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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(MARK ONE)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [fee required] for the fiscal year ended December 31, 2001 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [no fee required] for the transition period
from to
COMMISSION FILE NUMBER 001-14437
RTI INTERNATIONAL METALS, INC.
(Exact name of registrant as specified in its charter)
OHIO 52-2115953
(State of Incorporation) (I.R.S. Employer Identification No.)
1000 WARREN AVENUE, NILES, OHIO 44446
(Address of principal executive offices) (Zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 330-544-7700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, Par Value $0.01 Per Share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 1, 2002: $108,818,572. The amount shown is based on the
closing price of the registrant's common stock on the New York Stock Exchange on
that date. Shares of common stock known by the registrant to be beneficially
owned by officers or directors of the registrant or persons who have filed a
report on Schedule 13D or 13G are not included in the computation. The
registrant, however, has made no determination that such persons are
"affiliates" within the meaning of Rule 12b-2 under the Securities Exchange Act
of 1934.
Number of shares of common stock outstanding at March 1, 2002: 20,807,772
DOCUMENTS INCORPORATED BY REFERENCE:
Selected Portions of the 2002 Proxy Statement-Part III of this Report.
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RTI INTERNATIONAL METALS, INC.
AND CONSOLIDATED SUBSIDIARIES
As used in this report, the terms "RTI", "Company", and "Registrant" mean
RTI International Metals, Inc., its predecessors and consolidated subsidiaries,
taken as a whole, unless the context indicates otherwise.
----------------------
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters......................................... 13
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 7(a). Quantitative and Qualitative Disclosures About Market
Risk........................................................ 23
Item 8. Financial Statements and Supplementary Data................. 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 47
Item 11. Executive Compensation...................................... 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 47
Item 13. Certain Relationships and Related Transactions.............. 47
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 47
Signatures............................................................... 48
Index to Exhibits........................................................ 49
PART I
ITEM 1. BUSINESS
THE COMPANY
RTI International Metals, Inc., is a leading U.S. producer of titanium mill
and fabricated-metal products for the global market. The Company conducts
business in two segments: the Titanium Group and the Fabrication and
Distribution Group. The Titanium Group's mill products are processed by RTI's
customers to provide products for use in the aerospace industry and industrial
markets. The Fabrication and Distribution Group's products are used primarily in
the aerospace, oil and gas, geothermal energy production and chemical process
industries, and a number of other industrial applications. The Fabrication and
Distribution Group also provides fabrication, extrusion and conversion services
to titanium and other specialty metals producers, and operates a number of
distribution centers specializing in high temperature and corrosion resistant
alloys including titanium, stainless steel and nickel-based products.
On September 30, 1998, the shareholders of the Company's now wholly-owned
subsidiary RMI Titanium Company ("RMI") approved a proposal to reorganize into a
holding company structure (the "1998 Reorganization"). Pursuant to this
reorganization, the Company became the parent company of RMI, and shares of RMI
Common Stock were automatically exchanged on a one-for-one (1:1) basis for
shares of RTI. Shares of RTI began trading on the New York Stock Exchange on
October 1, 1998.
The Company is a successor to entities that have been operating in the
titanium industry since 1951. In 1990, USX Corporation ("USX") and Quantum
Chemical Corporation ("Quantum") transferred their entire ownership interest in
RMI's immediate predecessor, RMI Company, an Ohio general partnership, to the
Company in exchange for shares of the Company's common stock (the "1990
Reorganization"). Quantum sold its shares of common stock to the public while
USX retained ownership of its shares.
In November, 1996, USX completed a public offering of its 6 3/4% notes (the
"Notes") which were exchangeable in February, 2000, for 5,483,600 shares of RTI
Common Stock owned by USX. On February 1, 2000, the trustee under the note
indenture delivered 5,483,000 of RTI common stock to the note holders in
exchange for the Notes terminating USX's ownership interest in RTI.
On July 3, 1997, the Company acquired 90% of the common stock of Galt
Alloys, Inc., ("Galt") a manufacturer of ferro titanium and a producer and
worldwide distributor of specialty alloys to ferrous and nonferrous customers.
Subsequent to the 90% acquisition of Galt, new facilities were constructed at
Galt that provide low cost feedstock to the Company's Niles, Ohio facility. Galt
conducts business as part of the Titanium Group.
On October 1, 1998, RTI acquired all of the capital stock of New Century
Metals, Inc. ("NCM") of Solon, Ohio. NCM was a manufacturer and distributor of
high temperature and corrosion resistant alloys including titanium, stainless
steel and nickel, in long bar form, for use in the aerospace, chemical
processing, oil exploration and production, and power generation industries. In
addition to manufacturing facilities acquired as part of the NCM capital stock
acquisition, the Company built and installed a 5,000 ton press in leased space
in Houston, Texas. This project was completed in the fall of 2001. The Houston
facility operates as part of the Fabrication unit of the Fabrication and
Distribution Group; and effective April 1, 2001, was formed as RTI Fabrications,
LP. NCM operated four distribution centers which now operate as part of the
Distribution unit of the Fabrication and Distribution Group.
Also on October 1, 1998, RTI acquired the assets of Weld-Tech Engineering,
L.P. ("Weld-Tech"). Weld-Tech, based in Houston, Texas operates as part of the
Energy unit of the Fabrication and Distribution Group. Weld-Tech provides
engineered and fabricated products, systems and services for the oil and gas
industry, including weld design, fabrication and repair, as well as materials
engineering and testing services.
On December 14, 2000, the Company purchased the remaining 60% of the
outstanding shares of Reamet, S.A. ("Reamet"). Since 1992, the Company had owned
40% of the outstanding shares of Reamet. Reamet, located in Villette, France, is
a premier distributor of titanium products to the French market, serving
aerospace, military and industrial customers. Its largest customer is
Aerospatiale, French partner to the Airbus consortium,
2
with which it has a contract to supply titanium, principally in the form of cut
plate. Reamet, a wholly owned subsidiary of RTI France, S.A.S., now operates as
part of the Fabrication and Distribution Group.
INDUSTRY OVERVIEW
Titanium is one of the newest specialty metals. Its physical
characteristics include high strength-to-weight ratio, high temperature
performance and superior corrosion and erosion resistance. The first major
commercial application of titanium occurred in the early 1950's when it was used
in components in aircraft gas turbine engines. Subsequent applications were
developed to use the material in other aerospace component parts and in airframe
construction. Historically, a majority of the U.S. titanium industry's output
has been used in aerospace applications. However, significant quantities of the
industry's output are currently used in nonaerospace applications, such as the
global chemical processing industry, oil and gas exploration and production,
geothermal energy production, consumer products and armor plate for military
applications.
The terrorists attacks of September 11, 2001 and their effect on the
general economy will have a significant influence on overall business conditions
for several years.
COMMERCIAL AEROSPACE AND DEFENSE
Aerospace demand originates from two aerospace sectors: commercial and
defense. The largest impact of September 11 is likely to be in commercial
aerospace markets, which provide approximately 40% of RTI's sales. Commercial
aerospace markets have been the dominant source of titanium demand since the
late 1980's. Airline operators experienced a dramatic drop in travel immediately
following September 11, which is expected to result in significant losses within
their industry causing a reduced demand for new aircraft. The primary builders
of large commercial aircraft, Boeing and Airbus, have adjusted their build rates
beginning in 2002 downward to reflect the expected change in demand. The most
current information indicates a drop in commercial aircraft production in 2002
of about 30-40% at Boeing and 20-25% at Airbus, or a total combined reduction of
approximately 30-35%. Neither aircraft producer has, as yet, issued firm build
schedules beyond 2002, and all build schedules are subject to change, and are
highly dependent on airline passenger travel and airline profitability.
Therefore, the exact magnitude of the downturn on commercial aerospace remains
uncertain for 2002.
In spite of this, the commercial aerospace sector is expected to continue
to dominate the long-term demand for titanium as a result of the expected
long-term growth of worldwide traffic and the need to repair and replace aging
commercial airline fleets over the next 20 years.
Defense markets represent approximately 30% of RTI's revenues. In 2001, it
is estimated that global demand from the commercial aerospace market
approximated 40% of total industry mill product shipments. The importance of the
military demand is expected to grow in 2002 and beyond due to increased defense
budgets and increased hardware purchases by the U.S. Government and European
nations, partially brought about by the events of September 11. It is estimated
that global military demand for titanium will increase, but it is not expected
to offset the total decline in the market caused by the drop in the commercial
aerospace sector. In 2001, it is estimated that global demand from military
markets for titanium approximated 15% of the total mill product shipments.
Historically, the cyclical nature of the aerospace industry has been the
principal cause of the fluctuations in performance of companies engaged in the
titanium industry. Over the past 20 years, U.S. titanium mill product shipments
registered cyclical peaks of 65 million pounds in 1997 to a low of 32 million
pounds in 1983. The U.S. titanium industry's reported shipments increased to 52
million in 2000 from 48 million pounds in 1999 . The estimate for 2001 is
approximately 53-55 million pounds, although published figures have not been
issued at the time of printing. If commercial airline passenger travel fails to
return to pre-September 11 levels, commercial airlines will continue to cancel
or delay aircraft orders, resulting in further pressure on titanium demand and
pricing.
INDUSTRIAL AND CONSUMER
The Company manufactures and distributes high temperature and corrosion
resistant alloys such as titanium, stainless steel and nickel to the chemical
processing, oil exploration and production, power generation, and sports and
recreation industries. The company also provides engineering and fabrication
services to the oil and gas
3
industry, including weld design, fabrication and repair, as well as materials
engineering and testing services. It is estimated that these market segments
total about 45% of worldwide demand for titanium.
The demand for oil and gas has increased deepwater exploration and
production in 2001, and this resulted in much higher demand for the Company's
products used in oil and gas exploration. At the end of 2001, the Company's
energy related business continued to expand, and this is expected to be ongoing
due to deepwater exploration and production which is forecast to grow over the
next several years.
PRODUCTS AND MARKETS
The Company's products are produced and marketed by two operating segments:
(1) the Titanium Group and (2) the Fabrication and Distribution Group.
The Titanium Group's products consist primarily of titanium mill products
and specialty alloys for use in the ferrous and nonferrous metals industries.
Titanium mill products consist of basic mill shapes such as ingot, slab, bloom,
billet, bar, sheet, plate, strip and welded tube. These products are sold to a
customer base consisting primarily of manufacturing and fabrication companies in
the aerospace and nonaerospace markets such as prime aircraft manufacturers and
subcontractors including metal fabricators, forge shops, machine shops and metal
distribution companies. Titanium mill products are semi-finished goods and most
often represent the raw or starting material for these customers, who then form,
fabricate, machine or further process them into finished or semi-finished parts.
This Group also manufactures titanium powders and sells specialty alloys used by
the ferrous and nonferrous metal industries.
The Fabrication and Distribution Group consists primarily of businesses
engaged in the fabrication and distribution of titanium and other ferrous and
nonferrous metals such as stainless steel and nickel-based alloys. Fabricated
products include pipe, engineered tubular products, hot-formed and
superplastically formed parts, cut shapes, and various specialized cut-to-size
programs. The Fabrication unit extrudes numerous shapes and sizes of specialty
metals for use in aerospace and nonaerospace applications. The Energy unit
fabricates components such as connectors, subsea manifolds and riser systems
which are used in offshore oil and gas production. The Energy unit also designs
and markets offshore riser systems, stress joints and drill pipe. The
Distribution unit operates a number of domestic metal distribution facilities,
which stock and deliver cut-to-size titanium products, as well as other
nonferrous and ferrous metals. The RTI Europe business unit operates
distribution facilities in Europe which stock and deliver cut to size titanium
products and other specialty metals.
The amount of sales and the percentage of the Company's consolidated sales
represented by each Group during each of the years beginning in 1999 were as
follows (dollars in millions):
2001 2000 1999
------------ ------------ ------------
$ % $ % $ %
------ --- ------ --- ------ ---
Titanium Group................................... $126.9 44% $124.2 50% $125.1 51%
Fabrication and Distribution Group............... 144.9 51 108.4 43 100.2 41
Other (1)........................................ 14.1 5 16.8 7 18.0 8
------ --- ------ --- ------ ---
Total.......................................... $285.9 100% $249.4 100% $243.3 100%
====== === ====== === ====== ===
---------------
(1) Includes United States Department of Energy ("DOE") remediation and
restoration contract.
Operating profit (loss) and the percentage of consolidated operating profit
contributed by each Group during each of the years beginning in 1999 was as
follows (dollars in millions):
2001 2000 1999
---------- ---------- -----------
$ % $ % $ %
---- --- ---- --- ---- ----
Titanium Group......................................... $4.0 41% $5.6 84% $9.2 192%
Fabrication and Distribution Group..................... 4.7 48% -- -- (6.4) (134)
Other (1).............................................. 1.1 11 1.1 16 2.0 42
---- --- ---- --- ---- ----
Total................................................ $9.8 100% $6.7 100% $4.8 100%
==== === ==== === ==== ====
---------------
(1) Includes DOE remediation and restoration contract.
4
The amount of the Company's consolidated assets identified with each Group
for each of the years ended December 31 were as follows (dollars in millions):
2001 2000 1999
------ ------ ------
Titanium Group.............................................. $218.0 $225.9 $256.3
Fabrication and Distribution Group.......................... 157.2 149.5 134.7
General Corporate (1)....................................... 12.6 8.4 9.2
------ ------ ------
Total..................................................... $387.8 $383.8 $400.2
====== ====== ======
---------------
(1) Consists primarily of unallocated cash, short-term investments and deferred
tax assets.
TITANIUM GROUP
The Titanium Group produces a full range of titanium mill products which
are used in both the aerospace and nonaerospace markets.
Commercial Aerospace. Approximately 55% of the Group's 2001 mill product
sales were commercial aerospace-related compared with approximately 58% in 2000
and 1999. The Group's products are certified and approved for use by all major
domestic and most international manufacturers of commercial aircraft and jet
engines. Products such as sheet, plate, strip, bar, billet and ingot, are
fabricated into parts and are utilized in aircraft structural sections such as
landing gear parts, fasteners, tail sections, wing support and carry-through
structures and various engine components including rotor blades, vanes, discs,
rings and engine cases.
According to The Airline Monitor, at December 31, 2001, the leading
manufacturers of commercial aircraft, Boeing Company and Airbus Industrie,
reported an aggregate of 2,919 aircraft under firm order which represents a 9.5%
decrease when compared to the backlog at December 31, 2000 of 3,224 aircraft.
The backlog for wide body aircraft, such as the Airbus A300, A310, A330, A340
and A380 and the Boeing 767 and 777, which typically consume more titanium per
aircraft than their narrow body counterparts, at December 31, 2001, was 739
aircraft which represents a 10.0% increase when compared to the backlog of 672
aircraft at December 31, 2000.
While the total backlog has declined, it remains at a level in excess of
2,900 units which at today's production rate equates to over 4 years of
production for Boeing and Airbus. There can be no assurance that it will remain
at this level, but a significant production backlog is expected to be in place
over the next few years. The long term outlook for this segment over the next 20
years is that approximately 18,000 new and replacement aircraft will be required
to support the demand of increased passenger travel.
Defense. Approximately 25% of the Group's mill product sales were defense
related, compared with approximately 25% in 2000 and 1999. The Company's
products are certified and approved for use by all major and most international
manufacturers of military aircraft and jet engines. The various mill products
are fabricated into parts and are utilized in aircraft structural sections, wing
skins, fasteners, wing carry-through structures and various engine components
including rotor blades, vanes, discs, rings and engine cases, and armor for
military vehicles. Product from this segment is utilized in programs such as the
C-17 military transport, fighter aircraft such as the F-18, F-15, F-16, F-22,
and the recently approved Joint Strike Fighter (F-35). Internationally it is
used on the European fighters such as the Tornado, Mirage, Eurofighter, and the
recently launched A-400 transport.
Industrial and Consumer. Principal mill products for these markets include
commercially pure (unalloyed) strip, welded tube and plate used for chemical
processing and pulp and paper equipment. The Group is also a supplier of
commercially pure titanium plate and strip, which offers superior corrosion
resistance and ductility for critical forming and metal expansion required in
applications such as heat exchangers and anodes for the chlorine industry.
Nonaerospace sales accounted for 20% of the Group's mill product sales in 2001,
16% in 2000 and 17% in 1999.
Other. The Company has a long-term agreement with the DOE covering the
remediation and restoration of certain of the Company's closed facilities in
Ashtabula, Ohio, for which the DOE is responsible as a result of work performed
there by the Company for the U.S. government. The Company is serving as the
prime contractor during the remediation and restoration period. Year-to-year
revenues and the time of completion of the project
5
will depend on DOE funding. In 2001, the Company recognized $14.1 million in
revenues under this program compared to $16.8 million in 2000 and $18.0 million
in 1999. As the prime contractor, the Company provides management services
necessary to complete assessment, clean-up and remediation activities.
