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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[ X ] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [fee required] for the fiscal year ended December 31, 1995 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [no fee required] for the transition period from
to
COMMISSION FILE NUMBER 1-10319
RMI TITANIUM COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 31-0875005
(State of Incorporation) (I.R.S. Employer
Identification No.)
1000 WARREN AVENUE, NILES, OHIO 44446
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 330-544-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, Par Value $0.01 Per Share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 1996: $52,526,481. The amount shown is based on the
closing price of the registrant's common stock on the New York Stock Exchange on
that date. Shares of common stock known by the registrant to be beneficially
owned by officers or directors of the registrant or persons who have filed a
report on Schedule 13D or 13G are not included in the computation. The
registrant, however, has made no determination that such persons are
"affiliates" within the meaning of Rule 12b-2 under the Securities Exchange Act
of 1934.
Number of shares of common stock outstanding at March 1, 1996: 15,421,325
DOCUMENTS INCORPORATED BY REFERENCE:
Selected Portions of the 1996 Proxy Statement--Part III of this Report.
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RMI TITANIUM COMPANY
AND CONSOLIDATED SUBSIDIARIES
As used in this report, the terms "RMI", "Company", and "Registrant" mean
RMI Titanium Company, its predecessors and consolidated subsidiaries, taken as a
whole, unless the context indicates otherwise. Unless otherwise indicated all
information in this report has been adjusted to give effect to RMI's one-for-ten
reverse split of Common Stock on March 31, 1994.
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TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business..................................................................... 1
Item 2. Properties................................................................... 8
Item 3. Legal Proceedings............................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders.......................... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.... 11
Item 6. Selected Financial Data...................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................... 12
Item 8. Financial Statements and Supplementary Data.................................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................................... 37
PART III
Item 10. Directors and Executive Officers of the Registrant........................... 37
Item 11. Executive Compensation....................................................... 37
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 37
Item 13. Certain Relationships and Related Transactions............................... 37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 37
Signatures.............................................................................. 38
Index to Exhibits....................................................................... 39
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PART 1
ITEM 1. BUSINESS
THE COMPANY
The Company is a leading U.S. producer of titanium mill and fabricated
products for the global market. The Company's mill products are processed by
RMI's customers to provide products for use in the aerospace industry and other
industrial markets, including, most recently, golf club manufacturing. The
Company's fabricated products are used primarily in the aerospace, oil and gas,
geothermal energy production and chemical process industries as well as for a
number of other industrial applications. The Company also provides fabrication
and conversion services for other titanium and specialty metals producers.
The Company, originally incorporated in Ohio in 1975, is a successor to
entities that have been operating in the titanium industry since 1958. In 1990,
USX Corporation ("USX") and Quantum Chemical Corporation ("Quantum") transferred
their entire ownership interest in the Company's immediate predecessor, RMI
Company, an Ohio general partnership, to the Company in exchange for shares of
the Company's Common Stock, par value $.01 per share ("Common Stock") (the
"Reorganization"). Quantum sold its shares of Common Stock to the public while
USX retained ownership of its shares. At December 31, 1995, USX owned
approximately 51% of the outstanding Common Stock.
INDUSTRY OVERVIEW
Titanium is one of the newest industrial metals. Its physical
characteristics include high strength-to-weight ratio, high temperature
performance and superior corrosion and erosion resistance. The first major
commercial application of titanium occurred in the early 1950's when it was used
as a component in aircraft gas turbine engines. Subsequent applications were
developed to use the material in other aerospace component parts and in airframe
construction.
Historically, a majority of the U.S. titanium industry's output has been
used in aerospace applications. In recent years, increased quantities of the
industry's output have been used in nonaerospace applications. Based on data
published by the U.S. Bureau of Mines, in 1995 more than 35% of the total U.S.
market shipments, including exports, were made to nonaerospace markets,
including the oil and gas, geothermal energy production and chemical process
industries and golf club manufacturing.
Aerospace demand originates from two sectors: commercial and military.
Since 1987, commercial aerospace has become the dominant factor in titanium
demand. The commercial aerospace sector is expected to continue to dominate the
demand for titanium as a result of the expected growth of worldwide airline
traffic and the need to repair and replace aging commercial airline fleets and
continuing depressed military aerospace markets.
The cyclical nature of the aerospace industry has been the principal cause
of the fluctuations in performance of companies engaged in the titanium
industry. Over the past 19 years, U.S. titanium mill product shipments
registered cyclical peaks of 54 million pounds in 1980 and 55 million pounds in
1989. Beginning in 1991, the industry experienced a dramatic downturn in demand
for mill products. Domestic industry shipments fell from 53 million pounds in
1990 to 34 million pounds in 1991, a decrease of 35%, the largest single one
year decrease in the history of the industry. Domestic industry shipments only
recovered modestly during the years 1991 through 1994. This most recent decline
in industry shipments reflected a sharp decline in military aerospace demand,
which continues to the present, and a decline in commercial aircraft build rates
due in part to significant financial losses suffered by commercial airline
carriers. Average realized mill product selling prices also deteriorated
throughout this period reaching lows during the years 1993 and 1994 that were
approximately 30% below 1990.
The following table highlights the cyclical nature of the titanium industry
by setting forth the total pounds of U.S. mill products shipped during the years
1977 through 1995 and the Company's shipments and average mill product prices
during such period.
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Although military aerospace markets remain depressed, commercial aerospace
markets have shown a recent increase in demand. In 1995, most major U.S.
commercial airline carriers reported stronger operating profits, and in the
second half of 1995 the commercial aerospace industry began to restore depleted
inventories of titanium mill products and aircraft manufacturers began to
increase build rates. RMI estimates, based on U.S. Bureau of Mines data, that
domestic industry mill product shipments to the commercial aerospace market in
1995 were approximately 20 million pounds, an increase of approximately 18%
compared to 1994. RMI further estimates, based on U.S. Bureau of Mines data,
that total industry shipments in 1995 were approximately 43 million pounds, an
increase of 26% compared to 1994.
PRODUCTS AND MARKETS
The Company operates on a single business segment: Titanium Mill Products
and Fabricated Products and Other Services. Titanium mill products consist of
products such as ingot, slab, bloom, billet, bar, plate, sheet, strip and welded
tube. Fabricated products include pipe, engineered tubular products, hot-formed
and superplastically formed parts for aerospace applications, cut shapes and
titanium metal powders. Other services include conversion and fabrication
services for other titanium and specialty metal producers and project
management. In addition, the Company acts as contractor for the U.S. Department
of Energy ("DOE") for the remediation and restoration of the Company's closed
facilities in Ashtabula, Ohio.
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The amount of the Company's consolidated sales and the percentage of
consolidated sales represented by each class of product during the five years
ended December 31, 1995 were as follows:
SALES
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------- ------------- ------------- ------------- -------------
(Dollars in Millions)
Mill products............. $138.1 81% $103.8 72% $ 96.5 76% $110.5 81% $128.8 78%
Fabricated products and
other services.......... 26.9 16 31.1 22 20.5 16 16.7 13 17.3 10
Other(1).................. 6.2 3 8.5 6 10.4 8 5.8 4 6.3 4
Discontinued
products(2)............. -- -- -- -- -- -- 2.6 2 13.2 8
------ --- ------ --- ------ --- ------ --- ------ ---
Total................... $171.2 100% $143.4 100% $127.4 100% $135.6 100% $165.6 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
<FN>
- ---------
(1) Includes DOE remediation and restoration contract.
(2) Discontinued products includes titanium sponge, sodium chloride, sodium
hypochlorite and metallic sodium, which are no longer manufactured by the
Company.
MILL PRODUCTS
The Company produces a full range of titanium mill products which are used
in both the aerospace and nonaerospace markets.
Aerospace. Mill product sales to the commercial and military aerospace
industries accounted for approximately 64% and 11%, respectively, of RMI's 1995
mill product sales compared to approximately 50% and 13% of RMI's 1994 mill
product sales. The Company's products are certified and approved for use by all
major domestic and most international manufacturers of commercial and military
aircraft and jet engines. Products such as sheet, plate, strip, bar, billet and
ingot are utilized in aircraft bulkheads, tail sections, wing supports and
carry-through structures and various engine components including rotor blades,
vanes, discs, rings and engine cases.
As of December 31, 1995, the leading manufacturers of commercial aircraft,
Boeing Company, McDonnell Douglas Corporation and Airbus Industrie, reported an
aggregate of approximately 1,869 planes under firm order and deliverable over
the next five years. The comparable backlogs as of December 31, 1994 and 1993
were 1,742 planes and 2,025 planes, respectively. Included in this backlog for
1995 are 230 firm orders for the new Boeing 777 wide-body aircraft, which
requires more titanium than any other commercial aircraft. Deliveries of
commercial aircraft by these three manufacturers totaled 380 in 1995, 432 in
1994, and 546 in 1993. Because it typically takes from 12 to 18 months from
placement of an order until delivery of a commercial aircraft, realized delivery
rates generally lag behind announced backlog estimates. In addition, changing
economic conditions and instability in the domestic commercial airline industry
may cause manufacturers to re-evaluate aircraft orders and options, thus
affecting realized aircraft delivery rates.
Nonaerospace. Principal nonaerospace mill products include commercially
pure (unalloyed) strip, welded tube and plate used for oil and gas and
geothermal energy production industries, chemical processing and pulp and paper
equipment. Bar is sold for the production of medical implants and
high-performance automotive engine parts. The Company is also a leading supplier
of commercially pure titanium plate and strip, which offers superior corrosion
resistance and ductility for critical forming and metal expansion required in
applications such as heat exchangers and anodes for the chlorine industry.
Nonaerospace sales accounted for approximately 25% of the Company's mill product
sales in 1995 and 37% of such sales in 1994. Since the Company's entry into
strip production in 1984 and tube production in 1986, sales of these two
products have grown to a majority of the Company's total nonaerospace mill
product sales.
The use of titanium in golf club heads emerged in 1995 as an important
nonaerospace product application for the titanium industry. Titanium was first
used in golf club manufacturing in the U.S. in 1988, and management believes the
market grew in 1995 to approximately 3.5 million pounds, or approximately 9%, of
U.S. industry mill product shipments. While titanium golf clubs have been used
in Japan for over six years,
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with titanium woods currently commanding approximately 60% of the Japanese
market, they have only recently gained significant popularity in the U.S.
market. Titanium golf clubs have developed as the latest of several
technological innovations in the golf industry in the last 25 years.
Titanium has become a desirable material for golf clubs due to its superior
strength-to-weight ratio as compared to steel. This characteristic allows club
manufacturers to create a larger club head without increasing the weight of the
club and to distribute weight more strategically around the club while
maintaining the club's structural integrity. Titanium also has a higher elastic
deformation than steel, providing optimal energy transfer at impact with the
ball and improved carry and distance. Titanium clubs have attracted the
attention of Professional Golf Association ("PGA"), Ladies PGA and Senior PGA
tour members, many of whom now use a titanium driver.
Almost every major golf club manufacturer, including Callaway, Cleveland,
Cobra, Lynx, Taylor Made, Titleist and Tommy Armour, is currently marketing a
titanium driver, and several of the major manufacturers are using titanium in
club heads for other clubs, including woods, irons and putters. Certain golf
club manufacturing companies have introduced full sets of titanium golf clubs. A
number of golf club head casting companies have announced expansions of their
golf club head production facilities.
FABRICATED PRODUCTS AND OTHER SERVICES
Fabricated products include pipe, engineered tubular products for the oil
and gas and geothermal energy production industries, hot-formed and
superplastically formed parts and cut shapes for aerospace applications and
titanium metal powders. Titanium powders are used for alloy additions,
superconductors, grain refinement of other metals and titanium powder metal
parts. Other services include conversion and fabrication services for other
titanium and specialty metals producers and project management.
The Company has devoted significant resources to develop new applications
and markets for titanium in the oil and gas and geothermal energy production
industries. During 1995, the Company completed shipment of the world's first
high-pressure titanium drilling riser for use in the Conoco Heidrun project
located in the Norwegian sector of the North Sea (one of the world's largest
floating, deep-water oil and gas production platforms). During 1995, the Company
was awarded a contract, valued in excess of $3 million, to supply titanium
stress joints for use in the Oryx Energy Neptune Production Riser System in the
Gulf of Mexico.
In late 1994, the Company was awarded a three-year contract to supply all
of the seamless titanium pipe required for a number of geothermal energy
production facilities located in the Imperial Valley of California. The initial
order under the contract is valued in excess of $7 million. Deliveries commenced
in late 1995 and are continuing in 1996. The Company expects to receive a second
order to be produced and shipped during 1996 and 1997.
The Company continues to work closely with several oil companies and
engineering concerns to develop other titanium projects or applications in the
oil and gas and geothermal energy production industries. RMI has entered into
several cooperative ventures to encourage and develop titanium products for use
in the oil and gas industry. For example, in January 1995, the Company entered
into an agreement with Stolt Comex Seaway SA ("Stolt Comex"), a Norwegian-based
diversified contractor to the offshore oil and gas industry, to combine RMI's
and Stolt Comex's expertise to market, engineer, fabricate and install titanium
production risers, flow lines and other titanium subsea systems. Pursuant to
this agreement, the parties have entered into discussions to form a joint
venture if a commercial market for such subsea systems is proven to exist. In
addition, in February 1996, the Company, Stolt Comex and Kvaerner Oilfield
Products Ltd., a Norwegian engineering concern, entered into an agreement
pursuant to which the parties agreed to submit joint bids for titanium riser
systems.
