Tuesday, August 4, 2009

Titanium Metals Reports A Not-So-Stellar Quarter

Titanium Metals released its second-quarter results this morning, and reported an EPS drop of 80.8% from the same quarter a year ago. The main reason was a drop in demand for its titanium products, which lowerd both the prices fetched and the volume sold. Demand diversion from scrap recycling was partly to blame. The company also attributed the drop to the delay in the introduction of the Boeing 787 and similar delays by Airbus.

The company won't be facing any liquidity or solvency crises soon. As of June 30th, according to its latest 10Q, its current ratio is 6.57 to one, and its quick ratio is an unusually high 2.14. Its quick assets, or its current assets minus inventory, are higher than all of its liabilities: the former is $264.6 million, and the latter is $245.9 million. Titanium Metals has no long-term debt, so its capital structure is all stockholders' equity. There's a miniscule amount of preferred outstanding; far less than 1% of shareholder's equity. Book value available to common equity is $6.27 per share; the stock is at $8.87.

On the other hand, it doesn't have much of a history of dividend payment; its dividend has been suspended as of the first quarter of '09. Its free cash flow for the first half of '09 was more than twice the amount needed to support its '08-level dividend of 8 cents per share, but that potential coverage ratio came from a slashing of capex spending by more than 75%. Had capex been the same level as it was in the first half of '08, free cash flow would have been less than half of the amount required for dividend payment. Interestingly, free cash flow in the first half of '08 was less than the amount needed to pay the dividend back then. Free cash flow was only 1.4 times dividend requirement in 2008.

Perhaps the lack of a free cash flow cushion, plus the recession, is what made Titanium Metals pass its dividend in the first quarter. Resuming the dividend at 8 cents, which seems unlikely for this quarter, would amount to saying that capital expenditures aren't going back to the old levels until earnings do.

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