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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 JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-10319
RMI TITANIUM COMPANY
(Exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of
incorporation or organization)
31-0875005
(I.R.S. Employer
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 August 1, 1997, 20,429,330 shares of common stock of the registrant were
outstanding.
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RMI TITANIUM COMPANY
FORM 10-Q
QUARTER ENDED JUNE 30, 1997
INDEX
PAGE
----
PART I--FINANCIAL INFORMATION
Item 1. Consolidated 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.............................................. 16
Signatures............................................................................ 17
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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 SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- -----------------------
1997 1996 1997 1996
------- ------- -------- --------
Sales.................................... $75,034 $58,310 $148,742 $112,907
Operating costs:
Cost of sales............................ 58,313 48,030 116,245 93,280
Selling, general and administrative
expenses............................... 2,805 2,310 5,531 4,719
Research, technical and product
development expenses................... 698 560 1,402 1,066
------- ------- -------- --------
Total operating costs............... 61,816 50,900 123,178 99,065
Operating income......................... 13,218 7,410 25,564 13,842
Other income-net......................... 261 1 426 60
Interest expense......................... (26) (552) (59) (1,836)
------- ------- -------- --------
Income before income taxes............... 13,453 6,859 25,931 12,066
Provision for income taxes (Note 4)...... 1,363 878 2,923 1,529
------- ------- -------- --------
Net income............................... $12,090 $ 5,981 $ 23,008 $ 10,537
======= ======= ======== ========
Net income per common share.............. $ 0.59 $ 0.33 $ 1.13 $ 0.63
======= ======= ======== ========
Weighted average shares
outstanding.................... 20,393,337 18,235,508 20,366,778 16,816,799
========== ========== =========== ==========
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)
JUNE 30 DECEMBER 31
1997 1996
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 17,786 $ 5,944
Receivables--less allowance for doubtful accounts of $1,097 and
$979......................................................... 63,247 57,702
Inventories..................................................... 101,386 92,616
Deferred tax asset.............................................. 4,277 2,733
Other current assets............................................ 3,675 4,205
--------- ----------
Total current assets......................................... 190,371 163,200
Property, plant and equipment, net of accumulated
depreciation................................................. 37,189 37,855
Noncurrent deferred tax asset................................... -- 4,467
Other noncurrent assets......................................... 10,494 10,358
--------- ----------
Total assets................................................. $ 238,054 $215,880
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................... $ 120 $ 120
Accounts payable................................................ 16,300 15,288
Accrued wages and other employee costs.......................... 7,737 6,299
Other accrued liabilities....................................... 8,115 9,357
--------- ----------
Total current liabilities.................................... 32,272 31,064
Long-term debt (Notes 3 and 7).................................... 640 3,600
Accrued postretirement benefit cost............................... 19,442 19,442
Noncurrent pension liabilities.................................... 1,028 1,028
Other noncurrent liabilities...................................... 2,010 2,010
--------- ----------
Total liabilities............................................ 55,392 57,144
--------- ----------
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;
20,992,473 and 20,858,748 shares issued (Note 3)............. 209 208
Additional paid-in capital (Note 3)............................. 236,728 234,958
Accumulated deficit............................................. (48,759) (71,767)
Deferred compensation........................................... (1,253) (557)
Excess minimum pension liability................................ (1,028) (1,028)
Treasury Common Stock at cost 573,961 and 568,198 shares........ (3,225) (3,078)
--------- ----------
Total shareholders' equity........................................ 182,662 158,736
--------- ----------
Total liabilities and shareholders' equity................... $ 238,054 $215,880
========= ==========
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)
SIX MONTHS ENDED
JUNE 30
---------------------
1997 1996
-------- --------