OTHER
The Company has a long-term agreement with the DOE covering the remediation
and restoration of the Company's closed facilities in Ashtabula, Ohio, for which
the DOE is responsible as a result of work performed there by the Company for
the U.S. government. The Company is serving as the prime contractor during the
remediation and restoration period. Revenues will vary year-to-year depending on
DOE funding. In
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1995, the Company recognized $6.2 million in such revenues compared to $8.5
million in 1994 and $10.4 million in 1993. As the prime contractor, the Company
provides management services necessary to complete assessment, clean-up and
remediation activities.
EXPORTS
Most of the Company's exports, with the exception of the drilling riser
discussed above under "Products and Markets--Fabricated Products and Other
Services," have consisted of titanium mill products used in aerospace markets.
Other exports include slab, commercially pure strip, plate and welded tubing
used in nonaerospace markets. The Company's export sales in 1995 were
approximately $30.1 million. Such sales were made primarily to the European
market, where the Company believes it is a leader in supplying alloy flat-rolled
titanium mill products as well as rotating-quality billet. The Company's export
sales were $39.8 million and $24.2 million in 1994 and 1993, respectively.
Export sales in 1994 and 1993 include revenues recognized in connection with the
titanium drilling riser contract.
As a leading supplier of alloy flat-rolled titanium mill products to the
European market, the Company has worked through its distributors to secure
contracts to furnish mill products to the major European aerospace
manufacturers. As a result, the Company has significant export sales to
customers in France, the United Kingdom and Germany. In order to enhance its
presence in the European market, in 1992 the Company acquired a 40% ownership
interest in its French distributor, Reamet, SA. In addition, the Company has
expanded its operations in the United Kingdom to include a distribution and
service center facility in Birmingham, England. Operations at the facility
commenced during the second quarter of 1995. Recently, the Company became a
qualified supplier to Rolls Royce Plc and received an order to supply material
from the Birmingham facility for use in fan blades and other critical rotating
parts in Rolls Royce's family of jet engines.
CONVERSION
The Company utilizes third-party converters to melt and/or finish
approximately 35% of its mill products. The use of these converters raises the
Company's effective processing capacity. Certain mill products, such as hot band
and cold rolled strip and oversized plate, are produced entirely by such
converters using semi-finished titanium mill products supplied by the Company.
The Company, however, is responsible for inspecting and delivering these
products to customers. The Company maintains long-term relationships with many
of these conversion companies.
BACKLOG
For a discussion of order backlog, see "Managements Discussion and Analysis
of Financial Condition and Results of Operations."
RAW MATERIALS
The principal raw materials used in the production of titanium mill
products are titanium sponge, a porous metallic material; titanium scrap; and
alloying agents. RMI acquires its raw materials from a number of suppliers, both
domestic and foreign, under long-term contracts and other negotiated
transactions. In 1995, the Company purchased approximately 14 million pounds of
titanium sponge. Requirements for sponge vary based upon product mix and the
level of scrap usage.
Following the closure of its sponge production facilities in 1992, the
Company began purchasing its titanium sponge from outside sources. The Company
has entered into two long-term sponge supply arrangements, each with pricing
below the cost of sponge which was produced at the Company's own facilities
prior to their closure. In addition, the Company has supplemented its metal
requirements with additional sponge and raw material purchases, including
titanium scrap, from other U.S. and foreign suppliers.
One of the sponge contracts, which is with a competitor, permits the
Company to purchase up to seven million pounds per year at specified prices per
pound during 1996, depending on the volume of sponge purchased, and thereafter
through 2003 at the Company's option at either market price (but not below the
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supplier's cost) or the price in effect under the contract for 1996 plus
adjustments for changes in the supplier's costs. The other contract, which is
with a Japanese supplier, permits the Company to purchase up to four million
pounds of sponge per year through 1999, either at market price or a 1994 base
price plus changes in the supplier's costs. In addition, this contract permits
the Company to purchase up to an additional two million pounds of sponge at
negotiated prices. This contract is subject to renegotiation or termination
under certain circumstances. The Company purchases the balance of its sponge
requirements pursuant to short-term agreements or at negotiated prices. Prices
for the Company's 1996 requirements have already been set under these contracts
and other short-term arrangements. In addition, RMI has negotiated at firm
prices approximately one-third of its anticipated sponge requirements for
customer orders scheduled for delivery in 1997.
The Company purchases titanium tetrachloride, the primary raw material used
in the manufacture of titanium sponge, from SCM Chemicals, Inc. pursuant to a
long-term supply agreement expiring in 2003. Titanium tetrachloride is shipped
to one of the Company's long-term sponge suppliers where it is used in providing
sponge for the Company.
The Company believes it has adequate sources for titanium sponge, scrap,
alloying agents and other raw materials.
COMPETITION AND OTHER MARKET FACTORS
The titanium metals industry is highly competitive on a worldwide basis.
Competition is primarily on the basis of price, quality and timely delivery.
Titanium also competes with other metals such as stainless steel and nickel
based corrosion resistant alloys. A metal manufacturing company with rolling and
finishing facilities could participate in the mill product segment of the
titanium industry. However, entry into the titanium industry as an integrated
producer would require a significant investment of capital and extensive
technical expertise.
Producers of titanium mill products are located primarily in the U.S.,
Japan, the former Soviet Union, Europe and China. Following closure of the
Company's sponge facilities in 1992, Oregon Metallurgical Corporation (Oremet)
and Titanium Metals Corporation of America (Timet) are the two remaining U.S.
integrated producers that produce their own sponge. There are also a small
number of domestic nonintegrated producers that, along with the Company, produce
mill products from purchased sponge, scrap or ingot. The Company does not
believe, however, that any of its nonintegrated U.S. competitors produce as full
a line of mill products as does RMI.
Imports of titanium mill products from countries that receive the
most-favored-nation ("MFN") tariff rate are subject to a 15% tariff. The tariff
rate applicable to imports from countries that do not receive MFN treatment is
45%. Japanese producers, which benefit from MFN treatment, participate
significantly in the European market, but historically have not been a major
factor in the U.S. mill products market. The United States currently does not
grant MFN treatment to imports, including titanium mill product imports, from
the former Soviet Union countries, except Russia. In 1995, a Russian producer
began to participate in the U.S. market for titanium mill products. This
titanium producer has the largest rated capacity in the world (although
management believes practical capacity is substantially less) and could
materially affect competition if its exports of titanium mill products were to
increase significantly.
MARKETING AND DISTRIBUTION
RMI markets its titanium mill products and related products and services
worldwide. Approximately 80% of the Company's consolidated sales are made
through its own sales force and the balance through independent distributors.
RMI's domestic sales force has offices in Niles, Ohio; Houston, Texas; Brea,
California; Washington, Missouri; and Salt Lake City, Utah. Technical marketing
personnel are available to service these offices and to assist in new product
applications and development. In addition, the Company's Customer Technical
Service and Research and Development Departments, both located in Niles, Ohio,
provide extensive customer support.
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In the U.S., RMI has expanded its market share by establishing
relationships with several specialized distributors that allow for a targeted
marketing approach to large customers that require a full-service distribution
supply. RMI also provides a direct distribution service on cut-to-size parts out
of its TRADCO, Inc. subsidiary in Washington, Missouri.
Internationally, RMI maintains a sales office and distribution warehouse in
Birmingham, England. In December 1992, the Company completed an acquisition of a
40% ownership interest in its French distributor, Reamet, SA. The Company also
has independent distributors covering The Netherlands, Italy, Israel, Norway,
Spain, Sweden, Brazil, Belgium, Germany, Switzerland, Korea, Philippines,
Taiwan, South Africa, India and Australia.
RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT
The Company conducts research, technical and product development activities
at facilities in Niles, Ohio. The principal goals of the Company's research
program are maintaining technical expertise in the production of titanium mill
and fabricated products and providing technical support in the development of
new markets and products. In addition to the Company's own funding, certain
major customers have assisted in funding the Company's development of specific
titanium applications. Research, technical and product development costs totaled
$3.4 million in 1995, $3.3 million in 1994 and $2.4 million in 1993. Customer
assisted funding, which is treated as a reduction of research and development
spending, reduced the Company's portion of research and development expense to
$1.8 million in 1995 and $1.5 million in each of 1994 and 1993.
The Company has research laboratories in Niles with melting, metal
processing and metal testing facilities and a corrosion laboratory for support
of nonaerospace markets.
PATENTS AND TRADEMARKS
The Company possesses a substantial body of technical know-how and trade
secrets and owns a number of U.S. patents applicable primarily to product
formulations and uses. The Company considers its know-how, trade secrets and
patents important to conduct its business, although no individual item is
considered to be material to the Company's current business.
EMPLOYEES
As of December 31, 1995, the Company and its subsidiaries employed 844
persons, 180 of whom were classified as administrative and sales personnel. At
December 31, 1995, approximately 62 of the 844 employees were directly involved
with the DOE remediation and restoration contract at the Company's now closed
facilities in Ashtabula, Ohio.
The United Steelworkers of America ("USWA") represents approximately 440 of
the hourly and clerical and technical employees at the Company's plant in Niles,
Ohio and the hourly employees at the closed facilities in Ashtabula, Ohio. Other
than six hourly workers at the Ashtabula facilities, who are represented by the
Oil, Chemical and Atomic Workers Union, the Company's other employees are not
represented by a union. In October 1995, following a five day work stoppage, a
three-year labor agreement was reached with the USWA represented employees at
Niles. The hourly employees at the facilities in Ashtabula agreed to a five-year
contract on January 15, 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the executive officers of the Company together with their
ages, as of December 31, 1995, and titles.
NAME AGE TITLE
- ------------------------------------- --- -----------------------------------------------
L. Frederick Gieg, Jr................ 64 President and Chief Executive Officer
John H. Odle......................... 53 Senior Vice President -- Commercial
Timothy G. Rupert.................... 49 Senior Vice President and Chief Financial
Officer
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Mr. Gieg has been a director and President and Chief Executive Officer of
the Company since 1990 and was President and Chief Executive Officer of its
predecessor since September 1, 1982. Previously, Mr. Gieg had been Vice
President and General Manager of the Western Steel Division of what is now the
U.S. Steel Group of USX. He began his career with USX in June 1953.
Mr. Odle has been Senior Vice President--Commercial of RMI and its
predecessor since 1989 and served as Vice President-Commercial from 1978 until
1989. Prior to that, Mr. Odle served as General Manager-Sales. He began his
career as a commercial management trainee in 1964 with USX.
Mr. Rupert was appointed Senior Vice President and Chief Financial Officer
in March 1994 and had served as Vice President and Chief Financial Officer since
September 1991. Prior to joining RMI, Mr. Rupert was employed by USX for 23
years in various accounting and finance positions.
ITEM 2. PROPERTIES
The Company has over 728,000 square feet of manufacturing facilities
exclusive of office space, located primarily in Niles, Ohio. The Company's
principal manufacturing plants, the principal products produced at such plants
and their aggregate capacities are set forth below.
MANUFACTURING FACILITIES
ANNUAL RATED ANNUAL PRACTICAL
LOCATION PRODUCT CAPACITY CAPACITY(1)
- ------------------------ ---------------------------------------- -------------- ----------------
Niles, Ohio Ingot (Million Pounds).................. 36 30
Niles, Ohio Mill Products (Million Pounds).......... 22 20
Hermitage, Pennsylvania Tube (Thousand Pounds).................. 780 780
Washington and Hot-Formed and Superplastically-Formed
Sullivan Missouri Components (Thousand Press Hours)..... 21 21
Salt Lake City, Utah Powders (Million Pounds)................ 1.5 1.5
<FN>
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(1) Practical capacity is based on current product mix and yields.
The Company owns all of the foregoing facilities, except for the Sullivan,
Missouri facility and certain buildings and property at Washington, Missouri,
all of which are leased. The plants have been constructed at various times over
a long period, many of the buildings have been remodeled or expanded and
additional buildings have been constructed from time to time.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. Given the
critical nature of many of the aerospace end uses for the Company's products,
including specifically their use in critical rotating parts of gas turbine
engines, the Company maintains aircraft products liability insurance of $250
million, which includes grounding liability.
In connection with the closing of the Company's facilities in Ashtabula,
Ohio, the Oil, Chemical and Atomic Workers Union, Local 729, commenced an action
in 1992 in the U.S. District Court for the Northern District of Ohio, captioned
OCAW, Local 7-629, AFL-CIO, et al. vs. RMI Titanium Company, against the Company
alleging violation of the notification provisions of the Worker Adjustment and
Retraining Notification Act ("WARN"). Three classes of former employees at such
facilities have alleged that they did not receive appropriate notice of their
pending layoffs or terminations as required under WARN and are seeking back pay
for the notification period. The Company believes that it has complied with the
provisions of WARN and that the claims are without merit.
ENVIRONMENTAL
The Company is subject to extensive federal, state and local laws and
regulations concerning environmental matters. During each of 1995 and 1994, the
Company spent approximately $0.6 million for environmental-
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related expenditures. Such expenditures totaled $0.9 million in 1993. The
Company broadly estimates environmental-related expenditures, including capital
items and compliance costs, will total approximately $3.4 million during the
1996-1997 period.
In connection with the Reorganization, the Company assumed all
responsibility for environmental matters relating to RMI Company and its
immediate predecessor, Reactive Metals, Inc., which commenced business on April
1, 1964, and agreed to indemnify Quantum and USX against any liability relating
to such environmental matters. Quantum and USX have been named as potentially
responsible parties in connection with the Fields Brook Superfund site discussed
below. In addition, Quantum initially acquired the Company's now closed
Ashtabula facilities in 1950, which it owned until 1964, when they were acquired
by Reactive Metals, Inc. Although the Company believes it may have claims with
respect to possible remediation and other costs against Quantum for the pre-1964
period, ultimate apportionment of any liability between the Company and Quantum
has not been finally agreed upon.
Active Investigative or Cleanup Sites. The Company is involved in
investigative or cleanup projects at certain waste disposal sites, including
those discussed below.