FABRICATION AND DISTRIBUTION GROUP
Fabricated products include value added activity, seamless pipe, engineered
tubular products and extrusions for oil and gas exploration and production and
geothermal energy production industries. Fabricated products also include
hot-formed and superplastically formed parts and cut shapes and extrusions for
aerospace (commercial and defense) applications.
The Company owns and operates a number of distribution facilities, both
foreign and domestic. These centers stock titanium as well as other nonferrous
and ferrous metals to fill customer needs for smaller quantity, quick delivery
orders. These centers also provide cutting and light fabrication services. In
addition, three locations, one near St. Louis, Missouri, one near Birmingham,
England, and one near Paris, France operate significant stocking and cut-to-size
programs designed to meet the needs of commercial aerospace, defense, and
industrial and consumer product customers for multi-year requirements.
The Fabrication and Distribution Group was the largest customer for RTI's
Titanium Group's mill products in 2001, utilizing approximately 25% of its
shipments, and this is likely to increase in the future.
In an effort to expand the fabrication and distribution business, the
Company made two strategic acquisitions during the fourth quarter of 1998. On
October 1, RTI acquired NCM of Solon, Ohio. NCM manufactured and distributed
high temperature and corrosion resistant alloys such as titanium, stainless
steel and nickel to the aerospace, chemical processing, oil exploration and
production, and power generation industries. In addition to the manufacturing
facilities acquired as part of the NCM capital stock acquisition, the Company
built and installed a 5,000 ton press in leased space in Houston, Texas in late
2001. All manufacturing facilities operate as part of the Fabrication unit of
the Fabrication and Distribution Group. NCM also operated four distribution
facilities which operate as part of the Distribution unit of the Fabrication and
Distribution Group. Additionally, in order to enhance and further expand its
already significant efforts to develop new markets for titanium in the oil and
gas exploration and production and geothermal energy production industries, RTI
acquired the assets of Weld-Tech of Houston, Texas on October 1, 1998. RTI
Energy Systems (Weld-Tech), operating as part of the Energy unit of the
Fabrication and Distribution Group, provides engineering and fabrication
services to the oil and gas industry, including weld design, fabrication and
repair, as well as materials engineering and testing services. RTI increased its
investment in RTI Energy Systems with the addition of a machining center. This
addition expanded capabilities and provided additional fabrication services to
its expanding customer base in titanium and other specialty metals, as well as
various steels. RTI Energy Systems specializes in the design, engineering and
marketing of offshore riser systems, connectors, stress joints and drill pipe
from titanium and other metals.
The Company continues to work closely with a number of oil companies and
engineering concerns to develop other titanium projects and applications in the
oil and gas and geothermal energy production industries. Customer funded
programs and continued research is an ongoing activity to support new growth
expected in this market in years to come.
EXPORTS
The majority of the Company's exports consist of titanium mill products and
extrusions used in aerospace markets. Other exports include slab, commercially
pure strip, plate and welded tubing used in nonaerospace markets. The Company's
export sales were 20% of sales in 2001, 23% in 2000 and 21% in 1999. Such sales
were made primarily to the European market, where the Company is a leader in
supplying flat-rolled titanium alloy mill products. Most of the Company's export
sales are denominated in U.S. dollars, which minimizes exposure to foreign
currency fluctuations.
The Company supplies flat-rolled titanium alloy mill products to the
European market, through RTI Europe, the Company's network of European
distribution companies, which secures contracts to furnish mill products to the
major European aerospace manufacturers. In order to enhance its presence in the
European market, in 1992 the Company acquired a 40% ownership interest in its
French distributor, Reamet. In 2000, RTI purchased the
6
remaining 60% of Reamet. In addition, the Company expanded its operations in the
United Kingdom to include a distribution and service center facility in
Birmingham, England. Operations at the facility commenced during the second
quarter of 1995, and have exhibited steady growth since that time. In January,
1998 RTI, through its French subsidiary, Reamet, was chosen by Aerospatiale as a
major supplier of the titanium flat rolled products required for its Airbus
programs beginning in 1999 and extending through 2001. A new multi-year supply
agreement is currently being finalized with European Aerospace and Defense
Systems ("EADS"), which owns 80% of Airbus, to cover 2002-2004 with an option
for an additional two years on alloy flat rolled products. In 2001, the Company
added additional distribution locations in Italy and Germany. As a result, the
Company has significant export sales to customers in France, the United Kingdom,
Italy, Spain, and Germany.
BACKLOG
The Company's order backlog for all market segments increased to $142.6
million as of December 31, 2001, from $132.1 million at December 31, 2000,
principally due to new business from energy markets.
RAW MATERIALS
The principal raw materials used in the production of titanium mill
products are titanium sponge, a porous metallic material; titanium scrap; and
alloying agents. RTI acquires its raw materials from a number of domestic and
foreign suppliers, under long-term contracts and other negotiated transactions.
Requirements for sponge and scrap vary depending upon the volume and mix of
final products. The addition of the Company's cold hearth melting facility
permits the Company to consume significantly more scrap in its primary melting
facility, thus reducing the need for purchased titanium sponge. Based on the
current levels of customer demand, current production schedules, and the level
of inventory on hand, the Company estimates its purchases of sponge and scrap
will decrease during 2002.
The Company has entered into two long-term sponge supply agreements. One of
the agreements is with a Japanese supplier and permits the Company to purchase
up to four million pounds of sponge per year through 2005, either at market
price or the price in effect under the contract plus changes in certain of the
supplier's costs. In addition, this contract permits the Company to purchase up
to an additional four million pounds of sponge at negotiated prices. During
2001, the Company entered into a new long-term supply agreement with a supplier
from Kazakhstan. This agreement commences in 2002 and permits the Company to
purchase up to eight million pounds of sponge annually for a period of five
years.
In addition, the Company makes spot purchases of raw materials from other
sources.
Companies in the Fabrication and Distribution group obtain the majority of
their titanium mill product requirements from the Titanium Group. These
transactions are priced at amounts approximating arm's length prices. Metallic
requirements are generally sourced from the best available producer at
competitive market prices.
The Company believes it has adequate sources of supply for titanium sponge,
scrap, alloying agents and other raw materials.
COMPETITION AND OTHER MARKET FACTORS
The titanium metals industry is highly competitive on a worldwide basis.
Titanium competes with other metals such as stainless steel and nickel-based
high temperature and corrosion resistant alloys. A metal manufacturing company
with rolling and finishing facilities could participate in the mill product
segment of the titanium industry. However, entry into the titanium industry as
an integrated producer would require a significant investment of capital and
extensive technical expertise.
The aerospace consumers of titanium products tend to be highly
concentrated. The Boeing Company and Airbus, through direct purchase and their
families of subcontractors, consume most of the aerospace products. Shipments of
aerospace products represented approximately 80% of RMI's mill product shipments
in 2001, 30% of which were used in defense applications. Producers of titanium
mill products are located primarily in the U.S., Japan, Russia, Europe and
China.
7
Imports of titanium mill products from countries that receive the normal
trade relations ("NTR") tariff rate are subject to a 15% tariff. The tariff rate
applicable to imports from countries that do not receive NTR treatment is 45%.
However, under the Trade Act of 1974, as amended, certain countries may be
designated for tariff preferences under the Generalized System of Preferences
program ("GSP"). The U.S. Trade Representative ("USTR") administers the GSP
program and makes recommendations to the President through an interagency
committee that conducts annual reviews of petitions by interested parties, and
by self initiated actions, to add or remove GSP eligibility for individual
products or countries. Effective October 18, 1993, the USTR extended the
benefits of GSP treatment to Russia. Consequently, certain wrought titanium
products from Russia, including sheet and plate, were granted duty free access
into the U.S. markets, up to a Competitive Needs Limit ("CNL"), which
effectively restricts the volume of imports of these products. Unwrought
products from Russia, such as sponge and ingot, were not granted GSP status.
In the fall of 1997, VSMPO, an integrated Russian titanium manufacturer,
petitioned the USTR for a waiver of the CNL on the wrought products, and also
filed a petition seeking to have unwrought products granted GSP status. The CNL
was actually exceeded by this producer in 1997, 1998, 1999, 2000, and 2001. In
July of 1998, the USTR granted the waiver of the CNL on the wrought products,
allowing unlimited imports of Russian mill products into the domestic market.
The petition on the unwrought products remains in a "pending" status.
On June 13, 2001, Titanium Metals Corporation ("Timet"), an integrated
domestic producer of titanium, petitioned the USTR for removal of GSP status for
the Russian wrought products and/or a reinstatement of the CNL. RTI is actively
supporting this petition. In addition, a sponge manufacturer from the
Commonwealth of Independent States also filed a petition, seeking GSP status of
unwrought titanium products from Kazakhstan. RTI likewise supports the granting
of this petition. Both of these petitions are filed and awaiting review by the
GSP committee. The Company believes that the increase in duty-free imports of
titanium mill products from Russia has increased competition in the domestic
titanium industry, and without the benefit of similar treatment for needed
imported sponge, has negatively impacted the domestic producers.
Competition in the Fabrication and Distribution Group is primarily on the
basis of price, quality, timely delivery and customer service. RTI Energy
Systems competes with a number of other fabricators, some of which are
significantly larger, in the offshore oil and gas exploration and production
industry. The Company believes the businesses that are part of the Fabrication
and Distribution group are well positioned to remain competitive and grow in
size due to the range of goods and services offered and the increasing synergy
with RMI Titanium for product and technical support.
MARKETING AND DISTRIBUTION
RTI markets its titanium mill products and related products and services
worldwide. The majority of the Company's sales are made through its own sales
force and lesser amounts through independent distributors. RTI's domestic sales
force has offices in Niles, Ohio; Houston, Texas; Brea, California; Washington,
Missouri; and Salt Lake City, Utah. Technical marketing personnel are available
to service these offices and to assist in new product applications and
development. In addition, the Company's Customer Technical Service and Research
and Development departments, both located in Niles, Ohio, provide extensive
customer support. Sales of products and services provided by companies in the
Fabrication and Distribution Group are made by personnel at each plant location.
Fabrication and Distribution Group locations include: Solon, Ohio; Los Angeles,
California; Houston, Texas; Sullivan and Washington, Missouri; Birmingham,
England; Villette, France; Dusseldorf, Germany; and Milan, Italy. Major U.S.
distribution centers are located in California, Texas, Missouri, and
Connecticut.
RESEARCH, TECHNICAL AND PRODUCT DEVELOPMENT
The Company conducts research, technical and product development activities
at its facilities in Niles, Ohio. The principal goals of the Company's research
program are maintaining technical expertise in the production of titanium mill
and fabricated products and providing technical support in the development of
new markets and products. Research, technical and product development costs
totaled $1.7 million in 2001, $1.3 million in 2000 and $4.0 million in 1999. The
decrease in research, technical and product development expenses from 1999 to
2000 and 2001, reflects a change in classification of expenses reported as
research, technical and product
8
development in 1999 to selling, general and administrative in 2000 and 2001, as
the energy business evolved into a stand alone commercial enterprise.
PATENTS AND TRADEMARKS
The Company possesses a substantial body of technical know-how and trade
secrets and owns a number of U.S. patents applicable primarily to product
formulations and uses. The Company considers its know-how, trade secrets and
patents important to conduct its business, although no individual item is
considered to be material to the Company's current business.
EMPLOYEES
As of December 31, 2001, the Company and its subsidiaries employed 1,170
persons, 488 of whom were classified as administrative and sales personnel. 835
of the total number of employees were in the Titanium Group, while 335 were
employed in the Fabrication and Distribution Group.
The United Steelworkers of America represents 406 of the hourly clerical
and technical employees at RMI's plant in Niles, Ohio and 17 hourly employees at
Earthline Technologies in Ashtabula, Ohio. No other Company employees are
represented by a union.
In 1999 the Company and the United Steel Workers of America, after a
strike, agreed to a forty-two month contract which expires in October, 2003. The
contract for the hourly employees at the facilities in Ashtabula expires in
January, 2006.
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are the executive officers of the Company, together with their
ages and titles as of December 31, 2001.
NAME AGE TITLE
---- --- -----
Timothy G. Rupert......................... 55 President and Chief Executive Officer
John H. Odle.............................. 59 Executive Vice President
Vice President, Chief Financial Officer, and
Lawrence W. Jacobs........................ 46 Treasurer
Dawne S. Hickton.......................... 44 Vice President and General Counsel
Gordon L. Berkstresser.................... 54 Vice President and Controller
Mr. Rupert was elected President and Chief Executive Officer in July 1999
and had served as Executive Vice President and Chief Financial Officer since
June of 1996 and Vice President and Chief Financial Officer since September
1991. He is also a Director of the Company.
Mr. Odle was elected Executive Vice President in June 1996. He previously
was Senior Vice President-Commercial of RMI and its predecessor since 1989 and
served as Vice President-Commercial from 1978 until 1989. Prior to that, Mr.
Odle served as General Manager-Sales. He is also a Director of the Company.
Mr. Jacobs was elected Vice President, Chief Financial Officer, and
Treasurer in July 1999, having served as Vice President and Treasurer since
March 1998. Mr. Jacobs had been Senior Vice President of PNC Bank, N.A. in
Pittsburgh, Pennsylvania, where he was the segment executive for the bank's
metal industry clients.
Mrs. Hickton was elected Vice President and General Counsel in June 1997.
Mrs. Hickton had been an Assistant Professor of Law at The University of
Pittsburgh School of Law and was associated with the Pittsburgh law firm of
Burns, White and Hickton.
Mr. Berkstresser was elected Vice President and Controller in October 1999.
Mr. Berkstresser joined RTI in February 1999 as Group Controller of the
Fabrication and Distribution Group. Prior to that, he was Senior Vice President
Finance and Administration of ERI Services Inc., a wholly owned subsidiary of
Equitable Resources Inc. Formerly, he worked for Aristech Chemical Corporation,
Pittsburgh, Pennsylvania. Mr. Berkstresser is a Certified Public Accountant.
9
ITEM 2. PROPERTIES
MANUFACTURING FACILITIES
The Company has approximately 1.2 million square feet of manufacturing
facilities, exclusive of office space. The Company's principal manufacturing
plants, the principal products produced at such plants and their aggregate
capacities are set forth below.
MANUFACTURING FACILITIES
ANNUAL RATED
LOCATION PRODUCTS CAPACITY
-------- -------- ------------
TITANIUM GROUP
Niles, OH Ingot (million pounds)............................. 36.0
Niles, OH Mill products (million pounds)..................... 22.0
Hermitage, PA Tube (million pounds).............................. 0.8
Salt Lake City, UT Powders (million pounds)........................... 1.5
Canton, OH Ferro titanium and specialty alloys (million
pounds)............................................ 16.0
FABRICATION AND DISTRIBUTION GROUP
Washington, MO Hot-formed and superplastically formed components
(thousand press hours)............................. 50.0
Sullivan, MO Cut parts (thousand man hours)..................... 23.0
Solon, OH Extruded products (million pounds)................. -0-
Houston, TX Extruded products (million pounds)................. 1.8
Houston, TX Machining & fabrication oil and gas products
(thousand man hours)............................... 246.0
Birmingham, England Cut parts and components (thousand man hours)...... 21.0
Villette, France Cut parts and components (thousand man hours)...... 9.0
The Company leases the facilities in Solon, Ohio; Sullivan, Missouri;
Houston, Texas; Birmingham, England and certain buildings and property at
Washington, Missouri and Canton, Ohio. All other facilities are owned. The
plants have been constructed at various times over a long period, many of the
buildings have been remodeled or expanded and additional buildings have been
constructed from time to time. The Company idled the fabricating facility in
Solon, Ohio in the fourth quarter 2001. The lease expires in 2002. The
production was assumed by the Houston, Texas fabricating facility which
completed the installation of a new 5,000 ton press in the fall of 2001.
CONVERSION SERVICES
The Company utilizes third-party converters to melt and/or finish
approximately 30% of its mill products. The use of these converters raises the
Company's effective processing capacity. Certain mill products, such as hot band
and cold rolled strip and oversized plate, are produced entirely by such
converters using semi-finished titanium mill products supplied by the Company.
However, the Company is responsible for inspecting and delivering these products
to customers. The Company maintains long-term relationships with many of these
conversion companies. The Company believes that, if necessary, it could provide
these products by utilization of other methods and sources of conversion.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. Given the
critical nature of many of the aerospace end uses for the Company's products,
including specifically their use in critical rotating parts of gas turbine
engines, the Company maintains aircraft products liability insurance of $350
million, which includes grounding liability. There are currently no material
pending or threatened claims against the Company, other than the environmental
matters discussed below.
10
ENVIRONMENTAL
The Company is subject to federal, state and local laws and regulations
concerning environmental matters. During 2001, 2000, and 1999, the Company spent
approximately $1.6 million, $1.2 million and $1.4 million, respectively, for
environmental remediation, compliance, and related services. The Company
estimates environmental-related expenditures, including capital items and
compliance costs, will total approximately $1.5 million annually for 2002 and
2003.
