<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________to ____________
Commission file number 001-14437
RTI INTERNATIONAL METALS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
OHIO 52-2115953
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
1000 WARREN AVENUE, NILES, OHIO 44446
(Address of principal executive offices)
(330) 544-7700
(Registrant's telephone number, including area code)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO __
At November 1, 1999, 20,847,758 shares of common stock of the registrant
were outstanding.
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<PAGE> 2
RTI INTERNATIONAL METALS, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I--FINANCIAL INFORMATION............................... 2
Item 1. Consolidated Financial Statements:
Introduction to Consolidated Financial Statements...... 2
Consolidated Statement of Income....................... 3
Consolidated Balance Sheet............................. 4
Consolidated Statement of Cash Flows................... 5
Consolidated Statement of Changes in Shareholders'
Equity................................................ 6
Selected Notes to Consolidated Financial Statements.... 7
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 9
PART II--OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 17
Item 5. Other Information................................... 17
Item 6. Exhibits and Reports on Form 8-K.................... 17
Signatures.................................................. 18
</TABLE>
<PAGE> 3
PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by
RTI International Metals, Inc. (the Company), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. The financial
information presented reflects all adjustments, consisting only of normal
recurring adjustments, which are, in the opinion of management, necessary for a
fair statement of the results for the interim periods presented. The results for
the interim periods are not necessarily indicative of the results to be expected
for the year.
2
<PAGE> 4
RTI INTERNATIONAL METALS, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales....................................... $ 51,383 $ 81,027 $ 178,019 $ 266,608
Operating costs:
Cost of sales............................... 47,884 55,779 153,409 191,664
Selling, general and administrative
expenses.................................. 5,781 4,130 18,080 11,946
Research, technical and product development
expenses.................................. 1,071 1,099 3,145 2,920
---------- ---------- ---------- ----------
Total operating costs.................. 54,736 61,008 174,634 206,530
Operating income............................ (3,353) 20,019 3,385 60,078
Other income--net........................... 136 808 812 2,231
Interest expense............................ (694) -- (1,864) (57)
---------- ---------- ---------- ----------
Income (loss) before income taxes........... (3,911) 20,827 2,333 62,252
Provision for (benefit from) income taxes
(Note 3).................................. (1,428) 5,124 870 1,086
---------- ---------- ---------- ----------
Net income (loss)........................... $ (2,483) $ 15,703 $ 1,463 $ 61,166
========== ========== ========== ==========
Net income (loss) per common share:
Basic.................................. $ (.12) $ 0.76 $ .07 $ 2.98
========== ========== ========== ==========
Diluted................................ (.12) $ 0.76 $ .07 $ 2.97
========== ========== ========== ==========
Weighted average shares outstanding:
Basic.................................. 20,761,932 20,527,397 20,754,748 20,507,660
========== ========== ========== ==========
Diluted................................ 20,761,932 20,647,677 20,858,470 20,627,924
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
<PAGE> 5
RTI INTERNATIONAL METALS, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31
1999 1998
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,061 $ 11,075
Receivables -- less allowance for doubtful accounts of
$1,449 and $911........................................ 42,297 63,077
Inventories, net (Note 5)................................. 178,604 166,835
Deferred income taxes..................................... 2,259 2,259
Other current assets...................................... 11,552 11,685
-------- --------
Total current assets................................... 235,773 254,931
Property, plant and equipment net......................... 93,445 77,024
Deferred income taxes..................................... 13,675 13,675
Goodwill.................................................. 37,092 38,144
Other noncurrent assets................................... 11,404 12,246
-------- --------
Total assets........................................... $391,389 $396,020
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ -- $ 16,000
Accounts payable.......................................... 14,426 16,279
Accrued wages and other employee costs.................... 11,568 8,892
Other accrued liabilities................................. 16,071 17,535
-------- --------
Total current liabilities.............................. 42,065 58,706
Long-term debt.............................................. 29,650 20,080
Accrued postretirement benefit cost......................... 19,020 19,020
Other noncurrent liabilities................................ 5,568 5,449
-------- --------
Total liabilities...................................... 96,303 103,255
-------- --------
Commitments and Contingencies (Note 4)
Shareholders' equity:
Common Stock, $0.01 par value, 50,000,000 and 30,000,000
shares authorized; 20,843,258 and 20,719,758 shares
issued and 20,843,258 and 20,719,758 outstanding....... 208 207
Additional paid-in capital................................ 239,388 238,109
Deferred compensation..................................... (2,434) (2,012)
Accumulated earnings...................................... 57,924 56,461
-------- --------
Total shareholders' equity.................................. 295,086 292,765
-------- --------
Total liabilities and shareholders' equity............. $391,389 $396,020
======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
<PAGE> 6
RTI INTERNATIONAL METALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
--------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 1,463 $ 61,166
Adjustment for items not affecting funds from operations:
Depreciation and amortization............................. 6,892 3,809
Deferred taxes............................................ -- (12,452)
Other-net................................................. 839 349
CHANGES IN ASSETS AND LIABILITIES (EXCLUDING CASH):
Receivables................................................. 20,780 (181)
Inventories................................................. (11,769) (34,644)
Accounts payable............................................ (1,853) (5,677)
Other liabilities........................................... 1,331 9,870
Other assets................................................ 844 (5,715)
-------- --------
Cash provided by operating activities................ 18,527 16,525
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (22,130) (22,888)
-------- --------
Cash used in investing activities.................... (22,130) (22,888)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of employee stock options........................ 19 236
Borrowings under revolving credit agreement............... 9,570 --
Repayment of notes payable................................ (16,000) --
Treasury Common Stock purchased........................... -- (37)
-------- --------
Cash provided by (used in) financing activities........... (6,411) 199
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS....................... (10,014) (6,164)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 11,075 30,211
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 1,061 $ 24,047
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for
Interest............................................... $ 1,849 $ 20
Income taxes........................................... $ 518 $ 7,500
Noncash financing activities
Issuance of Common Stock for Restricted Stock Awards... $ 1,261 $ 919
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
<PAGE> 7
RTI INTERNATIONAL METALS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDT'L.
