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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
---------------------
FORM 10-Q/A
(AMENDMENT NO. 1)
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005.
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 ___
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES X NO ___
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
YES ___NO X
At August 1, 2005, 22,835,116 shares of common stock of the registrant were
outstanding.
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RTI INTERNATIONAL METALS, INC.
FORM 10-Q/A
QUARTER ENDED JUNE 30, 2005
INDEX
EXPLANATORY NOTE
RTI International Metals, Inc. is filing this Form 10-Q/A for the period
ended June 30, 2005 to reflect the restatement of its consolidated statements of
cash flows for the period ended June 30, 2005 and 2004. The restatement arose as
a result of management's determination that the tax effect of employee stock
options exercised were incorrectly reported as "cash flows from financing
activities." The tax effect should have been reported as "cash flows from
operating activities" as prescribed by Emerging Issues Task Force ("EITF") 00-
15, "Classification in the Statement of Cash Flows of the Income Tax Benefit
Received by a Company upon Exercise of Nonqualified Employee Stock Options." The
Consolidated Statements of Cash Flows for 2005 and 2004 have been restated. See
note 17 in the notes to the consolidated financial statements contained in this
amendment for further information relating to the restatement.
No attempt has been made in this Form 10-Q/A to modify or update other
disclosures presented in the original report on Form 10-Q except as required to
reflect the effects of the restatement. This Form 10-Q/A does not reflect events
occurring after the filing of the original Form 10-Q or modify or update those
disclosures. Information not affected by the restatement is unchanged and
reflects the disclosure made at the time of the original filing of Form 10-Q
with the Securities and Exchange Commission on August 9, 2005.
The following Items are hereby amended and restated in their entirety.
PAGE
----
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements:....................................... 2
Consolidated Statement of Operations (Unaudited)........................ 2
Consolidated Balance Sheet (Unaudited).................................. 3
Consolidated Statement of Cash Flows(Unaudited)......................... 4
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)... 5
Condensed Notes to Consolidated Financial Statements (Unaudited)........ 6
Item 2. Management's Discussion and Analysis of Financial Condition 19
and Results of Operations...................................
Item 4. Controls and Procedures..................................... 31
PART II--OTHER INFORMATION
Item 6. Exhibits.................................................... 33
Signatures................................................................... 34
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RTI INTERNATIONAL METALS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Sales....................................... $ 95,040 $ 51,809 $ 168,527 $ 102,339
Operating costs:
Cost of sales............................... 69,061 44,099 118,012 91,285
Selling, general and administrative
expenses.................................. 10,522 8,041 21,684 16,379
Research, technical and product development
expenses.................................. 417 297 783 584
----------- ----------- ----------- -----------
Total operating costs.................. 80,000 52,437 140,479 108,248
----------- ----------- ----------- -----------
Other operating income...................... -- 97 -- 97
----------- ----------- ----------- -----------
Operating income (loss)..................... 15,040 (531) 28,048 (5,812)
Other income (Note 10)...................... 315 54 453 9,372
Interest income............................. 238 27 396 26
----------- ----------- ----------- -----------
Income (loss) from continuing operations
before income taxes....................... 15,593 (450) 28,897 3,586
Provision (benefit) for income taxes (Note
5)........................................ 5,013 (776) 9,918 616
----------- ----------- ----------- -----------
Income from continuing operations........... 10,580 326 18,979 2,970
Income from discontinued operations, net of
tax (Note 15)............................. -- 107 -- 238
----------- ----------- ----------- -----------
Net income.................................. $ 10,580 $ 433 $ 18,979 $ 3,208
=========== =========== =========== ===========
Basic earnings per common share (Note 6):
Continuing operations..................... $ 0.48 $ 0.02 $ 0.86 $ 0.14
Discontinued operations................... $ -- $ -- $ -- $ 0.01
----------- ----------- ----------- -----------
Net income................................ $ 0.48 $ 0.02 $ 0.86 $ 0.15
=========== =========== =========== ===========
Diluted earnings per common share (Note 6):
Continuing operations..................... $ 0.47 $ 0.02 $ 0.84 $ 0.14
Discontinued operations................... $ -- $ -- $ -- $ 0.01
----------- ----------- ----------- -----------
Net income................................ $ 0.47 $ 0.02 $ 0.84 $ 0.15
=========== =========== =========== ===========
Weighted average shares used to compute
earnings per share:
Basic..................................... 22,233,556 21,202,363 22,109,449 21,154,367
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted................................... 22,657,458 21,480,691 22,558,186 21,466,156
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The accompanying notes are an integral part of these Consolidated Financial
Statements.
2
RTI INTERNATIONAL METALS, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2005 2004
-------- ------------
ASSETS
ASSETS:
Cash and cash equivalents................................. $ 71,195 $ 62,701
Receivables--less allowance for doubtful accounts of
$2,000 and $1,704...................................... 58,500 44,490
Inventories, net (Note 7)................................. 177,955 133,512
Current deferred income tax asset......................... 1,145 1,145
Income tax receivable..................................... -- 3,321
Other current assets...................................... 3,885 3,597
-------- --------
Total current assets................................... 312,680 248,766
Property, plant and equipment, net........................ 81,079 82,593
Goodwill (Note 8)......................................... 47,579 46,618
Other intangible assets, net (Note 8)..................... 16,126 16,040
Noncurrent deferred income tax asset...................... 3,012 3,012
Intangible pension asset.................................. 3,365 3,365
Other noncurrent assets................................... 2,609 3,099
-------- --------
Total assets........................................... $466,450 $403,493
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable.......................................... $ 29,088 $ 14,253
Accrued wages and other employee costs.................... 7,395 4,863
Billings in excess of costs and estimated revenues (Note
9)..................................................... 13,150 4,708
Income taxes payable...................................... 4,018 --
Other accrued liabilities................................. 8,024 6,498
-------- --------
Total current liabilities.............................. 61,675 30,322
Accrued postretirement benefit cost....................... 20,743 20,811
Accrued pension cost...................................... 22,878 21,090
Other noncurrent liabilities.............................. 6,307 7,312
-------- --------
Total liabilities...................................... 111,603 79,535
-------- --------
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value, 50,000,000 shares
authorized; 22,859,256 and 22,194,344 shares issued;
22,415,184 and 21,772,730 shares outstanding........... 230 221
Additional paid-in capital................................ 271,312 258,526
Deferred compensation..................................... (3,584) (2,499)
Treasury stock, at cost; 444,072 and 421,614 shares....... (4,389) (3,906)
Accumulated other comprehensive loss...................... (22,076) (22,759)
Retained earnings......................................... 113,354 94,375
-------- --------
Total shareholders' equity............................. 354,847 323,958
-------- --------
Total liabilities and shareholders' equity........... $466,450 $403,493
======== ========
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)
SIX MONTHS ENDED
JUNE 30,
-----------------------------
2005 2004
------------- -------------
(RESTATED) (RESTATED)
(SEE NOTE 17) (SEE NOTE 17)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 18,979 $ 3,208
Income from discontinued operations, net of tax............. -- 238
-------- -------
Income from continuing operations........................... 18,979 2,970
Adjustment to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 6,462 5,848
Stock-based compensation and other........................ 807 542
Tax benefits from exercise of stock options............... 2,367 650
(Gain) loss on sale of property, plant and equipment...... (4) 4
Other..................................................... (371) (99)
CHANGES IN ASSETS AND LIABILITIES (EXCLUDING CASH):
Receivables............................................... (15,210) (7,112)
Inventories............................................... (44,462) 12,425
Accounts payable.......................................... 12,923 (3,696)
Income taxes payable...................................... 6,583 (4,766)
Billings in excess of costs and estimated earnings........ 8,862 (1,329)
Other current liabilities................................. 7,034 1,902
Other assets and liabilities.............................. 826 2,835
-------- -------
Cash provided by continuing operating activities.......... 4,796 10,174
Cash provided by discontinued operating activities........ -- 173
-------- -------
Cash provided by operating activities.................. 4,796 10,347
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired, and other investing... (290) --
Proceeds from disposal of property, plant and equipment... 5 75
Capital expenditures...................................... (4,553) (2,285)
-------- -------
Cash used in investing activities...................... (4,838) (2,210)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee stock options.......... 8,808 1,957
Purchase of common stock held in treasury................. (483) (288)
Deferred charges related to credit facility............... -- (285)
-------- -------
Cash provided by financing activities.................. 8,325 1,384
-------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 211 112
-------- -------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 8,494 9,633
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 62,701 67,970
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 71,195 $77,603
======== =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized........ $ 142 $ 238
Cash paid for income taxes................................ $ 311 $ 2,948
NON-CASH FINANCING ACTIVITIES:
Issuance of common stock for vested restricted stock
awards................................................. $ 1,620 $ 769
Capital lease obligations incurred........................ $ 36 $ 6
The accompanying notes are an integral part of these Consolidated Financial
Statements.
4
RTI INTERNATIONAL METALS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED
ADDT'L TREASURY OTHER
SHARES COMMON PAID-IN DEFERRED COMMON RETAINED COMPREHENSIVE
OUTSTANDING STOCK CAPITAL COMPENSATION STOCK EARNINGS INCOME (LOSS) TOTAL
----------- ------ -------- ------------ -------- -------- ------------- --------
Balance at December 31,
2004....................... 21,772,730 $221 $258,526 $(2,499) $(3,906) $ 94,375 $(22,759) $323,958
Shares issued for restricted
stock award plans.......... 73,812 1 1,619 (1,620) -- -- -- --
Compensation expense
recognized................. -- -- -- 535 -- -- -- 535
Treasury common stock
purchased at cost.......... (22,458) -- -- -- (483) -- -- (483)
Exercise of employee stock
options including tax
benefit of stock plans..... 591,100 8 11,167 -- -- -- -- 11,175
Net income................... -- -- -- -- -- 18,979 -- 18,979
Foreign currency translation,
net of tax................. -- -- -- -- -- -- 683 683
Comprehensive Income.........
