<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 MARCH 31, 2000.
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 May 1, 2000, 20,851,799 shares of common stock of the registrant were
outstanding.
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RTI INTERNATIONAL METALS, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
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<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........................ 10
PART II--OTHER INFORMATION.................................. 15
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 15
Item 6. Exhibits and Reports on Form 8-K.................... 16
Signatures.................................................. 17
</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
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RTI INTERNATIONAL METALS, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Sales....................................................... $ 70,508 $ 67,450
Operating costs:
Cost of Sales............................................... 59,748 54,112
Selling, general and administrative expenses................ 7,144 6,019
Research, technical and product development expenses........ 393 1,028
---------- ----------
Total operating costs.................................. 67,285 61,159
---------- ----------
Operating income............................................ 3,223 6,291
Other income-net............................................ 149 332
Interest expense............................................ (773) (683)
---------- ----------
Income before income taxes.................................. 2,599 5,940
Provision for income taxes (Note 3)......................... 1,014 2,198
---------- ----------
Net income.................................................. $ 1,585 $ 3,742
========== ==========
Net income per common share (Note 4):
Basic.................................................. $ 0.08 $ 0.18
========== ==========
Diluted................................................ $ 0.08 $ 0.18
========== ==========
</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>
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 390 $ 3,664
Receivables--less allowance for doubtful accounts of
$1,467 and $1,454...................................... 58,066 56,050
Inventories, net (Note 6)................................. 172,747 175,783
Deferred income taxes..................................... 6,766 6,764
Other current assets...................................... 9,714 10,508
-------- --------
Total current assets................................... 247,683 252,769
Property, plant and equipment, net........................ 96,406 96,524
Deferred income taxes..................................... 2,274 2,274
Goodwill.................................................. 36,954 37,366
Other noncurrent assets................................... 12,355 11,310
-------- --------
Total assets........................................... $395,672 $400,243
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 20,251 $ 20,271
Accrued wages and other employee costs.................... 12,057 16,560
Other accrued liabilities................................. 6,770 6,764
-------- --------
Total current liabilities.............................. 39,078 43,595
Long-term debt.............................................. 34,500 36,200
Accrued postretirement benefit cost......................... 19,383 19,383
Other noncurrent liabilities................................ 5,310 5,461
-------- --------
Total liabilities...................................... 98,271 104,639
-------- --------
Commitments and Contingencies (Note 5)
Shareholders' equity:
Common Stock, $0.01 par value, 50,000,000 shares
authorized; 20,914,099 and 20,860,599 shares issued and
20,851,799 and 20,798,299 outstanding.................. 208 208
Additional paid-in capital................................ 240,203 239,812
Deferred compensation..................................... (2,839) (2,660)
Treasury Stock, at cost; 62,300 and 62,300 shares......... (440) (440)
Accumulated earnings...................................... 60,269 58,684
-------- --------
Total shareholders' equity.................................. 297,401 295,604
-------- --------
Total liabilities and shareholders' equity............. $395,672 $400,243
======== ========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
4
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RTI INTERNATIONAL METALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------
2000 1999
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 1,585 $ 3,742
Adjustment for items not affecting funds from operations:
Depreciation and amortization............................. 2,927 2,339
Deferred taxes............................................ (2) --
Other-net................................................. 212 122
CHANGES IN ASSETS AND LIABILITIES (EXCLUDING CASH):
Receivables................................................. (2,016) 5,307
Inventories................................................. 3,036 4,032
Accounts payable............................................ (20) (5,545)
Other current liabilities................................... (4,497) (238)
Other assets and liabilities................................ (402) 1,800
------- --------
Cash provided by operating activities................ 823 11,559
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in subsidiaries, net of cash acquired......... -- (16,000)
Capital expenditures...................................... (2,397) (5,603)
