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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, 1997
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)
OHIO
(State or other jurisdiction of
incorporation or organization)
31-0875005
(I.R.S. Employer
Identification No.)
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, 1997, 20,371,445 shares of common stock of the registrant were
outstanding.
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RMI TITANIUM COMPANY
FORM 10-Q
QUARTER ENDED MARCH 31, 1997
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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.............................................. 15
Signatures............................................................................ 16
</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
---------------------
1997 1996
------- -------
<S> <C> <C>
Sales............................................................... $73,708 $54,597
Operating costs:
Cost of sales....................................................... 57,932 45,250
Selling, general and administrative expenses........................ 2,726 2,409
Research, technical and product development expenses................ 704 506
------- -------
Total operating costs.......................................... 61,362 48,165
------- -------
Operating income.................................................... 12,346 6,432
Other income-net.................................................... 165 59
Interest expense.................................................... (33) (1,284)
------- -------
Income before income taxes.......................................... 12,478 5,207
Provision for income taxes (Note 4)................................. 1,560 651
------- -------
Net income.......................................................... $10,918 $ 4,556
======= =======
Net income per common share......................................... $ 0.54 $ 0.30
======= =======
Weighted average shares outstanding.......................... 20,339,923 15,398,090
========== ==========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
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RMI TITANIUM COMPANY
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31 DECEMBER 31
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 10,725 $ 5,944
Receivables--less allowance for doubtful accounts of $1,037 and
$979......................................................... 65,124 57,702
Inventories..................................................... 94,684 92,616
Deferred tax asset.............................................. 1,173 2,733
Other current assets............................................ 3,775 4,205
--------- --------
Total current assets......................................... 175,481 163,200
Property, plant and equipment, net of accumulated
depreciation................................................. 37,232 37,855
Noncurrent deferred tax asset................................... 4,467 4,467
Other noncurrent assets......................................... 10,588 10,358
--------- --------
Total assets................................................. $ 227,768 $215,880
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................... $ 120 $ 120
Accounts payable................................................ 17,231 15,288
Accrued wages and other employee costs.......................... 7,725 6,299
Other accrued liabilities....................................... 9,752 9,357
--------- --------
Total current liabilities.................................... 34,828 31,064
Long-term debt (Notes 3 and 7).................................... 670 3,600
Accrued postretirement benefit cost............................... 19,442 19,442
Noncurrent pension liabilities.................................... 1,028 1,028
Other noncurrent liabilities...................................... 2,010 2,010
--------- --------
Total liabilities............................................ 57,978 57,144
--------- --------
Contingencies (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;
20,929,748 and 20,858,748 shares issued (Note 3)............. 209 208
Additional paid-in capital (Note 3)............................. 236,010 234,958
Accumulated deficit............................................. (60,849) (71,767)
Deferred compensation........................................... (1,327) (557)
Excess minimum pension liability................................ (1,028) (1,028)
Treasury Common Stock at cost 573,961 and 568,198 shares........ (3,225) (3,078)
--------- --------
Total shareholders' equity........................................ 169,790 158,736
--------- --------
Total liabilities and shareholders' equity................... $ 227,768 $215,880
========= ========
</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
-------------------
1997 1996
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<S> <C> <C>
CASH PROVIDED FROM (USED IN) OPERATIONS:
Net income.............................................................. $10,918 $ 4,556
Adjustment for items not affecting funds from operations:
Depreciation.......................................................... 1,259 1,246
Deferred taxes........................................................ 1,560 651
Other-net............................................................. 122 167
------- -------
13,859 6,620
------- -------
CHANGES IN ASSETS AND LIABILITIES (EXCLUDING CASH):
Receivables............................................................. (7,482) (3,913)
