminate until the end of 1998. Borrowings under the new agreement, according to a TIMET report, will be available for general corporate purposes, including possible acquisitions, and the refinancing of the approximately $4 million of letters of credit outstanding.

According to the company’s 1996 annual report, Titanium Metals Corporation was a 75 percent-owned subsidiary of Tremont Corporation during 1994 and 1995 with the remaining 25 percent held by Union Titanium Sponge Corporation (UTSC), a consortium of Japanese companies. In February 1996, TIMET acquired the titanium businesses of IMI plc and affiliates (IMI) for stock, and in June 1996 completed an initial public offering of common stock which together reduced Tremont’s ownership in TIMET to 30 percent and UTSC’s ownership to 10 percent. Contran Corporation holds, directly or through subsidiaries, approximately 44 percent of Tremont’s outstanding common stock. Substantially all of Contran’s outstanding voting stock is held by trusts established for the benefit of the children and grandchildren of Harold C. Simmons, of which Mr. Simmons is the sole trustee. Mr. Simmons may be deemed to control Contran, Tremont, and TIMET.