In connection with the 1990 Reorganization, the Company assumed all
responsibility for environmental matters relating to RMI Company and its
immediate predecessor, Reactive Metals, Inc., which commenced business on April
1, 1964, and agreed to indemnify Quantum and USX against any liability relating
to such environmental matters. Quantum initially acquired the Company's now
closed Ashtabula facilities in 1950, which it owned until 1964, when they were
acquired by Reactive Metals, Inc. Although the Company believes it may have
claims with respect to possible remediation and other costs against Quantum for
the pre-1964 period, ultimate apportionment of any liability between the Company
and Quantum has not been finally agreed upon.
Active Investigative or Cleanup Sites. The Company is involved in
investigative or cleanup projects at certain waste disposal sites, including
those discussed below.
Fields Brook Superfund Site. The Company is involved in a superfund site
known as Fields Brook in Ashtabula, Ohio. Cleanup began in 2000, and is expected
to be completed in 2002. The Company estimates its share of the remaining work
to cost $0.3 million. The Company has accrued an amount for this matter. See
Note 14 to the consolidated financial statements.
Resource Conservation and Recovery Act of 1976 ("RCRA")
Proceedings-Ashtabula Sodium Plant. The Company, through its independent
environmental consultant, has identified and reported to the EPA the presence of
metals resulting from RMI operations.
A Corrective Measures Study report prepared for the Company by the
consultant states that the presence of metals would not be expected to have an
adverse impact on humans or the environment, and, after conducting a detailed
analysis of cleanup alternatives, the study recommended that metals contaminated
material be consolidated at the Fields Brook Superfund site landfill. That work
was completed in 2000. It is possible that the EPA will require additional work.
See Note 14 to the consolidated financial statements.
Ashtabula River. The Ashtabula River and Harbor has been designated one of
43 Areas of Concern on the Great Lakes by the International Joint Commission.
Fields Brook empties into the Ashtabula River, which in turn flows into Lake
Erie. The State of Ohio has appropriated $7 million in state funds to the
Ashtabula River dredging project to assist in securing federal funds needed to
conduct the dredging.
The Company believes it is most appropriate to use public funds to cleanup
a site with regional environmental and economic development implications such as
the Ashtabula River and Harbor. The Ashtabula River Partnership ("ARP"), a
voluntary group of public and private entities including, among others, the
Company, the EPA, and the Ohio EPA, was formed in July 1994 to bring about the
remediation of the river. The ARP is working both to design a cost-effective
remedy and to secure public funding. Phase 1, the Comprehensive Management Plan,
is nearly complete and Phase 2, the Detailed Design, is underway. To fund Phase
3, the Remedial Action, and to resolve Natural Resource Damages, the Company has
estimated the private contribution to the project could approximate $15 million,
of which roughly 10% is allocated to the Company (before contributions from
third parties). It is possible that the EPA could determine that the Ashtabula
River and Harbor should be designated as an extension of the Fields Brook
Superfund site, or, alternatively, as a separate Superfund site. The Company has
accrued an amount for this matter based on its best estimate of its share of the
currently proposed remediation plan. See Note 14 to the consolidated financial
statements.
Given the status of the proceedings at certain of these sites, and the
evolving nature of environmental laws, regulations, and remediation techniques,
the Company's ultimate obligation for investigative and remediation costs cannot
be predicted. It is the Company's policy to recognize environmental costs in its
financial statements when an obligation becomes probable and a reasonable
estimate of exposure can be determined. At December 31, 2001, the amount accrued
for future environmental-related costs was $1.7 million. Based on available
information, RMI believes that its share of potential environmental-related
costs, before expected contributions
11
from third parties, is in a range from $2.8 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) in a range of approximately $1.9 to
$2.3 million which the Company believes are probable. The Company has been
receiving contributions from such third parties for a number of years as partial
reimbursement for costs incurred by the Company. As these proceedings continue
toward final resolution, amounts in excess of those already provided may be
necessary to discharge the Company from its obligations for these sites.
The ultimate resolution of the foregoing contingencies could, individually
or in the aggregate, be material to the consolidated financial statements.
However, management believes that RMI will remain a viable and competitive
enterprise even though it is possible these matters could be resolved
unfavorably.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
COMMON STOCK DATA:
Principal market for common stock: New York Stock Exchange
Holders of record of common stock at January 31, 2002: 883
RANGE OF COMMON STOCK PRICES AND DIVIDENDS FOR 2001
QUARTER HIGH LOW
------- ------ ------
First....................................................... $17.75 $11.87
Second...................................................... 16.20 12.05
Third....................................................... 15.27 5.60
Fourth...................................................... 10.95 7.60
Year........................................................ $17.75 $ 5.60
RANGE OF COMMON STOCK PRICES AND DIVIDENDS FOR 2000
QUARTER HIGH LOW
------- ------ ------
First....................................................... $ 9.44 $ 6.19
Second...................................................... 13.94 8.38
Third....................................................... 14.88 11.56
Fourth...................................................... 14.94 12.31
Year........................................................ $14.94 $ 6.19
The Company has not paid dividends on its Common Stock since the second
quarter of 1991. The declaration of dividends is at the discretion of the Board
of Directors of the Company. The declaration and payment of future dividends and
the amount thereof will be dependent upon the Company's results of operations,
financial condition, cash requirements for its business, future prospects and
other factors deemed relevant by the Board of Directors.
13
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
INCOME STATEMENT DATA:
Sales............................... $285,900 $249,382 $243,309 $337,476 $318,530
Operating income.................... 9,781 6,741 4,769 67,996 56,315
Income before income taxes.......... 20,112(1) 11,409(2) 3,527 70,101 57,317
Net income.......................... 12,078 6,731 2,223 68,143(3) 60,085(3)
NET INCOME PER COMMON SHARE:
Basic............................. $ 0.58 $ 0.32 $ 0.11 $ 3.31 $ 2.94
Diluted........................... $ 0.57 $ 0.32 $ 0.11 $ 3.29 $ 2.92
AS OF DECEMBER 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital..................... $201,257 $208,388 $209,174 $196,225 $184,824
Total assets........................ 387,751 386,279 400,243 396,020 291,309
Long-term debt...................... -- 19,800 36,200 20,080 --
Total shareholders' equity.......... 306,975 301,859 295,604 292,765 221,173
---------------
(1) Includes the effect of a $6.3 million gain from the settlement of a
contractual claim and a $5.2 million gain related to a stock distribution to
the Company in connection with the demutualization of one of its insurance
carriers in which it was a participant.
(2) Includes the effect of a $6.0 million gain from the settlement of a
contractual claim.
(3) Includes a $22.8 million and a $21.2 million income tax benefit relating to
NOL utilization and the reduction in the deferred tax valuation allowance in
1998 and 1997, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in connection with the information
contained in the Consolidated Financial Statements and Notes to Consolidated
Financial Statements. The following information contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, and are subject to the safe harbor created by that Act. Such
forward-looking statements may be identified by their use of words like
"expects," "anticipates," "intends," "projects," or other words of similar
meaning. Forward-looking statements are based on expectations and assumptions
regarding future events. The Company cannot guarantee that these assumptions are
accurate. In addition to factors discussed throughout this report, the following
factors and risks should be considered, including, without limitation,
statements regarding the future availability and prices of raw materials,
competition in the titanium industry, demand for the Company's products, the
historic cyclicality of the titanium and aerospace industries, increased defense
spending, long-term supply agreements, the ultimate determination of pending
trade petitions, global economic conditions, the Company's order backlog and the
conversion of that backlog into revenue, labor relations, the long-term impact
of the events of September 11, and the continuing war on terrorism, and other
statements contained herein that are not historical facts. Because such
forward-looking statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by such forward-looking statements. These and other risk
factors are set forth below in the "Outlook" section, as well as in the
Company's other filings with the Securities and Exchange Commission ("SEC") over
the last 12 months, copies of which are available from the SEC or may be
obtained upon request from the Company.
14
OVERVIEW
Historically, a majority of the U.S. titanium industry's output has been
used in aerospace applications. The cyclical nature of the aerospace industry
has been the principal cause of the fluctuations in performance of companies
engaged in the titanium industry. Over the past 20 years, titanium mill products
shipments registered a cyclical peak of 65 million pounds in 1997 and a low of
32 million pounds in 1983.
In the 1995-1997 period, most major commercial airlines reported stronger
operating profits and, during this same period, aircraft manufacturers increased
build rates. From a peak in 1997, demand was reduced in 1998 and again in 1999
primarily due to excess inventory within the supply network. In 2000, demand was
modestly improved compared to 1999 and improved again in 2001 as supply and
demand reached an equilibrium. Build rates were forecast to continue to improve
throughout 2001, however, because of the terrorist events of September 11, 2001,
and airline financial difficulties leading up to the events, the outlook changed
suddenly and dramatically. The effect will change demand and production downward
for 2002 and likely 2003, as highlighted in the Outlook section. The latest
figures on the airline industry according to The Airline Monitor, at December
31, 2001, indicate that the leading manufacturers of commercial aircraft, Boeing
Company and Airbus Industrie, reported an aggregate of 2,919 aircraft under firm
order, which represents a 9.5% decrease when compared to the backlog at December
31, 2000 of 3,224 aircraft. The backlog for wide body aircraft, such as the
Airbus A300, A310, A330, A340 and A380, and the Boeing 767 and 777, which
typically consume more titanium per aircraft than their narrow body
counterparts, at December 31, 2001, was 739 aircraft, which represents a 10.0%
increase when compared to the backlog of 672 aircraft at December 31, 2000.
While the total backlog has declined, it remains at a level in excess of 2,900
units which at today's production rate equates to over 4 years of production for
Boeing Company and Airbus Industrie. There can be no assurance that it will
remain at this level, but a significant production backlog is expected to be in
place over the next few years. The long term outlook for this segment over the
next 20 years is that approximately 18,000 new and replacement aircraft will be
required to support the demand of increased passenger travel, effectively
doubling the current fleet of commercial aircraft. Demand from military
aerospace markets in recent years has stabilized at reduced build rate levels
but given recent events, growth is anticipated for the foreseeable future.
The Company estimates that total industry shipments of titanium mill
products in 2001 increased to approximately 53-55 pounds million pounds, from 52
million pounds in 2000.
In recent years, the Company has devoted significant resources to
developing new markets for titanium in the oil and gas and geothermal energy
production industries. In addition to designing and fabricating the world's
first all titanium high pressure drilling riser in 1995, the Company has also
produced significant quantities of seamless titanium pipe for use in geothermal
energy applications. The Company also supplied titanium stress joints for use in
a production riser system located in the Gulf of Mexico. The Company conducts
its operations for oil and gas and geothermal energy from its Houston, Texas
facility under the name RTI Energy Systems, Inc. RTI Energy Systems also
engineers, designs and markets offshore riser systems, stress joints, drill pipe
and components.
On December 14, 2000, the Company purchased the remaining 60% of the
outstanding shares of Reamet. Since 1992, the Company had owned 40% of the
outstanding shares of Reamet. Reamet, located in Villette, France, is a premier
distributor of titanium products to the French market, serving aerospace,
military and industrial customers. Its largest customer is Aerospatiale, French
partner to the Airbus consortium, with which it has a contract to supply
titanium, principally in the form of cut plate. Reamet now operates as part of
the Fabrication and Distribution Group.
RTI's strategy is to build on its leading position in the worldwide
titanium industry while maintaining a strong financial condition and stringent
quality, safety and environmental standards. RTI is emphasizing higher margin
products in its traditional markets, while continuing to develop new markets and
products such as seamless tubulars and fabricated systems for oil and gas
exploration and production.
15
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net Sales
Net sales increased 14.6% to $285.9 million for the year ended December 31,
2001 compared to net sales of $249.4 million in 2000. Sales for the Company's
Titanium Group and Other operations amounted to $141.0 million for the year
ended December 31, 2001 compared to $141.0 million in 2000. Shipments of
titanium mill products were 11.6 million pounds in the year ended December 31,
2001, compared to 9.4 million pounds in 2000, a 23.4% increase. Mill product
shipments in the year ended December 31, 2001 were higher than those in 2000 as
aerospace demand for forged mill products improved. Average realized prices on
mill products for the year ended December 31, 2001 decreased 17.7% to $13.37 per
pound from $15.73 per pound in 2000. The decrease in average realized prices for
mill products resulted primarily from an increased mix of lower value-added
forged mill products when compared to 2000. Sales for the Company's Fabrication
and Distribution Group amounted to $144.9 million in the year ended December 31,
2001, compared to $108.4 million in 2000 an increase of $36.5 million, or 33.7%.
This increase reflects the acquisition of Reamet, improvements in energy market
sales, and continued improvements in distribution sales in the United States and
Europe, partially offset by a reduction in sales of fabricated products due to
the delayed startup of the new extrusion facility in Houston.
Gross Profit
Gross profit amounted to $43.4 million, or 15.2% of sales for the year
ended December 31, 2001 compared to a gross profit of $36.0 million or 14.4% of
sales in 2000. This increase in gross margin of $7.4, or 20.6%, is primarily due
to the acquisition of Reamet, increased sales in energy markets, and
improvements in demand for distribution products, partially offset by the impact
of a reduction in sales of fabricated products due to the delayed implementation
of the new extrusion facility in Houston.
Selling, General and Administrative Expenses
Selling, general and administrative expenses amounted to $32.0 million or
11.2% of sales for the year ended December 31, 2001, compared to $28.0 million
or 11.2% of sales in 2000. The increase in selling, general and administrative
expenses of $4.0 million, or 14.3%, reflects the impact of the Reamet
acquisition, higher than anticipated startup and relocation costs associated
with the installation of a new extrusion press in Houston, as well as increased
expenses in the distribution businesses as a result of increased sales volume.
Research, Technical and Product Development Expenses
Research, technical and product development expenses amounted to $1.7
million in 2001 compared to $1.3 million in 2000. This increase of $0.4 million,
or 30.8%, primarily reflects amounts spent on research and development on
products for the energy market.
Operating Income
Operating income for the year ended December 31, 2001 amounted to $9.8
million, or 3.4% of sales compared to $6.7 million, or 2.7% of sales, in 2000.
This increase of $3.1 million, or 46.3%, consists of a decrease in operating
income from the Titanium Group of $1.6 million primarily due to a decrease in
realized prices as a result of an increased mix of lower value-added forged mill
products. This decrease was more than offset by an increase in operating income
in the Fabrication and Distribution Group of $4.7 million due to the acquisition
of Reamet and improved distribution and energy market sales, offset by higher
than expected startup costs and a reduction in revenues due to the delayed
implementation of the new extrusion facility in Houston.
Other Income
Other income for the year ended December 31, 2001 amounted to $11.0
million, compared to $6.5 million in 2000. This increase primarily reflects a
gain of $5.2 million from a stock distribution to the Company as a result of the
demutualization of one of its insurance carriers in which it was a participant,
partially offset by the absence of a gain on sale of a portion of RMI's now
closed Ashtabula, Ohio facilities which was recorded in 2000.
16
Interest Expense
Interest expense for the year ended December 31, 2001 amounted to $0.7
million compared to $1.9 million in 2000. The decrease is primarily the result
of reduced borrowing levels. At December 31, 2001, the Company had no debt.
Income Taxes
In the year ended December 31, 2001, the Company recorded an income tax
expense of $7.8 million compared to a $4.7 million expense recorded in 2000. The
effective tax rates for the year ended December 31 of 2001 and 2000 were
approximately 39% and 41%, respectively. The effective tax rates of 39% and 41%
were greater than the federal statutory rate of 35% primarily due to state
income taxes and non-deductible goodwill amortization.
Cumulative Effect of Change in Accounting Principle
The cumulative loss effect of a change in accounting principle for the year
ended December 31, 2001 of $0.2 million, net of $0.1 million in income taxes,
results from the Company's adoption of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The gross charge of $0.3 million represents
the recognition of the net liability for the fair value of a foreign currency
forward purchase contract upon adoption.
Net Income
Net income for the year ended December 31, 2001 amounted to $12.1 million
or 4.2% of sales, compared to $6.7 million or 2.7% of sales in the comparable
2000 period. This increase reflects the acquisition of Reamet, improved
distribution and energy market sales, a reduction in interest expense, and the
gain resulting from a distribution of stock to the Company from one of its
insurance carriers. This was partially offset by higher than expected startup
costs and a reduction in operating margin due to the delayed implementation of
the new extrusion facility in Houston.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net Sales
Net sales for the year ended December 31, 2000 increased to $249.4 from
$243.3 million in 1999, an increase of $6.1 million, or 3%. Titanium Group sales
to third parties decreased $0.9 million, or 0.1%, to $124.2 million in 2000 from
$125.1 million in 1999. Mill product shipments for 2000 amounted to 9.4 million
pounds compared to 8.9 million pounds in 1999. The increase in 2000 mill product
shipments compared to 1999 is primarily due to increased shipments to companies
in the Fabrication and Distribution Group (intercompany). Average realized
selling prices for mill products decreased to $15.73 per pound in 2000 compared
to $16.06 per pound in 1999 primarily as a result of an increase in product mix
of lower value-added forged products. Fabrication and Distribution Group sales
increased $8.2 million, or 8.2%, to $108.4 million in 2000 from $100.2 in 1999
due to greater demand for fabricated products by the energy sector and increased
shipments of the Company's distribution products in the United States and
Europe. The Segment also benefited from the acquisition of Reamet on December
14, 2000.
