<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 JUNE 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 August 1, 1999, 20,760,758 shares of common stock of the registrant were
outstanding.
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<PAGE> 2
RTI INTERNATIONAL METALS, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I--FINANCIAL INFORMATION
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 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 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales..................................... $ 59,186 $ 96,542 $ 126,636 $ 185,581
Operating costs:
Cost of sales............................. 51,413 72,364 105,525 135,885
Selling, general and administrative
expenses................................ 6,280 3,810 12,299 7,816
Research, technical and product
development expenses.................... 1,046 974 2,074 1,821
----------- ----------- ----------- -----------
Total operating costs................ 58,739 77,148 119,898 145,522
Operating income.......................... 447 19,394 6,738 40,059
Other income-net.......................... 344 881 676 1,423
Interest expense.......................... (487) (3) (1,170) (57)
----------- ----------- ----------- -----------
Income before income taxes................ 304 20,272 6,244 41,425
Provision for income taxes (Note 3)....... 100 (10,138) 2,298 (4,038)
----------- ----------- ----------- -----------
Net income................................ $ 204 $ 30,410 $ 3,946 $ 45,463
=========== =========== =========== ===========
Net income per common share:
Basic................................ $ 0.01 $ 1.48 $ 0.19 $ 2.22
=========== =========== =========== ===========
Diluted.............................. $ 0.01 $ 1.47 $ 0.19 $ 2.20
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic................................ 20,758,186 20,512,420 20,751,096 20,497,628
=========== =========== =========== ===========
Diluted.............................. 20,908,084 20,645,859 20,834,404 20,645,859
=========== =========== =========== ===========
</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>
JUNE 30 DECEMBER 31
1999 1998
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 16,388 $ 11,075
Receivables -- less allowance for doubtful accounts of
$1,174 and $911........................................ 52,514 63,077
Inventories, net (Note 5)................................. 170,104 166,835
Deferred income taxes..................................... 2,259 2,259
Other current assets...................................... 11,437 11,685
-------- --------
Total current assets................................... 252,702 254,931
Property, plant and equipment net......................... 88,375 77,024
Deferred income taxes..................................... 13,675 13,675
Goodwill.................................................. 37,482 38,144
Other noncurrent assets................................... 11,795 12,246
-------- --------
Total assets........................................... $404,029 $396,020
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ -- $ 16,000
Accounts payable.......................................... 14,806 16,279
Accrued wages and other employee costs.................... 11,462 8,892
Other accrued liabilities................................. 19,418 17,535
-------- --------
Total current liabilities.............................. 45,686 58,706
Long-term debt.............................................. 36,500 20,080
Accrued postretirement benefit cost......................... 19,020 19,020
Other noncurrent liabilities................................ 5,619 5,449
-------- --------
Total liabilities...................................... 106,825 103,255
-------- --------
Contingencies (Note 4)
Shareholders' equity:
Common Stock, $0.01 par value, 50,000,000 shares
authorized; 20,760,758 and 20,719,758 shares issued and
20,760,758 and 20,719,758 outstanding.................. 207 207
Additional paid-in capital................................ 238,578 238,109
Deferred compensation..................................... (1,988) (2,012)
Accumulated earnings...................................... 60,407 56,461
-------- --------
Total shareholders' equity.................................. 297,204 292,765
-------- --------
Total liabilities and shareholders' equity............. $404,029 $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>
SIX MONTHS ENDED
JUNE 30
--------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 3,946 $ 45,463
Adjustment for items not affecting funds from operations:
Depreciation and amortization............................. 4,658 2,724
Deferred taxes............................................ -- (12,452)
Other-net................................................. 235 200
CHANGES IN ASSETS AND LIABILITIES (EXCLUDING CASH):
Receivables................................................. 10,563 4,210
Inventories................................................. (3,269) (18,257)
Accounts payable............................................ (1,473) (3,851)
Other liabilities........................................... 4,623 4,341
Other assets................................................ 699 (676)
-------- --------
Cash provided by operating activities................ 19,982 21,702
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (15,107) (11,279)
-------- --------
Cash used in investing activities.................... (15,107) (11,279)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of employee stock options........................ 18 108
Borrowings under revolving credit agreement............... 16,420 --
Repayment of notes payable................................ (16,000) --
Treasury Common Stock purchased........................... -- (37)
-------- --------
Cash provided by financing activities..................... 438 71
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 5,313 10,494
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 11,075 30,211
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 16,388 $ 40,705
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for
Interest............................................... $ 752 $ 20
Income taxes........................................... $ 766 $ 5,000
Noncash financing activities
Issuance of Common Stock for Restricted Stock Awards... $ 451 $ 919
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
<PAGE> 7
RTI INTERNATIONAL METALS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDT'L. RETAINED
SHARES COMMON PAID-IN DEFERRED EARNINGS COMPREHENSIVE
OUTSTANDING STOCK CAPITAL COMPENSATION (DEFICIT) 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.......................... 36,250 -- 451 (451) -- --
Compensation expense recognized........ -- -- -- 475 -- --
Shares issued from exercise of employee
stock options........................ 4,750 -- 18 -- -- --
Net income............................. -- -- -- -- 3,946 3,946
-------
Comprehensive income................... -- -- -- -- -- 3,946
---------- ---- -------- ------- -------- =======
Balance at June 30, 1999............... 20,760,758 $207 $238,578 $(1,988) $ 60,407
========== ==== ======== ======= ========
</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 STATEMENT
(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 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 six months ended June 30, 1999 the Company recorded an income tax
expense of $2.3 million, or approximately 37% of pre-tax income. The effective
tax rate for the six month period ended June 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 six months
ended June 30, 1998 was approximately 29%.