CASH PROVIDED FROM (USED IN) OPERATIONS:
Net income............................................................ $ 23,008 $ 10,537
Adjustment for items not affecting funds from operations:
Depreciation........................................................ 2,520 2,459
Deferred taxes...................................................... 2,923 1,505
Other-net........................................................... 256 397
-------- --------
28,707 14,898
-------- --------
CHANGES IN ASSETS AND LIABILITIES (EXCLUDING CASH):
Receivables........................................................... (5,665) (8,648)
Inventories........................................................... (8,770) (10,286)
Accounts payable...................................................... 1,012 (490)
Other current liabilities............................................. 196 (1,131)
Other assets.......................................................... 394 (1,288)
-------- --------
(12,833) (21,843)
-------- --------
Cash from (used in) operating activities......................... 15,874 (6,945)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................................ (1,854 (1,323)
-------- --------
Cash used in investing activities................................ (1,854) (1,323)
-------- --------
CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Common Stock.......................... 929 81,374
Debt repayments..................................................... (2,960) (63,260)
Treasury Common Stock purchased..................................... (147) --
-------- --------
Cash from (used in) financing activities............................ (2,178) 18,114
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................... 11,842 9,846
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...................... $ 5,944 $ 509
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................ $ 17,786 $ 10,355
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for
Interest (net of amounts capitalized)............................ $ 28 $ 1,639
Income taxes..................................................... $ 633 $ 211
Noncash financing activities
Issuance of restricted stock..................................... $ 832 $ 682
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
ADDT'L. RETAINED TREASURY PENSION
SHARES COMMON DEFERRED PAID-IN EARNINGS COMMON LIABILITY
OUTSTANDING STOCK COMPENSATION CAPITAL (DEFICIT) STOCK ADJUSTMENT
----------- ------ ------------ -------- --------- -------- ----------
Balance at December 31, 1995..... 15,339,893 $159 $ -- $151,715 $(103,526) $(3,078) $ (8,381)
Shares issued for Directors'
Compensation................... 2,585 -- -- 56 -- -- --
Shares issued for Restricted
Stock Award Plans.............. 51,000 -- (682) 682 -- -- --
Compensation expense
recognized..................... -- -- 125 -- -- -- --
Shares issued as a result of
Common Stock Offering (Note
4)............................. 4,600,000 46 -- 80,347 -- -- --
Shares issued from exercise of
employee stock options......... 297,072 3 -- 2,158 -- -- --
Net income....................... -- -- -- -- 31,759 -- --
Excess minimum pension
liability...................... -- -- -- -- -- -- 7,353
---------- ---- -------- -------- --------- ------- --------
Balance at December 31, 1996..... 20,290,550 $208 $ (557) $234,958 $ (71,767) $(3,078) $ (1,028)
Shares issued for Restricted
Stock Award Plans.............. 32,550 -- (832) 832 -- -- --
Compensation expense
recognized..................... -- -- 136 -- -- -- --
Shares issued from exercise of
employee stock options......... 101,175 1 -- 928 -- -- --
Treasury Common Stock purchased
at cost........................ (5,763) -- -- -- -- (147) --
Net income....................... -- -- -- -- 23,008 -- --
---------- ---- -------- -------- --------- ------- --------
Balance at June 30, 1997......... 20,418,512 $209 $ (1,253) $236,718 $ (48,759) $(3,225) $ (1,028)
========== ==== ======== ======== ========= ======= ========
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 June 30, 1997 approximately 27% of the outstanding
common stock was owned by USX. For additional information on the Company's
capital structure see Note 3.
In November, 1996, USX Corporation completed a public offering of its notes
exchangeable February, 2000, for 5,483,600 shares of RMI Common Stock, owned by
USX (or for an equivalent amount of cash at USX's option). Such shares represent
all of the RMI Common Stock owned by USX.
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, $10.2 million was contributed to the Company's
pension plans and the balance used for general corporate purposes. Concurrent
with the Company's Stock Offering, USX Corporation sold 2,300,000 shares of its
investment in RMI Common Stock at the same price. RMI did not receive any of the
proceeds from the sale of RMI Common Stock by USX. As a result of these
transactions, USX's percentage of ownership in RMI was reduced from
approximately 51% to approximately 27%.
