Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to             

Commission File Number: 001-14437

RTI INTERNATIONAL METALS, INC.

(Exact name of registrant as specified in its charter)

 

Ohio   52-2115953

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

Westpointe Corporate Center One, 5th Floor

1550 Coraopolis Heights Road

Pittsburgh, Pennsylvania

  15108-2973
(Address of principal executive offices)   (Zip Code)

(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.    x  Yes    ¨  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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  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.

 

  Large accelerated filer    x     Accelerated filer   ¨
  Non-accelerated filer    ¨   (Do not check if a smaller company)   Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Number of shares of the Corporation’s common stock (“Common Stock”) outstanding as of November 1, 2013 was 30,557,195.

 

 

 


Table of Contents

RTI 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

 

     Page  
PART I—FINANCIAL INFORMATION  
Item 1.    Financial Statements      1   
  

Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2013 and 2012 (Restated)

     1   
  

Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2013 and 2012 (Restated)

     2   
  

Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2013 and December 31, 2012 (Restated)

     3   
  

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2013 and 2012 (Restated)

     4   
  

Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2013

     5   
  

Notes to Condensed Consolidated Financial Statements (Unaudited)

     6   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      36   
Item 3.    Quantitative and Qualitative Disclosures About Market Risk      46   
Item 4.    Controls and Procedures      47   
PART II—OTHER INFORMATION   
Item 1A.    Risk Factors      47   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      48   
Item 6.    Exhibits      48   

Signatures

     49   

Index to Exhibits

     50   


Table of Contents

PART IFINANCIAL INFORMATION

Item 1. Financial Statements.

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share amounts)

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012
(As Restated)
    2013     2012
(As Restated)
 

Net sales

   $ 196,532      $ 182,545      $ 588,514      $ 521,077   

Cost and expenses:

        

Cost of sales

     151,435        148,895        460,192        420,901   

Selling, general, and administrative expenses

     22,491        21,725        70,040        65,236   

Research, technical, and product development expenses

     1,041        1,012        3,024        3,181   

Asset and asset-related charges

     —          1,617        —          1,617   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     21,565        9,296        55,258        30,142   

Other income (expense), net

     (294     16        965        318   

Interest income

     78        18        159        133   

Interest expense

     (7,387     (4,708     (32,876     (13,195
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     13,962        4,622        23,506        17,398   

Provision for income taxes

     1,670        1,423        3,507        6,048   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to continuing operations

   $ 12,292      $ 3,199      $ 19,999      $ 11,350   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to discontinued operations, net of tax

     —          389        (156     1,413   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 12,292      $ 3,588      $ 19,843      $ 12,763   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to continuing operations:

        

Basic

   $ 0.40      $ 0.11      $ 0.66      $ 0.37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.37      $ 0.11      $ 0.65      $ 0.37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share attributable to discontinued operations:

        

Basic

   $ —        $ 0.01      $ (0.01   $ 0.05   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ —        $ 0.01      $ (0.01   $ 0.05   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding:

        

Basic

     30,325,662        30,137,187        30,285,004        30,117,204   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     40,374,609        30,247,372        30,498,847        30,232,304   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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Table of Contents

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(In thousands, except share and per share amounts)

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012
(As Restated)
     2013     2012
(As Restated)
 

Net income

   $ 12,292       $ 3,588       $ 19,843      $ 12,763   

Other comprehensive income (loss):

          

Foreign currency translation, net of tax of $1,449, $2,427, $(2,471) and $2,220

     2,691         4,508         (4,589     4,123   

Unrealized gains (losses) on investments, net of tax of $10, $0, $(2) and $0

     18         —           (4     —     

Realized losses on investments, net of tax of $0, $0, $0 and $4

     —           —           —          8   

Benefit plan amortization, net of tax of $767, $725, $4,572, and $2,175

     1,250         1,201         9,324        3,608   
  

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     3,959         5,709         4,731        7,739   
  

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income

   $ 16,251       $ 9,297       $ 24,574      $ 20,502   
  

 

