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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission file number 1-10319
RMI TITANIUM COMPANY
(Exact name of registrant as specified in its charter)
OHIO 31-0875005
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 WARREN AVENUE, NILES, OHIO 44446
(Address of principal executive offices)
(330) 544-7700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
At October 31, 1996, 20,246,600 shares of common stock of the registrant
were outstanding.
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RMI TITANIUM COMPANY
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1996
INDEX
PAGE
----
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements:
Introduction to Consolidated Financial Statements................................ 2
Consolidated Statement of Operations............................................. 3
Consolidated Balance Sheet....................................................... 4
Consolidated Statement of Cash Flows............................................. 5
Consolidated Statement of Shareholders' Equity................................... 6
Selected Notes to Consolidated Financial Statements.............................. 7
Item 2. Management's Discussion and Analysis of Results of Operations and Financial
Condition........................................................................... 10
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................................. 17
Signatures............................................................................ 18
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PART I--FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by
RMI Titanium Company (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. The financial information
presented reflects all adjustments, consisting only of normal recurring
adjustments, which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. The results for the
interim periods are not necessarily indicative of the results to be expected for
the year.
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RMI TITANIUM COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- ----------------------
1996 1995 1996 1995
------- ------- -------- --------
Sales....................................... $64,479 $42,912 $177,386 $122,636
Operating costs:
Cost of sales (Note 8)...................... 52,854 40,022 146,134 121,808
Selling, general and administrative
expenses.................................. 2,575 2,407 7,294 7,495
Research, technical and product development
expenses.................................. 390 284 1,456 1,433
------- ------- -------- --------
Total operating costs.................. 55,819 42,713 154,884 130,736
Operating income (loss)..................... 8,660 199 22,502 (8,100)
Other income (expense)-net.................. 184 66 244 (1,640)
Interest expense............................ (142) (1,232) (1,978) (3,599)
------- ------- -------- --------
Income (loss) before income taxes........... 8,702 (967) 20,768 (13,339)
Provision (credit) for income taxes (Note
4)........................................ (2,136) -- (607) --
------- ------- -------- --------
Net income (loss)........................... $10,838 $ (967) $ 21,375 $(13,339)
======= ======= ======== ========
Net income (loss) per common share(Note
3):....................................... $ 0.54 $ (0.06) $ 1.19 $ (0.87)
======= ======= ======== ========
Weighted average shares
outstanding....................... 20,133,416 15,322,209 17,930,408 15,288,824
========== ========== ========== ==========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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RMI TITANIUM COMPANY
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30 DECEMBER 31
1996 1995
-------------- -----------
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 723 $ 509
Receivables--less allowance for doubtful accounts of
$1,897 and $1,670.......................................... 55,309 41,251
Inventories.................................................. 94,637 74,053
Deferred tax asset........................................... 261 1,036
Other current assets......................................... 1,775 1,656
-------- ---------
Total current assets.................................... 152,705 118,505
Property, plant and equipment, net of accumulated
depreciation................................................ 38,645 39,964
Noncurrent deferred tax asset................................ 7,611 6,164
Other noncurrent assets...................................... 7,038 6,926
-------- ---------
Total assets............................................ $205,999 $ 171,559
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................ $ 120 $ 120
Accounts payable............................................. 20,413 17,646
Accrued wages and other employee costs....................... 7,787 7,237
Other accrued liabilities.................................... 8,447 6,764
-------- ---------
Total current liabilities............................... 36,767 31,767
Long-term debt (see Notes 3 and 7)................................ 6,630 64,020
Accrued postretirement benefit cost............................... 18,795 18,795
Noncurrent pension liabilities.................................... 1,135 18,078
Other noncurrent liabilities...................................... 2,010 2,010
-------- ---------
Total liabilities....................................... 65,337 134,670
-------- ---------
Contingencies (Note 5)
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares authorized;
no shares outstanding....................................... -- --
Common Stock, $0.01 par value, 30,000,000 shares authorized;
20,814,398 and 15,908,091 shares issued (Note 3)............ 208 159
Additional paid-in capital (Note 3).......................... 234,655 151,715
Accumulated deficit.......................................... (82,151) (103,526)
Deferred compensation........................................ (591) --
Excess minimum pension liability............................. (8,381) (8,381)
Treasury Common Stock at cost 568,198 shares................. (3,078) (3,078)
-------- ---------
Total shareholders' equity........................................ 140,662 36,889
-------- ---------
Total liabilities and shareholders' equity.............. $205,999 $ 171,559
======== =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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RMI TITANIUM COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30
----------------------