SHARES COMMON PAID-IN DEFERRED RETAINED COMPREHENSIVE
OUTSTANDING STOCK CAPITAL COMPENSATION EARNINGS INCOME
----------- ------ -------- ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998.......................... 20,719,758 $207 $238,109 $(2,012) $ 56,461 $
Shares issued for Restricted
Stock Award Plans........... 118,250 1 1,260 (1,261) --
Compensation expense
recognized.................. -- -- -- 839 --
Shares issued from exercise of
employee stock options...... 5,250 -- 19 -- --
Net income.................... -- -- -- -- 1,463 1,463
-------
Comprehensive income.......... $ 1,463
---------- ---- -------- ------- -------- =======
Balance at September 30,
1999........................ 20,843,258 $208 $239,388 $(2,434) $ 57,924
========== ==== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
6
<PAGE> 8
RTI INTERNATIONAL METALS, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--GENERAL
The consolidated financial statements include the accounts of RTI
International Metals, Inc. and its majority owned subsidiaries. All significant
intercompany transactions have been eliminated.
NOTE 2--ORGANIZATION
On September 30, 1998, the shareholders of RMI Titanium Company ("RMI")
approved the formation of an Ohio holding company named RTI International
Metals, Inc. Under the terms of a restructuring agreement, RTI exchanged its
shares of common stock on a one-for-one basis for all of the outstanding common
stock of RMI Titanium Company, which immediately became a wholly owned
subsidiary of RTI. Shares of RTI began trading on the New York Stock Exchange on
October 1, 1998.
The Company is a successor to entities that have been operating in the
titanium industry since 1958. In 1990, USX Corporation ("USX") and Quantum
Chemical Corporation ("Quantum") transferred their entire ownership interest in
the Company's immediate predecessor, RMI Company, an Ohio general partnership,
to the Company in exchange for shares of the Company's Common Stock (the
"Reorganization"). Quantum then sold its shares to the public. USX retained
ownership of its shares.
In November, 1996, USX Corporation completed a public offering of its notes
which are exchangeable in February, 2000, for 5,483,600 shares of RTI Common
Stock, owned by USX (or for an equivalent amount of cash at USX's option). On
March 31, 1999, USX announced that it terminated its ownership interest in the
Company. USX irrevocably deposited with Chase Manhattan Trust Company, N.A., all
of the 5,483,600 shares of the Company's Common Stock it previously owned. The
deposit of the shares is in full satisfaction of USX's 6 3/4% Exchangeable Notes
due February 1, 2000 (the "Notes"). Chase is the trustee under the note
indenture and will hold the shares in trust for the benefit of the holders of
the Notes until the shares are exchanged for the Notes on the maturity date. The
Notes are exchangeable for shares of the Company on a variable basis up to one
share per Note depending on the market price of the Company's shares at
maturity. The maximum number of RTI shares deliverable upon maturity is
5,483,600 and the minimum is 4,645,706.
The 5,483,600 shares of common stock previously owned by USX represents
approximately 27% of the issued and outstanding shares of the Company. The
Company does not believe that any of the Note holders will exercise control over
the Company as a result of the transaction.
NOTE 3--INCOME TAXES
In the nine months ended September 30, 1999 the Company recorded an income
tax expense of $0.9 million, or approximately 37% of pre-tax income. The
effective tax rate for the nine month period ended September 30, 1998 was less
than the statutory rate of 35% because of a nonrecurring $16.1 million
adjustment to reduce the deferred tax asset valuation allowance due to changes
in the Company's expectations about the ultimate realization of its deferred tax
assets. Exclusive of this adjustment, the effective tax rate for the nine months
ended September 30, 1998 was approximately 28%.
NOTE 4--COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is subject to environmental
laws and regulations concerning the production, handling, storage,
transportation, emission, and disposal of waste materials and is also subject to
other federal and state laws and regulations regarding health and safety
matters. These laws and regulations are constantly evolving, and it is not
currently possible to predict accurately the ultimate effect these laws and
regulations will have on the Company in the future.
7
<PAGE> 9
The Company is involved in investigative or cleanup projects under federal
or state environmental laws at a number of waste disposal sites, including the
Fields Brook Superfund Site. Given the status of the proceedings with respect to
these sites, ultimate investigative and remediation costs cannot presently be
accurately predicted, but could, in the aggregate, be material. Based on the
information available regarding the current ranges of estimated remediation
costs at currently active sites, and what RTI believes will be its ultimate
share of such costs, provisions for environmental-related costs have been
recorded. These provisions are in addition to amounts which have previously been
accrued for the Company's share of environmental study costs.