Gross Profit
Gross profit for the year ended December 31, 2000 amounted to $36.0
million, or 14.4% of sales compared to $33.6 million, or 13.8% of sales in 1999.
This increase of $2.4 million, or 7.1%, was primarily a result of increased
sales in the Fabrication and Distribution Group enhanced by improved gross
profit percentages at the Company's Distribution locations. The improvement also
reflects a $1.9 million charge related to new market development in 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses amounted to $27.9 million in
2000 compared to $24.8 million in 1999. This increase of $3.1 million, or 12.5%,
reflects a change in classification of expenses reported as
17
research, technical, and product development in 1999 to selling, general and
administrative in 2000, as the energy business evolved into a stand-alone
commercial enterprise.
Research, Technical and Product Development Expenses
Research, technical and product development costs amounted to $1.3 million
in 2000 and $4.0 million in 1999. The decrease reflects a change in
classification of expenses reported as research, technical, and product
development in 1999 to selling, general and administrative in 2000, as the
energy business evolved into a stand-alone commercial enterprise.
Operating Income
Operating income for the year ended December 31, 2000 amounted to $6.7
million, or 2.7% of sales compared to $4.8 million, or 2.0% of sales in 1999.
The improvement in operating income of $1.9 million, or 39.6%, reflects the $6.4
million improvement to the Fabrication and Distribution Group's results
primarily due to greater demand for fabricated products by the energy sector and
increased shipments of distribution products in the United States and Europe.
The improvement also reflects a $1.9 million charge related to new market
development in 1999. This is partially offset by a reduction in operating income
in the Titanium Group due to an adverse change in product mix.
Other Income
Other income in 2000 amounted to $6.5 million compared to $1.3 million in
1999. This increase results primarily from the settlement of a contractual claim
with the Boeing Company, whereby the Boeing Company paid the Company
contractually specified liquidated damages for failing to meet minimum order
volumes.
Interest Expense
Interest expense in 2000 amounted to $1.9 million compared to $2.6 million
in 1999. This decrease results primarily from increased capitalization of
interest during 2000 compared to 1999.
Income Taxes
For the year ended December 31, 2000, the Company recorded a provision for
income taxes of $4.7 million compared to $1.3 million in 1999. The effective tax
rate for the year ended December 31, 2000 was approximately 41% compared to 37%
in 1999. The difference between the statutory tax rate of 35% and the effective
rate for the years ended December 31, 2000 and 1999 is primarily due to state
income taxes, non-deductible goodwill amortization and prior year tax
adjustments.
Net Income
Net income for year ended December 31, 2000 amounted to $6.7 million, or
2.7% of sales compared to $2.2 million, or 0.9% of sales in 1999. This increase
is due primarily to improved results in the Company's Fabrication and
Distribution Segment, and the settlement with Boeing Company.
OUTLOOK
The terrorist attacks of September 11, 2001, and their effect on the
general economy, will have a significant influence on business conditions for
several years.
Commercial Aerospace Markets
The largest impact is likely to be on commercial aerospace markets, which
provides approximately 40% of RTI's sales. Airline operators experienced a
dramatic drop in travel immediately following September 11, which is expected to
result in significant losses within their industry causing a reduced demand for
new aircraft. The primary builders of large commercial aircraft, Boeing and
Airbus, have adjusted their build rates beginning in 2002 downward to reflect
the expected change in demand. The most current information indicates a drop in
commercial aircraft production next year of about 30-40% at Boeing and about
20-25% at Airbus, or a total
18
combined reduction of approximately 30-35%. Neither aircraft producer has, as
yet, issued build schedules beyond 2002, and all build schedules are subject to
change, and are highly dependent on airline passenger travel and airline
profitability. Therefore, the exact magnitude of the downturn on commercial
aerospace remains uncertain for 2002.
Titanium mill products that are ordered by the prime aircraft producers and
their subcontractors are generally ordered in advance of final aircraft
production by 6 to 18 months. This is due to the time it takes to produce a
final assembly or part that is ready for installation in an airframe or jet
engine. Discussions are currently being held with RTI's customers concerning
their requirements for the commercial aircraft business over the next twelve
months. It is expected that shipments from RTI to this segment will be reduced
substantially in 2002. The impact on the Company could include order
cancellations or delays or both.
The near-term effect of the reduction in commercial aircraft demand on RTI
will be mitigated somewhat by the long-term agreement RMI entered into with
Boeing on January 28, 1998. Under this agreement, RMI supplies Boeing and its
family of commercial suppliers with up to 4.5 million pounds of titanium
products annually. The agreement, which began in 1999, has an initial term of
five years and, is subject to review by the parties prior to expiration in 2004.
Under the accord, Boeing receives firm prices in exchange for RMI receiving a
minimum volume commitment of 3.25 million pounds per year. If volumes fall short
of the minimum commitment, the contract contains provisions for financial
compensation. In accordance with the agreement, and as a result of volume
shortfalls in both 1999 and 2000, Boeing settled claims of approximately $6
million in both 2000 and 2001, respectively. The claim for 2001 will be settled
during the 1st quarter 2002, and is expected to be approximately $7 million.
RMI, through its French subsidiary, Reamet, was chosen by Aerospatiale, now
part of EADS, as the major supplier of the titanium flat rolled products
required for Aerospatiale's Airbus programs which began in 1999 and extended
through 2001. Requirements are principally for flat rolled products, including
value added cut-to-size shapes. Negotiations are in progress with EADS to
continue the supply of similar items over the next several years, and are
expected to be finalized in early 2002.
Defense Markets
The importance of military markets to RTI, approximately 30% of revenues,
is expected to rise in 2002 and beyond due to increased defense budgets, and
increased hardware purchases by the U.S. Government, partially brought about by
the events of September 11, 2001. It is estimated that overall titanium
consumption will be increased within this segment in 2002 globally, but it is
not expected to offset the total decline in the market caused by the drop in the
commercial aerospace sector. RTI believes it is well positioned to provide mill
products and fabrications to this segment if increased consumption is required
to support defense needs. RTI supplies titanium and other materials to most
military aerospace programs, including the F-22, C-17, F/A-18, F-15, and in
Europe, the Tornado, Mirage, and Eurofighter.
The Company was chosen by BAE Systems RO Defence UK to supply the titanium
components for the new XM-777 lightweight 155 mm Howitzer. Delivery is expected
to begin in 2003 and continue through 2010. Initial deliveries will be to the
U.S. Marine Corps, followed by deliveries to the U.S. Army and the Italian and
British armed forces. It is anticipated that over 800 guns may be produced.
Sales under this contract could potentially exceed $100 million.
Lockheed Martin, a major customer of the Company, was awarded the largest
military contract ever on October 26, 2001, for the military's $200 billion
Joint Strike Fighter program. The aircraft, which will be used by all branches
of the military, is expected to consume 25,000 to 30,000 pounds of titanium per
airplane. Timing and order patterns, which are likely to extend well into the
future for this program, have not been quantified, but may be as many as 3,000
to 6,000 planes over the next 30 to 40 years. The Company has been notified that
it has been selected as the supplier of titanium sheet and plate for the design
and development phase over the next five years.
Industrial and Consumer Markets
The remaining 30% of RTI's sales are generated in various industrial
markets, where business conditions are expected to be mixed over the next year
or two.
19
Revenues from Oil and Gas markets are expected to reach new highs for RTI
in 2002, and increase again in 2003, due to the increase in deep water projects
predicted over the next several years. Despite the weak economy, the Company
believes that oil and gas exploration will continue at an accelerated pace for
the next several years.
On October 1, 2001, RTI Energy Systems, Inc., was selected by Atlantia
Offshore Limited to provide engineering, procurement, and manufacturing of the
production riser systems for their Matterhorn Project in the Gulf of Mexico.
Atlantia selected the RTI production riser system design, which includes high
fatigue performance RTI produced connectors. RTI will also supply critical riser
tensioning equipment and structural components. The initial purchase order
exceeds $6 million.
If the general economy declines, demand from consumer market customers,
such as chemical processing companies, may decrease.
Backlog
The Company's order backlog for all market segments increased to $142.6
million as of December 31, 2001, from $132.1 million at December 31, 2000,
principally due to new business from energy markets.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operating activities totaled $35.1 million in 2001
compared to $32.3 million in 2000. The change in net cash flows from operating
activities for the year ended December 31, 2001, compared to 2000, primarily
reflects an increase in net income and an increase in other current liabilities,
offset by an increase in accounts receivable and significantly greater
reductions in inventory in 2000 than in 2001. In 2001 and 2000, $8.8 million and
$10.1 million, respectively, was generated through a reduction in working
capital and other balance sheet line items. The Company's working capital ratio
was 6.5 to 1 at December 31, 2001.
During 2001 and 2000, the Company's cash flow requirements for capital
expenditures were funded with cash provided by operations. The Company
anticipates that it will be able to fund its capital expenditure requirements
for 2002 with funds generated by operations.
At December 31, 2001, the Company had a borrowing capacity equal to the
total amount of its existing credit agreement.
On September 9, 1999, RTI filed a universal shelf registration with the
Securities and Exchange Commission. This registration permits RTI to issue up to
$100 million of debt and/or equity securities at an unspecified future date. The
proceeds of any such issuance could be utilized to finance acquisitions, capital
investments or other general purposes; however, RTI has not issued any
securities to date and has no immediate plans to do so.
CAPITAL EXPENDITURES
Gross capital expenditures for the years ended December 31, 2001 and 2000
amounted to $12.2 million and $11.6 million, respectively. Included in 2001
spending was $4.5 million related to a new 5,000 ton press and site preparation
at a Fabrication and Distribution location in Houston. In 2000, $5.5 million was
spent related to this project. In 2000, $2.7 million was spent for capital
improvements to the production processes in Niles, Ohio.
The Company continued to install its Enterprise Resource Planning (ERP)
software system at additional operating locations throughout the year, and in
2001 spent $1.4 million compared to $2.5 million spent on the system in 2000.
RTI anticipates that current capital spending plans can be funded using cash
provided from internally generated sources. Capital spending for 2002 is
budgeted at approximately $11.0 million.
CREDIT AGREEMENT
The Company maintains a credit agreement, entered into on September 30,
1998, which provides a $100 million five-year unsecured revolving credit
facility. The Company can borrow up to the lesser of $100 million or a borrowing
base equal to the sum of 85% of qualifying accounts receivable and 60% of
qualifying inventory.
20
Under the terms of the facility, the Company, at its option, will be able
to borrow at (a) a base rate (which is the higher of PNC Bank's prime rate or
the Federal Funds Effective Rate plus 0.5% per annum), or (b) LIBOR plus a
spread (ranging from .75% to 1.75%) determined by the ratio of the Company's
consolidated total indebtedness to consolidated earnings before interest, taxes,
depreciation and amortization. At December 31, 2001, there were no borrowings
outstanding under the facility. At December 31, 2001, the Company had a
borrowing capacity equal to the total amount of this agreement.
ENVIRONMENTAL MATTERS
The Company is subject to environmental laws and regulations as well as
various health and safety laws and regulations that are subject to frequent
modifications and revisions. While the costs of compliance for these matters
have not had a material adverse impact on the Company in the past, it is
impossible to predict accurately the ultimate effect these changing laws and
regulations may have on the Company in the future.
At December 31, 2001, the amount accrued for future environment-related
costs was $1.7 million. Based on available information, RMI believes its share
of potential environmental-related costs, before expected contributions from
third parties, is in a range from $2.8 million to $6.5 million, in the
aggregate. The amount accrued is net of expected contributions from third
parties (which does not include any amounts from insurers) in a range of
approximately $1.9 to $2.3 million, which the Company believes are probable. The
Company has received contributions from such third parties for a number of years
as partial reimbursement for costs incurred by the Company. As these proceedings
continue toward final resolution, amounts in excess of those already provided
may be necessary to discharge the Company from its obligations for these
projects.
The ultimate resolution of these environmental matters could, individually
or in the aggregate, be material to the consolidated financial statements.
However, management believes that the Company will remain a viable and
competitive enterprise even though it is possible that these matters could be
resolved unfavorably.
NEW ACCOUNTING STANDARDS
In July 2001, the FASB issued Statements of Financial Accounting Standards
No. 141 (FAS 141), "Business Combinations", and No. 142 (FAS 142), "Goodwill and
Other Intangible Assets".
FAS 141 supersedes Accounting Principles Board Opinion No. 16 (APB 16),
"Business Combinations". The most significant changes made by FAS 141 are: (1)
requiring that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001; (2) establishing specific criteria
for the recognition of intangible assets separately from goodwill; and (3)
requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized).
FAS 142 supersedes APB 17, "Intangible Assets". FAS 142 primarily addresses
the accounting for goodwill and intangible assets subsequent to their
acquisition (i.e., the post-acquisition accounting). The most significant
changes made by FAS 142 are: (1) goodwill and indefinite lived intangible assets
will no longer be amortized; (2) goodwill will be tested for impairment at least
annually at the reporting unit level; (3) intangible assets deemed to have an
indefinite life will be tested for impairment at least annually; and (4) the
amortization period of intangible assets with finite lives will no longer be
limited to forty years.
FAS 141 must be applied to all business combinations initiated after June
30, 2001. FAS 142 must be adopted as of January 1, 2002. All of the Company's
acquisitions in recent years have been accounted for under purchase accounting.
At adoption of FAS 142, an evaluation of goodwill and intangible assets will be
required and any impairment of goodwill or intangible assets at that time will
be recognized as a cumulative effect of adoption. Management has completed a
preliminary evaluation of the impact of adoption of FAS 142. This change in
accounting will increase 2002 net income by approximately $1.0 million or 4.8
cents per share because goodwill amortization will cease. The standard also
requires a reassessment of intangibles and goodwill for impairment. The Company
expects to finalize its reassessment by the end of the second quarter 2002, but
does not believe the new standard will have a material impact.
In August 2001, the FASB issued FAS 143, "Accounting for Asset Retirement
Obligations." FAS 143 prescribes the accounting for retirement obligations
associated with tangible long-lived assets, including: (1) the timing of
liability recognition; (2) initial measurement of the liability; (3) allocation
of the cost of the obligation
21
to expense; (4) measurement and recognition of subsequent changes to the
liability; and (5) financial statement disclosures. FAS 143 requires that an
asset retirement cost be capitalized as part of the cost of the related long-
lived asset and subsequently allocated to expense using a systematic and
rational method. The standard is required to be adopted in fiscal years
beginning after June 15, 2002. At adoption, any transition adjustment required
will be reported as a cumulative effect of a change in accounting principle.
Management has not yet completed its evaluation of the impact of the adoption of
this standard.
In September 2001, the FASB issued FAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." FAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business (as previously defined in that Opinion).
This standard prescribes a single accounting model for long-lived assets to be
disposed of by sale, and also prescribes the accounting for the impairment of
long-lived assets to be held and used and for assets to be disposed of by other
than sale (e.g., abandonment). Under this standard, long-lived assets to be
disposed of by sale should be carried at the lower of their carrying amount or
fair value less cost to sell and depreciation (amortization) should cease.
Discontinued operations are no longer measured on a net realizable value basis,
and future operating losses are no longer recognized before they occur. For
long-lived assets to be held and used, the significant changes under FAS 143
are: (1) the removal of goodwill from the scope of this standard; (2) the use of
a probability-weighted cash flow approach to measuring the future cash flows
from the assets; and (3) the use of a "primary asset" approach to grouping
assets for purposes of testing for impairment. This standard is required to be
adopted in fiscal years beginning after December 15, 2001; early adoption is
permitted. The requirements of this standard are to be applied prospectively
from adoption with no cumulative effect of change in accounting principle
reported. Management has completed a preliminary evaluation and does not expect
a material financial impact from the adoption of this standard.
ACQUISITIONS
On October 1, 1998, RTI acquired all of the capital stock of NCM for $35
million and the payment by RTI of certain bank debt amounting to $8.9 million.
The $35 million purchase price consisted of $16 million in cash, a $16 million
note, payable January 4, 1999, bearing interest at 5.81% per annum, and $3
million of the Company's common stock valued at $19.2875 per share. NCM is a
manufacturer and distributor of high temperature and corrosion resistant alloys
such as titanium, stainless steel and nickel, in long bar form, to the
aerospace, chemical processing, oil and gas exploration and production, and
power generation industries. In addition to the manufacturing facilities, NCM
operated four distribution centers in the United States and one in England.
Also on October 1, 1998, RTI acquired all of the assets of Weld-Tech, for
$11.3 million in cash and the payment of a $1.4 million note owed by Weld-Tech
to a corporation, the shareholders of which were also partners of Weld-Tech.
Weld-Tech, based in Houston, Texas, now operates under the name RTI Energy
Systems. Weld-Tech provides engineering and fabrication services for the oil and
gas industry, including weld design, fabrication and repair, as well as
materials engineering and testing services.