1996 1995
-------- --------
CASH PROVIDED FROM (USED IN) OPERATIONS:
Net income (loss).................................................... $ 21,375 $(13,339)
Adjustment for items not affecting funds from operations:
Depreciation.................................................... 3,711 4,826
Deferred taxes.................................................. (607) --
Asset impairment charge......................................... -- 5,031
Write-down of joint venture investment.......................... -- 1,901
Expense for stock appreciation rights........................... -- 1,465
Other-net....................................................... 516 649
-------- --------
24,995 533
-------- --------
CHANGES IN ASSETS AND LIABILITIES (EXCLUDING CASH):
Receivables.......................................................... (14,278) (10,647)
Inventories.......................................................... (20,584) 1,117
Accounts payable..................................................... 2,767 (4,369)
Other current liabilities............................................ 1,963 2,837
Noncurrent pension liabilities....................................... (16,100) --
Other assets......................................................... (1,074) (1,061)
-------- --------
(47,306) (12,123)
-------- --------
Cash used in operating activities.......................... (22,311) (11,590)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of facilities................................ -- 130
Capital expenditures............................................ (2,392) (1,139)
-------- --------
Cash used in investing activities.......................... (2,392) (1,009)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of Employee Stock Options.............................. 1,914 --
Net proceeds from Common Stock Offering......................... 80,393 --
Borrowings under credit agreements.............................. 5,900 13,300
Debt repayments................................................. (63,290) (90)
-------- --------
Cash provided from financing activities......................... 24,917 13,210
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS................................ 214 611
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................... $ 509 $ 385
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................... $ 723 $ 996
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized) $ 2,466 $ 3,350
======== ========
Cash paid for income taxes...................................... $ 211 $ --
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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RMI TITANIUM COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
EXCESS
MINIMUM
ADD'TL. RETAINED TREASURY PENSION
SHARES COMMON DEFERRED PAID-IN EARNINGS COMMON LIABILITY
OUTSTANDING STOCK COMPENSATION CAPITAL (DEFICIT) STOCK ADJUSTMENT
----------- ------ ------------ -------- --------- -------- ----------
Balance at December 31, 1994...... 15,271,561 $ 158 $ -- $151,058 $ (98,918) $(3,069 ) $ (6,633)
Shares issued for Directors'
Compensation.................... 4,952 -- -- 38 -- -- --
Treasury Common Stock purchased at
cost............................ (1,098) -- -- -- -- (9 ) --
Shares issued for Restricted Stock
Award Plans..................... 10,000 -- -- 71 -- -- --
Shares issued from exercise of
employee stock options.......... 54,478 1 -- 548 -- -- --
Net loss.......................... -- -- -- -- (4,608) -- --
Excess minimum pension
liability....................... -- -- -- -- -- -- (1,748)
---------- ------ ------ -------- --------- -------- ----------
Balance at December 31, 1995...... 15,339,893 $ 159 $ -- $151,715 $(103,526) $(3,078 ) $ (8,381)
Shares issued for Restricted Stock
Award Plans..................... 51,000 -- (682) 682 -- -- --
Compensation expense recognized... -- -- 91 -- -- -- --
Shares issued as result of Common
Stock Offering (Note 3)......... 4,600,000 46 -- 80,347 -- -- --
Shares issued from exercise of
employee stock options.......... 255,307 3 -- 1,911 -- -- --
Net income........................ -- -- -- -- 21,375 -- --
---------- ----- ------ -------- --------- ------- ---------
Balance at September 30, 1996..... 20,246,200 $ 208 $ (591) $234,655 $ (82,151) $(3,078) $ (8,381)
========== ===== ====== ======== ========= ======= =========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
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RMI TITANIUM COMPANY
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--GENERAL
The consolidated financial statements include the accounts of RMI Titanium
Company and its majority owned subsidiaries. All significant intercompany
transactions are eliminated. The Company's operations are conducted in one
business segment, the production and marketing of titanium metal and related
products.
NOTE 2--ORGANIZATION
The Company is a successor to entities that have been operating in the
titanium industry since 1958. In 1990, USX Corporation ("USX") and Quantum
Chemical Corporation ("Quantum") transferred their entire ownership interest in
the Company's immediate predecessor, RMI Company, an Ohio general partnership,
to the Company in exchange for shares of the Company's Common Stock (the
"Reorganization"). Quantum then sold its shares to the public. USX retained
ownership of its shares. At September 30, 1996, approximately 27% of the
outstanding common stock was owned by USX. For information on the Company's
capital structure see Note 3.
NOTE 3--COMMON STOCK OFFERING
On May 7, 1996, the Company completed a Common Stock Offering of 4,600,000
shares at a price of $18.50 per share. Net proceeds to RMI after deducting
underwriting fees and expenses amounted to $80.3 million. The proceeds were used
to repay all outstanding indebtedness under the existing bank credit facilities
amounting to $65.5 million, $10.1 million was contributed to the Company's
pension plans and the balance used for general corporate purposes. Concurrent
with the Company's Stock Offering, USX Corporation sold 2,300,000 shares of its
investment in RMI Common Stock at the same price. RMI did not receive any of the
proceeds from the sale of RMI Common Stock by USX. As a result of these
transactions, USX's percentage of ownership in RMI was reduced from
approximately 51% to approximately 27%. As of September 30, 1996, there were
20,246,200 shares of RMI Common Stock outstanding.
NOTE 4--INCOME TAXES
In the three and nine month periods ended September 30, 1996, the Company
recorded an income tax benefit of $2.1 million and $0.6 million, respectively.
