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RTI International Metals 10-Q 2011 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One)
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011 OR
For the transition period from to Commission File Number: 001-14437 RTI INTERNATIONAL METALS, INC. (Exact name of registrant as specified in its charter)
(412) 893-0026 Registrant’s telephone number, including area code: Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ Number of shares of the Corporation’s common stock (“Common Stock”) outstanding as of July 29, 2011 was 30,189,961.
Table of ContentsRTI INTERNATIONAL METALS, INC AND CONSOLIDATED SUBSIDIARIES As used in this report, the terms “RTI,” “Company,” “Registrant,” “we,” “our,” and “us,” mean RTI International Metals, Inc., its predecessors, and consolidated subsidiaries, taken as a whole, unless the context indicates otherwise.
INDEX
Table of ContentsPART I—FINANCIAL INFORMATION
RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (In thousands, except share and per share amounts)
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited) (In thousands, except share and per share amounts)
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Condensed Consolidated Statement of Comprehensive Income and Shareholders’ Equity (Unaudited) (In thousands, except share amounts)
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated) Note 1—Basis of Presentation: The accompanying unaudited Condensed Consolidated Financial Statements of RTI International Metals, Inc. and its subsidiaries (the “Company” or “RTI”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, these financial statements contain all of the adjustments of a normal and recurring nature considered necessary to state fairly the results for the interim periods presented. The results for the interim periods are not necessarily indicative of the results to be expected for the year. The balance sheet at December 31, 2010 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by GAAP for complete financial statements. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these Condensed Consolidated Financial Statements be read in conjunction with accounting policies and Notes to the Consolidated Financial Statements included in the Company’s 2010 Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 1, 2011. Note 2—Organization: The Company is a leading producer and global supplier of titanium mill products and a manufacturer of fabricated titanium and specialty metal components for the international aerospace, defense, energy, and industrial and consumer markets. It is a successor to entities that have been operating in the titanium industry since 1951. The Company first became publicly traded on the New York Stock Exchange in 1990 under the name RMI Titanium Co. and the symbol “RTI”, and was reorganized into a holding company structure in 1998 under the name RTI International Metals, Inc. The Company conducts business in three segments: the Titanium Group, the Fabrication Group, and the Distribution Group. The Titanium Group melts, processes, and produces a complete range of titanium mill products which are further processed by its customers for use in a variety of commercial aerospace, defense, and industrial and consumer applications. With operations in Niles, Ohio; Canton, Ohio; and Hermitage, Pennsylvania; and a new facility under construction in Martinsville, Virginia, the Titanium Group has overall responsibility for the production of primary mill products including, but not limited to, bloom, billet, sheet, and plate. In addition, the Titanium Group produces ferro titanium alloys for its steel-making customers. The Titanium Group also focuses on the research and development of evolving technologies relating to raw materials, melting and other production processes, and the application of titanium in new markets. The Fabrication Group is comprised of companies with significant hard-metal expertise that extrude, fabricate, machine, and assemble titanium and other specialty metal parts and components. Its products, many of which are complex engineered parts and assemblies, serve commercial aerospace, defense, oil and gas, power generation, medical device, and chemical process industries, as well as a number of other industrial and consumer markets. With operations located in Houston, Texas; Washington, Missouri; Laval, Canada; and a representative office in China, the Fabrication Group provides value-added products and services such as engineered tubulars and extrusions, fabricated and machined components and sub-assemblies, as well as engineered systems for deepwater oil and gas exploration and production infrastructure.
