The statements contained in this Quarterly Report on Form 10-Q ("Quarterly Report") that are not historical facts, including, but not limited to, statements found in the Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), are forward-looking statements that represent management's beliefs and assumptions based on currently available information. Forward-looking statements can generally be identified by the use of words such as "believes," "intends," "may," "will," "looks," "should," "could," "anticipates," "expects" or comparable terminology or by discussions of strategies or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we do not know if these expectations will prove to be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly affect expected results. Actual future results could differ materially from those described in such forward-looking statements, and we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Among the factors that could cause actual results to differ materially are the risks and uncertainties discussed in this Quarterly Report, including risks and uncertainties in those portions referenced above and those described from time to time in our other filings with the SEC which include, but are not limited to:

· the cyclicality of the commercial aerospace industry;

· the performance of aerospace manufacturers and us under our long-term agreements;

· the existence or renewal of certain long-term agreements;

· the difficulty in forecasting demand for titanium products;

· global economic, financial and political conditions;

· global production capacity for titanium;

· changes in product pricing and costs;

· the impact of long-term contracts with vendors on our ability to reduce or increase supply;

· the possibility of labor disruptions;

· fluctuations in currency exchange rates;

· fluctuations in the market price of marketable securities;

· uncertainties associated with new product or new market development;

· the availability of raw materials and services;

· changes in raw material prices and other operating costs (including energy costs);

· possible disruption of business or increases in the cost of doing business resulting from terrorist activities or global conflicts;

· competitive products and strategies; and

· other risks and uncertainties.

Should one or more of these risks materialize (or the consequences of such a development worsen), or should the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or expected.

The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and related notes included elsewhere in this Quarterly Report and with our Consolidated Financial Statements and the information under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," which are included in our 2008 Annual Report.

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General overview. We are a vertically integrated producer of titanium sponge, melted products and a variety of mill products for commercial aerospace, military, industrial and other applications. We are one of the world's leading producers of titanium melted products (ingot, electrodes and slab) and mill products (billet, bar, plate, sheet and strip). We are the only producer with major titanium production facilities in both the United States and Europe, the world's principal markets for titanium.

RESULTS OF OPERATIONS

Quarter ended September 30, 2009 compared to quarter ended September 30, 2008

Summarized financial information. The following table summarizes certain information regarding our results of operations for the three months ended September 30, 2008 and 2009. Our reported average selling prices are a reflection of actual selling prices after the effects of currency exchange rates, customer and product mix and other related factors throughout the periods presented.

                                                         Three months ended September 30,
                                                             % of total                     % of total
                                              2008           net sales         2009         net sales
                                                   (In millions, except product shipment data)
Net sales:
Melted products                            $     33.3                 11 %   $    16.1                9 %
Mill products                                   228.4                 77 %       149.2               82 %
Other titanium products                          33.7                 12 %        16.1                9 %

Total net sales                                 295.4                100 %       181.4              100 %

Cost of sales                                   222.5                 75 %       163.7               90 %

Gross margin                                     72.9                 25 %        17.7               10 %

Selling, general, administrative and
development expense                              18.0                  6 %        14.2                8 %
Other (expense) income, net                      (2.0 )                1 %           -                -

Operating income                           $     52.9                 18 %   $     3.5                2 %

Melted product shipments:
Volume (metric tons)                            1,115                              675
Average selling price (per kilogram)       $    29.85                        $   23.90

Mill product shipments:
Volume (metric tons)                            3,845                            2,665
Average selling price (per kilogram)       $    59.40                        $   56.00

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Gross margin. For the third quarter of 2009, our gross margin was $17.7 million as compared to $72.9 million for the third quarter of 2008, primarily reflecting the effects of lower volumes and average selling prices for our melted and mill products. Due to low utilization of our production capacity, the favorable impacts on our gross margin from declining raw material costs, primarily titanium scrap, were largely offset by higher per-unit overhead costs. In addition, abnormally low production throughout our major manufacturing operations resulted in unabsorbed overhead of $9.4 million for the third quarter of 2009.

Operating income. Our operating income for the third quarter of 2009 was $3.5 million compared to $52.9 million for the same period of 2008, primarily reflecting the decline in gross margin.

Income taxes. Our effective income tax rate increased to 69% for the third quarter of 2009 compared to 28% for the third quarter of 2008 primarily due to the net effects of lower earnings, changes in foreign tax law that caused us to revise our judgments regarding our ability to utilize certain foreign tax attributes and incremental taxes on foreign earnings. We operate in multiple tax jurisdictions, and as a result, the geographic mix of our pre-tax income or loss can impact our overall effective tax rate. Our effective income tax rate in the 2008 period was lower than the U.S. statutory rate due to the implementation of an internal corporate reorganization prior to 2008. See Note 9 to the condensed consolidated financial statements for a tabular reconciliation of our statutory income tax expense to our actual tax expense.

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Nine months ended September 30, 2009 compared to nine months ended September 30, 2008

Summarized financial information. The following table summarizes certain information regarding our results of operations for the nine months ended September 30, 2008 and 2009. Our reported average selling prices are a reflection of actual selling prices after the effects of currency exchange rates, customer and product mix and other related factors throughout the periods presented.