These amounts are comprised of an income tax provision against pretax income for
the nine-month period of $2.0 million and the three-month period of $0.5 million
and an income tax benefit of $2.6 million for both periods, resulting from an
adjustment to the deferred tax asset valuation allowance due to changes in the
Company's expectations about the ultimate realization of its deferred tax assets
in years after 1996. No tax effect was recorded for the three months and nine
months ended September 30, 1995. Excluding the $2.6 million valuation allowance
adjustment, the effective tax rate for the three months and the nine months
ended September 30, 1996 was approximately 5.3 percent and 9.6 percent,
respectively. The difference between the statutory federal tax rate of 35
percent and the effective tax rate is principally due to an adjustment to the
deferred tax asset valuation allowance which existed at December 31, 1995 as it
related to expected 1996 results. The Company currently expects improved
profitability in 1996 compared to the expectations inherent in the December 31,
1995 deferred tax asset. The effect of this adjustment reduced the year to date
1996 tax provision by approximately $2.5 million and $5.3 million for the three
and nine month periods ended September 30, 1996, respectively. The amount of
current taxes expected to be paid in 1996 is minimal.
Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
"Accounting for Income Taxes," requires a valuation allowance when it is "more
likely than not" that some portion or all of the deferred tax assets will not be
realized. It further states that "forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in recent years." The ultimate realization of this deferred
income tax asset depends upon the Company's ability to generate
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sufficient taxable income in the future prior to the expiration of its loss
carryforwards. The Company has evaluated the available evidence supporting the
realization of future taxable income and, based upon that evaluation, believes
it is more likely than not at this time that a portion of its deferred tax
assets will be realized. The remaining valuation allowance has been 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 future periods' interim and annual financial statements, the
Company will periodically evaluate its strategic and business plans, in light of
evolving business conditions, and the valuation allowance will be adjusted for
future income expectations resulting from that process, to the extent different
from those inherent in the current valuation allowance.
As a result, the application of SFAS No. 109 valuation allowance
determination process could result in recognition of significant income tax
provisions or benefits in a single interim or annual period due to changes in
income expectations over a horizon that may span several years. Such tax
provision or benefit effect would likely be material in the context of the
specific interim or annual reporting period in which changes in judgement about
more extended future periods are reported.
If an "ownership change" were to occur within the meaning of Section 382 of
the Internal Revenue Code of 1986, as amended, the utilization of net operating
loss carryforwards would be subject to an annual limitation. Should the annual
limitation apply, the Company believes that it would affect the timing of the
use of, but not the ultimate ability of the Company to use, the net operating
loss carryforwards to reduce future income tax liabilities.
NOTE 5--CONTINGENCIES
In the ordinary course of business, the Company is subject to pervasive
environmental laws and regulations concerning the production, handling, storage,
transportation, emission, and disposal of waste materials and is also subject to
other federal and state laws and regulations regarding health and safety
matters. These laws and regulations are constantly evolving, and it is not
currently possible to predict accurately the ultimate effect these laws and
regulations will have on the Company in the future.
On October 9, 1992 the U.S. Environmental Protection Agency ("EPA") filed a
complaint alleging certain violations of the Resource Conservation and Recovery
Act of 1976, as amended ("RCRA") at the Company's now closed Sodium Plant in
Ashtabula, Ohio. The USEPA's determination is based on information gathered
during inspections of the facility in February, March and June of 1991. Under
the complaint the USEPA 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 nature of the proceedings, the Company is
currently unable to determine the ultimate liability, if any, that may arise
from this matter.
The Company is involved in investigative or cleanup projects under federal
or state environmental laws at a number of waste disposal sites, including the
Field Brooks Superfund Site. Given the status of the proceedings with respect to
these sites, ultimate investigative and remediation costs cannot presently be
accurately predicted, but could, in the aggregate, be material. Based on the
information available regarding the current ranges of estimated remediation
costs at currently active sites, and what the Company believes will be its
ultimate share of such costs, provisions for environmental-related costs have
been recorded. These provisions are in addition to amounts which have previously
been accrued for the Company's share of environmental study costs.
With regard to the Fields Brook Superfund Site, the Company, together with
31 other companies, has been identified by the EPA as a potentially responsible
party ("PRP") with respect to a superfund site defined as the Fields Brook
Watershed in Ashtabula, Ohio, which includes the Company's now closed Ashtabula
facilities. The EPA's 1986 estimate of the cost of remediation of the Fields
Brook operable sediment unit was $48 million. However, recent studies show the
volume of sediment to be substantially lower than projected in
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1986. These studies, together with improved remediation technology and redefined
cleanup standards have resulted in a more recent estimate of the remediation
cost of approximately $25 million. The actual cost of remediation may vary from
the estimate depending upon any number of factors.
The EPA, in March 1989, ordered 22 of the PRPs to conduct a design phase
study for the sediment operable unit and a source control study, which studies
are nearly complete and are estimated to cost $22 million. The Company, working
cooperatively with fourteen others in accordance with two separate agreements,
is complying with the order. The Company has accrued and has been paying its
portion of the cost of complying with the EPA's order, which includes the
studies. It is anticipated that the studies will be completed in 1997. Actual
cleanup would not commence prior to 1998. The Company's share of the study costs
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 September 30, 1996, 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 (which does not include any amounts from insurers) of approximately $2.1
million, which the Company believes are probable. The Company has been receiving
contributions from such third parties for a number of years as partial
reimbursement for costs incurred by the Company. As these proceedings continue
toward final resolution, amounts in excess of those already provided may be
necessary to discharge the Company from its obligations for these projects.