 

    

 

 

    

 

 

   

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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Table of Contents

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

 

     September 30,
2013
    December 31,
2012
(As Restated)
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 315,021      $ 97,190   

Short-term investments

     45,187        —     

Receivables, less allowance for doubtful accounts of $736 and $722

     118,827        105,317   

Inventories, net

     420,400        385,116   

Costs in excess of billings

     3,425        2,260   

Deferred income taxes

     31,406        31,380   

Assets of discontinued operations

     —          14,741   

Other current assets

     23,041        11,270   
  

 

 

   

 

 

 

Total current assets

     957,307        647,274   

Property, plant, and equipment, net

     367,849        375,949   

Goodwill

     129,838        130,610   

Other intangible assets, net

     53,042        56,495   

Deferred income taxes

     29,435        33,287   

Other noncurrent assets

     14,910        8,866   
  

 

 

   

 

 

 

Total assets

   $ 1,552,381      $ 1,252,481   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 75,039      $ 91,661   

Accrued wages and other employee costs

     29,801        34,096   

Unearned revenues

     38,467        24,998   

Liabilities of discontinued operations

     —          2,332   

Other accrued liabilities

     26,037        22,550   
  

 

 

   

 

 

 

Total current liabilities

     169,344        175,637   

Long-term debt

     419,249        198,337   

Liability for post-retirement benefits

     44,112        45,066   

Liability for pension benefits

     10,297        20,711   

Deferred income taxes

     73,882        46,384   

Unearned revenues

     12,033        13,013   

Other noncurrent liabilities

     12,134        11,798   
  

 

 

   

 

 

 

Total liabilities

     741,051        510,946   
  

 

 

   

 

 

 

Commitments and Contingencies

    

Shareholders’ equity:

    

Common stock, $0.01 par value; 50,000,000 shares authorized; 31,360,663 and 31,136,899 shares issued; 30,554,253 and 30,354,324 shares outstanding

     314        311   

Additional paid-in capital

     530,415        484,798   

Treasury stock, at cost; 806,410 and 782,575 shares

     (18,798     (18,399

Accumulated other comprehensive loss

     (39,991     (44,722

Retained earnings

     339,390        319,547   
  

 

 

   

 

 

 

Total shareholders’ equity.

     811,330        741,535   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,552,381      $ 1,252,481   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands, except per share amounts)

 

     Nine Months Ended
September 30,
 
     2013     2012
(As Restated)
 

OPERATING ACTIVITIES:

    

Net income

   $ 19,843      $ 12,763   

Adjustment for non-cash items included in net income:

    

Depreciation and amortization

     32,469        29,405   

Asset and asset related charges

     —          1,617   

Goodwill impairments

     484        —     

Deferred income taxes

     349        (4,717

Stock-based compensation

     4,543        3,658   

Excess tax benefits from stock-based compensation activity

     (405     (100

Amortization of discount on long-term debt

     10,592        7,192   

Deferred financing cost writedown

     1,498        —     

Other

     1,115        1,498   

Changes in assets and liabilities:

    

Receivables

     (14,169     (11,799

Inventories

     (36,394     (71,352

Accounts payable

     (11,866     10,424   

Income taxes payable

     (11,566     8,893   

Unearned revenue

     13,502        8,907   

Cost in excess of billings

     (1,165     (1,751

Other current assets and liabilities

     (2,493     (7,181

Other assets and liabilities

     3        (12,907
  

 

 

   

 

 

 

Cash provided by (used in) operating activities

     6,340        (25,450
  

 

 

   

 

 

 

INVESTING ACTIVITIES:

    

Purchase of investments

     (128,324     (4,037

Maturity/sale of investments

     82,957        176,809   

Capital expenditures

     (26,357     (47,879

Divestitures

     10,475        —     

Acquisitions, net of cash acquired

     —          (182,811
  

 

 

   

 

 

 

Cash used in investing activities

     (61,249     (57,918
  

 

