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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(MARK ONE)
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [fee required] for the fiscal year ended December 31, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [no fee required] for the transition period from
______________________ to ______________________
COMMISSION FILE NUMBER 1-10319
RMI TITANIUM COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
OHIO 31-0875005
(State of Incorporation) (I.R.S. Employer
Identification No.)
1000 WARREN AVENUE, NILES, OHIO 44446
(Address of principal executive offices) (Zip code)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 330-544-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
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Common Stock, Par Value $0.01 Per Share New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
---------
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 3, 1997: $216,315,792. The amount shown is based on the
closing price of the registrant's common stock on the New York Stock Exchange on
that date. Shares of common stock known by the registrant to be beneficially
owned by officers or directors of the registrant or persons who have filed a
report on Schedule 13D or 13G are not included in the computation. The
registrant, however, has made no determination that such persons are
"affiliates" within the meaning of Rule 12b-2 under the Securities Exchange Act
of 1934.
Number of shares of common stock outstanding at March 3, 1997: 20,360,250.
DOCUMENTS INCORPORATED BY REFERENCE:
Selected Portions of the 1997 Proxy Statement-Part III of this Report.
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RMI TITANIUM COMPANY
AND CONSOLIDATED SUBSIDIARIES
As used in this report, the terms "RMI", "Company", and "Registrant" mean
RMI Titanium Company, its predecessors and consolidated subsidiaries, taken as a
whole, unless the context indicates otherwise.
------------------------
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.................................................................... 1
Item 2. Properties.................................................................. 8
Item 3. Legal Proceedings........................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders......................... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters... 11
Item 6. Selected Financial Data..................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 12
Item 8. Financial Statements and Supplementary Data................................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................................ 36
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... 36
Item 11. Executive Compensation...................................................... 36
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 36
Item 13. Certain Relationships and Related Transactions.............................. 36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............ 36
Signatures............................................................................... 37
Index to Exhibits........................................................................ 38
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PART I
ITEM 1. BUSINESS
THE COMPANY
RMI is a leading U.S. producer of titanium mill and fabricated products for
the global market. The Company's mill products are processed by RMI's customers
to provide products for use in the aerospace industry and other industrial
markets, including, most recently, golf club manufacturing. The Company's
fabricated products are used primarily in the aerospace, oil and gas, geothermal
energy production and chemical process industries as well as for a number of
other industrial applications. The Company also provides fabrication and
conversion services for titanium and other specialty metals producers.
The Company is a successor to entities that have been operating in the
titanium industry since 1958. In 1990, 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 Common Stock (the "Reorganization"). Quantum sold its
shares of Common Stock to the public while USX retained ownership of its shares.
At December 31, 1996, USX owned approximately 27% of the outstanding Common
Stock.
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, and 27% of the outstanding shares of
RMI.
INDUSTRY OVERVIEW
Titanium is one of the newest specialty metals. Its physical
characteristics include high strength-to-weight ratio, high temperature
performance and superior corrosion and erosion resistance. The first major
commercial application of titanium occurred in the early 1950's when it was used
as a component in aircraft gas turbine engines. Subsequent applications were
developed to use the material in other aerospace component parts and in airframe
construction.
Historically, a majority of the U.S. titanium industry's output has been
used in aerospace applications. In recent years, increased quantities of the
industry's output have been used in nonaerospace applications. Based on data
published by the U. S. Geological Survey, (including its predecessor agency, the
U. S. Bureau of Mines, "USGS"), the Company estimates that more than 35% of the
total 1995 U.S. market shipments, including exports, were made to nonaerospace
markets, including the oil and gas, geothermal energy production and chemical
process industries and golf club manufacturing.
Aerospace demand originates from two aerospace sectors: commercial and
military. Since 1987, commercial aerospace has become the dominant factor in
titanium demand. The commercial aerospace sector is expected to continue to
dominate the demand for titanium as a result of the expected growth of worldwide
airline traffic and the need to repair and replace aging commercial airline
fleets and continuing reduced military aerospace spending.
The cyclical nature of the aerospace industry has been the principal cause
of the fluctuations in performance of companies engaged in the titanium
industry. Over the past 19 years, U.S. titanium mill product shipments
registered cyclical peaks of 54 million pounds in 1980 and 55 million pounds in
1989. Beginning in 1991, the industry experienced a dramatic downturn in demand
for mill products. Domestic industry shipments fell from 53 million pounds in
1990 to 34 million pounds in 1991, a decease of 35%, the largest single one year
decrease in the history of the industry. Domestic industry shipments only
recovered modestly during the years 1991 through 1994. This most recent decline
in industry shipments reflected a sharp decline in military aerospace
consumption and a decline in commercial aircraft build rates due in part to
significant financial losses suffered by commercial airline carriers. RMI's
average realized mill product selling prices also deteriorated throughout this
period reaching lows during the years 1993 and 1994 that were approximately 30%
below 1990.
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The following table highlights the cyclical nature of the titanium industry
by setting forth the total pounds of U.S. mill products shipped during the years
1978 through 1996 and the Company's shipments and average mill product prices
during such period.
SHIPMENT AND MILL PRODUCT PRICE HISTORY
<TABLE>
<CAPTION>
Measurement Period RMI Avg. RMI Industry
(Fiscal Year Covered) Price Shipments Shipments
<S> <C> <C> <C>
'78 5.5 11.3 30.7
'79 8.1 13 33
'80 12.2 14 39.5
'81 15.7 15 35
'82 16.3 10 28
'83 10.5 8.5 23.5
'84 10.0 13.7 31.3
'85 10.2 13.7 31.3
'86 9.6 13 29
'87 9.3 13.7 30.3
'88 10.7 14.5 34.5
'89 12.2 16 38
'90 13.1 16.5 34.5
'91 12.2 11.5 21.5
'92 11.3 11.5 23.5
'93 10.6 11.3 24.7
'94 9.9 11.6 23.4
'95 10.9 14.4 28.4
'96 11.88 18.5 38.6
Sources: RMI and Titanium Development Association.
</TABLE>
Commercial aerospace markets have shown a recent increase in demand while
military aerospace markets have stabilized at the reduced build rate levels. In
1995, most major U.S. commercial airline carriers reported stronger operating
profits and, in the second half of 1995 and through 1996, aircraft manufacturers
increased build rates. As of December 31, 1996, the leading manufacturers of
commercial aircraft, Boeing Company, McDonnell Douglas Corporation and Airbus
Industrie, reported an aggregate of 2,370 planes under firm order and
deliverable over the next five years. The comparable backlogs as of December 31,
1995 and 1994 were 1,869 planes and 1,742 planes, respectively. RMI estimates
that domestic industry mill product shipments to the commercial aerospace market
in 1996 were approximately 27.5 million pounds, an increase of approximately 37%
compared to 1995.
PRODUCTS AND MARKETS
Titanium mill products consist of products such as ingot, slab, bloom,
billet, bar, plate, sheet, strip and welded tube. Fabricated products include
pipe, engineered tubular products, hot-formed and superplastically formed parts
for aerospace application, cut shapes and titanium metal powders. Other services
include conversion and fabrication services for other titanium and specialty
metal producers and project management. In addition, the Company acts as
contractor for the U.S. Department of Energy ("DOE") for the remediation and
restoration of the Company's closed facilities in Ashtabula, Ohio.
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The amount of sales and the Company's consolidated percentage of
consolidated sales represented by each class of product during each of the years
beginning in 1992 was as follows:
<TABLE>
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RMI SALES
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
$ % $ % $ % $ % $ %
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mill Products................ $203.7 81% $138.1 81% $103.8 72% $ 96.5 76% $110.5 81%
Fabricated Products and Other
Services................... 37.2 15 26.9 16 31.1 22 20.5 16 16.7 13
Other (1).................... 10.5 4 6.2 3 8.5 6 10.4 8 5.8 4
Discontinued Products (2).... -- -- -- -- -- -- -- -- 2.6 2
------ --- ------ --- ------ --- ------ --- ------ ---
Total...................... $251.4 100% $171.2 100% $143.4 100% $127.4 100% $135.6 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
</TABLE>
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(1) Includes DOE remediation and restoration contract.
(2) Discontinued products includes titanium sponge, sodium chloride, sodium
hypochlorite, and metallic sodium, which are no longer manufactured by the
Company.
MILL PRODUCTS
The Company produces a full range of titanium mill products which are used
in both the aerospace and nonaerospace markets.
Aerospace Business. Approximately 78% of the Company's 1996 mill product
sales were aerospace related compared with approximately 75% in 1995 and 63% in
1994. The Company's products are certified and approved for use by all major
domestic and most international manufacturers of commercial and military
aircraft and jet engines. Products such as sheet, plate, strip, bar, billet and
ingot, as well as related products such as hot-formed or superplastically formed
parts, are utilized in aircraft bulkheads, tail sections, wing support and
carry-through structures and various engine components including rotor blades,
vanes, discs, rings and engine cases.
As of December 31, 1996, the leading manufacturers of commercial aircraft,
Boeing Company, McDonnell Douglas Corporation and Airbus Industrie, reported an
aggregate of 2,370 planes under firm order and deliverable over the next five
years. The comparable backlogs as of December 31, 1995 and 1994 were 1,869
planes, and 1,742 planes, respectively. Included in the backlog for December 31,
1996 are 273 firm orders for the new Boeing 777 wide-body aircraft, which
requires more titanium than any other commercial aircraft. Deliveries of
commercial aircraft by these three manufacturers totaled 345 in 1996, 380 in
1995, and 432 in 1994. Because it typically takes from 12 to 18 months from
placement of an order until delivery of a commercial aircraft, realized delivery
rates generally lag behind announced backlog estimates. In addition, changing
economic conditions and instability in the domestic commercial airline industry
may cause manufacturers to re-evaluate aircraft orders and options, thus
affecting realized aircraft delivery rates.
Nonaerospace. Principal nonaerospace mill products include commercially
pure (unalloyed) strip, welded tube and plate used for chemical processing and
pulp and paper equipment. Bar is sold for the production of medical implants and
high-performance automotive engine parts. The Company is also a supplier of
commercially pure titanium plate and strip, which offers superior corrosion
resistance and ductility for critical forming and metal expansion required in
applications such as heat exchangers and anodes for the chlorine industry.
Nonaerospace sales accounted for 22% of the Company's mill product sales in
1996, 25% in 1995 and 37% in 1994. Since the Company's entry into strip
production in 1984 and tube production in 1986, sales of these two products have
grown to a majority of the Company's total nonaerospace mill product sales.
The use of titanium in golf club heads emerged in 1995 and 1996 as an
important nonaerospace product application for the titanium industry. The
Company believes this market amounted to 10.0 million pounds, or approximately
17%, of U.S. industry mill product shipments in 1996, compared to 3.5 million
pounds and 8% of shipments in 1995. While titanium golf clubs have been used in
Japan for over six years, with titanium
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woods currently commanding approximately 60% of the Japanese market, they have
only recently gained significant popularity in the U.S. market. Titanium golf
clubs have developed as the latest of several technological innovations in the
golf industry in the last 25 years.
FABRICATED PRODUCTS AND OTHER SERVICES
Fabricated products include pipe, engineered tubular products for the oil
and gas and geothermal energy production industries, hot-formed and
superplastically formed parts and cut shapes for aerospace applications and
titanium metal powders. Titanium powders are used for alloy additions,
superconductors, grain refinement of other metals and titanium powder metal
parts. Other services include conversion and fabrication services for other
titanium and specialty metals producers and project management. Revenues from
fabricated products and other services accounted for 15% of RMI's sales in 1996,
16% in 1995 and 22% in 1994. Sales to the aerospace market represented 66%, 51%
and 41% of such revenues in 1996, 1995 and 1994, respectively, with sales to the
nonaerospace market representing the balance.
The Company has devoted significant resources, the costs of which have been
expensed, to develop new applications and markets for titanium in the oil and
gas and geothermal energy production industries. Sales to the oil and gas and
geothermal energy production industries were 1% of RMI's sales in 1996, 3% of
RMI's sales in 1995 and 9% of RMI's sales in 1994.
In late 1994, the Company was awarded a contract (expiring in January 1998)
to supply all of the seamless titanium pipe required for a number of geothermal
energy production facilities located in the Imperial Valley of California.
Deliveries under the initial order of $7 million were completed in 1996. During
the fourth quarter of 1996, the Company received the second $7 million release
under the contract. Production is expected to be completed during the first half
of 1997.
During 1995, the Company completed shipment of the world's first
high-pressure titanium drilling riser for use in the Conoco Heidrun project (one
of the world's largest floating, deep-water oil and gas production platforms)
located in the Norwegian sector of the North Sea. During 1995, the Company
received several orders, valued in excess of $3 million, to supply titanium
stress joints for use in the Oryx Energy Neptune Production Riser System in the
Gulf of Mexico.
The Company continues to work closely with several oil companies and
engineering concerns to develop other titanium projects or applications in the
oil and gas and geothermal energy production industries. RMI has entered into
several cooperative ventures to encourage and develop titanium products for use
in the oil and gas industry. For example, in January 1995, the Company entered
into an agreement with Stolt Comex Seaway SA ("Stolt Comex"), a Norwegian-based
diversified contractor to the offshore oil and gas industry, to combine RMI's
and Stolt Comex's expertise to market, engineer, fabricate and install titanium
production risers, flow lines and other titanium subsea systems. Pursuant to
this agreement, the parties have entered into discussions to form a joint
venture if a commercial market for such subsea systems is proven to exist.