The Company is also the subject of, or a party to, a number of other
pending or threatened legal actions involving a variety of matters.
The ultimate resolution of these foregoing contingencies could,
individually or in the aggregate, be material to the consolidated financial
statements. However, management believes that the Company will remain a viable
and competitive enterprise even though it is possible that these matters could
be resolved unfavorably.
NOTE 6--INVENTORIES:
(DOLLARS IN THOUSANDS)
-------------------------------------
SEPTEMBER 30, 1996 DECEMBER 31,
(UNAUDITED) 1995
------------------- -------------
Raw material and supplies............................ $ 28,596 $ 22,609
Work-in-process and finished goods................... 90,677 71,290
Adjustments to LIFO values........................... (24,636) (19,846)
--------- ---------
$ 94,637 $ 74,053
========= =========
Inventories are valued at cost as determined by the last-in, first-out
(LIFO) method which, in the aggregate, is lower than market. Inventory costs
generally include materials, labor costs and manufacturing overhead (including
depreciation).
Included in work-in-process are costs relating to long-term contracts. Such
costs, net of amounts recognized to date, were $1.3 million at September 30,
1996 and $2.5 million at December 31, 1995.
NOTE 7--CREDIT FACILITY:
In connection with the Common Stock Offering referred to in Note 3 above,
the Company has entered into a credit agreement, dated April 15, 1996 (the
"Credit Facility"), to replace the Company's prior credit facilities. The Credit
Facility has a term of three years and permits borrowings, on a revolving basis,
of up to the lesser of $50 million or a borrowing base equal to the sum of 85%
of qualified accounts receivable and 50%
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of qualified inventory. At September 30, 1996, $5.9 million was outstanding
under the facility. The Company had sufficient accounts receivable and inventory
at September 30, 1996 to borrow the entire $50 million.
Under the terms of the Credit Facility, the Company, at its option, is able
to borrow at (a) a base rate (which is the higher of PNC Bank's prime rate or
the Federal Funds Effective Rate plus 1/2% per annum), or (b) LIBOR or the
Federal Funds Effective Rate, plus a spread (ranging from 1/2% to 1%)
determined by the ratio of the Company's consolidated earnings before interest
and taxes to consolidated interest expense.
Borrowings under the Credit Facility will initially be secured by the
Company's accounts receivable, inventory, other personal property and cash and
cash equivalents. Borrowings will become unsecured if the Company complies with
all the financial covenants under the New Credit Facility for four consecutive
quarters, beginning with the date of the Credit Facility and expiring with the
quarter ended June 30, 1997.
An event of default under the Credit Facility shall occur if, among other
things, any person or group of persons other than USX shall have acquired
beneficial ownership of 25% or more of the voting stock of the Company. The
Credit Facility contains additional terms and financial covenants which are
typical for other similar facilities.
NOTE 8--ASSET IMPAIRMENT
The Company elected to adopt 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", 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. The 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in conjunction with the information
contained in the Consolidated Financial Statements and Selected Notes to
Consolidated Financial Statements. The following information contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, and are subject to the safe harbor created by
that Act. Such forward-looking statements include, without limitation,
statements regarding estimates of industry shipments, the future availability
and prices of raw materials, the availability of capital on acceptable terms,
the competitiveness of the titanium industry, potential environmental
liabilities, the Company's order backlog and the conversion of that backlog into
revenue, the Company's strategies and other statements contained herein that are
not historical facts. Because such forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, changes in general economic and business
conditions (including in the aerospace and golf club markets), the Company's
ability to recover its raw material costs in the pricing of its products, the
availability of capital on acceptable terms, actions of competitors, 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 of such products, changes
in business strategies, and other factors.
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1995
NET SALES
Net sales increased to $64.5 million, or 50% for the three months ended
September 30, 1996 compared to net sales of $42.9 million in the corresponding
1995 period. This increase resulted from increased mill product shipments and
higher average selling prices. Mill product shipments in the third quarter of
1996 increased by
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21% to 4.6 million pounds from third quarter 1995 shipment levels of 3.8 million
pounds. Average realized mill product selling prices in the third quarter of
1996 increased by approximately 19% to $12.26 per pound from 1995 third quarter
levels. Both demand and pricing on incoming orders for titanium mill products
continue to show improvement from 1995 levels. Sales related to new products and
markets amounted to $1.9 million in the third quarter of 1996 compared to $0.7
million in the third quarter of 1995. Sales of hot-formed parts and cut shapes
increased to $5.1 million in the third quarter of 1996 from $3.1 million in the
same period of 1995.