On December 14, 2000, RTI acquired the remaining outstanding shares of
Reamet of Villette, France for $4.3 million. Net of cash acquired, the Company's
additional investment equaled $1.3 million. Reamet is a premier distributor of
titanium products to the French market, serving aerospace, military and
industrial customers. Its largest customer is Aerospatiale, French partner to
the Airbus consortium, with which it has a contract to supply titanium,
principally in the form of cut plate.
RTI is in the process of evaluating other potential acquisition candidates
to determine if they are likely to increase the Company's earnings and value.
RTI evaluates such potential acquisitions on the basis of their ability to
enhance or improve the Company's existing operations or capabilities, as well as
the ability to provide access to new markets and/or customers for its products.
RTI may make acquisitions using its available cash resources, borrowings under
its existing credit facility, new debt financing, the Company's common stock,
joint venture/partnership arrangements or any combination of the above.
22
CRITICAL ACCOUNTING POLICIES
The preparation of RTI's financial statements are prepared in accordance
with generally accepted accounting principles accepted in the United States of
America. These principles require management to make estimates and assumptions
that have a material impact on the amounts recorded for assets and liabilities
and resultant revenue and expenses. Management estimates are based on historical
evidence and other available information, which in management's opinion provide
the most reasonable and likely result under the current facts and circumstances.
Under different facts and circumstances expected results may differ materially
from the facts and circumstances applied by management.
Of the accounting policies described in note 2 and others not expressly
stated but adopted by management as the most appropriate and accurate under the
current facts and circumstances, the policy of goodwill and asset valuation,
deferred taxes and pensions and other postretirement benefits would be most
critical if management estimates were incorrect.
In the case of goodwill and property plant and equipment, if future product
demand or market conditions reduce management's expectation of future cash flows
from these assets a write-down of the carrying value of goodwill or property
plant and equipment may be required.
In the case of deferred tax assets, management has provided under current
facts and circumstances what it believes to be adequate allowances for reduced
value. Similarly to goodwill and property, plant and equipment, should the
future benefit of deferred tax assets become impaired because of the possibility
of reduced utilization, an increase to the valuation allowance and corresponding
charge to expense may be required.
In the case of pensions and other postretirement benefits, assumptions made
including discount rate, estimated returns on assets, salary increases and
mortality rates may materially affect the Company's liabilities and expenses.
Changes in these estimates based on facts and circumstances at the time have
routinely resulted in both increases and decreases in the expenses associated to
these liabilities from year to year.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risk and
price fluctuations related to the purchases of certain materials and supplies
used in its manufacturing operations. The Company obtains competitive prices for
materials and supplies when available. The majority of the Company's raw
material purchases for titanium sponge are made under long-term contracts with
negotiated prices.
The Company's long-term credit arrangement is based on rates that float
with LIBOR based rates or bank prime rates and the carrying value approximates
fair value. At December 31, 2001, the Company had no outstanding obligations
under this credit arrangement.
The Company is subject to foreign currency exchange exposure for purchases
of materials, equipment and services, including wages, which are denominated in
currencies other than the U.S. dollar, as well as non-dollar denominated sales.
From time to time the Company may use forward exchange contracts to manage these
risks, although they are generally considered to be minimal. The majority of the
Company's sales are made in U.S. dollars, which minimizes exposure to foreign
currency fluctuation.
As of December 31, 2001, the Company had an outstanding purchase commitment
of 288 thousand Euros due at various times through 2002. At year-end, this
purchase commitment was equivalent to $256 thousand. The Company also had
forward contracts for the purchase of 287.5 thousand Euros at a contractual rate
of 1.104 Euros per U.S. dollar.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Management........................................ 25
Report of Independent Accountants........................... 25
FINANCIAL STATEMENTS:
Consolidated Statement of Income for the years ended
December 31, 2001, 2000 and 1999....................... 26
Consolidated Balance Sheet at December 31, 2001 and
2000................................................... 27
Consolidated Statement of Cash Flows for the years ended
December 31, 2001, 2000 and 1999....................... 28
Consolidated Statement of Changes in Shareholders' Equity
for the years ended December 31, 2001, 2000 and 1999... 29
Notes to Consolidated Financial Statements................ 30
FINANCIAL STATEMENT SCHEDULES:
Report of Independent Accountants on Financial Statement
Schedule............................................... S-1
Schedule II -- Valuation and Qualifying Accounts.......... S-2
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
24
REPORT OF MANAGEMENT
RTI International Metals, Inc., has prepared and is responsible for the
consolidated financial statements and other financial information included in
this Annual Report. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and necessarily include
some amounts based on the best judgments and estimates of management. Financial
information displayed in other sections of this Annual Report is consistent with
that in the consolidated financial statements.
The Company maintains a comprehensive formalized system of internal
accounting controls. Management believes that the internal accounting controls
provide reasonable assurance that transactions are executed and recorded in
accordance with Company policy and procedures and that the accounting records
may be relied on as a basis for preparation of the consolidated financial
statements and other financial information. In addition, as part of their audit
of the consolidated financial statements, the Company's independent accountants,
who are elected by the shareholders, review and test the internal accounting
controls selectively to establish a basis of reliance thereon in determining the
nature, extent and timing of audit tests to be applied.
The Audit Committee of the Board of Directors, composed entirely of
directors who are not employees of the Company, meets regularly with the
independent accountants, management and internal auditors to discuss the
adequacy of internal accounting controls and the quality of financial reporting.
Both the independent accountants and internal auditors have full and free access
to the Audit Committee.
/s/ T. G. Rupert
T. G. Rupert
President and
Chief Executive Officer
/s/ Lawrence W. Jacobs
Lawrence W. Jacobs
Vice President,
Chief Financial Officer and Treasurer
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF RTI INTERNATIONAL METALS, INC.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of RTI International Metals, Inc. and its subsidiaries at December 31,
2001 and 2000, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
January 25, 2002
25
RTI INTERNATIONAL METALS, INC.
CONSOLIDATED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
Sales................................................. $ 285,900 $ 249,382 $ 243,309
Operating costs:
Cost of sales......................................... 242,476 213,432 209,703
Selling, general and administrative expenses.......... 31,971 27,935 24,794
Research, technical and product development
expenses............................................ 1,672 1,274 4,043
----------- ----------- -----------
Total operating costs............................ 276,119 242,641 238,540
----------- ----------- -----------
Operating income...................................... 9,781 6,741 4,769
Other income--net..................................... 11,000 6,540 1,319
Interest expense...................................... (669) (1,872) (2,561)
----------- ----------- -----------
Income before income taxes............................ 20,112 11,409 3,527
Provision for income taxes............................ 7,843 4,678 1,304
----------- ----------- -----------
Income before cumulative effect of change in
accounting principle................................ 12,269 6,731 2,223
Cumulative effect of change in accounting principle
(Note 2)............................................ (191) -- --
----------- ----------- -----------
Net income............................................ $ 12,078 $ 6,731 $ 2,223
=========== =========== ===========
Earnings per common share (Note 4)
Income before cumulative effect of change in
accounting principle:
Basic............................................... $ 0.58 $ 0.32 $ 0.11
=========== =========== ===========
Diluted............................................. $ 0.57 $ 0.32 $ 0.11
=========== =========== ===========
Net income:
Basic............................................... $ 0.58 $ 0.32 $ 0.11
=========== =========== ===========
Diluted............................................. $ 0.57 $ 0.32 $ 0.11
=========== =========== ===========
Weighted average shares used to compute earnings per
share:
Basic............................................... 20,848,056 20,848,783 20,776,200
=========== =========== ===========
Diluted............................................. 21,032,736 21,024,991 20,870,883
=========== =========== ===========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
26
RTI INTERNATIONAL METALS, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
2001 2000
-------- --------
ASSETS
ASSETS:
Cash and cash equivalents................................... $ 8,036 $ 6,374
Receivables, less allowance for doubtful accounts of $1,219
and $926 (Note 5)......................................... 50,572 46,417
Inventories, net (Note 6)................................... 158,561 165,210
Deferred income taxes (Note 8).............................. 7,418 9,146
Other current assets (Note 10).............................. 13,136 10,235
-------- --------
Total current assets................................... 237,723 237,382
Property, plant and equipment, net (Note 7)................. 98,375 97,989
Goodwill.................................................... 34,133 35,736
Other noncurrent assets (Note 10)........................... 17,520 15,172
-------- --------
Total assets........................................... $387,751 $386,279
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable............................................ $ 17,799 $ 18,199
Accrued wages and other employee costs...................... 7,494 5,646
Other accrued liabilities................................... 11,173 5,149
-------- --------
Total current liabilities.............................. 36,466 28,994
Long-term debt (Note 9)..................................... -- 19,800
Accrued postretirement benefit cost (Note 10)............... 19,940 19,986
Deferred income taxes (Note 8).............................. 1,296 2,555
Noncurrent pension liability (Note 10)...................... 17,787 7,106
Other noncurrent liabilities................................ 5,287 5,979
-------- --------
Total liabilities...................................... 80,776 84,420
-------- --------
Commitments and Contingencies (Note 14)
SHAREHOLDERS' EQUITY:
Common stock, $0.01 par value; 50,000,000 shares authorized;
21,035,454 and 20,946,712 shares issued; and 20,730,604
and 20,851,962 shares outstanding......................... 210 208
Additional paid-in capital.................................. 241,579 240,527
Deferred compensation....................................... (2,278) (2,187)
Treasury stock, at cost; 304,850 and 94,750 shares.......... (2,612) (846)
Accumulated other comprehensive income...................... (7,417) (1,258)
Retained earnings........................................... 77,493 65,415
-------- --------
Total shareholders' equity............................. 306,975 301,859
-------- --------
Total liabilities and shareholders' equity............. $387,751 $386,279
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
27
RTI INTERNATIONAL METALS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
2001 2000 1999
------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $12,078 $ 6,731 $ 2,223
Adjustment for non-cash items included in net income:
Depreciation and amortization............................. 13,585 11,941 9,338
Deferred income taxes..................................... 3,786 2,447 6,894
Stock-based compensation and other........................ 2,049 1,030 1,016
Gain on receipt of common stock (Note 2).................. (5,177) -- --
Changes in assets and liabilities (net of effects of
businesses acquired):
Receivables............................................... (4,975) 12,375 7,027
Inventories............................................... 6,649 14,418 (8,948)
Accounts payable.......................................... (400) (6,369) 3,992
Other current liabilities................................. 7,509 (12,567) (3,103)
Other assets and liabilities.............................. (30) 2,271 1,609
------- -------- --------
Cash provided by operating activities.................. 35,074 32,277 20,048
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in subsidiaries, net of cash acquired......... -- (1,325) (16,000)
Capital expenditures...................................... (12,167) (11,594) (27,179)
------- -------- --------
Cash used in investing activities...................... (12,167) (12,919) (43,179)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of employee stock options.......... 321 158 40
Net borrowings (repayments) under revolving credit
agreements............................................. (19,800) (16,400) 16,120
Purchase of common stock held in treasury................. (1,766) (406) (440)
------- -------- --------
Cash provided by (used in) financing activities........ (21,245) (16,648) 15,720
------- -------- --------
Increase (decrease) in cash and cash equivalents............ 1,662 2,710 (7,411)
Cash and cash equivalents at beginning of period............ 6,374 3,664 11,075
------- -------- --------
Cash and cash equivalents at end of period.................. $ 8,036 $ 6,374 $ 3,664
======= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest (net of amounts capitalized)......... $ 877 $ 2,108 $ 2,218
======= ======== ========
Cash paid for income taxes.................................. $ 4,288 $ 2,143 $ 712
======= ======== ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock for restricted stock awards........ $ 544 $ 391 $ 1,502
======= ======== ========
Capital lease obligations incurred.......................... $ 388 $ -- $ --
======= ======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
28
RTI INTERNATIONAL METALS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED
ADDT'L. TREASURY OTHER
SHARES COMMON PAID-IN DEFERRED COMMON RETAINED COMPREHENSIVE
OUTSTANDING STOCK CAPITAL COMPENSATION STOCK EARNINGS INCOME TOTAL
----------- ------ -------- ------------ -------- -------- ------------- --------
Balance at December 31,
1998........................ 20,719,758 $207 $238,109 $(2,012) $ -- $56,461 -- $292,765
Shares issued for directors'
compensation................ 12,841 -- 162 -- -- -- -- 162
Shares issued for restricted
stock award plans........... 118,250 1 1,501 (1,502) -- -- -- --
Compensation expense
recognized.................. -- -- -- 854 -- -- -- 854
Treasury common stock
purchased at cost........... (62,300) -- -- -- (440) -- -- (440)
Exercise of employee stock
options including tax
benefit..................... 9,750 -- 40 -- -- -- -- 40
Net income.................... -- -- -- -- -- 2,223 -- 2,223
Comprehensive income..........
---------- ---- -------- ------- ------- ------- ------- --------
Balance at December 31,
1999........................ 20,798,299 $208 $239,812 $(2,660) $ (440) $58,684 -- $295,604
Shares issued for directors'
compensation................ 12,110 -- 166 -- -- -- -- 166
Shares issued for restricted
stock award plans........... 53,500 -- 391 (391) -- -- -- --
Compensation expense
recognized.................. -- -- -- 864 -- -- -- 864
Treasury common stock
purchased at cost........... (32,450) -- -- -- (406) -- -- (406)
Exercise of employee stock
options including tax
benefit..................... 20,503 -- 158 -- -- -- -- 158
Net income.................... -- -- -- -- -- 6,731 -- 6,731
Adjustment to excess minimum
pension liability........... -- -- -- -- -- -- (1,258) (1,258)
Comprehensive income..........
---------- ---- -------- ------- ------- ------- ------- --------
Balance at December 31,
2000........................ 20,851,962 $208 $240,527 $(2,187) $ (846) $65,415 $(1,258) $301,859
Shares issued for directors'
compensation................ 14,619 -- 187 (187) -- -- -- --
Shares issued for restricted
stock award plans........... 34,500 -- 544 (544) -- -- -- --
Compensation expense
recognized.................. -- -- -- 640 -- -- -- 640
Treasury common stock
purchased at cost........... (210,100) -- -- -- (1,766) -- -- (1,766)
Exercise of employee stock
options including tax
benefit..................... 39,623 2 321 -- -- -- -- 323
Net income.................... -- -- -- -- -- 12,078 -- 12,078
Adjustment to excess minimum
pension liability........... -- -- -- -- -- -- (7,419) (7,419)
Unrealized gains on
investments held for sale... -- -- -- -- -- -- 1,260 1,260
Comprehensive income..........
---------- ---- -------- ------- ------- ------- ------- --------
Balance at December 31,
2001........................ 20,730,604 $210 $241,579 $(2,278) $(2,612) $77,493 $(7,417) $306,975
========== ==== ======== ======= ======= ======= ======= ========
COMPREHENSIVE
INCOME
-------------
Balance at December 31,
1998........................
Shares issued for directors'
compensation................
Shares issued for restricted
stock award plans...........
Compensation expense
recognized..................
Treasury common stock
purchased at cost...........
Exercise of employee stock
options including tax
benefit.....................
Net income.................... $ 2,223
-------
Comprehensive income.......... $ 2,223
=======
Balance at December 31,
1999........................
Shares issued for directors'
compensation................
Shares issued for restricted
stock award plans...........
Compensation expense
recognized..................
Treasury common stock
purchased at cost...........
Exercise of employee stock
options including tax
benefit.....................
Net income.................... $ 6,731
Adjustment to excess minimum
pension liability........... (1,258)
-------
Comprehensive income.......... $ 5,473
=======
Balance at December 31,
2000........................
Shares issued for directors'
compensation................
Shares issued for restricted
stock award plans...........
Compensation expense
recognized..................
Treasury common stock
purchased at cost...........
Exercise of employee stock
options including tax
benefit.....................
Net income.................... $12,078
Adjustment to excess minimum
pension liability........... (7,419)
Unrealized gains on
investments held for sale... 1,260
-------
Comprehensive income.......... $ 5,919
=======
Balance at December 31,
2001........................
The accompanying notes are an integral part of these Consolidated Financial
Statements.
29
RTI INTERNATIONAL METALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, UNLESS OTHERWISE NOTED)
NOTE 1-- ORGANIZATION AND OPERATIONS:
The Company is a successor to entities that have been operating in the
titanium industry since 1951. The Company is engaged in the manufacture of
titanium mill products and the fabrication and distribution of titanium and
other specialty metal products for use in the aerospace, oil and gas exploration
and production, geo-thermal energy production, chemical processing, and other
industries.
The consolidated financial statements of RTI International Metals, Inc.
(the "Company") include the financial position and results of operations for the
Company and its subsidiaries.
NOTE 2-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation:
The consolidated financial statements include the accounts of RTI
International Metals, Inc. and its majority owned and wholly-owned subsidiaries.
All significant intercompany accounts and transactions are eliminated.