------- --------
Cash used in investing activities.................... (2,397) (21,603)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of employee stock options........................ -- 6
Net borrowings and repayments under revolving credit
agreement.............................................. (1,700) 16,420
------- --------
Cash provided by (used in) financing activities........... (1,700) 16,426
------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (3,274) 6,382
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 3,664 11,075
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 390 $ 17,457
======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized........ $ 170 $ 752
Cash paid for income taxes................................ $ 931 $ 766
Noncash financing activities
Issuance of common stock for restricted stock awards... $ 391 $ 415
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
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RTI INTERNATIONAL METALS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
ADDT'L. RETAINED
SHARES COMMON PAID-IN DEFERRED TREASURY EARNINGS COMPREHENSIVE
OUTSTANDING STOCK CAPITAL COMPENSATION STOCK (DEFICIT) TOTAL INCOME
----------- ------ -------- ------------ -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1999.................. 20,798,299 $208 $239,812 $(2,660) (440) $58,684 295,604 --
Shares issued for
restricted stock award
plans................. 53,500 -- 391 (391) -- -- -- --
Compensation expense
recognized............ -- -- -- 212 -- -- 212 --
Shares issued from
exercise of employee
stock options......... -- -- -- -- -- -- --
Net income.............. -- -- -- -- -- 1,585 1,585 1,585
------
Comprehensive income.... -- -- -- -- -- -- -- $1,585
---------- ---- -------- ------- ----- ------- -------- ======
Balance at March 31,
2000.................. 20,851,799 $208 $240,203 $(2,839) $(440) $60,269 $297,401
========== ==== ======== ======= ===== ======= ========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
6
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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 1951. 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 6
3/4% notes (the "Notes") which were exchangeable in February, 2000, for
5,483,600 shares of RTI Common Stock owned by USX. On March 31, 1999, USX
announced that it terminated its ownership interest in the Company. USX
irrevocably deposited with Chase Manhattan Trust Company, NA, all of the
5,483,600 shares of the Company's common stock it previously owned. The deposit
of the shares was in full satisfaction of the Notes. Chase was the trustee under
the note indenture and held the shares in trust for the benefit of the holders
of the Notes until the shares were exchanged for the Notes on the maturity date.
On February 1, 2000, Chase delivered 5,483,000 of RTI common shares to the
note holders in exchange for the Notes.
NOTE 3--INCOME TAXES
In the three months ended March 31, 2000, the Company recorded an income
tax expense of $1.0 million, or 39.0% of pre-tax income. The effective tax rate
for the three month period ended March 31, 2000 of 39.0% exceeded the federal
statutory rate of 35% as a result of state income taxes and non-deductible
goodwill amortization.
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NOTE 4--EARNINGS PER SHARE
A reconciliation of the income and weighted average number of outstanding
common shares used in the calculation of basic and diluted earnings per share
for the quarters ended March 31, 2000 and 1999 follows (in thousands except
number of shares and per share amounts):
<TABLE>
<CAPTION>
NET EARNINGS
INCOME SHARES PER SHARE
------ ---------- ---------
<S> <C> <C> <C>
For the quarter ended March 31, 2000
Basic EPS................................................... $1,585 20,832,182 $0.08
Effect of potential common stock:
Stock options............................................. -- 62,432 --
------ ---------- -----
Diluted EPS................................................. $1,585 20,894,614 $0.08
====== ========== =====
For the quarter ended March 31, 1999
Basic EPS................................................... $3,742 20,743,927 $0.18
Effect of potential common stock:
Stock options............................................. -- 82,006 --
------ ---------- -----
Diluted EPS................................................. $3,742 20,825,933 $0.18
====== ========== =====
</TABLE>
NOTE 5--COMMITMENTS AND CONTINGENCIES
In connection with the 1990 Reorganization, the Company agreed to indemnify
USX and Quantum against liabilities related to their ownership of RMI and its
immediate predecessor, Reactive Metals, Inc., which was formed by USX and
Quantum in 1964.
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. Given the
critical nature of many of the aerospace end uses for the Company's products,
including specifically their use in critical rotating parts of gas turbine
engines, the Company maintains aircraft products liability insurance of $250
million, which includes grounding liability.
Environmental Matters
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.
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 the Company 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 current estimate of the cost of remediation of Fields Brook,
based on recent studies, improved remediation technology and redefined cleanup
standards is approximately $15 million. The actual cost of remediation may vary
from the estimate depending upon any number of factors.