GROSS PROFIT
Gross profit amounted to $11.6 million, or 18.0% of sales for the quarter
ended September 30, 1996 compared to gross profit of $2.9 million or 6.7% of
sales for the comparable 1995 period. This improvement results primarily from
the increased shipments and selling prices for titanium mill products together
with improved margins on hot-formed parts and cut shapes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses amounted to $2.6 million for
the quarter ended September 30, 1996 compared to $2.4 million for the same
quarter in 1995. Research, technical and product development expenses amounted
to $0.4 million in the third quarter of 1996 compared to $0.3 million in the
third quarter of 1995.
OPERATING INCOME
Operating income for the three months ended September 30, 1996 amounted to
$8.7 million, or 13.4% of sales compared to $0.2 million in the same period of
1995. This improvement results primarily from significant increases in shipments
and profit margins on mill products.
INTEREST EXPENSE
Because of significantly lower borrowing levels, interest expense decreased
to $0.1 million in the third quarter of 1996 from $1.2 million in the third
quarter of 1995. For further information on borrowings see "Liquidity and
Capital Resources."
INCOME TAXES
In the third quarter of 1996, the Company recorded an income tax benefit of
$2.1 million. This amount is comprised of an income tax provision of $0.5
million against pretax income for the quarter and an income tax benefit of $2.6
million resulting from an adjustment to the deferred tax asset valuation
allowance due to changes in the Company's expectations about the ultimate
realization of its deferred tax assets in years after 1996. No tax effect was
recorded for the three months ended September 30, 1995. Excluding the $2.6
million valuation allowance adjustment, the effective tax rate for the three
months ended September 30, 1996 was approximately 5.3%. The difference between
the statutory federal tax rate of 35% and the effective tax rate is principally
due to an adjustment to the deferred tax asset valuation allowance as it relates
to expected 1996 results. The Company currently expects improved profitability
in 1996 compared to the expectations inherent in the December 31, 1995 valuation
allowance. The effect of this adjustment reduced the third quarter's 1996 tax
provision by approximately $2.5 million. The amount of current taxes expected to
be paid in 1996 is minimal.
OTHER INCOME
Other income (expense) for the third quarter of 1996 amounted to $0.2
million compared to $0.1 million in the third quarter of 1995.
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NET INCOME
The net income for the quarter ended September 30, 1996 amounted to $10.8
million or 16.8% of sales compared to a net loss of $1.0 million in the
comparable 1995 period. The 1996 results include the $2.1 million tax benefit
referred to above.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
NET SALES
Net sales for the nine months ended September 30, 1996 increased to $177.4
million from $122.6 million in the first nine months of 1995, an increase of
$54.8 million, or 45%. This increase resulted primarily from increased mill
products shipments and higher average selling prices. Mill products shipments
for the first nine months of 1996 amounted to 13.4 million pounds compared to
10.6 million pounds in the comparable period of 1995. Average realized mill
product selling prices increased to $11.71 per pound in the first nine months of
1996 compared to $10.14 per pound during the comparable period of 1995. Both
demand and pricing for titanium mill products continued to remain strong in both
commercial aerospace and industrial product markets. Sales related to new
products and markets decreased from $2.2 million in the first nine months of
1995 to $1.9 million in the first nine months of 1996. Sales of hot-formed parts
and cut shapes increased to $12.1 million in the first nine months of 1996 from
$9.6 million in the same period of 1995.
GROSS PROFIT
Gross profit for the nine months ended September 30, 1996 amounted to $31.3
million, or 17.6% of sales, compared to gross profit of $0.8 million, or 0.7% of
sales, in the first nine months of 1995. This increase results primarily from
increased shipments and selling prices for titanium mill products. Results in
1995 were adversely impacted by a $5.0 million asset impairment charge following
the adoption of SFAS No. 121 and costs associated with the cost of stock
appreciation rights amounting to $0.8 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses amounted to $7.3 million for
the first nine months of 1996 compared to $7.5 million for the comparable period
in 1995. Research, technical and product development expenses amounted to $1.4
million in each of the nine month periods ended September 30, 1996 and 1995.
Selling, general and administrative expenses, together with research, technical
and product development expenses for the first nine months of 1995, include $0.6
million of costs related to stock appreciation rights.
OPERATING INCOME
Operating income for the nine months ended September 30, 1996 amounted to
$22.5 million, or 12.7% of sales compared to a loss of $8.1 million in the same
period of 1995. This improvement results primarily from significant increases in
mill product shipments and average mill product selling prices. Results for the
1995 period were adversely impacted by a $5.0 million asset impairment charge
and costs associated with stock appreciation rights referred to above.
INTEREST EXPENSE
Interest expense for the first nine months of 1996 amounted to $2.0 million
compared to $3.6 million in the same period of 1995. This improvement results
primarily from reduced levels of indebtedness during 1996. For further
information on indebtedness, see "Liquidity and Capital Resources" below.