Use of estimates:
Generally accepted accounting principles require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at year-end
and the reported amounts of revenues and expenses during the year. Actual
results could differ from these estimates.
Inventories:
Inventories are valued at cost as determined by the last-in, first-out
(LIFO) method for approximately 60% of the Company's inventories. The remaining
inventories are valued at cost determined by a combination of the first-in,
first-out (FIFO) and weighted average cost methods. Inventory costs generally
include materials, labor costs and manufacturing overhead (including
depreciation). When market conditions indicate an excess of carrying cost over
market value, a lower-of-cost-or-market provision is recorded.
Property, plant and equipment:
In general, depreciation and amortization of properties is determined using
the straight-line method over the estimated useful lives of the various classes
of assets. For financial accounting purposes, depreciation and amortization are
provided over the following useful lives:
Building and improvements................................... 20-25 years
Machinery and equipment..................................... 10-14 years
Furniture and fixtures...................................... 3-10 years
Computer hardware and software.............................. 3-10 years
The cost of properties retired or otherwise disposed of, together with the
accumulated depreciation provided thereon, is eliminated from the accounts. The
net gain or loss is recognized in other income and expense.
Routine maintenance, repairs and replacements are charged to operations.
Expenditures that materially increase values, change capacities or extend useful
lives are capitalized.
The cost of property, plant and equipment includes all direct costs of
acquisition and capital improvements. Applicable amounts of interest on
borrowings outstanding during the construction or acquisition period for major
capital projects are capitalized.
Under the provisions of SOP 98-1, the Company capitalizes costs associated
with software developed or obtained for internal use when both the preliminary
project stage is completed and management has authorized
30
further funding for the project which it deems probable will be completed and
used to perform the function intended. Capitalized costs include only (1)
external direct costs of materials and services consumed in developing or
obtaining internal-use software, (2) payroll and payroll-related costs for
employees who are directly associated with and who devote time to the
internal-use software project, and (3) internal costs incurred, when material,
while developing internal-use software. Capitalization of such costs ceases no
later than the point at which the project is substantially complete and ready
for its intended purpose.
Goodwill:
Goodwill arising from business acquisitions, which represents the excess of
the purchase price over the fair value of the assets acquired is generally
amortized over the life of assets acquired, not to exceed 25 years.
The carrying amount of goodwill is reviewed if facts and circumstances
suggest that it may be impaired. If this review indicates that the carrying
amount of goodwill will not be recoverable, as determined based on the estimated
undiscounted cash flows of the acquired entity to which the goodwill relates
over the remaining amortization period, the carrying amount of the goodwill is
reduced by the estimated shortfall of discounted cash flows. In addition,
goodwill associated with assets acquired in a purchase business combination are
included in impairment evaluations when events or circumstances exist that
indicate the carrying amount of those assets may not be recoverable.
Environmental:
The Company expenses environmental expenditures related to existing
conditions from which no future benefit is determinable. Expenditures that
enhance or extend the life of the assets are capitalized. The Company determines
its liability for remediation on a site by site basis and records a liability at
the time when it is probable and can be reasonably estimated. The Company's
estimated liability is reduced to reflect the anticipated participation of other
potentially responsible parties in those instances where it is probable that
such parties are legally responsible and financially capable of paying their
respective shares of the relevant costs. The estimated liability of the Company
is not discounted or reduced for possible recoveries from insurance carriers.
Revenue and cost recognition:
Revenues from the sale of commercial products are recognized upon passage
of title and risk of ownership to the customer, which in most cases coincides
with shipment. Revenues from long-term, fixed-price contracts are recognized on
the percentage-of-completion method, measured based on the achievement of
certain milestones in the production and fabrication process. Such milestones
have been weighted based on the critical nature of the operation performed,
which management believes is the best available measure of progress on these
contracts. Revenues related to cost-plus-fee contracts are recognized on the
basis of costs incurred during the period plus the fee earned.
Contract costs comprise all direct material and labor costs, including
outside processing fees, and those indirect costs related to contract
performance. Provisions for estimated losses on uncompleted contracts are made
in the period in which such losses are determined.
Contract costs and estimated earnings on uncompleted contracts, net of
progress billings, are included in the consolidated balance sheet under
"Inventories."
Pensions:
The Company and its subsidiaries have a number of pension plans which cover
substantially all employees. Most employees in the Titanium Group are covered by
defined benefit plans in which benefits are based on years of service and annual
compensation. Contributions to the defined benefit plans, as determined by an
independent actuary in accordance with applicable regulations, provide not only
for benefits attributed to date but also for those expected to be earned in the
future. The Company's policy is to fund pension costs at amounts equal to the
minimum funding requirements of ERISA plus additional amounts as may be approved
from time to time.
31
The majority of employees in the Fabrication and Distribution Group
participate in defined contribution or money purchase plans. Employees of
Tradco, Inc., a company which operates as part of the Fabrication and
Distribution Group, except those employees assigned to the Titanium Group,
participate in a defined benefit plan.
Postretirement benefits:
The Company provides health care benefits and life insurance coverage for
certain of its employees and their dependents. Under the Company's current
plans, certain of the Company's employees will become eligible for those
benefits if they reach retirement age while working with the Company. In
general, employees of the Titanium Group are covered by postretirement health
care and life insurance benefits.
The Company does not prefund postretirement benefit costs, but rather pays
claims as presented.
Income taxes:
In connection with the 1990 Reorganization and Initial Public Offering, the
tax basis of RMI Titanium Company's assets at that time reflected the fair
market value of the common stock then issued by RMI. The new tax basis was
allocated to all assets of RMI based on federal income tax rules and
regulations, and the results of an independent appraisal. For financial
statement purposes, these assets are carried at historical cost. As a result,
the tax basis of a significant portion of RMI's assets exceeds the related book
values and depreciation and amortization for tax purposes exceeds the
corresponding financial statement amounts.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities
multiplied by the enacted tax rates which will be in effect when these
differences are expected to reverse. In addition, deferred tax assets may arise
from net operating losses ("NOL") which can be carried forward to offset future
taxable income, as well as tax credits which can be carried forward to offset
future cash tax liabilities.
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. The Company continually evaluates the available evidence supporting
the realization of deferred tax assets and adjusts the valuation allowance
accordingly.
Foreign currencies:
For foreign subsidiaries whose functional currency is the U.S. dollar,
monetary assets and liabilities are remeasured at current rates, non-monetary
assets and liabilities are remeasured at historical rates, and revenues and
expenses are translated at average rates on a monthly basis throughout the
period. Resulting differences from the remeasurement process are recognized in
income in the respective category of revenue or cost.
Transactions and balances denominated in currencies other than the
functional currency of the transacting entity are remeasured at current rates
when the transaction occurs and at each balance sheet date.
Derivative financial instruments:
The Company may enter into derivative financial instruments only for
hedging purposes. Prior to the adoption of SFAS No. 133 in January of 2001,
gains or losses arising on the derivative instrument were deferred when changes
in the value of the derivative effectively reduced the underlying exposure. If a
derivative instrument failed to meet the criteria as an effective hedge, gains
and losses were recognized currently in income.
SFAS No. 133 requires all derivatives to be recognized as either assets or
liabilities on the balance sheet and be measured at fair value. Changes in such
fair value will be recognized in income immediately if the derivatives are
designated for purposes other than hedging or are deemed not to be effective
hedges. The Company adopted SFAS No. 133 on January 1, 2001. A net charge of
$0.2 million is reflected as a cumulative effect of adoption of SFAS No. 133 in
the Company's results of operations for 2001.
32
Stock-based compensation:
As permitted by the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), the Company has elected to measure stock-based
compensation under the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25), and to adopt the
disclosure-only alternative described in SFAS No. 123. For restricted stock
awards, the Company records deferred stock-based compensation based on the fair
market value of common stock on the date of the award. Such deferred stock-based
compensation is amortized over the vesting period of each individual award.
Cash equivalents:
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Other income -- net:
During 2001, the Company received a common stock distribution in connection
with the demutualization of one of its insurance carriers. The fair market value
of the common stock on the date of distribution of $5.2 million was recorded in
other income. At December 31, 2001 an unrealized gain of $1.2 million, net of
tax, was recorded in other comprehensive income and the total carrying value was
reflected in other current assets.
New accounting standards:
On July 20, 2001, the FASB issued Statements of Financial Accounting
Standards No. 141 (FAS 141), "Business Combinations", and No. 142 (FAS 142),
"Goodwill and Other Intangible Assets".
FAS 141 supersedes Accounting Principles Board Opinion No. 16 (APB 16),
"Business Combinations". The most significant changes made by FAS 141 are: (1)
requiring that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001; (2) establishing specific criteria
for the recognition of intangible assets separately from goodwill; and (3)
requiring unallocated negative goodwill to be written off immediately as an
extraordinary gain (instead of being deferred and amortized).
FAS 142 supersedes APB 17, "Intangible Assets". FAS 142 primarily addresses
the accounting for goodwill and intangible assets subsequent to their
acquisition (i.e., the post-acquisition accounting). The most significant
changes made by FAS 142 are: (1) goodwill and indefinite lived intangible assets
will no longer be amortized; (2) goodwill will be tested for impairment at least
annually at the reporting unit level; (3) intangible assets deemed to have an
indefinite life will be tested for impairment at least annually; and (4) the
amortization period of intangible assets with finite lives will no longer be
limited to forty years.
FAS 141 must be applied to all business combinations initiated after June
30, 2001. FAS 142 must be adopted as of January 1, 2002. All of the Company's
acquisitions in recent years have been accounted for under purchase accounting.
At adoption of FAS 142, an evaluation of goodwill and intangible assets will be
required and any impairment of goodwill or intangible assets at that time will
be recognized as a cumulative effect of adoption. Management has completed a
preliminary evaluation of the impact of adoption of FAS 142. This change in
accounting will increase 2002 net income by approximately $1.0 million or 4.8
cents per share because goodwill amortization will cease. The standard also
requires a reassessment of intangibles and goodwill for impairment. The Company
expects to finalize its reassessment by the end of the second quarter 2002, but
does not believe the new standard will have a material impact.
In August 2001, the FASB issued FAS 143, "Accounting for Asset Retirement
Obligations." FAS 143 prescribes the accounting for retirement obligations
associated with tangible long-lived assets, including: (1) the timing of
liability recognition; (2) initial measurement of the liability; (3) allocation
of the cost of the obligation to expense; (4) measurement and recognition of
subsequent changes to the liability; and (5) financial statement disclosures.
FAS 143 requires that an asset retirement cost be capitalized as part of the
cost of the related long-lived asset and subsequently allocated to expense using
a systematic and rational method. The standard is required to be adopted in
fiscal years beginning after June 15, 2002. At adoption, any transition
adjustment required will be reported as a cumulative effect of a change in
accounting principle. Management has not yet completed its evaluation of the
impact of the adoption of this standard.
33
In September 2001, the FASB issued FAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." FAS 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This Statement
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business (as previously defined in that Opinion).
This standard prescribes a single accounting model for long-lived assets to be
disposed of by sale, and also prescribes the accounting for the impairment of
long-lived assets to be held and used and for assets to be disposed of by other
than sale (e.g., abandonment). Under this standard, long-lived assets to be
disposed of by sale should be carried at the lower of their carrying amount or
fair value less cost to sell and depreciation (amortization) should cease.
Discontinued operations are no longer measured on a net realizable value basis,
and future operating losses are no longer recognized before they occur. For
long-lived assets to be held and used, the significant changes under FAS 143
are: (1) the removal of goodwill from the scope of this standard; (2) the use of
probability-weighted cash flow approach to measuring the future cash flows from
the assets; and (3) the use of a "primary asset" approach to grouping assets for
purposes of testing for impairment. This standard is required to be adopted in
fiscal years beginning after December 15, 2001; early adoption is permitted. The
requirements of this standard are to be applied prospectively from adoption with
no cumulative effect of change in accounting principle reported. Management has
completed a preliminary evaluation and does not expect a material financial
impact from the adoption of this standard.
NOTE 3-- ACQUISITIONS:
Reamet
Pursuant to a Stock Purchase Agreement dated December 14, 2000, RTI
acquired the remaining 70,000 shares of Reamet of Villette, France for cash of
$4.0 million. This acquisition was accounted for using the purchase method of
accounting.
Reamet is a premier distributor of titanium products to the French market.
Reamet was previously accounted for under the cost basis of accounting, despite
the Company's 40% interest due to the practical inability of RTI to exercise
significant influence.
The accompanying financial statements include the results of operations of
Reamet from the date of acquisition on December 14, 2000. The following
unaudited pro forma income statement data presents a summary of the results of
operations of RTI and Reamet on a combined basis as if the acquisition had
occurred on January 1, 1999 and January 1, 2000. This pro forma combined data is
presented for informational purposes only and may not necessarily reflect the
results of operations of the Company had the acquisition occurred on January 1,
1999 or January 1, 2000.
YEAR ENDED DECEMBER 31,
-------------------------
PRO FORMA PRO FORMA
2000 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
Net sales................................................... $253,304 $249,023
======== ========
Net income.................................................. $ 8,596 $ 3,343
======== ========
Net income per common share
Basic..................................................... $ 0.41 $ 0.16
======== ========
Diluted................................................... $ 0.41 $ 0.16
======== ========
The purchase price of $4.9 million, consisting of cash paid of $4.0
million, acquisition costs of $0.3 million, and the Company's original cost of
the minority interest it held in Reamet prior to the acquisition of $0.6
million, has been allocated to the assets acquired and liabilities assumed.
34
NOTE 4-- EARNINGS PER SHARE:
A reconciliation of the income and weighted average number of outstanding
common shares used in the calculation of basic and diluted earnings per share
for each of the years ended December 31, 2001, 2000, and 1999, follows (in
thousands except number of shares and per share amounts):
NET EARNINGS
INCOME SHARES PER SHARE
------- ---------- ---------
For the year ended December 31, 2001
Basic EPS............................................ $12,078 20,848,056 $0.58
Effect of potential common stock:
Stock options...................................... -- 184,680 (0.01)
------- ---------- -----
Diluted EPS.......................................... $12,078 21,032,736 $0.57
======= ========== =====
For the year ended December 31, 2000
Basic EPS............................................ $ 6,731 20,848,783 $0.32
Effect of potential common stock:
Stock options...................................... -- 176,208 --
------- ---------- -----
Diluted EPS.......................................... $ 6,731 21,024,991 $0.32
======= ========== =====
For the year ended December 31, 1999
Basic EPS............................................ $ 2,223 20,776,200 $0.11
Effect of potential common stock:
Stock options...................................... -- 94,683 --
------- ---------- -----
Diluted EPS.......................................... $ 2,223 20,870,883 $0.11
======= ========== =====
735,978, 780,600, and 772,177 shares of common stock issuable upon exercise of
employee stock options have been excluded from the calculation of diluted
earnings per share in 2001, 2000 and 1999, respectively, because the exercise
price of the options exceeded the weighted average market price of the Company's
common stock during those periods.
NOTE 5-- ACCOUNTS RECEIVABLE:
DECEMBER 31,
-----------------
2001 2000
------- -------
Trade and commercial customers.............................. $50,581 $44,425
U.S. Government--Department of Energy....................... 1,210 2,918
------- -------
51,791 47,343
Less--Allowance for doubtful accounts....................... (1,219) (926)
------- -------
$50,572 $46,417
======= =======
NOTE 6--INVENTORIES:
DECEMBER 31,
-------------------
2001 2000
-------- --------
Raw materials and supplies.................................. $ 30,304 $ 35,323
Work-in-process and finished goods.......................... 142,041 141,084
Adjustment to LIFO values................................... (13,784) (11,197)
-------- --------
$158,561 $165,210
======== ========
35
NOTE 7-- PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost and consists of the
following:
DECEMBER 31,
---------------------
2001 2000
--------- ---------
Land........................................................ $ 1,162 $ 1,162
Buildings and improvements.................................. 43,803 42,767
Machinery and equipment..................................... 142,578 132,304
Computer hardware and software, furniture and fixtures, and
other..................................................... 44,272 39,858
Construction in progress.................................... 2,410 11,310
--------- ---------
234,225 227,401
Less--Accumulated depreciation.............................. (135,850) (129,412)
--------- ---------
$ 98,375 $ 97,989
========= =========
NOTE 8--INCOME TAXES:
The "Provision for income taxes" caption in the Consolidated Statement of
Income includes the following income tax expense (benefit):
DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999
--------------------------- --------------------------- ---------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------ ------- -------- ------ ------- -------- ------
Federal.............. $3,053 $3,190 $6,243 $1,390 $2,806 $4,196 $(4,227) $5,287 $1,060
State................ 294 449 743 184 503 687 36 318 354
Foreign.............. 700 157 857 (19) (186) (205) (42) (68) (110)
------ ------ ------ ------ ------ ------ ------- ------ ------
Total.............. $4,047 $3,796 $7,843 $1,555 $3,123 $4,678 $(4,233) $5,537 $1,304
====== ====== ====== ====== ====== ====== ======= ====== ======
A reconciliation of the expected tax at the federal statutory tax rate to
the actual provision follows:
DECEMBER 31,
------------------------
2001 2000 1999
------ ------ ------
Statutory rate of 35% applied to income before income
taxes.................................................... $7,037 $3,993 $1,234
Effects of net operating loss carryforwards and valuation
allowance adjustments.................................... -- -- 312
State income taxes, net of federal benefit................. 483 450 559
Adjustments of prior year's tax............................ 374 (82) (844)
Effects of foreign operations.............................. (415) (148) (530)
Nondeductible expenses..................................... 364 465 573
------ ------ ------
Total provision.......................................... $7,843 $4,678 $1,304
====== ====== ======
36
Deferred tax assets and liabilities resulted from the following:
DECEMBER 31,
-------------------
2001 2000
-------- --------
Deferred tax assets
Inventories............................................... $ 4,925 $ 5,003
Intangible assets......................................... -- 1,460
Postretirement benefit costs.............................. 7,615 7,632
Employment costs.......................................... 2,382 2,325
Tax credits............................................... 1,807 2,012
Environmental related costs............................... 638 697
Pension costs............................................. 72 --
Other..................................................... 1,052 1,213
-------- --------
Total deferred tax assets.............................. 18,491 20,342
Deferred tax liabilities
Pension costs............................................. -- (4,638)
Property, plant and equipment............................. (10,236) (9,113)
Anthem disposition........................................ (1,977) --
Intangible assets......................................... (156) --
-------- --------
Total deferred tax liabilities......................... (12,369) (13,751)
-------- --------
Net deferred tax asset...................................... $ 6,122 $ 6,591
======== ========
Alternative minimum tax credits as of December 31, 2001 amounted to $1.8
million and have no expiration date. The valuation allowance of $0.3 million as
of December 31, 1999 was taken to income during 2000 due to the expiration of a
deferred tax asset related to a capital loss carry forward.
