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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________to____________
Commission file number 001-14437
RTI INTERNATIONAL METALS, INC.
(Exact name of registrant as specified in its charter)
OHIO 52-2115953
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 WARREN AVENUE, NILES, OHIO 44446
(Address of principal executive offices)
(330) 544-7700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO _
At November 1, 2002, 20,775,983 shares of common stock of the registrant
were outstanding.
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RTI INTERNATIONAL METALS, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2002
INDEX
PAGE
----
PART I--FINANCIAL INFORMATION............................... 2
Item 1. Consolidated Financial Statements:
Consolidated Statement of Operations................... 2
Consolidated Balance Sheet............................. 3
Consolidated Statement of Cash Flows................... 4
Consolidated Statement of Shareholders' Equity......... 5
Selected Notes to Consolidated Financial Statements.... 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition........................ 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................... 21
Item 4. Controls and Procedures............................ 21
PART II--OTHER INFORMATION.................................. 22
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 22
Item 6. Exhibits and Reports on Form 8-K................... 22
Signatures.................................................. 23
PART I -- FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
RTI INTERNATIONAL METALS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Sales..................................... $ 68,105 $ 76,047 $ 206,726 $ 217,154
Operating costs:
Cost of sales............................. 55,945 64,067 166,280 185,475
Selling, general and administrative
expenses................................ 7,266 7,674 24,796 24,363
Research, technical and product
development expenses.................... 288 454 997 1,354
----------- ----------- ----------- -----------
Total operating costs................ 63,499 72,195 192,073 211,192
Operating income.......................... 4,606 3,852 14,653 5,962
Other income, net (Note 7)................ 122 85 9,207 5,966
Interest expense.......................... 185 174 473 497
----------- ----------- ----------- -----------
Income before income taxes................ 4,543 3,763 23,387 11,431
Provision for income taxes (Note 3)....... 1,538 1,476 8,887 4,457
----------- ----------- ----------- -----------
Income before cumulative effect of change
in accounting principle................. 3,005 2,287 14,500 6,974
Cumulative effect of change in accounting
principle (Note 9)...................... -- -- -- (191)
----------- ----------- ----------- -----------
Net income................................ $ 3,005 $ 2,287 $ 14,500 $ 6,783
=========== =========== =========== ===========
Earnings per common share (Note 4)
Income before cumulative effect of
change in accounting principle:
Basic................................... $ 0.14 $ 0.11 $ 0.70 $ 0.33
=========== =========== =========== ===========
Diluted................................. $ 0.14 $ 0.11 $ 0.69 $ 0.33
=========== =========== =========== ===========
Net income:
Basic................................... $ 0.14 $ 0.11 $ 0.70 $ 0.32
=========== =========== =========== ===========
Diluted................................. $ 0.14 $ 0.11 $ 0.69 $ 0.32
=========== =========== =========== ===========
Weighted average shares used to compute
earnings per share:
Basic................................... 20,767,348 20,879,036 20,772,092 20,888,470
=========== =========== =========== ===========
Diluted................................. 20,900,695 21,028,092 20,892,541 21,113,102
=========== =========== =========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
RTI INTERNATIONAL METALS, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------- ------------
(UNAUDITED)
ASSETS
ASSETS:
Cash and cash equivalents................................. $ 25,662 $ 8,036
Receivables--less allowance for doubtful accounts of
$1,139 and $1,219...................................... 45,370 50,572
Inventories, net (Note 5)................................. 160,728 158,561
Deferred income taxes..................................... 8,096 7,418
Other current assets...................................... 5,314 13,136
-------- --------
Total current assets................................... 245,170 237,723
Property, plant and equipment, net........................ 93,119 98,375
Goodwill.................................................. 34,133 34,133
Other noncurrent assets................................... 17,078 17,520
-------- --------
Total assets........................................... $389,500 $387,751
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable.......................................... $ 10,882 $ 17,799
Accrued wages and other employee costs.................... 7,795 7,494
Unearned revenue (Note 6)................................. 3,092 6,133
Income taxes payable...................................... 4,961 29
Other accrued liabilities................................. 4,421 5,011
-------- --------
Total current liabilities.............................. 31,151 36,466
Long-term debt............................................ -- --
Accrued postretirement benefit cost....................... 19,940 19,940
Deferred income taxes..................................... 1,296 1,296
Accrued pension cost...................................... 11,351 17,787
Other noncurrent liabilities.............................. 5,205 5,287
-------- --------
Total liabilities...................................... 68,943 80,776
Commitments and contingencies (Note 7)
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value, 50,000,000 shares
authorized; 21,118,833 and 21,035,454 shares issued;
20,773,983 and 20,730,604 shares outstanding........... 211 210
Additional paid-in capital................................ 242,331 241,579
Deferred compensation..................................... (2,269) (2,278)
Treasury stock, at cost; 344,850 and 304,850 shares....... (3,032) (2,612)
Accumulated other comprehensive (loss).................... (8,677) (7,417)
Retained earnings......................................... 91,993 77,493
-------- --------
Total shareholders' equity............................. 320,557 306,975
-------- --------
Total liabilities and shareholders' equity........ $389,500 $387,751
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
3
RTI INTERNATIONAL METALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30
------------------
2002 2001
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $14,500 $ 6,783
Adjustment for items not affecting funds from operations:
Depreciation and amortization............................. 9,372 9,942
Deferred income taxes..................................... (678) (123)
Stock-based compensation and other........................ 1,677 1,434
CHANGES IN ASSETS AND LIABILITIES (EXCLUDING CASH):
Receivables............................................... 4,555 (11,077)
Inventories............................................... (1,916) 3,433
Accounts payable.......................................... (6,917) 2,528
Other current liabilities................................. 1,903 13,252
Other assets and liabilities.............................. 944 357
------- --------
Cash provided by operating activities................ 23,440 26,529
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (4,746) (10,109)
------- --------
Cash used in investing activities.................... (4,746) (10,109)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of employee stock options........................ 87 309
Net borrowings and repayments under revolving credit
agreement.............................................. -- (18,200)
Purchase of common stock held in treasury................. (420) (1,766)
Deferred charges related to credit facility............... (735) --
------- --------
Cash used in financing activities.................... (1,068) (19,657)
------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 17,626 (3,237)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 8,036 6,374
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $25,662 $ 3,137
======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized........ $ 264 $ 787
Cash paid for income taxes................................ $ 3,961 $ 2,287
NONCASH FINANCING ACTIVITIES:
Issuance of common stock for restricted stock awards...... $ 666 $ 731
Capital lease obligations incurred........................ $ -- $ 311
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
RTI INTERNATIONAL METALS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
ACCUMULATED
ADDT'L TREASURY OTHER
SHARES COMMON PAID-IN DEFERRED COMMON RETAINED COMPREHENSIVE
OUTSTANDING STOCK CAPITAL COMPENSATION STOCK EARNINGS INCOME TOTAL
----------- ------ -------- ------------ -------- -------- ------------- --------
Balance at December 31,
2001...................... 20,730,604 $210 $241,579 $(2,278) $(2,612) $77,493 $(7,417) $306,975
Shares issued for directors'
compensation.............. 18,912 -- 187 (187) -- -- -- --
Shares issued for restricted
stock award plans......... 50,000 1 478 (479) -- -- -- --
Compensation expense
recognized................ -- -- -- 675 -- -- -- 675
Treasury common stock
purchased at cost......... (40,000) -- -- -- (420) -- -- (420)
Exercise of employee stock
options including tax
benefit................... 14,467 -- 87 -- -- -- -- 87
Net income.................. -- -- -- -- -- 14,500 -- 14,500
Realized gains on
investments held for sale
(net of tax).............. -- -- -- -- -- -- (1,260) (1,260)
Comprehensive income........
