TIMET Misses, Inks Merger Deal

Titanium Metals Corporation (TIE), also known as TIMET, reported earnings of 11 cents per share in third-quarter 2012, roughly 21% lower than 14 cents per share recorded in the year ago quarter. Adjusted earnings (excluding one-time charges) of 12 cents per share missed the Zacks Consensus Estimate of 16 cents. The bottom line was hurt by lower shipment volumes.

Separately, the company announced that it has agreed to be acquired by metal fabrication company Precision Castparts Corp. (PCP - Analyst Report) under a deal worth roughly $2.9 billion.

Revenues

Revenues decreased 1.8% to $257.7 million in the third quarter from $262.5 million in the prior-year quarter, missing the Zacks Consensus Estimate of $284 million. Sales were hurt by reduced volumes for industrial-grade products, which more than offset higher average selling prices.

Costs and Margins

Cost of sales remained flat year over year at $207.4 million. As a percentage of sales, costs decreased to 19.5% in the reported quarter from 21% in the year-ago quarter. In the reported quarter, gross profit was $50.3 million compared with $55.1 million in the year-ago quarter, reflecting lower sales volume.

Selling, general and administrative expense increased 3.5% year over year to $17.7 million. Operating income in the reported quarter was $32.7 million compared with $38.5 million in the year-ago quarter.

Shipments and Pricing

Melted product shipments of 1,300 metric tons reflect a 16.9% decline from the last year level of 1,565 metric tons. Average selling price increased from $22 per kilogram to $22.75 per kilogram. Milled products shipments inched up 0.3% to 3,965 metric tons and product prices moved up 2.3% to $53.35 per kilogram.

Merger Deal

TIMET entered into a deal with Precision Castparts, under which the latter has agreed to acquire all of the company`s outstanding shares for $16.50 per share in cash. The offer represents a 44% premium to TIMET’s closing price on November 8.

The total value of the transaction is roughly $2.9 billion. Precision Castparts believes that the acquisition will help it to streamline its supply chain and cut input costs. The board of directors of TIMET approved the merger agreement based on the recommendation of a special committee.

Outlook

Moving ahead, Titanium Metals envisions continued growth in the commercial aerospace sector over the long term. The company believes that its customer supply agreements, which secure major positions on the engines and structures for key growth platforms, will be instrumental in growing its aerospace business in the future.

In order to meet the demand, the company has also initiated several capital projects to increase melt capacity and improve efficiency at certain facilities in the U.S. and abroad with completion expected to coincide with the significant ramp up of production.

Titanium remains confident of ensuring maximum returns through its cost efficient programs and manufacturing and raw material flexibility.

We currently have a long-term Neutral recommendation on Titanium Metals. The company, which competes with Allegheny Technologies Inc. (ATI - Analyst Report) and RTI International Metals, Inc. (RTI - Snapshot Report), maintains a Zacks #4 Rank, which translates into a short-term (1 to 3 months) Sell rating.