NOTE 4--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 PRP's, 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 June 30, 1999, the amount accrued for future environmental-related costs
was $3.5 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 $4.2 million to $7.0 million, in the aggregate. 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)
-----------------------------------
JUNE 30, 1999
(UNAUDITED) DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
Raw material and supplies..................... $ 65,352 $ 73,820
Work-in-process and finished goods............ 122,577 111,103
Adjustments to LIFO values.................... (17,825) (18,088)
-------- --------
$170,104 $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
six month periods ended June 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ -------------------
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
BUSINESS SEGMENT NET SALE:
Titanium
Trade............................................ $32,162 $ 64,651 $ 64,401 $132,529
Intersegment..................................... 4,012 5,278 18,142 10,772
------- -------- -------- --------
36,174 69,929 82,543 143,301
Fabrication and Distribution
Trade............................................ $22,929 $ 28,661 $ 53,169 $ 46,808
Intersegment..................................... -- -- -- --
------- -------- -------- --------
22,929 28,661 53,169 46,808
------- -------- -------- --------
Other operations................................... 4,095 3,230 9,066 6,244
Adjustments and eliminations....................... (4,012) (5,278) (18,142) (10,772)
------- -------- -------- --------
Total net sales............................... $59,186 $ 96,542 $126,636 $185,581
======= ======== ======== ========
SEGMENT OPERATING INCOME:
Titanium......................................... $ 944 $ 16,352 $ 5,685 $ 35,179
Fabrication and distribution..................... (815) 2,977 58 4,541
Other operations................................. 318 65 995 339
------- -------- -------- --------
Total operating income........................ 447 19,394 6,738 40,059
RECONCILIATION OF SEGMENT OPERATING INCOME TO
REPORTED INCOME BEFORE INCOME TAXES:
Other income-net................................. 344 881 676 1,423
Interest expense................................. 487 3 1,170 57
Reported income before income taxes........... $ 304 $ 20,272 $ 6,244 $ 41,425
======= ======== ======== ========
</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, uncertain defense spending, including
proposed congressional spending cuts for the F-22 program; long-term supply
agreements, 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, 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 JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
NET SALES
Net sales decreased to $59.2 million for the three months ended June 30,
1999 compared to net sales of $96.5 million in the corresponding 1998 period.
Sales for the Company's Titanium Group amounted to $36.2 million in the three
months ended June 30, 1999 compared to $69.9 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, partially offset by increased
average selling prices. Shipments of titanium mill products were 2.1 million
pounds in the second quarter of 1999 compared to 4.9 million pounds for the same
period in 1998. The decrease in mill product shipments reflects the impact of a
six month strike at the Company's largest production facility which ended April
19, 1999, together with a general softening in demand for products used in
aerospace applications. Because of the need to perform needed maintenance on the
plant facility following the strike, and training and requalification of
returning workers, significant production levels were not attained until early
May. Average selling prices on mill products in the second quarter of 1999
increased to $16.18 per pound from $14.57 per pound in the second quarter 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 $22.9 million in the three months ended June 30, 1999 compared to
$28.7 million in the same period of 1998. The primary reasons for this decrease
are reduced sales from oil and gas markets as well as reduced sales from
fabricated aerospace products, partially offset by the addition of $10.1 million
of net sales from the Company's newly acquired subsidiaries, New Century Metals,
Inc. ("NCM" and Weld-Tech Engineering, L.P. ("Weld-Tech"). Both companies were
acquired during the fourth quarter of 1998.