Fields Brook Superfund Site. The Company, together with 31 other
companies, has been identified by the U.S. Environmental Protection Agency (the
"EPA") as a potentially responsible party ("PRP") with respect to a superfund
site defined as the Fields Brook Watershed in Ashtabula, Ohio, which includes
the Company's now closed Ashtabula facilities. The EPA's 1986 estimate of the
cost of remediation of the Fields Brook sediment operable unit was $48 million.
Recent studies, together with improved remediation technology and redefined
cleanup standards, have resulted in a more recent estimate of the remediation
cost of approximately $25 million. The actual cost of remediation may vary from
the estimate depending upon any number of factors.
The EPA, beginning in March 1989, ordered 22 of the PRPs to conduct a
design phase study for the sediment operable unit and a source control study,
which studies are currently estimated to cost $19 million. The Company, working
cooperatively with fourteen others, is complying with the order and has accrued
and has been paying its portion of the cost of such compliance. It is
anticipated that the studies will be completed no earlier than late 1996. Actual
cleanup is not expected to commence prior to mid-year 1997. The Company's share
of the study costs has been established at 9.95%. In June, 1995, the Company and
twelve others entered into a Phase 2 (actual cleanup) allocation agreement which
assigns 9.44% of the cost to RMI. However, actual percentages may be more or
less based on contributions from other parties which are not currently
participating in the Phase 2 allocation agreement.
The Ohio Environmental Protection Agency (the "Ohio EPA") has notified the
PRPs of its intention to undertake a Natural Resource Damage Assessment ("NRDA")
for the Fields Brook site which could lead to a Natural Resource Damage Claim
("NRDC") against the PRPs. The NRDA cannot be completed until the remediation of
the Fields Brook watershed is complete. It is not possible to predict, at this
time, the cost to the Company, if any, as a result of the NRDA and any NRDC that
might be brought.
Resource Conservation and Recovery Act of 1975 ("RCRA")
Proceedings-Ashtabula Sodium Plant. The Company, through its independent
environmental consultant, has identified and reported to the EPA the presence of
metals and hazardous organic materials on portions of its closed facilities in
Ashtabula, Ohio. As to the organic material, the consultant has determined it
originates from an off-site source, and the Company does not anticipate it will
be required to clean up this material.
A Corrective Measures Study report prepared for the Company by the
consultant states that the presence of metals would not be expected to have an
adverse impact on humans or the environment, and, after conducting a detailed
analysis of cleanup alternatives, the study recommended that metals contaminated
material be consolidated at an on-site landfill and contained in place, at an
estimated cost of $1 million. The EPA has approved the Corrective Measures Study
but has not yet selected a cleanup alternative. The Company has accrued an
amount for this matter.
Ashtabula River. The Ashtabula River and Harbor has been designated one of
43 Areas of Concern on the Great Lakes by the International Joint Commission.
Fields Brook empties into the Ashtabula River, which
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in turn flows into Lake Erie. The State of Ohio has appropriated $7 million in
state funds to the Ashtabula River dredging project to assist in securing
federal funds needed to conduct the dredging.
The Company believes it is most appropriate to use public funds to cleanup
a site with regional environmental and economic development implications such as
the Ashtabula River and Harbor. The Ashtabula River Partnership ("ARP"), a
voluntary group of public and private entities including, among others, the
Company, the EPA, and the Ohio EPA, was formed in July 1994 to bring about the
remediation of the river. The ARP is working both to design a cost-effective
remedy and to secure public funding. Phase 1, the Comprehensive Management Plan,
is well underway and is completely funded with public money. To fund Phase 2,
the Detailed Design, the Company and at least three other private parties have
pledged a voluntary contribution of up to $100,000 each, contingent upon
receiving matching federal funds. It is possible that the EPA could determine
that the Ashtabula River and Harbor should be designated as an extension of the
Fields Brook Superfund site, or, alternatively, as a separate Superfund site. It
is not possible at this time to predict the methods or responsibility for any
remediation and whether the Company will have any liability for any costs
incurred in cleaning up the Ashtabula River and Harbor.
With respect to each of the above sites, all of which are located in Ohio,
the State of Ohio may assert its interests and rights independent of those of
the EPA. The Company has notified all its insurers relative to the environmental
claims reported above and has demanded that the insurers assume the Company's
defense of such claims and indemnify the Company against such claims. During
1993, the Company settled a claim with one insurer for $0.4 million. None of the
remaining insurers have agreed to defend or indemnify the Company, and several
have denied coverage. However, the Company continues to pursue these claims with
its insurers.
Alleged RCRA Violations. On October 9, 1992, the EPA filed a complaint
alleging certain violations of RCRA at the Company's now closed facilities in
Ashtabula, Ohio. The EPA's determination is based on information gathered during
inspections of the facility in 1991. Under the complaint the EPA proposed to
assess a civil penalty of approximately $1.4 million for alleged failure to
comply with RCRA. The Company is contesting the complaint. It is the Company's
position that it has complied with the provisions of RCRA and that the EPA's
assessment of penalties is inappropriate. A formal hearing has been requested
and informal discussions with the EPA to settle this matter are ongoing. Based
on the preliminary nature of the proceedings, the Company is currently unable to
determine the ultimate liability, if any, that may arise from this matter.
Given the status of the proceedings at certain of these sites, and the
evolving nature of environmental laws, regulations, and remediation techniques,
the Company's ultimate obligation for investigative and remediation costs cannot
be predicted. It is the Company's policy to recognize in its financial
statements environmental costs as an obligation becomes probable and a
reasonable estimate of exposure can be determined. At December 31, 1995, the
amount accrued for future environmental-related costs was $2.4 million. Based on
available information, RMI believes that its share of potential
environmental-related costs, before expected contributions from third parties,
is in a range from $3.7 to $6.3 million in the aggregate. The amount accrued is
net of expected contributions from third parties (other than insurers) of
approximately $2.1 million which the Company believes are probable. The Company
has been receiving contributions from such third parties for a number of years
as partial reimbursement for costs incurred by the Company. As these proceedings
continue toward final resolution, amounts in excess of those already provided
may be necessary to discharge the Company from its obligations for these sites.
The ultimate resolution of the foregoing contingencies could, individually
or in the aggregate, be material to the consolidated financial statements.
However, management believes that RMI will remain a viable and competitive
enterprise even though it is possible these matters could be resolved
unfavorably.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
COMMON STOCK DATA:
Principal market for Common Stock: New York Stock Exchange
Holders of record of Common Stock at January 31, 1996: 863
RANGE OF COMMON STOCK PRICES AND DIVIDENDS FOR 1995
QUARTER HIGH LOW
--------------------------------------------------------------- ----- ---
First.......................................................... $ 5 1/2 $3 1/8
Second......................................................... 9 3/4 3 3/4
Third.......................................................... 10 3/8 6 3/4
Fourth......................................................... 9 7/8 6 1/2
Year........................................................... $10 3/8 $3 1/8
RANGE OF COMMON STOCK PRICES AND DIVIDENDS FOR 1994
QUARTER HIGH LOW
--------------------------------------------------------------- ---- ---
First.......................................................... $21 1/4 $15
Second......................................................... 17 5/8 2 3/8
Third.......................................................... 2 3/4 2
Fourth......................................................... 5 5/8 2 1/2
Year........................................................... $21 1/4 $ 2
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In June 1994, the Company commenced a rights offering pursuant to which
each holder of Common Stock was entitled to subscribe for shares of Common Stock
at a price of $2 per share. In July 1994, the Company issued approximately 13.8
million shares of Common Stock in that offering.
The Company has not paid dividends on its Common Stock since the second
quarter of 1991. The declaration of dividends is at the discretion of the Board
of Directors of the Company. The declaration and payment of future dividends and
the amount thereof will be dependent upon the Company's results of operations,
financial condition, cash requirements for its business, future prospects and
other factors deemed relevant by the Board of Directors.
The Company's existing credit facilities do not permit RMI to pay
dividends, distributions or other payments in respect of shares of its capital
stock, including the Common Stock, or redeem or purchase such shares, except for
annual redemptions not in excess of $200,000 consistent with past practices.
Notwithstanding the foregoing, if RMI has had positive net income for each of
two consecutive quarters, it may pay dividends to its shareholders to the extent
of 25% of net income for the current and immediately preceding quarter, provided
no event of default shall have occurred and be continuing, or shall thereby
occur.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY
(Dollars in thousands except for per share data)
(Year ended December 31)
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
INCOME STATEMENT DATA:
Sales.......................... $171,166 $143,392 $127,397 $135,607 $165,568
Operating loss................. (5,220)(1) (7,971) (10,764) (11,387) (52,712)(2)
Loss before cumulative effect
of a change in accounting
principle.................... (4,608)(3) (11,562) (11,955) (14,062) (57,085)
Net loss....................... (4,608)(3) (12,764)(4) (28,893)(5) (14,062) (57,085)
BALANCE SHEET DATA:
(at end of period)
Working capital................ $ 86,738 $ 74,694 $ 66,319 $ 72,229 $ 79,820
Total assets................... 171,559 160,810 152,647 153,257 173,888
Long-term debt due after one
year......................... 64,020 54,740 66,660 62,280 58,800
Equity......................... 36,889 42,596(6) 27,861 63,302 77,705
NET LOSS PER COMMON SHARE: (7)
Before change in accounting
principle.................... $ (0.30) $ (1.45) $ (8.14) $ (9.66) $ (39.17)
Net loss....................... (0.30) (1.60) (19.67) (9.66) $ (39.17)
<FN>
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(1) Includes a $5.0 million charge reflecting the June 30, 1995 adoption of
Statement of Financial Accounting Standards ("SFAS") No. 121. See Note 7 to
the Consolidated Financial Statements.
(2) Includes a charge of $37.1 million relating to the closing of RMI's titanium
sponge production facilities.
(3) Includes a $5.0 million charge reflecting the adoption of SFAS No. 121 and a
$7.2 million income tax benefit. See Notes 7 and 8 to the Consolidated
Financial Statements.
(4) Includes a $1.2 million charge reflecting the adoption of SFAS No. 112. See
Note 11 to Consolidated Financial Statements.
(5) Includes a $16.9 million charge reflecting the adoption of SFAS No. 106. See
Note 11 to the Consolidated Financial Statements.
(6) Includes a $26.4 million increase resulting from the net proceeds of a
rights offering. See Note 4 to the Consolidated Financial Statements.
(7) 1991-1993 Common Share data has been adjusted to reflect a March 31, 1994
one-for-ten reverse stock split. See Note 4 to the Consolidated Financial
Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with "Selected
Financial Data" and the Consolidated Financial Statements and Notes thereto of
the Company included elsewhere herein. The following information contains
forward-looking statements which involve certain risks and uncertainties. Actual
results and events may differ significantly from those discussed in the
forward-looking statements.
OVERVIEW
Historically, a majority of the U.S. titanium industry's output has been
used in aerospace applications. The cyclical nature of the aerospace industry
has been the principal cause of the fluctuations in performance of companies
engaged in the titanium industry. Over the past 19 years, titanium mill products
shipments registered cyclical peaks of 54 million pounds in 1980 and 55 million
pounds in 1989. Beginning in 1991, the industry experienced a dramatic downturn
in demand for mill products. Domestic industry shipments fell from
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53 million pounds in 1990 to 34 million pounds in 1991, a decrease of 35%, the
largest single one year decrease in the history of the industry. This most
recent decline in industry shipments reflects a sharp decline in military
aerospace demand, which continues to the present, and a decline in commercial
aircraft build rates due in part to significant financial losses suffered by
U.S. commercial airline carriers. Average realized mill product selling prices
deteriorated during the years 1993 and 1994 and were approximately 30% below
1990 levels.
Although military aerospace markets remain at historically low levels,
commercial aerospace markets have shown a recent increase in demand. In 1995,
most major commercial airlines reported stronger operating profits and, in the
second half of 1995, the commercial aerospace industry began to restore depleted
inventories of titanium mill products and aircraft manufacturers began to
increase build rates. RMI estimates, based on U.S. Bureau of Mines data, that
industry mill products shipments to the commercial aerospace market in 1995 were
20 million pounds, an increase of approximately 18% compared to 1994. RMI
further estimates, based on U.S. Bureau of Mines data, that total industry
shipments in 1995 were approximately 43 million pounds, an increase of 26%
compared to 1994. RMI can give no assurance as to extent or duration of any
recovery in the commercial aerospace market or the extent to which such recovery
will result in increases in demand for titanium products.
During 1995, the use of titanium in golf clubs emerged as an important
nonaerospace market for the U.S. titanium industry. See "Business--Products and
Markets--Mill Products." The Company believes that titanium shipments for use in
golf clubs amounted to approximately 9% of U.S. industry mill product shipments
in 1995. Based on industry estimates, RMI believes that U.S. industry mill
product shipments to the golf club market could increase to eight million pounds
in 1996. The Company cannot give any assurances as to the extent or the level of
demand from the golf club market. The golf club market benefits RMI indirectly
by increasing prices for titanium mill products industry-wide. Although demand
for titanium scrap for the golf club manufacturing market has placed upward
pressure on the Company's raw material costs, this pressure has been more than
offset to date by higher selling prices for the Company's mill products.
In response to industry-wide conditions the Company closed its sponge
production facilities in early 1992, which allowed the Company to stem
immediately significant losses generated at these plants, as well as maintain
the flexibility to purchase titanium sponge and other raw materials, such as
foreign or domestic scrap, at favorable prices. The Company entered into two
long-term titanium sponge supply arrangements which assure a supply of a
substantial portion of the Company's expected sponge requirements. Prices for
the Company's 1996 requirements have already been set under these contracts and
other short term arrangements. In addition, RMI has negotiated at firm prices
approximately one-third of its anticipated sponge requirements for customer
orders scheduled for delivery in 1997. The Company will purchase the balance of
its sponge requirements at negotiated prices from a number of suppliers. If
demand for titanium products continues to increase, it is possible that supplies
of titanium sponge could become limited or that prices could increase
substantially, or both, and, as a result, that the Company's costs could rise
accordingly. See "Item 1--Business--Raw Materials." These actions have reduced
the Company's raw material costs during the years 1993 through 1995 and should
continue to improve the Company's competitive position.