8
<PAGE> 10
The Company and twelve others entered into a Phase 2 (actual cleanup)
allocation agreement which assigns 9.44% of the cost to RMI. However, the actual
percentage may be more or less based on contributions from other parties which
are not currently participating in the Phase 2 allocation agreement.
At March 31, 2000, the amount accrued for future environmental-related
costs were $2.6 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.
Gain Contingency
In 1999, RTI made claim against Boeing Commercial Airplane Group of
approximately $7 million for contractual amounts due in connection with the
terms of their long-term supply agreement. Under the terms of the contract,
Boeing was required to order a minimum of 3.25 million pounds of titanium during
1999. Actual shipments were less than one million pounds. This claim was treated
as a gain contingency under SFAS No. 5, "Accounting for Contingencies" as of
December 31, 1999 and March 31, 2000, therefore recognition of any amount
realizable under this claim has been deferred.
On April 26, 2000, Boeing satisfied the above mentioned contractual claim
for approximately $6 million. The financial impact of this settlement will be
reflected in the quarter ending June 30, 2000.
Other
The company is also the subject of, or a party to, a number of other
pending or threatened legal actions involving a variety of matters incidental to
the business.
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 6--INVENTORIES:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------------------
MARCH 31, 2000
(UNAUDITED) DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
Raw material and supplies...................... $ 65,510 $ 65,468
Work-in-process and finished goods............. 125,062 128,140
Adjustments to LIFO values..................... (17,825) (17,825)
-------- --------
$172,747 $175,783
======== ========
</TABLE>
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NOTE 7--SEGMENT REPORTING:
The Company's reportable segments are the Titanium Group and the
Fabrication and Distribution Group. Segment information for the quarterly
periods ended March 31, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31,
-----------------
2000 1999
------- -------
<S> <C> <C>
NET SALES:
Titanium
Trade..................................................... $37,286 $32,239
Intersegment.............................................. 13,647 14,130
------- -------
50,933 46,369
Fabrication and Distribution
Trade..................................................... 29,144 30,240
Intersegment.............................................. 175 --
------- -------
29,319 30,240
Other operations............................................ 4,078 4,971
Adjustments and eliminations................................ (13,822) (14,130)
------- -------
Total net sales........................................ $70,508 $67,450
======= =======
OPERATING INCOME:
Titanium.................................................. $ 2,932 $ 4,741
Fabrication and distribution.............................. 91 873
Other operations.......................................... 200 677
------- -------
Total operating income................................. 3,223 6,291
RECONCILIATION OF OPERATING INCOME TO
REPORTED INCOME BEFORE TAXES:
Other income--net......................................... 149 332
Interest expense.......................................... (773) (683)
------- -------
Reported income before taxes........................... $ 2,599 $ 5,940
======= =======
</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 Selected 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,
competition in the domestic and international titanium and specialty metals
industries, demand for the Company's products, the historic cyclicality of the
aerospace, chemical processing and the oil and gas industries, uncertain defense
spending, the enforceability of long-term supply agreements, difficulties
associated with new market development, global economic conditions, the
Company's order backlog and the conversion of that backlog into revenue, labor
relations, 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.
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THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
NET SALES
Net sales increased to $70.5 million for the three months ended March 31,
2000 compared to net sales of $67.5 million in the corresponding 1999 period.
Sales for the Company's Titanium Group amounted to $41.3 million in the first
three months of 2000 compared to $37.3 million in the same period of 1999. This
sales increase is due primarily to increased shipments of titanium mill products
partially offset by a decrease in average selling prices. Shipments of titanium
mill products were 2.8 million pounds in the first quarter of 2000 compared to
2.2 million pounds for the same period in 1999. The increase in first quarter
2000 mill product shipments reflects the impact of the strike at the Company's
largest production facility which lasted the entire first quarter of 1999.
Average selling prices on mill products in the first quarter of 2000 decreased
to $16.60 per pound from $17.63 per pound in the first quarter of 1999. The
decrease in average selling prices for mill products results primarily from an
increase in product mix of lower value-added forged products when compared to
1999. Sales for the Company's Fabrication and Distribution Group amounted to
$29.1 million in the three months ended March 31, 2000 compared to $30.2 million
in the same period of 1999. The primary reason for this decrease was a general
softening in demand for products used in aerospace and energy applications.