---------- ---- -------- ------- ------- ------- ------- --------
Balance at September 30,
2002...................... 20,773,983 $211 $242,331 $(2,269) $(3,032) $91,993 $(8,677) $320,557
========== ==== ======== ======= ======= ======= ======= ========
COMPREHENSIVE
INCOME
-------------
Balance at December 31,
2001......................
Shares issued for directors'
compensation..............
Shares issued for restricted
stock award plans.........
Compensation expense
recognized................
Treasury common stock
purchased at cost.........
Exercise of employee stock
options including tax
benefit...................
Net income.................. $14,500
Realized gains on
investments held for sale
(net of tax).............. (1,260)
-------
Comprehensive income........ $13,240
=======
Balance at September 30,
2002......................
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
RTI INTERNATIONAL METALS, INC.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--ORGANIZATION AND BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
RTI International Metals, Inc. (the "Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. The
consolidated financial statements include the accounts of RTI International
Metals, Inc. and its majority owned subsidiaries. All significant intercompany
transactions have been eliminated. The financial information presented reflects
all adjustments, consisting only of normal recurring adjustments, which are, in
the opinion of management, necessary for a fair presentation of the results for
the interim periods presented. The results for the interim periods are not
necessarily indicative of the results to be expected for the year.
NOTE 2--ORGANIZATION
On September 30, 1998, the shareholders of the Company's now wholly-owned
subsidiary RMI Titanium Company ("RMI") approved a proposal to reorganize into a
holding company structure (the "1998 Reorganization"). Pursuant to this
reorganization, the Company became the parent company of RMI, and shares of RMI
common stock were automatically exchanged on a one-for-one (1:1) basis for
shares of RTI. Shares of RTI began trading on the New York Stock Exchange on
October 1, 1998.
The Company is a successor to entities that have been operating in the
titanium industry since 1951. In 1990, USX Corporation ("USX") and Quantum
Chemical Corporation ("Quantum") transferred their entire ownership interest in
RMI's immediate predecessor, RMI Company, an Ohio general partnership, to the
Company in exchange for shares of the Company's common stock (the "1990
Reorganization"). Quantum sold its shares of common stock to the public while
USX retained ownership of its shares.
In November, 1996, USX completed a public offering of its 6 3/4% notes (the
"Notes") which were exchangeable in February, 2000, for 5,483,600 shares of RTI
common stock owned by USX. On February 1, 2000, the trustee under the note
indenture delivered 5,483,000 of RTI common stock to the note holders in
exchange for the Notes terminating USX's ownership interest in RTI.
NOTE 3--INCOME TAXES
In the nine months ended September 30, 2002, the Company recorded an income
tax expense of $8.9 million, or 38% of pre-tax income compared to an expense of
$4.5 million, or 39% for the nine months ended September 30, 2001. The effective
tax rate for the three months ended September 30, 2002 was 34% as it reflected
an adjustment to bring the effective tax rate for the nine months ended
September 30, 2002 from 39% to 38%. The effective tax rate for the nine-month
periods ended September 30, 2002 of 38% and September 30, 2001 of 39% exceeded
the federal statutory rate of 35% primarily as a result of state income taxes.
The effective tax rate for the nine-month period ended September 30, 2001 also
exceeded the federal statutory rate of 35% due to non-deductible goodwill
amortization.
6
NOTE 4--EARNINGS PER SHARE
A reconciliation of the income and weighted average number of outstanding
common shares used in the calculation of basic and diluted earnings per share
for the quarters and nine months ended September 30, 2002 and 2001 are as
follows (in thousands except number of shares and per share amounts):
QUARTER ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
------------------------------- --------------------------------
NET EARNINGS NET EARNINGS
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
------ ---------- --------- ------- ---------- ---------
2002
Basic EPS........................... $3,005 20,767,348 $0.14 $14,500 20,772,092 $ 0.70
Effect of potential common stock:
Stock options..................... -- 133,347 -- -- 120,449 (0.01)
------ ---------- ----- ------- ---------- ------
Diluted EPS......................... $3,005 20,900,695 $0.14 $14,500 20,892,541 $ 0.69
====== ========== ===== ======= ========== ======
2001
Basic EPS........................... $2,287 20,879,036 $0.11 $ 6,783 20,888,470 $ 0.32
Effect of potential common stock:
Stock options..................... -- 149,056 -- -- 224,632 --
------ ---------- ----- ------- ---------- ------
Diluted EPS......................... $2,287 21,028,092 $0.11 $ 6,783 21,113,102 $ 0.32
====== ========== ===== ======= ========== ======
913,846 and 914,512 shares of common stock issuable upon exercise of employee
stock options have been excluded from the calculation of diluted earnings per
share for the quarters ended September 30, 2002 and 2001, respectively, and
914,066 and 736,328 have been excluded from the calculation of diluted earnings
per share for the nine months ended September 30, 2002 and 2001, respectively,
because the exercise price of the options exceeded the weighted average market
price of the Company's common stock during those periods.
NOTE 5--INVENTORIES
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
Raw material and supplies.................... $ 34,164 $ 30,304
Work-in-process and finished goods........... 141,769 142,041
LIFO adjustment.............................. (15,205) (13,784)
-------- --------
Inventories, at LIFO cost.................. $160,728 $158,561
======== ========
NOTE 6--UNEARNED REVENUE
The Company reported a liability for unearned revenue of $3.1 million as of
September 30, 2002 and $6.1 million as of December 31, 2001. These amounts
primarily represent payments, received in advance from energy market customers
on long-term orders, which the Company has not recognized as revenues. The
decrease reflects the Company fulfilling obligations and recognizing revenue
relating to advanced payments that existed at year-end.
NOTE 7--COMMITMENTS AND CONTINGENCIES
Under a 1990 reorganization, the Company agreed to indemnify USX and
Quantum against liabilities related to their ownership of RMI and its immediate
predecessor, Reactive Metals, Inc., which was formed by USX and Quantum in 1964.
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. Given the
critical nature of many of the aerospace end uses for the Company's products,
including specifically their use in critical rotating parts of gas turbine
engines, the Company maintains aircraft products liability insurance of $250
million, which includes grounding liability.