OTHER
The Company has a long-term agreement with the DOE covering the remediation
and restoration of the Company's closed facilities in Ashtabula, Ohio, for which
the DOE is responsible as a result of work performed there by the Company for
the U.S. government. The Company is serving as the prime contractor during the
remediation and restoration period. Year-to-year revenues and the time of
completion of the project will depend on DOE funding. In 1996, the Company
recognized $10.5 million in such revenues compared to $6.2 million in 1995 and
$8.5 million in 1994. As the prime contractor, the Company provides management
services necessary to complete assessment, clean-up and remediation activities.
EXPORTS
Most of the Company's exports, with the exception of the drilling riser
discussed above under 'Products and Markets-Fabricated Products and Other
Services,' have consisted of titanium mill products used in aerospace markets.
Other exports include slab, commercially pure strip, plate and welded tubing
used in nonaerospace markets. The Company's export sales were 17% of sales in
1996, compared to 18% and 27% of
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sales in 1995 and 1994, respectively. Such sales were made primarily to the
European market, where the Company believes it is a leader in supplying alloy
flat-rolled titanium mill products as well as rotating-quality billet. Export
sales in 1994 include revenues recognized in connection with the titanium
drilling riser contract. Most of the Company's export sales are made in U.S.
dollars, which minimizes exposure to foreign currency fluctuations.
As a leading supplier of alloy flat-rolled titanium mill products to the
European market, the Company has worked through its distributors to secure
contracts to furnish mill products to the major European aerospace
manufacturers. As a result, the Company has significant export sales to
customers in France, the United Kingdom and Germany. In order to enhance its
presence in the European market, in 1992 the Company acquired a 40% ownership
interest in its French distributor, Reamet, SA. In addition, the Company has
expanded its operations in the United Kingdom to include a distribution and
service center facility in Birmingham, England. Operations at the facility
commenced during the second quarter of 1995. In 1996, the Company became a
qualified supplier to Rolls Royce Plc and received an order to supply material
from the Birmingham facility for use in fan blades and other critical rotating
parts in Rolls Royce's family of jet engines.
BACKLOG
For a discussion of order backlog, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RAW MATERIALS
The principal raw materials used in the production of titanium mill
products are titanium sponge, a porous metallic material; titanium scrap; and
alloying agents. RMI acquires its raw materials from a number of suppliers, both
domestic and foreign, under long-term contracts and other negotiated
transactions. The Company purchased approximately 15 million pounds of titanium
sponge in 1996 and approximately 12 million pounds of titanium sponge in 1995.
Requirements for sponge vary based upon product mix and the level of scrap
usage.
Following the closure of its sponge production facilities in 1992, the
Company began purchasing its titanium sponge from outside sources. The Company
has entered into two long-term sponge supply arrangements, each with pricing
below the cost of sponge which was produced at the Company's own facilities
prior to their closure. In addition, the Company has supplemented its metal
requirements with additional sponge and raw material purchases, including
titanium scrap, from other U.S. and foreign suppliers.
One of the sponge contracts, which is with a competing producer of mill
products, permits the Company to purchase up to seven million pounds per year at
specified prices per pound during 1997, depending on the volume of sponge
purchased, and thereafter through 2003 at the Company's option at either market
price (but not below the supplier's cost) or the price in effect under the
contract for 1996 plus adjustments for changes in certain of the supplier's
costs, such as labor, electricity and raw materials. The other contract, which
is with a Japanese supplier, permits the Company to purchase up to four million
pounds of sponge per year through 1999, either at market price or a 1994 base
price plus changes in certain of the suppliers' costs, such as labor,
electricity and raw materials. In addition, this contract permits the Company to
purchase up to an additional two million pounds of sponge at negotiated prices.
These contracts are subject to renegotiation or termination under certain
circumstances. The Company purchases the balance of its sponge requirements
pursuant to short-term agreements or at negotiated prices. Prices for the
Company's 1997 requirements have already been set under these contracts and
other short-term arrangements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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
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duty, thereby allowing the Company access to lower cost sources for a
significant portion of its titanium sponge requirements.
The Company purchases titanium tetrachloride, the primary raw material used
in the manufacture of titanium sponge, from SCM Chemicals, Inc. pursuant to a
long-term supply agreement expiring in 2003. Titanium tetrachloride is shipped
to one of the Company's long-term sponge suppliers where it is used in providing
sponge for the Company.
The Company believes it has adequate sources for titanium sponge, scrap,
alloying agents and other raw materials.
COMPETITION AND OTHER MARKET FACTORS
The titanium metals industry is highly competitive on a worldwide basis.
Competition is primarily on the basis of price, quality and timely delivery.
Titanium also competes with other metals such as stainless steel and nickel
based corrosion resistant alloys. A metal manufacturing company with rolling and
finishing facilities could participate in the mill product segment of the
titanium industry. However, entry into the titanium industry as an integrated
producer would require a significant investment of capital and extensive
technical expertise.
Producers of titanium mill products are located primarily in the U.S.,
Japan, the former Soviet Union, Europe and China. Following closure of the
Company's sponge facilities in 1992, Oregon Metallurgical Corporation (Oremet)
and Titanium Metals Corporation of America (Timet) are the two remaining U.S.
integrated producers that produce their own sponge. There are also a small
number of domestic nonintegrated producers that, along with the Company, produce
mill products from purchased sponge, scrap or ingot. The Company does not
believe, however, that any of its nonintegrated U.S. competitors produce as full
a line of mill products as does RMI.
Imports of titanium mill products from countries that receive the
most-favored-nation ("MFN") tariff rate are subject to a 15% tariff. The tariff
rate applicable to imports from countries that do not receive MFN treatment is
45%. Japanese producers, which benefit from MFN treatment, participate
significantly in the European market, but historically have not been a major
factor in the U.S. mill products market. The United States currently grants MFN
treatment to imports, including titanium mill product imports, from the former
Soviet Union countries, including Russia. Effective October 18, 1993, the U.S.
Government extended the benefits of the Generalized System of Preferences
("GSP") to Russia. Under GSP, the U.S. grants duty-free access to semifinished
and agricultural products from developing countries and territories. Certain
titanium mill products are covered by GSP. However, titanium sponge, ingot and
slab have not been afforded GSP treatment. In 1995, a Russian producer began to
participate in the U.S. market for titanium mill products. This titanium
producer has the largest rated capacity in the world (although management
believes practical capacity is substantially less) and could materially affect
competition if its exports of titanium mill products were to increase
significantly.
MARKETING AND DISTRIBUTION
RMI markets its titanium mill products and related products and services
worldwide. Approximately 80% of the Company's sales are made through its own
sales force and the balance through independent distributors. RMI's domestic
sales force has offices in Niles, Ohio; Houston, Texas; Brea, California;
Washington, Missouri; and Salt Lake City, Utah. Technical marketing personnel
are available to service these offices and to assist in new product applications
and development. In addition, the Company's Customer Technical Service and
Research and Development Departments, both located in Niles, Ohio, provide
extensive customer support.
RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT
The Company conducts research, technical and product development activities
at facilities in Niles, Ohio. The principal goals of the Company's research
program are maintaining technical expertise in the production of titanium mill
and fabricated products and providing technical support in the development of
new
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markets and products. In addition to the Company's own funding, certain major
customers have assisted in funding the Company's development of specific
titanium applications. Research, technical and product development costs totaled
$3.7 million in 1996, $3.4 million in 1995 and $3.3 million in 1994. Customer
assisted funding, which is treated as a reduction of research and development
spending, reduced the Company's portion of research and development expense to
$2.1 million in 1996, $1.8 million in 1995 and $1.5 million in 1994.
The Company has research laboratories in Niles with melting, metal
processing and metal testing facilities and a corrosion laboratory for support
of nonaerospace markets.
PATENTS AND TRADEMARKS
The Company possesses a substantial body of technical know-how and trade
secrets and owns a number of U.S. patents applicable primarily to product
formulations and uses. The Company considers its know-how, trade secrets and
patents important to conduct its business, although no individual item is
considered to be material to the Company's current business.
EMPLOYEES
As of December 31, 1996, the Company and its subsidiaries employed 953
persons, 199 of whom were classified as administrative and sales personnel. At
December 31, 1996, 74 of the 953 employees were directly involved with the DOE
remediation and restoration contract at the Company's now closed facilities in
Ashtabula, Ohio.
The United Steelworkers of America ("USWA") represents 469 of the hourly
and clerical and technical employees at the Company's plant in Niles, Ohio and
the hourly employees at the closed facilities in Ashtabula, Ohio. Other than six
hourly workers at the Ashtabula facilities, who are represented by the Oil,
Chemicals and Atomic Workers Union, the Company's other employees are not
represented by a union. In October 1995, following a five day work stoppage, a
three-year labor agreement was reached with the USWA represented employees at
Niles. The hourly employees at the facilities in Ashtabula agreed to a five-year
contract on January 15, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the executive officers of the Company together with their
ages, as of December 31, 1996, and titles.
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
L. Frederick Gieg, Jr............. 64 President and Chief Executive Officer
(retired effective 2/28/97)
John H. Odle...................... 54 Executive Vice President
Timothy G. Rupert................. 50 Executive Vice President & Chief Financial Officer
Harry B. Watkins.................. 58 Vice President--Technical Marketing & Tubular Group
</TABLE>
Mr. Gieg has been a director and President and Chief Executive Officer of
the Company since 1990 and was President and Chief Executive Officer of its
predecessor since September 1, 1982. Previously, Mr. Gieg had been Vice
President and General Manager of the Western Steel Division of what is now the
U.S. Steel Group of USX. He began his career with USX in June 1953. Mr. Gieg
retired effective February 28, 1997.
Mr. Odle was elected Executive Vice President in June 1996. He previously
was Senior Vice President-- Commercial of RMI and its predecessor since 1989 and
served as Vice President--Commercial from 1978 until 1989. Prior to that, Mr.
Odle served as General Manager--Sales. He began his career as a commercial
management trainee in 1964 with USX.
Mr. Rupert was elected Executive Vice President and Chief Financial Officer
in June 1996 and had served as Vice President and Chief Financial Officer since
September 1991. Prior to joining RMI, Mr. Rupert was employed by USX for 23
years in various accounting and finance positions.
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Mr. Watkins was elected to his present position of Vice President in April
1996. Previously, he held a number of managerial and sales positions with RMI
beginning in 1985. Mr. Watkins was employed by USX Corporation for 24 years
prior to joining RMI.
ITEM 2. PROPERTIES
MANUFACTURING FACILITIES
The Company has over 728,0000 square feet of manufacturing facilities
exclusive of office space, located primarily in Niles, Ohio. The Company's
principal manufacturing plants, the principal products produced at such plants
and their aggregate capacities are set forth below.
MANUFACTURING FACILITIES
<TABLE>
<CAPTION>
ANNUAL RATED
LOCATION PRODUCTS CAPACITY
-------- -------- --------
<S> <C> <C>
Niles, Ohio Ingot (Million Pounds).................................... 36
Niles, Ohio Mill Products (Million Pounds)............................ 22
Hermitage, PA Tube (Thousand Pounds).................................... 780
Washington, MO Hot-Formed and Superplastically Formed Components
Sullivan, MO (Thousand Press Hours).................................... 21
Salt Lake City, UT Powders (Million Pounds).................................. 1.5
</TABLE>
The Company owns all of the foregoing facilities, except for the Sullivan,
Missouri facility and certain buildings and property at Washington, Missouri,
all of which are leased. The plants have been constructed at various times over
a long period, many of the buildings have been remodeled or expanded and
additional buildings have been constructed from time to time.
CONVERSION SERVICES
The Company utilizes third-party converters to melt and/or finish
approximately 35% of its mill products. The use of these converters raises the
Company's effective processing capacity. Certain mill products, such as hot band
and cold rolled strip and oversized plate, are produced entirely by such
converters using semi-finished titanium mill products supplied by the Company.
The Company, however, is responsible for inspecting and delivering these
products to customers. The Company maintains long-term relationships with many
of these conversion companies. In the ordinary course of business RMI purchases
conversion services, including rotary piercing of seamless titanium pipe, from
USX Corporation and related companies. The Company believes that, if necessary,
it could obtain alternative sources for conversion services.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. Given the
critical nature of many of the aerospace end uses for the Company's products,
including specifically their use in critical rotating parts of gas turbine
engines, the Company maintains aircraft products liability insurance of $250
million, which includes grounding liability.
In connection with the closing of the Company's facilities in Ashtabula,
Ohio, the Oil, Chemical and Atomic Workers Union, Local 729, commenced an action
in 1992 in the U.S. District Court for the Northern District of Ohio, captioned
OCAW, Local 7-629, AFL-CIO, et al. vs. RMI Titanium Company, against the Company
alleging violation of the notification provisions of the Worker Adjustment and
Retraining Notification Act ("WARN"). Three classes of former employees at such
facilities have alleged that they did not receive appropriate notice of their
pending layoffs or terminations as required under WARN and are seeking back pay
for the notification period. The Company believes that it has complied with the
provisions of WARN and that the claims are without merit.
8
<PAGE> 11
ENVIRONMENTAL
The Company is subject to extensive federal, state and local laws and
regulations concerning environmental matters. During each of 1996, 1995 and
1994, the Company spent approximately $0.6 million for environmental-related
expenditures. The Company broadly estimates environmental-related expenditures,
including capital items and compliance costs, will total approximately $3.4
million during the 1997-1999 period.
In connection with the Reorganization, the Company assumed all
responsibility for environmental matters relating to RMI Company and its
immediate predecessor, Reactive Metals, Inc., which commenced business on April
1, 1964, and agreed to indemnify Quantum and USX against any liability relating
to such environmental matters. Quantum and USX have been named as potentially
responsible parties in connection with the Fields Brook Superfund site discussed
below. In addition, Quantum initially acquired the Company's now closed
Ashtabula facilities in 1950, which it owned until 1964, when they were acquired
by Reactive Metals, Inc. Although the Company believes it may have claims with
respect to possible remediation and other costs against Quantum for the pre-1964
period, ultimate apportionment of any liability between the Company and Quantum
has not been finally agreed upon.
