SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the quarterly period ended June 30, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
Commission file number 0-28538
Titanium Metals Corporation
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(Exact name of registrant as specified in its charter)
Delaware 13-5630895
- --------------------------------- ----------------------
(State or other jurisdiction of IRS Employer
incorporation or organization) Identification No.)
1999 Broadway, Suite 4300, Denver, Colorado 80202
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 296-5600
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
Number of shares of common stock outstanding on August 7, 2003: 3,183,182
Forward-Looking Information
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 Consolidated Financial Statements and in
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 the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurance that 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 the
Company disclaims 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 the Company's other filings with the Securities
and Exchange Commission ("SEC") which include, but are not limited to, the
cyclicality of the commercial aerospace industry, the performance of aerospace
manufacturers and the Company under their long-term agreements, the renewal of
certain long-term agreements, the difficulty in forecasting demand for titanium
products, global economic and political conditions, global productive capacity
for titanium, changes in product pricing and costs, the impact of long-term
contracts with vendors or the Company's ability to reduce or increase supply or
achieve lower costs, the possibility of labor disruptions, fluctuations in
currency exchange rates, control by certain stockholders and possible conflicts
of interest, uncertainties associated with new product development, the supply
of raw materials and services, changes in raw material 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,
the Company's ability to achieve reductions in its cost structure 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.
TITANIUM METALS CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - June 30, 2003 (unaudited) and
December 31, 2002 2
Consolidated Statements of Operations - Three and
six months ended June 30, 2003 and 2002 (unaudited) 4
Consolidated Statements of Comprehensive Loss - Three
and six months ended June 30, 2003 and 2002 (unaudited) 6
Consolidated Statements of Cash Flows - Six months ended
June 30, 2003 and 2002 (unaudited) 7
Consolidated Statement of Changes in Stockholders' Equity -
Six months ended June 30, 2003 (unaudited) 9
Notes to Consolidated Financial Statements (unaudited) 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 31
Item 4. Controls and Procedures 31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 6. Exhibits and Reports on Form 8-K 32
- 1 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
ASSETS 2003 2002
------------------ ------------------
(unaudited)
Current assets:
Cash and cash equivalents $ 26,434 $ 6,214
Accounts and other receivables, less allowance
of $2,792 and $2,859, respectively 81,604 66,393
Receivable from related parties 1,913 2,398
Refundable income taxes 2,335 1,703
Inventories 160,316 181,932
Prepaid expenses and other 2,619 3,077
Deferred income taxes 1,147 809
------------------ ------------------
Total current assets 276,368 262,526
Investment in joint ventures 21,801 22,287
Property and equipment, net 242,184 254,672
Intangible assets, net 7,551 8,442
Other 16,487 15,851
------------------ ------------------
Total assets $ 564,391 $ 563,778
================== ==================
See accompanying Notes to Consolidated Financial Statements
- 2 -
TITANIUM METALS CORPORATION
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands, except per share data)
June 30, December 31,
LIABILITIES, MINORITY INTEREST AND 2003 2002
STOCKHOLDERS' EQUITY ------------------ ------------------
(unaudited)
Current liabilities:
Notes payable $ 5,384 $ 12,994
Current maturities of long-term debt and capital
lease obligations 587 642
Accounts payable 27,140 26,460
Accrued liabilities 45,322 46,511
Customer advances 28,184 5,416
Payable to related parties 330 602
------------------ ------------------
Total current liabilities 106,947 92,625
Long-term debt - 6,401
Capital lease obligations 9,289 9,575
Payable to related parties 644 644
Accrued OPEB cost 12,989 13,417
Accrued pension cost 62,101 61,080
Accrued environmental cost 3,531 3,531
Deferred income taxes 1,086 1,036
Accrued dividends on BUCS 11,333 4,462
Other 1,244 -
------------------ ------------------
Total liabilities 209,164 192,771
------------------ ------------------
Minority interest - Company-obligated mandatorily
redeemable convertible preferred securities of subsidiary
trust holding solely subordinated debt securities ("BUCS") 201,241 201,241
Other minority interest 9,863 10,416
Stockholders' equity:
Preferred stock $.01 par value; 100 shares authorized,
none issued - -
Common stock, $.01 par value; 9,900 shares authorized,
3,192 and 3,194 shares issued 32 32
Additional paid-in capital 350,733 350,889
Accumulated deficit (147,313) (127,371)
Accumulated other comprehensive loss (57,997) (62,737)
Treasury stock, at cost (9 shares) (1,208) (1,208)
Deferred compensation (124) (255)
------------------ ------------------
Total stockholders' equity 144,123 159,350
------------------ ------------------
Total liabilities and stockholders' equity $ 564,391 $ 563,778
================== ==================
Commitments and contingencies (Note 14)
See accompanying Notes to Consolidated Financial Statements
- 3 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- ------------- -------------- -------------
Net sales $ 101,813 $ 94,295 $ 201,106 $ 198,735
Cost of sales 97,455 92,871 195,730 192,203
-------------- ------------- -------------- -------------
Gross margin 4,358 1,424 5,376 6,532
Selling, general, administrative and
development expense 9,583 11,414 19,478 21,793
Equity in earnings of joint ventures 228 823 413 1,328
Other income (expense), net 2,910 2,158 3,538 2,209
-------------- ------------- -------------- -------------
Operating loss (2,087) (7,009) (10,151) (11,724)
Interest expense 488 735 1,176 1,473
Other non-operating
income (expense), net (269) (228) (789) (28,357)
-------------- ------------- -------------- -------------
Loss before income taxes, minority
interest and cumulative effect of
change in accounting principles (2,844) (7,972) (12,116) (41,554)
Income tax expense (benefit) 24 615 481 (839)
Minority interest - BUCS 3,463 3,333 6,871 6,666
Other minority interest, net of tax 20 425 283 1,046
-------------- ------------- -------------- -------------
Loss before cumulative effect of
change in accounting principles (6,351) (12,345) (19,751) (48,427)
Cumulative effect of change in
accounting principles - - (191) (44,310)
-------------- ------------- -------------- -------------
Net loss $ (6,351) $ (12,345) $ (19,942) $ (92,737)
============== ============= ============== =============
See accompanying Notes to Consolidated Financial Statements
- 4 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (CONTINUED)
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- ------------- -------------- -------------
Basic and diluted loss per share:
Before cumulative effect of change in
accounting principles $ (2.00) $ (3.91) $ (6.24) $ (15.33)
Cumulative effect of change in
accounting principles - - (0.06) (14.03)
-------------- ------------- -------------- -------------
Basic and diluted loss per share $ (2.00) $ (3.91) $ (6.30) $ (29.36)
============== ============= ============== =============
Weighted average shares outstanding 3,170 3,160 3,167 3,158
============== ============= ============== =============
Pro forma amounts assuming SFAS
No. 143 was applied during all
periods affected:
Net loss $ (6,351) $ (12,353) $ (19,751) $ (92,754)
============== ============= ============== =============
Basic and diluted loss per share $ (2.00) $ (3.91) $ (6.24) $ (29.37)
============== ============= ============== =============
See accompanying Notes to Consolidated Financial Statements
- 5 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (unaudited)
(In thousands)
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- ------------- -------------- -------------
Net loss $ (6,351) $ (12,345) $ (19,942) $ (92,737)
Other comprehensive income (loss) -
currency translation adjustment 4,830 8,842 4,740 7,566
-------------- ------------- -------------- -------------
Comprehensive loss $ (1,521) $ (3,503) $ (15,202) $ (85,171)
============== ============= ============== =============
See accompanying Notes to Consolidated Financial Statements
- 6 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(In thousands)
Six months ended June 30,
-------------------------------------
2003 2002
----------------- ----------------
Cash flows from operating activities:
Net loss $ (19,942) $ (92,737)
Depreciation and amortization 18,986 18,248
Cumulative effect of change in accounting principles 191 44,310
Noncash impairment of investment in Special Metals
Corporation preferred securities - 27,500
Equity in earnings of joint ventures, net of distributions (362) (1,058)
Deferred income taxes (248) (1,672)
Other minority interest 284 1,046
Other, net 575 827
Change in assets and liabilities:
Receivables (11,438) 10,529
Inventories 24,862 (8,662)
Prepaid expenses and other 497 6,165
Accounts payable and accrued liabilities (948) (17,740)
Customer advances 22,691 (6,884)
Income taxes (562) (1,421)
Accounts with related parties, net 207 2,648
Accrued OPEB and pension costs (896) (1,418)
Accrued dividends on BUCS 6,871 -
Other, net (543) 962
----------------- ----------------