With regard to the Fields Brook Superfund Site, the Company, together with
31 other companies, has been identified by the EPA as a potentially responsible
party ("PRP") under Comprehensive Environmental Response, Compensation Liability
Act ("CERCLA") with respect to a superfund site defined as the Fields Brook
Watershed in Ashtabula, Ohio, which includes the Company's now closed Ashtabula
facilities. The EPA's 1986 estimate of the cost of remediation of the Fields
Brook sediment operable unit was $48 million. Recent studies, together with
improved remediation technology and redefined cleanup standards have resulted in
a more recent estimate of the remediation cost of approximately $25 million. The
actual cost of remediation may vary from the estimate depending upon any number
of factors.
The EPA, beginning in March 1989, ordered 22 of the PRPs to conduct a
design phase study for the sediment operable unit and a source control study.
These studies are nearly complete. The Company, working cooperatively with
fourteen others in accordance with two separate agreements, is complying with
the order. The Company has accrued and has been paying its portion of the cost
of such compliance. Actual cleanup will not commence prior to 2000. The
Company's share of the study and clean-up costs has been established at 9.95%.
In June, 1995, the Company and twelve others entered into a Phase 2 (actual
cleanup) allocation agreement which assigns 9.44% of the cost to RMI. On July 7,
1999, a consent decree among the PRPs, the United States and the State of Ohio,
was entered in United States District Court, which formalized the Company's
share of the Fields Brook Phase 2 costs at the previously agreed to cost
allocation percentage. The consent decree also settles the Natural Resource
Damage Claims, the EPA's past cost demands and also requires the United States,
as a PRP, to pay a share of future costs.
At September 30, 1999, the amount accrued for future environmental-related
costs was $2.8 million. Based on available information, RMI believes its share
of potential environmental-related costs, before expected contributions from
third parties, is in a range from $3.5 million to $6.3 million, in the
aggregate. The July 7, 1999 consent decree formalized the estimated cost of
remediation for the Fields Brook site. As a result, the Company, in connection
with its quarterly evaluation of its accrual for future environmental-related
costs, has reduced its accrual to $2.8 million from $3.5 million as of June 30,
1999. This adjustment has been reflected in cost of sales. The amount accrued is
net of expected contributions from third parties (which does not include any
amounts from insurers) of approximately $2.1 million, which the Company believes
are probable. The Company has been receiving contributions from such third
parties for a number of years as partial reimbursement for costs incurred by the
Company. As these proceedings continue toward final resolution, amounts in
excess of those already provided may be necessary to discharge the Company from
its obligations for these projects.
The ultimate resolution of these foregoing contingencies could,
individually or in the aggregate, be material to the consolidated financial
statements. However, management believes that the Company will remain a viable
and competitive enterprise even though it is possible that these matters could
be resolved unfavorably.
NOTE 5--INVENTORIES:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
---------------------------------------
SEPTEMBER 30, 1999
(UNAUDITED) DECEMBER 31, 1998
------------------ -----------------
<S> <C> <C>
Raw material and supplies.................. $ 67,908 $ 73,820
Work-in-process and finished goods......... 128,521 111,103
Adjustments to LIFO values................. (17,825) (18,088)
-------- --------
$178,604 $166,835
======== ========
</TABLE>
8
<PAGE> 10
NOTE 6--SEGMENT REPORTING:
The Company's reportable segments are the Titanium Group and the
Fabrication and Distribution Group. Segment information for the quarterly and
nine month periods ended September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -------------------
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
BUSINESS SEGMENT NET SALES:
Titanium
Trade..................................... $ 26,611 $57,242 $ 91,012 $189,771
Intersegment.............................. 10,209 5,171 28,351 15,943
-------- ------- -------- --------
36,820 62,413 119,363 205,714
Fabrication and Distribution
Trade..................................... 20,134 17,967 73,303 64,775
Intersegment.............................. 1,004 -- 1,004 --
-------- ------- -------- --------
21,138 17,967 74,307 64,775
Other operations............................ 4,638 5,818 13,704 12,062
Adjustments and eliminations................ (11,213) (5,171) (29,355) (15,943)
-------- ------- -------- --------
Total net sales........................ $ 51,383 $81,027 $178,019 $266,608
======== ======= ======== ========
SEGMENT OPERATING INCOME (LOSS):
Titanium.................................. $ (838) $18,238 $ 4,847 $ 53,417
Fabrication and distribution.............. (2,782) 1,654 (2,724) 6,195
Other operations.......................... 267 127 1,262 466
-------- ------- -------- --------
Total operating income (loss).......... (3,353) 20,019 3,385 60,078
RECONCILIATION OF SEGMENT OPERATING INCOME
TO REPORTED INCOME (LOSS) BEFORE INCOME
TAXES:
Other income--net......................... 136 751 812 2,174
Interest expense.......................... 694 (57) 1,864 0
-------- ------- -------- --------
Reported income (loss) before income
taxes................................ $ (3,911) $20,827 $ 2,333 $ 62,252
======== ======= ======== ========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in connection with the information
contained in the Consolidated Financial Statements and Notes to Consolidated
Financial Statements. The following information contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, and are subject to the safe harbor created by that Act. Such
forward-looking statements include, without limitation, statements regarding the
future availability and prices of raw materials, the competitiveness of the
titanium industry, demand for the Company's products, the historic cyclicality
of the titanium and aerospace industries, the impact of industry-wide
adjustments to inventory, uncertain defense spending, long-term supply
agreements, the performance of customers under long-term contracts, the ultimate
determination of pending trade petitions, global economic conditions, the
availability of capital on acceptable terms, the Company's order backlog and the
conversion of that backlog into revenue, labor relations, the long-term impact
of a recently concluded work stoppage, including the implementation of new work
rules; the impact of Year 2000 compliance, the ability to efficiently integrate
into the manufacturing process enterprise resource planning software
application, and other statements contained herein that are not historical
facts. Because such forward-looking statements involve risks and uncertainties,
there are important factors that could cause actual results to differ materially
from those expressed or implied by such forward-looking statements. These and
other risk factors are set forth below in the "Outlook" section, as well as
being described in the Company's other filings with the Securities and Exchange
Commission ("SEC") over the last 12 months, copies of which are available from
the SEC or may be obtained upon request from the Company.
