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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, 1996
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 1-10319
RMI TITANIUM COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
OHIO 31-0875005
(State or other
jurisdiction of (I.R.S. Employer
incorporation or Identification
organization) 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 7, 1996, 20,056,472 shares of common stock of the registrant were
outstanding.
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RMI TITANIUM COMPANY
FORM 10-Q
QUARTER ENDED MARCH 31, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
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PART I--FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Introduction to Consolidated Financial Statements................................ 2
Consolidated Statement of Operations............................................. 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........................................................................... 10
PART II--OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........................... 14
Item 6. Exhibits and Reports on Form 8-K.............................................. 14
Signatures............................................................................ 15
</TABLE>
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PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by
RMI Titanium Company (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.
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RMI TITANIUM COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
QUARTER ENDED
MARCH 31
--------------------
1996 1995
------- -------
<S> <C> <C>
Sales................................................................ $54,597 $40,103
Operating costs:
Cost of sales........................................................ 45,250 38,166
Selling, general and administrative expenses......................... 2,409 2,406
Research and development expenses.................................... 506 408
------- -------
Total operating costs......................................... 48,165 40,980
------- -------
Operating profit (loss).............................................. 6,432 (877)
Other income-net..................................................... 59 33
Interest expense..................................................... (1,284) (1,019)
------- -------
Income (loss) before income taxes.................................... 5,207 (1,863)
Provision for income taxes (Note 4).................................. 651 --
------- -------
Net income (loss).................................................... $ 4,556 $(1,863)
======= =======
Net income (loss) per common share................................... $ 0.30 $ (0.12)
======= =======
Weighted average shares outstanding........................... 15,398,090 15,271,561
========== ==========
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
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RMI TITANIUM COMPANY
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31 DECEMBER 31
1996 1995
-------------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 696 $ 509
Receivables--less allowance for doubtful accounts of $1,752
and $1,670................................................. 45,087 41,251
Inventories.................................................. 74,136 74,053
Deferred tax asset........................................... 385 1,036
Other current assets......................................... 1,944 1,656
--------- ---------
Total current assets.................................... 122,248 118,505
Property, plant and equipment, net of accumulated
depreciation................................................ 39,293 39,964
Noncurrent deferred tax asset................................ 6,164 6,164
Other noncurrent assets...................................... 6,937 6,926
--------- ---------
Total assets............................................ $174,642 $ 171,559
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................ $ 120 $ 120
Accounts payable............................................. 14,200 17,646
Accrued wages and other employee costs....................... 9,089 7,237
Other accrued liabilities.................................... 5,488 6,764
--------- ---------
Total current liabilities............................... 28,897 31,767
Long-term debt (see Notes 3 and 7)................................ 64,690 64,020
Accrued postretirement benefit cost............................... 18,795 18,795
Noncurrent pension liabilities.................................... 18,078 18,078
Other noncurrent liabilities...................................... 2,010 2,010
---------- ---------
Total liabilities....................................... 132,470 134,670
---------- ---------
Contingencies (see Note 5)........................................