---------- ---- -------- ------- ------- -------- -------- --------
Balance at June 30, 2005..... 22,415,184 $230 $271,312 $(3,584) $(4,389) $113,354 $(22,076) $354,847
========== ==== ======== ======= ======= ======== ======== ========
COMPREHENSIVE
INCOME
-------------
Balance at December 31,
2004.......................
Shares issued for restricted
stock award plans..........
Compensation expense
recognized.................
Treasury common stock
purchased at cost..........
Exercise of employee stock
options including tax
benefit of stock plans.....
Net income................... 18,979
Foreign currency translation,
net of tax................. 683
-------
Comprehensive Income......... $19,662
=======
Balance at June 30, 2005.....
The accompanying notes are an integral part of these Consolidated Financial
Statements.
5
RTI INTERNATIONAL METALS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--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 statement of the results for the
interim periods presented. The financial statements should be read in
conjunction with accounting policies and notes to consolidated financial
statements included in the Company's 2004 Annual Report on Form 10-K, as
amended. Certain prior period amounts have been reclassified to conform to the
current period presentation. The results for the interim periods are not
necessarily indicative of the results to be expected for the year.
NOTE 2--ORGANIZATION
RTI International Metals, Inc. is a leading U.S. producer of titanium mill
products and fabricated metal parts for the global market. The Company conducts
business in two segments: the Titanium Group and the Fabrication and
Distribution Group. The Titanium Group melts and produces a complete range of
titanium mill products, which are further processed by its customers for use in
a variety of commercial, aerospace, defense, and industrial applications. The
Fabrication and Distribution Group is comprised of companies that process and
distribute titanium and other specialty metals. Its products, many of which are
engineered parts and assemblies, serve aerospace, oil and gas, power generation,
and chemical process industries, as well as a number of other industrial and
consumer markets.
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. USX terminated its ownership interest in
RTI in 2000.
NOTE 3--ACQUISITIONS
On October 1, 2004, RTI acquired all of the stock of Claro Precision, Inc.,
("Claro") of Montreal, Quebec, Canada. The aggregate purchase price was $30.6
million consisting of cash of $23.6 million less cash acquired of $1.6 million
and 358,908 shares of RTI common stock with a fair value of $7.0 million. The
purchase agreement provided for a post-closing audit period for adjustments to
the purchase price to finalize and determine whether the target equity amount of
$9.7 million existed on the closing date. In accordance with the purchase
agreement the Company determined that an adjustment to the purchase price of
$0.2 million was due the Company and has been included as a reduction to the
allocated purchase price.
The purchase was made with available cash on hand and newly issued common
shares. Claro operates and reports under the Company's Fabrication and
Distribution segment and was reflected in results of operations effective
October 1, 2004.
6
Claro is a manufacturer of precision-machined components and complex
mechanical and electrical assemblies for the aerospace industry.
The following is a summary of the allocation of the purchase price to the
assets acquired and liabilities assumed from Claro based on their fair market
values as of October 1, 2004. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations," the purchase
price was assigned to the assets and liabilities acquired based on fair value.
Fair value is defined in SFAS 141 as the "amount at which that asset (or
liability) could be bought (or incurred) or sold (or settled) in a current
transaction between willing parties, that is, other than in a forced liquidation
sale."
ALLOCATED
PURCHASE
(IN THOUSANDS) PRICE
-------------- ---------
Acquired assets:
Cash........................................................ $ --
Accounts receivable......................................... 2,802
Inventories................................................. 4,728
Other assets................................................ 46
Property, plant & equipment................................. 3,836
Goodwill.................................................... 10,529
Intangible assets........................................... 16,200
-------
Total assets.............................................. 38,141
Acquired liabilities:
Accounts payable............................................ 1,010
Income taxes payable........................................ 1,543
Current deferred income taxes liability..................... 1,145
Other accrued liabilities................................... 160
Noncurrent deferred income taxes............................ 5,414
-------
Total liabilities......................................... 9,272
-------
Net assets acquired....................................... 28,869
=======
Purchase price
Cash................................................... 22,014
RTI common stock....................................... 7,016
Target equity adjustment............................... (161)
-------
$28,869
=======
The following unaudited pro forma information for RTI is provided to
include the results of Claro as if the acquisition had been consummated at the
beginning of the period presented;
PRO FORMA PRO FORMA
QUARTER SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2004
------------------------------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Net sales................................................... $55,633 $109,987
Net income.................................................. $ 1,134 $ 4,537
Net income per common share
Basic..................................................... 0.05 0.22
Diluted................................................... 0.05 0.21
7
The $16.2 million of intangible assets represent the assigned value of
customer relationships with an estimated useful life of approximately 20 years.
Accumulated amortization at June 30, 2005 and December 31, 2004 related to these
intangible assets was $562 thousand and $160 thousand, respectively. Goodwill of
$10.5 million resulted from the acquisition and is non-deductible for income tax
purposes in Canada. Additionally, fixed assets were stepped-up to approximate
fair market value and are being depreciated in accordance with Company
accounting policies. The preliminary purchase price allocations are subject to
adjustment and may be modified within one year from the acquisition. Subsequent
changes are not expected to have a material effect on the Company's consolidated
financial position.
The pro forma combined financial results have been prepared for comparative
purposes only and include certain adjustments as described above. The pro forma
information does not purport to be indicative of the results of operations that
actually would have resulted had the combination occurred on January 1, 2004, or
of future results of the consolidated entities.
NOTE 4-- STOCK OPTION AND RESTRICTED STOCK AWARD PLANS
The 2004 Stock Plan, which was approved by a vote of the Company's
shareholders at the 2004 Annual Meeting of Shareholders, replaced the 1995 Stock
Plan and the 2002 Non-Employee Director Stock Option Plan.
The 2004 Plan limits the number of shares available for issuance to
2,500,000 (plus any shares covered by options already outstanding under the 1995
Plan and 2002 Plan that expire or are terminated without being exercised and any
shares delivered in connection with the exercise of any outstanding awards under
the 1995 Plan and 2002 Plan) during its ten-year term and limits the number of
shares available for grants of restricted stock to 1,250,000. The plan expires
after ten years and requires that the exercise price of stock options, stock
appreciation rights and other similar instruments awarded under the plan is not
less than the fair market value of RTI stock on the date of the grant award.
During the six months ended June 30, 2005, options to purchase up to 84,500
shares were granted at an exercise price of $21.50 per share. All option
exercise prices were equal to the common stock's fair market value on the date
of the grant. Options are for a term of ten years from the date of the grant,
and vest ratably over the three-year period beginning with the date of the
grant. All 84,500 shares underlying options granted in 2005 were outstanding at
June 30, 2005.
During the six months ended June 30, 2005, 73,812 shares of restricted
stock were granted under the 2004 Stock Plan. Compensation expense equal to the
fair market value on the date of the grant is recognized ratably over the
vesting period of each grant which is typically five years.
As permitted by the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), the Company has elected to measure stock-based
compensation under the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25), and to adopt the
disclosure-only alternative described in SFAS No. 123. For restricted stock
awards, the Company records deferred stock-based compensation based on the fair
market value of common stock on the date of the award. Such deferred stock-based
compensation is amortized over the vesting period of each individual award.
If compensation expense for the Company's stock options granted 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
8
income and earnings per share for the quarter ended and six months ended June
30, 2005 and 2004 would have been as follows (dollars in thousands; except per
share amounts):
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
2005 2004 2005 2004
------- ------ ------- ------
(UNAUDITED) (UNAUDITED)
Net income.............................. $10,580 $ 433 $18,979 $3,208
Add: Stock-based employee compensation
expense included in reported net
(loss) income, net of related tax
effects............................... 187 170 351 290
Deduct: Total stock-based employee
compensation expense determined under
fair value methods for all awards, net
of related tax effects................ (323) (372) (613) (695)
------- ------ ------- ------
Pro forma net income.................... $10,444 $ 231 $18,717 $2,803
======= ====== ======= ======
Net income per share:
As reported -basic.................... $ 0.48 $ 0.02 $ 0.86 $ 0.15
-diluted................. 0.47 0.02 0.84 0.15
Pro forma -basic...................... 0.47 0.01 0.85 0.13
-diluted.................. 0.46 0.01 0.83 0.13
Included in the Company's income for the quarters ended June 30, 2005 and
2004 is stock-based compensation expense relating to restricted stock grants
amounting to $275 and $207, respectively. Net of tax, these amounts were $187
and $170, respectively. For the six months ended June 30, 2005 and 2004, the
expense amounted to $535 and $354, respectively. Net of tax these amounts were
$350 and $267, respectively. (See Note 16 -- new accounting
pronouncements-discussion on FAS 123R)
NOTE 5--INCOME TAXES
Income tax expense for the three months ended June 30, 2005 was $5.0
million, including the beneficial effects of discrete items (discussed below),
compared to a $(0.8) million benefit for the same period in 2004. The annual
effective tax rate applied to ordinary income was 37% compared to a rate of 18%
in the second quarter of 2004. The second quarter 2005 rate exceeded the federal
statutory rate of 35% due to state taxes, which was partially offset by the
utilization of previously impaired foreign net operating losses.
Ohio levies tax on the greater of an income-based or net worth-based
computation. In prior years, operating forecasts suggested that the Company
would pay Ohio tax based on its net worth; accordingly, no Ohio deferred income
taxes were provided. Operating forecasts now suggest that the Company will pay
Ohio income tax; accordingly, the second quarter tax provision reflects a net
benefit of $0.5 million to establish Ohio deferred income taxes.
On June 30, 2005, Ohio enacted substantial revisions to its income and
franchise tax laws, which will phase out the Ohio income-based tax beginning in
2005. The Company has evaluated the impact of this law change on its Ohio
deferred income tax balance and has recorded a net benefit of $0.2 million as a
result of this enacted legislation.