Active Investigative or Cleanup Sites. The Company is involved in
investigative or cleanup projects at certain waste disposal sites, including
those discussed below.
Fields Brook Superfund Site. The Company, together with 31 other
companies, has been identified by the U. S. Environmental Protection Agency the
("EPA") as a potentially responsible party ("PRP") under the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA") with respect
to a superfund site defined as the Fields Brook Watershed in Ashtabula, Ohio,
which includes the Company's now closed Ashtabula facilities. The EPA's 1986
estimate of the cost of remediation of the Fields Brook sediment operable unit
was $48 million. Recent studies, together with improved remediation technology
and redefined cleanup standards, have resulted in a more recent estimate of the
remediation cost of approximately $25 million. The actual cost of remediation
may vary from the estimate depending upon any number of factors.
The EPA, beginning in March 1989, ordered 22 of the PRPs to conduct a
design phase study for the sediment operable unit and a source control study.
These studies are nearly complete and are currently estimated to cost $22
million. The Company, working cooperatively with fourteen others, is complying
with the order and has accrued and has been paying its portion of the cost of
such compliance. It is anticipated that the studies will be completed no earlier
than 1997. Actual cleanup is not expected 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 RMI. However, actual percentages
may be more or less based on contributions from other parties which are not
currently participating in the Phase 2 allocation agreement.
The U.S. Department of the interior, on behalf of the Natural Resource
Trustees for Fields Brook, has notified the PRPs of the Trustees' belief that
the PRPs have incurred liability for injuries to natural resources and has
proposed a negotiated settlement. It is not possible to predict at this time the
cost of a natural resource settlement, although the Company believes it is
likely that the PRPs will negotiate a settlement that will not result in any
material obligation to the Company.
Resource Conservation and Recovery Act of 1975 ("RCRA")
Proceedings-Ashtabula Sodium Plant. The Company, through its independent
environmental consultant, has identified and reported to the EPA the presence of
metals and hazardous organic materials on portions of its closed facilities in
Ashtabula, Ohio. As to the organic material, the consultant has determined it
originates from an off-site source, and the Company does not anticipate it will
be required to clean up this material.
A Corrective Measures Study report prepared for the Company by the
consultant states that the presence of metals would not be expected to have an
adverse impact on humans or the environment, and, after conducting a detailed
analysis of cleanup alternatives, the study recommended that metals contaminated
material be consolidated at an on-site landfill and contained in place, at an
estimated cost of $1 million. The
9
<PAGE> 12
EPA has approved the Corrective Measures Study but has not yet selected a
cleanup alternative. The Company has accrued an amount for this matter.
Ashtabula River. The Ashtabula River and Harbor has been designated one of
43 Areas of Concern on the Great Lakes by the International Joint Commission.
Fields Brook empties into the Ashtabula River, which in turn flows into Lake
Erie. The State of Ohio has appropriated $7 million in state funds to the
Ashtabula River dredging project to assist in securing federal funds needed to
conduct the dredging.
The Company believes it is most appropriate to use public funds to cleanup
a site with regional environmental and economic development implications such as
the Ashtabula River and Harbor. The Ashtabula River Partnership ("ARP"), a
voluntary group of public and private entities including, among others, the
Company, the EPA, and the Ohio EPA, was formed in July 1994 to bring about the
remediation of the river. The ARP is working both to design a cost-effective
remedy and to secure public funding. Phase 1, the Comprehensive Management Plan,
is well underway and is completely funded with public money. To fund Phase 2,
the Detailed Design, the Company and the 14 other PRPs who are cooperating at
the Fields Brook Superfund site collectively have pledged a voluntary
contribution of $1 million over two years, contingent upon receiving matching
Federal funds. In 1996, $0.5 million in matching Federal funds was granted. It
is possible that the EPA could determine that the Ashtabula River and Harbor
should be designated as an extension of the Fields Brook Superfund site, or,
alternatively, as a separate Superfund site. It is not possible at this time to
predict the methods or responsibility for any remediation and whether the
Company will have any liability for any costs incurred in cleaning up the
Ashtabula River and Harbor.
With respect to each of the above sites, all of which are located in Ohio,
the State of Ohio may assert its interests and rights independent of those of
the EPA. The Company has notified all its insurers relative to the environmental
claims reported above and has demanded that the insurers assume the Company's
defense of such claims and indemnify the Company against such claims. During
1993, the Company settled a claim with one insurer for $0.4 million. None of the
remaining insurers have agreed to defend or indemnify the Company, and several
have denied coverage. However, the Company continues to pursue these claims with
its insurers.
Alleged RCRA Violations. On October 9, 1992, the EPA filed a complaint
alleging certain violations of RCRA at the Company's now closed facilities in
Ashtabula, Ohio. The EPA's determination is based on information gathered during
inspections of the facility in 1991. Under the complaint the EPA proposed 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 nature of the proceedings, the Company is currently unable to determine
the ultimate liability, if any, that may arise from this matter.
Given the status of the proceedings at certain of these sites, and the
evolving nature of environmental laws, regulations, and remediation techniques,
the Company's ultimate obligation for investigative and remediation costs cannot
be predicted. It is the Company's policy to recognize in its financial
statements environmental costs as an obligation becomes probable and a
reasonable estimate of exposure can be determined. At December 31, 1996, the
amount accrued for future environmental-related costs was $2.6 million. Based on
available information, RMI believes that its share of potential
environmental-related costs, before expected contributions from third parties,
is in a range from $3.9 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 sites.
The ultimate resolution of the foregoing contingencies could, individually
or in the aggregate, be material to the consolidated financial statements.
However, management believes that RMI will remain a viable and competitive
enterprise even though it is possible these matters could be resolved
unfavorably.
10
<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
COMMON STOCK DATA:
Principal market for common stock: New York Stock Exchange
Holders of record of common stock at January 31, 1997: 848
RANGE OF COMMON STOCK PRICES AND DIVIDENDS FOR 1996
<TABLE>
<CAPTION>
DIVIDEND
QUARTER HIGH LOW DECLARED
------- ---- --- ---------
<S> <C> <C> <C>
First........................................... $16 1/2 $ 7 7/8 $--
Second.......................................... 24 3/4 14 --
Third........................................... 28 1/2 18 3/4 --
Fourth.......................................... 28 1/8 21 --
Year............................................ $28 1/2 $ 7 7/8 $--
</TABLE>
RANGE OF COMMON STOCK PRICES AND DIVIDENDS FOR 1995
<TABLE>
<CAPTION>
DIVIDEND
QUARTER HIGH LOW DECLARED
------- ---- --- ---------
<S> <C> <C> <C>
First........................................... $ 5 1/2 $ 3 1/8 $--
Second.......................................... 9 3/4 3 3/4 --
Third........................................... 10 3/8 6 3/4 --
Fourth.......................................... 9 7/8 6 1/2 --
Year............................................ $10 3/8 $ 3 1/8 $--
</TABLE>
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 the Company, after
deducting underwriting fees and expenses, amounted to $80.3 million.
The Company has not paid dividends on its Common Stock since the second
quarter of 1991. The declaration of dividends is at the discretion of the Board
of Directors of the Company. The declaration and payment of future dividends and
the amount thereof will be dependent upon the Company's results of operations,
financial condition, cash requirements for its business, future prospects and
other factors deemed relevant by the Board of Directors.
11
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY
Year Ended December 31
(Dollars in thousands except for per share data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales................................ $251,357 $171,166 $143,392 $127,397 $135,607
Operating income (loss).............. 33,730 (5,220)(1) (7,971) (10,764) (11,387)
Income (loss) before cumulative
effect of a change in accounting
principle.......................... 31,759 (4,608)(2) (11,562) (11,955) (14,062)
Net income (loss).................... 31,759 (4,608)(2) (12,764)(3) (28,893)(4) (14,062)
BALANCE SHEET DATA:(at end of period)
Working capital...................... $132,136 $ 86,738 $ 74,694 $ 66,319 $ 72,229
Total assets......................... 215,880 171,559 160,810 152,647 153,257
Long-term debt....................... 3,600 64,020 54,740 66,660 62,280
Equity............................... 158,736(5) 36,889 42,596(6) 27,861 63,302
NET INCOME (LOSS) PER COMMON SHARE:
(7)
Before change in accounting
principle.......................... $ 1.71 $ (0.30) $ (1.45) $ (8.14) $ (9.66)
Net income (loss).................... $ 1.71 $ (0.30) $ (1.60) $ (19.67) $ (9.66)
</TABLE>
- ---------
(1) Includes a $5.0 million charge reflecting the June 30, 1995 adoption of
Statement of Financial Accounting Standards ("SFAS") No. 121. See Note 7 to
the Consolidated Financial Statements.
(2) Includes a $5.0 million charge reflecting the adoption of SFAS No. 121 and a
$7.2 million income tax benefit. See Notes 7 and 8 to the Consolidated
Financial Statements.
(3) Includes a $1.2 million charge reflecting the adoption of SFAS No. 112. See
Note 11 to Consolidated Financial Statements.
(4) Includes a $16.9 million charge reflecting the adoption of SFAS No. 106. See
Note 11 to the Consolidated Financial Statements.
(5) Includes a $80.3 million increase resulting from the net proceeds of a
common stock offering. See Note 4 to the Consolidated Financial Statements.
(6) Includes a $26.4 million increase resulting from the net proceeds of a
rights offering. See Note 4 to the Consolidated Financial Statements.
(7) The 1992-1993 Common Share data has been adjusted to reflect a March 31,
1994 one-for-ten reverse stock split. See Note 4 to the Consolidated
Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the Consolidated Financial Statements and Notes thereto of
the Company included elsewhere herein. 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.
12
<PAGE> 15
OVERVIEW
Historically, a majority of the U.S. titanium industry's output has been
used in aerospace applications. The cyclical nature of the aerospace industry
has been the principal cause of the fluctuations in performance of companies
engaged in the titanium industry. Over the past 19 years, titanium mill products
shipments registered cyclical peaks of 54 million pounds in 1980 and 55 million
pounds in 1989. Beginning in 1991, the industry experienced a dramatic downturn
in demand for mill products. Domestic industry shipments fell from 53 million
pounds in 1990 to 34 million pounds in 1991, a decrease of 35%, the largest
single one year decrease in the history of the industry. This decline in
industry shipments reflected a sharp decline in military aerospace consumption
and a decline in commercial aircraft build rates due in part to significant
financial losses suffered by U.S. commercial airlines carriers. RMI's average
realized mill product selling prices deteriorated during the years 1993 and 1994
and were approximately 30% below 1990 levels.
Commercial aerospace markets have shown a recent increase in demand while
military aerospace markets have stabilized at the reduced build rate levels. In
1995, most major commercial airlines reported stronger operating profits and, in
the second half of 1995 and through 1996, aircraft manufacturers increased build
rates. As of December 31, 1996, the leading manufacturers of commercial
aircraft, Boeing Company, McDonnell Douglas Corporation and Airbus Industrie,
reported an aggregate of 2,370 planes under firm order and deliverable over the
next five years. The comparable backlogs as of December 31, 1995 and 1994 were
1,869 planes and 1,742 planes, respectively. The Company estimates that industry
mill products shipments to the commercial aerospace market in 1996 were
approximately 27.5 million pounds, an increase of approximately 37% compared to
1995. Total industry shipments in 1996 were 57.1 million pounds, an increase of
33% compared to 1995. RMI can give no assurance as to the extent or duration of
the recovery in the commercial aerospace market or the extent to which such
recovery will result in increases in demand for titanium products.
During 1995 and 1996, the use of titanium in golf clubs emerged as an
important nonaerospace market for the U.S. titanium industry. The Company
believes that titanium shipments for use in golf clubs amounted to 3.5 million
pounds, or approximately 8% of U.S. industry mill product shipments, in 1995 and
10.0 million pounds, or 17% of such shipments, in 1996. Demand from the golf
club market benefits RMI by increasing utilization in the titanium mill products
industry, resulting in increased prices for titanium mill products
industry-wide. Although demand for titanium scrap for the golf club
manufacturing market has placed upward pressure on the Company's raw material
costs, this pressure has been more than offset by higher selling prices for the
Company's mill products.
In response to industry-wide conditions the Company closed its sponge
production facilities in early 1992, which allowed the Company to stem
immediately the significant losses generated at these plants, as well as achieve
the flexibility to purchase titanium sponge and other raw materials, such as
foreign or domestic scrap, at the most favorable prices available. The Company
entered into two long-term titanium sponge supply arrangements which assure a
supply of a substantial portion of the Company's expected sponge requirements.
Prices for the Company's 1997 requirements have been set under these contracts
and other short term arrangements. Raw material prices are a significant factor
in the overall cost of production of the Company's titanium mill products. RMI
has instituted raw material escalator and surcharge clauses on substantially all
of its new incoming orders. These escalators and surcharges are linked to
current raw material prices for titanium sponge, alloys and scrap. However,
because of the cyclical nature of the titanium industry and the effect that
overall demand for titanium mill products may have on future pricing, the
Company can give no assurances as to the continuing ability to recover raw
material cost increases.
RMI's strategy is to build on its leading position in the worldwide
titanium industry while maintaining a strong financial condition and stringent
quality, safety and environmental standards. RMI is emphasizing higher margin
products in its traditional markets, while continuing to develop new markets and
products such as seamless tubulars for oil and gas and geothermal energy
production.
