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Athena Jiang

TIE AT A GLANCE

P/E ► 22.0 AVG EV/EBITDA ► 4.18 LOW ROA ► 5.7% AVG ROE ► 6.8% AVG Debt to Equity ► 0.241 LOW Current Ratio ► 6.14 VERY HIGH Interest Coverage Ratio ► 230 VERY HIGH

 

 

 

 

 

 

Titanium Metals Corporation is a U.S. based producer of raw and processed titanium products. Historically, titanium, a corrosion-resistant, light, strong, and relatively expensive metal, has been used in aerospace products such as airplane wing supports and jet engines, as well as in armor plating, chemical plants, and pollution control. TIE produces three categories of products: titanium sponge (spongy-looking pure metal used as a raw material), melted titanium and titanium alloys (slabs of metal), and mill titanium (the final processed product). As of 2007, TIE’s melted product and mill product capacities (44,650 and 22,600 metric tons respectively) each represent 18-20% of world capacity. ^[1] It is also the largest U.S. producer of titanium sponge^[2] and expanded one of its facilities in 2007, which will increase its production capacity of titanium sponge by 12,600 metric tons, or 47%. ^[3]

The company is highly dependent on the aerospace industry. TIE's long-term agreements with aerospace customers, including Boeing Company (BA), Rolls-Royce, and their parts suppliers accounted for 55% of revenue in 2007. ^[4] Airlines will replace their aging fleets in the next few years, and Boeing expects to sell over 1000 of its new 787 Dreamliner model by the end of the next year. ^[5] While TIE's long term contracts lick in future revenue they also increase the company's exposure to fluctuations in titanium prices. The nature of their contracts prevents the company from fully passing through increases in the costs of raw materials. TIE’s price for melted titanium has increased by 50% in each of the last two years due to demand outstripping supply. ^[6] TIE's revenue grew by 8% but net income fell by 4.7% in 2007. TIE pays other companies for titanium sponge and raw metal, so raw material prices impact TIE's supply chain.

Titanium production is a global business and over the last decade, TIE has faced increasing competition from foreign manufacturers. VSMPO-Avisma, one of TIE's major competitors, is based in Russia and benefits from lower production costs due to its larger economies of scale and lower wage costs. TIE's competitive disadvantage has been partly offset by its lower transportation costs --it is the only titanium producer with major production in the United States-- and its exemption from the 15% tariff levied on imported titanium. Both the U.S. and Japan seem to favor the repeal of this trade policy, however. ^[7]

Business Overview

TIE is a vertically integrated company and controls its production process from ore extraction to the distribution of its processed titanium products. Melted (ingots and slabs) and mill (bars, plates, and sheets) titanium comprised 89% of its revenue in 2007. ^[8] Its main customers are in the commercial aerospace, military, and industrial sectors, comprising 94% of total revenue. ^[9]

Revenue increased by 8% to 1.28 billion USD in 2007; however, net income actually decreased by 4.7% to 268.2 million USD. ^[10] This decrease in net income was caused by a significant increase in expenses when the prices of titanium sponge and scrap, which are raw materials, shot up in late 2006 and early 2007 to $29/kg, quadruple historically stable prices. At the same time, TIE’s demand for raw materials increased as it shifted its focus to milled products in the past year. Toward the end of 2007 and into 2008, the cost of raw titanium has begun to decline as global titanium sponge capacity increases. ^[11]

^[12]

^[13]

^[14]

Trends and Forces

• Worldwide changes in raw titanium prices: during the third and fourth quarters of 2006, titanium sponge reached $29/kg compared to a historical price of $5 to $7 before 2007. ^[15] This increase in titanium prices cut into TIE’s net income because its large mill product business depends on raw titanium purchased from other titanium suppliers. TIE has a 1 billion USD backlog of orders due to long manufacturing times, and the price of raw titanium when it begins the manufacturing process can change from the price of raw titanium it anticipates when it signs a contract with its customers. In the past year, TIE did not expect titanium prices to increase four-fold and thus could not pass on its increased costs to its customers. Also, when prices are high for a prolonged period, some manufacturers substitute titanium with cheaper metals, which further reduces TIE’s net income. During the second half of last year, worldwide prices fell as production capacity increased, and this trend is expected to continue into 2008. ^[16]

• Health of commercial aerospace industry: TIE depends more on the aerospace industry than does the average titanium producer. In 2007, sales to companies in the commercial aerospace sector accounted for 60% of TIE’s mill products and 44% of the titanium industry’s mill products. ^[17] Revenue generated from sales to aerospace companies was 55% of total revenue in 2007. Since 2001, the aerospace industry has faltered due to a combination of high oil prices, decrease in U.S. air travel after the weakening of the U.S. economy, and significant debt in individual companies. ^[18] TIE’s cyclical revenues correspond to the cyclical strength and weakness of the commercial aerospace industry.