NOTE 4--INCOME TAXES
The effective tax rate for the three and six month periods ended June 30,
1997 was 10.1% and 11.3%, respectively. The difference between the statutory tax
rate of 35% and the effective tax rate is principally due to adjustments to the
valuation allowance of approximately $3.3 million for the three months and $6.2
million for the six months periods ended June 30, 1996. The Company currently
expects improved profitability in 1997 as a result of increased sales, product
pricing and gross margins, when compared to the expectations inherent in the
December 31, 1996 valuation allowance. Accordingly, the valuation allowance was
adjusted for the difference between such revised future income expectations and
those inherent in the valuation allowance at December 31, 1996. The amount of
current taxes expected to be paid in 1997 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 sufficient
taxable income 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 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.
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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
changes in future income expectations resulting from that process.
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.
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $95 million available to reduce federal taxable income through
2010. 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. In May 1997, the Company
finalized a settlement of this matter with the EPA which provides for the
payment of a $0.1 million civil penalty and a commitment to perform certain
other work.
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 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 currently 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 no earlier
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than late 1997. Actual cleanup would not commence prior to 1998. The Company's
share of the study costs has been established at 9.95%. In June, 1995, the
Company and twelve others entered into a Phase 2 (actual cleanup) allocation
agreement which assigns 9.44% of the cost to 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 June 30, 1997, 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 $3.9 million to $6.5 million, in the aggregate. The
amount accrued is net of expected contributions from third parties (which does
not include any amounts from insurers) of approximately $2.1 million, which the
Company believes are probable. The Company has been receiving contributions from
such third parties for a number of years as partial reimbursement for costs
incurred by the Company. As these proceedings continue toward final resolution,
amounts in excess of those already provided may be necessary to discharge the
Company from its obligations for these projects.
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)
JUNE 30, 1997
(UNAUDITED) DECEMBER 31, 1996
-------------- -----------------
Raw material and supplies...................... $ 45,773 $ 33,126
Work-in-process and finished goods............. 84,449 88,326
Adjustments to LIFO values..................... (28,836) (28,836)
-------- --------
$101,386 $ 92,616
======== ========
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 certain long-term
contracts. Such costs, net of amounts recognized to date, were $2.3 million at
June 30, 1997 and $0.8 million at December 31, 1996.
NOTE 7--CREDIT AGREEMENT:
In connection with the Common Stock offering referred to in Note 3 above,
the Company entered into a credit agreement, dated April 15, 1996 (the "Credit
Facility"), to replace the Company's existing credit facilities. The Credit
Facility has a term of three years and permits borrowings, on a revolving basis,
of up to the lesser of $50 million or a borrowing base equal to the sum of 85%
of qualified accounts receivable and 50% of qualified inventory. At June 30,
1997 no amounts were outstanding under the facility. The Company had sufficient
accounts receivable and inventory at June 30, 1997, to borrow the entire $50
million.
Under the terms of the Credit Facility, the Company, at its option, will be
able to borrow at (a) a base rate (which is the higher of PNC Bank's prime rate
or the Federal Funds Effective Rate plus 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.
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Prior to June 30, 1997, borrowings under the Credit Facility were secured
by the Company's accounts receivable, inventory, other personal property and
cash and cash equivalents. Effective July 1, 1997, borrowings are unsecured.
The Credit Facility contains additional terms and financial covenants which
are typical for other similar facilities.
NOTE 8--SUBSEQUENT EVENT
On July 3, 1997, the Company acquired 90% of the common stock of Galt
Alloys, Inc., a manufacturer of ferrotitanium and a producer and worldwide
distributor of specialty alloys to ferrous and nonferrous customers. RMI's
investment in Galt amounts to an initial cash investment of $3 million and an
agreement to invest up to an additional $17 million to finance a major expansion
program at Galt, which is expected to be completed in the next 18 to 24 months.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion should be read in connection with the information
contained in the Consolidated Financial Statements and Selected Notes to
Consolidated Financial Statements. The following information contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, and are subject to the safe harbor created by
that Act. Such forward-looking statements include, without limitation,
statements regarding the future availability and prices of raw materials, 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.