NOTE 9-- LONG-TERM DEBT:
The Company maintains a credit agreement, entered into on September 30,
1998, which provides a $100 million five-year unsecured revolving credit
facility. The Company can borrow up to the lesser of $100 million or a borrowing
base equal to the sum of 85% of qualifying accounts receivable and 60% of
qualifying inventory.
Under the terms of the facility, the Company, at its option, will be able
to borrow at (a) a base rate (which is the higher of PNC Bank's prime rate or
the Federal Funds Effective Rate plus 0.5% per annum), or (b) LIBOR plus a
spread (ranging from .75% to 1.75%) determined by the ratio of the Company's
consolidated total indebtedness to consolidated earnings before interest, taxes,
depreciation and amortization. At December 31, 2001, there were no borrowings
outstanding under the facility. At December 31, 2001, the Company was in
compliance with all covenants under this agreement, and under the leverage
covenant, had a borrowing capacity equal to the total amount of the agreement.
DECEMBER 31,
-------------------
2001 2000
-------- --------
Revolving credit facility maturing September 29, 2003
bearing interest at 7.67% at December 31, 2000............ $ -- $ 19,800
======== ========
37
NOTE 10-- EMPLOYEE BENEFIT PLANS:
The following table provides reconciliations of the changes in the
Company's pension and other postemployment benefit plan obligations and the
values of plan assets for the years ended December 31, 2001 and 2000, and a
statement of the funded status as of December 31, 2001 and 2000.
PENSION OTHER POSTRETIREMENT
BENEFIT PLANS BENEFIT PLANS
------------------- ---------------------
2001 2000 2001 2000
-------- -------- --------- ---------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation January 1........................ $ 91,278 $ 84,839 $ 19,228 $ 16,629
Service cost........................................ 1,890 1,757 251 223
Interest cost....................................... 6,380 6,329 1,340 1,396
Plan amendments..................................... -- -- -- 2,118
Actuarial (gain) loss............................... 2,771 4,993 904 6
Benefits paid....................................... (6,774) (6,640) (1,758) (1,144)
-------- -------- -------- --------
Benefit obligation December 31...................... $ 95,545 $ 91,278 $ 19,965 $ 19,228
======== ======== ======== ========
CHANGE IN PLAN ASSETS:
Fair value of plan assets January 1................. $ 90,533 $ 94,115
Actual return on plan assets........................ 1,352 2,995
Employer contributions.............................. 67 63
Benefits paid....................................... (6,774) (6,640)
-------- --------
Fair value of plan assets December 31............... $ 85,178 $ 90,533
======== ========
As of December 31, 2001, approximately 54.3% of the plans' assets are
invested in equity securities, 22.1% in government debt instruments, and the
balance in cash equivalents or debt securities. Included in the aggregate
disclosures above are four plans for which the projected benefit obligation
exceeds the fair value of plan assets at December 31, 2001 by $10.4 million. As
of December 31, 2000, the projected benefit obligation exceeded the fair value
of plan assets in three plans.
PENSION OTHER POSTRETIREMENT
BENEFIT PLANS BENEFIT PLANS
------------------- ---------------------
2001 2000 2001 2000
-------- -------- --------- ---------
FUNDED STATUS:
Funded status December 31........................... $(10,367) $ (745) $(19,965) $(19,228)
Unrecognized (gain) loss............................ 18,500 9,273 (1,725) (2,683)
Unrecognized prior service cost..................... 4,388 5,179 1,750 1,925
-------- -------- -------- --------
Net amount recognized............................... $ 12,521 $ 13,707 $(19,940) $(19,986)
======== ======== ======== ========
Amounts recognized in the Consolidated Balance Sheet at December 31 consist
of the following:
PENSION OTHER POSTRETIREMENT
BENEFIT PLANS BENEFIT PLANS
------------------- ---------------------
2001 2000 2001 2000
-------- -------- --------- ---------
Prepaid benefit cost................................ $ 12,521 $ 13,707 $ -- $ --
Intangible asset.................................... 4,438 5,171 -- --
Accrued benefit liability........................... -- -- (19,940) (19,986)
Additional minimum liability........................ (17,787) (7,106) -- --
Accumulated other comprehensive income.............. 13,349 1,935 -- --
-------- -------- -------- --------
$ 12,521 $ 13,707 $(19,940) $(19,986)
======== ======== ======== ========
38
Net periodic benefit costs as determined by independent actuaries, include
the following components:
OTHER POSTRETIREMENT
PENSION BENEFIT PLANS BENEFIT PLANS
--------------------------- ---------------------------
2001 2000 1999 2001 2000 1999
------- ------- ------- ------- ------- -------
Service cost.......................... $ 1,890 $ 1,757 $ 1,801 $ 251 $ 223 $ 197
Interest cost......................... 6,380 6,329 5,461 1,340 1,396 1,211
Expected return on assets............. (7,908) (7,640) (7,183) -- -- --
Prior service cost amortization....... 791 791 791 175 193 --
Amortization of actuarial loss........ 100 2 175 -- -- --
Amortization of transition
obligation.......................... -- 256 307 -- -- --
------- ------- ------- ------- ------- -------
Net periodic benefit cost............. $ 1,253 $ 1,495 $ 1,352 $ 1,766 $ 1,812 $ 1,408
======= ======= ======= ======= ======= =======
Assumptions used in the determination of the benefit obligations include
the following:
2001 2000
---- ----
Discount rate............................................... 7.00% 7.25%
Rate of increase in compensation............................ 4.8% 4.8%
Expected return on plan assets.............................. 9.0% 9.0%
The ultimate costs of certain of the Company's retiree health care plans
are capped at predetermined out-of-pocket spending limits. The annual rate of
increase in the per capita costs for these plans is limited to the predetermined
spending cap. As of December 31, 2001, the predetermined limits had been reached
and, as a result, increases in claim cost rates will have no impact on the
reported accumulated postretirement benefit obligation or net periodic expense.
As identified under Management's Discussion and Analysis of Financial
Condition and Results of Operations, the Company acquired stock under the
demutualization of one of its insurance carriers in 2001. The Company
subsequently sold all of the stock for $7.2 million and immediately contributed
the amount to each of its four defined benefit pension plans in January of 2002.
NOTE 11-- LEASES:
The Company and its subsidiaries have entered into various operating and
capital leases for the use of certain equipment, principally office equipment
and vehicles. The operating leases generally contain renewal options and provide
that the lessee pay insurance and maintenance costs. The total rental expense
under operating leases amounted to $2.7 million in 2001, $3.7 million in 2000
and $3.6 million in 1999.
The Company's future minimum commitments under operating and capital leases
for years after 2001 are as follows (in thousands):
OPERATING CAPITAL
--------- -------
2002........................................................ $2,726 $ 807
2003........................................................ 1,908 246
2004........................................................ 1,356 169
2005........................................................ 989 128
2006........................................................ 896 35
Thereafter.................................................. 1,847 22
------ ------
Total lease payments................................... $9,722 1,407
======
Less interest portion.................................................. (131)
------
Amount recognized as capital lease obligations......................... $1,276
======
39
NOTE 12-- TRANSACTIONS WITH RELATED PARTIES:
The Company, in the ordinary course of business, purchases goods and
services from USX, which was deemed a related party until March 31, 1999. On
that date, USX's right to approximately 27% ownership of the Company was
irrevocably transferred. In 1999, the Company purchased goods and services equal
to $0.8 million.
The United States Steel and Carnegie Pension Fund (the "Pension Fund") is
the trustee of the Company's pension plans. The Pension Fund is a registered
investment advisor under the Investment Advisors Act of 1940, and receives a
negotiated fee for such services. The Company paid the Pension Fund $131,000 in
1999. For the years 2000 and 2001, the Pension Fund was not considered a related
party.
Mr. Richard Burkhart, an officer of the Company prior to his resignation in
February, 2000, received, as a 50% owner of XXI, LLC, the benefit of rent paid
for a building in Solon, Ohio amounting to $199,445 in 2000 and $159,566 in
1999. On January 6, 1999, RTI paid $16,247,443 to Mr. Burkhart as part of the
purchase of NCM. Mr. Burkhart was 50% owner of NCM.
NOTE 13-- SEGMENT REPORTING:
The Company's reportable operating segments are the Titanium Group and the
Fabrication and Distribution Group.
The Titanium Group manufactures and sells a wide range of titanium mill
products to a customer base consisting primarily of manufacturing and
fabrication companies in the aerospace and nonaerospace markets. Titanium mill
products consist of basic mill shapes such as ingot, slab, bloom, billet, bar,
plate, sheet, strip and welded tube. Titanium mill products are sold primarily
to customers such as metal fabricators, forge shops and, to a lesser extent,
metal distribution companies. Titanium mill products are usually raw or starting
material for these customers, who then form, fabricate or further process mill
products into finished or semi-finished components or parts.
The Fabrication and Distribution Group is engaged primarily in the
fabrication of titanium, specialty metals and steel products, including pipe and
engineered tubular products, for use in the oil and gas and geo-thermal energy
industries; hot and superplastically formed parts; and cut, forged, extruded and
rolled shapes for aerospace and nonaerospace applications. This segment also
provides warehousing, distribution, finishing, cut-to-size and just-in-time
delivery services of titanium, steel and other metal products.
Other Operations is comprised of certain small businesses and operations
dissimilar to either the Titanium Group or the Fabrication and Distribution
Group, and primarily consists of the Company's Environmental Services Division
located in Ashtabula, Ohio. While the Environmental Services Division is
structurally a part of the Titanium Group, the aggregation rules of generally
accepted accounting principles do not permit combination with that group for
this footnote disclosure.
Intersegment sales are accounted for at prices which are generally
established by reference to similar transactions with unaffiliated customers.
Reportable segments are measured based on segment operating income after an
allocation of certain corporate items such as general corporate overhead and
expenses. Assets of general corporate activities include unallocated cash and
short-term investments, and deferred taxes.
Segment information for the three years ended December 31, 2001 is as
follows:
2001 2000 1999
-------- -------- --------
NET SALES:
Titanium
Trade..................................................... $126,889 $124,149 $125,079
Intersegment.............................................. 48,389 45,806 40,680
-------- -------- --------
175,278 169,955 165,759
Fabrication and distribution
Trade..................................................... 144,916 108,423 100,195
Intersegment.............................................. 1,605 318 2,238
-------- -------- --------
146,521 108,741 102,433
Other operations............................................ 14,095 16,810 18,035
Eliminations................................................ (49,994) (46,124) (42,918)
-------- -------- --------
Total net sales........................................ $285,900 $249,382 $243,309
======== ======== ========
40
2001 2000 1999
-------- -------- --------
OPERATING INCOME (LOSS):
Titanium.................................................... $ 4,045 $ 5,608 $ 9,153
Fabrication and distribution................................ 4,685 (17) (6,356)
Other operations............................................ 1,051 1,150 1,972
-------- -------- --------
Total.................................................. $ 9,781 $ 6,741 $ 4,769
======== ======== ========
Allocated corporate items included in segment operating
income (1):
Titanium.................................................... $ (5,757) $ (4,051) $ (6,500)
Fabrication and distribution................................ (2,886) (2,238) (3,633)
-------- -------- --------
$ (8,643) $ (6,289) $(10,133)
======== ======== ========
---------------
(1) Allocated on a three factor formula based on sales, assets and payrolls.
ASSETS:
Titanium.................................................... $216,179 $227,883 $255,825
Fabrication and distribution................................ 157,162 149,536 134,695
Other operations............................................ 1,787 462 505
General corporate assets.................................... 12,623 8,398 9,218
-------- -------- --------
Total consolidated assets.............................. $387,751 $386,279 $400,243
======== ======== ========
CAPITAL EXPENDITURES:
Titanium.................................................... $ 6,008 $ 5,564 $ 20,071
Fabrication and distribution................................ 6,159 5,958 6,995
Other operations............................................ -- 72 113
-------- -------- --------
Total capital spending................................. $ 12,167 $ 11,594 $ 27,179
======== ======== ========
DEPRECIATION AND AMORTIZATION:
Titanium.................................................... $ 9,917 $ 8,962 $ 6,425
Fabrication and distribution................................ 3,651 2,957 2,898
Other operations............................................ 17 22 15
-------- -------- --------
Total depreciation and amortization.................... $ 13,585 $ 11,941 $ 9,338
======== ======== ========
41
REVENUE BY MARKET INFORMATION:
Titanium
Aerospace................................................. $125,595 $123,594 $112,380
Nonaerospace.............................................. 49,683 46,361 53,379
-------- -------- --------
Total.................................................. $175,278 $169,955 $165,759
Fabrication and distribution
Aerospace................................................. $ 92,907 $ 76,386 $ 75,163
Nonaerospace.............................................. 53,614 32,355 27,270
-------- -------- --------
Total.................................................. $146,521 $108,741 $102,433
Other operations
Nonaerospace.............................................. $ 14,095 $ 16,810 $ 18,035
Eliminations................................................ (49,994) (46,124) (42,918)
-------- -------- --------
Total net sales........................................ $285,900 $249,382 $243,309
======== ======== ========
The following geographic area information includes trade sales based on
product shipment destination, and property, plant and equipment based on
physical location.
2001 2000 1999
-------- -------- --------
Geographic location of trade sales:
United States............................................. $229,345 $192,058 $192,434
England................................................... 17,223 14,624 18,775
France.................................................... 14,873 17,833 13,269
Rest of world............................................. 24,459 24,867 18,831
-------- -------- --------
Total.................................................. $285,900 $249,382 $243,309
======== ======== ========
Gross property, plant and equipment:
United States............................................. $231,955 $225,243 $213,929
England................................................... 2,058 1,976 1,944
France.................................................... 212 182 --
-------- -------- --------
Total.................................................. $234,225 $227,401 $215,873
======== ======== ========
In 2001, no single customer accounted for more than 10% of consolidated
revenues. In the years ended December 31, 2001, 2000 and 1999, export sales were
$56.6 million, $57.3 million, and $50.9 million, respectively, principally to
customers in Western Europe.
Substantially all of the Company's sales and operating revenues are
generated from its U.S. and European operations. A significant portion of the
Company's sales are made to customers in the aerospace industry. The
concentration of aerospace customers may expose the Company to cyclical, credit
and other risks generally associated with the aerospace industry. In the three
years ended December 31, 2001, no single customer accounted for as much as 10%
of consolidated sales, although Boeing Company, Airbus Industrie and their
subcontractors together consume in excess of 10% of the Company's sales. Trade
accounts receivable are generally not secured or collateralized.
NOTE 14-- CONTINGENCIES:
In connection with the 1990 Reorganization, the Company agreed to indemnify
USX and Quantum against liabilities related to their ownership of RMI and its
immediate predecessor, Reactive Metals, Inc., which was formed by USX and
Quantum in 1964.
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. Given the
critical nature of many of the aerospace end uses for the Company's
42
products, including specifically their use in critical rotating parts of gas
turbine engines, the Company maintains aircraft products liability insurance of
$250 million, which includes grounding liability.
Environmental Matters
In the ordinary course of business, the Company is subject to environmental
laws and regulations concerning the production, handling, storage,
transportation, emission, and disposal of waste materials and is also subject to
other federal and state laws and regulations regarding health and safety
matters. These laws and regulations are constantly evolving, and it is not
currently possible to predict accurately the ultimate effect these laws and
regulations will have on the Company in the future.