7
Environmental Matters
In the ordinary course of business, the Company is subject to environmental
laws and regulations concerning the production, handling, storage,
transportation, emission, and disposal of waste materials and is also subject to
other federal and state laws and regulations regarding health and safety
matters. These laws and regulations are constantly evolving, and it is not
currently possible to predict accurately the ultimate effect these laws and
regulations will have on the Company in the future.
The Company is involved in investigative or cleanup projects under federal
or state environmental laws at a number of waste disposal sites, including the
Fields Brook Superfund Site and the Ashtabula River Area of Concern. Given the
status of the proceedings with respect to these sites, ultimate 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.
With regard to the Fields Brook Superfund Site, the Company and twelve
other parties entered into an allocation agreement which assigns 9.44% of the
cost to RMI. However, the actual percentage may be more or less based on
contributions from other parties which are not currently participating in the
allocation agreement. Cleanup began in 2000 and is expected to be completed in
2002. The current estimate of the remaining cost of remediation of the Fields
Brook site is approximately $8 million.
The Ashtabula River and Harbor has been designated as 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
remediate 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 complete. To fund the Detailed Design and Remedial Action,
the Company has estimated the private contribution to the project could
approximate $14 million, of which roughly 10% to 15% is allocated to the Company
(before contributions from third parties). It is possible that the EPA could
determine that the Ashtabula River and Harbor should be designated as an
extension of the Fields Brooks Superfund site, or, alternatively, as a separate
Superfund site. The Company has accrued an amount for this matter based on its
best estimate of its share of the currently proposed remediation plan. The
Fields Brook PRP group has indicated to the Ashtabula River Partnership the
group's willingness to participate in funding in exchange for a release from
CERCLA liability.
At September 30, 2002, the amount accrued for future environmental-related
costs was $1.7 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 $2.8 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) which could equal
from $1.9 to $2.3 million. The Company has been receiving contributions from
such third parties for a number of years as partial reimbursement for costs
incurred by the Company. As these proceedings continue toward final resolution,
amounts in excess of those already provided may be necessary to discharge the
Company from its obligations for these projects.
Gain Contingency
In 2000, RTI made a claim against Boeing Commercial Airplane Group for
approximately $6 million for contractual amounts due in connection with the
terms of their long-term supply agreement. Under the terms of the contract,
Boeing was required to order a minimum of 3.25 million pounds of titanium during
2000. Actual shipments were approximately 1.1 million pounds. This claim was
treated as a gain contingency under Statements of Financial Accounting Standards
No. 5, "Accounting for Contingencies" (FAS 5), deferring the realization of
income until Boeing satisfied the claim.
8
On March 19, 2001, Boeing satisfied the above-mentioned 2000 contractual
claim for approximately $6 million. The financial impact of this settlement was
recorded in other income in the first quarter of 2001.
In 2001, RTI made a similar claim against Boeing Commercial Airplane Group
for approximately $7 million in connection with the terms of their long-term
supply agreement. Under the terms of the contract, Boeing was required to order
a minimum of 3.25 million pounds of titanium during 2001. Actual shipments were
approximately 0.9 million pounds. This claim was also treated as a gain
contingency under FAS 5, deferring realization of income until Boeing satisfied
the claim.
On March 6, 2002, Boeing satisfied the above-mentioned 2001 contractual
claim for approximately $7 million. The financial impact of this settlement was
recorded in other income in the first quarter of 2002.
Other
The Company is also the subject of, or a party to, a number of other
pending or threatened legal actions involving a variety of matters incidental to
its business.
The ultimate resolution of these foregoing contingencies could,
individually or in the aggregate, be material to the consolidated financial
statements. However, management believes that the Company will remain a viable
and competitive enterprise even though it is possible that these matters could
be resolved unfavorably.
NOTE 8--SEGMENT REPORTING
The Company's reportable operating segments are the Titanium Group and the
Fabrication and Distribution Group.
The Titanium Group manufactures and sells a wide range of titanium mill
products to a customer base consisting primarily of manufacturing and
fabrication companies in the aerospace and nonaerospace markets. Titanium mill
products consist of basic mill shapes such as ingot, slab, bloom, billet, bar,
plate, sheet, strip and welded tube. Titanium mill products are sold primarily
to customers such as metal fabricators, forge shops and, to a lesser extent,
metal distribution companies. Titanium mill products are usually raw or starting
material for these customers, who then form, fabricate or further process mill
products into finished or semi-finished components or parts.
The Fabrication and Distribution Group is engaged primarily in the
fabrication of titanium, specialty metals and steel products, including pipe and
engineered tubular products, for use in the oil and gas and geo-thermal energy
industries; hot and superplastically formed parts; and cut, forged, extruded and
rolled shapes for aerospace and nonaerospace applications. This segment also
provides warehousing, distribution, finishing, cut-to-size and just-in-time
delivery services of titanium, steel and other metal products.
Other Operations is comprised of certain small businesses and operations
dissimilar to either the Titanium Group or the Fabrication and Distribution
Group, and primarily consists of the Company's Environmental Services Division
located in Ashtabula, Ohio. While the Environmental Services Division is
structurally a part of the Titanium Group, the aggregation rules of generally
accepted accounting principles do not permit combination with that group for
this footnote disclosure.
Intersegment sales are accounted for at prices which are generally
established by reference to similar transactions with unaffiliated customers.
Reportable segments are measured based on segment operating income after an
allocation of certain corporate items such as general corporate overhead and
expenses.
9
Segment information for the three-month and nine-month periods ended
September 30, 2002 and 2001 is as follows:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -------------------
2002 2001 2002 2001
-------- -------- -------- --------
NET SALES:
Titanium
Trade............................................... $ 26,244 $ 35,360 $ 83,890 $ 96,663
Intersegment........................................ 11,226 10,604 43,923 35,996
-------- -------- -------- --------
37,470 45,964 127,813 132,659
Fabrication and Distribution
Trade............................................... 36,615 37,442 109,014 109,969
Intersegment........................................ 620 266 1,513 883
-------- -------- -------- --------
37,235 37,708 110,527 110,852
Other operations...................................... 5,246 3,245 13,822 10,522
Adjustments and eliminations.......................... (11,846) (10,870) (45,436) (36,879)
-------- -------- -------- --------
Total net sales.................................. $ 68,105 $ 76,047 $206,726 $217,154
======== ======== ======== ========
OPERATING INCOME (LOSS):
Titanium............................................ $ 2,320 $ 2,486 $ 10,657 $ 1,873
Fabrication and distribution........................ 1,792 1,180 3,183 3,560
Other operations.................................... 494 186 813 529
-------- -------- -------- --------
Total operating income........................... 4,606 3,852 14,653 5,962
RECONCILIATION OF OPERATING INCOME TO REPORTED
INCOME BEFORE TAXES:
Other income (loss)--net............................ 122 85 9,207 5,966
Interest expense.................................... 185 174 473 497
-------- -------- -------- --------
Reported income before taxes..................... $ 4,543 $ 3,763 $ 23,387 $ 11,431
======== ======== ======== ========
NOTE 9--CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The Financial Accounting Standards Board (FASB) issued Statements of
Financial Accounting Standards No. 133 (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities" in June 1998. FAS 133 requires all
derivatives to be recognized as either assets or liabilities on the balance
sheet and to be measured at fair value. Changes in the fair value of derivatives
will be recognized in income immediately if the derivatives are designated for
purposes other than hedging or are deemed not effective as hedges.