Income tax expense for the six months ending June 30, 2005 was $9.9
million, including the beneficial effects of discrete items (discussed above),
compared to a $0.6 million expense for the same period in 2004. The annual
effective tax rate applied to ordinary income was 37% compared to a rate of 17%
for the six months ending June 30, 2004. The six months ending June 30, 2005
rate exceeded the federal statutory rate of 35% due to state taxes, which was
partially offset by the utilization of previously impaired foreign net operating
losses.
9
On October 22, 2004, the President signed the American Jobs Creation Act of
2004 (the "Act"). The Company has estimated that the deduction attributable to
qualified production activities will decrease its annual effective tax rate by
approximately 1%. Other effects of the Act include the one-time deduction of 85%
of foreign earnings that are repatriated to the United States, as defined by the
Act. Although certain technical matters were clarified during the second
quarter, the Company is continuing to evaluate whether, and to what extent the
Company might repatriate up to $3 million of un-remitted foreign earnings
pursuant to this provision, which could incur a tax liability of up to $1
million. We expect to be in a position to finalize this assessment in the fourth
quarter of 2005.
NOTE 6--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 three and six months ended June 30, 2005 and 2004 are as follows (in
thousands except number of shares and per share amounts):
QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------------- --------------------------------
NET EARNINGS NET EARNINGS
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
------- ---------- --------- ------- ---------- ---------
2005
Basic EPS..................... $10,580 22,233,556 $0.48 $18,979 22,109,449 $0.86
Effect of potential common
stock:
Stock options............... -- 423,902 (0.01) -- 448,737 (0.02)
------- ---------- ----- ------- ---------- -----
Diluted EPS................... $10,580 22,657,458 $0.47 $18,979 22,558,186 $0.84
======= ========== ===== ======= ========== =====
2004
Basic EPS..................... $ 433 21,202,363 $0.02 $ 3,208 21,154,367 $0.15
Effect of potential common
stock:
Stock options............... -- 278,328 -- -- 311,789
------- ---------- ----- ------- ---------- -----
Diluted EPS................... $ 433 21,480,691 $0.02 $ 3,208 21,466,156 $0.15
======= ========== ===== ======= ========== =====
106,203 and 605,541 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 June 30, 2005 and 2004, respectively;
because the exercise price of the options exceeded the weighted average market
price of the Company's common stock during those periods. 107,852 and 606,864
shares of common stock issuable upon exercise of employee stock options have
been excluded from the calculation of diluted earnings per share for the six
months ended June 30, 2005 and 2004 respectively, because the exercise price of
the options exceeded the weighted average market price of the Company's common
stock.
NOTE 7--INVENTORIES
Inventories consisted of (dollars in thousands):
JUNE 30, DECEMBER 31,
2005 2004
-------- ------------
Raw material and supplies................................... $ 66,632 $ 40,459
Work-in-process and finished goods.......................... 145,512 112,010
Adjustment to LIFO values................................... (34,189) (18,957)
-------- --------
Inventories, at LIFO cost................................. $177,955 $133,512
======== ========
10
NOTE 8--GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying amount of goodwill and other intangible assets attributable to
each segment at December 31, 2004 and June 30, 2005 is as follows (in
thousands):
Goodwill
TRANSLATION
DECEMBER 31, 2004 ADJUSTMENTS ADJUSTMENT JUNE 30, 2005
----------------- ----------- ----------- -------------
Titanium Group............................ $ 1,955 $636 $ -- $ 2,591
Fabrication and Distribution Group........ 44,663 -- 325 44,988
------- ---- ---- -------
Total..................................... $46,618 $636 $325 $47,579
======= ==== ==== =======
During the six months ended June 30, 2005, additional goodwill was added to
the Titanium Group through the finalization of the acquisition of the minority
interest in Galt Alloys, Inc.
Intangibles
The components of other intangible assets comprised of customer
relationships and their estimated useful lives is as follows:
ESTIMATED TRANSLATION
USEFUL LIFE DECEMBER 31, 2004 AMORTIZATION ADJUSTMENT JUNE 30, 2005
----------- ----------------- ------------ ----------- -------------
Titanium Group................ $ -- $ -- $ -- $ --
Fabrication and Distribution
Group....................... 20 years 16,040 (402) 488 16,126
------- ----- ---- -------
Total......................... $16,040 $(402) $488 $16,126
======= ===== ==== =======
NOTE 9--BILLINGS IN EXCESS OF COSTS AND ESTIMATED REVENUES
The Company reported a liability for billings in excess of costs and
estimated revenues of $13.2 million as of June 30, 2005 and $4.7 million as of
December 31, 2004. These amounts represent payments, received in advance from
energy market customers, Titanium Group and Fabrication and Distribution Group
customers on long-term orders, which the Company has not recognized as revenues.
NOTE 10--OTHER INCOME
For the three months ended June 30, 2005 and 2004, the components of other
income are as follows (dollars in millions):
QUARTER ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
-------------- --------------
2005 2004 2005 2004
----- ----- ----- -----
Other Income
Gain on receipt of liquidated damages................. $ -- $ -- $ -- $9.1(1)
Foreign exchange gains and other...................... 0.3 0.1 0.5 0.3
---- ---- ---- ----
$0.3 $0.1 $0.5 $9.4
==== ==== ==== ====
---------------
(1) These gains resulted from financial settlements from Boeing Airplane Group
relating to Boeing's failure to meet minimum order requirements under terms
of a long-term agreement between RTI and Boeing. Boeing satisfied the final
claim under this agreement during the first quarter of 2004.
11
NOTE 11--PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company provides defined benefit pension plans for certain of its
salaried and represented workforce. Benefits for its salaried participants are
generally based on participant's years of service and compensation. Benefits for
represented pension participants are generally determined based on an amount for
years of service. Other Company employees participate in 401(k) plans whereby
the Company may provide a match of employee contributions. These plans are
generally not significant to the Company. The policy of the Company with respect
to its defined benefit plans is to contribute at least the minimum amounts
required by applicable laws and regulations.
The cost of the Company's retiree health care plans (Other Postretirement
Benefits) is capped at predetermined out-of-pocket spending limits. Retiree
health care is available to participants in the defined benefit pension plans.
Benefit payments are made from company assets. Other Postretirement Benefits are
not funded.
The 2005 and 2004 amounts shown below reflect the defined benefit pension
and other postretirement benefit expense for the three and six months ended June
30 for each year for those salaried and hourly covered employees (dollars in
thousands):
PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
------------------------------------- ---------------------------------
QUARTER ENDED SIX MONTHS ENDED QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
----------------- ----------------- -------------- ----------------
2005 2004 2005 2004 2005 2004 2005 2004
------- ------- ------- ------- ----- ----- ------ -------
Service cost.................... $ 550 $ 577 $ 1,100 $ 1,154 $ 96 $100 $ 192 $ 200
Interest cost................... 1,592 1,622 3,184 3,244 410 396 820 792
Expected return on plan
assets........................ (1,922) (2,047) (3,844) (4,094) -- -- -- --
Amortization of prior service
cost.......................... 160 144 320 288 44 44 88 88
Amortization of unrealized gains
and losses.................... 510 202 1,020 404 93 25 186 50
------- ------- ------- ------- ---- ---- ------ -------
Net periodic benefit cost..... $ 890 $ 498 $ 1,780 $ 996 $643 $565 $1,286 $ 1,130
======= ======= ======= ======= ==== ==== ====== =======
RTI International Metals also has a supplemental pension Program
("Program") for certain key employees. The Program is unfunded. The second
quarter net periodic benefit cost related to the Program was $93,000 for 2005
and $129,000 for 2004 and for the six months ended June 30, 2005 and 2004 was
$186,000 and $258,000 respectively.
NOTE 12--COMMITMENTS AND CONTINGENCIES
In connection with the 1990 Reorganization, the Company agreed to indemnify
USX and Quantum against liabilities related to their ownership of RMI and its
immediate predecessor, Reactive Metals, Inc., which was formed by USX and
Quantum in 1964.
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. In our opinion,
the ultimate liability, if any, resulting from these matters will have no
significant effect on our consolidated financial statements. 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 $350 million, which
includes grounding liability.
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. During the six months ended June 30, 2005, the
Company spent approximately $0.4 million for environmental remediation,
compliance, and related services. 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 accurately predict the ultimate effect these changing laws and
12
regulations may have on the Company in the future. The Company continues to
evaluate its obligations for environmental related costs on a quarterly basis
and makes adjustments in accordance with provisions of Statement of Position No.
96-1, "Environmental Remediation Liabilities."
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 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.
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 environmental costs in its
financial statements when an obligation becomes probable and a reasonable
estimate of exposure can be determined.
At June 30, 2005 and December 31, 2004, the amount accrued for future
environmental-related costs was $3.7 million and $3.8 million, respectively. Of
the total amount accrued at June 30, 2005, $0.6 million is expected to be paid
out within one year and is included in the other accrued liabilities line of the
balance sheet. The remaining $3.1 million is recorded in other non-current
liabilities.
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 $2.9 to $7.7 million in the aggregate. The Company has
included in its other noncurrent assets $2.1 million as expected contributions
from third parties. This amount represents the contributions from third parties
in conjunction with the Company's most likely estimate of $3.7 million. These
third parties include prior owners of RMI property and prior customers of RMI,
that have agreed to partially reimburse the Company for certain
environmental-related costs. 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.
Former Ashtabula Extrusion Plant
The Company's former extrusion plant in Ashtabula, Ohio was used to extrude
depleted uranium under a contract with the DOE from 1962 through 1990. In
accordance with that agreement, the DOE retained responsibility for the cleanup
of the facility when the facility was no longer needed for processing government
material. Processing ceased in 1990, and in 1993 RMI was chosen as the prime
contractor for the remediation and restoration of the site by the DOE. Since
then, contaminated buildings have been removed and approximately two-thirds of
the site has been free released by the Ohio Department of Health, to RMI, at DOE
expense.