RMI's strategy is to build on its leading position in the worldwide
titanium industry while maintaining a strong financial condition and stringent
quality, safety and environmental standards. RMI is emphasizing higher margin
products in its traditional markets, while continuing to develop new markets and
products such as seamless tubulars for oil and gas and geothermal energy
production and the use of billet for golf club applications. The Company cannot
give any assurances as to the extent to which it will be able to develop new
markets for its products, the time required for such development or the level of
demand for such products.
RESULTS OF OPERATIONS
Net Sales. Net sales in 1995 increased by $27.8 million, or 19%, compared
to 1994. This increase resulted primarily from an increase in the volume of mill
product shipments and higher average selling prices, partially offset by
decreased revenues from fabricated products and other services and other sales.
Shipments of mill products in 1995 increased to 14.4 million pounds, 25% higher
than in 1994, reflecting an increase in demand for mill products from commercial
aerospace and other industrial markets. The majority of this
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increase occurred in the second half of 1995, reflecting strengthening business
conditions as the year progressed. Approximately 75% of RMI's 1995 mill product
sales were aerospace related compared with approximately 63% in 1994. The
Company's average realized mill product selling price increased to $10.23 per
pound in 1995, approximately 6% higher than in 1994, and increased to $10.49 per
pound in the fourth quarter of 1995. Realized prices were favorably affected in
1995 by increasing demand from the golf club market. See "Overview" above.
Because the titanium drilling riser for the Conoco Heidrun project was
substantially completed in 1994, sales of fabricated products and other services
declined to $26.9 million in 1995 from $31.1 million in 1994. Other sales
decreased by $2.3 million, or 27%, compared to 1994, due to decreased funding
for the DOE remediation and restoration contract.
Net sales in 1994 increased by $16.0 million, a 12% increase, compared to
1993. This increase resulted primarily from increased revenues recognized in
connection with the titanium drilling riser contract and an increase in mill
product shipments. Shipments of mill products increased in 1994 to 11.5 million
pounds, 4% higher than in 1993. The Company's average realized selling price for
mill products of $9.63 per pound, however, remained virtually unchanged in 1994
compared to 1993. Prices on orders in 1994, while showing slight improvement,
reflected soft demand for titanium mill products. Sales of related products and
other services increased to $31.1 million in 1994 compared to $20.5 in 1993
primarily as a result of revenues recognized in connection with the titanium
drilling riser. Revenue recognized under the DOE remediation and restoration
contract decreased from $10.4 million to $8.5 million in 1994 due to decreased
DOE funding levels.
Gross Profit. Gross profit in 1995 improved to $6.2 million, an increase
of 100%, compared to $3.1 million in 1994. This improvement relates primarily to
increased shipments of titanium mill products and higher realized mill product
selling prices, partially offset by a reduction in sales of fabricated products
and other services, increases in raw material costs and an asset impairment
charge of $5.0 million following the adoption of SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." See Note 7 to the Consolidated Financial Statements
Gross profit in 1994 improved to a profit of $3.1 million compared to a
loss of $0.1 million in 1993. This improvement related primarily to the titanium
drilling riser contract as well as the favorable impact of increased mill
product shipments.
Selling, General and Administrative Expenses ("SG&A"). SG&A expenses of
$9.5 million in 1995 remained virtually flat compared to 1994, despite increased
sales in 1995, as a result of the Company's efforts to contain costs. SG&A
expenses increased by $0.4 million in 1994 compared to 1993 primarily as a
result of increased levels of business activity. As a percentage of sales, SG&A
expenses were 5.6% in 1995, 6.6% in 1994 and 7.2% in 1993.
Research, Technical and Product Development Expenses. The Company's total
research spending amounted to $3.4 million in 1995, $3.3 million in 1994 and
$2.4 million in 1993. The Company's major research objectives are to maintain
its technical expertise in titanium production, provide customer technical
support and develop new products and markets. Certain major customers have
assisted in funding the Company's overall product development effort. Such
funding, which is included as a reduction of research expense, reduced the
Company's portion of research expense to $1.9 million in 1995 and $1.5 million
in each of 1994 and 1993, respectively.
Operating Loss. The operating loss for 1995 amounted to $5.2 million
compared to an $8.0 million loss in 1994. This improvement resulted primarily
from increased shipments of mill products and higher realized mill product
selling prices, partially offset by a $5.0 million asset impairment charge
following the adoption of SFAS No. 121. Both shipments and selling prices were
favorably impacted by a general increase in demand for titanium mill products.
The operating loss for 1994 of $8.0 million compared to a loss of $10.7
million in 1993. The improved results in 1994 reflect profit recognized in
connection with the titanium drilling riser contract combined with an increase
in mill product shipments.
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Other Income (Expense). Other income (expense) for 1995 included a $1.9
million charge for impairment of the Company's investment in a joint venture.
Amounts in 1993 include a $1.4 million gain on sales and retirements of
equipment and facilities.
Interest Expense. Net interest expense amounted to $5.0 million in 1995,
$3.3 million in 1994 and $2.7 million in 1993. Interest expense increased in
1995 from 1994 due to higher levels of borrowing to support increased business
levels and higher overall interest rates. Interest expense increased in 1994
from 1993 due to significantly higher overall interest rates partially offset by
lower levels of borrowing.
Income Taxes. In 1995, an income tax benefit of $7.2 million was recorded
to recognize a portion of the Company's deferred tax assets believed more likely
than not to be realized under the provisions of SFAS No. 109, "Accounting for
Income Taxes." For additional information, see "Income Tax Considerations"
below. No tax provision or benefit was recorded in either 1994 or 1993.
Net Loss. In 1995, the Company reported a net loss of $4.6 million
compared to a net loss of $12.8 million in 1994 and $28.9 million in 1993. The
1995 results were adversely affected by a $5.0 million charge resulting from the
adoption of SFAS No. 121. The 1994 results were adversely affected by a $1.2
million charge representing the cumulative effect of adopting the provisions of
SFAS No. 112, "Employers' Accounting for Postretirement Benefits," while the
1993 results were adversely affected by a $16.9 million charge representing the
cumulative effect of adopting the provisions of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions."
OUTLOOK
RMI's order backlog increased to $159 million at February 29, 1996 from
$134 million at year-end 1995, $83 million at June 30, 1995 and $67 million at
year-end 1994. The following table summarizes the Company's quarterly order
backlog for the three years ended December 31, 1995. The Company defines "Order
backlog" as firm purchase orders generally subject, upon payment of specified
charges, to cancellation by the customer.
AS OF THE QUARTER ENDED
--------------------------------------------------
DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
----------- ------------ ------- --------
(IN MILLIONS)
1995............................ $ 134 $110 $83 $ 86
1994............................ 67 61 61 70
1993............................ 70 72 58 59
During the second half of 1995 and continuing into 1996, the Company has
experienced a significant increase in the volume of incoming orders at increased
prices. The Company estimates that as of February 29, 1996 orders for
approximately 90% of its anticipated 1996 shipments have been booked or shipped
at average prices approximately 15% higher than its 1995 average realized mill
product selling price of $10.23 per pound. The Company is currently booking
orders for titanium mill products for delivery in early 1997 at prices greater
than $12 per pound. The increase in demand has been driven primarily by the
recovery in the commercial aerospace market and the emergence of the golf club
market. As facility utilization in the titanium industry continues to grow and
lead times lengthen, the Company expects prices on new orders to continue to
strengthen.
The increase in demand for titanium products has put upward pressure on
prices for certain raw materials used by the Company. Prices paid by the Company
for titanium sponge have remained relatively stable due to the Company's long
term supply arrangements. Prices for titanium sponge under the terms of the
Company's long-term supply contracts are fixed for 1996, based on the quantity
purchased. Purchases of sponge above the quantities available under the
contracts would likely be purchased from other sources at higher prices. Due to
increased demand resulting primarily from the emerging golf club market, current
prices for titanium scrap, which accounts for approximately 40% of the Company's
raw material requirements, have increased approximately 46% from first quarter
1995 prices. Prices of certain alloying agents have also increased as a result
of increased demand. The Company, and others, have announced increased prices
and surcharges to recover these increased costs.
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The information included in this "Outlook" section is forward-looking and
involves risks and uncertainties that could significantly impact expected
results. The Company's outlook is significantly dependent upon the continued
growth of the commercial aerospace and golf club markets, its ability to recover
its raw material costs in the pricing of its products, the extent to which the
Company is able to develop new markets for its products, the time required for
such development and the level of demand for such products. See "Item 1.
Business--Industry Overview," "--Products and Markets--Mill Products" and "--
Raw Materials."
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used in operating activities totaled $7.7 million in 1995,
$13.2 million in 1994 and $4.2 million in 1993. The change in net cash flows
used in operating activities in 1995 compared to 1994 was due primarily to
improved results of operations partially offset by an increase in accounts
receivable and noncash deferred tax assets. The increase in net cash flows used
in operating activities in 1994 compared to 1993 was primarily the result of
increased inventory levels required for the Company's long-term contract for the
titanium drilling riser. Working capital amounted to $86.7 million at December
31, 1995, compared to $74.7 million at December 31, 1994. The increase in
working capital in 1995 compared to 1994 reflects an increase in inventories and
accounts receivable. The Company's working capital ratio was 3.73 to 1 at
December 31, 1995 compared to 3.60 to 1 at December 31, 1994.
In 1995, the Company's cash flow requirements for operating losses, capital
expenditures and working capital were funded by borrowings under its revolving
credit agreements. In 1994, the Company's cash flow requirements for operating
losses, capital expenditures and working capital were funded through proceeds
from a rights offering to holders of Common Stock.
At December 31, 1995, the Company had borrowings of $58.2 million under its
revolving credit agreement and $5.0 million under a second revolving credit
agreement guaranteed by the Export Import Bank of the United States. Other
long-term debt of $0.9 million consisted of industrial revenue bonds. At
December 31, 1995, RMI's percentage of total debt to total capitalization was
63%.
The Company is in the process of negotiating a new three-year credit
agreement with certain banks which would replace its existing credit agreements.
The Company expects the new agreement will contain lower borrowing rates and
other terms and conditions which will be more favorable than those of its
current revolving credit agreements. For additional information concerning the
Company's existing credit agreements, see Note 9 to the Consolidated Financial
Statements.
In 1994 the Company raised working capital through a rights offering to
shareholders. After deducting expenses of the offering, net proceeds increased
total shareholders' equity by approximately $26.4 million.
On March 8, 1996 the Company filed with the Securities and Exchange
Commission ("SEC") a Registration Statement on Form S-3 registering four million
shares of Common Stock, exclusive of shares subject to an underwriters'
over-allotment option, for a potential future public offering. Proceeds from the
offering would be used to reduce indebtedness outstanding under its existing
credit agreements. USX Corporation has announced that it intends to contribute
to its pension fund, concurrent with the closing of the stock offering referred
to above, approximately 2.5 million shares of RMI Common Stock that it currently
owns. USX has also announced that it does not intend to purchase any additional
shares of RMI Common Stock from the public offering. The public offering,
together with the USX pension contribution are not expected to result in an
ownership change within the meaning of Section 382 of the Internal Revenue Code
of 1986 as amended (the "Code"). For further information see "Income Tax
Considerations" below.
The Company anticipates that it will be able to fund its 1996 working
capital requirements and its capital expenditures primarily from funds generated
by operating activities and, to the extent necessary, from borrowings under its
negotiated credit facility.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 established
standards for accounting for stock-based compensation but also allows companies
to continue to account for stock-based compensation under the provisions of
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Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued
to Employees" and make certain additional disclosures in the notes to their
financial statements. The new standard is effective for fiscal years beginning
after December 15, 1995. It is the Company's intention to continue to account
for stock-based compensation in accordance with APB Opinion No. 25 and provide
the additional required disclosure in the notes to the consolidated financial
statements.
INCOME TAX CONSIDERATIONS
Section 382 Limitation. At December 31, 1995, the Company had net
operating loss carryforwards of approximately $104 million available to reduce
federal taxable income through 2010. If an "ownership change" were to occur
within the meaning of Section 382 of the Code, the utilization of net operating
loss carryforwards would be subject to an annual limitation. Generally, an
"ownership change" occurs with respect to a corporation if shareholders who own,
directly or indirectly, 5% or more of the capital stock of the corporation
increase their aggregate percentage ownership of such stock by more than 50
percentage points over the lowest percentage of such stock owned by such
shareholders at any time during a prescribed testing period. The proposed public
offering and the contribution by USX to its pension fund described above are not
expected to result in an ownership change that would cause the annual limitation
to apply. In the event the offering and the USX pension fund Contribution do not
cause such an ownership change, an ownership change could result from other
equity transactions immediately following such public offering and contribution,
including transactions such as exercises of stock options, purchases or sales of
Common Stock by certain stockholders, including USX and the USX pension fund,
and other issuances of Common Stock by the Company. If the annual limitation
were to apply, the amount of the limitation would generally equal the product of
(i) the fair market value of the Company's equity immediately prior to the
ownership change, with certain adjustments, including a possible adjustment to
exclude certain capital contributions made in the two years preceding the date
of the ownership change, and (ii) a long-term tax exempt bond rate of return
published monthly by the Internal Revenue Service. Should the annual limitation
apply, the Company believes that it would not materially affect the potential
use of the net operating loss carryforwards to reduce any future income tax
liabilities over time; however, it is possible that the Company's results in a
particular year could exceed the annual limitation, in which case such excess
would not be reduced by the net operating loss carryforward and the Company's
tax liability would be correspondingly higher.