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
NET SALES
Net sales increased to $75.0 million,or 29% for the three months ended June
30, 1997 compared to net sales of $58.3 million in the corresponding 1996
period. This sales increase is due primarily to increased average selling prices
for titanium mill products, and a shift in product mix to more value added
products such as sheet and plate and away from commodity type products such as
billet and bloom used in the golf club market. Shipments of titanium mill
products in both the second quarter of 1997 and 1996 amounted to 4.6 million
pounds. Average selling prices on mill products in the second quarter of 1997
increased by approximately 22% to $14.02 per pound from $11.54 per pound in the
second quarter of 1996. Pricing on incoming orders for titanium mill products
continue to show improvement from 1996 levels.
GROSS PROFIT
Gross profit amounted to $16.7 million, or 22.3% of sales for the quarter
ended June 30, 1997 compared to a gross profit of $10.3 million or 17.6% for the
comparable 1996 period. This improvement results primarily from increased profit
margins on titanium mill products resulting from a more favorable product mix
and higher average selling prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses amounted to $2.8 million for
the quarter ended June 30, 1997 compared to $2.3 million for the same quarter in
1996. Research, technical and product development expenses amounted to $0.7
million in the second quarter of 1997 compared to $0.6 million in the second
quarter of 1996. Selling, general and administrative expenses together with
research, technical and product development expenses amounted to approximately
4.7% of sales in the second quarter of 1997 compared to 4.9% of sales in the
comparable 1996 period.
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OPERATING INCOME
Operating income for the three months ended June 30, 1997 amounted to $13.2
million, or 17.6% of sales compared to $7.4 million or 12.7% of sales in the
same period of 1996. This improvement results primarily from significant
increases in profit margins on mill products.
INTEREST EXPENSE
Because of decreased average borrowing levels, interest expense decreased
to $0.03 million in the second quarter of 1997 from $0.5 million in the second
quarter of 1996. For further information on borrowings see "Liquidity and
Capital Resources."
INCOME TAXES
In the second quarter of 1997, the Company recorded a provision for income
taxes amounting to $1.4 million compared to $0.9 million in the second quarter
of 1996. The effective federal tax rate for the second quarter of 1997 and 1996
was approximately 10.1% and 12.8%, respectively. The difference between the
statutory tax rate of 35% and the effective tax rate for the second quarter of
1997 is principally due to an adjustment of approximately $3.3 million and $1.5
million, respectively, to the deferred tax asset valuation allowance which
existed at March 31, 1997 and 1996. The Company currently expects improved
profitability in 1997 as a result of increased sales, product pricing and gross
margins, when compared to the expectation inherent in the December 31, 1996
valuation allowance. Accordingly, the valuation allowance was adjusted for the
difference between such revised future income expectations and those inherent in
the valuation allowance at December 31, 1996. The amount of current taxes
expected to be paid in 1997 is minimal. For further information on income taxes,
see "Income Tax Considerations" and "SFAS No. 109 Effects" below.
OTHER INCOME
Other income for the second quarter of 1997 amounted to $0.3 million. Other
income for the second quarter of 1996 was insignificant.
NET INCOME
Net income for the quarter ended June 30, 1997 amounted to $12.1 million or
16.1% of sales compared to $6.0 million, or 10.3% of sales in the comparable
1996 period.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
NET SALES
Net sales for the six months ended June 30, 1997 increased to $148.7 from
$112.9 million in the first six months of 1996, an increase of $35.8 million, or
31.7%. This increase results primarily from higher average selling prices and
increased mill product shipments. Mill products shipments for the first six
months of 1997 amounted to 9.4 million pounds compared to 8.9 million pounds in
the comparable period of 1996. Average realized transaction prices increased to
$13.88 per pound in the first six months of 1997 compared to $11.43 per pound in
1996. Both demand and pricing for titanium mill products continue to remain
strong.