RESULTS OF OPERATIONS
Net Sales. Net sales in 1996 increased by $80.2 million to $251.4 million,
or 47% compared to 1995. This increase resulted primarily from increased mill
product shipments and higher average selling prices. Mill
13
<PAGE> 16
products shipments in 1996 amounted to 18.5 million pounds compared to 14.4
million pounds in 1995, a 29% increase. Average realized mill product selling
prices increased to $11.88 per pound in 1996 compared to $10.23 per pound during
1995, a 16% increase. Both demand and pricing for titanium mill products
continue to remain strong in both commercial aerospace and industrial product
markets. Sales related to the development of new products and markets which
includes long-term contracts for oil and gas and geothermal energy production
increased from $5.8 million in 1995 to $6.6 million in 1996. Due to increased
aerospace demand, sales of hot-formed parts and cut shapes increased to $17.1
million in 1996 from $12.7 million in the same period of 1995. As a result of
increased funding under the DOE remediation and restoration contract, other
sales increased to $10.5 million in 1996 from $6.2 million in 1995.
Net sales in 1995 increased by $27.8 million to $171.2 million, or 19%,
compared to 1994. This increase resulted primarily from increased mill product
shipments and higher average selling prices, partially offset by decreased
revenues from fabricated products and other services and other sales. Shipments
of mill products in 1995 increased to 14.4 million pounds, 25% higher than in
1994, reflecting an increase in demand for mill products from commercial
aerospace and other industrial markets. The majority of this increase occurred
in the second half of 1995, reflecting strengthening business conditions as the
year progressed. Approximately 75% of RMI's 1995 mill product sales were
aerospace related compared with approximately 63% on 1994. The Company's average
realized mill product selling price increased to $10.23 per pound in 1995,
approximately 6% higher than in 1994. Realized prices were favorably affected in
1995 by increasing demand from the golf club market. See "Overview" above.
Because the titanium drilling riser for the Conoco Heidrun project was
substantially completed in 1994, sales of fabricated products and other services
declined to $26.9 million in 1995 from $31.1 million in 1994. Other sales
decreased by $2.3 million to $6.2 million, or 27%, compared to 1994, due to
decreased funding for the DOE remediation and restoration contract.
Gross Profit. Gross profit in 1996 amounted to $45.6 million, or 18.1% of
sales, compared to gross profit of $6.2 million, or 3.6% of sales in 1995. This
increase results primarily from increased shipments and selling prices for
titanium mill products. Results in 1995 were adversely impacted by a $5.0
million asset impairment charge following the adoption of SFAS No. 121 and costs
associated with stock appreciation rights amounting to $0.8 million.
Gross profit in 1995 improved to $6.2 million, an increase of 100%,
compared to $3.1 million in 1994. This improvement relates primarily to
increased shipments of titanium mill products and higher realized mill product
selling prices, partially offset by a reduction in sales of fabricated products
and other services, increases in raw material costs and an asset impairment
charge of $5.0 million following the adoption of SFAS No. 121.
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses
amounted to $9.8 million in 1996 compared to $9.6 million in 1995 and $9.5
million in 1994. SG&A expenses, together with research, technical and product
development expenses, discussed below, in 1995, include $0.6 million of costs
related to stock appreciation rights. As a percentage of sales, SG&A expenses
were 3.9% in 1996, 5.6% in 1995, and 6.6% in 1994.
Research, Technical and Product Development Expenses. The Company's total
research spending amounted to $3.7 million in 1996, $3.4 million in 1995, and
$3.3 million in 1994. The Company's major research objectives are to maintain
its technical expertise in titanium production, provide customer technical
support and develop new products and markets. Certain major customers have
assisted in funding the Company's overall product development effort. Such
funding, which is included as a reduction of research expense, reduced the
Company's portion of research expense to $2.1 million in 1996, $1.9 million in
1995, and $1.5 million in 1994.
Operating Income/Loss. Operating income in 1996 amounted to $33.7 million,
or 13.4% of sales compared to a loss of $5.2 million in 1995. This improvement
results primarily from significant increases in mill product shipments and
average mill product selling prices. Results for the 1995 period were adversely
impacted by a $5.0 million asset impairment charge and costs associated with
stock appreciation rights referred to above.
14
<PAGE> 17
The operating loss for 1995 amounted to $5.2 million compared to an $8.0
million loss in 1994. This improvement resulted primarily from increased
shipments of mill products and higher realized mill product selling prices,
partially offset by a $5.0 million asset impairment charge following the
adoption of SFAS No. 121. Both shipments and selling prices were favorably
impacted by a general increase in demand for titanium mill products.
Other Income (Expense). Other income (expense) in 1996 includes a $0.4
million loss on disposal of fixed assets. The 1995 amounts included a $1.9
million charge for impairment of the Company's investment in a joint venture. In
June 1995, the Company and Permascand AB of Sweden decided, for economic
reasons, to discontinue operations of Permipipe Titanium AS, their welded
titanium pipe joint venture in Norway.
Interest Expense. Interest expense in 1996 amounted to $2.2 million
compared to $5.0 million in 1995. This improvement results primarily from
reduced levels of indebtedness during 1996. For further information on
indebtedness, see "Liquidity and Capital Resources" below.
Net interest expense amounted to $5.0 million in 1995 compared to $3.3
million in 1994. Interest expense increased in 1995 from 1994 due to higher
levels of borrowing to support increased business levels and higher overall
interest rates.
Income Taxes. During 1996, the Company recorded an income tax benefit of
$0.1 million. This amount is comprised of an income tax provision against pretax
income for the year of $2.5 million and an income tax benefit of $2.6 million
resulting from an adjustment to the deferred tax asset valuation allowance due
to changes in the Company's expectations about the ultimate realization of its
deferred tax assets in years after 1996. Excluding the $2.6 million valuation
allowance adjustment, the effective tax rate for the year ended December 31,
1996, was approximately 7.9%. The difference between the statutory federal tax
rate of 35% and the effective tax rate is principally due to an adjustment to
the deferred tax asset valuation allowance which existed at December 31, 1995 as
it related to expected 1996 results. The effect of this adjustment reduced the
1996 tax provision by approximately $8.6 million.
In 1995, an income tax benefit of $7.2 million was recorded to recognize a
portion of the Company's deferred tax assets believed more likely than not to be
realized under the provisions of SFAS No. 109, "Accounting for Income Taxes."
For additional information, including a potential Section 382 limitation due to
a change in control, see "Income Tax Considerations" below. No tax provision or
benefit was recorded in 1994.
Net Income/Loss. Net income for the year ended December 31, 1996 amounted
to $31.8 million, or 12.6% of sales compared to a loss of $4.6 million in 1995.
Results for 1995 include the $5.0 million impairment charge following the
adoption of SFAS No. 121, a $1.9 million impairment of an investment in a joint
venture, and $1.5 million in costs incurred in connection with stock
appreciation rights.
In 1995, the Company reported a net loss of $4.6 million compared to a net
loss of $12.8 million in 1994. 1995 results were adversely affected by the
charges referred to above. The 1994 results were adversely affected by a $1.2
million charge representing the cumulative effect of adopting the provisions of
SFAS No. 112, "Employers' Accounting for Postretirement Benefits."
OUTLOOK
RMI's order backlog increased to $330 million at February 28, 1997 from
$328 million at year-end 1996. The comparative order backlog at December 31,
1995 and 1994 amounted to $134 million and $67 million, respectively. The
Company defines "Order backlog" as firm purchase orders generally subject, upon
payment of specified charges, to cancellation by the customer.
Beginning in 1995 and continuing throughout 1996, the Company experienced a
significant increase in the volume of incoming orders at increased prices,
resulting in a steady increase in order backlog. The Company's average realized
mill product selling price increased to $11.88 per pound in 1996, compared to
$10.23 per pound in 1995, a 16% increase. The Company estimates that as of
December 31, 1996, orders for approximately 95% of its anticipated 1997
shipments have been booked at average prices greater than $13 per pound. The
increase in demand has been driven primarily by the recovery in the commercial
aerospace
15
<PAGE> 18
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 will increase
slightly over 1996 levels. 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
significantly during 1996. 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used in operating activities, after funding a $16.1 cash
contribution to the Company's pension plans, totaled $13.6 million in 1996
compared to $7.7 million used in operations during 1995. The change in new cash
flows from operating activities in 1996, compared to 1995, was due primarily to
improved results of operations offset by an increase in working capital. Working
capital amounted to $132.1 million at December 31, 1996, compared to $86.7
million at December 31, 1995. The increase in working capital results primarily
from increases in inventories and accounts receivable necessary to support
higher levels of business activity. The Company's working capital ratio was 5.25
to 1 at December 31, 1996 compared to 3.73 to 1 at December 31, 1995.
Net cash flows used in operating activities totaled $7.7 million in 1995
compared to $13.2 million in 1994. The change in net cash flows used in
operating activities in 1995 compared to 1994 was due primarily to improved
results of operations partially offset by an increase in accounts receivable and
noncash deferred tax assets.
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, as referred to below, and the balance was used for general corporate
purposes. In 1994, the Company raised working capital through a rights offering
to shareholders (the "Rights Offering"). After deducting expenses of the
offering, net proceeds increased total shareholders' equity by approximately
$26.4 million.
In September 1996, the Company made a $16.1 million cash contribution to
certain of its defined benefit pension plans. This contribution was funded by
using $10.2 million of the net proceeds from the Common Stock Offering, and $5.9
million in borrowings under the Credit Facility, discussed below.
During 1996, the Company's cash flow requirements for capital expenditures
were funded by internally generated funds and proceeds from the Common Stock
Offering. In 1995, the Company's cash flow requirements for operating losses,
capital expenditures and working capital were funded primarily through
borrowings. In 1994, the Company's cash flow requirements for operating losses,
capital expenditures and working capital were funded through proceeds from the
Rights Offering.
16
<PAGE> 19
During 1996, the Company funded 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 Credit Facility. The Company anticipates that it will be able to fund its
1997 working capital requirements and its currently expected capital
expenditures primarily from funds generated by operations and borrowings under
the Credit Facility, as required. The Company may, however, undertake strategic
initiatives and make additional capital expenditures in 1997 which may require
additional financing therefor. 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.
Credit Facility. On April 15, 1996, the Company entered into a Credit
Facility with PNC Bank, N.A. as agent. 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. The Company had sufficient accounts
receivable and inventory at December 31, 1996 to borrow the entire $50 million.
At December 31, 1996, $2.9 million was outstanding under the Credit Facility.
The Credit Facility contains the following financial covenants: (i) the Company
shall not permit its consolidated net worth to be less than $36.9 million plus
50% of the Company's consolidated net income for each fiscal quarter in which
net income was earned beginning January 1, 1996; (ii) the Company shall not
permit the ratio of consolidated earnings before interest and taxes to
consolidated interest expense to be less than 2.5 to 1.0; and (iii) capital
expenditures, including assets acquired under capitalized leases, shall not
exceed $10 million per year.
An event of default under the 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
Credit Facility contains additional terms, financial covenants and events of
default which are typical for other similar facilities.
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 at least 2006. 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. An ownership change could result from equity 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.
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), ("DECS"). Such shares
represent all of the RMI Common Stock owned by USX and 27% of the outstanding
shares of RMI. While not free from doubt, the Company believes the sale of the
DECS itself should not result in an ownership change. USX has agreed to
indemnify the Company against any additional federal, state and local taxes
incurred if there is a determination that an ownership change has occurred as a
result of the sale by USX of the DECS (but not the exchange, at maturity, of the
Common Stock for the DECS, if USX delivers Common Stock), other than in the
event there is a determination that an ownership
17
<PAGE> 20
change had occurred prior to the date of issuance of the DECS. If one or more
events occur subsequent to the issuance of the DECS which would have constituted
an ownership change if the sale of the DECS had not occurred, USX's
indemnification obligation is limited to the difference between the additional
taxes payable as a result of an ownership change resulting from the sale of the
DECS and the additional taxes payable assuming such ownership change had
occurred as a result of one or more such events. The Company is unable to
determine whether an ownership change will occur if Common Stock is exchanged
for the DECS since such determination will be dependent on the facts at the time
of exchange.
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 December 31, 1996, the Company considered a number of
factors including the improved profitability in 1996 compared to expectations
inherent in the December 31, 1995 valuation allowance. Accordingly, the
valuation allowance was adjusted by approximately $8.6 million as of December
31, 1996 for the difference between such revised future income expectations and
those inherent in the valuation allowance at December 31, 1995 as it related to
expected 1996 results. Additionally, the valuation allowance was adjusted by
$2.6 million at September 30, 1996 because of improving expectations regarding
income in years after 1996 which were not inherent in the valuation allowance at
December 31, 1995. The effect of these adjustments resulted in a tax benefit of
$0.1 million for the year ended December 31, 1996.
The application of SFAS No. 109 valuation allowance determination process
could result in recognition of further 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 will likely 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 December 31, 1996, 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
18
<PAGE> 21
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 contesting the
complaint. Based on the 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.
For a further discussion of environmental matters see "Business--Legal
Proceedings--Environmental."
CAPITAL EXPENDITURES
Gross capital expenditures in 1996 amounted to $4.2 million compared to
$1.6 million in 1995. The Company currently estimates that its 1997 capital
expenditures will be in a range of $8.0 to $10.0 million. The Company may,
however, undertake strategic initiatives and make additional capital
expenditures in 1997. See "Liquidity and Capital Resources" above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Management.............................................................. 20
Report of Independent Accountants................................................. 20
FINANCIAL STATEMENTS:
Consolidated Statement of Operations for the years ended
December 31, 1996, 1995 and 1994........................................... 21
Consolidated Balance Sheet at December 31, 1996 and 1995..................... 22
Consolidated Statement of Cash Flows for the years ended
December 31, 1996, 1995 and 1994........................................... 23
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994........................................... 24
Notes to Consolidated Financial Statements................................... 25
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
19
<PAGE> 22
REPORT OF MANAGEMENT
RMI Titanium Company has prepared and is responsible for the consolidated
financial statements and other financial information included in this Annual
Report. The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and necessarily include some
amounts based on the best judgements and estimates of management. Financial
information displayed in other sections of this Annual Report is consistent with
that in the consolidated financial statements.