9
<PAGE> 11
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
NET SALES
Net sales decreased to $51.4 million for the three months ended September
30, 1999 compared to net sales of $81.0 million in the corresponding 1998
period. Sales for the Company's Titanium Group amounted to $36.8 million in the
three months ended September 30, 1999 compared to $62.4 million in the same
period of 1998. This sales decrease is due primarily to reduced shipments of
titanium mill products resulting from reduced aerospace demand, and three and a
half weeks of downtime on the four high rolling mill at the Company's Niles,
Ohio facility in July. Two weeks of the downtime were for scheduled maintenance;
the remaining week and a half were due to equipment failure. Shipments of
titanium mill products were 2.1 million pounds in the third quarter of 1999
compared to 4.5 million pounds for the same period in 1998. The decrease in mill
product shipments reflects a general softening in demand for products used in
aerospace applications as well as the downtime on the rolling mill. Average
selling prices on mill products in the third quarter of 1999 decreased
marginally to $14.67 per pound from $14.76 per pound in the third quarter of
1998. Sales for the Company's Fabrication and Distribution Group amounted to
$21.1 million in the three months ended September 30, 1999 compared to $18.0
million in the same period of 1998. The primary reason for this increase is the
addition of $8.5 million of net sales from the Company's newly acquired
subsidiaries, New Century Metals, Inc. ("NCM") and Weld-Tech Engineering, L.P.
("Weld-Tech") offset by reduced sales from fabricated aerospace and oil and gas
products. Both companies were acquired during the fourth quarter of 1998.
GROSS PROFIT
Gross profit amounted to $3.5 million, or 6.8% of sales for the quarter
ended September 30, 1999 compared to a gross profit of $25.2 million or 31.2%
for the comparable 1998 period. The primary reason for this decrease is the
impact of reduced titanium mill product shipments resulting from the general
softening in demand for mill products used in aerospace applications, reduced
profits from oil and gas activities reflecting $1.9 million in aggregate charges
related to new market development, the downtime on the rolling mill in July, and
reduced activity in hot-formed part and cut-to-size programs, partially offset
by NCM and Weld-Tech gross profits.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses amounted to $5.8 million for
the quarter ended September 30, 1999 compared to $4.1 million for the same
quarter in 1998. This increase results primarily from the inclusion of $1.5
million of SG&A costs from NCM and Weld-Tech. Research, technical and product
development expenses amounted to $1.1 million in each of the quarters ended
September 30, 1999 and 1998.
OPERATING INCOME
Operating loss for the three months ended September 30, 1999 amounted to
$3.4 million, compared to a $20.0 million profit in the same period of 1998. The
Titanium Group reported an operating loss of $0.8 million in 1999 compared to an
$18.2 million profit in 1998. This decrease resulted primarily from reduced
profit margins on mill products. The reduction in mill product profit margins
resulted primarily from lower shipping levels as a result of the general
softening in demand for mill products used in aerospace as well as the three and
a half weeks of downtime on the Company's four high rolling mill. Operating
income in the Fabrication and Distribution Group amounted to a loss of $2.8
million for the third quarter of 1999 compared to a profit of $1.7 million in
1998. This decrease results primarily from losses generated from oil and gas
activities which reflect $1.9 million in aggregate charges related to new market
development, and the cut-to-size programs and distribution businesses, which
were affected by reduced aerospace demand.
INCOME TAXES
In the third quarter of 1999, the Company recorded an income tax benefit of
$1.4 million compared to a tax provision of $5.1 million recorded in the third
quarter of 1998. The effective tax rate for the third quarter of 1999 was
approximately 37%. The effective tax rate for the third quarter of 1998 was
approximately 25%. The difference between the statutory tax rate of 35% and the
effective tax rate for the third quarter of 1998 was
10
<PAGE> 12
primarily due to adjustments to the deferred tax asset valuation allowance as it
related to expected 1998 full year results.
OTHER INCOME
Other income for the third quarter of 1999 amounted to $0.1 million
compared to $0.8 million for the same period in 1998. This decrease resulted
primarily from reduced investment income on short-term securities.
INTEREST EXPENSE
Interest expense for the third quarter 1999 amounted to $0.7 million
compared to no interest expense in the same period of 1998. This increase is due
to increased levels of debt outstanding.