GROSS PROFIT
Gross profit for the six months ended June 30, 1997 amounted to $32.5
million, or 21.8% of sales compared to $19.6 million, or 17.4% of sales in the
first six months of 1996. This increase results primarily from increased selling
prices for titanium mill products and increased volume.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses amounted to $5.5 million for
the first six months of 1997 compared to $4.7 million for the comparable period
in 1996. Research, technical and product development
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expenses amounted to $1.4 million, and $1.1 million in the six month periods
ended June 30, 1997 and 1996, respectively. Selling, general and administrative
expenses together with research, technical and product development expenses for
the first six months of 1997 amounted to 4.7% of sales compared to 5.1% of sales
in the first six months of 1996.
OPERATING INCOME
Operating income for the six months ended June 30, 1997 amounted to $25.6
million, or 17.4% of sales compared to $13.8 million, or 12.3% of sales in the
same period of 1996. This improvement results primarily from increases in
average realized transaction prices and mill product shipments.
INTEREST EXPENSE
Interest expense for the first six months of 1997 amounted to $0.06 million
compared to $1.8 million in the same period of 1996. This improvement results
primarily from reduced levels of indebtedness. See "Liquidity and Capital
Resources" below.
INCOME TAXES
In the first six months of 1997, the Company recorded a provision for
income taxes of $2.9 million compared to $1.5 million in the first six months of
1996. The effective federal income tax rate for 1997 was approximately 11.3% in
1997 and approximately 12.5% in 1996. The difference between the statutory
federal rate and the effective tax rate results principally from an adjustment
of approximately $6.4 million and $2.7 million to the deferred tax asset
valuation allowance which existed at December 31, 1996 and 1995, respectively.
NET INCOME
Net income for the six months ended June 30, 1997 amounted to $23.0
million, or 15.5% of sales compared to $10.5 million, or 9.3% of sales in the
first six months of 1996.
OUTLOOK
The Company's total order backlog as of June 30, 1997 was approximately
$366 million, compared to $328 million at December 31, 1996, an increase of
approximately 12%.
Beginning in the second half of 1995, continuing through 1996 and into
1997, the Company has experienced a significant increase in the volume of
incoming orders at increased prices. The Company estimates that as of June 30,
1997, orders for over 95% of its anticipated 1997 shipments have been booked or
shipped at average prices significantly higher than its 1996 average realized
mill product selling price of $11.88 per pound. The Company's average realized
mill product selling price increased to $13.88 per pound in the first six months
of 1997 compared to $11.43 per pound in the first six months of 1996. The
Company is currently booking orders for titanium mill products for delivery in
early 1998 at prices greater than $14 per pound. The increase in demand has been
driven primarily by the recovery in the commercial aerospace market.
Because of competitive factors in the titanium industry and the cyclical
nature of the aerospace industry, there can be no assurances that prices and
demand will continue to improve. The Company intends to continue its efforts to
develop new markets and products such as seamless tubulars for oil and gas and
geothermal energy production.
The increase in demand for titanium products has put upward pressure on
prices for certain raw materials used by the Company. Prices for the Company's
1997 titanium sponge requirements have been set under long-term supply contracts
and short-term arrangements. Prices for titanium sponge in 1997 have increased
slightly over 1996 levels. The Company is currently negotiating 1998 prices. Due
to increased demand, prices for titanium scrap, which accounts for approximately
40% of the Company's raw material requirements, remain elevated, although prices
have stabilized somewhat recently. Prices of certain alloying agents have also
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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 antidumping order on
titanium sponge from Russia. The Department of Commerce determined that dumping
did not occur on sales made by Interlink, a major trading company for Russian-
produced titanium sponge, during the review period. A final determination
confirming the earlier finding was issued in November 1996. The Company
purchases nearly all of its Russian titanium sponge through Interlink. These
purchases previously carried an 84% dumping duty. The no-dumping finding
eliminates this duty, thereby allowing the Company access to lower cost sources
for a significant portion of its titanium sponge requirements.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operating activities totaled $15.9 million in the first
six months of 1997 compared to $6.9 million used in operations during the first
six months of 1996. The change in net cash flows from operating activities in
the first six months of 1997, compared to the comparable 1996 period was due
primarily to significantly improved results of operations. Working capital
amounted to $158.1 million at June 30, 1997, compared to $132.1 million at
December 31, 1996. The increase in working capital results primarily from
increases in cash, inventory and accounts receivable partially offset by an
increase in accounts payable and other current liabilities. The Company's
working capital ratio was 5.9 to 1 at June 30, 1997.