SFAS No. 109 Effects. SFAS No. 109 requires a valuation allowance when it
is more likely than not that some portion or all of the deferred tax assets will
not be realized. It further states that forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in recent years. The ultimate realization of all or part of
the Company's deferred income tax assets depends on the Company's ability to
generate sufficient taxable income in the future.
In making an assessment of realizability at December 31, 1995, the Company
considered a number of factors, including the return to profitability in the
fourth quarter of 1995, a substantial and growing backlog of profitable orders
and a general improvement in overall industry operating conditions and business
fundamentals in the Company's key market sectors. The Company concluded that it
was appropriate to recognize a portion of its deferred tax assets, corresponding
to the level of income which could reasonably be expected over the course of a
historical titanium industry business cycle of approximately three years.
Accordingly, a portion of the valuation allowance provided in previous years was
released, resulting in a credit to income tax expense in 1995 of $7.2 million.
The remaining valuation allowance was retained, in light of the requirement in
SFAS No. 109 to give weight to objective evidence such as recent losses and the
historical titanium industry business cycle.
When preparing 1996 and future periods' interim and annual financial
statements, the Company will periodically evaluate its strategic and business
plans, in light of evolving business conditions, and the valuation allowance
will be adjusted for future income expectations resulting from that process, to
the extent different from those inherent in the valuation allowance established
as of December 31, 1995.
As a result, the application of the SFAS No. 109 valuation allowance
determination process could result in recognition of significant income tax
provisions or benefits in a single interim or annual period due to changes in
income expectations over a horizon that may span several years. Such tax
provision or benefit effect
17
20
would likely be material in the context of the specific interim or annual
reporting period in which changes in judgment about more extended future periods
are reported. This effect is a consequence of the application of the SFAS No.
109 valuation allowance determination process, which is a balance sheet oriented
model and which does not have periodic matching of pretax income or loss and the
related tax effects as an objective.
The Section 382 limitation described above could, if applicable, adversely
impact the income tax provision or benefit in a particular year as a result of
the application of the SFAS No. 109 valuation allowance determination process;
however, it is not expected to have an adverse impact over time.
If the Company's principal markets continue to exhibit improvement, and
such improvement is manifested in positive trends in the value and profitability
of customer orders and backlog, additional tax benefits may be reported in
future periods as the valuation allowance is further reduced. Alternatively, to
the extent that the Company's future profit expectations remain static or are
diminished, tax provisions may be charged against pretax income. In either
event, such valuation allowance-related tax provisions or benefits should not
necessarily be viewed as recurring. Further, subject to the effects, if any, of
the limitation described above, the amount of current taxes that the Company
expects to pay for the foreseeable future is minimal, and the Company's
carryforward tax attributes are viewed by management as a significant
competitive advantage to the extent that profits can be sheltered effectively
from tax and re-employed in the growth of the business.
ENVIRONMENTAL MATTERS
The Company is subject to environmental laws and regulations as well as
various health and safety laws and regulations that are subject to frequent
modifications and revisions. While the costs of compliance for these matters
have not had a material adverse impact on RMI in the past, it is impossible to
predict accurately the ultimate effect these changing laws and regulations may
have on the Company in the future. During each of 1995 and 1994, the Company
spent approximately $0.6 million for environmental-related expenditures, such
expenditures having totaled $0.9 million in 1993.
At December 31, 1995, the amount accrued for future environment-related
costs was $2.4 million. Based on available information, RMI believes its share
of potential environmental-related costs, before expected contributions from
third parties, is in a range from $3.7 million to $6.3 million, in the
aggregate. The amount accrued is net of expected contributions from third
parties (other than insurers) of approximately $2.1 million, which the Company
believes are probable. The Company has been receiving contributions from such
third parties for a number of years as partial reimbursement for costs incurred
by the Company. As these proceedings continue toward final resolution, amounts
in excess of those already provided may be necessary to discharge the Company
from its obligations for these projects. In 1992, the EPA filed a complaint and
proposed a $1.4 million civil penalty for alleged failure to comply with RCRA.
The Company is contesting the complaint. Based on the preliminary nature of the
proceeding the Company is currently unable to determine the ultimate liability,
if any, that may arise from this matter.
The ultimate resolution of these environmental matters could individually
or in the aggregate be material to the consolidated financial statements.
However, management believes that the Company will remain a viable and
competitive enterprise even though it is possible that these matters could be
resolved unfavorably.
For a further discussion of environmental matters, see Item 3--"Legal
Proceedings--Environmental."
CAPITAL EXPENDITURES
Gross capital expenditures in 1995 and 1994 amounted to $1.6 million and
$1.1 million, respectively. The Company has budgeted capital spending of
approximately $5.0 million in 1996. RMI anticipates that it can fund this
spending using cash provided from operations.
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21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Management.............................................................. 20
Report of Independent Accountants................................................. 20
FINANCIAL STATEMENTS:
Consolidated Statement of Operations for the years ended
December 31, 1995, 1994 and 1993........................................... 21
Consolidated Balance Sheet at December 31, 1995 and 1994..................... 22
Consolidated Statement of Cash Flows for the years ended
December 31, 1995, 1994 and 1993........................................... 23
Consolidated Statement of Shareholders' Equity for the years ended
December 31, 1995, 1994 and 1993........................................... 24
Notes to Consolidated Financial Statements................................... 25
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
19
22
REPORT OF MANAGEMENT
RMI Titanium Company has prepared and is responsible for the consolidated
financial statements and other financial information included in this Annual
Report. The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles and necessarily include some
amounts based on the best judgements and estimates of management. Financial
information displayed in other sections of this Annual Report is consistent with
that in the consolidated financial statements.
The Company maintains a comprehensive formalized system of internal
accounting controls. Management believes that the internal accounting controls
provide reasonable assurance that transactions are executed and recorded in
accordance with Company policy and procedures and that the accounting records
may be relied on as a basis for preparation of the consolidated financial
statements and other financial information. In addition, as part of their audit
of the consolidated financial statements, the Company's independent accountants,
who are elected by the shareholders, review and test the internal accounting
controls selectively to establish a basis of reliance thereon in determining the
nature, extent and timing of audit tests to be applied.
The Audit Committee of the Board of Directors, composed entirely of
directors who are not employees of the Company, meets regularly with the
independent accountants, management and internal auditors to discuss the
adequacy of internal accounting controls and the quality of financial reporting.
Both the independent accountants and internal auditors have full and free access
to the Audit Committee.
/s/ L. F. GIEG, Jr.
L. F. Gieg, Jr.
President and
Chief Executive Officer
/s/ T. G. RUPERT
T. G. Rupert
Senior Vice President and
Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RMI TITANIUM COMPANY
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of RMI Titanium Company and its subsidiaries at December 31, 1995 and
1994, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 2 to the financial statements, in 1995 the Company
adopted Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." As
discussed in Note 11 to the financial statements, in 1994 the Company adopted
Statement of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits." As discussed in Note 11 to the financial statements,
in 1993 the Company adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
PRICE WATERHOUSE LLP
Pittsburgh, Pennsylvania
January 26, 1996
20
23
RMI TITANIUM COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31
--------------------------------------
1995 1994 1993
---------- --------- ---------
Sales.................................................... $ 171,166 $ 143,392 $ 127,397
Operating costs:
Cost of sales (Note 7)................................... 164,949 140,289 127,486
Selling, general and administrative expenses............. 9,576 9,531 9,133
Research, technical and product development expenses..... 1,861 1,543 1,542
---------- --------- ---------
Total operating costs.......................... 176,386 151,363 138,161
---------- --------- ---------
Operating loss........................................... (5,220) (7,971) (10,764)
Other (expense) income--net.............................. (1,622) (291) 1,554
Interest expense......................................... (4,966) (3,300) (2,745)
---------- --------- ---------
Loss before income taxes................................. (11,808) (11,562) (11,955)
Provision (credit) for income taxes (Note 8)............. (7,200) -- --
---------- --------- ---------
Loss before cumulative effect of change in accounting
principle.............................................. (4,608) (11,562) (11,955)
Cumulative effect of change in accounting principle
(Note 11).............................................. -- (1,202) (16,938)
---------- --------- ---------
Net loss................................................. $ (4,608) $ (12,764) $ (28,893)
========== ========= =========
Net loss per common share:
Before cumulative effect of change in accounting
principle........................................... $ (0.30) $ (1.45) $ (8.14)
Cumulative effect of change in accounting principle.... -- (0.15) (11.53)
---------- --------- ---------
Net loss................................................. $ (0.30) $ (1.60) $ (19.67)
========== ========= =========
Weighted average shares outstanding (Note 4)............. 15,301,854 7,958,395 1,468,885
========== ========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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24
RMI TITANIUM COMPANY
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
1995 1994
--------- ---------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................ $ 509 $ 385
Receivables, less allowance for doubtful accounts of $1,670 and
$704............................................................... 41,251 28,846
Inventories.......................................................... 74,053 72,466
Deferred tax asset................................................... 1,036 --
Other current assets................................................. 1,656 1,674
--------- ---------
Total current assets............................................ 118,505 103,371
Property, plant and equipment, net of accumulated depreciation....... 39,964 50,016
Noncurrent deferred tax asset........................................ 6,164 --
Other noncurrent assets.............................................. 6,926 7,423
--------- ---------
Total assets.................................................... $ 171,559 $ 160,810
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.................................... $ 120 $ 120
Accounts payable..................................................... 17,646 17,832
Accrued wages and other employee costs............................... 7,237 7,238
Other accrued liabilities............................................ 6,764 3,487
--------- ---------
Total current liabilities....................................... 31,767 28,677
Long-term debt....................................................... 64,020 54,740
Accrued postretirement benefit cost.................................. 18,795 17,286
Noncurrent pension liabilities....................................... 18,078 15,501
Other noncurrent liabilities......................................... 2,010 2,010
--------- ---------
Total liabilities............................................... 134,670 118,214
--------- ---------
Contingencies (see Note 15)..........................................
SHAREHOLDERS' EQUITY:
Preferred Stock, no par value; 5,000,000 shares authorized;
no shares outstanding.............................................. -- --
Common Stock, $0.01 par value, 30,000,000 shares authorized;
15,908,091 and 15,838,661 shares issued (Note 4)................... 159 158
Additional paid-in capital (Note 4).................................. 151,715 151,058
Accumulated deficit.................................................. (103,526) (98,918)
Excess minimum pension liability..................................... (8,381) (6,633)
Treasury Common Stock, at cost (shares: 1995-568,198;
1994-567,100)...................................................... (3,078) (3,069)
--------- ---------
Total shareholders' equity...................................... 36,889 42,596
--------- ---------
Total liabilities and shareholders' equity...................... $ 171,559 $ 160,810
========= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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25
RMI TITANIUM COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31
----------------------------------
1995 1994 1993
-------- -------- --------
CASH PROVIDED FROM (USED IN) OPERATIONS:
Net loss................................................... $ (4,608) $(12,764) $(28,893)
Adjustment for items not affecting funds from operations:
Change in accounting principle........................... 5,031 1,202 16,938
Compensation expense for stock appreciation rights....... 1,465 -- --
Depreciation............................................. 6,443 6,140 6,298
Deferred income taxes.................................... (7,200) -- --
Impairment of joint venture investment................... 1,901 -- --
Other-noncash charges--net............................... 2,137 1,757 (493)
-------- -------- --------
5,169 (3,665) (6,150)
-------- -------- --------
CHANGES IN ASSETS AND LIABILITIES (EXCLUDING CASH):
Receivables................................................ (13,159) (248) (3,792)
Inventories................................................ (1,587) (14,974) 1,332
Accounts payable........................................... (186) 6,062 2,881
Other current liabilities.................................. 2,469 (331) 2,475
Other assets and liabilities............................... (732) 197 (883)
Other...................................................... 301 (258) (92)
-------- -------- --------
(12,894) (9,552) 1,921
-------- -------- --------
Cash used in operating activities................ (7,725) (13,217) (4,229)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in joint ventures............................ -- (172) (1,216)
Proceeds from sale of facilities......................... 130 120 2,124
Capital expenditures..................................... (1,552) (1,063) (1,014)
-------- -------- --------
Cash used in investing activities................ (1,422) (1,115) (106)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock............... -- 26,422 --
Net borrowings under revolving credit agreements......... 9,400 15,750 4,500
Debt repayments.......................................... (120) (27,670) (120)
Treasury Common Stock repurchased........................ (9) (78) (22)
-------- -------- --------
Cash from financing activities................... 9,271 14,424 4,358
-------- -------- --------
Increase in cash and cash equivalents...................... 124 92 23
Cash and cash equivalents at beginning of period........... 385 293 270
-------- -------- --------
Cash and cash equivalents at end of period................. $ 509 $ 385 $ 293
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized)........ $ 4,320 $ 3,283 $ 2,548
======== ======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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26
RMI TITANIUM COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
EXCESS
ADDT'L. RETAINED TREASURY MINIMUM
SHARES COMMON DEFERRED PAID-IN EARNINGS COMMON PENSION
OUTSTANDING STOCK COMPENSATION CAPITAL (DEFICIT) STOCK LIABILITY
----------- ------ ------------ -------- --------- -------- --------
Balance at December 31,
1992..................... 14,604,384 $ 152 $ (249) $124,306 $ (57,261) $(2,969) $ (677)
Compensation expense
recognized............... -- -- 245 -- -- -- --
Shares issued for
Restricted Stock Plans... 122,700 1 (201) 200 -- -- --
Shares issued in lieu of
cash Directors'
Compensation............. 35,439 -- -- 72 -- -- --
Treasury Common Stock
purchased at cost........ (12,064) -- -- -- -- (22) --
Net loss................... -- -- -- -- (28,893) -- --
Excess minimum pension
liability................ -- -- -- -- -- -- (6,843)
----------- ----- ------ -------- --------- ------- -------
Balance at December 31,
1993..................... 14,750,459 $ 153 $ (205) $124,578 $ (86,154) $(2,991) $(7,520)
Compensation expense
recognized............... -- -- 205 -- -- -- --
One-for-ten reverse stock
split effective March 31,
1994 (Note 4)............ (13,275,414) (138) -- 138 -- -- --
Shares issued as result of
Rights Offering (Note
4)....................... 13,775,057 143 -- 26,279 -- -- --
Shares issued in lieu of
cash Directors'
Compensation............. 25,783 -- -- 59 -- -- --
Treasury Common Stock
purchased at cost........ (4,564) -- -- -- -- (78) --
Shares issued for
Restricted Stock Award
Plans.................... 240 -- -- 4 -- -- --
Net loss................... -- -- -- -- (12,764) -- --
Excess minimum pension
liability................ -- -- -- -- -- -- 887
----------- ----- ------ -------- --------- -------- -------
Balance at December 31,
1994..................... 15,271,561 $ 158 $ -- $151,058 $ (98,918) $(3,069) $(6,633)
Shares issued in lieu of
cash Directors'
Compensation............. 4,952 -- -- 38 -- -- --
Treasury Common Stock
purchased at cost........ (1,098) -- -- -- -- (9 ) --
Shares issued for
Restricted Stock Award
Plans.................... 10,000 -- -- 71 -- -- --
Shares issued from exercise
of employee stock
options.................. 54,478 1 -- 548 -- -- --
Net loss................... -- -- -- -- (4,608) -- --
Excess minimum pension
liability................ -- -- -- -- -- -- (1,748)
----------- ----- ------ -------- --------- ------- -------
Balance at December 31,
1995..................... 15,339,893 $ 159 $ -- $151,715 $(103,526) $(3,078) $(8,381)
=========== ===== ====== ======== ========= ======= =======
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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RMI TITANIUM COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1--ORGANIZATION AND OPERATIONS:
The consolidated financial statements of RMI Titanium Company (the
"Company") include the financial position and results of operations for the
Company and its subsidiaries.