NET INCOME
Net loss for the quarter ended September 30, 1999 amounted to $2.5 million
compared to net income of $15.7 million in the comparable 1998 period. The
decrease in net income is due primarily to reduced profits in both the Company's
Titanium and Fabrication and Distribution Groups when compared to the same
period in 1998. The Titanium Group's results were adversely impacted by reduced
aerospace demand and the downtime on the four high rolling mill in July. The
Fabrication and Distribution Group's results were also impacted by the reduced
overall demand for titanium products used in aerospace applications, $1.3
million in after tax charges related to new market development, as well as soft
demand for tubular goods and fabricated products used in oil and gas
applications.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
NET SALES
Net sales amounted to $178.0 million for the nine months ended September
30, 1999 compared to net sales of $266.6 million in the corresponding 1998
period. This decrease results primarily from reduced sales of titanium mill
products partially offset by increased net revenues from fabricated products.
Sales for the Company's Titanium Group amounted to $119.4 million in the nine
months ended September 30, 1999 compared to $205.7 million in the same period of
1998. This sales decrease is due primarily to reduced shipments of titanium mill
products resulting from reduced aerospace demand, and the impact of a six month
strike at the Company's Niles, Ohio facility, as well as downtime on the
Company's rolling mill in Niles, Ohio, partially offset by increased average
selling prices. Shipments of titanium mill products were 6.4 million pounds in
the first nine months of 1999 compared to 14.3 million pounds for the same
period in 1998. Average selling prices on mill products in the first nine months
of 1999 increased to $16.17 per pound from $14.80 per pound in the first nine
months of 1998. The increase in average selling prices for mill products results
primarily from a shift in product mix toward higher value-added flat-rolled
products when compared to 1998. Sales for the Company's Fabrication and
Distribution Group amounted to $74.3 million in the nine months ended September
30, 1999 compared to $64.8 million in the same period of 1998. The primary
reason for this increase is the addition of $30.3 million of net sales from NCM
and Weld-Tech, partially offset by reduced sales from oil and gas markets as
well as reduced sales from fabricated aerospace products. Both NCM and Weld-Tech
were acquired during the fourth quarter of 1998.
GROSS PROFIT
Gross profit amounted to $24.6 million, or 13.8% of sales for the nine
months ended September 30, 1999 compared to a gross profit of $74.9 million or
28.1% for the comparable 1998 period. The primary reason for this decrease is
the impact of reduced titanium mill product shipments resulting from the work
stoppage at the Company's Niles, Ohio plant referred to above, the incursion of
higher operating expenses in advance of a return to normal production levels
following the strike, a reduction of mill product shipments as a result of
decreased aerospace demand, $1.9 million in aggregate charges related to new
market development, and downtime on the rolling mill, partially offset by
profits contributed by NCM and Weld-Tech.
11
<PAGE> 13
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses amounted to $18.1 million for
the nine months ended September 30, 1999 compared to $11.9 million for the same
period in 1998. This increase results primarily from the inclusion of $6.4
million of SG&A costs from NCM and Weld-Tech. Research, technical and product
development expenses amounted to $3.1 million in the nine months ended September
30, 1999 compared to $2.9 million in the same period of 1998.
OPERATING INCOME
Operating income for the nine months ended September 30, 1999 amounted to
$3.4 million, compared to $60.1 million in the same period of 1998. Operating
income in the Titanium Group decreased to $4.8 million in the first nine months
of 1999 compared to $53.4 million in 1998. This decrease results primarily from
reduced profit margins on mill products. The reduction in mill product profit
margins resulted primarily from lower shipping levels as a result of decreased
aerospace demand, the work stoppage, and downtime on the rolling mill, partially
offset by a shift in product mix to higher margin value-added flat roll
products. Operating losses in the Fabrication and Distribution Group amounted to
$2.7 million for the first nine months of 1999 compared to a profit of $6.2
million in 1998. This decrease resulted from $1.9 million in aggregate charges
related to new market development, losses generated from oil and gas activities,
and the cut-to-size programs and distribution businesses.
INCOME TAXES
In the first nine months of 1999, the Company recorded an income tax
provision of $0.9 million compared to a provision of $1.1 million recorded in
the same period of 1998. The 1998 period benefited from a $16.1 million
nonrecurring adjustment to the Company's deferred tax valuation allowance. The
effective tax rate for the first nine months of 1999 was approximately 37%.
Exclusive of the nonrecurring adjustments, the effective tax rate for the first
nine months of 1998 was approximately 28%. The difference between the statutory
tax rate of 35% and the effective tax rate for the first nine months of 1998 was
primarily due to adjustments to the deferred tax asset valuation allowance as it
related to expected 1998 full year results.
OTHER INCOME
Other income in the nine months ended September 30, 1999 amounted to $0.8
million compared to $2.2 million for the same period in 1998. This decrease
resulted primarily from reduced investment income on short-term securities.
INTEREST EXPENSE
Interest expense for the first nine months of 1999 amounted to $1.9 million
compared to $0.1 million in the first nine months of 1998. This increase is due
to increased levels of debt outstanding.
NET INCOME
Net income for the nine months ended September 30, 1999 amounted to $1.5
million compared to $61.2 million in the comparable 1998 period. The decrease in
net income is due primarily to reduced profits in both the Company's Titanium
and Fabrication and Distribution groups when compared to the same period in
1998. Prior year results were favorably impacted by a $16.1 million nonrecurring
tax benefit when compared to the first nine months of 1999. The Titanium Group's
results were adversely impacted by reduced aerospace demand, the effects of the
work stoppage, and downtime on the rolling mill. The Fabrication and
Distribution Group's results were also impacted by reduced demand for hot
formed, cut-to-size and fabricated titanium products used in aerospace
applications as well as soft demand, resulting from reduced exploration
activity, for tubular goods and fabricated products used in oil and gas
applications and $1.3 million in after tax charges related to new market
development.