During the first six months of 1997, the Company's cash flow requirements
for capital expenditures were funded by cash provided from operating activities.
In the first six months of 1996, the Company's cash flow requirements for
capital expenditures and working capital needs were funded through borrowings
under the existing credit facilities, and proceeds from the Common Stock
Offering referred to below.
On May 7, 1996, the Company completed a public offering of 4,600,000 shares
of common stock at a price of $18.50 per share (the "Common Stock Offering").
Net proceeds to RMI after deducting underwriting fees and expenses amounted to
$80.3 million. The new proceeds were used to repay all outstanding indebtedness
(amounting to $65.5 million) under the then existing bank credit facilities, and
to contribute $10.2 million to certain of the company's defined benefit pension
plans. The balance was used for general corporate purposes.
The Company anticipates that it will be able to fund its 1997 working
capital requirements and its capital expenditures primarily from funds generated
by operations. 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 if needed.
On July 3, 1997, the Company acquired 90% of the common stock of Galt
Alloys, Inc., a manufacturer of ferrotitanium and a producer and worldwide
distributor of specialty alloys to ferrous and nonferrous customers. In
connection with this transaction, Galt is undertaking a major expansion program
estimated to cost approximately $20 million, designed to enable Galt to better
serve the titanium industry and its customers. The expansion will include a new
scrap preparation facility, and plasma consolidation furnace, and a plasma
hearth furnace. RMI's investment in Galt amounts to an initial cash investment
of $3 million and an agreement to invest an additional $17 million over the
period required to complete the expansion referred to above which is expected to
be approximately 18-24 months.
In connection with the Common Stock offering referred to above, the Company
entered into a credit agreement, dated April 15, 1996 (the "Credit Facility"),
to replace the Company's prior credit facilities. The Credit Facility has a term
of three years and permits borrowings, on a revolving basis, of up to the lesser
of $50 million or a borrowing base equal to the sum of 85% of qualified accounts
receivable and 50% of qualified inventory. At June 30, 1997 no amounts were
outstanding under the facility. The Company had sufficient accounts receivable
and inventory at June 30, 1997, to borrow the entire $50 million.
Under the terms of the Credit Facility, the Company, at its option, will be
able to borrow at (a) a base rate (which is the higher of PNC Bank's prime rate
or the Federal Funds Effective Rate plus 1/2% per
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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.
Prior to June 30, 1997, borrowings under the Credit Facility were secured
by the Company's accounts receivable, inventory, other personal property and
cash and cash equivalents. Beginning July 1, 1997, borrowings will be unsecured.
At June 30, 1997, the Company had no amounts outstanding under the bank credit
facility. Other long-term debt of $0.6 million consisted of industrial revenue
bonds.
INCOME TAX CONSIDERATIONS
Section 382 Limitation. At December 31, 1996, the Company had net operating
loss carryforwards of approximately $95 million available to reduce federal
taxable income through 2010. 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. Management
does not believe that the sale of shares of Common Stock resulted in an
ownership change. 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 June 30, 1997, the Company considered a number of factors
including the improved profitability in 1997 as a result of increased sales,
product pricing and gross margins, when compared to expectations inherent in the
December 31, 1996 valuation allowance. Accordingly, the valuation allowance was
adjusted for the difference between such revised future income expectations and
those inherent in the valuation allowance at December 31, 1996.
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. 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.