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
The Distribution Group stocks, distributes, finishes, cuts-to-size, and facilitates just-in-time delivery services of titanium, steel, and other specialty metal products, primarily nickel-based specialty alloys. With operations in Garden Grove, California; Windsor, Connecticut; Sullivan, Missouri; Staffordshire, England; and Rosny-Sur-Seine, France; the Distribution Group is in close proximity to its wide variety of commercial aerospace, defense, and industrial and consumer customers. Both the Fabrication Group and the Distribution Group utilize the Titanium Group as their primary source of titanium mill products. Note 3—Stock-Based Compensation: Stock Options A summary of the status of the Company’s stock options as of June 30, 2011, and the activity during the six months then ended, is presented below:
The fair value of stock options granted was estimated at the date of grant using the Black-Scholes option-pricing model based upon the assumptions noted in the following table:
The weighted-average grant date fair value of stock option awards granted during the six months ended June 30, 2011 was $14.70. Restricted Stock A summary of the status of the Company’s nonvested restricted stock as of June 30, 2011, and the activity during the six months then ended, is presented below:
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
The fair value of restricted stock grants was calculated using the market value of the Company’s Common Stock on the date of issuance. The weighted-average grant date fair value of restricted stock awards granted during the six months ended June 30, 2011 was $29.14. Performance Share Awards A summary of the Company’s performance share award activity during the six months ended June 30, 2011 is presented below:
The fair value of the performance share awards granted was estimated by the Company at the grant date using a Monte Carlo model. The weighted-average grant-date fair value of performance shares awarded during the six months ended June 30, 2011 was $43.68. Note 4—Income Taxes: Management estimates the annual effective income tax rate quarterly, based on current annual forecasted results. Items unrelated to current year ordinary income are recognized entirely in the period identified as a discrete item of tax. The quarterly income tax provision is comprised of tax on ordinary income provided at the most recent estimated annual effective tax rate, increased or decreased for the tax effect of discrete items. For the six months ended June 30, 2011, the estimated annual effective tax rate applied to ordinary income was 35.0% compared to a rate of (52.1)% for the six months ended June 30, 2010. The effective tax rate in each year results from the mix of foreign losses benefitted at lower rates and domestic income taxed at higher rates. Although these factors are present in both 2011 and 2010, the differing mix of foreign losses and domestic income between the periods has a substantial influence on the tax rates for each respective period. The level of expected annual operating results forecasted in each period amplifies the rate impact of these factors. Inclusive of discrete items, the Company recognized a provision for income taxes of $2,621, or 37.0% of pretax income, and $(7,831), or (56.7)% of pretax income, for federal, state, and foreign income taxes for the six months ended June 30, 2011 and 2010, respectively. Discrete items for the six months ended June 30, 2011 were not material. Discrete items totaling $638 increased the benefit from income taxes for the six months ended June 30, 2010 and were comprised of a $1.6 million charge associated with repeal of the Medicare Part D subsidy contained in healthcare legislation enacted in during the first quarter of 2010 with the remainder associated with the effective settlement of an income tax examination and other immaterial items. Note 5—Earnings Per Share: Basic earnings per share was computed by dividing net income by the weighted-average number of shares of Common Stock outstanding for each respective period. Diluted earnings per share was calculated by dividing net income by the weighted-average of all potentially dilutive shares of Common Stock that were outstanding during the periods presented. At June 30, 2011, the Company had $230 million aggregate principal amount of 3.0% Convertible Senior Notes due 2015 (the “Notes”) outstanding. Under the Financial Accounting Standards Board’s (the “FASB”)
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
authoritative guidance, earnings per share for convertible notes with an optional net share settlement provision is calculated under the “If Converted” method. For the three and six months ended June 30, 2011, diluted earnings per share was calculated by including both cash and non-cash interest expense related to the Notes and excluding the shares underlying the Notes in accordance with the “If Converted” method. Actual weighted-average shares of Common Stock outstanding used in the calculation of basic and diluted earnings per share for the three and six months ended June 30, 2011 and 2010 were as follows:
For the three and six months ended June 30, 2011, options to purchase 249,865 and 248,601 shares of Common Stock, at an average price of $48.18 and $48.31, respectively, were excluded from the calculation of diluted earnings per share because their effects were antidilutive. For the three and six months ended June 30, 2010, options to purchase 276,603 and 261,727 shares of Common Stock, at an average price of $46.61 and $47.82, respectively, were excluded from the calculation of diluted earnings per share because their effects were antidilutive. Note 6—Cash, cash equivalents, short-term investments, and marketable securities: Cash and cash equivalents The Company considers all highly-liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents principally consist of investments in short-term money market funds and corporate commercial paper. Available-for-sale securities Investments in marketable securities that are being held for an indefinite period are classified as available-for-sale and are recorded at fair value based on market quotes using the specific identification method, with unrealized gains and losses recorded as a component of accumulated other comprehensive income until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis. The Company considers these investments to be available-for-sale as they may be sold to fund other investment opportunities as they arise. The major categories of the Company’s cash equivalents and marketable securities are as follows: Money market mutual funds The Company invests in money market mutual funds that seek to maintain a stable net asset value of $1.00, while limiting overall exposure to credit, market, and liquidity risks.