12
<PAGE> 14
OUTLOOK
Beginning in 1995, and continuing into early 1998, the U.S. titanium
industry experienced a significant increase in demand and pricing for titanium
mill products. This increase in demand resulted primarily from an unprecedented
increase in demand from the commercial aerospace markets. During the 1995-1997
period, most commercial airlines reported stronger operating profits. In order
to meet increasing passenger load demands and the need to replace older, less
efficient aircraft, commercial airlines placed orders for new and replacement
aircraft at near record levels, and the leading manufacturers of commercial
aircraft announced increased build and delivery rates for certain aircraft.
Because of the Asian financial crisis, production delays and difficulties at its
manufacturing facilities and uncertain global economic conditions affecting the
demand for commercial aircraft, beginning in mid 1998, Boeing Commercial
Airplane Group made a number of announcements reducing its forecasted production
rates on a number of aircraft models in the 1999-2000 time frame. Other
aerospace contractors announced delivery delays and rescheduling resulting from
the Boeing announcements and, therefore, created a need to adjust industry-wide
inventory requirements downward from peak levels. The extent or duration of this
inventory adjustment period, and the amount of excess inventory in the
procurement pipeline is unknown, but the inventory correction is expected to
last throughout 1999. RMI has experienced some order cancellations and
rescheduling of orders. Volume and pricing of incoming orders has shown some
softening particularly in the forging products such as ingot and bloom. Demand
and pricing for the Company's core value-added products, alloy sheet and plate,
while softening somewhat, remain relatively strong. The reduction in commercial
aircraft build rates will impact the overall demand for titanium mill products
for at least the next three to four quarters. Based on currently available
information, the Company anticipates that the U.S. titanium industry's 1999
total shipments will decrease 25%-35% from 1998 levels. If worldwide economic
conditions cause commercial airlines to cancel or delay additional aircraft,
titanium demand and pricing could come under further pressure.
On February 2, 1998, RMI entered into an agreement with Boeing Commercial
Airplane Group whereby RMI will supply Boeing and its family of commercial
suppliers with up to 4.5 million pounds of titanium products annually. The
agreement, which began in 1999, has an initial term of five years and, subject
to review by the parties in the fourth year, can be extended for an additional
five years. Under the accord, Boeing will receive firm prices in exchange for
RMI receiving a minimum volume commitment of 3.25 million pounds per year.
Should volumes drop below the minimum contractual commitment, the contract
contains provisions for financial compensation. Boeing has recently notified the
Company that it is unlikely Boeing will meet its 1999 minimum purchase
commitment volumes.
In another accord, RMI, through its French affiliate, Reamet, has been
chosen by Aerospatiale as the major supplier of the titanium flat rolled
products required for its Airbus programs beginning in 1999 and extending
through 2001. Requirements are principally for flat rolled products, including
value-added cut-to-size shapes. Airbus has indicated that it expects to increase
its build rates over the next several years.
RMI has also been designated the sole supplier of titanium mill products
for the Air Force F-22 fighter being built by Lockheed Martin and Boeing. The
new contract, which begins this year, will continue through the life of the
program with approximately 339 aircraft forecast to be produced by the year
2012. The sales value of this contract could potentially total $340 million. The
number of aircraft ultimately produced and the amount of titanium supplied by
RMI is contingent upon funding provided for the F-22 program in the military
budget. Program funding for the F-22 was recently approved by Congress for the
next year. Future funding for the F-22 program is unclear as the Company
believes Congress will be approving funding year-to-year.
RMI was also selected by military aircraft producers Boeing and Northrop as
the principal supplier of titanium alloy plate and alloy sheet including
just-in-time, cut-to-size products, for the C-17 Transport, F-15 Eagle and the
F/A-18 Hornet programs. The Hornet program includes the new E/F version which
utilizes considerably more titanium than earlier C/D models. The agreement began
with May 1999 requirements and runs through April 2001. In September 1999, the
military effectively cancelled the F-15 Eagle program, however, the Company
believes any reductions from the loss of this program will be offset by
increases in the C-17 Transport, F/A-18 Hornet, and F-22 programs.
RMI has been named by B.F. Goodrich Aerospace Aerostructures Group, which
designs and manufactures engine nacelle systems for large commercial and
military aerospace applications, as its principal supplier of alloy
13
<PAGE> 15
sheet. RMI also secured contracts with Contrucciones Aeronauticas S.A. (CASA) of
Spain and Daimler-Benz Aerospace AG of Germany for their alloy plate and sheet
requirements in connection with the Airbus and Eurofighter programs. All three
contracts, totaling more than $60 million, began in 1999 and extend for a
minimum of three years.
RMI purchases significant quantities of titanium sponge at opportunistic
prices. During the work stoppage referred to in this document, RMI consumed very
little sponge, electing instead to purchase ingot from outside suppliers. As a
result, the Company has significant quantities of sponge on hand, and estimates
that its 1999 sponge purchases will be significantly reduced from 1998 levels.
Additionally, because of reduced demand and an abundant worldwide supply of
titanium sponge, RMI expects lower sponge prices for 1999. Due to the softening
of demand for titanium mill products resulting from reduced commercial aircraft
build rates, overall demand for titanium scrap, which accounts for approximately
40% of the Company's raw material requirements, has decreased. Because of
increased supplies of titanium scrap, prices for scrap have eased. Prices for
the Company's alloying agents are closely tied to overall demand. RMI believes
that it has an adequate supply of raw materials available from a number of
different suppliers.