In December, 2003, in accordance with its terms, the Department of Energy
terminated the contract "for convenience." It is not known at this time what
role, if any, RMI will play in the balance of the cleanup although discussions
are ongoing. Remaining soil removal is expected to take approximately 18-24
months. As license holder and owner of the site, RMI is responsible to the state
of Ohio for complying with soil and water regulations. However, remaining
cleanup cost is expected to be borne by the DOE in accordance with their
contractual obligation.
Gain Contingency
As part of Boeing Commercial Airplane Group's long-term supply agreement
with the Company, Boeing was required to order a minimum of 3.25 million pounds
of titanium in each of the five years beginning in 1999. They failed to do so in
all five years of the contract.
13
The Company made a claim against Boeing in accordance with the provisions
of the long-term contract for each of the years in which the minimum was not
achieved. Revenue under the provisions of Statement of Financial Accounting
Standards No. 5 ("SFAS No. 5"), "Accounting for Contingencies" was deemed not
realized until Boeing settled the claims. Accordingly, the claims were treated
as a gain contingency dependent upon realization.
As a result of the application of SFAS No. 5 as to gain contingencies, the
Company recorded other income of approximately $6 million in 2000 and 2001, and
approximately $7 million in 2002, $8 million in 2003 and $9.1 million in 2004.
In all years, revenue recognized from these cash receipts was presented as other
income in the financial statements. The agreement with Boeing has since expired
as the final payment was received in 2004.
Purchase Commitments
The Company has purchase commitments for materials, supplies, and machinery
and equipments as part of the ordinary course of business. A few of these
commitments extend beyond one year. The Company believes these commitments are
not at prices in excess of current market.
Other
The Company is currently investigating the impact of improper testing on a
limited number of titanium plates. The improper testing was discovered during an
internal quality review in the second quarter of 2005. The Company has no reason
to believe that any of the material is defective, and is working with all
affected customers to determine whether additional inspection may be necessary.
The Company is also the subject of, or a party to, a number of 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 13--TRANSACTIONS WITH RELATED PARTIES
In accordance with a stock purchase agreement dated October 1, 2004 the
Company purchased all of the shares of Claro Precision Inc., from Mr. Jean-Louis
Mourain and Mr. Daniel Molina. The purchase agreement provided for a lease
agreement whereby the Company would lease space in two buildings, owned
indirectly by Mr. Mourain and Mr. Molina, for three years from October 1, 2004
with an option to extend for an additional three years. The annual rental is
approximately $160,000 at current exchange rates. Rental expense of
approximately $40,000 was incurred in the quarter ended June 30, 2005 and
approximately $80,000 for the six months ended June 30, 2005. Mr. Mourain was
engaged by the Company as a consultant and Mr. Molina was made President of
Claro Precision Inc. The Company believes that the rental cost is representative
of market conditions around the Montreal area.
The Company acquired Reamet S.A., located in Villette, France, in December
2000. In accordance with the purchase agreement, the Company was obligated to
acquire a residence located on the previously acquired land. The owner of the
residence and his immediate family have been involved in the management of the
business before and since the acquisition. The residence was acquired for
$581,000 (the fair value as appraised) including closing costs in February 2004.
NOTE 14--SEGMENT REPORTING
The Company's reportable operating segments are the Titanium Group and the
Fabrication and Distribution Group.
14
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 and sheet. 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 Titanium Group included the
activities related to the clean up and remediation of a former titanium
extrusion facility operated by the Company under a contract from the U.S.
Department of Energy.
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; cut, forged, extruded and
rolled shapes; and commercially pure titanium strip and welded tube 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.
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.
Segment information for the quarters ended June 30, 2005 and 2004 and for
the six months ended June 30, 2005 and 2004 is as follows (dollars in
thousands):
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -------------------
2005 2004 2005 2004
------- ------- -------- --------
TOTAL SALES
Titanium Group................................ $88,084 $35,023 $154,460 $ 72,741
Fabrication and Distribution Group............ 69,613 47,906 129,913 89,434
------- ------- -------- --------
Total...................................... 157,697 82,929 284,373 162,175
INTER- AND INTRA-SEGMENT SALES
Titanium Group................................ 48,441 22,072 89,842 46,690
Fabrication and Distribution Group............ 14,216 9,048 26,004 13,146
------- ------- -------- --------
Total...................................... 62,657 31,120 115,846 59,836
TOTAL SALES TO EXTERNAL CUSTOMERS
Titanium Group................................ 39,643 12,951 64,618 26,051
Fabrication and Distribution Group............ 55,397 38,858 103,909 76,288
------- ------- -------- --------
Total...................................... $95,040 $51,809 $168,527 $102,339
======= ======= ======== ========
15
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------- -------------------
2005 2004 2005 2004
------- ------- -------- --------
OPERATING INCOME (LOSS)
Allocated corporate items included in segment
income before income taxes below:
Titanium Group................................ $ 1,322 $ 970 $ 2,781 $ 1,861
Fabrication and Distribution Group............ 2,931 2,068 6,130 3,961
------- ------- -------- --------
Total...................................... $ 4,253 $ 3,038 $ 8,911 $ 5,822
======= ======= ======== ========
Titanium Group................................ $ 9,264 $(2,105) $ 18,812 $ (6,250)
Fabrication and Distribution Group............ 5,776 1,574 9,236 438
------- ------- -------- --------
Total...................................... $15,040 $ (531) $ 28,048 $ (5,812)
======= ======= ======== ========
INCOME (LOSS) BEFORE INCOME TAXES
Allocated corporate items included in segment
income before income taxes below:
Titanium Group................................ $ 1,151 $ 877 $ 2,446 $ 7,454
Fabrication and Distribution Group............ 2,758 1,974 5,795 (3,785)
------- ------- -------- --------
Total...................................... $ 3,909 $ 2,851 $ 8,241 $ 3,669
======= ======= ======== ========
Titanium Group................................ $ 9,522 $(2,009) $ 19,296 $ 3,143
Fabrication and Distribution Group............ 6,071 1,559 9,601 443
------- ------- -------- --------
Total...................................... $15,593 $ (450) $ 28,897 $ 3,586
======= ======= ======== ========
NOTE 15--DISCONTINUED OPERATIONS
In December of 2004, the Company terminated operations at the Company's
Tube Mill operations as it had determined that its raw material source was
inadequate to maintain commercially viable operations. The operating results of
Tube Mill for the quarter ended and six months ended June 30, 2004, as
summarized below, have been reclassified and are presented as discontinued
operations.
SIX MONTHS
QUARTER ENDED ENDED
(IN THOUSANDS) JUNE 30, 2004 JUNE 30, 2004
-------------- ------------- -------------
Net sales.................................................. $3,765 $7,347
====== ======
Income before income taxes................................. 153 340
Provision for income taxes................................. 46 102
------ ------
Net income from discontinued operations.................... $ 107 $ 238
====== ======
NOTE 16--NEW ACCOUNTING PRONOUNCEMENTS
In December 2004 the Financial Accounting Standards Board (FASB) issued
SFAS No. 151, Inventory Costs (SFAS 151). The Company is required to adopt SFAS
151 on a prospective basis as of January 1, 2006. SFAS 151 clarifies the
accounting for abnormal amounts of idle facility expense, freight, handling
cost, and wasted material. SFAS 151 requires that those items--if abnormal--be
recognized as expenses in the period incurred. SFAS 151 requires the allocation
of fixed production overheads to the cost of conversion based upon the normal
capacity of the production facilities. The Company has not yet determined what
effect SFAS 151 will have on its financial statements.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004,"
16
which states that the FASB staff believes that the lack of clarification of
certain provisions within the Act and the timing of the enactment necessitate a
practical exemption to the FAS 109 requirement to reflect in the period of
enactment the effect of a new tax law. Accordingly, an enterprise is allowed
time beyond the financial reporting period of enactment to evaluate the effect
of the Act on its plan for reinvestment or repatriation of foreign earnings for
purposes of applying FAS 109. The Company is evaluating the impact of earnings
repatriation and once concluded will apply its action in accordance with FAS
109.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004) (SFAS 123R), Share-Based Payment. In March
2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the
SEC Staff's interpretation of SFAS 123R and provides the Staff's views regarding
interactions between SFAS 123R and certain SEC rules and regulations and
provides interpretations of the valuation of share-based payments for public
companies. SFAS 123R requires the mandatory expensing of share-based payments,
including employee stock options, based on their fair value. In April 2005, the
SEC approved the delay for implementation of FAS 123R. The delay will affect all
awards granted subsequent to January 1, 2006. As a result the standard will be
adopted for the Company's 2006 fiscal year. SFAS 123R provides alternative
methods of adoption including prospective and modified retroactive applications.
The Company is currently evaluating the financial impact, including the
available alternatives under SFAS 123R and SAB 107.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduced a
prescription drug benefit under Medicare (Medicare Part D), as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. On May 19, 2004,
FASB issued Staff Position FSP FAS 106-2 (FSP 106-2), which supercedes FSP 106-1
and provides guidance on accounting for the effects of the new Medicare
prescription drug legislation for employers whose prescription drug benefits are
actuarially equivalent to the drug benefit under Medicare Part D. The effect of
the Act did not have a material impact on the Company.
In May 2005, the FASB issued FAS No. 154, "Accounting Changes and Error
Corrections" (FAS 154), which changes the requirements for the accounting and
reporting of a change in accounting principle. FAS 154 applies to all voluntary
changes in accounting principle as well as to changes required by an accounting
pronouncement that does not include specific transition provisions. FAS 154
eliminates the requirement to include the cumulative effect of changes in
accounting principle in the income statement and instead requires that changes
in accounting principle be retroactively applied. A change in accounting
estimate continues to be accounted for in the period of change and future
periods if necessary. A correction of an error continues to be reported by
restating prior period financial statements. FAS 154 is effective for accounting
changes and correction of errors made on or after January 1, 2006.