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized;
no shares outstanding....................................... -- --
Common Stock, $0.01 par value, 30,000,000 shares authorized;
16,012,074 and 15,908,091 shares issued (Note 3)............ 160 159
Additional paid-in capital (Note 3).......................... 153,100 151,715
Accumulated deficit.......................................... (98,970) (103,526)
Deferred compensation........................................ (659) --
Excess minimum pension liability............................. (8,381) (8,381)
Treasury Common Stock at cost 568,198 shares................. (3,078) (3,078)
--------- ---------
Total shareholders' equity........................................ 42,172 36,889
--------- ---------
Total liabilities and shareholders' equity.............. $174,642 $ 171,559
======== =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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RMI TITANIUM COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1996 1995
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<S> <C> <C>
CASH PROVIDED FROM (USED IN) OPERATIONS:
Net income (loss)...................................................... $ 4,556 $(1,863)
Adjustment for items not affecting funds from operations:
Depreciation...................................................... 1,246 1,604
Deferred taxes.................................................... 651 --
Other--net........................................................ 167 414
------- -------
6,620 155
------- -------
CHANGES IN ASSETS AND LIABILITIES (EXCLUDING CASH):
Receivables............................................................ (3,913) (7,357)
Inventories............................................................ (83) 1,220
Accounts payable....................................................... (3,446) (5,413)
Other current liabilities.............................................. 486 2,162
Other assets........................................................... (299) (758)
------- -------
(7,255) (10,146)
------- -------
Cash used in operating activities............................ (635) (9,991)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of facilities.................................. -- 128
Capital expenditures.............................................. (575) (314)
------- -------
Cash used in investing activities............................ (575) (186)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock........................ 727 --
Borrowings under credit agreements................................ 700 10,100
Debt repayments................................................... (30) (30)
------- -------
Cash provided from financing activities........................... 1,397 10,070
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....................... 187 (107)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....................... $ 509 $ 385
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $ 696 $ 278
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized)............... $ 1,639 $ 959
======= =======
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
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RMI TITANIUM COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
EXCESS
MINIMUM
ADD'TL. RETAINED TREASURY PENSION
SHARES COMMON DEFERRED PAID-IN EARNINGS COMMON LIABILITY
OUTSTANDING STOCK COMPENSATION CAPITAL (DEFICIT) STOCK ADJUSTMENT
----------- ------ ------------ -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994...... 15,271,561 $ 158 $ -- $151,058 $ (98,918) $(3,069) $(6,633)
Shares issued for Directors'
Compensation.................... 4,952 -- -- 38 -- -- --
Treasury Common Stock purchased at
cost............................ (1,098) -- -- -- -- (9) --
Shares issued for Restricted Stock
Award Plans..................... 10,000 -- -- 71 -- -- --
Shares issued from exercise of
employee stock options.......... 54,478 1 -- 548 -- -- --
Net loss.......................... -- -- -- -- (4,608) -- --
Excess minimum pension
liability....................... -- -- -- -- -- -- (1,748)
----------- ----- ------ -------- --------- ------- -------
Balance at December 31, 1995...... 15,339,893 $ 159 $ -- $151,715 $(103,526) $(3,078) $(8,381)
Shares issued for Restricted Stock
Award Plans..................... 51,000 -- (682) 682 -- -- --
Compensation expense recognized... -- -- 23 -- -- -- --
Shares issued from exercise of
employee stock options.......... 52,983 1 -- 703 -- -- --
Net income........................ -- -- -- -- 4,556 -- --
----------- ----- ------ -------- --------- ------- -------
Balance at March 31, 1996......... 15,443,876 $ 160 $ (659) $153,100 $ (98,970) $(3,078) $(8,381)
=========== ===== ====== ======== ========= ======= =======
</TABLE>
The accompanying notes are an integral part of these
Consolidated Financial Statements.
6
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RMI TITANIUM COMPANY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--GENERAL
The consolidated financial statements include the accounts of RMI Titanium
Company and its majority owned subsidiaries. All significant intercompany
transactions are eliminated. The Company's operations are conducted in one
business segment, the production and marketing of titanium metal and related
products.
NOTE 2--ORGANIZATION
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. At March 31, 1996, approximately 51% of the outstanding
common stock was owned by USX. For information on changes in the Company's
capital structure subsequent to March 31, 1996 see Note 3.
NOTE 3--COMMON STOCK OFFERING
On May 7, 1996, the Company completed a Common Stock Offering of 4,600,000
shares (including an underwriters' overallotment option of 600,000 shares) at a
price of $18.50 per share. Net proceeds to RMI after deducting underwriting fees
amounted to $80.7 million before payment of estimated expenses of $.3 million.
The proceeds were used to repay all outstanding indebtedness under the existing
bank credit facilities amounting to $65.5 million. The balance of the proceeds
will be used for general corporate purposes. As a part of the Common Stock
offering, USX Corporation sold 2,300,000 shares (including an underwriter's
overallotment of 300,000 shares) of its investment in RMI Common Stock at the
same price. RMI did not receive any of the proceeds from the sale of RMI Common
Stock by USX. As a result of these transactions, USX's percentage of ownership
in RMI has been reduced from approximately 51% to approximately 27%. As of May
7, 1996, there were 20,056,472 shares of RMI Common Stock outstanding.