Inventories............................................................. (2,068) (83)
Accounts payable........................................................ 1,943 (3,446)
Other current liabilities............................................... 1,821 486
Other assets............................................................ 200 (299)
------- -------
(5,586) (7,255)
------- -------
Cash from (used in) operating activities........................... 8,273 (635)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.................................................. (636) (575)
------- -------
Cash used in investing activities.................................. (636) (575)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock............................ 221 727
Borrowings under credit agreements.................................... -- 700
Debt repayments....................................................... (2,930) (30)
Treasury Common Stock purchased....................................... (147) --
------- -------
Cash from (used in) financing activities.............................. (2,856) 1,397
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ 4,781 187
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........................ $ 5,944 $ 509
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............................. $10,725 $ 696
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for
Interest (net of amounts capitalized).............................. $ 21 $ 1,639
Income taxes....................................................... $ 130 $ 0
Noncash financing activities
Issuance of restricted stock....................................... $ 832 $ 682
</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
ADDT'L. 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, 1995.... 15,339,893 $159 $ -- $151,715 $(103,526) $(3,078) $ (8,381)
Shares issued for Directors'
Compensation.................. 2,585 -- -- 56 -- -- --
Shares issued for Restricted
Stock Award Plans............. 51,000 -- (682) 682 -- -- --
Compensation expense
recognized.................... -- -- 125 -- -- -- --
Shares issued as a result of
Common Stock Offering (Note
4)............................ 4,600,000 46 -- 80,347 -- -- --
Shares issued from exercise of
employee stock options........ 297,072 3 -- 2,158 -- -- --
Net income...................... -- -- -- -- 31,759 -- --
Excess minimum pension
liability..................... -- -- -- -- -- -- 7,353
---------- ---- -------- -------- --------- ------- --------
Balance at December 31, 1996.... 20,290,550 $208 $ (557) $234,958 $ (71,767) $(3,078) $ (1,028)
Shares issued for Restricted
Stock Award Plans............. 32,550 -- (832) 832 -- -- --
Compensation expense
recognized.................... -- -- 62 -- -- -- --
Shares issued from exercise of
employee stock options........ 38,450 1 -- 220 -- -- --
Treasury Common Stock purchased
at cost....................... (5,763) -- -- -- -- (147) --
Net income...................... -- -- -- -- 10,918 -- --
---------- ---- -------- -------- --------- ------- --------
Balance at March 31, 1997....... 20,355,787 $209 $ (1,327) $236,010 $ (60,849) $(3,225) $ (1,028)
========== ==== ======== ======== ========= ======= ========
</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, 1997 approximately 27% of the outstanding
common stock was owned by USX. For additional information on the Company's
capital structure see Note 3.
In November, 1996, USX Corporation completed a public offering of its notes
exchangeable February, 2000, for 5,483,600 shares of RMI Common Stock, owned by
USX (or for an equivalent amount of cash at USX's option). Such shares represent
all of the RMI Common Stock owned by USX.
NOTE 3--COMMON STOCK OFFERING
On May 7, 1996, the Company completed a Common Stock Offering of 4,600,000
shares at a price of $18.50 per share. Net proceeds to RMI after deducting
underwriting fees and expenses amounted to $80.3 million. The proceeds were used
to repay all outstanding indebtedness under the existing bank credit facilities
amounting to $65.5 million, $10.2 million was contributed to the Company's
pension plans and the balance used for general corporate purposes. Concurrent
with the Company's Stock Offering, USX Corporation sold 2,300,000 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 was reduced from
approximately 51% to approximately 27%.
NOTE 4--INCOME TAXES
The effective tax rate for the quarters ended March 31, 1997 and 1996 was
12.5%. The difference between the statutory tax rate of 35% and the effective
tax rate is principally due to an adjustment of approximately $2.9 million and
$1.2 million, respectively, to the deferred tax asset valuation allowance which
existed at December 31, 1996 and 1995. The Company currently expects improved
profitability in 1997 as a result of increased sales, product pricing and gross
margins, when compared to the expectations inherent in the December 31, 1996
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, 1996. The amount of current taxes
expected to be paid in 1997 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 as
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 EPA's determination is based on information gathered during
inspections of the facility in February, March and June of 1991. Under the
complaint the EPA proposes to assess a civil penalty of approximately $1.4
million for alleged failure to comply with RCRA. The Company is in the process
of finalizing a recent settlement of this matter with the EPA which provides for
the payment of a $0.1 million civil penalty and a commitment to perform certain
other work.