NOTE 17--RESTATEMENT OF STATEMENT OF CASH FLOWS FOR THE TAX EFFECTS OF STOCK
OPTIONS EXERCISED
A restatement of the Company's Consolidated Statement of Cash Flows arose
as a result of management's determination that the tax effect of employee stock
options exercised were incorrectly reported as "cash flows from financing
activities." These should have been reported as "cash flows from operating
activities" as prescribed by Emerging Issues Task Force ("EITF") 00-15,
"Classification in the Statement of Cash Flows of the Income Tax Benefit
Received by a Company upon Exercise of Nonqualified Employee Stock Options." The
Consolidated Statements of Cash Flows for 2005 and 2004 have been restated.
The restatement does not affect the net change in cash and cash equivalents
for any of the periods presented and has no effect on the Company's consolidated
balance sheet, the consolidated statement of operations and any related earnings
per share amounts for any of the periods presented.
17
The effect of the above restatement for each period is shown below:
AS PREVIOUSLY
REPORTED FOR AS RESTATED
SIX MONTHS FOR SIX MONTHS
ENDED ENDED
JUNE 30, EFFECT OF JUNE 30,
2004 RESTATEMENT 2004
--------------- ----------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Tax benefits from exercise of stock
options.................................. $ 0 $ 650 $ 650
Cash provided by continuing operating
activities............................... $9,524 $ 650 $10,174
Cash provided by operating activities....... $9,697 $ 650 $10,347
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee stock
options.................................. $2,607 $(650) $ 1,957
Cash provided by financing activities....... $2,034 $(650) $ 1,384
AS PREVIOUSLY
REPORTED FOR AS RESTATED
SIX MONTHS FOR SIX
ENDED MONTHS ENDED
JUNE 30, EFFECT OF JUNE 30,
2005 RESTATEMENT 2005
--------------- ----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Tax benefits from exercise of stock
options.................................. $ 0 $ 2,367 $2,367
Cash provided by continuing operating
activities............................... $ 2,429 $ 2,367 $4,796
Cash provided by operating activities....... $ 2,429 $ 2,367 $4,796
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee stock
options.................................. $11,175 $(2,367) $8,808
Cash provided by financing activities....... $10,692 $(2,367) $8,325
NOTE 18--SUBSEQUENT EVENT
On July 29, 2005, a fire occurred at an outside storage location in
Wichita, Kansas destroying approximately $1.2 million of turnings scrap
inventory destined for the Company's melting location in Canton, Ohio. The
Company has notified its insurance carriers of the fire. The Company believes
that the loss value will be substantially covered under the conditions of its
insurance indemnifications.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in connection with the information
contained in the Consolidated Financial Statements and 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 may be identified by their use of words like
"expects," "anticipates," "intends," "projects," or other words of similar
meaning. Forward-looking statements are based on expectations and assumptions
regarding future events. In addition to factors discussed throughout this
report, the following factors and risks should also be considered, including,
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,
increased defense spending, the success of new market development, long-term
supply agreements, the outcome of trade negotiations, global economic
conditions, the Company's order backlog and the conversion of that backlog into
revenue, the long-term impact of the events of September 11, and the continuing
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.
RTI International Metals, Inc. (the "Company" or "RTI") is a leading U.S.
producer of titanium mill products and fabricated metal parts for the global
market. The Company conducts business in two segments: the Titanium Group and
the Fabrication and Distribution Group ("F&D"). The Titanium Group melts and
produces a complete range of titanium mill products, which are further processed
by its customers for use in a variety of aerospace and industrial applications.
The Fabrication and Distribution Group is comprised of companies that fabricate,
machine, assemble and distribute titanium and other specialty metal parts and
components. Its products, many of which are engineered parts and assemblies,
serve aerospace, oil and gas, power generation, and chemical process industries,
as well as a number of other industrial and consumer markets.
A restatement of the Company's Consolidated Statement of Cash Flows arose
as a result of management's determination that the tax effect of employee stock
options exercised were incorrectly reported as "cash flows from financing
activities." These should have been reported as "cash flows from operating
activities" as prescribed by Emerging Issues Task Force ("EITF") 00-15,
"Classification in the Statement of Cash Flows of the Income Tax Benefit
Received by a Company upon Exercise of Nonqualified Employee Stock Options." The
Consolidated Statements of Cash Flows for 2005 and 2004 have been restated. The
restatement does not affect the net change in cash and cash equivalents for any
of the periods presented and has no effect on the Company's consolidated balance
sheet, the consolidated statement of operations and any related earnings per
share amounts for any of the periods presented.
DISCONTINUED OPERATIONS
The Company disclosed in a news release dated September 30, 2004 that its
Tube Mill operations had stopped soliciting new orders because of a shortage of
skelp from its supplier, which is the key raw material in manufacturing titanium
strip.
The decision to halt the solicitation of new orders was to continue until a
search for other sources of skelp was concluded. In December 2004 the Company
terminated its search for other skelp sources and as a result terminated
production activity and discontinued the titanium strip product line and
utilized the facility for other purposes unrelated to the manufacture of welded
tubing. Tube Mill operations had been reported within the F&D segment.
Discontinued operations, which represent operating results of the Tube Mill
operations for which further information was included in Note 15 to the
Consolidated Financial Statements, reported trade sales of
19
$14.4 million, $10.5 million and $12.9 million for the years ended December 31,
2004, 2003, and 2002, respectively.
RESULTS OF OPERATIONS
(Dollars in millions)
NET SALES
QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------- -----------------
2005 2004 2005 2004
----- ----- ------- -------
Titanium Group............................... $39.6 $13.0 $ 64.6 $ 26.0
Fabrication and Distribution Group........... 55.4 38.8 103.9 76.3
----- ----- ------ ------
Total...................................... $95.0 $51.8 $168.5 $102.3
===== ===== ====== ======
Titanium Group
Of the $26.6 million increase in trade sales, $23.3 was a result of an
increase in trade shipments of 1 million pounds and $3 million was due to
increased shipments and prices of ferro titanium. The increase in titanium trade
sales was a result of continued strong demand for titanium from aerospace
markets as build rates and higher titanium usage per aircraft created increased
demand for the product. Mill product shipments including those to the Company's
Fabrication and Distribution Group, totaled 2.7 million pounds for the quarter
compared to 1.2 million pounds in the prior year period.
In the six months ended June 30, 2005 sales for the Titanium Group amounted
to $64.6 compared to $26.0 million same period of 2004. Of the $38.6 million
increase, approximately $20 million was due to increased shipments of 1.5
million pounds to trade customers. The increase in titanium trade sales was a
result of continued strong demand for titanium in aerospace markets as build
rates and higher titanium usage per aircraft created increased demand for the
product. Sales of ferro titanium increased by approximately $18 million as
prices and shipments were higher in the current six months than the year ago
period.
In the first half of 2005, mill product shipments to trade customers as
well as to the Company's Fabrication and Distribution Group equaled 5 million
pounds compared to 2.3 million pounds in the first half of 2004 or a change of
over 100%.
Fabrication and Distribution Group
Sales for F&D amounted to $55.4 million in the quarter ended June 30, 2005,
compared to $38.8 million in the same period of 2004. The increase of $16.6
million occurred primarily in the Group's distribution markets, both domestic
and foreign. Revenue increased approximately $8 million on increased demand and
higher prices for Titanium products. The addition of Claro Precision Inc.
("Claro") in the fourth quarter of 2004 and higher revenues on the Group's
fabrication activities resulted in additional revenue of approximately $8
million.
In the six months ended June 30, 2005 sales for F&D amounted to $103.9
million compared to $76.3 million in the same period of 2004. The increase of
$27.6 million continued similarly to the second quarter comparison as the
group's distribution markets both domestic and foreign as revenue increased
approximately $9 million on increased demand and higher prices for Titanium
products. The addition of Claro in the fourth quarter of 2004 and higher
revenues on the Group's fabrication activities resulted in additional revenue of
approximately $18 million less the effects of a decline in the energy markets.
20
GROSS PROFIT (LOSS)
QUARTER ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
------------- --------------
2005 2004 2005 2004
----- ---- ----- -----
Titanium Group.............................. $12.2 $0.1 $24.8 $(1.4)
Fabrication and Distribution Group.......... 13.8 7.6 25.7 12.5
----- ---- ----- -----
Total....................................... $26.0 $7.7 $50.5 $11.1
===== ==== ===== =====
Titanium Group
Gross profit increased to $12.2 million for the quarter ended June 30, 2005
from a gross profit of $0.1 million for the same period of 2004 or a favorable
change of $12.1 million. The favorable change was a result of the incremental
margin impact of an increase in titanium shipments of 1.5 million pounds or
approximately $8 million and an approximately $9 million (125%) increase in
melting and production activity in Titanium producing and finishing facilities.
Partially offsetting the shipment and melting and production activity was
increased material costs for sponge and scrap of approximately $5 million.
For the six months ending June 30, 2005 period gross profit increased for
the Titanium Group versus the period ending June 30, 2004 by $26.2 million
primarily as a result of volume related effects. Titanium shipments increased
over the prior period by 2.7 million pounds resulting in an approximate margin
effect of $10 million. Correspondingly, the impact of two fold melting and
finishing activities resulted in approximately $20 million in improved
throughput and absorption of fixed costs. Increased costs for sponge and scrap
reduced the margin increase by approximately $5 million. Improved pricing on
ferro titanium sales resulted in a $2 million increase in margins.
Fabrication and Distribution Group
Gross profit increased to $13.8 million for the quarter ended June 30, 2005
from a gross profit of $7.6 million for the same period of 2004, or a favorable
change of $6.2 million. Increased revenues from domestic and international
distribution markets as a result of both demand and increased prices contributed
approximately $5 million to the change in gross profits. Demand for titanium
products was generally stronger than the year ago period in all geographic
markets. Sales into international markets including Europe and Canada
contributed an additional increase of $1.2 million partially offset by reduced
sales and margin to the energy markets.