Net cash provided (used) by operating activities 40,225 (19,357)
----------------- ----------------
Cash flows from investing activities:
Capital expenditures (3,579) (3,337)
Other 37 -
----------------- ----------------
Net cash used by investing activities (3,542) (3,337)
----------------- ----------------
Cash flows from financing activities:
Indebtedness:
Borrowings 237,703 206,196
Repayments (251,764) (198,640)
Dividends paid to minority interest (1,892) (1,115)
Other, net (632) (322)
----------------- ----------------
Net cash (used) provided by financing activities (16,585) 6,119
----------------- ----------------
Net cash provided (used) by operating,
investing and financing activities $ 20,098 $ (16,575)
================= ================
See accompanying Notes to Consolidated Financial Statements
- 7 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (CONTINUED)
(In thousands)
Six months ended June 30,
-------------------------------------
2003 2002
----------------- ----------------
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing activities $ 20,098 $ (16,575)
Currency translation 122 (553)
----------------- ----------------
20,220 (17,128)
Cash at beginning of period 6,214 24,500
----------------- ----------------
Cash at end of period $ 26,434 $ 7,372
================= ================
Supplemental disclosures:
Cash paid for:
Interest, net of amounts capitalized $ 799 $ 876
BUCS dividends $ - $ 6,666
Income taxes, net $ 1,291 $ 2,253
Noncash investing and financing activities:
Capital lease obligations incurred when the Company
entered into certain leases for new equipment $ - $ 731
See accompanying Notes to Consolidated Financial Statements
- 8 -
TITANIUM METALS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (unaudited)
Six months ended June 30, 2003
(In thousands)
Accumulated Other
Comprehensive Loss
Additional --------------------- Total
Common Common Paid-In Accumulated Currency Pension Treasury Deferred Stockholders'
Shares Stock Capital Deficit Translation Liabilities Stock Compensation Equity
------- -------- ---------- ----------- ---------- --------- -------- ---------- -----------
Balance at December 31, 2002 3,185 $ 32 $ 350,889 $ (127,371) $ (1,036) $(61,701) $(1,208) $ (255) $ 159,350
Components of comprehensive
income (loss):
Net loss - - - (19,942) - - - - (19,942)
Change in cumulative
currency translation
adjustment - - - - 4,740 - - - 4,740
Issuance of common stock 3 - 72 - - - - - 72
Stock award cancellations (5) - (228) - - - - 228 -
Amortization of deferred
compensation, net of effects
of stock award cancellations - - - - - - - (97) (97)
------- -------- ---------- ----------- ---------- --------- -------- ---------- -----------
Balance at June 30, 2003 3,183 $ 32 $ 350,733 $ (147,313) $ 3,704 $(61,701) $(1,208) $ (124) $ 144,123
======= ======== ========== =========== ========== ========= ======== ========== ===========
See accompanying Notes to Consolidated Financial Statements
- 9 -
TITANIUM METALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1 - Organization and basis of presentation
Titanium Metals Corporation ("TIMET") is a vertically integrated producer
of titanium sponge, melted products and a variety of mill products for
aerospace, industrial and other applications. At June 30, 2003, Valhi, Inc. and
subsidiaries ("Valhi") held approximately 40.8% of TIMET's outstanding common
stock and approximately 0.4% of the Company's outstanding BUCS. At June 30,
2003, the Combined Master Retirement Trust ("CMRT"), a trust formed by Valhi to
permit the collective investment by trusts that maintain the assets of certain
employee benefit plans adopted by Valhi and certain related companies, held
approximately 9% of TIMET's common stock. TIMET's U.S. pension plans began
investing in the CMRT in the second quarter of 2003; however, these plans invest
in only a portion of the CMRT that does not hold TIMET common stock. At June 30,
2003, Contran Corporation ("Contran") held directly an additional 42.2% of the
Company's outstanding BUCS and held, directly or through subsidiaries,
approximately 90% of Valhi's outstanding common stock. Substantially all of
Contran's outstanding voting stock is held by trusts established for the benefit
of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons
is sole trustee. In addition, Mr. Simmons is the sole trustee of the CMRT and a
member of the trust investment committee for the CMRT. Mr. Simmons may be deemed
to control each of Contran, Valhi and TIMET.
The accompanying Consolidated Financial Statements include the accounts of
TIMET and its majority-owned subsidiaries (collectively, the "Company"). All
material intercompany transactions and balances have been eliminated. The
Consolidated Balance Sheet at June 30, 2003 and the Consolidated Statements of
Operations, Comprehensive Loss, Changes in Stockholders' Equity and Cash Flows
for the periods ended June 30, 2003 and 2002 have been prepared by the Company
without audit. In the opinion of management, all adjustments necessary to
present fairly the consolidated financial position, results of operations and
cash flows have been made. The results of operations for interim periods are not
necessarily indicative of the operating results of a full year or of future
operations. Certain prior year amounts have been reclassified to conform to the
current year presentation. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The accompanying
Consolidated Financial Statements should be read in conjunction with the
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002 (the "2002 Annual Report").
On February 4, 2003, the Company's stockholders approved a proposal to
amend TIMET's Certificate of Incorporation to effect a reverse stock split of
the Company's common stock at a ratio of one share of post-split common stock
for each eight, nine or ten shares of pre-split common stock issued and
outstanding, with the final exchange ratio to be selected by the Board of
Directors. Subsequently, the Company's Board of Directors unanimously approved
the reverse stock split on the basis of one share of post-split common stock for
each outstanding ten shares of pre-split common stock. The reverse stock split
became effective after the close of trading on February 14, 2003. All share and
per share disclosures for all periods presented in the Consolidated Financial
Statements and Notes thereto have been adjusted to give effect to the reverse
stock split.
- 10 -
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 143, Accounting for Asset Retirement Obligations on January 1, 2003. Under
SFAS No. 143, the fair value of a liability for an asset retirement obligation
covered under the scope of SFAS No. 143 is recognized in the period in which the
liability is incurred, with an offsetting increase in the carrying amount of the
related long-lived asset. Over time, the liability is accreted to its future
value, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
Under the transition provisions of SFAS No. 143, the Company recognized (i)
an asset retirement cost capitalized as an increase to the carrying value of its
property, plant and equipment of approximately $0.2 million, (ii) accumulated
depreciation on such capitalized cost of approximately $0.1 million and (iii) an
other noncurrent liability for the asset retirement obligation of approximately
$0.3 million. Amounts resulting from the initial application of SFAS No. 143
were measured using information, assumptions and interest rates all as of
January 1, 2003. The amount recognized as the asset retirement cost was measured
as of the date the asset retirement obligation was incurred. Cumulative
accretion on the asset retirement obligation and accumulated depreciation on the
asset retirement cost were recognized for the time period from the date the
asset retirement cost and liability would have been recognized had the
provisions of SFAS No. 143 been in effect at the date the liability was
incurred, through January 1, 2003. The difference between the amounts to be
recognized as described above and any associated amounts recognized in the
Company's balance sheet as of December 31, 2002 was recognized as a cumulative
effect of a change in accounting principle as of January 1, 2003. The asset
retirement obligation recognized as a result of adopting SFAS No. 143 relates
primarily to landfill closure and leasehold restoration costs.
The following table shows pro forma amounts relating to the Company's asset
retirement obligations as if SFAS No. 143 were applied throughout 2002, as well
as a roll forward of the asset retirement obligation through June 30, 2003:
(In thousands)
Asset retirement obligation, 1/1/2002 $ 312
Accretion expense 15
--------------------
Asset retirement obligation, 12/31/2002 327
New obligation 69
Accretion expense 9
---------------------
Asset retirement obligation, 6/30/2003 $ 405
=====================
Accretion expense during the first six months of 2003 is reported as a
component of other operating expense.
The Company has elected the disclosure alternative prescribed by SFAS No.
123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure, and has
chosen to account for its stock-based employee compensation related to stock
options in accordance with Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and its various interpretations. Under
APB Opinion No. 25, compensation cost is generally recognized for fixed stock
options for which the exercise price is less than the market price of the
underlying stock on the grant date. The Company recognized no compensation cost
for fixed stock options during the three and six months ended June 30, 2003 and
2002.
- 11 -
The following table illustrates the effect on net loss and loss per share
if the Company had applied the fair value recognition provisions of SFAS No.