GROSS PROFIT
Gross profit amounted to $7.8 million, or 13.1% of sales for the quarter
ended June 30, 1999 compared to a gross profit of $24.2 million or 25.0% 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, and the general softening in
demand for mill products used in aerospace applications, as well as reduced
profits from oil and gas activities and reduced activity in the Group's hot-
formed part and cut-to-size programs, partially offset by gross profit
contributed by NCM and Weld-Tech.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses amounted to $6.3 million for
the quarter ended June 30, 1999 compared to $3.8 million for the same quarter in
1998. This increase results primarily from the inclusion of $2.6 million of SG&A
costs from the Company's recently acquired subsidiaries NCM and Weld-Tech.
Research, technical and product development expenses amounted to $1.0 million in
each of the quarters ended June 30, 1999 and 1998.
OPERATING INCOME
Operating income for the three months ended June 30, 1999 amounted to $0.4
million, compared to $19.4 million in the same period of 1998. Operating income
in the Titanium Group decreased to $0.9 million in 1999 compared to $16.4
million 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 and the incursion of higher operating expenses in
advance of increased production levels. Operating income in the Fabrication and
Distribution Group amounted to a loss of $0.8 million for the second quarter of
1999 compared to a profit of $3.0 million in 1998. This decrease results
primarily from losses generated from oil and gas activities which were adversely
impacted by low oil and gas prices, and the Company's cut-to-size programs and
distribution businesses, which were affected by reduced aerospace demand.
10
<PAGE> 12
INCOME TAXES
In the second quarter of 1999, the Company recorded an income tax provision
of $0.1 million compared to a tax credit of $10.1 million recorded in the second
quarter of 1998. The second quarter of 1998 was favorably impacted by a $16.1
million nonrecurring deferred tax benefit resulting from an adjustment to the
Company's deferred tax valuation allowance. The effective tax rate for the
second quarter of 1999 was approximately 37%. Exclusive of the nonrecurring
deferred adjustments, the effective tax rate for the second quarter of 1998 was
approximately 29%. The difference between the statutory tax rate of 35% and the
effective tax rate for the second quarter 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 for the second quarter of 1999 amounted to $0.3 million
compared to $0.9 million for the same period in 1998. This decrease resulted
primarily from reduced investment income on short-term securities.
NET INCOME
Net income for the quarter ended June 30, 1999 amounted to $0.2 million
compared to $30.4 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.
Second quarter 1998 results were favorably impacted by a $16.1 million
nonrecurring deferred tax benefit when compared to the second quarter of 1999.
The Titanium Group's results were adversely impacted by reduced aerospace demand
and the effects of the work stoppage. The Fabrication and Distribution Group's
results were also impacted by the reduced overall demand for titanium products
used in aerospace applications as well as soft demand for tubular goods and
fabricated products used in oil and gas applications, where lower oil and gas
prices reduced exploration activities.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
NET SALES
Net sales amounted to $126.6 million for the six months ended June 30, 1999
compared to net sales of $185.6 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 $82.5 million in the six months ended
June 30, 1999 compared to $143.3 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, partially offset by increased average
selling prices. Shipments of titanium mill products were 4.3 million pounds in
the first six months of 1999 compared to 9.8 million pounds for the same period
in 1998. The decrease in mill product shipments reflects the impact of a six
month strike at the Company's largest production facility which ended April 12,
1999, together with a general softening in demand for products used in aerospace
applications. Because of the need to perform needed maintenance on the plant
facility following the strike, and training and requalification of returning
workers, significant production levels were not attained until early May.
Average selling prices on mill products in the first six months of 1999
increased to $16.92 per pound from $14.82 per pound in the first half 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 $53.2 million in the six months ended June 30, 1999 compared to
$46.8 million in the same period of 1998. The primary reason for this increase
is the addition of $21.8 million of net sales from the Company's recently
acquired subsidiaries, 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.
11
<PAGE> 13
GROSS PROFIT
Gross profit amounted to $21.1 million, or 16.7% of sales for the six
months ended June 30, 1999 compared to a gross profit of $49.7 million or
26.8%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 and a reduction of mill product shipments as a result of
decreased aerospace demand, partially offset by profits contributed by the
Fabrication and Distribution Group.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses amounted to $12.3 million for
the six months ended June 30, 1999 compared to $7.8 million for the same period
in 1998. This increase results primarily from the inclusion of $4.9 million of
SG&A costs from the Company's recently acquired subsidiaries, NCM and Weld-Tech.
Research, technical and product development expenses amounted to $2.1 million in
the six months ended June 30, 1999 compared to $1.8 million in the same period
of 1998.