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 $22 million. The Company, working cooperatively
with fourteen others in accordance with two separate agreements, is complying
with the order. The Company has accrued and has been paying its portion of the
cost of complying with the EPA's order, which includes the studies. It is
anticipated that the studies will be completed no earlier
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than mid 1997. Actual cleanup is not scheduled to commence prior to 1998. The
Company's share of the study costs has been established at 9.95%. In June, 1995,
the Company and twelve others entered into a Phase 2 (actual cleanup) allocation
agreement which assigns 9.44% of the cost to 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, 1997, the amount accrued for future environmental-related
costs was $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 $3.9 million to $6.5 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, 1997
(UNAUDITED) DECEMBER 31, 1996
-------------- -----------------
<S> <C> <C>
Raw material and supplies............................ $ 39,747 $ 33,126
Work-in-process and finished goods................... 83,773 88,326
Adjustments to LIFO values........................... (28,836) (28,836)
-------- ---------
$ 94,684 $ 92,616
======== =========
</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 certain long-term
contracts. Such costs, net of amounts recognized to date, were $1.7 million at
March 31, 1997 and $0.8 million at December 31, 1996.
NOTE 7--CREDIT AGREEMENT:
In connection with the Common Stock offering referred to in Note 3 above,
the Company entered into a credit agreement, dated April 15, 1996 (the "Credit
Facility"), to replace the Company's prior credit facilities. The 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. At March 31,
1997 no amounts were outstanding under the facility. The Company had sufficient
accounts receivable and inventory at March 31, 1997, to borrow the entire $50
million.
Under the terms of the Credit Facility, the Company, at its option, will be
able to borrow at (a) a base rate (which is the higher of PNC Bank's prime rate
or the Federal Funds Effective Rate plus 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 Credit Facility are 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 Credit Facility for four consecutive quarters beginning with
the date
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of the Credit Facility and expiring with the quarter ended June 30, 1997. The
Credit Facility contains additional terms and financial covenants which are
typical for other similar facilities.
NOTE 8--EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No.
128 establishes new standards for computing and presenting earnings per share.
The Company is required to adopt the provisions of SFAS No. 128 for its
consolidated financial statements for the year ended December 31, 1997 and
subsequent interim periods. Upon adoption, the standard also requires the
restatement of all prior period earnings per share information presented. The
adoption of SFAS No. 128 is not expected to have a material effect on the
Company's earnings per share computations.
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, the
competitiveness of the titanium industry, the Company's order backlog and the
conversion of that backlog into revenue 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.
NET SALES
Net sales increased by $19.1 million to $73.7 million, or 35%, for the
three months ended March 31, 1997 compared to the corresponding 1996 period.
This sales increase is due primarily to increased shipments of titanium mill
products and higher average selling prices. Shipments of titanium mill products
increased by 14% to 4.8 million pounds compared to first quarter quarter 1996
shipments of 4.2 million pounds. Average selling prices on mill products in the
first quarter of 1997 increased by approximately 22% to $13.75 per pound from
$11.31 per pound in the first quarter of 1996. Both demand and pricing on
incoming orders for titanium mill products continue to show improvement from
1996 levels.
GROSS PROFIT
Gross profit amounted to $15.8 million for the quarter ended March 31, 1997
compared to a gross profit of $9.3 million for the comparable 1996 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 of $2.7 million, or 3.7% of
sales, in the quarter ended March 31, 1997 compared favorably with selling,
general and administrative expenses of $2.4 million, or 4.4% of sales, in the
comparable 1996 period.
OPERATING INCOME
Operating income for the three months ended March 31, 1997 amounted to
$12.3 million compared to $6.4 million in the same period of 1996. This
improvement results primarily from significant improvements in shipments and
profit margins on mill products.