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
Commercial paper The Company invests in high quality commercial paper issued by highly-rated corporations. By definition, the stated maturity on commercial paper obligations cannot exceed 270 days. Short-term municipal bond fund The dividends received by the Company are not taxable for U.S. Federal income tax purposes. The fund invests in municipal bonds that are near their maturity. Corporate notes and bonds The Company evaluates its corporate debt securities based upon a variety of factors including, but not limited to, the credit rating of the issuer. All of the Company’s corporate debt securities are rated as investment grade by the major rating agencies. U.S. government agencies These U.S. government guaranteed debt securities are rated as investment grade by the major rating agencies and are publicly traded and valued. Cash, cash equivalents, short-term investments, and marketable securities consist of the following:
The Company’s short-term investments and marketable securities at June 30, 2011 and December 31, 2010 were as follows:
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
Available-for-sale investments at June 30, 2011 had contractual maturities as follows:
The Company classifies investments maturing within one year as short-term investments. Investments maturing in excess of one year are classified as noncurrent. As of June 30, 2011, no investments classified as available-for-sale have been in a continuous unrealized loss position for greater than twelve months. The Company believes that the unrealized losses on the available-for-sale portfolio as of June 30, 2011 are temporary in nature and are related to market interest rate fluctuations and not indicative of a deterioration in the creditworthiness of the issuers. Note 7—Fair Value Measurements: For certain of the Company’s financial instruments and account groupings, including cash and cash equivalents, accounts receivable, accounts payable, accrued wages and other employee costs, unearned revenue, and other accrued liabilities, the carrying value approximates the fair value of these instruments and groupings. Listed below are the Company’s assets and liabilities, and their fair values, that are measured at fair value on a recurring basis. There were no transfers between levels for the six months ended June 30, 2011.
As of June 30, 2011, the Company did not have any financial assets or liabilities that were measured at fair value on a non-recurring basis.