NOTE 4--INCOME TAXES
The effective tax rate for the first quarter was 12.5%. The difference
between the statutory tax rate of 35% and the effective tax rate for the first
quarter of 1996 is principally due to an adjustment of approximately $1.2
million to the deferred tax asset valuation allowance which existed at December
31, 1995. The Company currently expects improved profitability in 1996 as a
result of increased sales, product pricing and gross margins, when compared to
the expectations inherent in the December 31, 1995 valuation allowance.
Accordingly, the valuation allowance was adjusted for the difference between
such revised future income expectations and those inherent in the valuation
allowance at December 31, 1995. The amount of current taxes expected to be paid
in 1996 is minimal.
Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
"Accounting for Income Taxes," requires a valuation allowance when it is "more
likely than not that some portion or all of the deferred tax assets will not be
realized. It further states that "forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such a
cumulative losses in recent years." The ultimate realization of this deferred
income tax asset depends upon the Company's ability to generate sufficient
taxable income in the future prior to the expiration of its loss carryforwards.
The Company has evaluated the available evidence supporting the realization of
future taxable income and, based upon that evaluation, believes it is more
likely than not at this time that a portion of its deferred tax assets will be
realized. The remaining valuation allowance was retained in light of the
requirement in SFAS No. 109 to give weight to objective evidence such as recent
losses and the historical titanium industry business cycle.
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When preparing future periods' interim and annual financial statements, the
Company will periodically evaluate its strategic and business plans, in light of
evolving business conditions, and the valuation allowance will be adjusted for
future income expectations resulting from that process, to the extent different
from those inherent in the current valuation allowance.
As a result, the application of SFAS No. 109 valuation allowance
determination process could result in recognition of significant income tax
provisions or benefits in a single interim or annual period due to changes in
income expectations over a horizon that may span several years. Such tax
provision or benefit effect would likely be material in the context of the
specific interim or annual reporting period in which changes in judgement about
more extended future periods are reported.
If an "ownership change" were to occur within the meaning of Section 382 of
the Internal Revenue Code of 1986, as amended, the utilization of net operating
loss carryforwards would be subject to an annual limitation. Should the annual
limitation apply, the Company believes that it would affect the timing of the
use of, but not the ultimate ability of the Company to use, the net operating
loss carryforwards to reduce future income tax liabilities.
NOTE 5--CONTINGENCIES
In the ordinary course of business, the Company is subject to pervasive
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.
On October 9, 1992 the U.S. Environmental Protection Agency ("EPA") filed a
complaint alleging certain violations of the Resource Conservation and Recovery
Act of 1976, as amended ("RCRA") at the Company's now closed Sodium Plant in
Ashtabula, Ohio. The USEPA's determination is based on information gathered
during inspections of the facility in February, March and June of 1991. Under
the complaint the USEPA proposes to assess a civil penalty of approximately $1.4
million for alleged failure to comply with RCRA. The Company is contesting the
complaint. It is the Company's position that it has complied with the provisions
of RCRA and that the EPA's assessment of penalties is inappropriate. A formal
hearing has been requested and informal discussions with the EPA to settle this
matter are ongoing. Based on the preliminary nature of the proceedings, the
Company is currently unable to determine the ultimate liability, if any, that
may arise from this matter.
The Company is involved in investigative or cleanup projects under federal
or state environmental laws at a number of waste disposal sites, including the
Field Brooks 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") 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 operable sediment unit was $48 million. However, recent studies show the
volume of sediment to be substantially lower than projected in 1986. These
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, in March 1989, ordered 22 of the PRPs to conduct a design phase
study for the sediment operable unit and a source control study, which studies
are currently estimated to cost $19 million. The
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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 complying with the EPA's order, which
includes the studies. It is anticipated that the studies will be completed no
earlier than late 1996. Actual cleanup would not commence prior to that time.
The Company's share of the study costs has been established at 9.95%. On June
21, 1995, the Company and twelve others entered into a Phase 2 (actual cleanup)
allocation agreement which assigns 9.44% of the cost to the Company. 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, 1996, the amount accrued for future environmental-related
costs was $2.4 million. Based on available information, RMI believes its share
of potential environmental-related costs, before expected contributions from
third parties, is in a range from $3.7 million to $6.3 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 Company is also the subject of, or a party to, a number of other
pending or threatened legal actions involving a variety of matters.