GROSS PROFIT
Gross profit amounted to $10.8 million, or 15.3% of sales for the quarter
ended March 31, 2000 compared to a gross profit of $13.3 million or 19.7% for
the comparable 1999 period. This decrease primarily reflects the unfavorable
impact of an increase in product mix of lower value-added forged mill products,
lower selling prices as a result of the general softening in demand for products
used in aerospace and energy applications, offset by the comparative increase in
mill product shipments due to the strike by the United Steelworkers of America
at the company's Niles, Ohio facility which began October 1, 1998 and was
settled April 12, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses amounted to $7.1 million for
the quarter ended March 31, 2000 compared to $6.0 million for the same quarter
in 1999. Research, technical and product development expenses amounted to $0.4
million in the first quarter of 2000 compared to $1.0 million in the first
quarter of 1999. The increase in selling, general and administrative expenses is
primarily offset by the decrease in research, technical and product development
expenses as costs incurred by RTI Energy Systems have shifted from product
development to sales and administrative in nature. The remainder of the increase
in selling, general and administrative is primarily due to one time pension
expense related to an executive retirement in the first quarter of 2000.
OPERATING INCOME
Operating income for the three months ended March 31, 2000 amounted to $3.2
million, or 4.6% of sales compared to $6.3 million or 9.3% of sales in the same
period of 1999. This change consists of a decrease in operating income in the
Titanium Group of $1.8 million primarily due to the unfavorable impact of an
increase in product mix of lower value-added forged mill products, lower selling
prices as a result of the general softening in demand for products used in
aerospace applications, partially offset by an increase in mill product
shipments due to the strike by the United Steelworkers of America at the
company's Niles, Ohio facility which began October 1, 1998 and was settled April
12, 1999. The change also reflects a decrease in operating income in the
Fabrication and Distribution Group of $.8 million due to lower selling prices as
a result of the general softening in demand for products used in aerospace and
energy applications.
INCOME TAXES
In the first quarter of 2000, the Company recorded an income tax provision
of $1.0 million compared to a $2.2 million provision recorded in the first
quarter of 1999. The effective tax rate for the first quarter of 2000 was
approximately 39%. The effective tax rate for the first quarter of 1999 was
approximately 37%. The effective tax
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rate for the three month period ended March 31, 2000 of 39.0% was greater than
the Federal statutory rate of 35% due to state income taxes and non-deductible
goodwill amortization.
OTHER INCOME
Other income for the first quarter of 2000 amounted to $0.1 million
compared to $0.3 million for the same period in 1999. This decrease resulted
primarily from reduced investment income on short-term securities.
NET INCOME
Net income for the quarter ended March 31, 2000 amounted to $1.6 million or
2.2% of sales, compared to $3.7 million or 5.5% of sales in the comparable 1999
period. This decrease reflects the unfavorable impact of an increase in product
mix of lower value-added forged mill products, lower selling prices as a result
of the general softening in demand for products used in aerospace and energy
applications, partially offset by an increase in mill product shipments due to
the strike by the United Steelworkers of America at the company's Niles, Ohio
facility which began October 1, 1998 and was settled April 12, 1999.
OUTLOOK
Because of the Asian financial crisis, production difficulties at its
manufacturing facilities and uncertain global economic conditions which affect
the demand for commercial aircraft, Boeing Commercial Airplane Group recently
made a number of announcements reducing its forecasted production rates on a
number of aircraft models in the 2000-2001 time frame. Aerospace contractors
have announced delivery delays and rescheduling resulting from the Boeing
announcements and, therefore, a need to adjust inventory requirements downward
from peak levels. The extent or duration of this inventory adjustment period, or
the amount of excess inventory in the procurement pipeline is unknown. The
Company has experienced some order cancellations, and in addition, the volume
and pricing of incoming orders has shown some softening particularly in 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 of commercial aircraft build rates will impact
the overall demand for titanium mill products for at least the next two to three
quarters. However, increased military spending should result in increased
military aerospace demand. Based on currently available information, the Company
anticipates that the U.S. titanium industry's total shipments may decrease in
2000 from 1999 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 January 28, 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, could be extended for an additional
five years. Under the accord, Boeing receives firm prices in exchange for RMI
receiving a minimum volume commitment of 3.25 million pounds per year. If
volumes drop below the minimum commitment, the contract contains provisions for
financial compensation. In accordance with the agreement RMI presented a demand
notice of approximately $7.1 million to Boeing Commercial Airplane Group for
such compensation since 1999 shipments amounted to only 900,000 pounds. On April
26, 2000, Boeing satisfied the above mentioned contractual claim for
approximately $6 million. The financial impact of this settlement will be
reflected in the quarter ending June 30, 2000.