 

   

 

 

 

FINANCING ACTIVITIES:

    

Borrowings on long-term debt

     402,500        —     

Repayments on long-term debt

     (120,590     (543

Deferred financing costs

     (12,370     (823

Proceeds from exercise of employee stock options

     1,960        335   

Excess tax benefits from stock-based compensation activity

     405        100   

Purchase of common stock held in treasury

     (399     (742
  

 

 

   

 

 

 

Cash provided by (used in) financing activities

     271,506        (1,673
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     1,234        1,588   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     217,831        (83,453

Cash and cash equivalents at beginning of period

     97,190        156,842   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 315,021      $ 73,389   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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Table of Contents

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

(In thousands, except per share amounts)

 

   

 

Common Stock

    Additional
Paid-In
Capital
    Treasury
Stock
    Retained
Earnings
    Accumulated
Other

Comprehensive
Loss
    Total  
    Shares Outstanding     Amount            

Balance at December 31, 2012
(As Restated)

    30,354,324      $ 311      $ 484,798      $ (18,399   $ 319,547      $ (44,722   $ 741,535   

Net income

    —          —          —          —          19,843        —          19,843   

Other comprehensive income, net

    —          —          —          —          —          4,731        4,731   

Shares issued for directors’ compensation

    25,574        —          —          —          —          —          —     

Shares issued for restricted stock award plans

    91,282        1        1        —          —          —          2   

Stock-based compensation expense recognized

    —          —          4,543        —          —          —          4,543   

Treasury stock purchased at cost

    (14,116     —          —          (399     —          —          (399

Exercise of employee options

    97,432        2        1,699        —          —          —          1,701   

Forfeiture of restricted stock awards

    (9,719     —          —          —          —          —          —     

Tax benefits from stock-based compensation activity

    —          —          (210     —          —          —          (210

Shares issued for employee stock purchase plan

    9,476        —          260        —          —          —          260   

Recognition of Equity component of 2019 Convertible Notes, net of deferred taxes

    —          —          52,687        —          —          —          52,687   

Derecognition of equity component of 2015 Convertible Notes, net of deferred taxes

    —          —          (13,363     —          —          —          (13,363
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

    30,554,253      $ 314      $ 530,415      $ (18,798   $ 339,390      $ (39,991   $ 811,330   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(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, 2012 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 second amended Annual Report on Form 10-K/A for the year ended December 31, 2012 as filed with the Securities and Exchange Commission (the “SEC”) on November 12, 2013.

Note 2—RESTATEMENTS AND REVISIONS:

The Company historically recognized revenues for certain of its long-term contracts upon the delivery of products or the performance of services. In July 2013, the Company began a review of these contracts, and determined that for certain of these contracts, this treatment was incorrect, and a project-based accounting model would be more appropriate. As such, the Company filed Amendment No. 1 to its Annual Report on Form 10-K/A (“Amendment No. 1”) on September 24, 2013 to correctly present the Consolidated Financial Statements as if these contracts were accounted for using the percentage-of-completion accounting model under Accounting Standards Codification (“ASC”) 605-35, Construction-Type and Production-Type Contracts, as well as other related adjustments. ASC 605-35 requires that management continually update estimates of projected revenues and costs for each contract to determine the appropriate amount of revenue and costs to recognize in each period. For certain contracts, since the Company had not been historically recording revenue and expenses in accordance with ASC 605-35, such estimates were not available for historical periods and it was not practicable to create such estimates. As a result, revenues and costs under these contracts have been recorded in equal amounts using the zero profit method under ASC 605-35 until the period when the Company believed it would have been able to estimate its remaining revenues and costs, at which point the cumulative contract gross profit earned to date was recorded. This generally occurred when the primary deliverable under the contract was delivered.