123:
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------- -------------- -------------- --------------
(In thousands, except per share data)
Net loss, as reported $ (6,351) $ (12,345) $ (19,942) $ (92,737)
Less total option related stock-based
employee compensation expense
determined under SFAS No. 123 (54) (146) (156) (374)
------------- -------------- -------------- --------------
Pro forma net loss $ (6,405) $ (12,491) $ (20,098) $ (93,111)
============= ============== ============== ==============
Basic and diluted loss per share:
As reported $ (2.00) $ (3.91) $ (6.30) $ (29.36)
============= ============== ============== ==============
Pro forma $ (2.02) $ (3.96) $ (6.35) $ (29.48)
============= ============== ============== ==============
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46, Consolidation of Variable Interest Entities. TIMET
Capital Trust I (the "Trust"), a wholly-owned subsidiary of TIMET that issued
the Company's BUCS, is the Company's only variable interest entity covered by
the scope of FASB Interpretation No. 46 that would require consolidation. TIMET
is the primary beneficiary of the Trust and has consolidated the Trust since its
formation, as the Company owns 100% of the Trust's outstanding voting
securities. See the Company's 2002 Annual Report for further discussion of the
Trust. The Company is still evaluating whether it has involvement with any other
variable interest entities and will apply the provisions of the Interpretation
to those entities, if applicable, in the quarter ending September 30, 2003. It
is possible that VALTIMET SAS ("VALTIMET"), a manufacturer of welded stainless
steel and titanium tubing in which the Company has a 43.7% equity investment,
may be determined to be a variable interest entity. TIMET's investment in
VALTIMET was $21.4 million at June 30, 2003.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity,
generally requiring classification of a financial instrument within SFAS No.
150's scope as a liability. The Company completed a review of the potential
applicability of SFAS No. 150 to the Company's BUCS, which have both liability
and equity characteristics and are classified on the mezzanine level of the
Consolidated Balance Sheet (between liabilities and equity), in accordance with
current SEC guidance. Based upon this review, the Company determined SFAS No.
150 does not apply to its BUCS.
- 12 -
Note 2 - Business segment information
The Company's production facilities are located in the United States,
United Kingdom, France and Italy, and its products are sold throughout the
world. The Company's worldwide integrated activities are conducted through its
"Titanium melted and mill products" segment, currently the Company's only
segment. Sales, gross margin, operating income (loss), inventory and receivables
are the key management measures used to evaluate segment performance. The
following table provides supplemental segment information to the Company's
Consolidated Financial Statements:
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------- -------------- -------------- --------------
($ in thousands, except selling price data)
Titanium melted and mill products:
Mill product net sales $ 69,760 $ 70,290 $ 143,391 $ 149,987
Melted product net sales 16,252 9,269 29,070 19,228
Other 15,801 14,736 28,645 29,520
------------- -------------- -------------- --------------
$ 101,813 $ 94,295 $ 201,106 $ 198,735
============= ============== ============== ==============
Mill product shipments:
Volume (metric tons) 2,180 2,130 4,495 4,815
Average price ($ per kilogram) $ 32.00 $ 33.00 $ 31.90 $ 31.15
Melted product shipments:
Volume (metric tons) 1,295 620 2,280 1,265
Average price ($ per kilogram) $ 12.55 $ 14.95 $ 12.75 $ 15.20
Note 3 - Inventories
June 30, December 31,
2003 2002
------------------ ------------------
(In thousands)
Raw materials $ 40,202 $ 52,825
Work-in-process 76,219 82,190
Finished products 60,238 63,458
Supplies 13,460 13,829
------------------ ------------------
190,119 212,302
Less adjustment of certain inventories to LIFO basis 29,803 30,370
------------------ ------------------
$ 160,316 $ 181,932
================== ==================
- 13 -
Note 4 - Preferred securities of Special Metal Corporation ("SMC")
As previously disclosed in the Company's 2002 Annual Report, in March 2002,
SMC and its U.S. subsidiaries filed a voluntary petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. As a result, the Company undertook
an assessment of its investment in SMC with the assistance of an external
valuation specialist and recorded a $27.5 million impairment charge to other
non-operating expense during the first quarter of 2002 for an other than
temporary decline in the estimated fair value of its investment in SMC. This
charge reduced the Company's carrying amount of its investment in the SMC
securities to zero. Based upon SMC's plan of reorganization filed with the
Bankruptcy Court, the Company currently believes that it will not recover any
amount from this investment.
Note 5 - Property and equipment
June 30, December 31,
2003 2002
--------------------- ------------------
(In thousands)
Land $ 6,288 $ 6,224
Buildings 39,738 38,874
Information technology systems 58,605 58,217
Manufacturing and other 316,243 312,163
Construction in progress 4,320 3,493
--------------------- ------------------
425,194 418,971
Less accumulated depreciation 183,010 164,299
--------------------- ------------------
$ 242,184 $ 254,672
===================== ==================
Note 6 - Goodwill
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. Under SFAS No. 142, goodwill is no longer amortized on a
periodic basis, but instead is subject to a two-step impairment test to be
performed on at least an annual basis. As a result of the adoption of SFAS No.
142, the Company recorded a non-cash goodwill impairment charge of $44.3
million, representing the entire balance of the Company's recorded goodwill at
January 1, 2002. Pursuant to the transition requirements of SFAS No. 142, this
charge was reported in the Company's Consolidated Statement of Operations as a
cumulative effect of a change in accounting principle as of January 1, 2002.
Note 7 - Other noncurrent assets
June 30, December 31,
2003 2002
------------------ ------------------
(In thousands)
Deferred financing costs $ 7,903 $ 8,244
Prepaid pension cost 8,272 7,295
Notes receivable from officers 163 163
Other 149 149
------------------ ------------------
$ 16,487 $ 15,851
================== ==================
- 14 -
Note 8 - Accrued liabilities
June 30, December 31,
2003 2002
--------------------- ------------------
(In thousands)
OPEB cost $ 3,701 $ 3,818
Pension cost 8,339 7,969
Payroll and vacation 6,645 6,007
Incentive compensation 410 1,326
Other employee benefits 8,715 11,141
Deferred income 1,556 1,679
Environmental costs 301 803
Accrued tungsten costs 2,168 2,190
Taxes, other than income 4,490 3,519
Other 8,997 8,059
--------------------- ------------------
$ 45,322 $ 46,511
===================== ==================
Note 9 - Boeing advance
Under the terms of the amended long-term agreement ("LTA") between TIMET
and The Boeing Company ("Boeing"), in years 2002 through 2007, Boeing is
required to advance TIMET $28.5 million annually less $3.80 per pound of
titanium product purchased by Boeing subcontractors from TIMET during the
preceding year. Effectively, the Company collects $3.80 less from Boeing than
the LTA selling price for each pound of titanium product sold directly to Boeing
and reduces the related customer advance recorded by the Company. For titanium
products sold to Boeing subcontractors, the Company collects the full LTA
selling price, but gives Boeing credit by reducing the next year's annual
advance by $3.80 per pound of titanium product sold to Boeing subcontractors.
The Boeing customer advance is also reduced as take-or-pay benefits are earned.
As of June 30, 2003, approximately $23.1 million of customer advances related to
the Company's LTA with Boeing.
Note 10 - Notes payable, long-term debt and capital lease obligations
June 30, December 31,
2003 2002
------------------- ------------------
(In thousands)
Notes payable:
U.S. credit agreement $ - $ 11,944
European credit agreements 5,384 1,050
------------------- ------------------
$ 5,384 $ 12,994
=================== ==================
Long-term debt:
U.K. bank credit agreement $ - $ 6,401
=================== ==================
Capital lease obligations $ 9,876 $ 10,217
Less current maturities 587 642
------------------- ------------------
$ 9,289 $ 9,575
=================== ==================
- 15 -
During the second quarter of 2003, TIMET UK received an interest-bearing
intercompany loan from a U.S. subsidiary of the Company enabling TIMET UK to
reduce its long-term borrowings under its U.K. bank credit agreement to zero. As
of June 30, 2003, the Company had aggregate unused borrowing availability under
its U.S. and European credit facilities of approximately $135 million.
Note 11 - Minority interests
In October 2002, the Company exercised its right to defer future dividend
payments on its BUCS for a period of up to 20 consecutive quarters, effective
beginning with the Company's December 1, 2002 scheduled dividend payment.
Dividends continue to accrue at the coupon rate on the principal and unpaid
dividends. Based on this deferral, accrued dividends on these BUCS are reflected
as long-term liabilities in the Consolidated Balance Sheets. Dividends are
reported in the Consolidated Statements of Operations as minority interest.