The Company adopted FAS No. 133 on January 1, 2001. A charge of
approximately $0.2 million, net of a tax benefit of approximately $0.1 million,
was recorded as a cumulative effect of adoption of FAS No. 133 in the Company's
results of operations for the first quarter of 2001. The charge represented the
fair value of the net liability of a foreign currency forward purchase contract
upon adoption.
NOTE 10--NEW ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141 (FAS 141), "Business
Combinations", and No. 142 (FAS 142), "Goodwill and Other Intangible Assets".
FAS 141 supersedes Accounting Principles Board Opinion No. 16 (APB 16),
"Business Combinations". The most significant changes made by FAS 141 are: (1)
requiring that the purchase method of accounting be used for all business
combinations initiated after September 30, 2001; (2) establishing specific
criteria for the recognition of intangible assets separately from goodwill; and
(3) requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized).
FAS 142 supersedes Accounting Principles Board Opinion No. 17 (APB 17),
"Intangible Assets". FAS 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their acquisition (i.e., the
10
post-acquisition accounting). The most significant changes made by FAS 142 are:
(1) goodwill and indefinite-lived intangible assets will no longer be amortized;
(2) goodwill will be tested for impairment at least annually at the reporting
unit level; (3) intangible assets deemed to have an indefinite life will be
tested for impairment at least annually; and (4) the amortization period of
intangible assets with finite lives will no longer be limited to forty years.
FAS 141 must be applied to all business combinations initiated or completed
after September 30, 2001. FAS 142 must have been adopted as of January 1, 2002.
The Company adopted FAS 142 in the first quarter of fiscal 2002 and discontinued
the amortization of goodwill. Management has completed its initial evaluation of
its existing goodwill for impairment in accordance with FAS 142. No impairment
loss or transition adjustments were required. The following table sets forth the
effect of discontinuing of goodwill amortization as required by FAS 142:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------- -----------------
2002 2001 2002 2001
------ ------ ------- -------
Income before income taxes, as reported..................... $4,543 $3,763 $23,387 $11,431
Add back: Goodwill amortization............................. -- 431 -- 1,247
------ ------ ------- -------
Income before income taxes, as adjusted..................... $4,543 $4,194 $23,387 $12,678
====== ====== ======= =======
Net income, as reported..................................... $3,005 $2,287 $14,500 $ 6,974
Add back: Effect of goodwill amortization................... -- 262 -- 761
------ ------ ------- -------
Net income, as adjusted..................................... $3,005 $2,549 $14,500 $ 7,735
====== ====== ======= =======
Basic earnings per share, as reported....................... $ 0.14 $ 0.11 $ 0.70 $ 0.32
Add back: Effect of goodwill amortization................... -- 0.01 -- 0.04
------ ------ ------- -------
Basic earnings per share, as adjusted....................... $ 0.14 $ 0.12 $ 0.70 $ 0.36
====== ====== ======= =======
Diluted earnings per share, as reported..................... $ 0.14 $ 0.11 $ 0.69 $ 0.32
Add back: Effect of goodwill amortization................... -- 0.01 -- 0.04
------ ------ ------- -------
Diluted earnings per share, as adjusted..................... $ 0.14 $ 0.12 $ 0.69 $ 0.36
====== ====== ======= =======
In August 2001, the FASB issued Statements of Financial Accounting
Standards No. 143 (FAS 143), "Accounting for Asset Retirement Obligations." FAS
143 prescribes the accounting for retirement obligations associated with
tangible long-lived assets, including: (1) the timing of liability recognition;
(2) initial measurement of the liability; (3) allocation of the cost of the
obligation to expense; (4) measurement and recognition of subsequent changes to
the liability; and (5) financial statement disclosures. FAS 143 requires that an
asset retirement cost should be capitalized as part of the cost of the related
long-lived asset and subsequently allocated to expense using a systematic and
rational method. The standard is required to be adopted in fiscal years
beginning after June 15, 2002. At adoption, any transition adjustment required
will be reported as a cumulative effect of a change in accounting principle.
Management has not yet completed its evaluation of the impact of the adoption of
this standard.
In September 2001, the FASB issued Statements of Financial Accounting
Standards No. 144 (FAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets." FAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement supersedes
Statements of Financial Accounting Standards No. 121 (FAS 121), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30 (APB 30), "Reporting the Results of Operations--Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business (as previously defined in that Opinion). This standard prescribes
a single accounting model for long-lived assets to be disposed of by sale, and
also prescribes the accounting for the impairment of long-lived assets to be
held and used and for assets to be disposed of by other than sale (e.g.,
abandonment). Under this standard, long-lived assets to be disposed of by sale
should be carried at the lower of its carrying amount or fair value less cost to
sell and depreciation (amortization) should cease. Discontinued operations are
no longer measured on a net realizable value basis, and future operating losses
are no longer recognized before they occur. For long-lived assets to be held and
used, the significant changes under FAS 144 are: (1) the removal of goodwill
from the scope of this standard; (2) the standard prescribes a probability-
11
weighted cash flow approach to measuring the future cash flows from the assets;
and (3) the standard prescribes a "primary asset" approach to grouping assets
for purposes of testing for impairment. This standard is required to be adopted
in fiscal years beginning after December 15, 2001; early adoption is permitted.
The requirements of this standard are to be applied prospectively from adoption
with no cumulative effect of change in accounting principle reported. The
Company adopted FAS 144 in the first quarter of 2002 and there was not a
material financial impact.
Statements of Financial Accounting Standards No. 146 (FAS 146), "Accounting
for Exit or Disposal Activities" was issued in July of 2002. FAS 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs that are associated with exit and disposal activities, including
restructuring activities. The scope of FAS 146 includes (1) costs to terminate
contracts that are not capital leases; (2) costs to consolidate facilities or
relocate employees; and (3) termination benefits provided to employees who are
involuntarily terminated under the terms of a one-time benefit arrangement that
is not an ongoing benefit arrangement or an individual deferred-compensation
contract. The provisions of this Statement will be effective for disposal
activities initiated after December 31, 2002, with early application encouraged.