Gross Profit increased for the Fabrication and Distribution Group for six
months ended June 30, 2005 versus June 30, 2004 by $13.2 million as revenues
from domestic and international distribution markets increased as a result of
both demand and increased prices. The impact of the increased prices and demand
in distribution increased margins over the prior period by approximately $9
million. Increased revenue from the group's fabrication and extrusion sales
resulted in additional gross profit of $3 million. Included in the fabrication
revenues was the impact of the Claro acquisition in the fourth quarter of 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
QUARTER ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
------------- --------------
2005 2004 2005 2004
----- ---- ----- -----
Titanium Group.............................. $ 2.5 $2.0 $ 5.2 $ 4.3
Fabrication and Distribution Group.......... 8.0 6.0 16.5 12.0
----- ---- ----- -----
Total....................................... $10.5 $8.0 $21.7 $16.3
===== ==== ===== =====
21
Titanium Group
Selling, general and administrative (SG&A) expenses for outside services
related to accounting, consulting and auditing expenses in the second quarter of
2005 increased by approximately $0.5 compared to the same period in 2004.
SG&A expenses as a result of outside services for compliance with increased
control efforts and auditing costs resulted in increased administrative costs of
approximately $0.8 million and compensation expenses increased $0.2 million in
the first half of 2005 compared to the same period in 2004.
Fabrication and Distribution Group
SG&A expenses increased $2.0 million from the second quarter of 2004.
Approximately $1.0 million of the increase was a result of accounting,
consulting and auditing costs related to increased control improvements. The
acquisition of Claro resulted in an additional $1.0 million of expenses in SG&A.
For the six months ending June 30, 2005 administrative and selling expenses
increased $4.5 million from the first half of 2004. Approximately $2.0 million
of the increase was a result of accounting, consulting and auditing costs
related to increased control improvements. The acquisition of Claro, resulted in
an additional $2.0 million of expenses in SG&A for the period and compensation
expenses for the group increased $0.5 million.
RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT EXPENSES
QUARTER ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
-------------- --------------
2005 2004 2005 2004
----- ----- ----- -----
Titanium Group................................. $0.4 $0.3 $0.8 $0.6
Fabrication and Distribution Group............. -- -- -- --
---- ---- ---- ----
Total.......................................... $0.4 $0.3 $0.8 $0.6
==== ==== ==== ====
Titanium Group
Research and development costs increased $0.1 million for the quarter ended
June 30, 2005 compared to the same period in 2004 as a result of additional
employee expenses in the 2005 period.
Research and development costs increased $0.2 million for the six months
ended June 30, 2005 compared to the same period in 2004 as a result of
additional employee expenses in the 2005 period.
Fabrication and Distribution Group
There were no R & D expenses for the group in 2005 and 2004.
OPERATING INCOME (LOSS)
QUARTER ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
-------------- --------------
2005 2004 2005 2004
----- ----- ----- -----
Titanium Group............................. $ 9.2 $(2.1) $18.8 $(6.2)
Fabrication and Distribution Group......... 5.8 1.6 9.2 0.4
----- ----- ----- -----
Total...................................... $15.0 $(0.5) $28.0 $(5.8)
===== ===== ===== =====
22
Titanium Group
Operating income for the quarter ended June 30, 2005 increased to $9.2
million compared to a loss of $(2.1) million for the same period in 2004. The
increase of $11.3 million resulted from improved gross profit of $12.1 million
due to an increase in shipments of 1.5 million pounds. As a result of increased
shipment activity, increased production loads and efficient throughput at
producing facilities resulted in reduced production costs per pound. Partially
offsetting improved margins as a result of shipment and production volume was
escalating raw material costs primarily for sponge and scrap. Period costs were
increased over the 2004 period as a result of additional costs for outside
services for accounting, consulting and auditing and reduced gross profits by
$0.5 million. R&D expenses were $0.1 million higher in the current quarter.
Operating income for the six months ended June 30, 2005 increased to $18.8
million compared to a loss of $(6.2) million for the same period in 2004. The
increase of $25.0 million resulted from improved gross profits of $26.2 million
due to an increase in shipment volume of 2.7 million pounds. Additionally,
melting and production activity exceeded more than a 100% volume change
resulting in improved throughput and absorption of fixed costs. Increased
margins on ferro titanium, primarily as a result of escalating selling prices,
contributed to the increase in gross margins. Partially offsetting the effects
of volume and ferro titanium was increased material costs and increased
administrative costs as a result of outside services and compensation.
Fabrication and Distribution Group
Operating income for the quarter ended June 30, 2005 increased to $5.8
million compared to income of $1.6 million for the same period in 2004. The
increase of $4.2 million was primarily due to increased gross profits of $6.2
million partially offset by increased SG&A spending of $2.0 million. The
increase in gross profit occurred in the group's distribution markets as
increased revenues and margins contributed to a favorable change of
approximately $5.0 million. SG&A increased as a result of the acquisition or
$0.9 million and as a result of additional auditing, consulting and accounting
costs approximating $1.0 million.
Operating income for the six months ended June 30, 2005 increased to $9.2
million compared to income of $0.4 million for the same period in 2004. The
increase of $8.8 million was primarily due to increased gross profits of $13.2
million partially offset by increased SG&A spending of $4.5 million. The
increase in gross profit occurred as a result of increased revenues from
domestic and international distribution markets and increased revenue from
fabrication and extrusion sales. Partially offsetting the increase in gross
margin was increased spending in SG&A for accounting, consulting and auditing
services. The Claro acquisition increased total SG&A expenses by $2.0 million
and compensation expenses increased $0.8 million.
OTHER INCOME
QUARTER ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
-------------- --------------
2005 2004 2005 2004
----- ----- ----- -----
Other Income................................... $0.3 $0.1 $0.5 $9.4
Other income increased by $0.2 million in the three months ending June 30,
2005 from the three months ended June 30, 2004. The increase was a result of
foreign exchange gains from French and Canadian operations.
Other income decreased by $8.9 million in the six months ended June 30,
2005 from the six months ended June 30, 2004. The decrease occurred as a result
of the receipt of a payment in 2004 from Boeing under a long-term contract for
Boeing's failure to take minimum shipments of titanium. Receipt of the sum in
2004 was the final payment under the contract.
23
INTEREST INCOME, NET
QUARTER ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
------------- ---------------
2005 2004 2005 2004
---- ----- ----- ------
Interest Income, net........................... $0.2 $ -- $0.4 $ --
Interest income increased by $0.2 million in the three months ending June
30, 2005 from the three months ended June 30, 2004. The increase was a result of
increased income on invested cash reserves and higher average interest rates.
Interest income increased by $0.4 million in the six months ending June 30,
2005 from the six months ended June 30, 2004. The increase was a result of
increased income on invested cash reserves and higher average interest rates.
INCOME TAX EXPENSE
QUARTER ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
------------- --------------
2005 2004 2005 2004
---- ----- ----- -----
Income Tax Expense............................ $5.0 $(0.8) $9.9 $0.6
Income tax expense for the three months ended June 30, 2005 was $5.0
million, including the beneficial effects of discrete items (discussed below),
compared to a $(0.8) million benefit for the same period in 2004. The annual
effective tax rate applied to ordinary income was 37% compared to a rate of 18%
in the second quarter of 2004. The second quarter 2005 rate exceeded the federal
statutory rate of 35% due to state taxes, which was partially offset by the
utilization of previously impaired foreign net operating losses.
Ohio levies tax on the greater of an income-based or net worth-based
computation. In prior years, operating forecasts suggested that the Company
would pay Ohio tax based on its net worth; accordingly, no Ohio deferred income
taxes were provided. Operating forecasts now suggest that the Company will pay
Ohio income tax; accordingly, the second quarter tax provision reflects a net
benefit of $0.5 million to establish Ohio deferred income taxes.
On June 30, 2005, Ohio enacted substantial revisions to its income and
franchise tax laws, which will phase out the Ohio income-based tax beginning in
2005. The Company has evaluated the impact of this law change on its Ohio
deferred income tax balance and has recorded a net benefit of $0.2 million as a
result of this enacted legislation.
Income tax expense for the six months ending June 30, 2005 was $9.9
million, including the beneficial effects of discrete items (discussed above),
compared to a $0.6 million expense for the same period in 2004. The annual
effective tax rate applied to ordinary income was 37% compared to a rate of 17%
for the six months ending June 30, 2004. The six months ending June 30, 2005
rate exceeded the federal statutory rate of 35% due to state taxes, which was
partially offset by the utilization of previously impaired foreign net operating
losses.
On October 22, 2004, the President signed the American Jobs Creation Act of
2004 (the "Act"). The Company has estimated that the deduction attributable to
qualified production activities will decrease its annual effective tax rate by
approximately 1%. Other effects of the Act include the one-time deduction of 85%
of foreign earnings that are repatriated to the United States, as defined by the
Act. Although certain technical matters were clarified during the second
quarter, the Company is continuing to evaluate whether, and to what extent the
Company might repatriate up to $3 million of un-remitted foreign earnings
pursuant to this provision, which could incur a tax liability of up to $1
million. We expect to be in a position to finalize this assessment in the fourth
quarter of 2005.
24
INCOME FROM DISCONTINUED OPERATIONS
QUARTER ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
------------- ---------------
2005 2004 2005 2004
----- ---- ------ -----
Discontinued operations........................ $ -- $0.1 $ -- $0.2
The operations of the Company's welded tubing operations were deemed a
discontinued operation in the fourth quarter of 2004 as the operation was unable
to source input material to satisfy its customers.
NET INCOME
QUARTER ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
------------- ---------------
2005 2004 2005 2004
----- ---- ------ -----
Net income................................... $10.6 $0.4 $19.0 $3.2
Net income improved by $10.2 million in the quarter ended June 30, 2005
compared to the same period in 2004. Net income represented 11% of sales in the
current period compared to less than 1% in 2004.