TIMET Savoie, S.A. ("TIMET Savoie"), the Company's 70% owned French
subsidiary, paid dividends during the second quarter of 2003 and 2002, of which
$1.9 million and $1.1 million, respectively, was paid to Compagnie Europeene du
Zirconium ("CEZUS"), the 30% minority owner in TIMET Savoie.
Note 12 - Other income (expense)
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- -------------
(In thousands)
Other operating income (expense):
Boeing take-or-pay $ 2,820 $ 2,156 $ 2,820 $ 2,156
Litigation settlement - - 475 -
Other income (expense), net 90 2 243 53
-------------- -------------- -------------- -------------
$ 2,910 $ 2,158 $ 3,538 $ 2,209
============== ============== ============== =============
Other non-operating income (expense):
Interest income $ 69 $ 24 $ 181 $ 93
Impairment of investment in SMC
preferred securities - - - (27,500)
Foreign exchange loss (257) (226) (887) (342)
Other income (expense), net (81) (26) (83) (608)
-------------- -------------- -------------- -------------
$ (269) $ (228) $ (789) $ (28,357)
============== ============== ============== =============
During the first quarter of 2003, the Company received $0.5 million related
to its settlement of certain litigation relating to power outages suffered at
its Henderson, Nevada facility in 1997 and 1998 as a result of contractor
activity.
- 16 -
Note 13 - Income taxes
Six months ended June 30,
----------------------------------------
2003 2002
------------------ ------------------
(In thousands)
Expected income tax expense, at 35% $ (4,241) $ (14,544)
Non-U.S. tax rates 309 658
U.S. state income taxes, net 5 162
Dividends received deduction (312) -
Extraterritorial income exclusion (187) -
Change in valuation allowance:
Effect of change in tax law - (1,797)
Adjustment of deferred tax valuation allowance 4,926 14,767
Other, net (19) (85)
------------------ ------------------
$ 481 $ (839)
================== ==================
During the first quarter of 2002, the Job Creation and Worker Assistance
Act of 2002 (the "JCWA Act") was signed into law. The Company benefits from
certain provisions of the JCWA Act, which liberalized certain net operating loss
("NOL") and alternative minimum tax ("AMT") restrictions. As a result, the
Company recognized $1.8 million of refundable U.S. income taxes during the first
quarter of 2002. The Company received $0.8 million of this refund in the fourth
quarter of 2002 and anticipates receiving the remaining $1.0 million during the
fourth quarter of 2003.
At June 30, 2003, the Company had, for U.S. federal income tax purposes,
NOL carryforwards of approximately $141 million that expire between 2020 and
2023. At June 30, 2003, the Company had AMT credit carryforwards of
approximately $4 million, which can be utilized to offset regular income taxes
payable in future years. The AMT credit carryforward has an indefinite
carryforward period. At June 30, 2003, the Company had the equivalent of a $22
million NOL carryforward in the United Kingdom and a $2 million NOL carryforward
in Germany, both of which have indefinite carryforward periods.
Note 14 - Commitments and contingencies
Environmental matters. As previously disclosed in the Company's 2002 Annual
Report, in 1999 TIMET and Basic Management, Inc. ("BMI") agreed that upon
payment by BMI of the cost to design, purchase and install the technology and
equipment necessary to allow the Company to stop discharging liquid and solid
effluents and co-products into settling ponds located on certain lands owned by
the Company adjacent to its Henderson, Nevada plant site (the "TIMET Pond
Property"), the Company would convey to BMI, at no additional cost, the TIMET
Pond Property. Under this agreement, BMI will pay 100% of the first $15.9
million of the cost for this project, and TIMET agreed to contribute 50% of the
cost in excess of $15.9 million, up to a maximum payment by TIMET of $2 million.
The Company presently expects that the total cost of this project will not
exceed $15.9 million. The Company and BMI are continuing discussions about this
project and also continuing investigation with respect to certain additional
issues associated with properties in the vicinity of the BMI industrial complex,
including possible groundwater issues.
- 17 -
The Company is also continuing assessment work with respect to its own
active plant site in Henderson, Nevada. During 2000, an initial study of certain
groundwater remediation issues at the Company's plant site and other
Company-owned sites within the BMI Complex was completed. The Company accrued
$3.3 million in 2000 based on the undiscounted cost estimates set forth in the
initial study. During 2002, the Company updated this study and accrued an
additional $0.3 million based on revised cost estimates. The Company expects
these accrued expenses to be paid over a period of up to thirty years.
As of June 30, 2003, the Company had accrued an aggregate of approximately
$3.8 million for environmental matters, including those discussed above. The
Company records liabilities related to environmental remediation obligations
when estimated future costs are probable and reasonably estimable. Such accruals
are adjusted as further information becomes available or circumstances change.
Estimated future costs are not discounted to their present value. It is not
possible to estimate the range of costs for certain sites. The imposition of
more stringent standards or requirements under environmental laws or
regulations, the results of future testing and analysis undertaken by the
Company at its operating facilities, or a determination that the Company is
potentially responsible for the release of hazardous substances at other sites,
could result in costs in excess of amounts currently estimated to be required
for such matters. No assurance can be given that actual costs will not exceed
accrued amounts or that costs will not be incurred with respect to sites as to
which no problem is currently known or where no estimate can presently be made.
Further, there can be no assurance that additional environmental matters will
not arise in the future.
Legal proceedings. In September 2000, the Company was named in an action
filed by the U.S. Equal Employment Opportunity Commission ("EEOC") in Federal
District Court in Las Vegas, Nevada (U.S. Equal Employment Opportunity
Commission v. Titanium Metals Corporation, CV-S-00-1172DWH-RJJ). The complaint,
as amended, alleged that several female employees at the Company's Henderson,
Nevada plant were the subject of sexual harassment and retaliation. In June
2003, the EEOC and TIMET settled this litigation. The amount paid by TIMET
pursuant to the settlement was not material.
The Company records liabilities related to legal proceedings when estimated
costs are probable and reasonably estimable. Such accruals are adjusted as
further information becomes available or circumstances change. Estimated future
costs are not discounted to their present value. It is not possible to estimate
the range of costs for certain matters. No assurance can be given that actual
costs will not exceed accrued amounts or that costs will not be incurred with
respect to matters as to which no problem is currently known or where no
estimate can presently be made. Further, there can be no assurance that
additional legal proceedings will not arise in the future.
- 18 -
Other. TIMET is the primary obligor on two $1.5 million workers'
compensation bonds issued on behalf of a former subsidiary, Freedom Forge
Corporation ("Freedom Forge"), which TIMET sold in 1989. The bonds were provided
as part of the conditions imposed on Freedom Forge in order to self-insure its
workers' compensation obligations. Freedom Forge filed for Chapter 11 bankruptcy
protection on July 13, 2001, and discontinued payment on the underlying workers'
compensation claims in November 2001. During 2002, TIMET received notices that
the issuers of the bonds were required to make payments on one of the bonds with
respect to certain of these claims and were requesting reimbursement from TIMET.
Based upon loss projections, the Company accrued $1.6 million for this bond
(including $0.1 million in legal fees reimbursable to the issuer of the bonds)
as other non-operating expense in 2002. Through June 30, 2003, TIMET has
reimbursed the issuer approximately $0.6 million under this bond and $1.0
million remains accrued for future payments. At this time one claimant has
submitted minor claims under the second bond. Payments made to this claimant
have been immaterial, and no additional claimants are currently anticipated.
Accordingly, no accrual has been recorded for potential claims that could be
filed under the second bond. TIMET may revise its estimated liability under
these bonds in the future as additional facts become known or claims develop.
As of June 30, 2003, the Company has $2.2 million accrued for pending and
potential future customer claims associated with certain standard grade material
produced by the Company, which was subsequently found to contain tungsten
inclusions as a result of tungsten contaminated silicon sold to the Company by a
third-party supplier. This amount does not represent the maximum possible loss
(which is not possible for the Company to estimate at this time) and may be
periodically revised in the future as more facts become known. As of June 30,
2003, the Company has received claims aggregating approximately $5.0 million and
has made settlement payments aggregating $0.6 million. Pending claims are being
investigated and negotiated. The Company believes that certain claims are
without merit or can be settled for less than the amount of the original claim.