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
The carrying amounts and fair values of financial instruments for which the fair value option was not elected were as follows:
The fair value of long-term debt was estimated based on the quoted market price for the debt. Note 8—Receivables: Receivables are carried at net realizable value. Estimates are made as to the Company’s ability to collect outstanding receivables, taking into consideration the amount, the customer’s financial condition, and the age of the receivable. The Company ascertains the net realizable value of amounts owed and provides an allowance when collection becomes doubtful. Receivables are expected to be collected in the normal course of business and consisted of the following:
Note 9—Inventories: Inventories are valued at cost as determined by the last-in, first-out (“LIFO”) method for approximately 61% and 63% of the Company’s inventories at June 30, 2011 and December 31, 2010, respectively. 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, 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. Inventories consisted of the following:
As of June 30, 2011 and December 31, 2010, the current cost of inventories exceeded their carrying value by $62,607 and $59,313, respectively. The Company’s FIFO inventory value is used to approximate current costs. Note 10—Goodwill and Other Intangible Assets: The Company does not amortize goodwill; rather, the carrying amount of goodwill is tested, at least annually, for impairment. Absent any events throughout the year which would indicate a potential impairment has occurred, the Company performs its annual impairment testing during the fourth quarter. While there have been no impairments during the first six months of 2011, uncertainties or other factors that could result in a potential impairment in future periods include continued long-term production delays or a
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
significant decrease in expected demand related to the Boeing 787 Dreamliner® program, as well as any cancellation of one of the other major aerospace programs the Company currently supplies, including the Joint Strike Fighter program or the Airbus family of aircraft, including the A380 and A350XWB programs. In addition, the Company’s ability to ramp up its production of these programs in a cost efficient manner may also impact the results of a future impairment test. Goodwill. The carrying amount of goodwill attributable to each segment at December 31, 2010 and June 30, 2011 was as follows:
Intangibles. Intangible assets consist of customer relationships as a result of the Company’s prior acquisitions. These finite-lived intangible assets, which were initially valued at fair value using an income approach, are being amortized over 20 years. In the event that long-term demand or market conditions change and the expected future cash flows associated with these assets is reduced, a write-down or acceleration of the amortization period may be required. There were no intangible assets attributable to either the Titanium Group or Distribution Group at December 31, 2010 and June 30, 2011. The carrying amount of intangible assets attributable to our Fabrication Group at December 31, 2010 and June 30, 2011 was as follows:
Note 11—Unearned Revenue: The Company reported a liability for unearned revenue of $22,889 and $28,358 as of June 30, 2011 and December 31, 2010, respectively. These amounts primarily represent payments received in advance from commercial aerospace, defense, and energy market customers on long-term orders, which the Company has not recognized as revenues. Note 12—Long-term Debt: Long-term debt consisted of:
During the three and six months ended June 30, 2011, the Company recorded long-term debt discount amortization of $2,195 and $4,361, respectively, as a component of interest expense. Interest expense from the amortization of debt issuance costs was $280 and $560 for the three and six months ended June 30, 2011, respectively. Additionally, the Company capitalized interest totaling $164 and $258 for the three and six months ended June 30, 2011, respectively.
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
Note 13—Employee Benefit Plans: Components of net periodic pension and other post-retirement benefit cost for the three and six months ended June 30, 2011 and 2010 for those salaried and hourly covered employees were as follows:
During the three and six months ended June 30, 2011, the Company made cash contributions totaling $1.3 million and $7.0 million, respectively, to its qualified defined benefit pension plans. The Company expects to make additional cash contributions of approximately $20.9 million during the remainder of 2011 in order to maintain its desired funding status. Note 14—Commitments and Contingencies: From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. In the Company’s opinion, the ultimate liability, if any, resulting from these matters will have no significant effect on its Consolidated Financial Statements. Given the critical nature of many of the aerospace end uses for the Company’s products, including specifically their use in critical rotating parts of gas turbine engines, the Company maintains aircraft products liability insurance of $500 million, which includes grounding liability. Environmental Matters Based on available information, the Company believes that its share of possible environmental-related costs is in a range from $737 to $2,209 in the aggregate. At June 30, 2011 and December 31, 2010, the amounts accrued for future environmental-related costs were $1,369 and $1,403, respectively. Of the total amount accrued at June 30, 2011, $100 was expected to be paid out within the next twelve months, and was included in the other accrued liabilities line of the balance sheet. The remaining $1,269 was recorded in other noncurrent liabilities. Other Matters 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 Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of the operations, cash flows, or the financial position of the Company. Note 15—Segment Reporting: The Company has three reportable segments: the Titanium Group, the Fabrication Group, and the Distribution Group. Both the Fabrication Group and the Distribution Group utilize the Titanium Group as their primary source of titanium mill products. Intersegment sales are accounted for at prices that 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 deferred taxes.