The Company maintains a comprehensive formalized system of internal
accounting controls. Management believes that the internal accounting controls
provide reasonable assurance that transactions are executed and recorded in
accordance with Company policy and procedures and that the accounting records
may be relied on as a basis for preparation of the consolidated financial
statements and other financial information. In addition, as part of their audit
of the consolidated financial statements, the Company's independent accountants,
who are elected by the shareholders, review and test the internal accounting
controls selectively to establish a basis of reliance thereon in determining the
nature, extent and timing of audit tests to be applied.
The Audit Committee of the Board of Directors, composed entirely of
directors who are not employees of the Company, meets regularly with the
independent accountants, management and internal auditors to discuss the
adequacy of internal accounting controls and the quality of financial reporting.
Both the independent accountants and internal auditors have full and free access
to the Audit Committee.
/s/ JOHN H. ODLE /s/ T. G. RUPERT
John H. Odle T. G. Rupert
Executive Vice President Executive Vice President &
Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RMI TITANIUM COMPANY
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of RMI Titanium Company and its subsidiaries at December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2 to the financial statements, in 1995 the Company
adopted Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As
discussed in Note 11 to the financial statements, in 1994 the Company adopted
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits."
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Pittsburgh, Pennsylvania
January 23, 1997
20
<PAGE> 23
RMI TITANIUM COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Sales.................................................. $ 251,357 $ 171,166 $ 143,392
Operating costs:
Cost of sales (Note 7)................................. 205,748 164,949 140,289
Selling, general and administrative expenses........... 9,785 9,576 9,531
Research, technical and product development expenses... 2,094 1,861 1,543
---------- ---------- ---------
Total operating costs........................... 217,627 176,386 151,363
---------- ---------- ---------
Operating income (loss)................................ 33,730 (5,220) (7,971)
Other income (expense)--net............................ 110 (1,622) (291)
Interest expense....................................... (2,181) (4,966) (3,300)
---------- ---------- ---------
Income (loss) before income taxes...................... 31,659 (11,808) (11,562)
Provision (credit) for income taxes (Note 8)........... (100) (7,200) --
---------- ---------- ---------
Income (loss) before cumulative effect of change in
accounting principle (Note 11)....................... 31,759 (4,608) (11,562)
Cumulative effect of change in accounting principle
(Note 11)............................................ -- -- (1,202)
---------- ---------- ---------
Net income (loss)...................................... $ 31,759 $ (4,608) $ (12,764)
========== ========== =========
Net income (loss) per common share:
Before cumulative effect of change in accounting
principle......................................... $ 1.71 $ (0.30) $ (1.45)
Cumulative effect of change in accounting
principle......................................... -- -- (0.15)
---------- ---------- ---------
Net income (loss)...................................... $ 1.71 $ (0.30) $ (1.60)
---------- ---------- ---------
Weighted average shares outstanding (Note 4)........... 18,516,645 15,301,854 7,958,395
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
21
<PAGE> 24
RMI TITANIUM COMPANY
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................... $ 5,944 $ 509
Receivables, less allowance for doubtful accounts of $979 and
$1,670............................................................ 57,702 41,251
Inventories......................................................... 92,616 74,053
Deferred tax asset.................................................. 2,733 1,036
Other current assets................................................ 4,205 1,656
--------- ---------
Total current assets......................................... 163,200 118,505
Property, plant and equipment, net of accumulated depreciation...... 37,855 39,964
Noncurrent deferred tax asset....................................... 4,467 6,164
Other noncurrent assets............................................. 10,358 6,926
--------- ---------
Total assets................................................. $ 215,880 $ 171,559
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................................... $ 120 $ 120
Accounts payable.................................................... 15,288 17,646
Accrued wages and other employee costs.............................. 6,299 7,237
Other accrued liabilities........................................... 9,357 6,764
--------- ---------
Total current liabilities.................................... 31,064 31,767
Long-term debt...................................................... 3,600 64,020
Accrued postretirement benefit cost................................. 19,442 18,795
Noncurrent pension liabilities...................................... 1,028 18,078
Other noncurrent liabilities........................................ 2,010 2,010
--------- ---------
Total liabilities............................................ 57,144 134,670
--------- ---------
Contingencies (see Note 15).........................................
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;
20,858,748 and 15,908,091 shares issued (Note 4).................. 208 159
Additional paid-in capital (Note 4)................................. 234,958 151,715
Accumulated deficit................................................. (71,767) (103,526)
Deferred compensation............................................... (557) --
Excess minimum pension liability.................................... (1,028) (8,381)
Treasury Common Stock at 568,198 shares............................. (3,078) (3,078)
--------- ---------
Total shareholders' equity................................... 158,736 36,889
--------- ---------
Total liabilities and shareholders' equity................... $ 215,880 $ 171,559
========= =========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
22
<PAGE> 25
RMI TITANIUM COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH PROVIDED FROM (USED IN) OPERATIONS:
Net income (loss).......................................... $ 31,759 $ (4,608) $(12,764)
Adjustment for items not affecting funds from operations:
Change in accounting principle........................ -- 5,031 1,202
Compensation expense for stock appreciation rights.... -- 1,465 --
Depreciation.......................................... 5,049 6,443 6,140
Deferred income taxes................................. -- (7,200) --
Impairment of joint venture investment................ -- 1,901 --
Other-noncash charges--net............................ 963 2,137 1,757
-------- -------- --------
37,771 5,169 (3,665)
-------- -------- --------
CHANGES IN ASSETS AND LIABILITIES (EXCLUDING CASH):
Receivables................................................ (16,731) (13,159) (248)
Inventories................................................ (18,563) (1,587) (14,974)
Accounts payable........................................... (2,358) (186) 6,062
Other current liabilities.................................. 1,125 2,469 (331)
Other assets and liabilities............................... (11,520) (732) 197
Noncurrent pension liabilities............................. (4,010) -- --
Other...................................................... 647 301 (258)
-------- -------- --------
(51,410) (12,894) (9,552)
-------- -------- --------
Cash used in operating activities................... (13,639) (7,725) (13,217)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in joint ventures............................ -- -- (172)
Proceeds from sale of facilities......................... 1,134 130 120
Capital expenditures..................................... (4,194) (1,552) (1,063)
-------- -------- --------
Cash used in investing activities................... (3,060) (1,422) (1,115)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of Employee Stock Options....................... 2,161 -- --
Net proceeds from issuance of Common Stock............... 80,393 -- 26,422
Net borrowings under revolving credit agreements......... 2,900 9,400 15,750
Debt repayments.......................................... (63,320) (120) (27,670)
Treasury Common Stock repurchased........................ -- (9) (78)
-------- -------- --------
Cash from financing activities...................... 22,134 9,271 14,424
-------- -------- --------
Increase in cash and cash equivalents...................... 5,435 124 92
Cash and cash equivalents at beginning of period........... 509 385 293
-------- -------- --------
Cash and cash equivalents at end of period................. $ 5,944 $ 509 $ 385
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized)........ $ 2,579 $ 4,320 $ 3,283
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
23
<PAGE> 26
RMI TITANIUM COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
EXCESS
ADDT'L. RETAINED TREASURY MINIMUM
SHARES COMMON DEFERRED PAID-IN EARNINGS COMMON PENSION
OUTSTANDING STOCK COMPENSATION CAPITAL (DEFICIT) STOCK LIABILITY
----------- ------ ------------ -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993....................... 14,750,459 $ 153 $ (205) $124,578 $ (86,154) $ (2,991) $(7,520)
Compensation expense
recognized................. -- -- 205 -- -- -- --
One-for-ten reverse stock
split effective March 31,
1994 (Note 4).............. (13,275,414) (138) -- 138 -- -- --
Shares issued as result of
Rights Offering (Note 4)... 13,775,057 143 -- 26,279 -- -- --
Shares issued for Directors'
Compensation............... 25,783 -- -- 59 -- -- --
Treasury Common Stock
purchased at cost.......... (4,564) -- -- -- -- (78) --
Shares issued for Restricted
Stock Award Plans.......... 240 -- -- 4 -- -- --
Net loss..................... -- -- -- -- (12,764) -- --
Excess minimum pension
liability.................. -- -- -- -- -- -- 887
----------- ------ ------ -------- --------- -------- -------
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 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)
=========== ===== ====== ======== ========= ======== =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
24
<PAGE> 27
RMI TITANIUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1--ORGANIZATION AND OPERATIONS:
The consolidated financial statements of RMI Titanium Company (the
"Company") include the financial position and results of operations for the
Company and its subsidiaries.
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 December 31, 1996 approximately 27% of the
outstanding common stock was owned by USX. For additional information on the
Company's capital structure see Note 4.
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, and 27% of the outstanding shares of
RMI.
The Company's operations are conducted primarily in one business segment,
the production and marketing of titanium metal and related products. In 1996, no
single customer accounted for more than 10% of consolidated revenues. In the
years ended December 31, 1996, 1995 and 1994, export sales were $41.5 million,
$30.1 million and $39.8 million, respectively, principally to customers in
Western Europe.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of RMI Titanium
Company and its majority owned subsidiaries. All significant intercompany
accounts and transactions are eliminated.
Use of Estimates:
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at year-end and
the reported amounts of revenues and expenses during the year.
Inventories:
Inventories are primarily 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).
Depreciation and amortization:
In general, depreciation and amortization of properties is determined using
the straight-line method over the estimated useful lives of the various classes
of assets. For financial accounting purposes, depreciation and amortization are
provided over the following useful lives:
<TABLE>
<S> <C>
Building and improvements........................ 20-25 years
Machinery and equipment.......................... 10-14 years
Furniture and fixtures........................... 3-10 years
</TABLE>
25
<PAGE> 28
Retirement and disposal of properties:
The cost of properties retired or otherwise disposed of, together with the
accumulated depreciation provided thereon, is eliminated from the accounts. The
net gain or loss is recognized in operating income.
Maintenance and repairs:
Routine maintenance, repairs and replacements are charged to operations.
Expenditures that materially increase values, change capacities or extend useful
lives are capitalized.
Long-lived assets:
Effective June 30, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The new standard
requires that certain long-lived and intangible assets be written down to fair
value whenever an impairment review indicates that the carrying value of the
asset cannot be recovered (see Note 7).
Revenue and cost recognition:
Revenues from the sale of commercial products are recognized upon passage
of title to the customer, which in most cases coincides with shipment. Revenues
from long-term, fixed-price contracts are recognized on the
percentage-of-completion method, measured based on the achievement of certain
milestones in the production and fabrication process. Such milestones have been
weighted based on the critical nature of the operation performed, which
management believes is the best available measure of progress on these
contracts. Revenues related to cost-plus-fee contracts are recognized on the
basis of costs incurred during the period plus the fee earned.
Contract costs comprise all direct material and labor costs, including
outside processing fees, and those indirect costs related to contract
performance. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
Contract costs and estimated earnings on uncompleted contracts, net of
progress billings, are included in the consolidated balance sheet under
"Inventories."
Pensions:
The Company and its subsidiaries have a number of noncontributory pension
plans which cover substantially all employees. Most employees are covered by
defined benefit plans in which benefits are based on years of service and annual
compensation. Contributions to the defined benefit plans, as determined by an
independent actuary in accordance with regulations, provide not only for
benefits attributed to date but also for those expected to be earned in the
future.
The Company's policy is to fund pension costs at amounts equal to the
minimum funding requirements of ERISA plus additional amounts as may be approved
from time to time.
Postretirement benefits:
The Company provides certain health care benefits and life insurance
coverage for certain of its employees and their dependents. Under the Company's
current plans, certain of the Company's employees will become eligible for those
benefits if they reach retirement age while working with the Company.
The Company does not prefund postretirement benefit costs, but rather pays
claims as presented.
Income tax:
In connection with the Reorganization, the tax basis of the Company's
assets at that time reflected the fair market value of the common stock then
issued by the Company. The new tax basis was allocated to all assets of the
Company based on federal income tax rules and regulations, and the results of an
independent
26
<PAGE> 29
appraisal. For financial statement purposes, the Company's assets are carried at
historical cost. As a result, the tax basis of a significant portion of the
Company's assets exceeds the related book values and depreciation and
amortization for tax purposes exceeds the corresponding financial statement
amounts. Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities as measured by the enacted tax rates which will be in effect when
these differences reverse.
Stock-based compensation:
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation." The statement established standards for accounting for
stock-based compensation but also allows companies to continue to account for
stock-based compensation under the provisions of Accounting Principles Board
(APB) Opinion No. 25 "Accounting for Stock Issued to Employees" and make certain
additional disclosures in the notes to financial statements. The Company
continues to account for stock-based compensation in accordance with APB Opinion
No. 25 (see Note 16).
Earnings Per Share:
Earnings per share of common stock is computed based on the weighted
average number of common shares outstanding during the period.
Cash flows:
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
NOTE 3--LONG-TERM CONTRACTS:
During 1996, 1995 and 1994, the Company recorded estimated revenues earned
under long-term contracts of $3.8 million, $5.8 million and $13.2 million
respectively. At December 31, 1996 and 1995, there were $0.8 million and $2.5
million, respectively, included in the consolidated balance sheet under
"Inventories," which represents the amount of cost incurred on the contracts,
plus estimated earnings, less progress billings (see Notes 5 and 6).