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INTEREST EXPENSE
Because of significantly decreased borrowing levels, interest expense
decreased to $0.03 million in the first quarter of 1997 from $1.3 million in the
first quarter of 1996.
INCOME TAXES
In the first quarter of 1997, the Company recorded a provision for income
taxes amounting to $1.6 million compared to $0.6 million in the first quarter of
1996. The effective tax rate in both periods was 12.5%. The difference between
the statutory tax rate of 35% and the effective tax rate is principally due to
an adjustment of approximately $2.9 million in 1997 and $1.2 million in 1996 to
the deferred tax asset valuation allowance which existed at the previous
year-end. The Company currently expects improved profitability in 1997 as a
result of increased sales, product pricing and gross margins, when compared to
the expectations inherent in the December 31, 1996 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, 1996. The amount of current taxes expected to be paid
in 1997 is minimal.
NET INCOME
Net income for the quarter ended March 31, 1997 amounted to $10.9 million
compared to net income of $4.6 million in the comparable 1996 period.
OUTLOOK
The Company's total order backlog as of March 31, 1997 was approximately
$352 million, compared to $328 million at December 31, 1996.
Beginning in the second half of 1995, continuing through 1996 and into
1997, the Company has experienced a significant increase in the volume of
incoming orders at increased prices. The Company estimates that as of March 31,
1997, orders for over 90% of its anticipated 1997 shipments have been booked or
shipped at average prices significantly higher than its 1996 average realized
mill product selling price of $11.88 per pound. The Company's average realized
mill product selling price increased to $13.75 per pound in the first quarter of
1997 compared 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 1998
at prices greater than $14 per pound. The increase in demand has been driven
primarily by the recovery in the commercial aerospace market.
Because of competitive factors in the titanium industry and the cyclical
nature of the aerospace industry, there can be no assurances that prices and
demand will continue to improve. The Company intends to continue its efforts to
develop new markets and products such as seamless tubulars for oil and gas and
geothermal energy production.
The increase in demand for titanium products has put upward pressure on
prices for certain raw materials used by the Company. Prices for the Company's
1997 titanium sponge requirements have been set under long-term supply contracts
and short-term arrangements. Prices for titanium sponge in 1997 have increased
slightly over 1996 levels. Due to increased demand, prices for titanium scrap,
which accounts for approximately 40% of the Company's raw material requirements,
remain elevated, although prices have stabilized somewhat recently. 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.
In July 1996, the Company was notified that the Department of Commerce
released preliminary findings in a review of an existing anti-dumping order on
titanium sponge from Russia. The Department of Commerce determined that dumping
did not occur on sales made by Interlink, a major trading company for Russian-
produced titanium sponge, during the review period. A final determination
confirming the earlier finding was issued in November 1996. The Company
purchases nearly all of its Russian titanium sponge through Interlink. These
purchases previously carried an 84% dumping duty. The no-dumping finding
eliminates this duty, thereby allowing the Company access to lower cost sources
for a significant portion of its titanium sponge requirements.
11
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LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operating activities totaled $8.3 million in the first
quarter of 1997 compared to $0.6 million used in operations during the first
quarter of 1996. The change in net cash flows from operating activities in the
first quarter of 1997, compared to the 1996 first quarter was due primarily to
significantly improved results of operations. Working capital amounted to $140.7
million at March 31, 1997, compared to $132.1 million at December 31, 1996. The
increase in working capital results primarily from increases in cash and
accounts receivable partially offset by an increase in accounts payable and
other current liabilities. The Company's working capital ratio was 5.04 to 1 at
March 31, 1997.
During the first quarter of 1997, the Company's cash flow requirements for
capital expenditures were funded by cash provided from operating activities. In
the first quarter of 1996, the Company's cash flow requirements for capital
expenditures and working capital needs were funded through borrowings under the
existing credit facilities.
At March 31, 1997, the Company had no amounts outstanding under the bank
credit facility. Other long-term debt of $0.7 million consisted of industrial
revenue bonds.