INCOME TAXES
In the first nine months of 1996, the Company recorded an income tax
benefit of $0.6 million. This amount is comprised of an income tax provision
against pretax income for the nine-month period of $2.0 million and an income
tax benefit of $2.6 million resulting from an adjustment to the deferred tax
asset valuation allowance due to changes in the Company's expectations about the
ultimate realization of its
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deferred tax assets in years after 1996. No tax effect was recorded for the nine
months ended September 30, 1995. Excluding the $2.6 million valuation allowance
adjustment, the effective tax rate for the nine months ended September 30, 1996
was approximately 9.6%. The difference between the statutory federal tax rate of
35 percent and the effective tax rate is principally due to an adjustment to the
deferred tax asset valuation allowance which existed at December 31, 1995 as it
related to expected 1996 results. The Company currently expects improved
profitability in 1996 compared to the expectations inherent in the December 31,
1995 deferred tax asset. The effect of this adjustment reduced the year-to-date
1996 tax provision by approximately $5.3 million. The amount of current taxes
expected to be paid in 1996 is minimal.
NET INCOME
Net income for the nine months ended September 30, 1996 amounted to $21.4
million, or 12.1% of sales compared to a loss of $13.3 million in the first nine
months of 1995. Results for the 1995 period include a $5.0 million impairment
charge following the adoption of SFAS No. 121, a $1.9 million impairment of an
investment in a joint venture, and $1.5 million in costs incurred in connection
with stock appreciation rights.
OUTLOOK
The Company's total order backlog as of September 30, 1996 was
approximately $327 million, compared to $134 million at December 31, 1995 and
$134 million at September 30, 1995.
During the second half of 1995 and continuing into 1996, the Company
experienced a steady increase in order backlog. The Company estimates that as of
September 30, 1996, orders for substantially all of its anticipated 1996
shipments have been booked or shipped at average prices more than 15% higher
than its 1995 average realized mill product selling price of $10.23 per pound.
The Company's average realized mill product selling price increased to $12.26
per pound in the third quarter of 1996. The Company estimates that as of
September 30, 1996, orders for 84% of its anticipated 1997 shipments have been
booked at average prices greater than $13 per pound. The increase in demand has
been driven primarily by the recovery in the commercial aerospace market and the
emergence of the golf club market. Because of competitive factors in the
titanium industry and the cyclical nature of the aerospace industry, there can
be no assurances that prices and demand will continue to improve. The Company
intends to continue its efforts to develop new markets and products such as
seamless tubulars for oil and gas and geothermal energy production, as well as
the use of billet for golf club applications.
The increase in demand for titanium products has put upward pressure on
prices for certain raw materials used by the Company. Prices for the Company's
1996 and 1997 titanium sponge requirements have been set under long-term supply
contracts and short-term arrangements. Prices for titanium sponge in 1997 are
expected to increase over 1996 levels. Due to increased demand resulting
primarily from the emerging golf club market, current prices for titanium scrap,
which accounts for approximately 40% of the Company's raw material requirements,
have increased significantly during 1996. Prices of certain alloying agents have
also increased as a result of increased demand. The Company, and others, have
announced increased prices and surcharges to recover these increased costs.
In July 1996, the Company was notified that the Department of Commerce
released preliminary findings in a review of an existing anti-dumping order on
titanium sponge from Russia. The Department of Commerce determined that dumping
did not occur on sales made by Interlink, a major trading company for Russian-
produced titanium sponge, during the review period. A final determination
confirming the earlier finding was issued in November 1996. The final
determination can be appealed to the Court of International Trade but is
effective unless and until it is overturned. The Company purchases nearly all of
its Russian titanium sponge through Interlink. These purchases previously
carried an 84% dumping duty. The no-dumping finding eliminates this duty,
thereby allowing the Company access to lower cost sources for a significant
portion of its titanium sponge requirements.
The information included in this "Outlook" section includes
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, and are subject to the safe harbor created by
that Act. Such forward-looking statements include, without limitation,
statements regarding the future
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availability and prices of raw materials, the competitiveness of the titanium
industry, the Company's order backlog and the conversion of that backlog into
revenue and other statements contained herein that are not historical facts.
Because such forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially include, but are not limited to,
changes in general economic and business conditions (including in the aerospace
and golf club markets), the Company's ability to recover its raw material costs
in the pricing of its products, actions of competitors, the extent to which the
Company is able to develop new markets for its products, and other factors.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used in operating activities totaled $22.3 million in the
first nine months of 1996 compared to $11.6 million used in operations during
the first nine months of 1995. The change in net cash flows from operating
activities in the first nine months of 1996, compared to the first nine months
of 1995, was due primarily to improved results of operations offset by an
increase in working capital. Working capital amounted to $115.9 million at
September 30, 1996, compared to $86.7 million at December 31, 1995. The increase
in working capital results primarily from increases in accounts receivable and
inventories, partially offset by increases in accounts payable and other current
liabilities. The Company's working capital ratio was 4.15 to 1 at September 30,
1996 compared to 3.73 to 1 at December 31, 1995.
On May 7, 1996, the Company completed a public offering of 4,600,000 shares
of common stock (including an underwriters' overallotment option of 600,000
shares) at a price of $18.50 per share (the "Common Stock Offering"). Net
proceeds to RMI after deducting underwriting fees and expenses amounted to $80.3
million. The net proceeds were used to repay all outstanding indebtedness
(amounting to $65.5 million) under the then existing bank credit facilities, and
to contribute $10.2 million to certain of the Company's defined benefit pension
plans, as referred to below, and the balance was used for general corporate
purposes.