In October 1993, the Company executed a long-term contract with the U.S.
Department of Energy ('DOE') covering the remediation and restoration of the
Company's former Extrusion Plant in Ashtabula, Ohio. The contract calls for the
Company to earn fees on cost-plus-fee and award fee basis, and acknowledges the
DOE's responsibility for the remediation of the site. During 1996, 1995 and
1994, the Company recognized revenues, including fees, of $10.5 million, $6.2
million and $8.5 million, respectively, under the contract. Total estimated
revenues under this contract are not determinable.
NOTE 4--COMMON STOCK OFFERING, REVERSE STOCK SPLIT AND RIGHTS 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%.
At its Annual Meeting held on March 31, 1994, the Company's shareholders
approved an amendment to the Articles of Incorporation of the Company, effecting
a one-for-ten reverse stock split. A Certificate of Amendment to the Articles of
Incorporation was filed with the Ohio Secretary of State on March 31, 1994, and
the reverse split became effective on that date. Pursuant to the reverse split,
each certificate representing shares of common stock outstanding immediately
prior to the reverse split was deemed to represent one-tenth
27
<PAGE> 30
the number of shares immediately after the reverse split. In order to supplement
its financial resources and provide financing for new titanium market
opportunities, the Board of Directors approved a rights offering to raise up to
$30 million. Each record holder of Common Stock at the close of business on June
24, 1994 received five transferable rights for each share of Common Stock. Each
right entitled the holder to purchase two shares of RMI Common Stock for a price
of $2.00 per share. The rights offering expired at July 22, 1994. Approximately
93% of the total number of rights were exercised. The exercise of the rights has
resulted in the issuance of 13,775,057 new shares of the Company's Common Stock.
Gross proceeds from the offering were $27.6 million. Net proceeds increased
Shareholders' Equity by approximately $26.4 million.
NOTE 5--INVENTORIES:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1995
-------- --------
<S> <C> <C>
Raw materials and supplies.................................... $ 33,126 $ 22,609
Work-in-process and finished goods............................ 88,326 71,290
Adjustment to LIFO values..................................... (28,836) (19,846)
-------- --------
$92,616.. $ 74,053
======== ========
</TABLE>
Included in inventories are costs relating to certain long-term contracts.
Such costs, net of amounts recognized to date, amounted to $0.8 million in 1996
and $2.5 million in 1995.
NOTE 6--ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1996 1995
------- -------
<S> <C> <C>
Trade and commercial customers.................................. $55,386 $39,655
Progress billings on uncompleted contracts...................... 2,380 2,604
U. S.Government--DOE............................................ 915 662
------- -------
58,681 42,921
Less allowance for doubtful accounts............................ (979) (1,670)
------- -------
$57,702 $41,251
======= =======
</TABLE>
NOTE 7--PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost and consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1996 1995
------- -------
<S> <C> <C>
Land............................................................ $ 659 $ 659
Buildings and improvements...................................... 36,429 36,451
Machinery and equipment......................................... 83,517 77,409
Other........................................................... 13,905 13,684
Construction in progress........................................ 1,894 5,541
------- -------
136,404 133,744
Less--Accumulated depreciation.................................. 98,549 93,780
------- -------
$37,855 $39,964
======= =======
</TABLE>
The Company elected to adopt SFAS No. 121 effective June 30, 1995. After
completing a review of its assets, the Company impaired the value of an asset
consisting of design and engineering work for a proposed titanium tetrachloride
facility. This asset was impaired due to recent market developments, the
conclusion of certain joint venture negotiations and the determination that such
a facility was not likely to be constructed in the near future. The asset
carrying value was reduced from $5.0 million to a nominal amount reflecting a
fair value determination under SFAS No. 121 versus a determination of ultimate
net realizable value under the Company's previous impairment approach.
28
<PAGE> 31
NOTE 8--INCOME TAXES:
Deferred taxes result from the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Loss carryforwards ($95,000 expiring in 2006 through
2010).................................................... $ 34,211 $ 37,488
Inventories................................................. 5,945 5,929
Property, plant and equipment............................... 3,620 6,223
Intangible assets........................................... 1,496 1,514
Other postretirement benefit costs.......................... 6,702 6,522
Other employment related items.............................. -- 2,771
Other....................................................... 686 2,789
Valuation allowance......................................... (43,738) (56,036)
-------- --------
Total deferred tax assets.............................. 8,922 7,200
-------- --------
Deferred tax liabilities...................................... 1,722 --
-------- --------
Net deferred taxes..................................... $ 7,200 $ 7,200
======== ========
</TABLE>
In 1996, the Company recorded an income tax benefit of $0.1 million. This
amount is comprised of an income tax provision of $2.5 million against pretax
income for the year and an income tax benefit of $2.6 million resulting from an
adjustment to the deferred tax asset valuation allowance due to changes in the
Company's expectations about the ultimate realization of its deferred tax assets
in years after 1996. Excluding the $2.6 million valuation allowance adjustment,
the effective tax rate for the year ended December 31, 1996 was approximately
7.9%. The difference between the statutory federal tax rate of 35% and the
effective tax rate is principally due to an adjustment to the deferred tax asset
valuation allowance as it relates to 1996 actual results, when compared to the
expectations inherent in the December 31, 1995 valuation allowance. The amount
of current taxes expected to be paid in 1997 is minimal.
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 this deferred income tax asset
depends on the Company's ability to generate sufficient taxable income in the
future. 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 has been retained, in
light of the requirement in FAS 109 to give weight to object evidence such as
recent losses and the historical titanium industry business cycle.
When preparing 1997 and 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 valuation allowance established
as of December 31, 1996.
As a result, the application of the 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 judgment about
more extended future periods are reported.
If an "ownership change" were to occur within the meaning 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. Application of the
limitation (if any) is not expected to affect the income tax provision (benefit)
reported for financial accounting purposes.
29
<PAGE> 32
The difference between the statutory tax rate of 35% applied to the pretax
loss and the effective tax rate for the year ended December 31, 1995 is due
principally to the release of $7.2 million of the valuation allowance, which had
been provided in previous years.
NOTE 9--LONG-TERM DEBT:
In connection with the Common Stock Offering referred to in Note 4 above,
the Company has 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 December 31,
1996, $2.9 million was outstanding under the facility. The Company had
sufficient accounts receivable and inventory at December 31, 1996 to borrow the
entire $50 million.
Under the terms of the Credit Facility, the Company, at its option, is 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 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, beginning with the date of the Credit Facility and expiring with the
quarter ended June 30, 1997.
An event of default under the 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
Credit Facility contains additional terms and financial covenants which are
typical for other similar facilities.
As of December 31, 1996, the Company was in compliance with the covenants
and terms of the Credit Facility. The available and unused portion of the
facility amounted to $47.1 million at December 31, 1996.
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1995
-------- --------
<S> <C> <C>
Revolving Credit Facility dated April 15, 1996, maturing April
14, 1999, bearing interest at 6.76% at December 31, 1996.... $ 2,900 --
Revolving Credit Agreement originally dated June 1993,
maturing March 31, 1997, bearing interest at rates ranging
from 7.93% to 8.11% at December 31, 1995.................... -- 58,200
Export Revolving Credit Facility dated May 3, 1995, maturing
September 26, 1996 bearing interest at 7.18% at December 31,
1995........................................................ -- 5,000
Industrial revenue bond bearing interest at floating rates
based on weekly tax exempt market rates (3.75% and 5.5% at
December 31, 1996 and 1995, respectively) in annual sinking
fund payments of $120 over 15 years from October, 1988...... 820 940
Current portion of long-term debt............................. (120) (120)
-------- --------
$ 3,600 $ 64,020
======== ========
</TABLE>
The minimum principal payments on long-term debt outstanding at December
31, 1996 for the succeeding five years are as follows:
<TABLE>
<S> <C>
1997................................. $ 120
1998................................. 120
1999................................. 3,020
2000................................. 120
2001................................. 120
</TABLE>
30
<PAGE> 33
NOTE 10--PENSION PLANS:
Pension expense was determined assuming an expected rate of return on plan
assets of 9% for 1996, 1995 and 1994. The components of pension expense for the
three years ended December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost....................... $ 1,358 $ 1,063 $ 1,242
Interest cost...................... 5,055 5,064 4,755
Return on plan assets:
Actual........................... (7,537) (10,598) 809
Deferred gain (loss)............. 2,410 (5,127) 6,095 (4,503) (5,422) (4,613)
------ ------- ------
Net amortization and deferral...... 1,043 606 693
------- ------- -------
$ 2,329 $ 2,230 $ 2,077
======= ======= =======
</TABLE>
Funds' status--The benefit obligations at December 31, 1996 and 1995 were
determined using discount rates of 7.5% and 7.0%, respectively, and an assumed
rate of compensation increase of 5.75% for both years.
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------
<S> <C> <C> <C>
1996 1995
-------------------------- -----------
<CAPTION>
OVERFUNDED UNDERFUNDED UNDERFUNDED
PLANS PLANS PLANS
---------- ----------- -----------
<S> <C> <C> <C>
Fair value of plan assets....................... $ 62,369 $ 11,232 $ 52,292
Projected benefit obligation (PBO).............. (59,626) (12,207) (75,175)
--------- --------- ---------
Plan assets greater (less) than PBO............. 2,743 (975) (22,883)
Unrecognized net loss........................... 4,444 1,233 12,277
Unrecognized transition obligation.............. 1,415 (239) 1,484
Unrecognized prior service cost................. 3,366 92 3,903
Adjustment required to recognize minimum
liability..................................... -- (1,028) (14,068)
--------- --------- ---------
Prepaid (accrued) pension expense............... $ 11,968 $ (917) $ (19,287)
========= ========= =========
Accumulated benefit obligation.................. $ (56,354) $ (12,150) $ (71,579)
========= ========= =========
Vested benefit obligation....................... $ (52,531) $ (12,031) $ (66,810)
========= ========= =========
</TABLE>
As of December 31, 1996, approximately 44% of the plans' assets are
invested in equity securities, 24% in government debt instruments, and the
balance in cash equivalents or debt securities.
Pursuant to the provisions of Statement of Financial Accounting Standards
No. 87 "Employers Accounting for Pensions," the Company recorded in noncurrent
liabilities an additional minimum pension obligation of $1.0 and $14.1 as of
December 31, 1996 and 1995, respectively, representing the amount by which the
accumulated benefit obligation for certain of the Company's plans exceeded the
fair value of plan assets plus accrued amounts previously recorded.
NOTE 11--POSTRETIREMENT HEALTH CARE BENEFITS AND OTHER EMPLOYEE BENEFITS:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Service cost............................................. $ 303 $ 266 $ 357
Interest cost............................................ 1,492 1,543 1,533
Net amortization and deferrals........................... 163 119 254
------ ------ ------
$1,958 $1,928 $2,144
====== ====== ======
</TABLE>
31
<PAGE> 34
The following table sets forth the plans' status reconciled with the amount
reported in the Company's balance sheet at December 31, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accumulated Postretirement Benefit Obligation ("APBO")
attributable to:
Retirees................................................. $(11,523) $(13,020)
Active participants...................................... (7,744) (8,692)
-------- --------
Total APBO............................................. $(19,267) $(21,712)
======== ========
Accrued liability included in balance sheet,
including transition obligation............................. $(18,618) $(18,199)
Unrecognized net loss......................................... (649) (3,513)
-------- --------
Total APBO............................................. $(19,267) $(21,712)
======== ========
</TABLE>
The ultimate costs of certain of the Company's retiree health care plans
are capped at predetermined out-of-pocket spending limits. The annual rate of
increase in the per capita costs for these plans is limited to the predetermined
spending cap. As of December 31, 1996, the predetermined limits had been reached
and, as a result, increases in claim cost rates will have no impact on the
reported accumulated postretirement benefit obligation or net periodic expense.
The discount rate used in determining the accumulated postretirement benefit
obligation at December 31, 1996 and 1995 was 7.5% and 7.0%, respectively.
Effective January 1, 1994 the Company adopted the provisions of Statement
of Financial Accounting Standards No. 112 ("SFAS 112"), "Employer's Accounting
for Postemployment Benefits." The results for the year ended December 31, 1994
reflect a one-time charge of $1.2 million representing the cumulative effect of
adopting the new standard. The liabilities recorded pursuant to SFAS 112 relate
principally to workers' compensation.
NOTE 12--OPERATING LEASES:
The Company and its subsidiaries have entered into various operating leases
for the use of certain equipment, principally office equipment and vehicles. The
leases generally contain renewal options and provide that the lessee pay
insurance and maintenance costs. The total rental expense under operating leases
amounted to $1.3 million in each of 1996, 1995 and 1994. Future commitments
under operating leases are considered to be immaterial.
NOTE 13--TRANSACTIONS WITH RELATED PARTIES:
The Company, in the ordinary course of business, purchases goods and
services, including conversion services, from USX and related companies. The
cost of such transactions to the Company amounted to $0.6 million in 1996, $1.3
million in 1995 and $0.7 million in 1994. Management believes the cost of these
transactions were on terms no less favorable to the Company than those obtained
from other parties. The United States Steel and Carnegie Pension Fund (the
"Pension Fund") is the trustee of the Company's pension plans. The Pension Fund
is a registered investment advisor under the Investment Advisors Act of 1940,
and receives a negotiated fee for such services. Other transactions with related
parties are incidental to the Company's business and are not significant.