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, 1996 DECEMBER 31,
(UNAUDITED) 1995
----------- ------------
<S> <C> <C>
Raw material and supplies..................... $ 23,494 $ 22,609
Work-in-process and finished goods............ 70,488 71,290
Adjustments to LIFO values.................... (19,846) (19,846)
--------- ---------
$ 74,136 $ 74,053
========= =========
</TABLE>
Inventories are valued at cost as determined by the last-in, first-out
(LIFO) method which, in the aggregate, is lower than market. Inventory costs
generally include materials, labor costs and manufacturing overhead (including
depreciation).
Included in work-in-process are costs relating to long-term contracts. Such
costs, net of amounts recognized to date, were $1.2 million at March 31, 1996
and $2.5 million at December 31, 1995.
NOTE 7--NEW CREDIT FACILITY:
In connection with the Common Stock offering referred to in Note 3 above,
the Company has entered into a credit agreement, dated April 15, 1996 (the "New
Credit Facility"), to replace the Company's existing credit facilities. The New
Credit Facility has a term of three years and permits borrowings, on a revolving
basis, of up to the lesser of $50 million or a borrowing base equal to the sum
of 85% of qualified accounts receivable and 50% of qualified inventory. The
Company had sufficient accounts receivable and inventory at March 31, 1996, to
borrow the entire $50 million.
Under the terms of the New 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 1/2% per annum), or (b)
LIBOR or the Federal Funds Effective Rate, plus a spread (ranging from 1/2% to
1%) determined by the ratio of the Company's consolidated earnings before
interest and taxes to consolidated interest expense.
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Borrowings under the New Credit Facility will initially be secured by the
Company's accounts receivable, inventory, other personal property and cash and
cash equivalents. Borrowings will become unsecured if the Company complies with
all the financial covenants under the New Credit Facility for four consecutive
quarters.
The New Credit Facility contains additional terms and financial covenants
which are typical for other similar facilities.
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 which involve certain risks and uncertainties. Actual
results and events may differ significantly from those discussed in the
forward-looking statements.
NET SALES
Net sales increased by $14.5 million to $54.6 million, or 36%, for the
three months ended March 31, 1996 compared to the corresponding 1995 period.
This sales increase is due primarily to increased sales of titanium mill
products. Shipments of titanium mill products increased by 28% to 4.2 million
pounds from first quarter 1995 shipments. Average selling prices on mill
products in the first quarter of 1996 increased by approximately 12% to $11.31
per pound from 1995 first quarter levels. Both demand and pricing on incoming
orders for titanium mill products continue to show improvement from 1995 levels.
GROSS PROFIT
Gross profit amounted to $9.3 million for the quarter ended March 31, 1996
compared to a gross profit of $1.9 million for the comparable 1995 period. This
improvement results primarily from the increased volume and prices for titanium
mill products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses amounted to $2.4 million in
each of the quarters ended March 31, 1996 and 1995. Research, technical and
product development expenses amounted to $0.5 million in the first quarter of
1996 compared to $0.4 million in the first quarter of 1995.
OPERATING PROFIT
Operating profit for the three months ended March 31, 1996 amounted to $6.4
million compared to a loss of $0.8 million in the same period of 1995. This
improvement results primarily from significant improvements in shipments and
profit margins on mill products.
INTEREST EXPENSE
Because of increased borrowing levels and higher overall interest rates,
interest expense increased to $1.3 million in the first quarter of 1996 from
$1.0 million in the first quarter of 1995.
INCOME TAXES
In the first quarter of 1996, the Company recorded a provision for income
taxes amounting to $.06 million. No taxes were provided in the first quarter of
1995. The effective tax rate for the first quarter of 1996 was 12.5%. The
difference between the statutory tax rate of 35% and the effective tax rate for
the first quarter of 1996 is principally due to an adjustment of approximately
$1.2 million to the deferred tax asset valuation allowance which existed at
December 31, 1995. The Company currently expects improved profitability in 1996
as a result of increased sales, product pricing and gross margins, when compared
to the expectations inherent in the December 31, 1995 valuation allowance.
Accordingly, the valuation allowance was adjusted for the difference between
such revised future income expectations and those inherent in the
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valuation allowance at December 31, 1995. The amount of current taxes expected
to be paid in 1996 is minimal.