For the six-month period ending June 30, 2005 net income improved by $15.8
million in the period ended June 30, 2005 compared to the same period in 2004.
Net income represented 11.2% of sales in the current period compared to 3.1% in
2004.
OUTLOOK
Overview
Aerospace applications comprise approximately 50% of worldwide consumption
and over 65% of U.S. consumption of titanium products.
Beginning in 2001, a confluence of events including weak U.S. and global
economies, combined with the terrorist attacks of September 11, 2001, followed
by the ongoing conflicts in the Middle East, had significant adverse effects on
the overall titanium industry through 2003. Beginning in 2004 however, the world
economies began to improve, air traffic demand rose significantly in the
commercial aircraft segment, and defense spending continued to grow, leading to
a strong rebound in the demand for titanium and specialty metal products.
According to the U.S. Geological Survey (USGS), U.S. shipments of titanium
mill products in 2004 increased to 42 million pounds from 34 million pounds in
2003. Aircraft manufacturers, as well as aerospace forecasters, have predicted
increased build rates for large, commercial aircraft production over the next
several years. This is expected to increase the demand and shipments for
titanium and specialty metals in the same period. Accordingly, the USGS reported
U.S. shipments of titanium mill products in the first quarter 2005 rose to 14
million pounds or an annual rate of 56 million pounds.
The following is a discussion of what is occurring within each of the three
major markets in which RTI participates.
Commercial Aerospace Markets
The Company's sales to this market represented approximately 35% of total
sales in 2004, up from 27% in 2003.
Boeing and Airbus reduced their build rates for aircraft to 586 planes in
2003, a 13.5% reduction from prior year. However, a turnaround began in 2004,
with the two major producers delivering 605 new aircraft. According to The
Airline Monitor, the combined production of large commercial aircraft by Boeing
and Airbus is forecast to reach 680 aircraft in 2005, 785 aircraft in 2006, 825
aircraft in 2007, and 880 aircraft in 2008.
25
Airbus is producing the largest commercial aircraft in production, the
A380, and Boeing has launched a totally new aircraft, the 787. Airbus is
expected to produce another new aircraft, the A350, to compete with Boeing's 787
model. All three of these new aircraft will use substantially more titanium per
aircraft than the preceding models. As a result, when production of these new
aircraft increases, the demand for titanium is expected to increase
significantly above previous peak markets for commercial aerospace applications.
Long term, the commercial aerospace sector is expected to continue to be a very
large consumer of titanium products over the next 20 years due to the forecast
growth of worldwide traffic and the need to repair and replace aging commercial
fleets.
RMI entered into a long-term mill product agreement with Boeing on January
28, 1998. Under this agreement, Boeing agreed to purchase a minimum of 3.25
million pounds annually. The agreement, which began in 1999, had an initial term
of five years and concluded at the end of 2003. If volumes fell short of the
minimum commitment, the contract contained provisions for financial
compensation. Boeing failed to make minimum purchases in each of the five years,
making its final compensation payment in the first quarter of 2004. Beginning in
January of 2004, business between the companies, which is not covered by other
contracts within RTI, is being conducted on a non-committed basis, that is, no
volume commitment by Boeing and no commitment of capacity or price by RMI.
RTI acquired Claro Precision, Inc., in October of 2004. Claro supplies
precision machining and complex sub-assemblies to the aerospace industry,
primarily Bombardier. The acquisition provides RTI with additional manufacturing
capabilities as well as access to the regional and business jet markets.
RTI, through its RTI Europe subsidiary, entered into an agreement with the
European Aeronautic Defense and Space Company ("EADS") in January 2005 to supply
value-added titanium products and parts to the EADS group of companies,
including Airbus. The contract is in place through 2008, subject to extension.
The new Airbus A380 is expected to utilize more titanium per aircraft than any
commercial plane yet produced. In 2003, Airbus became the world's largest
producer of commercial aircraft and this continued in 2004.
Defense Markets
Shipments to military markets represented approximately 30% of the
Company's 2004 revenues and are expected to remain significant as U.S. and other
countries' defense budgets remain strong. In fact, the latest U.S. Department of
Defense budget figures for Research, Development Testing and Evaluation (RDT&E)
and Procurement reflect an increase of 21% from 2005 through 2009.
RTI believes it is well positioned to supply mill products and fabrications
required for projected demand from this market. RTI currently supplies titanium
and other materials to most military aerospace programs, including the F/A-22,
C-17, F/A-18, F-15, F-16, Joint Strike Fighter ("JSF") (F-35) and in Europe, the
Mirage, Rafale and Eurofighter-Typhoon.
The Company was chosen by BAE Systems RO Defence UK to supply the titanium
components for the new XM-777 lightweight 155 mm Howitzer. Delivery began late
in 2003 and will continue through 2010. Production approval for 495 units was
awarded to BAE in March 2005. Initial deliveries 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 1,000 guns may be produced. Sales under this
contract could potentially exceed $70 million.
The Company entered into a new agreement with BAE Systems in January 2005
to provide value added titanium flat rolled products for the Eurofighter
Aircraft through 2009.
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 JSF
program. The aircraft, which will be used by all branches of the military, is
expected to consume 30,000 to 40,000 pounds of titanium per airplane depending
on the model specified. 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
26
Company has entered into agreements with Lockheed and its teaming partner, BAE
Systems, to be the supplier of titanium sheet and plate for the design and
development phase of the program.
Industrial and Consumer Markets
35% of RTI's 2004 revenues were generated in various industrial and
consumer markets where increased demand is expected over the next twelve months.
Revenues from oil and gas markets are expected to increase in 2005 and
beyond due to continued activity in deep water projects. In January 2005, RTI
Energy Systems was selected by BP to provide titanium stress joints for its Shah
Deniz project located in the Caspian Sea, Azerbaijan. Titanium was chosen
because both strength and flexibility will be needed to deal with the strong
currents in the development area. Fabrication will begin in 2005 and shipments
will be made over the next 9-12 months.
RTI serves a number of other industrial and consumer markets through its
distribution businesses. The products sold and applications served are numerous
and varied. The resulting diversity tends to provide sales stability through
varying market conditions. The Company believes demand from these markets will
continue to improve in 2005.
The Company operates a facility that produces ferro-titanium, an additive
to certain grades of steel. The recent world wide demand for steel has
significantly increased demand for ferro-titanium. Sales of ferro-titanium
constituted over 10% of total sales in 2004 and strong demand continued for this
product in the first half of 2005, but is expected to lessen somewhat the
balance of the year due to a softer market forecast in steel.
Backlog
The Company's order backlog for all markets increased to approximately
$352.5 million as of June 30, 2005, up from $237.9 million at December 31, 2004,
principally due to increased demand from the commercial aerospace industry. Of
the backlog at June 30, 2005, approximately $171 million will be realized in
2005.
LIQUIDITY AND CAPITAL RESOURCES
(Dollars in millions)
The Company believes it will generate sufficient cash flow from operations
to fund operations and capital expenditures in 2005. In addition, RTI has cash
reserves and available borrowing capacity to maintain adequate liquidity. RTI
currently has no debt, and based on the expected strength of 2005 cash flows,
the Company does not believe there are any material near-term risks related to
fluctuations in interest rates.
Cash provided by operating activities
SIX MONTHS ENDED JUNE 30, 2005 2004
------------------------- ---- -----
Cash provided by operating activities....................... $4.8 $10.3
The decrease in net cash flows from operating activities for the six months
ended June 30, 2005 compared to the six months ended June 30, 2004 primarily
reflects an increase in working capital items, primarily receivables and
inventory, due to the improved demand in all market segments as mentioned in the
"Outlook" section of this Management's Discussion and Analysis. The overall
decrease in cash flows from operating activities was a result of inventory
increases as demand for titanium products continued to increase in the first
half of 2005. Partially offsetting the increase in inventories was an increase
in net income on higher sales levels and increases in accounts payable and
billings in excess of costs. In addition, the overall decrease in cash flows
from operating activities was partially offset by an increase in tax benefits
from stock options of $1.7 million.
The increase in accounts payable is attributable to purchases on increased
quantities of scrap and higher prices for both scrap and sponge. Billings in
excess of costs increased primarily on two contracts for which cash
27
had been collected but revenue was not recognized in accordance with the
Company's revenue recognition criteria.
The Company's working capital ratio was 5.1 and 8.2 to 1 at June 30, 2005
and December 31, 2004, respectively.
Cash used in investing activities
SIX MONTHS ENDED JUNE 30, 2005 2004
------------------------- ---- ----
Cash used in investing activities........................... $4.8 $2.2
Gross capital expenditures for the six months ended June 30, 2005 amounted
to $4.5 million compared to $2.3 million in 2004.
During the six months ended June 30, 2005 and 2004, the Company's cash flow
requirements for capital expenditures were funded with cash provided by
operations. The Company anticipates that its capital expenditures for 2005 will
total approximately $13 million and will be funded with cash generated by
operations.
At June 30, 2005 and December 31, 2004, the Company had a borrowing
capacity equal to $89.0 and $33.8 million, respectively.
Cash provided by financing activities
SIX MONTHS ENDED JUNE 30, 2005 2004
------------------------- ---- ----
Cash provided by financing activities....................... $8.3 $1.4
The favorable change in cash flows from financing activities for the six
months ended June 30, 2005 compared to the six months ended June 30, 2004
primarily reflects an increase in proceeds from the exercise of employee stock
options of $6.9 million. Partially offsetting these cash inflows was the
purchase of approximately 22,000 shares of common stock that was reclassified to
treasury.
CREDIT AGREEMENT
The Company amended its former $100 million, three-year credit agreement on
June 4, 2004. The amendment provides for $90 million of standby credit through
May 31, 2008. The Company has the option to increase the available credit to
$100 million with the addition of another bank, without the approval of the
existing bank group. The terms and conditions of the amended facility remain
unchanged with the exception that the tangible net worth covenant in the
replaced facility was eliminated.