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
A summary of financial information by reportable segment is as follows:
Note 16—New Accounting Standards: In April 2011, the FASB issued ASU No. 2011-02, “Receivables – A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” This ASU clarifies when a restructuring of receivables constitutes a troubled debt restructuring for a creditor. This applies to both the recording of an impairment loss and related disclosures for a troubled debt restructuring. The amendments in this ASU are effective for interim
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
and annual periods beginning on or after June 15, 2011, and apply retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The Company does not expect the new guidance to have a material impact on its Consolidated Financial Statements. In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” The new guidance amends current fair value measurement and enhances disclosure requirements to include expansion of the information required for “Level 3” measurements. The amendments in this ASU are effective for fiscal years and interim periods beginning after December 15, 2011 and are to be applied prospectively. The Company does not expect the new guidance to have a material impact on its Consolidated Financial Statements. In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income – Presentation of Comprehensive Income.” This ASU requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments in this ASU are effective for interim and annual periods beginning on or after December 15, 2011, and apply retrospectively. Other than the changes to the presentation of the components of comprehensive income, the Company does not expect the new guidance to have a material impact on its Consolidated Financial Statements. Note 17—Guarantor Subsidiaries: The Notes are jointly and severally, fully and unconditionally guaranteed by RTI International Metals, Inc., and several of its 100% owned subsidiaries (the “Guarantor Subsidiaries”). Separate financial statements of RTI International Metals, Inc. and each of the Guarantor Subsidiaries are not presented because the guarantees are full and unconditional and the Guarantor Subsidiaries are jointly and severally liable. The Company believes separate financial statements and other disclosures concerning the Guarantor Subsidiaries would not be material to investors in the Notes. There are no current restrictions on the ability of the Guarantor Subsidiaries to make payments under the guarantees referred to above, except, however, the obligations of each Subsidiary Guarantor under its guarantee will be limited to the maximum amount as will result in obligations of such Subsidiary Guarantor under its guarantee not constituting a fraudulent conveyance or fraudulent transfer for purposes of bankruptcy law, the Uniform Conveyance Act, the Uniform Fraudulent Transfer Act, or any similar Federal or state law.
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
The following tables present Condensed Consolidating Financial Statements as of June 30, 2011 and December 31, 2010 and for the three and six months ended June 30, 2011 and 2010: Condensed Consolidating Statement of Operations Three Months Ended June 30, 2011
Note to Condensed Consolidating Statement of Operations: The parent company charges a management fee to the subsidiaries based upon its budgeted annual expenses. A credit in selling, general, and administrative expenses (“SG&A”) for the parent company indicates that actual expenses were lower than budgeted expenses. A credit in parent company SG&A is offset by an equal debit amount in the subsidiaries’ SG&A.
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
Condensed Consolidating Statement of Operations Three Months Ended June 30, 2010
Notes to Condensed Consolidating Statement of Operations: During the three months ended June 30, 2010, rebates on sales were provided to one of the Company’s customers. This amount was recorded at the parent company as it was outside of the ordinary course of business for contracts of this type and the contract was between the parent company and the customer. The parent company charges a management fee to the subsidiaries based upon its budgeted annual expenses. During the three months ended June 30, 2010, the guarantor subsidiaries received a credit in SG&A totaling $15.4 million related to the settlement of Airbus’ 2009 contractual obligations.
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
Condensed Consolidating Statement of Operations Six Months Ended June 30, 2011
Note to Condensed Consolidating Statement of Operations: The parent company charges a management fee to the subsidiaries based upon its budgeted annual expenses. A credit in SG&A for the parent company indicates that actual expenses were lower than budgeted expenses. A credit in parent company SG&A is offset by an equal debit amount in the subsidiaries’ SG&A.