In connection with the preparation of Amendment No. 1, multiple spreadsheets had been created and used to calculate the historic revenue and costs of goods sold under the contracts requiring application of the percentage of-completion methodology under ASC 605-35. During the Company’s third quarter closing process, the Company determined that one of these spreadsheets inadvertently contained computational errors resulting in an inaccurate calculation of the revenues and costs of sales for these contracts. As a result, the Company filed its second amended Annual Report on Form 10-K/A for the year ended December 31, 2012 (“Amendment No. 2”), with the SEC on November 12, 2013.

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

The Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2012 were restated in Amendment No. 1 and Amendment No. 2. In conjunction with Amendment No. 2, the Company also made immaterial corrections associated with its acquisition of its RTI Remmele Engineering and RTI Remmele Medical subsidiaries which increased current deferred tax assets $192, while decreasing goodwill and non-current deferred tax liabilities by $5,260 and $5,068, respectively. The effects of the restatements on the Condensed Consolidated Financial Statements as previously filed for the three and nine months ended September 30, 2012 and the Condensed Consolidated Balance Sheet as of December 31, 2012 are presented below. Columns labeled “Second Restatement Adjustment” represent the reconciling difference between Amendment No. 1 and Amendment No. 2. Additionally, the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2012 and the Condensed Consolidated Balance Sheet as of December 31, 2012 have been recast for the effects of reporting RTI Pierce Spafford as a discontinued operation.

The Condensed Consolidated Financial Statements have been restated for the three and nine months ended September 30, 2012 and for the year ended December 31, 2012 as follows:

 

     Three Months Ended September 30, 2012  
     Previously
Reported
     First
Restatement
Adjustment
    Second
Restatement
Adjustment
     As
Corrected
     Discontinued
Operations
    Currently
Reported
 

Condensed Consolidated Statement of Operations

               

Net sales

   $ 189,075       $ 439      $ 259       $ 189,773       $ (7,228   $ 182,545   

Cost of sales

     151,128         3,689        19         154,836         (5,941     148,895   

Operating income

     12,884         (3,250     240         9,874         (578     9,296   

Income before income taxes

     8,226         (3,250     240         5,216         (594     4,622   

Provision for income taxes

     2,601         (1,049     76         1,628         (205     1,423   

Net income attributable to continuing operations

     5,625         (2,201     164         3,588         (389     3,199   

Basic earnings per share—continuing operations

   $ 0.19       $ (0.07   $ 0.01       $ 0.12       $ (0.01   $ 0.11   

Diluted earnings per share—continuing operations

   $ 0.19       $ (0.07   $ 0.01       $ 0.12       $ (0.01   $ 0.11   
     Nine Months Ended September 30, 2012  
     Previously
Reported
     First
Restatement
Adjustment
    Second
Restatement
Adjustment
     As
Corrected
     Discontinued
Operations
    Currently
Reported
 

Condensed Consolidated Statement of Operations

               

Net sales

   $ 542,202       $ 1,600      $ 752       $ 544,554       $ (23,477   $ 521,077   

Cost of sales

     432,054         7,583        276         439,913         (19,012     420,901   

Operating income

     37,836         (5,983     476         32,329         (2,187     30,142   

Income before income taxes

     25,108         (5,983     476         19,601         (2,203     17,398   

Provision for income taxes

     8,695         (2,017     160         6,838         (790     6,048   

Net income attributable to continuing operations

     16,413         (3,966     316         12,763         (1,413     11,350   

Basic earnings per share—continuing operations

   $ 0.54       $ (0.13   $ 0.01       $ 0.42       $ (0.05   $ 0.37   

Diluted earnings per share—continuing operations

   $ 0.54       $ (0.13   $ 0.01       $ 0.42       $ (0.05   $ 0.37   

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

    December 31, 2012  
    Previously
Reported
    First
Restatement
Adjustment
    Second
Restatement
Adjustment
    As
Corrected
    Discontinued
Operations
    Currently
Reported
 

Condensed Consolidated Balance Sheet

           