NOTE 14--OTHER INCOME STATEMENT INFORMATION:
Costs incurred for repairs and maintenance of plant and equipment totaled
$5.9 million, $4.8 million, and $3.3 million, for the years ended December 31,
1996, 1995, and 1994, respectively.
Real and personal property taxes amounted to $1.9 million, $1.8 million,
and $1.7 million for the years ended December 31, 1996, 1995, and 1994,
respectively.
Other income (expense) for 1995 includes a $1.9 million impairment of the
Company's investment in the Permipipe Titanium AS joint venture.
32
<PAGE> 35
NOTE 15--CONTINGENCIES:
In connection with the Reorganization, the Company has agreed to indemnify
USX and Quantum against liabilities related to their ownership of the Company
and its immediate predecessor, Reactive Metals, Inc., which was formed by USX
and Quantum in 1964.
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. Given the
critical nature of many of the aerospace end uses for the Company's products,
including specifically their use in critical rotating parts of gas turbine
engines, the Company maintains aircraft products liability insurance of $250
million, which includes grounding liability.
ENVIRONMENTAL MATTERS
In the ordinary course of business, the Company is subject to 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 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 Brook Superfund Site. Given the status of the proceedings with respect to
these sites, ultimate investigative and remediation costs cannot presently be
accurately predicted, but could, in the aggregate be material. Based on the
information available regarding the current ranges of estimated remediation
costs at currently active sites, and what the Company believes will be its
ultimate share of such costs, provisions for environmental-related costs have
been recorded. These provisions are in addition to amounts which have previously
been accrued for the Company's share of environmental study costs.
With regard to the Field Brook Superfund Site, the Company, together with
31 other companies, has been identified by the U. S. Environmental Protection
Agency ("EPA") as a potentially responsible party ("PRP") with respect to a
superfund site defined as the Field 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 nearly complete and are currently estimated to cost $22 million. The
Company, working cooperatively with fourteen others, is complying with the order
and has accrued and has been paying its portion of the cost of complying with
the cost of such compliance. It is anticipated that the studies will be
completed no earlier than mid 1997. Actual cleanup is not scheduled to commence
prior to 1998. The Company's share of the study costs have been established at
9.95%. In June 1995, the Company and twelve others entered into a Phase 2
(actual cleanup) allocation agreement
33
<PAGE> 36
which assigns 9.44% of the cost to RMI. However, the actual percentage may be
more or less based on contributions from other parties which are not currently
participating in the Phase 2 allocation agreement.
At December 31, 1996, 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 (other than 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 16--STOCK OPTION AND RESTRICTED STOCK AWARD PLANS:
1989 STOCK OPTION INCENTIVE PLAN:
The 1989 Stock Option Incentive Plan authorized the granting of options to
purchase up to 775,500 shares of Common Stock to eligible officers and key
management employees at not less than the market value on the date the options
are granted. Options granted could include stock appreciation rights. The option
period was not to exceed ten years from the date of the grant. During 1995
substantially all option holders voluntarily relinquished their stock
appreciation rights. No further grants can be made under the plan.
1995 STOCK PLAN
The RMI Titanium Company 1995 Stock Plan, which was approved by a vote of
the Company's shareholders at the 1995 Annual Meeting of Shareholders, replaced
both the 1989 Stock Option Incentive Plan and the 1989 Employee Restricted Stock
Award Plan. The Plan permits the grant of any or all of the following types of
awards in any combination: a) Stock Options; b) Stock Appreciation Rights; and
c) Restricted Stock. A committee appointed by the Board of Directors administers
the Plan, and determines the type or types of grants to be made under the Plan
and sets forth in each such Grant the terms, conditions and limitations
applicable to it, including, in certain cases, provisions relating to a possible
change in control of the Company.
During 1996, 215,000 option shares were granted at a price of $21.62, which
was the fair market value on the date of the grant. The options are for a term
of ten years from the date of the grants, and vest ratably over a three year
period beginning in 1997. All 1996 grants were outstanding at December 31, 1996.
No grants were made in 1995.
During 1996 and 1995, 51,000 and 10,000 shares, respectively, of restricted
stock were granted under the 1995 Stock Plan at the fair market value on the
date of the grant. Compensation expense is recognized ratably over the vesting
period of each grant which is typically five years.
34
<PAGE> 37
The following table presents a summary of stock option activity under the
plans described above for the years ended December 31, 1994 through 1996: (as
adjusted for the one-for-ten reverse stock split and rights offering)
<TABLE>
<CAPTION>
SHARES PRICE
-------- --------------
<S> <C> <C>
Balance December 31, 1993................................ 361,827 $ 2.80 - 13.32
Granted.................................................. 370,000 4.06
Exercised................................................ -- --
Forfeited................................................ (44,083) 2.80 - 13.32
-------- --------------
Balance December 31, 1994................................ 687,744 $2.80 - 13.32
Granted.................................................. -- --
Exercised................................................ (54,478) 2.80 - 6.91
Forfeited................................................ (18,094) 2.80 - 13.32
-------- --------------
Balance December 31, 1995................................ 615,172 $2.80 - 13.32
Granted.................................................. 215,000 21.62
Exercised................................................ (297,072) $2.80 - 13.32
Forfeited................................................ -- --
-------- --------------
Balance December 31, 1996................................ 533,100 $2.80 - 21.62
======== ==============
</TABLE>
At December 31, 1996 the weighted average exercise price and weighted
average remaining contractual life for all outstanding options was $12.61 and
7.6 years respectively. 138,100 of the outstanding options at December 31, 1996
were exercisable at a weighted average exercise price of $9.74.
For the purposes of the fair value requirements of SFAS No. 123, the
Black-Scholes option pricing model was used. If compensation expense for the
Company's stock options granted in 1996 had been determined based on the fair
value at the grant date for the awards in accordance with SFAS No. 123, the
effect on the Company's net income and earnings per share for the year ended
December 31, 1996 would have been immaterial.
NOTE 17--SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The following table sets forth selected quarterly financial data for 1996
and 1995.
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
1996 QUARTER QUARTER QUARTER QUARTER
----------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales.......................................... $54,597 $58,310 $64,479 $73,971
Gross profit................................... 9,347 10,280 11,625 14,357
Operating income............................... 6,432 7,410 8,660 11,228
Net income..................................... 4,556 5,981 10,838 10,384
Net income per share........................... 0.30 0.33 0.54 0.51
</TABLE>
<TABLE>
<CAPTION>
1ST 2ND 3RD 4TH
1995 QUARTER QUARTER(1) QUARTER QUARTER(2)
----------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales.......................................... $40,103 $39,621 $42,912 $48,530
Gross profit (loss)............................ 1,937 (3,999) 2,890 5,389
Operating income (loss)........................ (877) (7,422) 199 2,880
Net income (loss).............................. (1,863) (10,509) (967) 8,731
Net income (loss) per share.................... (0.12) (0.69) (0.06) 0.57
</TABLE>
- ---------
(1) Operating income includes a $5.0 million charge reflecting the adoption of
SFAS No. 121.
(2) Net income was favorably affected by the recognition of a $7.2 million
income tax benefit.
35
<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In addition to the information set forth under the caption "Executive
Officers of the Registrant" in Part I, Item 1 of this report, information
concerning the directors of the Company is incorporated by reference to
"Election of Directors" on pages 5 through 8 of the 1997 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to "The
Board of Directors--Compensation of Directors" on page 5 and Executive
Compensation" on pages 10 through 12, of the 1997 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to "Other
Information--Security Ownership" on pages 9 and 10 of the 1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to "Other
Information--Certain Transactions" on page 16 of the 1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) AND (2) FINANCIAL STATEMENTS
See "Financial Statements."
(3) SEE INDEX TO EXHIBITS.
(B) REPORT ON FORM 8-K FILED IN THE FOURTH QUARTER OF 1996
None.
(C) EXHIBITS
The exhibits listed on the Index to Exhibits are filed herewith or are
incorporated by reference.
36
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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
By /s/ TIMOTHY G. RUPERT
--------------------------------------
Timothy G. Rupert
Executive Vice President &
Chief Financial Officer
Dated: March 25, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE AND TITLE DATE
------------------- ----
<S> <C>
CRAIG R. ANDERSSON, Director;
NEIL A. ARMSTRONG, Director;
DANIEL I. BOOKER, Director;
RONALD L. GALLATIN, Director;
CHARLES C. GEDEON, Director;
ROBERT M. HERNANDEZ, Director;
JOHN H. ODLE, Director;
TIMOTHY G. RUPERT, Director;
WESLEY W. VON SCHACK, Director
By /s/ TIMOTHY G. RUPERT March 25, 1997
- ------------------------------------------------------
T. G. Rupert
Director and Attorney-in-Fact
/s/ TIMOTHY G. RUPERT March 25, 1997
- ------------------------------------------------------
T. G. Rupert
Executive Vice President
(Principal Executive Officer)
/s/ JOHN H. ODLE March 25, 1997
- ------------------------------------------------------
John H. Odle
Executive Vice President
(Principal Executive Officer)
/s/ TIMOTHY G. RUPERT March 25, 1997
- ------------------------------------------------------
T. G. Rupert
Executive Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
37
<PAGE> 40
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION NUMBER
- ------- --------------------------------------------------------------------- ----------
<C> <S> <C>
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, as amended through April
26, 1995.
4.1 Credit Agreement between RMI Titanium Company and PNC Bank, National
Association dated as of April 15, 1996, incorporated by reference to
Exhibit 4.1 to the Company's Registration Statement on Form S-3 No.
333-01553 Amendment No. 2.
10.1 Agreement for the sale and purchase of titanium tetrachloride between
SCM Chemicals, Inc., and RMI Titanium Company dated March 9, 1993,
incorporated by reference to Exhibit 10.13 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1992. +
10.2 Agreement for the supply, purchase and sale of chlorine between SCM
Chemicals, Inc., and RMI Titanium Company dated as of November 13,
1990, incorporated by reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1990.
10.3 RMI Company Annual Incentive Compensation Plan, incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement on
Form S-1 No. 33-30667 Amendment No. 2.
10.4 RMI Titanium Company 1989 Stock Option Incentive Plan, incorporated by
reference to Exhibit 10.4 to the Company's Registration Statement on
Form S-1 No. 33-30667 Amendment No. 2.
10.5 RMI Titanium Company Supplemental Pension Plan effective August 1,
1987, and amended as of December 12, 1990, incorporated by reference
to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1990.
10.6 RMI Titanium Company 1989 Employee Restricted Stock Award Plan,
incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1, No. 33-30667 Amendment No. 2.
10.7 Amendment to RMI Titanium Company 1989 Employee Restricted Stock Award
Plan, incorporated by reference to Exhibit 10.10 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1990.
10.8 RMI Titanium Company Excess Benefits Plan effective July 18, 1991,
incorporated by reference to Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991.
10.9 Sales Agreement for the supply of titanium sponge and plasma
electrodes between Oregon Metallurgical Corporation and RMI Titanium
Company dated as of August 8, 1994, incorporated by reference to
Exhibit 10.9 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.+
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION NUMBER
- ------- --------------------------------------------------------------------- ----------
<C> <S> <C>
10.10 Sales Agreement for the supply of titanium sponge between Osaka
Titanium Co., Ltd., Sumitomo Corporation, Sumitomo Corporation of
America, and RMI Titanium Company dated as of September 4, 1992,
incorporated by reference to Exhibit 10.10 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.+
10.11 RMI Titanium Company 1995 Stock Plan, incorporated by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
10.12 Employment agreement, dated September 1, 1996, between the Company and
John H. Odle, incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996.
10.13 Employment agreement, dated September 1, 1996, between the Company and
T. G. Rupert, incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996.
10.14 Employment agreement dated February 1, 1997 between the Company and
Harry B. Watkins.
10.15 Registration Rights Agreement dated August 21, 1996 between the
Company and USX Corporation, incorporated by reference to Exhibit 10.3
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1996.
21 Subsidiaries of the Company.
23.1 Consent of Price Waterhouse LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
27.1 Financial Statements of The RMI Employee Savings and Investment Plan
for the year ended December 31, 1996 (to be filed by amendment).
27.1 Financial Statements of The RMI Bargaining Unit Employee Savings and
Investment Plan for the year ended December 31, 1996 (to be filed by
amendment).
</TABLE>
- ---------
+ Confidential treatment has been requested.
39
<PAGE> 1
[LOGO]
EXHIBIT 10.14
RMI TITANIUM LETTERHEAD
January 21, 1997
Mr. Harry B. Watkins
7709 Silver Fox Drive
Boardman, OH 44512
Dear Mr. Watkins:
This Letter Agreement sets forth the basis upon which I have been
authorized by the Board of Directors of RMI Titanium Company ("Company") to
continue your employment in the officer position described in paragraph 1 below
for the Employment Period (as hereinafter defined). The "Employment Period"
shall initially be the period February 1, 1997, through January 31, 2000;
provided, however, that on February 1, 2000, and each February 1 thereafter, the
Employment Period shall automatically be extended for one additional year
unless, not later than the immediately preceding October 1, either you or the
Company shall have given written notice to the other that you or it does not
wish to extend the Employment Period; and provided further that the Employment
Period shall terminate automatically when you attain age 65. In the event this
Letter Agreement is terminated for any reason other than your death, your
obligations as set forth in paragraph 8 shall survive and be enforceable
notwithstanding such termination. This Letter Agreement supersedes and replaces
in its entirety the Letter Agreement between you and the Company dated March 1,
1994.
1. During the Employment Period, you will serve as Vice President-Technical
Marketing & Tubular Group of the Company (or on any other officer position
within the Company to which you may hereafter be elected by the Company's Board
of Directors), performing all duties and functions appropriate to that office,
as well as such additional duties as the Company's Executive Vice President &
Chief Financial Officer or Board of Directors may, from time to time, assign to
you. During the Employment Period, you will devote your full time and best
efforts to the performance of all such duties.