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
Condensed Consolidating Statement of Operations Six Months Ended June 30, 2010
Notes to Condensed Consolidating Statement of Operations: During the six months ended June 30, 2010, the parent company recorded net sales related to the March 2010 settlement of Airbus’ 2009 contractual obligations. Additionally, during the six months ended June 30, 2010, rebates on sales were provided to one of the Company’s customers. This amount was recorded at the parent company as it was outside of the ordinary course of business for contracts of this type and the contract was between the parent company and the customer. The parent company charges a management fee to the subsidiaries based upon its budgeted annual expenses. During the six months ended June 30, 2010, the guarantor subsidiaries received a credit in SG&A totaling $15.4 million related to the settlement of Airbus’ 2009 contractual obligations.
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
Condensed Consolidating Balance Sheet As of June 30, 2011
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
Condensed Consolidating Balance Sheet As of December 31, 2010
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
Condensed Consolidating Statement of Cash Flows Six Months Ended June 30, 2011
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Table of ContentsRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (In thousands, except share and per share amounts, unless otherwise indicated)
Condensed Consolidating Statement of Cash Flows Six Months Ended June 30, 2010
Note 18—Subsequent Events: On July 25, 2011, the Company’s RTI Hamilton, Inc. subsidiary and Tronox LLC (“Tronox”) reached an agreement in principle to settle the ongoing litigation regarding a contract for the long-term supply of titanium tetrachloride. Under the terms of the agreement to settle, the Company will pay Tronox $9.9 million in full satisfaction of its contractual take-or-pay obligation. The Company had previously accrued a liability of $11.0 million related to this litigation. The $1.1 million accrual reduction was recorded during the three and six months ended June 30, 2011, as a reduction to Cost of Sales.
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Forward-Looking Statements The following discussion should be read in connection with the information contained in the condensed Consolidated Financial Statements and condensed 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 is subject to the safe harbor created by that Act. Such forward-looking statements may be identified by their use of words like “expects,” “anticipates,” “believes,” “intends,” “estimates,” “projects,” or other words of similar meaning. Forward-looking statements are based on expectations and assumptions regarding future events. In addition to factors discussed throughout this quarterly report, the following factors and risks should also be considered, including, without limitation:
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 in this filing, as well as in other filings filed with or furnished to 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. Except as may be required by applicable law, we undertake no duty to update our forward-looking information. Overview RTI International Metals, Inc. (the “Company,” “RTI,” “we,” “us,” or “our”) is a leading producer and global supplier of titanium mill products and a supplier of fabricated titanium and specialty metal components for the international aerospace, defense, energy, and industrial and consumer markets. The Company conducts business in three segments.
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Table of ContentsThe Titanium Group melts, processes, and produces a complete range of titanium mill products which are further processed by its customers for use in a variety of commercial aerospace, defense, and industrial and consumer applications. With operations in Niles, Ohio; Canton, Ohio; and Hermitage, Pennsylvania; and the new facility under construction in Martinsville, Virginia, the Titanium Group has overall responsibility for the production of primary mill products including, but not limited to, bloom, billet, sheet, and plate. In addition, the Titanium Group produces ferro titanium alloys for its steel-making customers. The Titanium Group also focuses on the research and development of evolving technologies relating to raw materials, melting and other production processes, and the application of titanium in new markets. The Fabrication Group is comprised of companies with significant hard-metal expertise that extrude, fabricate, machine, and assemble titanium and other specialty metal parts and components. Its products, many of which are complex engineered parts and assemblies, serve the commercial aerospace, defense, oil and gas, power generation, medical device, and chemical process industries, as well as a number of other industrial and consumer markets. With operations located in Houston, Texas; Washington, Missouri; Laval, Canada; and a representative office in China, the Fabrication Group provides value-added products and services such as engineered tubulars and extrusions, fabricated and machined components and sub-assemblies, as well as