OPERATING INCOME
Operating income for the six months ended June 30, 1999 amounted to $6.7
million, compared to $40.1 million in the same period of 1998. Operating income
in the Titanium Group decreased to $5.7 million in the first six months of 1999
compared to $35.2 million in 1998. This decrease results primarily from reduced
profit margins on mill products. The reduction in mill product profit margins
results primarily from lower shipping levels as a result of decreased aerospace
demand and the work stoppage partially offset by a shift in product mix to
higher margin value-added flat roll products. Operating income in the
Fabrication and Distribution Group amounted to $0.1 million for the second half
of 1999 compared to a profit of $4.5 million in 1998. This decrease results
primarily from losses generated from oil and gas activities, the Company's
cut-to-size programs and distribution businesses.
INCOME TAXES
In the first six months of 1999, the Company recorded an income tax
provision of $2.3 million compared to a tax credit of $4.0 million recorded in
the first half 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 six months of 1999 was approximately 37%.
Exclusive of the nonrecurring adjustments, the effective tax rate for the first
six months of 1998 was approximately 29%. The difference between the statutory
tax rate of 35% and the effective tax rate for the second quarter 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 six months ended June 30, 1999 amounted to $0.7 million
compared to $1.4 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 six months of 1999 amounted to $1.2 million
compared to $0.1 million in the first six months of 1998. This increase is due
to increased levels of debt outstanding.
NET INCOME
Net income for the six months ended June 30, 1999 amounted to $3.9 million
compared to $45.5 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.
12
<PAGE> 14
1998 results were favorably impacted by a $16.1 million nonrecurring tax credit
when compared to the first six months of 1999. The Titanium Group's results were
adversely impacted by reduced aerospace demand and the effects of the work
stoppage. The Fabrication and Distribution Group's results were also impacted by
the reduced overall 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.
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 which may
affect 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 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 slowing in the growth of commercial
aircraft build rates will impact the overall demand for titanium mill products
for at least the next two to three quarters. Based on currently available
information, the Company anticipates that the U.S. titanium industry's total
shipments will decrease in 1999 from 1998 levels, although the amount of
decrease cannot be accurately predicted. If worldwide economic conditions cause
commercial airlines to cancel or delay 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 is currently undergoing congressional
debate in Washington. The Company is unable to predict the amount or duration of
funding for the program.
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<PAGE> 15
RMI has also been 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.
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 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.
Negotiations covering RMI's 1999 titanium sponge requirements and pricing
levels have been completed. In 1998 RMI purchased significant quantities of
titanium sponge at opportunistic prices. During the work stoppage referred to
below, 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
June 30, 1999 was approximately $226 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 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. Second quarter 1999 results were adversely
impacted by the effects of the work stoppage. It is impossible to accurately
know what RMI's sales and earnings would have been in both the three and six
month periods ended June 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 half 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 $20.0 million in the first
six months of 1999 compared to $21.7 million in the first six months of 1998.
The change in net cash flows from operating activities in the first six months
of 1999, compared to the comparable 1998 period was due primarily to reduced
results of operations partially offset by a reduction in working capital funding
requirements. The Company's working capital ratio was 5.5 to 1 at June 30, 1999.
During the first six months of 1999 and the comparable 1998 period, the
Company's cash flow requirements for capital expenditures were funded by cash
provided from operating activities.
14
<PAGE> 16
The Company anticipates that it will be able to fund its 1999 working
capital requirements and its capital expenditures from funds generated by
operations. However, the Company may borrow funds under its credit facility to
supplement available cash resources 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.
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 June 30, 1999 $36.5
million was outstanding under the facility. 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 June 30, 1999, the amount accrued for future environment-related costs
were $3.5 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 $4.2 million to $7.0 million, in the aggregate. 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 six months of 1999 and 1998
amounted to $15.1 and $11.3 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 $7.0 million in the second half 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. Initially, the ERP will be installed at the Company's largest domestic
operations, and then eventually at all domestic and foreign operations. The
Company has purchased and begun installing the ERP system. A pilot program is up
and successfully running at one of the Company's distribution facilities.
Financial applications such as payroll and general ledger have been installed
and are
15
<PAGE> 17
running. Other applications covering operations and manufacturing functions are
currently being developed and should be implemented periodically throughout
1999.
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 June 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 aggressively 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.
Modifications to these devices are underway, and the Company estimates that
necessary modifications will be completed during the third quarter of 1999. The
Company has also contacted its key vendors, suppliers and service providers to
monitor their compliance efforts. A follow-up has started with those third
parties not responding to the Company's original request. To the extent
necessary, the Company has begun identifying alternative suppliers. 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
possibly 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 delivery 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.
16
<PAGE> 18
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' ability to modify proprietary software and 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 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, 199 , 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 June 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: August 16, 1999
By: /s/ L. W. JACOBS
------------------------------------
L. W. Jacobs
Vice President & Chief Financial
Officer
18
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