There is no assurance that all potential claims have been submitted to the
Company. The Company has filed suit seeking full recovery from its silicon
supplier for any liability the Company might incur, although no assurance can be
given that the Company will ultimately be able to recover all or any portion of
such amounts. In April 2003, the Company received notice that this silicon
supplier had filed a voluntary petition for reorganization under Chapter 11 of
the U.S. Bankruptcy code. TIMET is currently investigating what effect, if any,
this bankruptcy may have on the Company's potential recovery. The Company has
not recorded any recoveries related to this matter as of June 30, 2003.
The Company is involved in various employment, environmental, contractual,
product liability and other claims, disputes and litigation incidental to its
business including those discussed above. While management, including internal
counsel, currently believes that the outcome of these matters, individually and
in the aggregate, will not have a material adverse effect on the Company's
financial position, liquidity or overall trends in results of operations, all
such matters are subject to inherent uncertainties. If an unfavorable outcome
were to occur in any given period, it is possible that it could have a material
adverse impact on the results of operations or cash flows in that particular
period.
For additional information concerning certain legal and environmental
matters, commitments and contingencies related to the Company, see the Company's
2002 Annual Report.
- 19 -
Note 15 - Earnings (loss) per share
Basic earnings (loss) per share is based on the weighted average number of
unrestricted common shares outstanding during each period. Diluted earnings
(loss) per share reflects the dilutive effect of common stock options,
restricted stock and the assumed conversion of the BUCS. The assumed conversion
of the BUCS was omitted from the diluted loss per share calculation for the
three and six months ended June 30, 2003 and 2002 because the effect was
antidilutive. Had the BUCS not been antidilutive, diluted losses would have been
decreased by $3.5 million and $6.9 million for the three and six months ended
June 30, 2003, respectively, and by $3.3 million and $6.7 million for the three
and six months ended June 30, 2002, respectively. Diluted average shares
outstanding would have been increased by 540,000 shares for each of these
periods from the assumed conversion of the BUCS. Stock options and restricted
shares excluded from the calculation because they were antidilutive approximated
148,000 for the three and six months ended June 30, 2003 and 166,000 for the
three and six months ended June 30, 2002.
- 20 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes certain information regarding the Company's
results of operations for the three and six months ended June 30, 2003 and 2002.
The 2003 percentage change information represents changes from the 2002 periods
to the corresponding 2003 periods, and the 2002 percentage change information
represents changes from the 2001 periods to the corresponding 2002 periods. See
"Outlook" for further discussion of the Company's business expectations for the
remainder of 2003.
Three months ended Six months ended
June 30, June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- ------------- -------------- --------------
($ in thousands) ($ in thousands)
Net sales $ 101,813 $ 94,295 $ 201,106 $ 198,735
Gross margin 4,358 1,424 5,376 6,532
Operating loss (2,087) (7,009) (10,151) (11,724)
Gross margin percent of net sales 4% 2% 3% 3%
Percentage change in:
Sales volume:
Mill product sales volume +2 -30 -7 -23
Melted product sales volume +109 -40 +80 -39
Selling prices - excludes changes in
product mix:
Mill products in U.S. dollars -2 +4 -2 +4
Mill products in billing currencies(1) -8 +4 -7 +4
Melted product in U.S. dollars -13 +3 -13 +5
Average selling prices - includes
changes in product mix:
Mill products -3 +12 +2 +6
Melted products -16 +8 -16 +8
- ----------------------------------------------------------------------------------------------------------------------
(1) Excludes the effect of changes in foreign currencies.
Second quarter of 2003 compared to second quarter of 2002. The Company's
sales of mill products decreased 1% from $70.3 million during the second quarter
2002 to $69.8 million during the second quarter of 2003. This decrease was
principally due to an 8% decrease in mill product selling prices expressed in
billing currencies (which exclude the effects of foreign currency translation)
and changes in product mix, partially offset by a 2% increase in mill product
sales volume and the effects of the weakening of the U.S. dollar compared to the
British pound sterling and the euro. Mill product selling prices expressed in
U.S. dollars (using actual foreign currency exchange rates prevailing during the
respective periods) decreased 2% in the second quarter of 2003 compared to the
second quarter of 2002.
- 21 -
Melted product sales increased 75% from $9.3 million during the second
quarter of 2002 to $16.3 million during the second quarter of 2003 primarily due
to a 109% increase in melted product sales volume as a result of new customer
relationships, share gains and changes in product mix. Melted product selling
prices decreased 13% during the second quarter of 2003, as compared to the
second quarter of 2002. Substantially all melted products are sold in U.S.
dollars. Average selling prices in the second quarter of 2003 for mill and
melted products (using actual product mix and foreign currency exchange rates
prevailing during the respective periods) decreased 3% and 16%, respectively,
from the second quarter of 2002.
Gross margin (net sales less cost of sales) was 4% of sales in the second
quarter of 2003, compared to 2% in the year-ago period. The increase in gross
margin during the second quarter of 2003 was primarily a result of the Company's
cost reduction efforts. Improved average plant operating rates, which were
approximately 59% of capacity during the second quarter of 2003 compared to 56%
during the second quarter of 2002, also contributed to the improved gross
margin. However, gross margin remains below acceptable levels due to the
relatively low product volumes and the related impact on manufacturing overhead
costs. As the Company reduces production volume in response to reduced
requirements, certain manufacturing overhead costs decrease at a slower rate and
to a lesser extent than production volume changes, generally resulting in higher
costs relative to production levels.
Selling, general, administrative and development expenses during the second
quarter of 2003 decreased by approximately 16% from year-ago levels, principally
as a result of lower personnel and travel costs, as well as focused cost control
in other administrative areas.
Equity in earnings of joint ventures during the second quarter of 2003 was
$0.6 million lower than the year-ago period, principally due to a decrease in
earnings of VALTIMET, the Company's minority-owned welded tube joint venture.
Net other income (expense) during the second quarter of 2003 was $0.8
million higher than the year-ago period principally due to an increase in the
amount of income the Company recognized under the take-or-pay provisions of its
agreement with Boeing.
First six months of 2003 compared to first six months of 2002. The
Company's sales of mill products decreased 4% from $150.0 million during the six
months ended June 30, 2002 to $143.4 million during the six months ended June
30, 2003. This decrease was principally due to a 7% decrease in mill product
sales volume and a 7% decrease in mill product selling prices expressed in
billing currencies, partially offset by changes in customer and product mix and
the effects of the weakening of the U.S. dollar compared to the British pound
sterling and the euro. Mill product selling prices expressed in U.S. dollars
decreased 2% in the six months ended June 30, 2003 compared to the six months
ended June 30, 2002.
Melted product sales increased 51% from $19.2 million during the six months
ended June 30, 2002 to $29.1 million during the six months ended June 30, 2003
primarily due to an 80% increase in melted product sales volume as a result of
new customer relationships, share gains and changes in product mix. Melted
product selling prices decreased 13% during the six months ended June 30, 2003,
as compared to the six months ended June 30, 2002. Average selling prices in the
first half of 2003 (using actual product mix and foreign currency exchange rates
prevailing during the respective periods) increased 2% for mill products and
decreased 16% for melted products from the first half of 2002.
- 22 -
Gross margin was 3% of sales during the six months ended June 30, 2003,
unchanged from the prior year, as the Company was able to reduce its costs
sufficiently to offset the impact of lower selling prices and lower mill product
volumes. Average plant operating rates declined from approximately 60% of
capacity in the six months ended June 30, 2002 to approximately 55% in the six
months ended June 30, 2003.
Selling, general, administrative and development expenses during the six
months ended June 30, 2003 decreased by approximately 11% from year-ago levels,
principally as a result of lower personnel and travel costs, as well as focused
cost control in other administrative areas.
Equity in earnings of joint ventures during the six months ended June 30,
2003 was $0.9 million lower than the year-ago period, principally due to a
decrease in earnings of VALTIMET.
Net other income (expense) during the six months ended June 30, 2003 was
$1.3 million higher than the year-ago period principally due to an increase in
the amount of income the Company recognized under the take-or-pay provisions of
its agreement with Boeing and a $0.5 million first quarter 2003 gain related to
the Company's settlement of certain litigation relating to power outages
suffered at its Henderson, Nevada facility in 1997 and 1998 as a result of
contractor activity.
Non-operating income (expense).