engineered systems for deepwater oil and gas exploration and production infrastructure. The Distribution Group stocks, distributes, finishes, cuts-to-size, and facilitates just-in-time delivery services of titanium, steel, and other specialty metal products, primarily nickel-based specialty alloys. With operations in Garden Grove, California; Windsor, Connecticut; Sullivan, Missouri; Staffordshire, England; and Rosny-Sur-Seine, France; the Distribution Group services a wide variety of commercial aerospace, defense, and industrial and consumer customers. Both the Fabrication and Distribution Groups access the Titanium Group as their primary source of titanium mill products. For the three months ended June 30, 2011 and 2010, approximately 51% and 43%, respectively, of the Titanium Group’s sales were to the Fabrication and Distribution Groups. For the six months ended June 30, 2011 and 2010, approximately 50% and 40%, respectively, of the Titanium Group’s sales were to the Fabrication and Distribution Groups. Trends and Uncertainties We believe that the long-term demand indicators in the titanium industry, driven largely by the significant backlog in the commercial aerospace market, remain strong as we move to the middle of the next decade. Build rate increases by Boeing and Airbus, supported by the significant commercial aircraft order activity at the 2011 Paris Air Show, and the increasing order activity in our titanium mill product business support that belief. In addition, we continue to win incremental value-added packages in validation of our strategy to move further up the value chain. In the near-term, we will be impacted by increasing titanium sponge prices as the underlying raw material input costs increase. In the medium to long-term, we expect these costs to moderate as supply catches up with demand. Additionally, while several of our major raw material suppliers are located in Japan, which is recovering from the effects of the recent natural disasters, we do not expect to encounter significant raw material supply disruptions.
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Table of ContentsThree Months Ended June 30, 2011 Compared To Three Months Ended June 30, 2010 Net Sales. Net sales for our reportable segments, excluding intersegment sales, for the three months ended June 30, 2011 and 2010 was as follows:
The combination of a 10% increase in shipments and a 9% increase in average realized selling prices of prime mill products to our trade customers resulted in a $5.1 million increase in the Titanium Group’s net sales. Additionally, ferro-alloy sales increased $0.7 million due to increased demand from our specialty steel customers. The decrease in the Fabrication Group’s net sales was principally the result of a reduction of $11.0 million in sales to our energy market customers due to the slowdown in drilling permitting in the Gulf of Mexico during the current year and the delivery of several engineered components supporting the containment of the oil spill in the Gulf of Mexico in the prior year. This impact was partially offset by higher shipments to military and commercial aerospace markets in the current period. The increase in the Distribution Group’s net sales was primarily related to higher demand for our titanium products, primarily in the commercial aerospace market, resulting in a $13.7 million improvement. Additionally, higher demand for our specialty metals products increased net sales by $3.6 million. These increases were partially offset by lower military sales in the current period. Gross Profit. Gross profit for our reportable segments for the three months ended June 30, 2011 and 2010 was as follows:
Improved operational efficiency in the Titanium Group increased gross profit by $4.1 million. Additionally, a higher margin sales mix and higher sales levels of prime mill products increased gross profit by $4.0 million and $1.3 million, respectively. Furthermore, the Titanium Group was favorably impacted $1.1 million due to the agreement to settle the dispute regarding the Tronox supply contract. The decrease in the Fabrication Group’s gross profit was primarily driven by a reduction in sales to our energy market customers, principally due to the slowdown in drilling permitting in the Gulf of Mexico during the current year and, the delivery of several engineered components supporting the containment of the oil spill in the Gulf of Mexico, in 2010 and the continued low level of deliveries related to the Boeing 787 Pi Box program, partially offset by higher shipments to the military and commercial aerospace markets in the current period. The increase in the Distribution Group’s gross profit was principally related to increased volume, which increased gross profit $4.2 million, driven by higher customer demand in the commercial aerospace market, partially offset by a lower margin sales mix in the current period, which decreased gross profit by $2.5 million.
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Table of ContentsSelling, General, and Administrative Expenses. Selling, general, and administrative expenses (“SG&A”) for our reportable segments for the three months ended June 30, 2011 and 2010 were as follows:
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