On May 7, 1996, the Company completed a public offering of 4,600,000 shares
of common stock at a price of $18.50 per share (the "Common Stock Offering").
Net proceeds to RMI after deducting underwriting fees and expenses amounted to
$80.3 million. The new proceeds were used to repay all outstanding indebtedness
(amounting to $65.5 million) under the then existing bank credit facilities, and
to contribute $10.2 million to certain of the company's defined benefit pension
plans. The balance was used for general corporate purposes.
The Company anticipates that it will be able to fund its 1997 working
capital requirements and its capital expenditures primarily from funds generated
by operations. The Company's long-term liquidity requirements, including capital
expenditures, are expected to be financed by a combination of internally
generated funds, borrowings and other sources of external financing if needed.
In connection with the Common Stock offering referred to above, the Company
entered into a credit agreement, dated April 15, 1996 (the "Credit Facility"),
to replace the Company's prior credit facilities. The 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. At March 31, 1997 no amounts were
outstanding under the facility. The Company had sufficient accounts receivable
and inventory at March 31, 1997, to borrow the entire $50 million.
Under the terms of the Credit Facility, the Company, at its option, will be
able to borrow at (a) a base rate (which is the higher of PNC Bank's prime rate
or the Federal Funds Effective Rate plus 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 Credit Facility are 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 Credit Facility for four consecutive quarters beginning with
the date of the Credit Facility and expiring with the quarter ended June 30,
1997.
INCOME TAX CONSIDERATIONS
SECTION 382 LIMITATION. At December 31, 1996, the Company had net
operating loss carryforwards of approximately $95 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 resulted in an
ownership change. An ownership change could result from equity
12
<PAGE> 14
transactions such as exercises of stock options, purchases or sales of Common
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, 1997, the Company considered a number of factors
including the improved profitability in 1997 as a result of increased sales,
product pricing and gross margins, when compared to expectations inherent in the
December 31, 1996 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, 1996.
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 consequence 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.
13
<PAGE> 15
At March 31, 1997, the amount accrued for future environment-related costs
was $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 $3.9 million to $6.5 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 in the process of finalizing a recent
settlement of this matter with the EPA which provides for the payment of a $0.1
million civil penalty and a commitment to perform certain other work.
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 each of the first quarter of 1997 and 1996
amounted to $0.6 million. The Company has budgeted capital spending of
approximately $10.0 million in 1997. RMI anticipates that it can fund this
spending using cash provided from operations.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS No.
128 establishes new standards for computing and presenting earnings per share.
The Company is required to adopt the provisions of SFAS No. 128 for its
consolidated financial statements for the year ended December 31, 1997 and
subsequent interim periods. Upon adoption, the standard also requires the
restatement of all prior period earnings per share information presented. The
adoption of SFAS No. 128 is not expected to have a material effect on the
Company's earnings per share computations.
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of stockholders was held on April 25, 1997. 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.
14
<PAGE> 16
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................................... 17,599,197 52,449
Neil A. Armstrong.................................... 17,598,567 53,079
Daniel I. Booker..................................... 17,595,784 55,862
Ronald L. Gallatin................................... 17,598,586 53,060
Charles C. Gedeon.................................... 17,598,072 53,574
Robert M. Hernandez.................................. 17,597,637 54,009
John H. Odle......................................... 17,599,237 52,409
Timothy G. Rupert.................................... 17,597,707 53,939
Wesley W. von Schack................................. 17,598,612 53,034
</TABLE>
2. Price Waterhouse LLP was elected as independent accountants for 1997.
(For, 17,626,209; against, 15,717; abstained, 9,720)
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.
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,
1997.
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 9, 1997
By: /s/ T. G. RUPERT
-----------------------------------
T. G. Rupert
Executive Vice President & Chief
Financial Officer
16
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<ARTICLE> 5
<CIK> 0000854663
<NAME> RMI TITANIUM
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 10,725
<SECURITIES> 0
<RECEIVABLES> 66,161
<ALLOWANCES> 1,037
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0
0
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