Management will adopt this standard on a prospective basis when necessary.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in connection with the information
contained in the Consolidated Financial Statements and Selected Notes to
Consolidated Financial Statements. The following information contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, and are subject to the safe harbor created by
that Act. Such forward-looking statements include, without limitation,
statements regarding the future availability and prices of raw materials,
competition in the titanium industry, demand for the Company's products, the
historic cyclicality of the titanium and aerospace industries, uncertain defense
spending, long-term supply agreements, the ultimate determination of pending
trade petitions, global economic conditions, the Company's order backlog and the
conversion of that backlog into revenue, labor relations, the long-term impact
of the events of September 11, 2001 and the ongoing war on terrorism, and other
statements contained herein that are not historical facts. Because such
forward-looking statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements. These and other risk
factors are set forth below in the "Outlook" section, as well as in the
Company's other filings with the Securities and Exchange Commission ("SEC") over
the last 12 months, copies of which are available from the SEC or may be
obtained upon request from the Company.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
NET SALES
Net sales decreased to $68.1 million for the three months ended September
30, 2002 compared to net sales of $76.0 million in the corresponding 2001
period. Sales for the Company's Titanium Group amounted to $31.5 million in the
three months ended September 30, 2002 compared to $38.6 million in the same
period of 2001. Titanium Group net sales decreased as a result of a decrease in
mill product shipments, partially offset by higher average realized prices as
product mix shifted to higher value-added rolled products. Shipments of titanium
mill products were 2.2 million pounds in the three months ended September 30,
2002, compared to 3.3 million pounds for the same period in 2001. Mill product
shipments in the three months ended September 30, 2002 were lower than those in
2001 as demand for forged mill products for aerospace markets declined. Included
in mill product shipments are intersegment shipments from the Titanium Group to
the Fabrication and Distribution Group (F&D). Shipments to F&D increased
marginally over the same period last year, reflecting the Company's intentional
shift to higher value added products through F&D. Average realized prices on
mill products for the three months ended September 30, 2002 increased to $14.35
per pound from $12.17 per pound in 2001. The increase in average realized prices
for mill products resulted primarily from an increased mix of higher value-added
rolled mill products when compared to 2001. Sales for the Company's Fabrication
and Distribution Group amounted to $36.6 million in the three months ended
September 30, 2002, compared to $37.4 million in the same period of 2001. This
decrease reflects reduced demand in distribution sales in the United States and
Europe, partially offset by an increase in energy market sales.
GROSS PROFIT
Gross profit amounted to $12.2 million, or 17.9% of sales for the three
months ended September 30, 2002 compared to a gross profit of $12.0 million or
15.8% for the comparable 2001 period. Gross margin improved as a result of
continuing Titanium Group cost reduction efforts and increased sales in energy
markets, partially offset by reduced volume in domestic and European
distribution sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses amounted to $7.3 million or
10.7% of sales for the three months ended September 30, 2002, compared to $7.7
million or 10.1% of sales for the same period in 2001. The decrease in selling,
general and administrative expenses reflects reductions in personnel and related
benefit costs.
13
RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT EXPENSES
Research, technical and product development expenses amounted to $0.3
million in 2002 compared to $0.5 million during the same period in 2001. The
decrease reflects less research and development spending related to energy
markets.
OPERATING INCOME
Operating income for the three months ended September 30, 2002 amounted to
$4.6 million, or 6.8% of sales compared to $3.9 million, or 5.1% of sales, in
the same period of 2001. This change consists of an increase in operating income
from the Titanium Group of $0.1 million primarily due to continuing cost
reduction efforts. This increase also reflects an increase in operating income
in the Fabrication and Distribution Group of $0.6 million due to an increase in
energy market sales partially offset by a decrease in demand in domestic and
European distribution sales.
OTHER INCOME
Other income for the three months ended September 30, 2002 and September
30, 2001 amounted to $0.1 million.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 2002 and
September 30, 2001 amounted to $0.2 million. Interest expense for both periods
are primarily the result of fees associated with the unused capacity on the
Company's credit facility. The Company had no bank debt at September 30, 2002.
INCOME TAXES
In the three months ended September 30, 2002, the Company recorded an
income tax expense of $1.5 million compared to a $1.5 million expense recorded
in the same period in 2001. The effective tax rates for the three months ended
September 30 of 2002 and 2001 were approximately 34% and 39%, respectively. The
effective tax rate of 34% for the three months ended September 30, 2002 reflects
an adjustment to bring the effective tax rate for the nine months ending
September 30, 2002 from 39% to 38%. The effective tax rate of 38% for the nine
months ended September 30, 2002 was greater than the federal statutory rate of
35% primarily due to state income taxes. The effective tax rate of 39% for the
three months ended September 30, 2001 was greater than the federal statutory
rate of 35% primarily due to state income taxes and non-deductible goodwill
amortization.
NET INCOME
Net income for the three months ended September 30, 2002 amounted to $3.0
million or 4.4% of sales, compared to $2.3 million or 3.0% of sales in the
comparable 2001 period. This change consists of an increase in operating income
from the Titanium Group of $0.1 million primarily due to continuing cost
reduction, and an improvement in operating income in the Fabrication and
Distribution Group of $0.6 million. The increase in the Fabrication and
Distribution Group was due to an increase in energy market sales partially
offset by a decrease in demand in domestic and European distribution sales.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
NET SALES
Net sales decreased to $206.7 million for the nine months ended September
30, 2002 compared to net sales of $217.2 million in the corresponding 2001
period. Sales for the Company's Titanium Group amounted to $97.7 million in the
nine months ended September 30, 2002 compared to $107.2 million in the same
period of 2001. Titanium Group net sales decreased primarily as a result of a
decrease in mill product shipments, partially offset by higher average realized
prices. Shipments of titanium mill products were 7.8 million pounds in the nine
months ended September 30, 2002, compared to 8.7 million pounds for the same
period in 2001. Mill product shipments in the nine months ended September 30,
2002 were less than those in 2001 as demand for forged mill
14
products for aerospace declined. Included in mill product shipments are
intersegment shipments from the Titanium Group to the Fabrication and
Distribution Group (F&D). Shipments to F&D increased over the same period last
year, reflecting the Company's intentional shift to higher value added products
through F&D. Average realized prices on mill products for the nine months ended
September 30, 2002 increased to $14.17 per pound from $13.47 per pound in 2001.
The increase in average realized prices for mill products resulted primarily
from an increased mix of higher value-added flat-rolled mill products when
compared to 2001. Sales for the Company's Fabrication and Distribution Group
amounted to $109.0 million in the nine months ended September 30, 2002, compared
to $110.0 million in the same period of 2001. This decrease reflects reduced
demand in distribution sales in the United States and Europe, partially offset
by an increase in energy market sales.
GROSS PROFIT
Gross profit amounted to $40.4 million, or 19.6% of sales for the nine
months ended September 30, 2002 compared to a gross profit of $31.7 million or
14.6% for the comparable 2001 period. Gross margin improved as a result of
continuing Titanium Group cost reduction efforts and increased sales in energy
markets, partially offset by reduced volume in domestic and European
distribution sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses amounted to $24.8 million or
12.0% of sales for the nine months ended September 30, 2002, compared to $24.4
million or 11.2% of sales for the same period in 2001. The increase in selling,
general and administrative expenses reflects the impact of an increase in
estimated accruals for employee related costs including benefits.
RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT EXPENSES
Research, technical and product development expenses amounted to $1.0
million for the nine months ended September 30, 2002, compared to $1.4 million
during the same period in 2001. The decrease primarily reflects reduced spending
related to energy markets.
OPERATING INCOME
Operating income for the nine months ended September 30, 2002 amounted to
$14.7 million, or 7.1% of sales, compared to $6.0 million, or 2.7% of sales, in
the same period of 2001. This change consists of an increase in operating income
from the Titanium Group of $9.1 million primarily due to continuing cost
reduction efforts. This increase was partially offset by a decrease in operating
income in the Fabrication and Distribution Group of $0.4 million due to a
decrease in demand in domestic and European distribution sales, partially offset
by an increase in energy market sales.
OTHER INCOME
Other income for the nine months ended September 30, 2002 amounted to $9.2
million, compared to $6.0 million in the same period of 2001. This increase
primarily reflects an increase in the amount received from Boeing of $0.8
million in settlement of contractually specified damages for failing to meet
minimum order volumes when compared to a similar payment received in 2001. The
increase also reflects the gain of $2.1 million on the sale of shares in 2002,
that were received by the Company in 2001 as a result of the demutualization of
one of its insurance carriers in which it was a participant.
INTEREST EXPENSE
Interest expense for the nine months ended September 30, 2002 and September
30, 2001 amounted to $0.5 million. Interest expense for both periods are
primarily the result of fees associated with the unused capacity on the
Company's credit facility. The Company had no bank debt at September 30, 2002.
15
INCOME TAXES
In the nine months ended September 30, 2002, the Company recorded an income
tax expense of $8.9 million compared to a $4.5 million expense recorded in the
same period in 2001. The effective tax rates for the nine months ended September
30, 2002 and 2001 were approximately 38% and 39%, respectively. The effective
tax rate of 38% for the nine months ended September 30, 2002 was greater than
the federal statutory rate of 35% primarily due to state income taxes. The
effective tax rate of 39% for the nine months ended September 30, 2001 was
greater than the federal statutory rate of 35% primarily due to state income
taxes and non-deductible goodwill amortization.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
The cumulative effect of change in accounting principle for the nine months
ended September 30, 2001 of $0.2 million, net of $0.1 million in income taxes,
resulted from the Company's adoption of Statements of Financial Accounting
Standards No. 133 (FAS 133), "Accounting for Derivative Instruments and Hedging
Activities". The gross charge of $0.3 million represented the recognition of the
net liability for the fair value of a foreign currency forward purchase contract
upon adoption.
NET INCOME
Net income for the nine months ended September 30, 2002 amounted to $14.5
million or 7.0% of sales, compared to $6.8 million or 3.1% of sales in the
comparable 2001 period. This change consists of an increase in operating income
from the Titanium Group of $9.1 million primarily due to continuing cost
reduction efforts. This increase was partially offset by a decrease in operating
income in the Fabrication and Distribution Group of $0.4 million due to a
decrease in demand in domestic and European distribution sales, partially offset
by an increase in energy market sales. This increase also reflects an increase
in the amount received from Boeing of $0.5 million, net of tax, in settlement of
contractually specified damages for failing to meet minimum order volumes when
compared to similar amounts received in 2001; and the gain of $1.3 million, net
of tax, on the sale of shares received by the Company in 2001 as a result of the
demutualization of one of its insurance carriers in which it was a participant.
OUTLOOK
The terrorist attacks of September 11, 2001, and their effect on the
general economy, are expected to have an adverse impact on airline and aircraft
business conditions for at least the next couple of years.
COMMERCIAL AEROSPACE MARKETS
The largest impact is likely to be on commercial aerospace markets, which
historically provides approximately 35-40% of RTI's sales. Airline operators
experienced a dramatic drop in travel immediately following September 11, which
resulted in significant losses within their industry causing a reduced demand
for new aircraft. The primary builders of large commercial aircraft, Boeing and
Airbus, have adjusted their build rates beginning in 2002 downward to reflect
the expected change in demand. The most current information indicates a combined
drop in commercial aircraft production by Boeing and Airbus of approximately 20%
in 2002 and an additional 10% to 15% decrease in 2003. All build schedules are
subject to change, and are highly dependent on airline passenger travel and
airline profitability. Therefore, the exact magnitude of the downturn on
commercial aerospace remains uncertain.
Titanium mill products that are ordered by the prime aircraft producers and
their subcontractors are generally ordered in advance of final aircraft
production by 6 to 18 months. This is due to the time it takes to produce a
final assembly or part that is ready for installation in an airframe or jet
engine. Consequently, increased demand for titanium mill products from
commercial aerospace markets would typically precede actual increases in
aircraft build rates.
The near-term effect of the reduction in commercial aircraft demand on RTI
will be mitigated somewhat by the long-term agreement RMI entered into with
Boeing on January 28, 1998. Under this agreement, RMI supplies
16
Boeing and its family of commercial suppliers with up to 4.5 million pounds of
titanium products annually. The agreement, which began in 1998, has a term of
five years, and is subject to review by the parties prior to expiration in 2003.
Under the accord, Boeing receives firm prices in exchange for RMI receiving a
minimum volume commitment of 3.25 million pounds per year. If volumes fall short
of the minimum commitment, the contract contains provisions for financial
compensation. In accordance with the agreement, and as a result of volume
shortfalls in 1999, 2000, and 2001, Boeing settled claims of approximately $6
million in both 2000 and 2001, and $7 million in 2002.
On April 26, 2002, RTI, through its European subsidiary, RTI Europe Ltd.,
entered into a new contract with Europe's largest aerospace group, European
Aeronautic Defense and Space Company ("EADS"), to supply value-added titanium
products and parts through 2004, subject to extension. The products will be used
in military aircraft, including the Eurofighter Typhoon and the Airbus family of
civil aircraft. In addition to mill products, RTI will supply cut, shaped and
machined items direct to EADS and Airbus manufacturing plants in France,
Germany, Spain and the UK from its value-added processing facilities in Europe.
The contract continues RTI's long-term involvement in these programs and is
expected to make RTI the second largest titanium supplier to Airbus.
DEFENSE MARKETS
The importance of military markets to RTI, which historically provides
approximately 30% of revenues, is expected to rise in 2002 and beyond due to
increased defense budgets, and increased hardware purchases by the U.S.
Government, partially brought about by the events of September 11, 2001. It is
estimated that overall titanium consumption will be increased within this
segment in 2002 globally, but it is not expected to offset the total decline in
the market caused by the drop in the commercial aerospace sector. RTI believes
it is well positioned to provide mill products and fabrications to this segment
if increased consumption is required to support defense needs. RTI supplies
titanium and other materials to most military aerospace programs, including the
F-22, C-17, F/A-18, F-15, and in Europe, the Mirage, Rafale, Eurofighter and
recently announced A-400M transport.