2. During the Employment Period, the Company will pay you, in equal monthly
installments, as compensation for your services an annual salary of $130,000.
This annual salary may be increased form time to time in the sole discretion of
the Company, but may only be decreased by the Company with your written consent.
Such annual salary, whether increased or decreased, shall constitute your "Base
Salary." In addition, you may be awarded such bonuses as the Board of Directors
of the Company determines to be appropriate under the Company's Annual Incentive
Compensation Plan or any successor bonus plan. You will also be eligible to
participate in the Company's 1995 Stock Plan, or any successor stock plan.
3. In the event of your death during the Employment Period, your right to
all compensation under this Letter Agreement allocable to days subsequent to
your death shall terminate and no further payments shall be due to you, your
personal representative, or your estate, except for that portion, if any, of
your Base Salary that is accrued and unpaid upon the date of your death.
<PAGE> 2
4. In the event you become physically or mentally disabled, in the sole
judgment of physicians selected by the Company's Board of Directors, such that
you cannot perform the duties and functions contracted for pursuant to this
Letter Agreement, and should such disability continue for at least 180
consecutive days (or in the judgment of such physicians, be likely to continue
for at least 180 consecutive days), the Company may terminate your employment
upon written notice to you. If your employment is terminated because of physical
or mental disability, your right to all compensation under this Letter Agreement
allocable to days subsequent to such termination shall terminate and no further
payments shall be due to you, your personal representative, or your estate,
except for that portion, if any, of your Base Salary that is accrued and unpaid
upon the date of termination.
5. The Company may, upon written notice to you fixing the date of
termination, terminate your services during the Employment Period for Cause. In
such event, your right to receive continued compensation under this Letter
Agreement will terminate and no further installments will be paid to you, except
for that portion, if any, of your Base Salary that is accrued and unpaid upon
the date of termination. For purposes of this Paragraph 5, Cause shall mean
termination upon (i) the willful and continued failure by you to substantially
perform your duties with the Company, (ii) the willful engaging by you in
conduct which is demonstrably and materially injurious to the Company,
monetarily or otherwise or (iii) your conviction of any felony or conviction of
a misdemeanor which impairs your ability substantially to perform your duties
with the Company. For purposes of this Paragraph 5, no act, or failure to act,
on your part shall be deemed "willful" unless done, or omitted to be done, by
you not in good faith and without reasonable belief that your action or omission
was in the best interest of the Company.
6. In addition to your annual Base Salary as set forth in Paragraph 2
above, you will be entitled in each calendar year to a vacation with pay in
accordance with the vacation policies of the Company. You will also be entitled
to: (1) participate in all of the Company's existing and future employee benefit
programs applicable to officers of the Company in accordance with the terms of
such benefit program plan documents; (2) receive one comprehensive physical
examination, at Company expense, in each calendar year, such examination to be
conducted by the Cleveland Clinic or comparable facility and provided in
accordance with terms and conditions comparable to those applicable to medical
examinations for USX executive officers; and (3) tax preparation and financial
planning advice under terms and conditions comparable to those applicable to USX
executive management.
7. This Letter Agreement shall inure to the benefit of and be enforceable
by your personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If you should die while
any amount would still be payable to you hereunder if you had continued to live,
all such amounts, unless otherwise provided herein, shall be paid in accordance
with the terms of this Letter Agreement, to your devisee, legatee or other
designee or, if there is not such designee, to your estate.
8. As additional consideration for the compensation and benefits provided
to you pursuant to this Letter Agreement, you agree that you will not, for a
period of 24 months after the end of the Employment Period, or the termination
of your employment with the Company (whichever first occurs), directly or
indirectly, compete with, engage in the same business as, be employed by, act a
consultant to, or be a director, officer, employee, owner or partner, or
otherwise participate in or assist (including, without limitation, by soliciting
customers for, or individuals to provide services to), any business or
organization which competes with the Company. For purposes of this Paragraph 8,
you will not be deemed to have breached your commitment merely because you own,
directly or indirectly, not more than one percent (1%) of the outstanding common
stock of such a corporation if, at the time you acquire such stock, such stock
is listed on a national securities exchange or is regularly traded in the
over-the-counter market by a member of either a national securities exchange or
the National Association of Securities Dealers, Inc. In order to protect the
interest of the Company, you will also maintain in strict confidence and not
disclose to any other person or entity any information received from any source
in the Company or developed by you in the course of performing your duties for
the Company. This obligation shall not extend to: (a) anything you can establish
as known to you from a source outside the Company, (b) anything which has been
published or becomes published hereafter other than by you, or (c) anything
which you receive from a non-Company source without restriction on its
disclosure. Should you breach or threaten to breach the commitments in this
Paragraph 8, and in recognition of the fact that the Company would not under
such circumstances be adequately compensated by money
<PAGE> 3
damages, the Company shall be entitled, in addition to any other rights and
remedies available to it, to an injunction restraining you from such breach.
Further, you acknowledge and agree that the provisions of this Paragraph 8 are
necessary, reasonable, and proportionate to protect the Company during such
noncompetition period.
9. The validity, interpretation, construction and performance of this
Letter Agreement shall be governed by the laws of the State of Ohio.
If the provisions of this Letter Agreement are acceptable to you, please
sign one original copy of this Letter Agreement and return it to me. You may
retain the second signed original for your files.
Very truly yours,
RMI TITANIUM COMPANY
By /s/ ROBERT M. HERNANDEZ
----------------------------------
Robert M. Hernandez
Chairman of the Board of Directors
Confirmed:
By /s/ HARRY B. WATKINS
----------------------------------
Harry B. Watkins
2/11/97
- -------------------------------------
Date
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
OTHER NAME, IF ANY,
STATE OR OTHER JURISDICTION THAT THE SUBSIDIARY
NAME OF INCORPORATION DOES BUSINESS UNDER
<S> <C> <C>
RMI Metals, Inc. Utah Micron Metals, Inc.
TRADCO, Inc. Missouri
Nati Gas, Inc. Ohio
RMI Titanium International, Inc. Barbados
RMI Titanium Coiled Tubing, Inc. Texas
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the prospectuses
constituting part of the Registration Statement on Form S-8 listed below of RMI
Titanium Company of our report dated January 23, 1997, appearing on page 20 of
this annual report on Form 10-K.
File No. 33-36248 Relating to the RMI 1989 Stock Option Incentive Plan
File No. 33-38340 Relating to the RMI Bargaining Unit Employees Savings and
Investment Plan
File No. 33-38339 Relating to the RMI Savings and Investment Plan
File No. 33-63025 Relating to the RMI Titanium Company 1995 Stock Plan
Price Waterhouse LLP
Pittsburgh, Pennsylvania
March 25, 1997
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That, the undersigned does hereby make, constitute and appoint, Timothy G.
Rupert or John H. Odle, my true and lawful attorney-in-fact, to sign and execute
for me and on my behalf, the Annual Report on Form 10-K for the year 1996 for
RMI Titanium Company, and any and all amendments thereto to be filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act, as
amended, in such form as they or any one or more of them may approve, and to do
any and all other acts which said attorney-in-fact may deem necessary or
desirable to enable RMI Titanium Company to comply with said Act and the rules
and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and seal.
March 6, 1997 /s/ CRAIG R. ANDERSSON
- ----------------------- -------------------------------
(Date) Craig R. Andersson
<PAGE> 2
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That, the undersigned does hereby make, constitute and appoint, Timothy G.
Rupert or John H. Odle, my true and lawful attorney-in-fact, to sign and execute
for me and on my behalf, the Annual Report on Form 10-K for the year 1996 for
RMI Titanium Company, and any and all amendments thereto to be filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act, as
amended, in such form as they or any one or more of them may approve, and to do
any and all other acts which said attorney-in-fact may deem necessary or
desirable to enable RMI Titanium Company to comply with said Act and the rules
and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and seal.
March 6, 1997 /s/ NEIL A. ARMSTRONG
- ----------------------- -------------------------------
(Date) Neil A. Armstrong
<PAGE> 3
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That, the undersigned does hereby make, constitute and appoint, Timothy G.
Rupert or John H. Odle, my true and lawful attorney-in-fact, to sign and execute
for me and on my behalf, the Annual Report on Form 10-K for the year 1996 for
RMI Titanium Company, and any and all amendments thereto to be filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act, as
amended, in such form as they or any one or more of them may approve, and to do
any and all other acts which said attorney-in-fact may deem necessary or
desirable to enable RMI Titanium Company to comply with said Act and the rules
and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and seal.
March 10, 1997 /s/ DANIEL I. BOOKER
- ----------------------- -------------------------------
(Date) Daniel I. Booker
<PAGE> 4
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That, the undersigned does hereby make, constitute and appoint, Timothy G.
Rupert or John H. Odle, my true and lawful attorney-in-fact, to sign and execute
for me and on my behalf, the Annual Report on Form 10-K for the year 1996 for
RMI Titanium Company, and any and all amendments thereto to be filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act, as
amended, in such form as they or any one or more of them may approve, and to do
any and all other acts which said attorney-in-fact may deem necessary or
desirable to enable RMI Titanium Company to comply with said Act and the rules
and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and seal.
March 6, 1997 /s/ RONALD L. GALLATIN
- ----------------------- -------------------------------
(Date) Ronald L. Gallatin
<PAGE> 5
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That, the undersigned does hereby make, constitute and appoint, Timothy G.
Rupert or John H. Odle, my true and lawful attorney-in-fact, to sign and execute
for me and on my behalf, the Annual Report on Form 10-K for the year 1996 for
RMI Titanium Company, and any and all amendments thereto to be filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act, as
amended, in such form as they or any one or more of them may approve, and to do
any and all other acts which said attorney-in-fact may deem necessary or
desirable to enable RMI Titanium Company to comply with said Act and the rules
and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and seal.
March 6, 1997 /s/ CHARLES C. GEDEON
- ----------------------- -------------------------------
(Date) Charles C. Gedeon
<PAGE> 6
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That, the undersigned does hereby make, constitute and appoint, Timothy G.
Rupert or John H. Odle, my true and lawful attorney-in-fact, to sign and execute
for me and on my behalf, the Annual Report on Form 10-K for the year 1996 for
RMI Titanium Company, and any and all amendments thereto to be filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act, as
amended, in such form as they or any one or more of them may approve, and to do
any and all other acts which said attorney-in-fact may deem necessary or
desirable to enable RMI Titanium Company to comply with said Act and the rules
and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and seal.
March 6, 1997 /s/ ROBERT M. HERNANDEZ
- ----------------------- -------------------------------
(Date) Robert M. Hernandez
<PAGE> 7
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That, the undersigned does hereby make, constitute and appoint, Timothy G.
Rupert or John H. Odle, my true and lawful attorney-in-fact, to sign and execute
for me and on my behalf, the Annual Report on Form 10-K for the year 1996 for
RMI Titanium Company, and any and all amendments thereto to be filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act, as
amended, in such form as they or any one or more of them may approve, and to do
any and all other acts which said attorney-in-fact may deem necessary or
desirable to enable RMI Titanium Company to comply with said Act and the rules
and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and seal.
March 9, 1997 /s/ JOHN H. ODLE
- ----------------------- -------------------------------
(Date) John H. Odle
<PAGE> 8
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That, the undersigned does hereby make, constitute and appoint, Timothy G.
Rupert or John H. Odle, my true and lawful attorney-in-fact, to sign and execute
for me and on my behalf, the Annual Report on Form 10-K for the year 1996 for
RMI Titanium Company, and any and all amendments thereto to be filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act, as
amended, in such form as they or any one or more of them may approve, and to do
any and all other acts which said attorney-in-fact may deem necessary or
desirable to enable RMI Titanium Company to comply with said Act and the rules
and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and seal.
March 5, 1997 /s/ TIMOTHY G. RUPERT
- ----------------------- -------------------------------
(Date) Timothy G. Rupert
<PAGE> 9
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That, the undersigned does hereby make, constitute and appoint, Timothy G.
Rupert or John H. Odle, my true and lawful attorney-in-fact, to sign and execute
for me and on my behalf, the Annual Report on Form 10-K for the year 1996 for
RMI Titanium Company, and any and all amendments thereto to be filed with the
Securities and Exchange Commission pursuant to the Securities Exchange Act, as
amended, in such form as they or any one or more of them may approve, and to do
any and all other acts which said attorney-in-fact may deem necessary or
desirable to enable RMI Titanium Company to comply with said Act and the rules
and regulations thereunder.
IN WITNESS WHEREOF, I have hereunto set my hand and seal.
March 11, 1997 /s/ WESLEY W. VON SCHACK
- ----------------------- -------------------------------
(Date) Wesley W. von Schack
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000854663
<NAME> RMI TITANIUM
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,944
<SECURITIES> 0
<RECEIVABLES> 58,681
<ALLOWANCES> 979
<INVENTORY> 92,616
<CURRENT-ASSETS> 163,200
<PP&E> 136,404
<DEPRECIATION> 98,549
<TOTAL-ASSETS> 215,880
<CURRENT-LIABILITIES> 31,064
<BONDS> 3,600
0
0
<COMMON> 208
<OTHER-SE> 158,528
<TOTAL-LIABILITY-AND-EQUITY> 215,880
<SALES> 251,357
<TOTAL-REVENUES> 251,357
<CGS> 205,748
<TOTAL-COSTS> 217,347
<OTHER-EXPENSES> 110
<LOSS-PROVISION> 280
<INTEREST-EXPENSE> 2,181
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<INCOME-TAX> (100)
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</TABLE>