In September 1996, the Company made a $16.1 million cash contribution to
certain of its defined benefit pension plans. This contribution was funded by
using $10.2 million of the net proceeds from the Common Stock Offering and $5.9
million in borrowings under the Company's credit facility referred to below.
During the first nine months of 1996, the Company's cash flow requirements
for capital expenditures were funded by internally generated funds and proceeds
from the Common Stock Offering. In the first nine months of 1995, the Company's
cash flow requirements for operating losses, capital expenditures and working
capital were funded primarily through borrowings.
The Company anticipates that it will be able to fund its 1996 working
capital requirements and its capital expenditures primarily from funds generated
by operations, proceeds from the Common Stock Offering, and, to the extent
necessary, from borrowings under its Credit Facility. The Company anticipates
that it will be able to fund its 1997 working capital requirements and its
currently expected capital expenditures primarily from funds generated by
operations and borrowings under the Credit Facility. The Company may, however,
undertake strategic initiatives and additional capital expenditures in 1997
which may require additional financing therefor. The Company's long-term
liquidity requirements, including capital expenditures, are expected to be
financed by a combination of internally generated funds, borrowings and other
sources of external financing as needed.
In connection with the Common Stock offering referred to above, the Company
has entered into a Credit Agreement, dated as of April 15, 1996 (the "Credit
Facility") to replace the prior credit facilities. The Credit Facility has a
term of three years and permits borrowings, on a revolving basis, of up to the
lesser of $50 million or a borrowing base equal to the sum of 85% of qualified
accounts receivable and 50% of qualified inventory. The Company had sufficient
accounts receivable and inventory at September 30, 1996, to borrow the entire
$50 million. At September 30, 1996, $5.9 million was outstanding under the
Credit Facility.
Under the Credit Facility, the Company, at its option, is able to borrow at
(a) a base rate (which is the higher of PNC Bank's prime rate or the Federal
Funds Effective Rate plus 1/2% per annum), or (b) LIBOR or the Federal Funds
Effective Rate, plus a spread (ranging from 1/2% to 1%) determined by the ratio
of the
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Company's consolidated earnings before interest and taxes to consolidated
interest expense. At any time when the Company's ratio of total liabilities to
net worth is greater than or equal to 1.4 to 1, the spread for LIBOR and Federal
Fund Effective Rate borrowings will be increased by 1/2 of 1%.
Borrowings under the Credit Facility are secured by the Company's accounts
receivable, inventory, other personal property and cash and cash equivalents.
Borrowings will become unsecured if the Company complies with all the financial
covenants under the Credit Facility for four consecutive quarters. The Credit
Facility contains the following financial covenants: (1) the Company shall not
permit its consolidated net worth to be less than $36.9 million plus 50% of the
Company's consolidated net income for each fiscal quarter in which net income
was earned beginning January 1, 1996; (ii) the Company shall not permit the
ratio of consolidated earnings before interest and taxes to consolidated
interest expense to be less than 2.5 to 1.0; and (iii) capital expenditures,
including assets acquired under capitalized leases, shall not exceed $10 million
per year.
An event of default under the Credit Facility shall occur if, among other
things, any person or group of persons other than USX shall have acquired
beneficial ownership of 25% or more of the voting stock of the Company. The
Credit Facility contains additional terms, financial covenants and events of
default which are typical for other similar facilities.
Other long-term debt of $0.7 million consisted of industrial revenue bonds.
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 at least 2006. If an "ownership change" were to occur,
the utilization of net operating loss carryforwards would be subject to an
annual limitation. Generally, an ownership change occurs with respect to a
corporation if shareholders who own, directly or indirectly, 5% or more of the
capital stock of the corporation increase their aggregate percentage ownership
of such stock by more than 50 percentage points over the lowest percentage of
such stock owned by such shareholders at any time during a prescribed testing
period. An ownership change could result from equity transactions such as
exercises of stock options, purchases or sales of Common Stock by certain
stockholders, including USX and other issuances of Common Stock by the Company.
If the annual limitation were to apply, the amount of the limitation would
generally equal the product of (i) the fair market value of the Company's equity
immediately prior to the ownership change, with certain adjustments, including a
possible adjustment to exclude certain capital contributions made in the two
years preceding the date of the ownership change, and (ii) a long-term tax
exempt bond rate of return published monthly by the Internal Revenue Service.
Should the annual limitation apply, the Company believes that it would not
materially affect the potential use of the net operating loss carryforwards to
reduce any future income tax liabilities over time; however, it is possible that
the Company's results in a particular year could exceed the annual limitation,
in which case such excess would not be reduced by the net operating loss
carryforward and the Company's tax liability would be correspondingly higher.
SFAS NO. 109 EFFECTS. SFAS 109 requires a valuation allowance when it is
more likely than not that some portion or all of the deferred tax assets will
not be realized. It further states that forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in recent years. The ultimate realization of all or part of
the Company's deferred income tax assets depends on the Company's ability to
generate sufficient taxable income in the future.