The Company was chosen by BAE Systems RO Defence UK to supply the
hot-formed, extruded and machined titanium components for the new XM-777
lightweight 155 mm Howitzer. Delivery is expected to begin in 2003 and continue
through 2010. Initial deliveries of the XM-777 will be to the U.S. Marine Corps,
followed by deliveries to the U.S. Army and the Italian and British armed
forces. It is anticipated that over 800 guns may be produced. Based on the
design currently under consideration, RTI's sales under this contract could
exceed $50 million.
Lockheed Martin, a major customer of the Company, was awarded the largest
military contract ever on October 26, 2001, for the military's $200 billion
Joint Strike Fighter program. The aircraft, which will be used by all branches
of the military, is expected to consume 10,000 to 15,000 pounds of titanium per
airframe. Timing and order patterns, which are likely to extend well into the
future for this program, have not been quantified, but may be as many as 3,000
to 6,000 planes over the next 30 to 40 years. The Company has been notified that
it has been selected as the supplier of titanium sheet, plate and machining
billet for the design and development phase over the next five years. A
definitive contract is currently being negotiated with conclusion expected in
the fourth quarter of 2002.
INDUSTRIAL AND CONSUMER MARKETS
The remaining 30% of RTI's sales are generated in various industrial
markets, where business conditions are expected to be mixed over the next year
or two. Uncertainty about the general economy will reduce demand for some of the
Company's industrial products, while others are expected to grow.
Revenues from oil and gas markets are expected to reach new highs for RTI
in 2002, due to the increase in offshore, deep water projects predicted over the
next several years. Despite the weak economy, the Company believes that oil and
gas exploration will continue at an accelerated pace for the next several years.
17
On April 1, 2002, RTI Energy Systems, Inc. (RTIES) was selected to produce
production riser equipment in connection with Unocal's West Seno Project off the
coast of Indonesia. RTIES began production of the system in the third quarter
2002. RTIES is providing the high-fatigue riser engineering design, in addition
to the manufacture of components using a combination of titanium and steel. The
system will incorporate RTIES proprietary high-fatigue connectors, keel and
transition joints, as well as RTIES titanium tapered stress joints. The West
Seno Project incorporates a number of unique design requirements and is well
suited for RTIES engineered products and capabilities in the application of both
steel and titanium within the same riser system. The contract value will be in
excess of $14 million.
BACKLOG
The Company's order backlog for all market segments decreased to $129.1
million as of September 30, 2002, from $143 million at December 31, 2001,
principally due to a reduction in demand for titanium mill products from
commercial aerospace markets. However, the order backlog increased from the
amount reported as of June 30, 2002 of $113 million primarily due to increased
demand for titanium mill products from military and commercial aerospace
markets.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operating activities totaled $23.4 million in the first
nine months of 2002 compared to $26.5 million in the first nine months of 2001.
The change in net cash flows from operating activities for the nine months ended
September 30, 2002, compared to the same period in 2001, primarily reflects
decreases in other current liabilities and accounts payable and an increase in
inventory, partially offset by an increase in net income, and a decrease in
accounts receivable. In 2002, $1.4 million was used as working capital
increased, and in 2001, $1.5 million was generated through a reduction in
working capital and other balance sheet line items. The Company's working
capital ratio was 7.9 to 1 at September 30, 2002.
During the first nine months of 2002 and 2001, the Company's cash flow
requirements for capital expenditures were funded with cash provided by
operations. The Company anticipates that it will be able to fund its capital
expenditure requirements for the balance of 2002 with funds generated by
operations.
At September 30, 2002, the Company maintained a credit agreement which
provided up to a maximum of $100 million of borrowing capacity. At September 30,
2002, there were no borrowings under this facility.
On September 9, 1999, RTI filed a universal shelf registration with the
Securities and Exchange Commission. This registration permits RTI to issue up to
$100 million of debt and/or equity securities at an unspecified future date. The
proceeds of any such issuance could be utilized to finance acquisitions, capital
investments or other general purposes; however, RTI has not issued any
securities to date and has no immediate plans to do so.
CREDIT AGREEMENT
At September 30, 2002, the Company maintained a credit agreement entered
into on April 26, 2002, which provides a $100 million three-year unsecured
revolving credit facility. This agreement replaced the previously existing $100
million five-year unsecured revolving credit facility entered into September 30,
1998. The Company can borrow up to the lesser of $100 million or a borrowing
base equal to the sum of 85% of qualifying accounts receivable and 60% of
qualifying inventory.
Under the terms of the facility, the Company, at its option, will be able
to borrow at (a) a base rate (which is the higher of PNC Bank's prime rate or
the Federal Funds Effective Rate plus 0.5% per annum), or (b) LIBOR plus a
spread (ranging from 1.0% to 2.25%) determined by the ratio of the Company's
consolidated total indebtedness to consolidated earnings before interest, taxes,
depreciation and amortization. At September 30, 2002, there were no borrowings
outstanding under the facility and the Company had a borrowing capacity equal to
the total amount of the agreement.
18
ENVIRONMENTAL MATTERS
The Company is subject to environmental laws and regulations as well as
various health and safety laws and regulations that are subject to frequent
modifications and revisions. While the costs of compliance for these matters
have not had a material adverse impact on the Company in the past, it is
impossible to predict accurately the ultimate effect these changing laws and
regulations may have on the Company in the future.
At September 30, 2002, the amount accrued for future environment-related
costs was $1.7 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 $2.8 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) which could equal
from $1.9 to $2.3 million. The Company has received contributions from such
third parties for a number of years as partial reimbursement for costs incurred
by the Company. As these proceedings continue toward final resolution, amounts
in excess of those already provided may be necessary to discharge the Company
from its obligations for these projects.
The ultimate resolution of these environmental matters could, individually
or in the aggregate, be material to the consolidated financial statements.
However, management believes that the Company will remain a viable and
competitive enterprise even though it is possible that these matters could be
resolved unfavorably.
CAPITAL EXPENDITURES
Gross capital expenditures for the first nine months of 2002 and 2001
amounted to $4.7 and $10.1 million, respectively. The Company has anticipated
total capital spending for 2002 of approximately $8.0 million. Based upon a
number of factors, including profitability, demand for the Company's products
and conditions in the commercial aerospace industry, the amount and/or timing of
capital spending could be affected.
NEW ACCOUNTING STANDARDS
On July 20, 2001, the Financial Accounting Standards Board (FASB) issued
Statements of Financial Accounting Standards No. 141 (FAS 141), "Business
Combinations", and No. 142 (FAS 142), "Goodwill and Other Intangible Assets".
FAS 141 supersedes Accounting Principles Board Opinion No. 16 (APB 16),
"Business Combinations". The most significant changes made by FAS 141 are: (1)
requiring that the purchase method of accounting be used for all business
combinations initiated after September 30, 2001; (2) establishing specific
criteria for the recognition of intangible assets separately from goodwill; and
(3) requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized).