• Long-term agreements: TIE has entered into LTAs through 2017 with several major customers, including Boeing and Rolls Royce, which shields it from both the positive and the negative effects of shocks to the price of raw titanium. ^[19] Also, Boeing expects over 1000 orders for its new 787 Dreamliner model by the end of 2008, so TIE stands to profit from Boeing’s increased demand for titanium and titanium-alloy components of its aircraft.

• Trade tariffs: From 1993 to 2004, the U.S. granted preferential trade status to certain titanium products from Russia and lifted tariffs on these products. Since 2004, titanium imports into the U.S. have been taxed at a rate of 15%, but the Japanese and U.S. governments have both proposed the elimination of tariffs on titanium products during the Doha Round of trade negotiations through the World Trade Organization. Negotiations are expected to continue through 2008. ^[20] TIE has lobbied against the repeal of the titanium tariffs since it wants to avoid increased competition with VSMPO-Avisma, a Russian state-owned company that controlled between 25-30% of global market share from 2003-2007 and is the largest titanium producer in the world.

Competition

TIE competes with domestic and international titanium producers on the basis of price and variety of products offered to its customers, and also with producers of metals such as steel and aluminum alloys that could be used as substitutes for titanium. More processed goods command higher prices, and the quality of titanium demanded is fairly inflexible in the aerospace market, the largest market for titanium. TIE’s main competitors for business from commercial aerospace companies are RTI International Metals (RTI), Allegheny Technologies (ATI), and Russia-based VSMPO-Avisma, the largest titanium supplier worldwide. All four companies have secured contracts with Boeing and will be supplying titanium for the production of the 787 Dreamliner. TIE's competitors also produce steel, aluminum, and other alloys in addition to titanium products.

The amount of competition that TIE faces from foreign companies, in particular from VSMPO-Avisma, will depend on the outcome of a tariff negotiation. The U.S. and Japanese governments both favor the elimination of titanium tariffs, which TIE opposes. If these tariffs were repealed, TIE would be exposed to increased competition of scale from VSMPO-Avisma even within the U.S., where it has its largest manufacturing facilities.

All data below is from 2006.

References

1. ↑ 2007 TIE 10-k, Item 2, pg. 12
2. ↑ 2007 TIE 10-k, Item 1, pg. 1
3. ↑ 2007 TIE 10-k, Item 1, pg. 6
4. ↑ 2007 TIE 10-k, Item 1, pg. 8
5. ↑ "Earnings: Boeing sees more 787 sales on horizon," Seattle Post-Intelligencer, 23 April 2008
6. ↑ 2007 TIE 10-k, Item 1A, pg. 11
7. ↑ 2007 TIE 10-k, Item 1, pg. 7
8. ↑ 2007 TIE 10-k, Item 7, pg. 16
9. ↑ 2007 TIE 10-k, Item 7, pg. 15
10. ↑ 2007 TIE 10-k, F-4
11. ↑ 2007 TIE 10-k, Item 7, pg. 16
12. ↑ 2007 TIE 10-k, F-5
13. ↑ 2007 TIE 10-k, Item 7, pg. 16
14. ↑ 2007 TIE 10-k, Item 1, pg. 7
15. ↑ Roskill Metals and Minerals Report, 3 September 2007
16. ↑ 2007 TIE 10-k, Item 1A, pg. 11
17. ↑ 2007 TIE 10-k, Item 1, pg. 10
18. ↑ "IATA Cuts 2008 Airline Industry Profit Forecast Again," RTT News, 1 April 2008
19. ↑ 2007 TIE 10-k, Item 1, pg. 7
20. ↑ 2007 TIE 10-k, Item 1, pg. 8
21. ↑ VSMPO 2007 4Q Report, Section 4.5, pg. 88