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. The credit agreement contains restrictions, among
others, on the minimum cash flow required, and the maximum leverage ratio
permitted. At June 30, 2005, there was approximately $1.0 million of standby
letters of credit outstanding under the facility, the Company was in compliance
with all covenants, and had a borrowing capacity equal to $89.0 million.
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. During the six months ended June 30, 2005, the
Company spent approximately $0.4 million for environmental remediation,
compliance, and related services. 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 accurately predict the ultimate effect these changing laws and
28
regulations may have on the Company in the future. The Company continues to
evaluate its obligations for environmental related costs on a quarterly basis
and makes adjustments in accordance with provisions of Statement of Position No.
96-1, "Environmental Remediation Liabilities."
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 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.
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 environmental costs in its
financial statements when an obligation becomes probable and a reasonable
estimate of exposure can be determined.
At June 30, 2005, the amount accrued for future environmental-related costs
was $3.7 million. Of the total amount accrued at June 30, 2005, $0.6 million is
expected to be paid out within one year and is included in the other accrued
liabilities line of the balance sheet. The remaining $3.1 million is recorded in
other non-current liabilities.
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 $2.9 to $7.7 million in the aggregate. The Company has
included in its other noncurrent assets $2.1 million as expected contributions
from third parties. These third parties include prior owners of RMI property and
prior customers of RMI, that have agreed to partially reimburse the Company for
certain environmental-related costs. 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.
Former Ashtabula Extrusion Plant
The Company's former extrusion plant in Ashtabula, Ohio was used to extrude
depleted uranium under a contract with the DOE from 1962 through 1990. In
accordance with that agreement, the DOE retained responsibility for the cleanup
of the facility when the facility was no longer needed for processing government
material. Processing ceased in 1990, and in 1993 RMI was chosen as the prime
contractor for the remediation and restoration of the site by the DOE. Since
then, contaminated buildings have been removed and approximately two-thirds of
the site has been free released by the Ohio Department of Health, to RMI, at DOE
expense.
In December, 2003, in accordance with its terms, the Department of Energy
terminated the contract "for convenience." It is not known at this time what
role, if any, RMI will play in the balance of the cleanup although discussions
are ongoing. Remaining soil removal is expected to take approximately 18-24
months. As license holder and owner of the site, RMI is responsible to the state
of Ohio for complying with soil and water regulations. However, remaining
cleanup cost is expected to be borne by the DOE in accordance with their
contractual obligation.
EMPLOYEES
As of June 30, 2005, the Company and its subsidiaries employed 1,208
persons, 380 of whom were classified as administrative and sales personnel. 587
of the total number of employees were in the Titanium Group, while 621 were
employed in the Fabrication & Distribution Group.
29
The United Steelworkers of America represents 298 of the hourly, clerical
and technical employees at RMI's plant in Niles, Ohio and 1 hourly employee at
RMI Environmental Services in Ashtabula, Ohio. No other Company employees are
represented by a union.
NEW ACCOUNTING STANDARDS
In December 2004 the Financial Accounting Standards Board (FASB) issued
SFAS No. 151, Inventory Costs. The Company is required to adopt SFAS 151 on a
prospective basis as of January 1, 2006. SFAS 151 clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling cost, and wasted
material. SFAS 151 requires that those items--if abnormal--be recognized as
expenses in the period incurred. SFAS 151 requires the allocation of fixed
production overheads to the cost of conversion based upon the normal capacity of
the production facilities. The Company has not yet determined what effect SFAS
151 will have on its financial statements.
In December 2004, the FASB issued FASB Staff Position No. FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004," which states that the
FASB staff believes that the lack of clarification of certain provisions within
the Act and the timing of the enactment necessitate a practical exemption to the
FAS 109 requirement to reflect in the period of enactment the effect of a new
tax law. Accordingly, an enterprise is allowed time beyond the financial
reporting period of enactment to evaluate the effect of the Act on its plan for
reinvestment or repatriation of foreign earnings for purposes of applying FAS
109. The Company is evaluating the impact of earnings repatriation and once
concluded will apply its action in accordance with FAS 109.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004) (SFAS 123R), Share-Based Payment. In March
2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the
SEC Staff's interpretation of SFAS 123R and provides the Staff's views regarding
interactions between SFAS 123R and certain SEC rules and regulations and
provides interpretations of the valuation of share-based payments for public
companies. SFAS 123R requires the mandatory expensing of share-based payments,
including employee stock options, based on their fair value. Recently, the FASB
delayed mandatory implementation for fiscal years beginning after December 15,
2005. As a result the standard will be adopted for the Company's 2006 fiscal
year. SFAS 123R provides alternative methods of adoption including prospective
and modified retroactive applications. The Company is currently evaluating the
financial impact, including the available alternatives under SFAS 123R and SAB
107.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduced a
prescription drug benefit under Medicare (Medicare Part D), as well as a federal
subsidy to sponsors of retiree health care benefit plans that provide a benefit
that is at least actuarially equivalent to Medicare Part D. On May 19, 2004,
FASB issued Staff Position FSP FAS 106-2 (FSP 106-2), which supercedes FSP 106-1
and provides guidance on accounting for the effects of the new Medicare
prescription drug legislation for employers whose prescription drug benefits are
actuarially equivalent to the drug benefit under Medicare Part D. The effect of
the Act did not have a material impact on the Company.
In May 2005, the FASB issued FAS No. 154, "Accounting Changes and Error
Corrections" (FAS 154), which changes the requirements for the accounting and
reporting of a change in accounting principle. FAS 154 applies to all voluntary
changes in accounting principle as well as to changes required by an accounting
pronouncement that does not include specific transition provisions. FAS 154
eliminates the requirement to include the cumulative effect of changes in
accounting principle in the income statement and instead requires that changes
in accounting principle be retroactively applied. A change in accounting
estimate continues to be accounted for in the period of change and future
periods if necessary. A correction of an error continues to be reported by
restating prior period financial statements. FAS 154 is effective for accounting
changes and correction of errors made on or after January 1, 2006.
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ITEM 4. CONTROLS AND PROCEDURE
(a) Evaluation of Disclosure Controls and Procedures
The Company's management, with the participation of the Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly
report on Form 10-Q. Based upon that evaluation they have concluded that the
Company's disclosure controls and procedures are not effective in ensuring that
all material information required to be filed in reports that the Company files
with the Securities and Exchange Commission is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
Commission because of material weaknesses in its internal control over financial
reporting as discussed in the Company's Form 10-K as amended on May 9, 2005.
The evaluation of our disclosure controls and procedures by our Chief
Executive Officer and Chief Administrative Officer included a review of the
restatement described in Note 17 on page 17 of this Form 10-Q/A, where the
Company restated its consolidated statement of cash flows for periods ended June
30, 2004 and 2005, including all interim periods. Management has determined that
the restatement is an additional effect of the material weaknesses already
described in the Form 10-K/A Amendment No. 2.
In light of material weaknesses described in the Form 10-K/A Amendment No.
2, management continues to perform additional analysis and other post-closing
procedures to ensure the Condensed Consolidated Financial Statements are
prepared in accordance with generally accepted accounting principles.
Accordingly, management believes that the interim financial statements included
in this report fairly present in all material respects our financial condition,
results of operations and cash flows for the period presented.
(b) Changes in Internal Control over Financial Reporting
The Company initiated a remediation program to address the material
weaknesses identified and reported in its Form 10-K as amended on May 9, 2005.
During the period since that filing the Company has performed:
- An examination of control design at 13 out of 15 significant locations
for 2005. The Company's internal audit group along with outside audit
resources performed the examination.
- Continued testing the installation of a new SAP fixed asset system.
- Continued work on the installation of a new SAP financial reporting
consolidation accounting system.
- Formed work teams of accounting and operating management personnel to
provide instruction and guidance relative to improvements in internal
control.
- Added two accounting managers, hired a director of taxation and hired a
controller for one of the Company's international locations.
- Reorganized the Company's accounting functions to provide additional
competencies and supervisory review.
- Reviewed the effectiveness of the design of internal controls over
footnote and disclosure spreadsheets.
- Provided additional training on the requirements for internal control
over financial reporting including a company wide conference for head
accounting personnel and business unit level presentations for process
owners.
- Formed a Steering Committee, consisting of executive management, to
oversee the Company's remediation and compliance efforts.
- Continued to expand its SAP network by continuing to install an SAP
system at one of its international locations.
31
The Company had previously reported in its Form 10-Q for the quarter ended
March 31, 2005 that it had replaced the Director of Corporate Accounting and
Consolidation. Additionally it had reported:
- It had reduced the number of SAP users with unrestricted access and:
- Directed the Company's internal audit department to concentrate on
examination, evaluation and testing of material weaknesses.
Until the Company completes its evaluation and testing of its controls, the
Company has:
- Re-tested certain material internal control weaknesses that existed at
December 31, 2004 to determine their effectiveness in the current quarter
and performed additional substantive testing to become reasonably assured
that the interim financial statements were materially correct.
- Performed substantive testing for certain transactions to ensure their
accuracy and compliance with GAAP.
- Enhanced review of critical transactions and balances to ensure their
accuracy.
- Changed third-party payroll processors to those that have issued Type II
SAS 70 reports in prior years.
- Performed substantive testing at one of its health care providers to
establish increased certainty over the Company's health care expenses and
liabilities.
The Company is unable to conclude that its internal controls over financial
reporting were effective as of June 30, 2005. The Company intends to evaluate
many of its controls for effectiveness in the third quarter.
32
PART II--OTHER INFORMATION
ITEM 6. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1 Form of indemnification agreement.(1)
31.1 Certification pursuant to Exchange Act Rules 13a-14 and
15d-14.
31.2 Certification pursuant to Exchange Act Rules 13a-14 and
15d-14.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
---------------
(1) Previously filed.
33
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: December 15, 2005
/s/ WILLIAM T. HULL
--------------------------------------
William T. Hull
Vice President and Chief Accounting
Officer
34