In another accord, RMI, through its French affiliate, Reamet, was chosen by
Aerospatiale as the major supplier of the titanium flat rolled products required
for its Airbus programs which began in 1999 and extend through 2001.
Requirements are principally for flat rolled products, including value added
cut-to-size shapes.
During the second quarter of 1998, RMI was 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 began in 1998 and will continue through the
life of the program with approximately 339 aircraft forecast to be produced by
the year 2012. The value of this contract could potentially total $340 million.
12
<PAGE> 14
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 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 in May
1999 and runs through April 2001.
RMI is also the principal supplier of alloy sheet to B.F. Goodrich
Aerospace Aerostructures Group, which designs and manufactures engine nacelle
systems for large commercial and military aerospace applications. RMI has
contracts with Construcciones 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, with
potential revenues totaling $60 million, began in 1999 and extend for a minimum
of three years.
As a result of continuing softening aerospace demand, and the aerospace
inventory adjustments referred to above, the Company's total order backlog as of
March 31, 2000 was approximately $125 million, compared to $150 million at
December 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operating activities totaled $.8 million in the first
three months of 2000 compared to $11.6 million in the first three months of
1999. The change in net cash flows from operating activities in the first three
months of 2000 compared to the same period in 1999 was due primarily to reduced
income and an increase in working capital funding requirements. The increase in
working capital funding resulted from increases in accounts receivable and
accounts payable partially offset by a reduction in current liabilities. The
reduction in current liabilities was primarily a result of the payment of prior
year profit sharing amounts to union employees at the company's Niles, Ohio
facility. The Company's working capital ratio was 6.3 to 1 at March 31, 2000.
During the first three months of 2000, the Company's cash flow requirements
for capital expenditures were funded with cash provided by operations and cash
on hand. During the comparable 1999 period, the Company's cash flow requirements
for capital expenditures were funded by cash provided from operating activities.
The Company anticipates that it will be able to fund its 2000 capital
expenditures with funds generated by operations.
On September 9, 1999, RTI filed a universal shelf registration with the
Securities and Exchange Commission. This registration would permit RTI to issue
up to $100 million of debt and/or equity securities at an unspecified future
date. The proceeds of any such issuance could be utilized to finance
acquisitions, capital investments or other general purposes; however, RTI has no
immediate plans to do so.
CREDIT AGREEMENT
RTI entered into a credit agreement dated September 30, 1998 (the "Credit
Facility"), to replace RMI's then existing credit facilities. The agreement
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. Total borrowings are subject to a maximum leverage test in accordance
with the agreement. 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. At March 31, 2000 the Company
was in compliance with all covenants under this credit agreement, and, under the
leverage covenant, had additional borrowing capacity of approximately $15.4
million. At March 31, 2000, $34.5 million was outstanding under the facility.
Recently, the Company determined that the above mentioned agreement
provided more credit than it was likely to need and that the leverage covenant
restricted its full usage. Accordingly, on May 11, 2000, the Company amended the
agreement to 1) reduce the $125 million facility to $100 million and terminate
the $25 million facility, 2) increase the leverage covenant, and 3) increase
certain LIBOR borrowing spreads by
13
<PAGE> 15
.25%. The resulting $100 million credit will permit more effective use of the
facility with no immediate increase in the borrowing rate. Costs and fees
related to the execution of the amendment were minimal.
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 the Company 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 March 31, 2000, the amount accrued for future environment-related costs
were $2.6 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 the first three months of 2000 and 1999 amounted
to $2.4 and $5.6 million, respectively. The Company has anticipated capital
spending of approximately $15 million in 2000, including amounts for the
Enterprise Resource Planning ("ERP") software project referred to below.