Three months ended Six months ended
June 30, June 30,
-------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
(In thousands) (In thousands)
Interest income $ 69 $ 24 $ 181 $ 93
SMC impairment charge - - - (27,500)
Foreign exchange loss (257) (226) (887) (342)
Interest expense (488) (735) (1,176) (1,473)
Other income (expense), net (81) (26) (83) (608)
-------------- -------------- -------------- --------------
$ (757) $ (963) $ (1,965) $ (29,830)
============== ============== ============== ==============
In March 2002, SMC and its U.S. subsidiaries filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. As a result, the
Company undertook an assessment of its investment in SMC with the assistance of
an external valuation specialist and recorded an additional $27.5 million
impairment charge during the first quarter of 2002 for an other than temporary
decline in the estimated fair value of its investment in SMC. This charge
reduced the Company's carrying amount of its investment in the SMC securities to
zero. Based upon SMC's plan of reorganization filed with the Bankruptcy Court,
the Company currently believes that it will not recover any amount from this
investment.
Income taxes. The Company operates in several tax jurisdictions and is
subject to varying income tax rates. As a result, the geographic mix of pretax
income can impact the Company's overall effective tax rate. For the three and
six months ended June 30, 2003 and 2002, the Company's income tax rate varied
from the U.S. statutory rate primarily due to an increase in the deferred tax
valuation allowance related to the Company's tax attributes that did not meet
the "more-likely-than-not" recognition criteria during those periods. See Note
13 to the Consolidated Financial Statements.
- 23 -
Minority interest. Dividend expense related to the Company's 6.625% BUCS
generally approximates $3.3 million per quarter and is reported in the
Consolidated Statement of Operations as minority interest. As previously
reported in the Company's 2002 Annual Report, no income tax benefit is currently
associated with this expense. In October 2002, the Company exercised its right
to defer future dividend payments on these securities effective with the
Company's December 1, 2002 scheduled dividend payment. Dividends continue to
accrue at the coupon rate on the principal and unpaid dividends. The Company
will consider resuming payment of dividends on the BUCS once the outlook for the
Company's business improves substantially. See Note 11 to the Consolidated
Financial Statements.
Cumulative effect of change in accounting principles. On January 1, 2003,
the Company adopted SFAS No. 143, Accounting for Asset Retirement Obligations,
and recognized (i) an asset retirement cost capitalized as an increase to the
carrying value of its property, plant and equipment of approximately $0.2
million, (ii) accumulated depreciation on such capitalized cost of approximately
$0.1 million and (iii) a liability for the asset retirement obligation of
approximately $0.3 million. The asset retirement obligation recognized relates
primarily to landfill closure and leasehold restoration costs.
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets, and recorded a non-cash goodwill impairment charge of $44.3
million, representing the entire balance of the Company's recorded goodwill at
January 1, 2002.
See further discussion regarding the Company's adoption of these accounting
principles in Notes 1 and 6 to the Consolidated Financial Statements.
European operations. The Company has substantial operations and assets
located in Europe, principally the United Kingdom, with smaller operations in
France and Italy. Titanium is sold worldwide, and many factors influencing the
Company's U.S. and European operations are similar. Approximately 44% of the
Company's sales originated in Europe for the six months ended June 30, 2003, of
which approximately 61% were denominated in currencies other than the U.S.
dollar, principally the British pound and the euro. Certain purchases of raw
materials, principally titanium sponge and alloys, for the Company's European
operations are denominated in U.S. dollars, while labor and other production
costs are primarily denominated in local currencies. The functional currencies
of the Company's European subsidiaries are those of their respective countries,
and the European subsidiaries are subject to exchange rate fluctuations that may
impact reported earnings and may affect the comparability of period-to-period
operating results. Borrowings of the Company's European operations may be in
U.S. dollars or in functional currencies. The Company's export sales from the
U.S. are denominated in U.S. dollars and are not subject to currency exchange
rate fluctuations.
The Company does not use currency contracts to hedge its currency
exposures. The Company's results of operations included net currency transaction
losses of $0.9 million during the six months ended June 30, 2003 and $0.3
million during the six months ended June 30, 2002. At June 30, 2003,
consolidated assets and liabilities denominated in currencies other than
functional currencies were approximately $39.6 million and $44.3 million,
respectively, consisting primarily of U.S. dollar cash, accounts receivable,
accounts payable and borrowings.
- 24 -
Supplemental information. On February 4, 2003, the Company's stockholders
approved a proposal to amend TIMET's Certificate of Incorporation to effect a
reverse stock split of the Company's common stock at a ratio of one share of
post-split common stock for each eight, nine or ten shares of pre-split common
stock issued and outstanding, with the final exchange ratio to be selected by
the Board of Directors. Subsequently, the Company's Board of Directors
unanimously approved the reverse stock split on the basis of one share of
post-split common stock for each outstanding ten shares of pre-split common
stock. The reverse stock split became effective after the close of trading on
February 14, 2003. All share and per share disclosures for all periods presented
in MD&A have been adjusted to give effect to the reverse stock split.
As previously discussed in the Company's 2002 Annual Report, imports of
most titanium products into the U.S. are generally subject to a 15% tariff. In
2002, the Government of Kazakhstan filed a petition to allow titanium sponge to
be imported duty free into the U.S. from Kazakhstan and Russia under a special
trade program known as the "Generalized System of Preferences" or "GSP." In
addition, TIMET filed a petition seeking the removal of duty-free treatment
under the GSP program for imports of titanium wrought products into the U.S.
from Russia. TIMET's Henderson, Nevada sponge operations represent the last
remaining titanium sponge production of any size in the U.S. On July 1, 2003,
the Kazakh petition was denied. As a result, the normal 15% tariff will continue
to apply to all imports of titanium sponge into the U.S. Action on TIMET's
petition was deferred, meaning duty-free treatment on imports of titanium
wrought products into the U.S. from Russia will continue for the time being.
Outlook. The Outlook section contains a number of forward-looking
statements, all of which are based on current expectations and exclude the
effect of potential future charges related to restructurings, asset impairments,
valuation allowances, changes in accounting principles and similar items, unless
otherwise noted. Undue reliance should not be placed on forward-looking
statements, as more fully discussed in the "Forward-Looking Information"
statement of this Quarterly Report. Actual results may differ materially. See
also Notes to the Consolidated Financial Statements regarding commitments,
contingencies, legal matters, environmental matters and other matters, including
new accounting principles, which could materially affect the Company's future
business, results of operations, financial position and liquidity.
The commercial airline industry business environment continues to face many
challenges. The weak economy and the uncertainties surrounding the aftermath of
the recent war in Iraq, as well as the potential threat of further terrorist
attacks, have extended the down cycle in the commercial airline market. Further,
the outbreak of the Severe Acute Respiratory Syndrome ("SARS") virus in Asia has
also negatively impacted demand for commercial air travel to that region.
However, with the SARS virus seemingly under control, commercial air traffic
results appear to be headed in a positive direction, although still well below
pre-September 11, 2001 levels. The Airline Monitor, a leading aerospace
publication, forecasts that the major U.S. airlines will lose $6.3 billion in
2003 after incurring $11.2 billion in losses in 2002. In addition, The Airline
Monitor's most recent forecast (published in July 2003) of large commercial
aircraft deliveries projects deliveries by Boeing and Airbus to be 580 airplanes
in 2003, decreasing 8% to 535 deliveries in 2004 and forecast to reach a
low-point of 475 deliveries in 2005, an 18% decrease from estimated 2003 levels.
The Airline Monitor delivery projections do not reach 2003 levels again until
2007.
- 25 -
TIMET currently expects sales for the full year 2003 to approximate $375
million to $395 million, which reflects a $20 million improvement in the upper
range from the Company's prior guidance. Sales in 2003, when compared to 2002,
are benefiting primarily from increased volumes for melted products and from the
weakening of the U.S. dollar compared to the British pound sterling and the
euro. Offsetting these increases are slightly lower volumes for mill products
and lower pricing for melted products.
Mill product sales volume for the full year 2003 is expected to approximate
8,700 metric tons, reflecting a 2% decrease compared to 2002 levels and a 5%
decrease from the Company's prior guidance. Melted product sales volume for the
full year 2003 is expected to approximate 4,250 metric tons, reflecting a 77%
increase over 2002 levels and a 20% increase from the Company's prior guidance.
The increase in melted product sales volume is due in part to new customer
relationships, share gains at certain customers, increased military aerospace
business and, to a lesser extent, a shift in purchasing preference by certain
customers in favor of ingot and away from wrought products.
The Company's backlog of unfilled orders was approximately $140 million at
June 30, 2003, down from the $165 million level at March 31, 2003, but
comparable to the $145 million level at June 30, 2002. Substantially all the
June 30, 2003 backlog is scheduled to ship within the next 12 months. However,
the Company's order backlog may not be a reliable indicator of future business
activity.