When preparing future periods' interim and annual financial statements, the
Company will periodically evaluate its strategic and business plans, in light of
evolving business conditions, and the valuation allowance will be adjusted for
future income expectations resulting from that process, to the extent different
from those inherent in the current valuation allowance. In making an assessment
of realizability at September 30, 1996, the Company considered a number of
factors including the improved profitability in 1996 as a result of increased
sales, product pricing and gross margins, when compared to expectations inherent
in the December 31, 1995 valuation allowance. Accordingly, the valuation
allowance has been adjusted by approximately $5.3 million as of September 30,
1996 for the difference between such revised future income expectations and
those inherent in the valuation allowance at December 31, 1995 as it related to
expected 1996 results.
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Additionally, the valuation allowance was adjusted by $2.6 million at September
30, 1996 because of improving expectations regarding income in years after 1996
which were not inherent in the valuation allowance at December 31, 1995. The
effect of these adjustments resulted in a tax benefit of $0.6 million for the
nine months ended September 30, 1996.
The application of SFAS No. 109 valuation allowance determination process
could result in recognition of further significant income tax provisions or
benefits in a single interim or annual period due to changes in income
expectations over a horizon that may span several years. Such tax provision or
benefit effect would likely be material in the context of the specific interim
or annual reporting period in which changes in judgement about more extended
future periods are reported. This effect is a consequence of the application of
the SFAS No. 109 valuation allowance determination process, which is a balance
sheet oriented model and which does not have periodic matching of pretax income
or loss and the related tax effects as an objective.
The Section 382 limitation described above could, if applicable, adversely
impact the income tax provision or benefit in a particular year as a result of
the application of the SFAS No. 109 valuation allowance determination process;
however, it is not expected to have an adverse impact over time.
If the Company's principal markets continue to exhibit improvement,
additional tax benefits may be reported in future periods, as the valuation
allowance is further reduced. Alternatively, to the extent that the Company's
future profit expectations remain static or are diminished tax provisions may be
charged against pretax income. In either event, such valuation allowance-related
tax provisions or benefits should not necessarily be viewed as recurring.
Further, subject to the effects, if any, of the limitation described above, the
amount of current taxes that the Company expects to pay for the foreseeable
future is minimal. The Company's carryforward tax attributes are viewed by
management as a significant competitive advantage to the extent that profits can
be sheltered effectively from tax and re-employed in the growth of the business.
ENVIRONMENTAL MATTERS
The Company is subject to environmental laws and regulations as well as
various health and safety laws and regulations that are subject to frequent
modifications and revisions. While the costs of compliance for these matters
have not had a material adverse impact on RMI in the past, it is impossible to
predict accurately the ultimate effect these changing laws and regulations may
have on the Company in the future.
At September 30, 1996, 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 (which does not include any amounts from insurers) of approximately $2.1
million, which the Company believes are probable. The Company has been receiving
contributions from such third parties for a number of years as partial
reimbursement for costs incurred by the Company. As these proceedings continue
toward final resolution, amounts in excess of those already provided may be
necessary to discharge the Company from its obligations for these projects. In
1992, the EPA filed a complaint and proposed a $1.4 million civil penalty for
alleged failure to comply with RCRA. The Company is contesting the complaint.
Based on the nature of the proceeding the Company is currently unable to
determine the ultimate liability, if any, that may arise from this matter.
The ultimate resolution of these environmental matters could individually,
or in the aggregate, be material to the consolidated financial statements.
However, management believes that the Company will remain a viable and
competitive enterprise even though it is possible that these matters could be
resolved unfavorably.
CAPITAL EXPENDITURES
Gross capital expenditures in the first nine months of 1996 and 1995
amounted to $2.4 million and $1.1 million, respectively. The Company has
budgeted capital spending of approximately $5.0 million in 1996. The Company
currently estimates that its 1997 capital expenditures will be approximately
$8.0 million. The Company may, however, undertake strategic initiatives and make
additional capital expenditures in 1997. See "Liquidity and Capital Resources"
above.
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PART II--OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3 Amended Code of Regulations of the Company, as amended through April
26, 1995.
10.1 Employment agreement, dated September 1, 1996, between the Company
and John H. Odle.
10.2 Employment agreement, dated September 1, 1996, between the Company
and Timothy G. Rupert.
10.3 Registration Rights Agreement dated August 21, 1996, between the
Company and USX Corporation.
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended September 30,
1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RMI TITANIUM COMPANY
--------------------------------------
(Registrant)
Date: November 13, 1996
By: /s/ T. G. RUPERT
------------------------------
T. G. Rupert
Executive Vice President & Chief
Financial Officer
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EXHIBIT INDEX
EXHIBIT
- -------
3 Amended Code of Regulations of the Company, as amended through
April 26, 1995.
10.1 Employment agreement, dated September 1, 1996, between the Company
and John H. Odle.
10.2 Employment agreement, dated September 1, 1996, between the Company
and Timothy G. Rupert.
10.3 Registration Rights Agreement dated August 21, 1996 between the
Company and USX Corporation.
27 Financial Data Schedule