The Company is a successor to entities that have been operating in the
titanium industry since 1958. In 1990, USX Corporation ("USX") and Quantum
Chemical Corporation ("Quantum") transferred their entire ownership interest in
the Company's immediate predecessor, RMI Company, an Ohio general partnership,
to the Company in exchange for shares of the Company's Common Stock (the
"Reorganization"). Quantum then sold its shares to the public. USX retained
ownership of its shares. At December 31, 1995, approximately 50.7% of the
outstanding Common Stock was owned by USX. For additional information on the
Company's capital structure, see Note 4.
The Company's operations are conducted primarily in one business segment,
the production and marketing of titanium metal and related products. In 1995, no
single customer accounted for more than 10% of consolidated revenues. In the
years ended December 31, 1995, 1994 and 1993, export sales were $30.1 million,
$39.8 million, and $24.2 million, respectively, principally to customers in
Western Europe.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of RMI Titanium
Company and its majority owned subsidiaries. All significant intercompany
accounts and transactions are eliminated.
Use of estimates:
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at year-end and
the reported amounts of revenues and expenses during the year.
Inventories:
Inventories are primarily valued at cost as determined by the last-in,
first-out (LIFO) method which, in the aggregate, is lower than market. Inventory
costs generally include materials, labor costs and manufacturing overhead
(including depreciation).
Depreciation and amortization:
In general, depreciation and amortization of properties is determined using
the straight-line method over the estimated useful lives of the various classes
of assets.
Retirement and disposal of properties:
The cost of properties retired or otherwise disposed of, together with the
accumulated depreciation provided thereon, is eliminated from the accounts. The
net gain or loss is recognized in other income and expense.
Maintenance and repairs:
Routine maintenance, repairs and replacements are charged to operations.
Expenditures that materially increase values, change capacities or extend useful
lives are capitalized.
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28
Long-lived assets:
Effective June 30, 1995, the Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS No. 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The new standard
requires that certain long-lived and intangible assets be written down to fair
value whenever an impairment review indicates that the carrying value of the
asset cannot be recovered. (See Note 7).
Revenue and cost recognition:
Revenues from the sale of commercial products are recognized upon passage
of title to the customer, which in most cases coincides with shipment. Revenues
from long-term, fixed-price contracts are recognized on the
percentage-of-completion method, measured based on the achievement of certain
milestones in the production and fabrication process. Such milestones have been
weighted based on the critical nature of the operation performed, which
management believes is the best available measure of progress on these
contracts. Revenues related to cost-plus-fee contracts are recognized on the
basis of costs incurred during the period plus the fee earned.
Contract costs comprise all direct material and labor costs, including
outside processing fees, and those indirect costs related to contract
performance. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
Contract costs and estimated earnings on uncompleted contracts, net of
progress billings, are included in the consolidated balance sheet under
"Inventories."
Pensions:
The Company and its subsidiaries have a number of noncontributory pension
plans which cover substantially all employees. Most employees are covered by
defined benefit plans in which benefits are based on years of service and annual
compensation. Contributions to the defined benefit plans, as determined by an
independent actuary in accordance with regulations, provide not only for
benefits attributed to date but also for those expected to be earned in the
future.
The Company's policy is to fund pension costs at amounts equal to the
minimum funding requirements of ERISA plus additional amounts as may be approved
from time to time.
Postretirement benefits:
The Company provides certain health care benefits and life insurance
coverage for certain of its employees and their dependents. Under the Company's
current plans, certain of the Company's employees will become eligible for those
benefits if they reach retirement age while working with the Company.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 106, ("SFAS No. 106") "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The new standard requires accrual
accounting for postretirement benefits, similar to accounting for pensions,
rather than recognizing cost as claims are paid, which was the method the
Company previously used. As permitted by SFAS No. 106, the Company elected to
recognize the accumulated postretirement benefit obligation at adoption
(transition obligation) immediately as a cumulative effect of a change in
accounting principle.
The Company does not prefund postretirement benefit costs, but rather pays
claims as presented.
Income tax:
In connection with the Reorganization, the tax basis of the Company's
assets at that time reflected the fair market value of the Common Stock then
issued by the Company. The new tax basis was allocated to all assets of the
Company based on federal income tax rules and regulations, and the results of an
independent appraisal. For financial statement purposes, the Company's assets
are carried at historical cost. As a result, the tax basis of a significant
portion of the Company's assets exceeds the related book values and depreciation
and amortization for tax purposes exceeds the corresponding financial statement
amounts.
26
29
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes."
Under the liability method specified by SFAS No. 109, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities as measured by the enacted tax
rates which will be in effect when these differences reverse. Prior to the
adoption of SFAS No. 109, the Company accounted for income taxes pursuant to
Statement of Financial Accounting Standards No. 96 ("SFAS No. 96"), "Accounting
for Income Taxes." The change from SFAS No. 96 to SFAS No. 109 did not have a
material effect on the financial position, results of operations or cash flows
of the Company.
Stock-based compensation:
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." The statement established standards for accounting
for stock-based compensation but also allows companies to continue to account
for stock-based compensation under the provisions of Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and make
certain additional disclosures in the notes to financial statements. The new
standard is effective for fiscal years beginning after December 15, 1995. It is
the Company's intention to continue to account for stock-based compensation in
accordance with APB Opinion No. 25 and provide the additional required
disclosure pursuant to the provisions of SFAS No. 123 in the notes to the
financial statements.
Cash flows:
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
NOTE 3--LONG-TERM CONTRACTS:
During 1993, the Company executed an agreement to supply all the titanium
components for the world's first high-pressure drilling riser for use by a major
oil company in development of a project in the Norwegian sector of the North Sea
(the "Riser Contract"). Work commenced on the Riser Contract during the third
quarter of 1993, and is now completed with final shipments of the riser joints
having been made in the first quarter of 1995. During the fourth quarter of
1994, the Company was awarded a three-year contract to supply all of the
titanium pipe casing required for a geothermal energy facility located in the
Imperial Valley of California. The initial release under the contract was
delivered in late 1995 and early 1996.
During 1995, 1994 and 1993, the Company recorded estimated revenues earned
under the above referenced contracts of $5.8 million, $13.2 million and $4.3
million, respectively. At December 31, 1995 and 1994, there were $2.5 million
and $8.1 million, respectively, included in the consolidated balance sheet under
"Inventories," which represents the amount of cost incurred on the contracts,
plus estimated earnings, less progress billings. (See Notes 5 and 6).
In October 1993, the Company executed a long-term contract with the U.S.
Department of Energy ("DOE") covering the remediation and restoration of the
Company's former Extrusion Plant in Ashtabula, Ohio. The contract calls for the
Company to earn fees on cost-plus-fee basis, and acknowledges the DOE's
responsibility for the remediation of the site. During 1995, 1994 and 1993, the
Company recognized revenues, including fees, of $6.2 million, $8.5 million and
$10.4 million, respectively, under the contract. Total estimated revenues under
this contract are not determinable.
NOTE 4--REVERSE STOCK SPLIT AND RIGHTS OFFERING:
At its Annual Meeting held on March 31, 1994, the Company's shareholders
approved an amendment to the Articles of Incorporation of the Company, effecting
a one-for-ten reverse stock split. A Certificate of Amendment to the Articles of
Incorporation was filed with the Ohio Secretary of State on March 31, 1994, and
the reverse split became effective on that date. Pursuant to the reverse split,
each certificate representing shares of Common Stock outstanding immediately
after the reverse split was deemed to represent one-tenth the number of shares
it represented immediately prior to the reverse split. In order to supplement
its financial
27
30
resources and provide financing for new titanium market opportunities, the Board
of Directors approved a rights offering to raise up to $30 million. Each record
holder of Common Stock at the close of business on June 24, 1994 received five
transferable rights for each share of Common Stock. Each right entitled the
holder to purchase two shares of RMI Common Stock for a price of $2.00 per
share. The rights offering expired July 22, 1994. Approximately 93% of the total
number of rights were exercised. The exercise of the rights resulted in the
issuance of 13,775,057 new shares of the Company's Common Stock. Gross proceeds
from the rights offering were $27.6 million. Net proceeds increased
Shareholders' Equity by approximately $26.4 million. As of December 31, 1995,
USX Corporation beneficially owns approximately 50.7% of the Company's Common
Stock. However, in accordance with the provisions of a voting trust agreement,
USX has placed 1,319,175 shares of RMI Common Stock into the trust so that the
number of shares of stock held by USX and its affiliates outside the trust do
not exceed the number of shares held by all other holders. This arrangement
resulted in USX (exclusive of its affiliates) having a direct voting interest in
RMI as of December 31, 1995 of approximately 42%. Per share and weighted average
share amounts reported herein have been adjusted to reflect the reverse split
and subsequent rights offering. Treasury Common Stock was not affected by the
reverse split or rights offering.
NOTE 5--INVENTORIES:
DECEMBER 31
-----------------------
1995 1994
-------- --------
Raw materials and supplies................................... $ 22,609 $ 13,825
Work-in-process and finished goods........................... 71,290 71,933
Adjustment to LIFO values.................................... (19,846) (13,292)
-------- --------
$ 74,053 $ 72,466
======== ========
Included in inventories are costs relating to the Riser Contract and
geothermal pipe contract. Such costs, net of amounts recognized to date,
amounted to $2.5 million in 1995 and $8.1 million in 1994.
During 1993 LIFO inventory quantities, which were carried at lower costs
than those prevailing in prior years, were reduced. The effect of this reduction
was to reduce cost of sales for 1993 by $128.
NOTE 6--ACCOUNTS RECEIVABLE:
DECEMBER 31
---------------------
1995 1994
------- -------
Trade and commercial customers................................. $39,655 $29,127
Progress billings on uncompleted contracts..................... 2,604 --
U. S. Government-DOE........................................... 662 423
------- -------
$42,921 $29,550
Less allowance for doubtful accounts........................... (1,670) (704)
------- -------
$41,251 $28,846
======= =======
28
31
NOTE 7--PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost and consists of the
following:
DECEMBER 31
---------------------
1995 1994
-------- --------
Land......................................................... $ 659 $ 659
Buildings and improvements................................... 36,451 36,443
Machinery and equipment...................................... 77,409 79,460
Other........................................................ 13,684 13,607
Construction in progress..................................... 5,541 7,326
-------- --------
133,744 137,495
Less -- Accumulated depreciation............................. 93,780 87,479
-------- --------
$ 39,964 $ 50,016
======== ========
The Company elected to adopt SFAS No. 121 effective June 30, 1995. After
completing a review of its assets, the Company impaired the value of an asset
consisting of design and engineering work for a proposed titanium tetrachloride
facility. This asset was impaired due to recent market developments, the
conclusion of certain joint venture negotiations and the determination that such
a facility was not likely to be constructed in the near future. The asset
carrying value has been reduced from $5.0 million to a nominal amount reflecting
a fair value determination under SFAS No. 121 versus a determination of ultimate
net realizable value under the Company's previous impairment approach.
NOTE 8--INCOME TAXES:
As discussed in Note 2, effective January 1, 1993, the Company adopted the
provisions of SFAS No. 109.