FAS 142 supersedes Accounting Principles Board Opinion No. 17 (APB 17),
"Intangible Assets". FAS 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their acquisition (i.e., the post-acquisition
accounting). The most significant changes made by FAS 142 are: (1) goodwill and
indefinite lived intangible assets will no longer be amortized; (2) goodwill
will be tested for impairment at least annually at the reporting unit level; (3)
intangible assets deemed to have an indefinite life will be tested for
impairment at least annually; and (4) the amortization period of intangible
assets with finite lives will no longer be limited to forty years.
FAS 141 must be applied to all business combinations initiated or completed
after September 30, 2001. FAS 142 must have been adopted as of January 1, 2002.
The Company adopted FAS 142 in the first quarter of fiscal 2002 and discontinued
the amortization of goodwill. Management has completed its initial evaluation of
its existing goodwill for impairment in accordance with FAS 142. No impairment
loss or transition adjustments were
19
required. The following table sets forth the effect of discontinuing of goodwill
amortization as required by FAS 142:
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------- -----------------
2002 2001 2002 2001
------ ------ ------- -------
Income before income taxes, as reported.................. $4,543 $3,763 $23,387 $11,431
Add back: Goodwill amortization.......................... -- 431 -- 1,247
------ ------ ------- -------
Income before income taxes, as adjusted.................. $4,543 $4,194 $23,387 $12,678
====== ====== ======= =======
Net income, as reported.................................. $3,005 $2,287 $14,500 $ 6,974
Add back: Effect of goodwill amortization................ -- 262 -- 761
------ ------ ------- -------
Net income, as adjusted.................................. $3,005 $2,549 $14,500 $ 7,735
====== ====== ======= =======
Basic earnings per share, as reported.................... $ 0.14 $ 0.11 $ 0.70 $ 0.32
Add back: Effect of goodwill amortization................ -- 0.01 -- 0.04
------ ------ ------- -------
Basic earnings per share, as adjusted.................... $ 0.14 $ 0.12 $ 0.70 $ 0.36
====== ====== ======= =======
Diluted earnings per share, as reported.................. $ 0.14 $ 0.11 $ 0.69 $ 0.32
Add back: Effect of goodwill amortization................ -- 0.01 -- 0.04
------ ------ ------- -------
Diluted earnings per share, as adjusted.................. $ 0.14 $ 0.12 $ 0.69 $ 0.36
====== ====== ======= =======
In August 2001, the FASB issued Statements of Financial Accounting
Standards No. 143 (FAS 143), "Accounting for Asset Retirement Obligations." FAS
143 prescribes the accounting for retirement obligations associated with
tangible long-lived assets, including: (1) the timing of liability recognition;
(2) initial measurement of the liability; (3) allocation of the cost of the
obligation to expense; (4) measurement and recognition of subsequent changes to
the liability; and (5) financial statement disclosures. FAS 143 requires that an
asset retirement cost should be capitalized as part of the cost of the related
long-lived asset and subsequently allocated to expense using a systematic and
rational method. The standard is required to be adopted in fiscal years
beginning after June 15, 2002. At adoption, any transition adjustment required
will be reported as a cumulative effect of a change in accounting principle.
Management has not yet completed its evaluation of the impact of the adoption of
this standard.
In September 2001, the FASB issued Statements of Financial Accounting
Standards No. 144 (FAS 144), "Accounting for the Impairment or Disposal of
Long-Lived Assets." FAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This Statement supersedes
Statements of Financial Accounting Standards No. 121 (FAS 121), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30 (APB 30), "Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions," for the disposal of a segment
of a business (as previously defined in that Opinion). This standard prescribes
a single accounting model for long-lived assets to be disposed of by sale, and
also prescribes the accounting for the impairment of long-lived assets to be
held and used and for assets to be disposed of by other than sale (e.g.,
abandonment). Under this standard, long-lived assets to be disposed of by sale
should be carried at the lower of its carrying amount or fair value less cost to
sell and depreciation (amortization) should cease. Discontinued operations are
no longer measured on a net realizable value basis, and future operating losses
are no longer recognized before they occur. For long-lived assets to be held and
used, the significant changes under FAS 144 are: (1) the removal of goodwill
from the scope of this standard; (2) the standard prescribes a probability-
weighted cash flow approach to measuring the future cash flows from the assets;
and (3) the standard prescribes a "primary asset" approach to grouping assets
for purposes of testing for impairment. This standard is required to be adopted
in fiscal years beginning after December 15, 2001; early adoption is permitted.
The requirements of this standard are to be applied prospectively from adoption
with no cumulative effect of change in accounting principle reported. The
Company adopted FAS 144 in the first quarter of 2002 and there was not a
material financial impact.
Statements of Financial Accounting Standards No. 146 (FAS 146), "Accounting
for Exit or Disposal Activities" was issued in July of 2002. FAS 146 addresses
significant issues regarding the recognition,
20
measurement, and reporting of costs that are associated with exit and disposal
activities, including restructuring activities. The scope of FAS 146 includes
(1) costs to terminate contracts that are not capital leases; (2) costs to
consolidate facilities or relocate employees; and (3) termination benefits
provided to employees who are involuntarily terminated under the terms of a
one-time benefit arrangement that is not an ongoing benefit arrangement or an
individual deferred-compensation contract. The provisions of this Statement will
be effective for disposal activities initiated after December 31, 2002, with
early application encouraged. Management will adopt this standard on a
prospective basis when necessary.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to the Company's exposure to market
risk since the Company filed its Form 10-K on March 14, 2002.
ITEM 4. CONTROLS AND PROCEDURES
RTI management, including the Chief Executive Officer and Chief Financial
Officer, have conducted an evaluation of the effectiveness of disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the disclosure controls and procedures are effective in ensuring that all
material information required to be filed in this quarterly report has been made
known to them in a timely fashion. There have been no significant changes in
internal controls, or in other factors that could significantly affect internal
controls, subsequent to the date the Chief Executive Officer and Chief Financial
Officer completed their evaluation.
21
PART II--OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
99.3 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.4 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated August 14, 2002, to
report the certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 by written statement of the Chief Executive Officer and Chief
Financial Officer.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RTI INTERNATIONAL METALS, INC.
--------------------------------------
(Registrant)
Date: November 8, 2002
By: /s/ L. W. JACOBS
------------------------------------
L. W. Jacobs
Vice President & Chief Financial
Officer
23
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Timothy G. Rupert, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RTI International
Metals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 7, 2002
/s/ TIMOTHY G. RUPERT
--------------------------------------
Timothy G. Rupert
Chief Executive Officer
24
CERTIFICATION
I, Lawrence W. Jacobs, certify that:
1. I have reviewed this quarterly report on Form 10-Q of RTI International
Metals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 7, 2002
/s/ LAWRENCE W. JACOBS
--------------------------------------
Lawrence W. Jacobs
Chief Financial Officer
25