                                                         Nine months ended September 30,
                                                             % of total                     % of total
                                              2008           net sales         2009         net sales
                                                   (In millions, except product shipment data)
Net sales:
Melted products                            $     94.6                 11 %   $    51.0                9 %
Mill products                                   693.5                 78 %       486.1               82 %
Other titanium products                          98.2                 11 %        53.4                9 %

Total net sales                                 886.3                100 %       590.5              100 %

Cost of sales                                   648.0                 73 %       501.8               85 %

Gross margin                                    238.3                 27 %        88.7               15 %

Selling, general, administrative and
development expense                              51.5                  6 %        44.8                7 %
Other (expense) income, net                      (2.3 )                -           1.7                -

Operating income                           $    184.5                 21 %   $    45.6                8 %

Melted product shipments:
Volume (metric tons)                            3,060                            1,915
Average selling price (per kilogram)       $    30.90                        $   26.65

Mill product shipments:
Volume (metric tons)                           11,195                            8,775
Average selling price (per kilogram)       $    61.95                        $   55.40

Net sales. Our net sales were $590.5 million for the first nine months of 2009 compared to net sales of $886.3 million for the first nine months of 2008. The 33% decrease in net sales was principally the result of reduced volumes and, to a lesser extent, lower average selling prices in the first nine months of 2009 compared to the same period in 2008. Product shipment volumes decreased 37% for melted products and 22% for mill products from the first nine months of 2008 to the same period of 2009, as overall titanium demand remains low due to the weak global economy and production delays within the commercial aerospace sector. Additionally, as a result of these production delays, we believe many of our customers have implemented strategies to reduce excess inventories and to maximize operating cash flows. Average selling prices decreased 14% for melted products and 11% for mill products over these same periods due to competitive pricing pressures resulting from lower demand for titanium products and a decline in raw material costs, primarily titanium scrap. The decline in raw material costs has contributed to lower selling prices for certain products under long-term customer agreements, in part due to raw material indexed pricing adjustments included in certain of these agreements.

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Operating income. Our operating income for the first nine months of 2009 was $45.6 million compared to $184.5 million for the same period of 2008, primarily reflecting the decline in gross margin.

Income taxes. Our effective income tax rate was 33% for the first nine months of 2009 compared to 29% for the first nine months of 2008. We operate in multiple tax jurisdictions, and as a result, the geographic mix of our pre-tax income or loss can impact our overall effective tax rate. Our effective income tax rates in both periods were lower than the U.S. statutory rate due to the implementation of an internal corporate reorganization prior to 2008. See Note 9 to the Condensed Consolidated Financial Statements for a tabular reconciliation of our statutory income tax expense to our actual tax expense.

European operations

We have substantial operations located in the United Kingdom, France and Italy. Approximately 35% of our sales originated in Europe for the nine months ended September 30, 2009, a portion of which were denominated in foreign currency, principally the British pound sterling or the euro. Certain raw material costs, principally purchases of titanium sponge and alloys for our European operations, are denominated in U.S. dollars, while labor and other production costs are primarily denominated in local currencies. The functional currencies of our European subsidiaries are those of their respective countries, and our European subsidiaries are subject to exchange rate fluctuations that may impact reported earnings and may affect the comparability of period-to-period operating results. Our European operations may incur borrowings denominated in U.S. dollars or in their respective functional currencies. Our export sales from the U.S. are denominated in U.S. dollars and are not subject to currency exchange rate fluctuations. We do not use currency contracts to hedge our currency exposures.

The translated U.S. dollar value of our foreign sales and operating results are subject to currency exchange rate fluctuations which may favorably or adversely impact reported earnings and may affect the comparability of period-to-period operating results. By applying the exchange rates prevailing during the prior year period to our local currency results of operations for the current year period, the translation impact of currency rate fluctuations can be calculated.

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As the U.S. dollar strengthened versus the euro and the British pound in the 2009 period compared to the 2008 period, fluctuations in foreign currency exchange rates had the following effects on our sales and operating income in the first three and nine months of 2009 as compared to the corresponding periods of 2008:

                            Three months         Nine months
                           ended Sept 30,       ended Sept 30,
                           2009 vs. 2008        2009 vs. 2008
                                      (In millions)

Increase (decrease) in:
Net sales                 $           (7.6 )   $          (44.9 )
Operating income                       1.9                  0.7

Outlook

Shipments of our titanium mill products for the first nine months of 2009 were 22% lower than shipments in the same period of 2008, which reflects the continuing softness in demand, particularly within the commercial aerospace sector. In addition to the ongoing weak global economy, circumstances within the commercial aerospace market continue to contribute to weak demand and lower prices for titanium products. Reduced passenger traffic and reduced financing available to commercial airlines and aircraft leasing companies have contributed to reduced production schedules for commercial aircraft. Further, excess supply chain inventories, particularly as a result of adjustments to production schedules for Boeing and Airbus, including delays in the completion of development and testing of the Boeing 787, continue to suppress customer demand for titanium products. Customer demand for our products is expected to remain soft until these factors begin to be resolved and inventory levels begin to stabilize.