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 ERP software system. In 1999 the ERP
system was installed at the Company's largest domestic operations. Approximately
$1.7 million is budgeted for 2000.
NEW ACCOUNTING STANDARDS
The FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" in June 1998. SFAS No. 133 requires all derivatives to be
recognized as either assets or liabilities on the balance sheet and be measured
at fair value. Changes in such fair value will be recognized in income
immediately if the derivatives are deemed not to be effective hedges. SFAS No.
133 is effective for fiscal years beginning after June 15, 2000. The Company is
currently assessing the financial effect of the adoption of SFAS No. 133.
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 would not adversely impact its
business. The Company made certain investments in its application software to
ensure the Company was Year 2000 compliant. In addition, the Company monitored
the compliance efforts of entities with which it interacts. The Company began
modification of its internally developed proprietary software in 1996.
Non-information technology systems such as process control devices and other
automated equipment which may have contained imbedded chips that could have been
affected by the Year 2000 problem were identified and modified during 1999. The
Company also contacted its key vendors, suppliers and service providers to
monitor their compliance efforts. A follow-up was made with those third parties
not responding to the Company's original request. To the extent necessary, the
Company identified alternative suppliers. A survey of the Company's customers to
assess
14
<PAGE> 16
their Year 2000 readiness was performed. The Company spent $1.0 million to
inventory, assess, modify and test both its information and non-information
technology requirements. These costs do not include the Enterprise Resource
Planning software.
Following a thorough evaluation and review of its existing and future
information technology requirements, RTI invested in a packaged Enterprise
Resource Planning (ERP) software system which replaced much of the Company's
existing business systems. Initially, the ERP system was installed at the
Company's largest domestic operations.
The ERP system is certified to be Year 2000 compliant. The system replaced
certain existing software which was not restructured to address the year-end
change at December 31, 1999.
The Company spent approximately $16.1 million for consulting, software and
hardware in conjunction with the ERP software through 1999 and $.7 million in
the 3 months ending March 31, 2000. The Company expects to spend a total of $1.7
million in 2000.
The Company believes that its Year 2000 compliance efforts were successful,
that its ability to manufacture and distribute its products was not impaired by
Year 2000 issues, and that it will not incur liability for breach of contract or
other harm arising out of any failure of its ERP system to be Year 2000
compliant.
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of stockholders was held on April 28, 2000. In
connection with the meeting, proxies were solicited pursuant to the Securities
Exchange Act. The following are the voting results on proposals considered and
voted upon at the meeting, all of which were described in the proxy statement.
1. All nominees for directors listed in the proxy statement were elected.
Listed below are the names of each director elected, together with their
individual vote totals.
<TABLE>
<CAPTION>
VOTES VOTES
FOR WITHHELD
-------- --------
<S> <C> <C>
Craig R. Andersson 17,265,731 1,489,329
Neil A. Armstrong 17,264,261 1,490,799
Daniel I. Booker 17,262,531 1,492,529
Ronald L. Gallatin 17,261,615 1,493,445
Charles C. Gedeon 17,263,331 1,491,729
Robert M. Hernandez 17,262,040 1,493,020
Edith E. Holiday 17,260,961 1,494,099
John H. Odle 17,264,478 1,490,582
Timothy G. Rupert 17,257,797 1,497,263
Wesley W. von Schack 17,265,531 1,489,529
</TABLE>
2. PricewaterhouseCoopers LLP was elected as independent accountants for 2000:
For, 17,293,129; against 1,354,768; abstained; 107,163.
15
<PAGE> 17
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) On January 26, 2000, the Company filed a report on Form 8-K reporting Item
5, Other Events, Claim against Boeing Commercial Airplane Group. On April 6,
2000, the Company filed a report on Form 8-K reporting Item 5, Other Events,
Settlement of Claim against Boeing Commercial Airplane Group.
16
<PAGE> 18
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: May 12, 2000
By: /s/ L. W. JACOBS
------------------------------------
L. W. Jacobs
Vice President & Chief Financial
Officer
17
<TABLE> <S> <C>
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<NAME> RTI INTERNATIONAL METALS, INC.
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