The Company's cost of sales is affected by a number of factors including,
among others, customer and product mix, material yields, plant operating rates,
raw material costs, labor and energy costs. Raw material costs represent the
largest portion of the Company's manufacturing cost structure. The Company
expects to manufacture a significant portion of its titanium sponge requirements
during the next several quarters and purchase the balance. The Company expects
the aggregate cost of purchased sponge to remain relatively stable in 2003. The
Company is experiencing higher prices for certain types of scrap, but it has
mitigated those increased costs by utilizing other cheaper raw material inputs.
Overall capacity utilization should average approximately 54% in 2003; however,
practical capacity utilization measures can vary significantly based on product
mix. The Company has implemented a number of actions to reduce manufacturing
costs, including seeking supplier price concessions and implementing stringent
spending controls and programs to improve manufacturing yields. These cost
reduction efforts have improved gross margins, and the Company now expects its
gross margin to be about 2% for the full year 2003 versus prior guidance of
breakeven.
Selling, general, administrative and development expenses for 2003 should
approximate $39 million. Interest expense in 2003 should approximate $2 million.
Minority interest on the Company's BUCS in 2003 should approximate $14 million,
including additional interest costs related to the deferral of the related
dividend payments. These amounts are unchanged from prior guidance.
The Company currently anticipates Boeing will purchase about 1.2 million
pounds of product from the Company in 2003. At this projected order level, the
Company expects to recognize about $24 million of income under the Boeing LTA's
take-or-pay provisions in 2003, which is $1 million lower than prior guidance.
Any such earnings will be reported as operating income, but will not be included
in sales revenue, sales volume or gross margin.
- 26 -
The Company operates in several tax jurisdictions and is subject to varying
income tax rates. As a result, the geographic mix of pretax income (or loss)
significantly impacts the Company's overall effective income tax rate. The
Company anticipates that its effective consolidated income tax rate will be
significantly below the U.S. statutory rate, because it does not expect to
record any income tax benefit on U.S. losses generated in 2003. Additionally,
the Company does not expect to record any income tax benefit on U.K. losses
generated in 2003. Income tax expense recorded in the first half of 2003 is
primarily the result of operations in other European jurisdictions.
The Company presently expects an operating loss in 2003 of $5 million to
$15 million and a net loss of $25 million to $35 million, an improvement from
prior guidance of an operating loss of $10 million to $20 million and a net loss
of $30 million to $40 million.
The Company currently expects to generate $40 million to $50 million in
cash flow from operations during 2003, as compared to prior guidance of $25
million to $35 million. This improvement is principally driven by reductions in
working capital, especially inventory. Capital expenditures in 2003 are expected
to approximate $12 million, principally covering capital maintenance, safety and
environmental programs. Depreciation and amortization should approximate $36
million in 2003. The Company does not expect its year-end net cash position to
change significantly from the current position.
Although the second quarter 2003 results showed improvement as compared to
both the first quarter 2003 and second quarter of last year, the Company
currently expects a softening in demand for titanium during the second half of
2003 and continuing into 2004. TIMET's focus for the balance of 2003 will remain
in the important areas of cost and inventory reductions to assure the Company
achieves the goals it set at the beginning of the year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated cash flows provided (used) by operating,
investing and financing activities are presented below. The following discussion
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto.
Six months ended June 30,
------------------------------------------
2003 2002
------------------- -------------------
(In thousands)
Cash provided (used) by:
Operating activities:
Excluding changes in assets and liabilities $ (516) $ (3,536)
Changes in assets and liabilities 40,741 (15,821)
------------------- -------------------
40,225 (19,357)
Investing activities (3,542) (3,337)
Financing activities (16,585) 6,119
------------------- -------------------
Net cash provided (used) by operating,
investing and financing activities $ 20,098 $ (16,575)
=================== ===================
Operating activities. Cash provided (used) by operating activities,
excluding changes in assets and liabilities, generally followed the trend in
operating results. Changes in assets and liabilities primarily reflect the
timing of purchases, production and sales and can vary significantly from period
to period.
- 27 -
Accounts receivable increased during the first half of 2003 primarily as a
result of increased sales. Accounts receivable decreased during the first half
of 2002 primarily as a result of decreased sales, partially offset by an
increase in days sales outstanding. Inventories decreased during the first half
of 2003 as a result of higher melted product sales volumes during the first half
of 2003 and the Company's focus on inventory reduction. The Company expects
inventory levels to decline further during the remainder of 2003. Inventories
increased in the first half of 2002 as a result of production begun by the
Company prior to certain customer cancellations and push-outs related to the
downturn in the commercial aerospace market, the timing of certain raw materials
purchases and the accelerated production of certain orders as part of its
contingency planning for a possible labor disruption at the Company's Toronto
plant.
Changes in accounts payable and accrued liabilities reflect, among other
things, the timing of payments to suppliers of titanium sponge, titanium scrap
and other raw materials purchases. Changes in customer advances during the first
half of 2003 reflect the Company's receipt in January 2003 of the $27.7 million
advance from Boeing, partially offset by the application of customer purchases
and the recognition of Boeing-related take-or-pay income during the first half
of the year. Under the terms of the amended Boeing LTA, in years 2002 through
2007, Boeing advances TIMET $28.5 million annually, less $3.80 per pound of
titanium product purchased from TIMET by Boeing subcontractors during the
preceding year. Effectively, the Company collects $3.80 less from Boeing than
the LTA selling price for each pound of titanium product sold directly to
Boeing, which reduces the related customer advance recorded by the Company. For
titanium products sold to Boeing subcontractors, the Company collects the full
LTA selling price, but gives Boeing credit by reducing the next year's annual
advance by $3.80 per pound of titanium product sold to Boeing subcontractors.
The Company currently estimates that the reduction against the 2004 advance from
Boeing will be less than $1 million. The LTA is structured as a take-or-pay
agreement such that, beginning in calendar year 2002, Boeing forfeits $3.80 per
pound in the event that its orders for delivery are less than 7.5 million pounds
in any given calendar year. The Company recognized $2.8 million and $2.2 million
of take-or-pay income during the six months ended June 30, 2003 and 2002,
respectively.
See "Results of Operations - Non-operating income (expense), net" and Note
4 to the Consolidated Financial Statements for discussion of the Company's
impairment of its investment in SMC securities.
In October 2002, the Company exercised its right to defer future dividend
payments on its BUCS for a period of up to 20 consecutive quarters, effective
beginning with the Company's December 1, 2002 scheduled dividend payment.
Dividends continue to accrue at the coupon rate on the principal and unpaid
dividends and are reflected as long-term liabilities in the Consolidated Balance
Sheet. The Company will consider resuming payment of dividends on the BUCS once
the outlook for the Company's business improves substantially. Since the Company
exercised its right to defer dividend payments, it is unable under the terms of
these securities, among other things, to pay dividends on or reacquire its
capital stock during the deferral period. However, the Company is permitted to
reacquire the BUCS during the deferral period provided the Company has satisfied
certain conditions under its U.S. credit facility, including maintenance of the
Company's excess availability above $25 million before and after such
reacquisition.
Investing activities. The Company's capital expenditures were $3.6
million for the six months ended June 30, 2003 compared to $3.3 million for the
same period in 2002, principally for capital maintenance and safety and
environmental projects.
- 28 -
Financing activities. Cash used during the six months ended June 30, 2003
was due primarily to the Company's $14.1 million of net repayments on its
outstanding borrowings upon the Company's receipt of the $27.7 million Boeing
advance in January 2003. Cash provided during the six months ended June 30, 2002
was due primarily to $7.6 million of net borrowings necessary to fulfill the
Company's working capital needs. TIMET Savoie also made dividend payments to
CEZUS of $1.9 million and $1.1 million during the second quarter of 2003 and
2002, respectively.