As a result of softening demand, the Company's total order backlog as of
September 30, 1999 was approximately $219 million, compared to $303 million at
December 31, 1998.
After the United Steelworkers of America and RMI failed to reach agreement
on a new contract covering the production and maintenance workers' clerical and
technical employees at its Niles, Ohio plant, a work stoppage, commenced October
1, 1998. On April 9, 1999, a tentative agreement was reached on the terms of a
new four and one-half year contract. On April 12, 1999 the agreement was
ratified ending the over six and one-half month strike. The Niles plant is the
Company's largest production facility. During the work stoppage, operations at
the plant were conducted by management and salaried personnel at a rate of
approximately 40-50% of normal production level. It is impossible to accurately
know what RMI's sales and earnings would have been in the nine month period
ended September 30, 1999, had the work stoppage not occurred. However, RMI
estimates, after giving consideration to market driven reductions, that its
shipments of titanium mill products were reduced as a result of the strike by
approximately 25% in the first six months of 1999. Because of the time required
to complete an orderly recall of production and maintenance workers, a
resumption to normal plant operating levels was not completed until early May.
The softening in both demand and pricing for titanium mill products destined for
the aerospace markets began before the strike commenced, and is continuing.
Therefore, the Company cannot accurately isolate the cost of the strike,
including lost production and shipments, from the overall softening aerospace
demand.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operating activities totaled $18.5 million in the first
nine months of 1999 compared to $16.5 million in the first nine months of 1998.
The change in net cash flows from operating activities in the first nine months
of 1999, compared to the comparable 1998 period was due primarily to the change
in working capital partially offset by the adverse change in net income. The
Company's working capital ratio was 5.6 to 1 at September 30, 1999.
During the first nine months of 1999 and the comparable 1998 period, the
Company's cash flow requirements for capital expenditures were funded primarily
by cash provided from operating activities and, to a lesser degree, by financing
activities.
The Company anticipates that it will be able to fund all of its 1999
working capital requirements with funds generated by operations. Funds for
capital expenditures, and the Company's recently announced share repurchase
program (see item 5) will be funded from a combination of cash provided by
operations and supplemental borrowings as required. The Company's long-term
liquidity requirements, including capital expenditures, are expected to be
financed by a combination of internally generated funds, borrowings and other
sources of external financing if needed.
On September 9, 1999, the Company filed a universal shelf registration with
the Securities and Exchange Commission. The registration would permit RTI to
issue up to $100 million of debt and/or equity securities at an
14
<PAGE> 16
unspecified future date. The proceeds of any such issuance could be utilized to
finance acquisitions, capital investments or other general purposes; however,
the Company has no immediate plans to do so.
CREDIT AGREEMENT
Concurrent with the September 1998 reorganization, RTI entered into a
credit facility, dated September 30, 1998 to replace RMI's existing credit
facilities. The unsecured Credit Facility provides for $125 million five-year
and $25 million one-year borrowings, on a revolving basis, of up to the lesser
of $150 million or a borrowing base equal to the sum of 85% of qualifying
accounts receivable and 60% of qualifying inventory. At September 30, 1999,
$29.7 million was outstanding under the facility. At September 30, 1999, the
Company was in compliance with all covenants under this credit agreement and,
under these covenants, had additional borrowing capacity of approximately $20.0
million. Under the terms of the Credit Facility, the Company, at its option will
be able to borrow at (a) a base rate (which is the higher of PNC Bank's prime
rate or the Federal Funds Effective Rate plus 0.5% per annum), or (b) LIBOR plus
a spread (ranging from 0.5% to 1.5%) determined by the ratio of the Company's
consolidated total indebtedness to consolidated earnings before interest, taxes,
depreciation and amortization.
ENVIRONMENTAL MATTERS
The Company is subject to environmental laws and regulations as well as
various health and safety laws and regulations that are subject to frequent
modifications and revisions. While the costs of compliance for these matters
have not had a material adverse impact on RMI in the past, it is impossible to
predict accurately the ultimate effect these changing laws and regulations may
have on the Company in the future.
At September 30, 1999, the amount accrued for future environment-related
costs were $2.8 million. Based on available information, RMI believes its share
of potential environmental-related costs, before expected contributions from
third parties, is in a range from $3.5 million to $6.3 million, in the
aggregate. The July 7, 1999 consent decree formalized the estimated cost of
remediation for the Fields Brook Site. As a result, the Company, in connection
with its quarterly evaluation of its accrual for future environmental-related
costs, has reduced its accrual to $2.8 million from $3.5 million at June 30,
1999. This adjustment has been reflected in cost of sales. The amount accrued is
net of expected contributions from third parties (which does not include any
amounts from insurers) of approximately $2.1 million, which the Company believes
are probable. The Company has received contributions from such third parties for
a number of years as partial reimbursement for costs incurred by the Company. As
these proceedings continue toward final resolution, amounts in excess of those
already provided may be necessary to discharge the Company from its obligations
for these projects.
The ultimate resolution of these environmental matters could individually,
or in the aggregate, be material to the consolidated financial statements.
However, management believes that the Company will remain a viable and
competitive enterprise even though it is possible that these matters could be
resolved unfavorably.