Deferred taxes result from the following (in thousands):
DECEMBER 31
---------------------
1995 1994
-------- --------
Deferred taxes assets:
Loss carryforwards ($104,133 expiring in 2006 through
2010)................................................... $ 37,488 $ 31,838
Inventories................................................ 5,929 5,590
Property, plant and equipment.............................. 6,223 5,494
Intangible assets.......................................... 1,514 2,243
Other postretirement benefit costs......................... 6,522 6,090
Other employment related items............................. 2,771 2,001
Other...................................................... 2,789 1,410
Valuation allowance........................................ (56,036) (54,666)
-------- --------
Total deferred tax assets............................... 7,200 --
-------- --------
Deferred tax liabilities..................................... -- --
-------- --------
Net deferred taxes...................................... $ 7,200 $ --
======== ========
SFAS No. 109 requires a valuation allowance when it is "more likely than
not that some portion or all of the deferred tax assets will not be realized."
It further states that "forming a conclusion that a valuation allowance is not
needed is difficult when there is negative evidence such as cumulative losses in
recent years." The ultimate realization of this deferred income tax asset
depends on the Company's ability to generate sufficient taxable income in the
future. The Company has evaluated the available evidence supporting the
realization of future taxable income and, based upon that evaluation, believes
it is more likely than not at this time that a portion of its deferred tax
assets will be realized. Factors considered in the evaluation process included
the return to profitability during the fourth quarter of 1995, a substantial and
growing backlog of profitable orders and a general improvement in overall
titanium industry operating conditions. Accordingly, a portion of the valuation
allowance was released, resulting in a credit to income tax expense in the
fourth quarter of 1995. The remaining valuation allowance was retained, in light
of the requirement in SFAS No. 109 to give weight to objective evidence such as
recent losses and the historical titanium industry business cycle.
29
32
When preparing 1996 and future periods' interim and annual financial
statements, the Company will periodically evaluate its strategic and business
plans, in light of evolving business conditions, and the valuation allowance
will be adjusted for future income expectations resulting from that process, to
the extent different from those inherent in the valuation allowance established
as of December 31, 1995.
If an "ownership change" were to occur within the meaning of Section 382 of
the Internal Revenue Code of 1986, as amended, the utilization of net operating
loss carryforwards would be subject to an annual limitation. Should the annual
limitation apply, the Company believes that it would affect the timing of the
use of, but not the ultimate ability of the Company to use, the net operating
loss carryforwards to reduce future income tax liabilities.
The difference between the statutory tax rate of 35% applied to the pretax
loss and the effective tax rate for the year ended December 31, 1995 is due
principally to the release of $7.2 million of the valuation allowance.
NOTE 9--LONG-TERM DEBT:
On May 3, 1995, the Company reached agreement with the participating banks
on the terms of an amendment to the $75 million revolving credit facility. The
new agreement extends the maturity of the loan from March 15, 1996 to March 31,
1997. The amendment also modifies an existing financial covenant for the
requirement to maintain a minimum balance of shareholders' equity, and
provisions requiring the imposition of a borrowing base formula. Under the
borrowing base formula, the Company can borrow up to the lesser of $75 million
or an amount equal to the products of the aggregate value of each of various
categories of collateral and an advance rate established by the banks for each
category of collateral, plus an available overadvance. The agreement also
contains a provision that if USX were to cease to beneficially own at least 48%
of the Company's voting equity securities, the terms of the agreement would be
subject to renegotiation and, in such event, failure by the Company and the
banks to reach agreement on appropriate amendments to the facility could
constitute an event of default. As of December 31, 1995 the Company was in
compliance with the covenants and terms of the amended revolving credit
facility. At December 31, 1995, the available and unused portion of the facility
was $16.8 million. The Company is currently negotiating with certain of the
participating banks to replace the existing agreement.
The Company and the banks which are parties to the amended revolving credit
facility are also parties to a second revolving credit facility which provides
for up to an additional $5 million of borrowings. The second facility permits
borrowings up to an amount determined pursuant to a borrowing base formula which
includes only certain collateral related to, or arising out of, the Company's
export sales. The second facility, which matures on September 26, 1996, is
guaranteed by the Export Import Bank of the United States. This facility
continues to be classified as long-term debt at December 31, 1995 based on the
company's intent and ability to refinance at maturity through the use of its $75
million revolving credit facility.
DECEMBER 31
-------------------
1995 1994
------- -------
Credit Agreement, dated May 3, 1995, final maturity March 31, 1997,
bearing interest at rates ranging from 7.93% to 8.11% at December 31,
1995 and 7.44% to 7.83% at December 31, 1994........................... $58,200 $53,800
Foreign Loan Agreement, dated May 3, 1995, final maturity September 26,
1996 bearing interest at 7.18% at December 31, 1995.................... 5,000 --
Industrial revenue bond bearing interest at a floating rate based on
weekly tax exempt market rates (5.5% and 6.1% at December 31, 1995 and
1994, respectively) repayable in annual sinking fund payments of $120
over 15 years from October 1988........................................ 940 1,060
Current portion of long-term debt........................................ (120) (120)
------- -------
$64,020 $54,740
======= =======
30
33
The minimum principal payments on long-term debt outstanding at December
31, 1995 for the succeeding five years are as follows:
1996........................................... $ 120
1997........................................... 63,320
1998........................................... 120
1999........................................... 120
2000........................................... 120
NOTE 10--PENSION PLANS:
Pension expense was determined assuming an expected rate of return on plan
assets of 9% for 1995 and 1994 and 10% in 1993. The components of pension
expense for the three years ended December 31, 1995 are summarized as follows:
1995 1994 1993
------------------ ----------------- -----------------
Service cost....................... $ 1,063 $ 1,242 $ 1,092
Interest cost...................... 5,064 4,755 4,940
Return on plan assets:
Actual........................... (10,598) 809 (3,460)
Deferred gain (loss)............. 6,095 (4,503) (5,422) (4,613) (1,595) (5,055)
------- ------ ------
Net amortization and deferral...... 606 693 611
------- ------- -------
Pension expense.................... $ 2,230 $ 2,077 $ 1,588
======= ======= =======
Funds' status--The benefit obligations at December 31, 1995 and 1994 were
determined using discount rates of 7.0% and 8.25%, respectively, and an assumed
rate of compensation increase of 5.75% for both years.
DECEMBER 31
---------------------
1995 1994
-------- --------
Fair value of plan assets...................................... $ 52,292 $ 44,465
Projected benefit obligation (PBO)............................. (75,175) (64,231)
-------- --------
Plan assets less than PBO...................................... (22,883) (19,766)
Unrecognized net loss.......................................... 12,277 9,967
Unrecognized transition obligation............................. 1,484 1,791
Unrecognized prior service cost................................ 3,903 2,579
Adjustment required to recognize minimum liability............. (14,068) (11,366)
-------- --------
Net pension liability........................................ $(19,287) $(16,795)
======== ========
Accumulated benefit obligation................................. $(71,579) $(61,260)
======== ========
Vested benefit obligation...................................... $(66,810) $(57,962)
======== ========
As of December 31, 1995, approximately 51% of the plans' assets are
invested in equity securities, and 39% in government debt instruments and the
balance in cash equivalents or debt securities.
Pursuant to the provisions of Statement of Financial Accounting Standards
No. 87 "Employers Accounting for Pensions," the Company recorded in other
noncurrent liabilities an additional minimum pension obligation of $14.1 million
and $11.4 million as of December 31, 1995 and 1994, respectively, representing
the amount by which the accumulated benefit obligation exceeded the fair value
of plan assets plus accrued amounts previously recorded.
NOTE 11--POSTRETIREMENT HEALTH CARE BENEFITS AND OTHER EMPLOYEE BENEFITS:
As discussed in Note 2, RMI adopted SFAS No. 106 effective January 1, 1993.
The Company elected to recognize immediately the transition obligation
determined at the date of adoption of the new accounting
31
34
standard. The cumulative effect of this change in accounting principle resulted
in a charge of $16.9 million to the Company's 1993 results.
Net periodic postretirement benefit cost for the three years ended December
31, 1995 included the following components (in thousands):
1995 1994 1993
------ ------ ------
Service cost..................................... $ 266 $ 357 $ 316
Interest cost.................................... 1,543 1,533 1,337
Net amortization and deferrals................... 119 254 --
------ ------ ------
$1,928 $2,144 $1,653
====== ====== ======
The following table sets forth the plans' status reconciled with the amount
reported in the Company's balance sheet at December 31, 1995 and 1994 (in
thousands):
1995 1994
-------- --------
Accumulated Postretirement Benefit Obligation ("APBO") attributable to:
Retirees..................................................... $(13,020) $(11,867)
Active participants.......................................... (8,692) (7,242)
-------- --------
Total APBO................................................ $(21,712) $(19,109)
======== ========
Accrued liability included in balance sheet, including
transition
obligation................................................... $(18,199) $(17,768)
Unrecognized net loss.......................................... (3,513) (1,341)
-------- --------
Total APBO................................................ $(21,712) $(19,109)
======== ========
For measurement purposes, a 5% annual rate of increase in the per capita
cost of postretirement medical benefits was assumed beginning in 1996 and
declining to 0% in 2004. The ultimate costs of certain of the Company's retiree
health care plans are capped at contractually determined out-of-pocket spending
limits. The annual rate of increase in the per capita costs for these plans is
limited to the contractually determined spending cap. The health care cost trend
assumption has a significant effect on the amounts reported. For example,
increasing the health care cost trend rate by one percentage point in each year
would increase the accumulated postretirement benefit obligation at December 31,
1995 by $2.3 million and increase net periodic expense by $0.2 million. The
discount rate used in determining the accumulated postretirement benefit
obligation at December 31, 1995 and 1994 was 7.0% and 8.25%, respectively.
Effective January 1, 1994 the Company adopted the provisions of Statement
of Financial Accounting Standards No. 112 ("SFAS No. 112"), "Employer's
Accounting for Postemployment Benefits." The results for the year ended December
31, 1994 reflect a one-time charge of $1.2 million representing the cumulative
effect of adopting the new standard. The liabilities recorded pursuant to SFAS
No. 112 relate principally to workers' compensation.
NOTE 12--OPERATING LEASES:
The Company and its subsidiaries have entered into various operating leases
for the use of certain equipment, principally office equipment and vehicles. The
leases generally contain renewal options and provide that the lessee pay
insurance and maintenance costs. The total rental expense under operating leases
amounted to $1.3 million in 1995, $1.3 million in 1994, and $1.4 million in
1993. Future commitments under operating leases are considered to be immaterial
by management of the Company.
NOTE 13--TRANSACTIONS WITH RELATED PARTIES:
The Company, in the ordinary course of business, purchases goods and
services, including conversion services, from USX and related companies. The
cost of such transactions to the Company amounted to approximately $1.3 million
in 1995, $0.7 million in 1994 and $0.1 million in 1993. The cost of these
transactions were on terms no less favorable to the Company than those obtained
from other parties. On August 2, 1993 the United States Steel and Carnegie
Pension Fund (the "Pension Fund") was appointed as trustee of the Company's
pension plans. The Pension Fund has for many years acted as trustee of USX
32
35
Corporation employee benefit plans. The Pension Fund is a registered investment
advisor under the Investment Advisors Act of 1940, and receives a negotiated fee
for such services. Other transactions with related parties are incidental to the
Company's business and are not significant.
NOTE 14--OTHER INCOME STATEMENT INFORMATION:
Costs incurred for repairs and maintenance of plant and equipment totaled
$4.8 million, $3.3 million, and $2.8 million, for the years ended December 31,
1995, 1994, and 1993, respectively.
Real and personal property taxes amounted to $1.8 million, $1.7 million,
and $1.5 million, for the years ended December 31, 1995, 1994, and 1993,
respectively.
Other income (expense) for 1995 includes a $1.9 million impairment of the
Company's investment in the Permipipe Titanium AS joint venture. 1993 amounts
include a $1.4 million gain on sales and retirements of equipment and
facilities.
NOTE 15--CONTINGENCIES:
In connection with the Reorganization, the Company has agreed to indemnify
USX and Quantum against liabilities related to their ownership of RMI Company
and its immediate predecessor, Reactive Metals, Inc., which was formed by USX
and Quantum in 1964.
The Company is the subject of, or a party to, a number of pending or
threatened legal actions involving a variety of matters.
AIRCRAFT PRODUCT LIABILITY
The Company was named as a defendant in a number of cases arising from the
aircraft crash at Sioux City, Iowa, which occurred on July 19, 1989. In its
final report, issued November 1, 1990, the National Transportation Safety Board
("NTSB") concluded that the titanium used to manufacture the fan disc which
ultimately failed, leading to the crash, was supplied by a major competitor of
the Company. In November, 1995 the Company was granted summary judgement in this
matter dismissing it from all cases.
ENVIRONMENTAL MATTERS
In the ordinary course of business, the Company is subject to pervasive
environmental laws and regulations concerning the production, handling, storage,
transportation, emission, and disposal of waste materials and is also subject to
other federal and state laws and regulations regarding health and safety
matters. These laws and regulations are constantly evolving, and it is not
currently possible to predict accurately the ultimate effect these laws and
regulations will have on the Company in the future.
On October 9, 1992 the U. S. Environmental Protection Agency ("EPA") filed
a complaint alleging certain violations of the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA") at the Company's now closed Sodium
Plant in Ashtabula, Ohio. The EPA's determination is based on information
gathered during inspections of the facility in February, March and June of 1991.
Under the complaint the EPA proposes to assess a civil penalty of approximately
$1.4 million for alleged failure to comply with RCRA. The Company is contesting
the complaint. It is the Company's position that it has complied with the
provisions of RCRA and that the EPA's assessment of penalties is inappropriate.
A formal hearing has been requested and informal discussions with the EPA to
settle this matter are ongoing. Based on the preliminary nature of the
proceedings, the Company is currently unable to determine the ultimate
liability, if any, that may arise from this matter.
The Company is involved in investigative or cleanup projects under federal
or state environmental laws at a number of waste disposal sites, including the
Fields Brook Superfund Site. Given the status of the proceedings with respect to
these sites, ultimate investigative and remediation costs cannot presently be
accurately predicted, but could, in the aggregate be material. Based on the
information available regarding the current ranges of estimated remediation
costs at currently active sites, and what the Company believes will be its
ultimate share of such costs, provisions for environmental-related costs have
been recorded. These
33
36
provisions are in addition to amounts which have previously been accrued for the
Company's share of environmental study costs.