Borrowing arrangements. Under the terms of the Company's U.S. asset-based
revolving credit agreement, which matures in February 2006, borrowings are
limited to the lesser of $105 million or a formula-determined borrowing base
derived from the value of accounts receivable, inventory and equipment
("borrowing availability"). This facility requires the Company's U.S. daily cash
receipts to be used to reduce outstanding borrowings, which may then be
reborrowed, subject to the terms of the agreement. Interest generally accrues at
rates that vary from LIBOR plus 2% to LIBOR plus 2.5%. Borrowings are
collateralized by substantially all of the Company's U.S. assets. The credit
agreement prohibits the payment of dividends on TIMET's BUCS if "excess
availability," as defined, is less than $25 million, limits additional
indebtedness, prohibits the payment of dividends on the Company's common stock
if excess availability is less than $40 million, requires compliance with
certain financial covenants and contains other covenants customary in lending
transactions of this type. The Company was in compliance in all material
respects with all covenants for the six months ended June 30, 2003 and for all
periods during the year ended December 31, 2002. Excess availability is
essentially unused borrowing availability and is defined as borrowing
availability less outstanding borrowings and certain contractual commitments
such as letters of credit. At June 30, 2003, excess availability was
approximately $86 million.
The Company's subsidiary, TIMET UK, has a credit agreement that provides
for borrowings limited to the lesser of (pound)22.5 million or a
formula-determined borrowing base derived from the value of accounts receivable,
inventory and equipment ("borrowing availability"). The credit agreement
includes a revolving and term loan facility and an overdraft facility (the "U.K.
facilities") and matures in December 2005. Borrowings under the U.K. facilities
can be in various currencies including U.S. dollars, British pounds sterling and
euros; accrue interest at rates that vary from LIBOR plus 1% to LIBOR plus
1.25%; and are collateralized by substantially all of TIMET UK's assets. The
U.K. facilities require the maintenance of certain financial ratios and amounts
and other covenants customary in lending transactions of this type. TIMET UK was
in compliance in all material respects with all covenants for the six months
ended June 30, 2003 and for all periods during the year ended December 31, 2002.
The U.K. overdraft facility is subject to annual review in December of each
year. In the event the overdraft facility is not renewed, the Company believes
it could refinance any outstanding overdraft borrowings under either the
revolving or term loan features of the U.K. facilities. During the second
quarter of 2003, TIMET UK received an interest-bearing intercompany loan from a
U.S. subsidiary of the Company enabling TIMET UK to reduce its long-term
borrowings under the U.K. facilities to zero. Unused borrowing availability at
June 30, 2003 under the U.K. facilities was approximately $37 million.
The Company also has overdraft and other credit facilities at certain of
its other European subsidiaries. These facilities accrue interest at various
rates and are payable on demand. Unused borrowing availability at June 30, 2003
under these facilities was approximately $12 million.
- 29 -
Although excess availability under TIMET's U.S. credit agreement remains
above $40 million, no dividends were paid by TIMET on its common shares during
the three and six month periods ended June 30, 2003 and 2002. As previously
discussed, TIMET is not permitted under the terms of the BUCS to pay such
dividends while deferring dividend payments on the BUCS.
Legal and environmental matters. See Note 14 to the Consolidated Financial
Statements for discussion of legal and environmental matters, commitments and
contingencies.
Other. The Company periodically evaluates its liquidity requirements,
capital needs and availability of resources in view of, among other things, its
alternative uses of capital, debt service requirements, the cost of debt and
equity capital and estimated future operating cash flows. As a result of this
process, the Company has in the past, or in light of its current outlook, may in
the future, seek to raise additional capital, modify its common and preferred
dividend policies, restructure ownership interests, incur, refinance or
restructure indebtedness, repurchase shares of common stock or BUCS, sell
assets, or take a combination of such steps or other steps to increase or manage
its liquidity and capital resources.
In the normal course of business, the Company investigates, evaluates,
discusses and engages in acquisition, joint venture, strategic relationship and
other business combination opportunities in the titanium, specialty metal and
other industries. In the event of any future acquisition or joint venture
opportunities, the Company may consider using then-available liquidity, issuing
equity securities or incurring additional indebtedness.
Non-GAAP financial measures
In an effort to provide investors with information in addition to the
Company's results as determined by accounting principles generally accepted in
the United States of America ("GAAP"), the Company has provided the following
non-GAAP financial disclosures that it believes may provide useful information
to investors:
o The Company discloses percentage changes in its mill and melted
product selling prices in U.S. dollars, which have been adjusted to
exclude the effects of changes in product mix, thereby facilitating
period-to-period comparisons. Depending on the composition of changes
in product mix, the percentage change in selling prices excluding the
effect of changes in product mix can be higher or lower than such
percentage change would be using the actual product mix prevailing
during the respective periods and
o In addition to disclosing percentage changes in its mill product
selling prices adjusted to exclude the effects of changes in product
mix, the Company also discloses such percentage changes in billing
currencies which have been further adjusted to exclude the effects of
changes in foreign currency exchange rates, also thereby facilitating
period-to-period comparisons. Generally, when the U.S. dollar
strengthens (weakens) against other currencies, the percentage change
in selling prices in billing currencies will be higher (lower) than
such percentage changes would be using actual exchange rates
prevailing during the respective periods.
- 30 -
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of the Company's market risks, refer to the Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk," in the Company's
2002 Annual Report. There have been no material changes to the information
provided that would require additional information with respect to the six
months ended June 30, 2003.
Item 4. CONTROLS AND PROCEDURES
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the SEC,
means controls and other procedures of the Company that are designed to ensure
that information required to be disclosed in the reports that the Company files
or submits to the SEC under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), is recorded, processed, summarized and reported, within the
time periods specified in the SEC's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by the Company in the reports
that it files or submits to the SEC under the Exchange Act is accumulated and
communicated to the Company's management, including its principal executive
officer and its principal financial officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure. Both J. Landis Martin, the Company's Chief Executive Officer, and
Bruce P. Inglis, the Company's Vice President - Finance and Corporate
Controller, have evaluated the Company's disclosure controls and procedures as
of June 30, 2003. Based upon their evaluation, these executive officers have
concluded that the Company's disclosure controls and procedures are effective as
of the date of such evaluation.
The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP, and includes
those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and
directors of the Company; and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the Company's consolidated
financial statements.
There has been no change to the Company's system of internal control over
financial reporting during the quarter ended June 30, 2003 that has materially
affected, or is reasonably likely to materially affect, the Company's system of
internal controls over financial reporting.
- 31 -
PART II. - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Note 14 of the Consolidated Financial Statements,
which information is incorporated herein by reference, and to the Company's 2002
Annual Report for descriptions of certain previously reported legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 20, 2003, for
the purpose of electing seven directors to serve until the 2004 Annual Meeting
of Shareholders and until their successors are duly elected and qualified. All
nominees for director were elected with the following vote:
Director Votes For Votes Withheld
------------------------------------ -------------------------- --------------------------
Norman N. Green 2,717,636 15,374
J. Landis Martin 2,717,298 15,712
Albert W. Niemi, Jr. 2,717,898 15,112
Glenn R. Simmons 2,714,450 18,560
Steven L. Watson 2,682,577 50,433
Terry N. Worrell 2,718,713 14,297
Paul J. Zucconi 2,718,656 14,354
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Intercorporate Services Agreement between Titanium Metals
Corporation and Contran Corporation, effective as of January 1,
2003.
10.2 Intercorporate Services Agreement between Titanium Metals
Corporation and NL Industries, Inc., effective as of January 1,
2003, incorporated by reference to Exhibit 10.2 to the NL
Industries, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2003.
10.3 Intercorporate Services Agreement between Titanium Metals
Corporation and Tremont LLC, effective as of January 1, 2003.
10.4*Titanium Metals Corporation Amended and Restated 1996
Non-Employee Director Compensation Plan, as amended and restated
effective May 20, 2003.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
* Management contract, compensatory plan or arrangement.
- 32 -
Note:The Company has retained a signed original of any exhibit listed
above that contains signatures, and the Company will provide any
such exhibit to the SEC or its staff upon request.
(b) Reports on Form 8-K filed by the registrant for the quarter ended June
30, 2003 and through August 7, 2003:
Date of Report Items Reported
----------------------------------- ---------------------------------
April 2, 2003 5 and 7
April 14, 2003 5 and 7
April 23, 2003 12 (under 9)
May 7, 2003 5 and 7
May 23, 2003 5 and 7
July 3, 2003 5 and 7
July 7, 2003 5 and 7
July 25, 2003 12 (under 9)
- 33 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TITANIUM METALS CORPORATION
-------------------------------------------------
(Registrant)
Date: August 8, 2003 By /s/ J. Landis Martin
-------------------------------------------------
J. Landis Martin
Chairman of the Board, President and
Chief Executive Officer
Date: August 8, 2003 By /s/ Bruce P. Inglis
-------------------------------------------------
Bruce P. Inglis
Vice President - Finance and Corporate Controller
- 34 -