CAPITAL EXPENDITURES
Gross capital expenditures in the first nine months of 1999 and 1998
amounted to $22.1 and $22.9 million, respectively. The Company has anticipated
capital spending of approximately $25 million in 1999, including amounts for the
Enterprise Resource Planning ("ERP") software project referred to below, and the
completion of the Galt Alloys expansion, which together are expected to total
approximately $5.0 million in the fourth quarter of the year. However, based
upon a number of factors, including profitability, demand for the Company's
products and conditions in the commercial aerospace industry, the amount and or
timing of capital spending could be affected.
After completing an evaluation of future information technology needs and
growth, together with expanding requirements for additional decision making
tools, the Company decided to install an Enterprise Resource Planning software
system. The ERP system has been installed at the Company's largest domestic
operation in Niles, Ohio. The ERP system, including applications for finance,
payroll, general ledger, operations and manufacturing will be implemented at
certain other locations in the fourth quarter, 1999.
15
<PAGE> 17
NEW ACCOUNTING STANDARDS
In March 1998, the Accounting Standards Executive Committee of the AICPA
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The principles established in
this statement are required to be applied to the Company's financial statements
in 1999. The provisions of this standard were adopted in the first quarter, but
did not have a material impact on financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established standards of
accounting and reporting of derivative financial instruments. In September 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133." As a
result, SFAS No. 133 is required to be adopted by the Company in 2001.
Management has not yet evaluated the impact this standard will have on reported
results of operations or financial position.
YEAR 2000 COMPLIANCE
This is a "Year 2000 readiness disclosure" as that term is defined in the
Year 2000 Information and Readiness Disclosure Act of 1998.
Beginning in January of 1996, the Company began to manage its computer
software and hardware to insure that the Year 2000 date change will not
adversely impact is business. The Company has and will continue to make certain
investments in its application software to ensure the Company is Year 2000
compliant. In addition, the Company is monitoring the compliance efforts of
entities with which it interacts. The Company began modification of its
internally developed proprietary software in 1996 and currently estimates that
substantially all of this software has been modified and tested to make it Year
2000 compliant. In any event, many of the Company's internally generated
software programs are considered noncritical applications which can, if
necessary, be performed manually. Noninformation technology systems such as
process control devices and other automated equipment which may contain imbedded
chips that could be affected by the Year 2000 problem have been identified. The
Company has also contacted its key vendors, suppliers and service providers to
monitor their compliance efforts. The Company is continuing to follow up with
those third parties not responding to the original request. A survey of the
Company's customers to assess their Year 2000 readiness is underway. The Company
estimates its costs to inventory, assess, modify and test both its information
and noninformation technology requirements will be less than $1.0 million. These
costs do not include the ERP software.
The ERP system is certified to be Year 2000 compliant. The system will
replace certain existing software which has not and will not be restructured to
address the year-end change at December 31, 1999. For additional information,
see Capital Expenditures above.
The most likely worst case Year 2000 scenario would be the inability of
third party suppliers such as utilities, telecommunication suppliers, critical
material suppliers, and financial institutions to continue providing their goods
and services to the Company. The inability of these vendors to continue
supplying the Company could, in the absence of alternative sources, have a
material adverse impact on the Company's operations and/or financial condition.
The Company has identified multiple alternative supply sources where possible.
It is possible that Year 2000 problems arising either within the Company or with
outside suppliers, could prevent the Company from manufacturing or delivering
products to its customers. However, management does not believe these potential
failures create any new or unique breach of contract liabilities. The Company
does not assume or provide any guarantees or warranties for consequential
damages for failure to deliver.
RTI believes it has allocated appropriate resources to identify and fix
Year 2000 problems; however, there can be no assurances that all Year 2000
problems will be identified and fixed in advance, and it is possible that some
Year 2000 problems could go undetected until after January 1, 2000.
This discussion of RTI's efforts and management's expectations relating to
the effect of Year 2000 compliance on operating results are forward-looking
statements. RTI's ability to achieve Year 2000 compliance and the level of
incremental costs associated therewith could be adversely impacted by, among
other things, the availability and cost of programming and testing resources,
vendors' abilities to modify proprietary software and
16
<PAGE> 18
unanticipated problems identified in the ongoing compliance review. In addition,
RTI has limited or no control over the actions of proprietary software vendors
and other entities with which it interacts. Therefore, Year 2000 compliance
problems experienced by these entities could adversely affect the results of the
Company.
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE.
ITEM 5. OTHER INFORMATION.
The Board of Directors has authorized the spending of up to $15 million to
repurchase shares of RTI common stock. The repurchase program does not include
specific price targets or timetables, and is subject to termination prior to
completion. Purchases under the program may be in either open market
transactions, including block purchases, or in privately negotiated
transactions. At the current stock price, the Company could purchase up to
approximately 10% of the Company's 20.8 million shares outstanding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<S> <C>
3.1 Amended and Restated Articles of Incorporation of the
Company, effective April 29, 1999, incorporated by reference
to Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999.
3.2 Amended Code of Regulations of the Company, incorporated by
reference to Exhibit 3.3 to the Company's Registration
Statement on Form S-4 No. 333-61935.
27 Financial Data Schedule
</TABLE>
(b) There were no reports on Form 8-K filed for the quarter ended September
30, 1999.
17
<PAGE> 19
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.
RTI INTERNATIONAL METALS, INC.
--------------------------------------
(Registrant)
Date: November 15, 1999
By: /s/ L. W. JACOBS
------------------------------------
L. W. Jacobs
Vice President & Chief Financial
Officer
18
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