NET INCOME
The net income for the quarter ended March 31, 1996 amounted to $4.6
million compared to a net loss of $1.9 million in the comparable 1995 period.
OUTLOOK
The Company's total order backlog as of March 31, 1996 was approximately
$194 million, compared to $134 million at December 31, 1995.
During the second half of 1995 and continuing into 1996, the Company has
experienced a significant increase in the volume of incoming orders at increased
prices. The Company estimates that as of March 31, 1996, orders for over 90% of
its anticipated 1996 shipments have been booked or shipped at average prices
approximately 15% higher than its 1995 average realized mill product selling
price of $10.23 per pound. The Company's average realized mill product selling
price increased to $11.31 per pound in the first quarter of 1996. The Company is
currently booking orders for titanium mill products for delivery in early 1997
at prices greater than $12 per pound. The increase in demand has been driven
primarily by the recovery in the commercial aerospace market and the emergence
of the golf club market. As facility utilization in the titanium industry
continues to grow and lead times lengthen, the Company expects prices on new
orders to continue to strengthen. However, because of competitive factors in the
titanium industry and the cyclical nature of the aerospace industry, there can
be no assurances that prices will continue to improve.
The increase in demand for titanium products has put upward pressure on
prices for certain raw materials used by the Company. Prices for titanium sponge
under the terms of the Company's long-term supply contracts are fixed for 1996,
based on the quantity purchased. Purchases of sponge above the quantities
available under the contracts would likely be purchased from other sources at
higher prices. Due to increased demand resulting primarily from the emerging
golf club market, current prices for titanium scrap, which accounts for
approximately 40% of the Company's raw material requirements, have increased
approximately 46% from first quarter 1995 prices. Prices of certain alloying
agents have also increased as a result of increased demand. The Company, and
others, have announced increased prices and surcharges to recover these
increased costs.
The information included in this "Outlook" section is forward-looking and
involves risks and uncertainties that could significantly impact expected
results. The Company's outlook is significantly dependent upon the continued
growth of the commercial aerospace and golf club markets, its ability to recover
its raw material costs in the pricing of its products, the extent to which the
Company is able to develop new markets for its products, the time required for
such development and the level of demand for such products.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used in operating activities totaled $0.6 million in the
first quarter of 1996 compared to $10.0 million used in operations during the
first quarter of 1995. The change in net cash flows from operating activities in
the first quarter of 1996, compared to the 1995 first quarter was due primarily
to improved results of operations. Working capital amounted to $93.4 million at
March 31, 1996, compared to $86.7 million at December 31, 1995. The increase in
working capital results primarily from an increase in accounts receivable and a
decrease in accounts payable. The Company's working capital ratio was 4.23 to 1
at March 31, 1996 compared to 3.73 to 1 at December 31, 1995.
During the first quarter of 1996, the Company's cash flow requirements for
capital expenditures were funded by borrowings under the existing credit
facilities. In the first quarter of 1995, the Company's cash flow requirements
for operating losses, capital expenditures and working capital were also funded
through similar borrowings.
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At March 31, 1996, the Company had borrowings of $58.9 million under the
existing bank credit facilities. Other long-term debt of $0.9 million consisted
of industrial revenue bonds.
On May 7, 1996, the Company completed a Common Stock offering of 4,600,000
shares (including an underwriters' overallotment option of 600,000 shares) at a
price of $18.50 per share. Net proceeds to RMI after deducting underwriting fees
amounted to $80.7 million before payment of estimated expenses of $.3 million.
The proceeds were used to repay all outstanding indebtedness under the existing
bank credit facilities on May 7, 1996 amounting to $65.5 million. The balance of
the proceeds will be used for general corporate purposes.
Additionally, RMI's Board of Directors has authorized the Company to enter
into one or more agreements with USX obligating RMI to file one or more
registration statements under the Securities Act for the registration of shares
of Common Stock owned by USX. RMI's obligation to register the USX shares will
be conditioned upon USX's agreement not to transfer any additional shares of
Common Stock prior to July 24, 1997 without RMI's consent.
The Company anticipates that it will be able to fund its 1996 working
capital requirements and its capital expenditures primarily from funds generated
by operations, proceeds from the Common Stock offering, and, to the extent
necessary, from borrowings under the New Credit Facility. 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 as needed.