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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 which
more closely approximate the federal statutory tax rate, 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,
consisting primarily of alternative minimum tax. The Company's approximately $95
million net operating loss 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 June 30, 1997, 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 $3.9 million to $6.5 million, in the aggregate. The
amount accrued is net of expected contributions from third parties (which does
not include any amounts from insurers) of approximately $2.1 million, which the
Company believes are probable. The Company has been receiving contributions from
such third parties for a number of years as partial reimbursement for costs
incurred by the Company. As these proceedings continue toward final resolution,
amounts in excess of those already provided may be necessary to discharge the
Company from its obligations for these projects. In 1992, the EPA filed a
complaint and proposed a $1.4 million civil penalty for alleged failure to
comply with RCRA. In May 1997, the Company finalized a settlement of this matter
with the EPA which provides for the payment of a $0.1 million civil penalty and
a commitment to perform certain other work.
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 the first six months of 1997 and 1996 amounted
to $1.8 and $1.3 million, respectively. The Company has budgeted capital
spending of approximately $11.5 million in 1997, exclusive of the Galt expansion
referred to above. In connection with the Galt expansion, the Company estimates
approximately $6.0 million in capital expenditures will be made in the second
half of 1997. RMI anticipates that capital spending can be funded using cash
provided from internally generated sources.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." SFAS No. 128 establishes new standards for computing and presenting
earnings per share. The Company is required to adopt the provisions of SFAS No.
128 for its consolidated financial statements beginning with the year ending
December 31, 1997. Upon adoption, the standard also requires the restatement of
all prior period earnings per share information presented.
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In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. The Company is required to
adopt the provisions of SFAS No. 130 beginning with its consolidated financial
statements for the three months ending March 31, 1998. SFAS No. 131 requires
certain disclosures about segment information in interim and annual financial
statements and related information about products and services, geographic areas
and major customers. The Company must adopt the provisions of SFAS No. 131 for
its consolidated financial statements for the year ending December 31, 1998.
The adoptions of SFAS No. 128, SFAS No. 130 and SFAS No. 131 are not
expected to have a material effect on the Company's financial position, results
of operations or cash flows.
YEAR 2000 COMPLIANCE
The Company has and will continue to make certain investments in its
application software to ensure the Company is year 2000 compliant. While it is
not possible, at present, to accurately estimate the total cost of this effort,
the Company does not anticipate it will have a material impact on the long-term
results of operations, liquidity or consolidated financial position of the
Company.
PART II--OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(a) At a Board of Directors meeting held on June 9, 1997, a share purchase
rights plan providing for rights to be issued to all common stockholders
of record on June 19, 1997. Rights generally will become exercisable at a
discounted price if a person or group acquires 20% or more (or 30% for USX
Corporation) of the outstanding shares of RMI Titanium Company common
stock. The Rights Agreement (including a Certificate of Adoption of
Amendment to Amended Articles of Incorporation as Exhibit A thereto, a
Form of Right Certificate as Exhibit B thereto and a Summary of Rights to
Purchase Preferred Stock as Exhibit C thereto) is incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
dated June 10, 1997. The form of an explanatory letter to shareholders
dated June 19, 1997 is incorporated by reference to Exhibit 99.1 to the
Company's Current Report on Form 8-K dated June 10, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
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 June 9, 1997,
incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K dated June 10, 1997.
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.
4.0 Credit Agreement dated as of April 15, 1996 by and among RMI Titanium
Company, an Ohio Corporation, and PNC Bank, National Association, as
agent for the Banks, incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form S-3 No. 333-01553 Amendment
No. 2.
4.1 Rights Agreement (including a Certificate of Adoption of Amendment to
Amended Articles of Incorporation as Exhibit A thereto, a Form of
Right Certificate as Exhibit B thereto and a Summary of Rights to
Purchase Preferred Stock as Exhibit C thereto), incorporated by
reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
dated June 10, 1997.
27 Financial Data Schedule
(b) Reports on Form 8-K.
June 10, 1997 filed under Item 5, the adoption of share purchase rights
plan.
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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
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(Registrant)
Date: August 14, 1997
By: /s/ T. G. RUPERT
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T. G. Rupert
Executive Vice President & Chief
Financial Officer
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