The Company is involved in investigative or cleanup projects under federal
or state environmental laws at a number of waste disposal sites, including the
Fields Brook Superfund Site and the Ashtabula Area of Concern. Given the status
of the proceedings with respect to these sites, ultimate investigative and
remediation costs cannot presently be accurately predicted, but could, in the
aggregate be material. Based on the information available regarding the current
ranges of estimated remediation costs at currently active sites, and what the
Company believes will be its ultimate share of such costs, provisions for
environmental-related costs have been recorded. These provisions are in addition
to amounts which have previously been accrued for the Company's share of
environmental study costs.
At December 31, 2001, the amount accrued for future environmental-related
costs was $1.7 million. Based on available information, RMI believes its share
of potential environmental-related costs, before expected contributions from
third parties, is in a range from $2.8 million to $6.5 million, in the
aggregate. The amount accrued is net of expected contributions from third
parties (other than insurers) of approximately $1.9 to $2.3 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.
Gain Contingency
In 1999, RTI made a claim against Boeing Commercial Airplane Group for
approximately $7 million for contractual amounts due in connection with the
terms of their long-term supply agreement. Under the terms of the contract,
Boeing was required to order a minimum of 3.25 million pounds of titanium during
1999. Actual shipments were less than one million pounds. This claim was treated
as a gain contingency under SFAS No. 5, "Accounting for Contingencies" (FAS 5),
deferring the realization of income until Boeing satisfied the claim.
On April 26, 2000, Boeing satisfied the above-mentioned contractual claim
for approximately $6 million. The financial impact of this settlement was
recorded in other income in 2000.
In 2000, RTI made a similar claim against Boeing Commercial Airplane Group
for approximately $6 million for contractual amounts due in connection with the
terms of their long-term supply agreement. Under the terms of the contract,
Boeing was required to order a minimum of 3.25 million pounds of titanium during
2000. Actual shipments were approximately 1.1 million pounds. This claim was
also treated as a gain contingency under FAS 5, deferring the realization of
income until Boeing satisfied the claim.
On March 19, 2001, Boeing satisfied the above-mentioned 2000 contractual
claim for approximately $6 million. The financial impact of this settlement was
recorded in other income in 2001.
In 2001 RTI made a similar claim against Boeing Commercial Airplane Group
for approximately $7.1 million in connection with the terms of their long-term
supply agreement. Under the terms of the contract, Boeing was required to order
a minimum of 3.25 million pounds of titanium during 2001. Actual shipments were
approximately 0.9 million pounds. This claim was also treated as a gain
contingency under FAS No 5, deferring realization of income until Boeing
satisfies the claim.
43
Other
The Company is also the subject of, or a party to, a number of other
pending or threatened legal actions involving a variety of matters incidental to
its business.
The ultimate resolution of these foregoing contingencies could,
individually or in the aggregate, be material to the consolidated financial
statements. However, management believes that the Company will remain a viable
and competitive enterprise even though it is possible that these matters could
be resolved unfavorably.
NOTE 15-- STOCK OPTION AND RESTRICTED STOCK AWARD PLANS:
1989 STOCK OPTION INCENTIVE PLAN:
The 1989 Stock Option Incentive Plan authorized the granting of options to
purchase up to 775,500 shares of Common Stock to eligible officers and key
management employees at not less than the market value on the date the options
are granted. Awards under the plan could include stock appreciation rights. The
exercise period of the options may be up to ten years from the date of the
grant. During 1995 substantially all option holders voluntarily relinquished
their stock appreciation rights. No further grants can be made under the plan.
There are still stock options outstanding under the 1989 Plan at December 31,
2001.
1995 STOCK PLAN
The 1995 Stock Plan, which was approved by a vote of the Company's
shareholders at the 1995 Annual Meeting of Shareholders, replaced both the 1989
Stock Option Incentive Plan and the 1989 Employee Restricted Stock Award Plan.
The Plan permits the grant of any or all of the following types of awards in any
combination: a) stock options; b) stock appreciation rights; and c) restricted
stock. The plan does not permit the granting of options with exercise prices
that are less than the market value on the date the options are granted. A
committee appointed by the Board of Directors administers the Plan, and
determines the type or types of grants to be made under the Plan and sets forth
in each such Grant the terms, conditions and limitations applicable to it,
including, in certain cases, provisions relating to a possible change in control
of the Company.
During 2001, 160,500 option shares were granted at an exercise price of
$15.7813. In 2000, 179,000 option shares were granted at an exercise price of
$7.313. In 1999, 184,500 option shares were granted at a price of $12.438 and
198,000 option shares were granted at a price of $9.59375. All option exercise
prices were equal to the common stock's fair market value on the date of the
grant. Options are for a term of ten years from the date of the grant, and vest
ratably over the three-year period beginning with the date of the grant. All
2001 grants were outstanding at December 31, 2001.
During 2001, 2000 and 1999, 49,119 shares, 65,610 shares and 53,500 shares,
respectively, of restricted stock were granted under the 1995 Stock Plan.
Compensation expense equal to the fair market value on the date of the grant is
recognized ratably over the vesting period of each grant which is typically five
years.
44
The following table presents a summary of stock option activity under the
plans described above for the years ended December 31, 1999 through 2001:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Balance January 1, 1999..................................... 769,219 $17.21
Granted..................................................... 382,500 $10.97
Exercised................................................... (9,750) $ 4.06
---------
Balance December 31, 1999................................... 1,141,969 $15.23
Granted..................................................... 179,000 $ 7.31
Exercised................................................... (20,503) $ 7.81
Expired..................................................... (19,891) $13.32
---------
Balance December 31, 2000................................... 1,280,575 $14.27
Granted..................................................... 160,500 $15.78
Exercised................................................... (39,623) $ 8.11
Expired..................................................... (1,332) $20.19
---------
Balance December 31, 2001................................... 1,400,120 $14.62
=========
At December 31, 2001 the weighted average exercise price and weighted
average remaining contractual life for all outstanding options are reflected in
the following tables:
OPTIONS OUTSTANDING
--------------------------------------------------------------------------------------------
RANGE OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICE NUMBER REMAINING LIFE EXERCISE PRICE
------------------------------------------- --------- ---------------- ----------------
$4.06...................................... 80,050 2.8 $ 4.06
$7.31 - $9.59.............................. 360,632 7.7 $ 8.47
$12.44 - $15.78............................ 507,336 7.7 $13.94
$20.19 - $25.56............................ 452,102 5.0 $22.16
---------
1,400,120 6.5 $14.62
=========
OPTIONS EXERCISABLE
--------------------------------------------------------------------------------------------
RANGE OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICE NUMBER REMAINING LIFE EXERCISE PRICE
------------------------------------------- --------- ---------------- ----------------
$4.06...................................... 80,050 2.8 $ 4.06
$7.31 - $9.59.............................. 181,337 7.5 $ 8.85
$12.44 - $15.78............................ 287,670 7.0 $13.23
$20.19 - $25.56............................ 452,102 5.0 $22.16
---------
1,001,159 5.9 $15.74
=========
Fair values of options at grant date were estimated using a Black-Scholes
model and the assumptions listed below.
2001 2000 1999
----- ----- -----
Expected life (years)....................................... 5 5 5
Risk-free interest rate..................................... 5.0% 5.0% 5.5%
Volatility.................................................. 40.0% 57.5% 58.8%
Dividend yield.............................................. 0% 0% 0%
Weighted average fair value of options granted during the
year...................................................... $6.75 $3.98 $6.13
45
If compensation expense for the Company's stock options granted had been
determined based on the fair value at the grant date for the awards in
accordance with SFAS No. 123, the effect on the Company's net income and
earnings per share for the three years ended December 31, 2001 would have been
as follows:
2001 2000 1999
------- ------ ------
Net income
As reported............................................. $12,078 $6,731 $2,223
Pro forma............................................... 11,381 5,870 760
Basic earnings per share
As reported............................................. $ 0.58 $ 0.32 $ 0.11
Pro forma............................................... $ 0.55 $ 0.28 $ 0.04
Diluted earnings per share
As reported............................................. $ 0.57 $ 0.32 $ 0.11
Pro forma............................................... $ 0.54 $ 0.28 $ 0.04
NOTE 16-- SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The following table sets forth selected quarterly financial data for 2001
and 2000.
1ST 2ND 3RD 4TH
2001 QUARTER(1) QUARTER QUARTER QUARTER(2)
---- ---------- ---------- ------- ----------
Sales....................................... $66,239 $74,868 $76,047 $68,746
Gross profit................................ 9,511 10,188 11,980 11,745
Operating income............................ 800 1,310 3,852 3,819
Net income.................................. 3,867 629 2,287 5,295
Net income per share:
Basic..................................... $ 0.19 $ 0.03 $ 0.11 $ 0.26
Diluted................................... $ 0.18 $ 0.03 $ 0.11 $ 0.25
1ST 2ND 3RD 4TH
2000 QUARTER QUARTER(1) QUARTER QUARTER
---- ---------- ---------- ------- ----------
Sales....................................... $70,508 $63,345 $61,723 $53,806
Gross profit................................ 10,760 8,926 8,634 7,630
Operating income............................ 3,223 1,779 1,697 42
Net income.................................. 1,585 4,835 398 (87)
Net income per share:
Basic..................................... $ 0.08 $ 0.23 $ 0.02 $ --
Diluted................................... $ 0.08 $ 0.23 $ 0.02 $ --
---------------
(1) Net income was favorably affected by the financial settlements from Boeing
related to its failure to meet 2000 and 1999 minimum order requirements
under terms of a long-term agreement between RTI and Boeing.
(2) Net income was favorably affected by the receipt of a Common Stock
distribution in connection with the demutualization of one of the Company's
insurance carriers.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
In addition to the information set forth under the caption "Executive
Officers of the Registrant" in Part I, Item 1 of this report, information
concerning the directors of the Company is incorporated by reference to
"Election of Directors" in the 2001 Proxy Statement, to be filed at a later
date.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to "The
Board of Directors--Compensation of Directors" and "Executive Compensation" in
the 2001 Proxy Statement, to be filed at a later date.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to "Other
Information--Security Ownership" in the 2001 Proxy Statement, to be filed at a
later date.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to "Certain
Relationships and Related Transactions" in the 2001 Proxy Statement, to be filed
at a later date.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)(1) AND (2) FINANCIAL STATEMENTS
See "Financial Statements."
(3) See Index to Exhibits.
(B) REPORT ON FORM 8-K FILED IN THE FOURTH QUARTER OF 2001
On December 26, 2001, the Company filed a report on Form 8-K reporting Item
5., announcing receipt of common stock valued at $6.6 million
(C) EXHIBITS
The exhibits listed on the Index to Exhibits are filed herewith or are
incorporated by reference.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
RTI INTERNATIONAL METALS, INC.
By /s/ LAWRENCE W. JACOBS
------------------------------------
Lawrence W. Jacobs
Vice President,
Chief Financial Officer & Treasurer
Dated: March 14, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE AND TITLE DATE
------------------- ----
CRAIG R. ANDERSSON, Director;
NEIL A. ARMSTRONG, Director;
DANIEL I. BOOKER, Director;
RONALD L. GALLATIN, Director;
CHARLES C. GEDEON, Director;
ROBERT M. HERNANDEZ, Director;
EDITH E. HOLIDAY, Director;
JOHN H. ODLE, Director;
WESLEY W. VON SCHACK, Director
/s/ TIMOTHY G. RUPERT March 14, 2002
------------------------------------------------------------
T. G. Rupert
Attorney-in-Fact
/s/ TIMOTHY G. RUPERT March 14, 2002
------------------------------------------------------------
T. G. Rupert
Director and President and Chief Executive Officer
(Principal Executive Officer)
48
INDEX TO EXHIBITS
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION NUMBER
------- ----------- ----------
2.0 Amended and Restated Reorganization Agreement, incorporated
by reference to Exhibit 2.1 to the Company's Registration
Statement on Form S-1 No. 33-30667 Amendment No. 1
2.1 Stock Purchase Agreement, dated as of October 1, 1998, by
and among RTI International Metals, Inc., New Century
Metals, Inc., Richard R. Burkhart and Joseph H. Rice,
incorporated by reference to Exhibit 2.1 and 2.2 to the
Company's Current Report on Form 8-K dated October 15, 1998
2.2 Asset Purchase Agreement, dated October 1, 1998, by and
among Weld-Tech Engineering Services, L.P. and Weld-Tech
Engineering, L.P., incorporated by reference to Exhibit 2.1
and 2.2 to the Company's Current Report on Form 8-K dated
October 15, 1998
3.1 Amended and Restated Articles of Incorporation of the
Company, effective April 29, 1999, incorporated by reference
to Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1999
3.2 Amended Code of Regulations of the Company, incorporated by
reference to Exhibit 3.3 to the Company's Registration
Statement on Form S-4 No. 333-61935
4.1 Credit Agreement between RTI International Metals, Inc. and
PNC Bank, National Association, as agent; Mellon Bank,
National Association of Pennsylvania and Bank One, National
Association as co-agents, dated as of September 30, 1998,
incorporated by reference to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended September 30,
1998
4.2 Amendment to Credit Agreement between RTI International
Metals, Inc. and PNC Bank, National Association, as agent:
Mellon Bank, National Association of Pennsylvania and Bank
One, National Association, as co-agents, dated May 11, 2000,
incorporated by reference to Exhibit 4.2 to the Company's
Annual Report on Form 10-K for the year ended December 31,
2000
10.1 RMI Company Annual Incentive Compensation Plan, incorporated
by reference to Exhibit 10.3 to the Company's Registration
Statement on Form S-1 No. 33-30667 Amendment No. 2
10.2 RMI Titanium Company 1989 Stock Option Incentive Plan,
incorporated by reference to exhibit 10.4 to the Company's
Registration Statement on Form S-1 No. 33-30667 Amendment
No. 2.
10.3 RTI International Metals, Inc. Supplemental Pension Plan
effective August 1, 1987, and amended as of January 28,
2000, incorporated by reference to Exhibit 10.5 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 2000
10.4 RTI International Metals, Inc. Excess Benefits Plan
effective July 18, 1991, as amended January 28, 2000,
incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the year ended December 31,
2000
10.5 RTI International Metals, Inc., 1995 Stock Plan incorporated
by reference to Exhibit 10.11 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995
10.6 Employment agreement, dated August 1, 1999, between the
Company and John H. Odle, incorporated by reference to
Exhibit 10.10 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999
10.7 Employment agreement, dated August 1, 1999, between the
Company and T. G. Rupert, incorporated by reference to
Exhibit 10.11 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999
10.8 Employment agreement, dated August 1, 1999 between the
Company and Dawne S. Hickton, incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999
49
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION NUMBER
------- ----------- ----------
10.9 Employment agreement, dated August 1, 1999 between the
Company and Lawrence W. Jacobs, incorporated by reference to
Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999
10.10 Employment agreement, dated November 1, 1999, between the
Company and Gordon L. Berkstresser, incorporated by
reference to Exhibit 10.14 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1999
21 Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
24 Powers of Attorney
99.1 Financial Statements of The RMI Employee Savings and
Investment Plan for the year ended December 31, 2001 (to be
filed by amendment)
99.2 Financial Statements of The RMI Bargaining Unit Employee
Savings and Investment Plan for the year ended December 31,
2001 (to be filed by amendment)
50
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
RTI International Metals, Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 25, 2002, appearing in this Annual Report on Form 10-K of RTI
International Metals, Inc. also included an audit of the financial statement
schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in connection with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
January 25, 2002
S-1
RTI INTERNATIONAL METALS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
(CHARGED)
BALANCE AT CREDITED TO WRITEOFFS BALANCE
BEGINNING COSTS AND AGAINST AT END
DESCRIPTION OF YEAR EXPENSES ALLOWANCE OTHER OF YEAR
----------- ---------- ----------- --------- -------- -------
Year ended December 31, 2001:
Allowance for doubtful accounts.......... $ (926) $(820) $527 $ -- $(1,219)
======= ===== ==== ======== =======
Valuation allowance for deferred income
taxes................................. $ -- $ -- $ -- $ -- $ --
======= ===== ==== ======== =======
Year ended December 31, 2000:
Allowance for doubtful accounts.......... $(1,454) $ 197 $331 $ -- $ (926)
======= ===== ==== ======== =======
Valuation allowance for deferred income
taxes................................. $ (312) $ -- $312 $ -- $ --
======= ===== ==== ======== =======
Year ended December 31, 1999:
Allowance for doubtful accounts.......... $(1,067) $(256) $ -- $ (131)(a) $(1,454)
======= ===== ==== ======== =======
Valuation allowance for deferred income
taxes................................. $ -- $(312) $ -- $ -- $ (312)
======= ===== ==== ======== =======
---------------
(a) Allowance for doubtful accounts recorded in final opening balance sheet of
subsidiaries acquired in fourth quarter of 1998.
S-2