In connection with the Common Stock offering referred to above, the Company
has entered into a Credit Agreement, dated as of April 15, 1996 to replace the
existing credit facilities. The New Credit Facility has a term of three years
and permits borrowings, on a revolving basis, of up to the lesser of $50 million
or a borrowing base equal to the sum of 85% of qualified accounts receivable and
50% of qualified inventory. The Company had sufficient accounts receivable and
inventory at March 31, 1996, to borrow the entire $50 million.
Under the New 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 1/2% per annum), or (b) LIBOR or the Federal
Funds Effective Rate, plus a spread (ranging from 1/2% to 1%) determined by the
ratio of the Company's consolidated earnings before interest and taxes to
consolidated interest expense.
Borrowings under the New Credit Facility will initially be secured by the
Company's accounts receivable, inventory, other personal property and cash and
cash equivalents. Borrowings will become unsecured if the Company complies with
all the financial covenants under the New Credit Facility for four consecutive
quarters.
An event of default under the New Credit Facility shall occur if, among
other things, any person or group of persons other than USX shall have acquired
beneficial ownership of 25% or more of the voting stock of the Company.
The New Credit Facility contains additional terms and financial covenants
which are typical for other similar facilities.
INCOME TAX CONSIDERATIONS
SECTION 382 LIMITATION. At December 31, 1995, the Company had net operating
loss carryforwards of approximately $104 million available to reduce federal
taxable income through 2010. If an "ownership change" were to occur, the
utilization of net operating loss carryforwards would be subject to an annual
limitation. Generally, an ownership change occurs with respect to a corporation
if shareholders who own, directly or indirectly, 5% or more of the capital stock
of the corporation increase their aggregate percentage ownership of such stock
by more than 50 percentage points over the lowest percentage of such stock owned
by such shareholders at any time during a prescribed testing period. Management
does not believe that the sale of shares of Common Stock from the recently
completed offering resulted in an ownership change. An ownership change could
result from equity transactions such as exercises of stock options, purchases or
sales of Common
12
<PAGE> 14
Stock by certain stockholders, including USX and other issuances of Common Stock
by the Company. If the annual limitation were to apply, the amount of the
limitation would generally equal the product of (i) the fair market value of the
Company's equity immediately prior to the ownership change, with certain
adjustments, including a possible adjustment to exclude certain capital
contributions made in the two years preceding the date of the ownership change,
and (ii) a long-term tax exempt bond rate of return published monthly by the
Internal Revenue Service. Should the annual limitation apply, the Company
believes that it would not materially affect the potential use of the net
operating loss carryforwards to reduce any future income tax liabilities over
time; however, it is possible that the Company's results in a particular year
could exceed the annual limitation, in which case such excess would not be
reduced by the net operating loss carryforward and the Company's tax liability
would be correspondingly higher.
SFAS NO. 109 EFFECTS. SFAS 109 requires a valuation allowance when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. It further states that forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in recent years. The ultimate realization of all or part of
the Company's deferred income tax assets depends on the Company's ability to
generate sufficient taxable income in the future.
When preparing future periods' interim and annual financial statements, the
Company will periodically evaluate its strategic and business plans, in light of
evolving business conditions, and the valuation allowance will be adjusted for
future income expectations resulting from that process, to the extent different
from those inherent in the current valuation allowance. In making an assessment
of realizability at March 31, 1996, the Company considered a number of factors
including the improved profitability in 1996 as a result of increased sales,
product pricing and gross margins, when compared to expectations inherent in the
December 31, 1995 valuation allowance. Accordingly, the valuation allowance was
adjusted for the difference between such revised future income expectations and
those inherent in the valuation allowance at December 31, 1995.
The application of SFAS No. 109 valuation allowance determination process
could result in recognition of significant income tax provisions or benefits in
a single interim or annual period due to changes in income expectations over a
horizon that may span several years. Such tax provision or benefit effect would
likely be material in the context of the specific interim or annual reporting
period in which changes in judgement about more extended future periods are
reported. This effect is a consequent of the application of the SFAS No. 109
valuation allowance determination process, which is a balance sheet oriented
model and which does not have periodic matching of pretax income or loss and the
related tax effects as an objective.