Although we have long-term agreements with a majority of our major customers, many of which specify annual pricing mechanisms and minimum purchase commitments, we anticipate that overall sales volumes and average selling prices for the remainder of 2009 will remain consistent with levels achieved during the first nine months of 2009. Boeing recently announced an expected first test flight for the Boeing 787 in the fourth quarter of 2009 and first deliveries in the fourth quarter of 2010. If Boeing achieves this timeline, we anticipate production rates throughout the commercial aerospace supply chain will accelerate over the next two to three years, which should increase customer demand for our products and positively affect our sales. We continue to adjust our production rates, global workforce and cost structures in response to changes in demand for our products. Although per-unit costs for both melted and mill products have been favorably impacted by declining raw material costs, primarily titanium scrap, such cost reductions are currently being offset by higher per-unit production and overhead costs resulting from allocation of such costs over lower production volumes.

Through careful management of production rates and costs, as well as conservative capital investment, we continue to maintain positive cash flows and a strong balance sheet, including $143.6 million of cash, borrowing availability under our bank credit agreements of approximately $217.1 million and no bank debt as of September 30, 2009. While we will continue to adjust our cost structure and production rates as necessary to promote operating cash flow and preserve our financial strength, earnings for the remainder of the year are expected to be at or near earnings achieved in the third quarter of 2009 based on current volume expectations.

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We continue to pursue our strategic plans to improve our production capabilities, with a focus on opportunities to improve our operating flexibility, efficiency and cost structure, to meet our customers' long-term needs. In particular, we continue to enhance our ability to meet our current and prospective customers' needs and strengthen our position as a reliable supplier in markets where technical ability and precision are critical. We have been successful over the last several years in establishing significant flexibility and cost advantages in our entire manufacturing process. We believe our efficient manufacturing processes and strong balance sheet have kept us well-positioned in the current economic environment, and we believe our financial strength will allow us to continue to invest in our business, fully serve our current and prospective customers and pursue strategic opportunities when appropriate.

LIQUIDITY AND CAPITAL RESOURCES

Our consolidated cash flows for the nine months ended September 30, 2008 and
2009 are presented below. The following should be read in conjunction with our
Condensed Consolidated Financial Statements and notes thereto.

                                                                 Nine months ended September 30,
                                                                  2008                  2009
                                                                          (In millions)
Cash provided by (used in):
Operating activities                                           $     128.0         $         129.5
Investing activities                                                (110.9 )                 (21.9 )
Financing activities                                                 (69.5 )                 (11.5 )

   Net cash (used in) provided by operating, investing and
financing activities                                           $     (52.4 )       $          96.1

Operating activities. Cash flow from operations is considered a primary source of our liquidity. Changes in pricing, production volume and customer demand, among other things, could significantly affect our liquidity. Cash provided by operating activities was $128.0 million for the first nine months of 2008 and $129.5 million for the first nine months of 2009. The net effects of the following significant items contributed to the cash provided by operating activities:

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· higher net cash provided by operations resulting from changes in receivables, inventories, payables and accrued liabilities of $84.6 million in 2009 in response to changing working capital requirements primarily resulting from declining inventory levels and other affects from overall reduced demand for our products; and

· lower net cash paid for income taxes in 2009 of $39.9 million primarily due to the lower earnings in 2009.

Investing activities. Cash flows used in our investing activities decreased from $110.9 million in the first nine months of 2008 to $21.9 million in the first nine months of 2009. Our capital expenditures were $89.3 million during the first nine months of 2008 compared to $24.9 million in 2009. Capital projects and other significant investing activities include the following:

· During 2008, we had construction underway for the first and second phases of our EB melt capacity expansion at our facility in Morgantown and other capacity expansion projects in the U.S. and Europe.

· Most of our capacity expansion projects are now substantially complete, and 2009 capital spending is limited to those required to properly maintain our equipment and facilities or complete active projects, such as the ongoing construction of a melt furnace at our Morgantown facility.

· We purchased $26.4 million in marketable equity securities during the first nine months of 2008 and $0.7 million during the first nine months of 2009.

Financing activities. We had the following significant items included in our cash flows from financing activities:

· We received cash from net borrowings of $13.1 million in the first nine months of 2008.

· We paid dividends on our common stock of $40.9 million in the first nine months of 2008.

· We purchased $36.5 million of treasury stock during the first nine months of 2008 and $5.9 million during the first nine months of 2009.

In February 2009, our board of directors suspended our quarterly common stock dividend after considering the current economic and financial environment.

Future cash requirements

Liquidity. Our primary source of liquidity on an ongoing basis is our cash flows from operating activities and borrowings under various credit facilities. We generally use these amounts to (i) fund capital expenditures, (ii) repay indebtedness incurred primarily for working capital purposes and (iii) provide for the payment of dividends. From time-to-time we will incur indebtedness, generally to (i) fund short-term working capital needs, (ii) refinance existing indebtedness, (iii) make investments in marketable and other securities (including the acquisition of securities issued by our subsidiaries and affiliates) or (iv) fund major capital expenditures or the acquisition of other assets outside the ordinary course of business.

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