With regard to the Fields Brook Superfund Site, the Company, together with
31 other companies, has been identified by the EPA as a potentially responsible
party ("PRP") with respect to a superfund site defined as the Fields Brook
Watershed in Ashtabula, Ohio, which includes the Company's now closed Ashtabula
facilities. The EPA's 1986 estimate of the cost of remediation of the Fields
Brook operable sediment unit was $48 million. Recent studies, together with
improved remediation technology and redefined cleanup standards, have resulted
in a more recent estimate of the remediation cost of approximately $25 million.
The actual cost of remediation may vary from the estimate depending upon any
number of factors.
The EPA, in March 1989, ordered 22 of the PRPs to conduct a design phase
study for the sediment operable unit and a source control study, which studies
are currently estimated to cost $19 million. The Company, working cooperatively
with fourteen others in accordance with two separate agreements, is complying
with the order. The Company has accrued and has been paying its portion of the
cost of complying with the EPA's order, which includes the studies. It is
anticipated that the studies will be completed no earlier than late 1996. Actual
cleanup would not commence prior to that time. The Company's share of the design
cost has been established at 9.95%. On June 21, 1995, the Company and twelve
others entered into a Phase 2 (actual cleanup) allocation agreement which
assigns 9.44% of the cost to the Company. However, the actual percentage may be
more or less based on contributions from other parties which are not currently
participating in the Phase 2 allocation agreement.
At December 31, 1995, the amount accrued for future environmental-related
costs was $2.4 million. Based on available information, RMI believes its share
of potential environmental-related costs, before expected contributions from
third parties, is in a range from $3.7 million to $6.3 million, in the
aggregate. The amount accrued is net of expected contributions from third
parties (other than insurers) of approximately $2.1 million, which the Company
believes are probable. The Company has been receiving contributions from such
third parties for a number of years as partial reimbursement for costs incurred
by the Company. As these proceedings continue toward final resolution, amounts
in excess of those already provided may be necessary to discharge the Company
from its obligations for these projects.
The Company is also the subject of, or a party to, a number of other
pending or threatened legal actions involving a variety of matters.
The ultimate resolution of these foregoing contingencies could,
individually or in the aggregate, be material to the consolidated financial
statements. However, management believes that the Company will remain a viable
and competitive enterprise even though it is possible that these matters could
be resolved unfavorably.
For a more detailed discussion of environmental matters, see
"Business--Legal Proceedings-- Environmental."
NOTE 16--STOCK OPTION AND RESTRICTED STOCK AWARD PLANS:
STOCK OPTION INCENTIVE PLAN:
The 1989 Stock Option Incentive Plan authorized the granting of options to
purchase up to 775,500 shares of Common Stock to eligible officers and key
management employees at not less than the market value on the date the options
are granted. Options granted included stock appreciation rights. The option
period may not exceed ten years from the date of the grant. During 1995
substantially all option holders voluntarily relinquished their stock
appreciation rights. No further grants will be made under the plan.
34
37
The following table presents a summary of stock option transactions under
the 1989 Stock Option Incentive Plan: (as adjusted for the one-for-ten reverse
stock split and rights offering)
SHARES OPTION PRICE
------- --------------
Balance December 31, 1992................................. 332,151 $4.13 - 13.32
Granted................................................... 103,390 2.80
Exercised................................................. -- --
Forfeited................................................. (73,714) 4.13 - 13.32
------- -------------
Balance December 31, 1993................................. 361,827 $2.80 - 13.32
Granted................................................... 370,000 4.06
Exercised................................................. -- --
Forfeited................................................. (44,083) 2.80 - 13.32
------- -------------
Balance December 31, 1994................................. 687,744 $2.80 - 13.32
Granted................................................... -- --
Exercised................................................. (54,478) 2.80 - 6.91
Forfeited................................................. (18,094) 2.80 - 13.32
------- -------------
Balance December 31, 1995................................. 615,172 $2.80 - 13.32
======= =============
1989 EMPLOYEE RESTRICTED STOCK AWARD PLAN:
The 1989 Restricted Stock Award Plan authorized the granting of shares of
Common Stock to employees who have made significant contributions to the success
of the Company. The plan authorized the award of up to 300,000 shares of Common
Stock, subject to adjustment in certain circumstances. Shares awarded are
subject to restrictions.
In 1995 and 1993, respectively, 10,000 and 134,000 shares of Common Stock
were awarded under the plan. No grants were made in 1994. Compensation expense
equivalent to the fair market value of the shares on the date of the grant is
being recognized over the vesting periods during which the restrictions lapse.
All restrictions on the 1993 grants were removed as of April 4, 1994. No further
grants will be made under the plan.
NON-EMPLOYEE DIRECTOR RESTRICTED STOCK AWARD PLAN:
The Non-Employee Director Restricted Stock Award Plan authorized the
granting of up to 15,000 shares of Common Stock to directors who are not and
have never been officers or employees of the Company. Shares awarded are subject
to a restriction providing that a participant shall not be permitted to sell,
transfer, pledge or assign awarded shares during the period commencing with the
date of an award and ending upon the participant retiring from the Board of
Directors. On the date of the Company's Annual Meeting of Shareholders each
calendar year, each eligible director was awarded 300 restricted shares. No
grant of such shares may be made after December 31, 1994.
1995 STOCK PLAN
The RMI Titanium Company 1995 Stock Plan, which was approved by a vote of
the Company's shareholders at the 1995 Annual Meeting of Shareholders, replaced
both the 1989 Stock Option Incentive Plan and the 1989 Employee Restricted Stock
Award Plan. The plan permits the grant of any or all of the following types of
awards in any combination: Stock Options, Stock Appreciation Rights and
Restricted Stock. Up to 2% of the outstanding Common Stock, as determined on
December 31 of the preceding year, may be granted annually. The Stock Plan
Committee, appointed by the Board of Directors, administers the plan, and
determines the type or types of grants to be made under the plan and shall set
forth in each such grant the terms, conditions and limitations applicable to
grants, including provisions relating to a possible change in control of the
Company.
As of December 31, 1995, no grants had been made under the Plan.
35
38
NOTE 17--SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The following table sets forth selected quarterly financial data for 1995
and 1994.
1ST 2ND 3RD 4TH
1995 QUARTER(1) QUARTER(1) QUARTER QUARTER(2)
- ---------------------------------------------------- ------- ------- ------- -------
Sales............................................... $40,103 $39,621 $42,912 $48,530
Gross profit........................................ 1,937 (3,999) 2,890 5,389
Operating profit (loss)............................. (877) (7,422) 199 2,880
Net income (loss)................................... (1,863) (10,509) (967) 8,731
Net income (loss) per share......................... (0.12) (0.69) (0.06) 0.57
1ST 2ND 3RD 4TH
1994 QUARTER QUARTER QUARTER QUARTER
- ---------------------------------------------------- ------- ------- ------- -------
Sales............................................... $36,360 $35,337 $32,842 $38,853
Gross profit........................................ 527 693 996 887
Operating loss...................................... (2,216) (2,017) (1,984) (1,754)
Cumulative effect of change in accounting
principle......................................... (1,202) -- -- --
Net loss............................................ (4,131) (3,023) (2,780) (2,830)
Net loss per common share before change in
accounting principle.............................. (1.99) (2.05) (0.21) (0.18)
Net loss per share.................................. (2.80) (2.05) (0.21) (0.18)
<FN>
- ---------
(1) The effect of adopting SFAS No. 121 amounting to $5,031, previously reported
as a cumulative effect of a change in accounting principle in the first
quarter of 1995, has been adjusted to reflect such affect as an element of
operating income in the second quarter of 1995.
(2) Net income in the fourth quarter of 1995 was favorably affected by the
recognition of a $7,200 income tax benefit.
36
39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In addition to the information set forth under the caption "Executive
Officers of the Registrant" in Part I, Item 1 of this report, information
concerning the directors of the Company is incorporated by reference to
"Election of Directors" on pages 6 through 8 of the 1996 Proxy Statement.
Information concerning reporting pursuant to Section 16 of the Securities
Exchange Act of 1934 is incorporated by reference to "Board of
Directors--Section 16 Reporting" on page 5 of the 1996 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to "The
Board of Directors-Compensation of Directors" on page 5 and "Executive
Compensation" on pages 11 and 14 (from the caption Pension Benefits) through 15,
of the 1996 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to "Other
Information-Security Ownership" on pages 9 through 11 of the 1996 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to "Other
Information-Certain Transactions" on page 15 of the 1996 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) AND (2) FINANCIAL STATEMENTS
See "Financial Statements."
(3) SEE INDEX TO EXHIBITS.
(B) REPORT ON FORM 8-K FILED IN THE FOURTH QUARTER OF 1995
None.
(C) EXHIBITS
The exhibits listed on the Index to Exhibits are filed herewith or are
incorporated by reference.
37
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
RMI TITANIUM COMPANY
By /s/ TIMOTHY G. RUPERT
----------------------------
Timothy G. Rupert
Senior Vice President and Chief
Financial Officer
Dated: March 25, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE AND TITLE DATE
------------------- ----
CRAIG R. ANDERSSON, Director;
NEIL A. ARMSTRONG, Director;
DANIEL I. BOOKER, Director;
RONALD L. GALLATIN, Director;
CHARLES C. GEDEON, Director;
ROBERT M. HERNANDEZ, Director;
LOUIS A. VALLI, Director; and
WESLEY W. VON SCHACK, Director
By /s/ TIMOTHY G. RUPERT March 25, 1996
----------------------------
Timothy G. Rupert
Attorney-in-Fact
By /s/ L. FREDERICK GIEG, JR. March 25, 1996
----------------------------
L. Frederick Gieg, Jr., President
and Chief Executive Officer and Director
(Principal Executive Officer)
By /s/ TIMOTHY G. RUPERT March 25, 1996
---------------------------
Timothy G. Rupert,
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
38
41
INDEX TO EXHIBITS
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION NUMBER
- ------- ------------------------------------------------------------------- ---------------
2.0 Amended and Restated Reorganization Agreement, incorporated by
reference to Exhibit 2.1 to the Company's Registration Statement on
Form S-1 No. 33-30667 Amendment No. 1.
3.1 Articles of Incorporation of the Company, as amended March 31,
1994, incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1994.
3.2 Amended Code of Regulations of the Company, incorporated by
reference to Exhibit 3.2 to the Company's Annual Report on Form
10-K for the year ended December 31, 1993.
4.1 Amended and restated Bank Credit Agreement between Society National
Bank, PNC Bank, National Association, and NBD Bank, N.A., as Banks,
Society National Bank as Agent, and RMI Titanium Company dated as
of May 3, 1995, incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1995.
4.2 Foreign Loan Agreement between Society National Bank, PNC Bank,
National Association, and NBD Bank, as Banks, Society National Bank
as Agent, and RMI Titanium Company dated May 3, 1995, incorporated
by reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period end June 30, 1995.
4.3 Specimen Common Stock Certificate of the Company.
9.1 RMI Voting Trust Agreement, dated as of August 4, 1994, between RMI
Titanium Company, USX Corporation and Mellon Bank, N.A., as
Trustee, incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1994.
10.1 Agreement for the sale and purchase of titanium tetrachloride
between SCM Chemicals, Inc., and RMI Titanium Company dated March
9, 1993, incorporated by reference to Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1992.+
10.2 Agreement for the supply, purchase and sale of chlorine between SCM
Chemicals, Inc., and RMI Titanium Company dated as of November 13,
1990, incorporated by reference to Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1990.
10.3 RMI Company Annual Incentive Compensation Plan, incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement
on Form S-1 No. 33-30667 Amendment No. 2.
10.4 RMI Titanium Company 1989 Stock Option Incentive Plan, incorporated
by reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 No. 33-30667 Amendment No. 2.
10.5 RMI Titanium Company Supplemental Pension Plan effective August 1,
1987, and amended as of December 12, 1990, incorporated by
reference to Exhibit 10.8 to the Company's Annual Report on Form
10-K for the year ended December 31, 1990.
10.6 RMI Titanium Company 1989 Employee Restricted Stock Award Plan,
incorporated by reference to Exhibit 10.6 to the Company's
Registration Statement on Form S-1, No. 33-30667 Amendment No. 2.
39
42
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION NUMBER
- ------- ------------------------------------------------------------------- ---------------
10.7 Amendment to RMI Titanium Company 1989 Employee Restricted Stock
Award Plan, incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the year ended December
31, 1990.
10.8 RMI Titanium Company Excess Benefits Plan effective July 18, 1991,
incorporated by reference to Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1991.
10.9 Sales Agreement for the supply of titanium sponge and plasma
electrodes between Oregon Metallurgical Corporation and RMI
Titanium Company dated as of August 8, 1994 (without exhibits).+
10.10 Sales Agreement for the supply of titanium sponge between Osaka
Titanium Co., Ltd., Summitomo Corporation, Summitomo Corporation of
America, and RMI Titanium Company dated as of September 4, 1992
(without exhibits).+
10.11 RMI Titanium Company 1995 Stock Plan.
21 Subsidiaries of the Company.
23.1 Consent of Price Waterhouse LLP.
24 Powers of Attorney.
27 Financial Data Schedule.
27.1 Financial Statements of The RMI Employee Savings and Investment
Plan for the year ended December 31, 1994 (to be filed by
amendment).
27.2 Financial Statements of The RMI Bargaining Unit Employee Savings
and Investment Plan for the year ended December 31, 1995 (to be
filed by amendment).
- ---------
+ Confidential treatment has been requested.
40