The Section 382 limitation described above could, if applicable, adversely
impact the income tax provision or benefit in a particular year as a result of
the application of the SFAS No. 109 valuation allowance determination process;
however, it is not expected to have an adverse impact over time.
If the Company's principal markets continue to exhibit improvement,
additional tax benefits may be reported in future periods, as the valuation
allowance is further reduced. Alternatively, to the extent that the Company's
future profit expectations remain static or are diminished tax provisions may be
charged against pretax income. In either event, such valuation allowance-related
tax provisions or benefits should not necessarily be viewed as recurring.
Further, subject to the effects, if any, of the limitation described above, the
amount of current taxes that the Company expects to pay for the foreseeable
future is minimal. The Company's carryforward tax attributes are viewed by
management as a significant competitive advantage to the extent that profits can
be sheltered effectively from tax and re-employed in the growth of the business.
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 March 31, 1996, the amount accrued for future environment-related costs
was $2.4 million. Based on available information, RMI believes its share of
potential environmental-related costs, before expected
13
<PAGE> 15
contributions from third parties, is in a range from $3.7 million to $6.3
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. In 1992, the EPA filed a complaint and proposed a $1.4 million civil
penalty for alleged failure to comply with RCRA. The Company is contesting the
complaint. Based on the preliminary nature of the proceeding the Company is
currently unable to determine the ultimate liability, if any, that may arise
from this matter.
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 quarter of 1996 and 1995 amounted
to $0.6 million and $0.3 million, respectively. The Company has budgeted capital
spending of approximately $5.0 million in 1996. RMI anticipates that it can fund
this spending using cash provided from operations or proceeds from the Common
Stock Offering.
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of stockholders was held April 25, 1996. 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 FOR VOTES WITHHELD
---------- --------------
<S> <C> <C>
Craig R. Andersson................................ 14,191,119 41,182
Neil A. Armstrong................................. 14,191,132 41,169
Daniel I. Booker.................................. 14,190,929 41,372
Ronald L. Gallatin................................ 14,191,149 41,152
Charles C. Gedeon................................. 14,190,941 41,360
L. Frederick Gieg, Jr............................. 14,191,038 41,263
Robert M. Hernandez............................... 14,191,149 41,152
Wesley W. von Schack.............................. 14,191,141 41,160
</TABLE>
2. Price Waterhouse LLP was elected as independent accountants for 1996.
(For, 14,190,191; against, 37,263; abstained, 4,847)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
2.0 Amended and Restated Reorganization Agreement, incorporated by
reference to Exhibit 2.1 to the Company's Registration Statement on
Form S-1 No. 33-30667 Amendment No. 1.
3.1 Articles of Incorporation of the Company, as amended March 31, 1994,
incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 1994.
14
<PAGE> 16
3.2 Amended Code of Regulations of the Company, incorporated by reference
to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1993.
4.0 Credit Agreement dated as of April 15, 1996 by and among RMI Titanium
Company, an Ohio Corporation, and PNC Bank, National Association, as
agent for the Banks, incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-3 No. 333-01553 Amendment
No. 2.
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended March 31,
1996.
15
<PAGE> 17
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.
RMI TITANIUM COMPANY
--------------------------------------
(Registrant)
Date: May 14, 1996
/s/ T. G. RUPERT
By: ----------------------------------
T. G. Rupert
Senior Vice President and Chief
Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000854663
<NAME> RMI TITANIUM
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 696
<SECURITIES> 0
<RECEIVABLES> 46,839
<ALLOWANCES> 1,752
<INVENTORY> 74,136
<CURRENT-ASSETS> 122,248
<PP&E> 134,319
<DEPRECIATION> 95,026
<TOTAL-ASSETS> 174,642
<CURRENT-LIABILITIES> 28,897
<BONDS> 64,690
<COMMON> 160
0
0
<OTHER-SE> 42,012
<TOTAL-LIABILITY-AND-EQUITY> 174,642
<SALES> 54,597
<TOTAL-REVENUES> 54,597
<CGS> 45,250
<TOTAL-COSTS> 48,087
<OTHER-EXPENSES> (59)
<LOSS-PROVISION> 78
<INTEREST-EXPENSE> 1,284
<INCOME-PRETAX> 5,207
<INCOME-TAX> 651
<INCOME-CONTINUING> 4,556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,556
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