Receivables

  $ 108,767      $      $ (1,261   $ 107,506      $ (2,189   $ 105,317   

Inventories, net

    405,289        (5,208     (3,841     396,240        (11,124     385,116   

Cost in excess of billings

           1,841        419        2,260               2,260   

Deferred income taxes

    28,899        1,733        748        31,380               31,380   

Assets of discontinued operations

                                14,741        14,741   

Other current assets

    10,709        561               11,270               11,270   

Total current assets

    650,854        (1,073     (3,935     645,846        1,428        647,274   

Property, plant and equipment, net

    375,996                      375,996        (47     375,949   

Goodwill

    137,251               (5,260     131,991        (1,381     130,610   

Other noncurrent assets

    5,844        3,022               8,866               8,866   

Total assets

    1,259,727        1,949        (9,195     1,252,481               1,252,481   

Accounts payable

    93,656                      93,656        (1,995     91,661   

Accrued wages and other employment costs

    34,433                      34,433        (337     34,096   

Unearned revenues

    26,164        1,984        (3,150     24,998               24,998   

Liabilities of discontinued operations

                                2,332        2,332   

Total current liabilities

    176,803        1,984        (3,150     175,637               175,637   

Deferred income taxes

    51,452               (5,068     46,384               46,384   

Unearned revenues

    9,991        3,022               13,013               13,013   

Total liabilities

    514,158        5,006        (8,218     510,946               510,946   

Retained earnings

    323,581        (3,057     (977     319,547               319,547   

Total shareholders’ equity

    745,569        (3,057     (977     741,535               741,535   

Total liabilities and shareholders’ equity

    1,259,727        1,949        (9,195     1,252,481               1,252,481   

 

     Nine Months Ended September 30, 2012  
     Previously     First
Restatement
    Second
Restatement
    As  
     Reported     Adjustment     Adjustment     Corrected  

Condensed Consolidated Statement of Cash Flows

        

Operating Activities:

        

Net income

   $ 16,413      $ (3,966   $ 316      $ 12,763   

Adjustment for non-cash items included in net income:

        

Deferred income taxes

     (2,860     (2,017     160        (4,717

Other

     675        —          823        1,498   

Changes in assets and liabilities:

        

Inventories

     (81,086     5,785        3,949        (71,352

Unearned revenue

     11,581        350        (3,024     8,907   

Cost in excess of billings

     —          (350     (1,401     (1,751

Other current assets and liabilities

     (6,844     (145     (192     (7,181

Other assets and liabilities

     (13,442     343        192        (12,907

Cash used in operating activities

     (26,273     —          823        (25,450

Financing Activities:

        

Deferred financing costs

     —          —          (823     (823

Cash used in financing activities

     (850     —          (823     (1,673

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

Revision of Prior Period Financial Statements

The Company has determined that the impact of errors related to the second amendment of its Annual Report on Form 10-K/A on the quarterly periods in 2013 was not material to the Quarterly Reports on Form 10-Q for March 31, 2013 and June 30, 2013, respectively, and has corrected the impact of the 2013 errors in this Quarterly Report on Form 10-Q for the nine months ended September 30, 2013. Therefore, the Condensed Consolidated Financial Statements for the three months ended March 31, 2013 and the three and six months ended June 30, 2013 will be revised in future filings. For the three months ended March 31, 2013, Net Sales were overstated by $662 and Cost of Sales was overstated by $26, resulting in an overstatement of Operating Income of $636. For the three months ended June 30, 2013, Net Sales were overstated by $206 and Cost of Sales was understated by $15, resulting in an overstatement of Operating Income of $221. The results for the three and nine months ended September 30, 2013 include an out of period adjustment related to the correction of the error from 2011 as a result of the errors related to Amendment No. 2, which decreased operating income $202. The reconciling difference between the “As Revised” balances for the three months ended March 31, 2013, presented below, and the balances reported in the March 31, 2013 Form 10-Q/A is the column labeled “Revision Adjustment.” The effects of the revision on the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows for the periods ending March 31, 2013 and June 30, 2013, and the Condensed Consolidated Balance Sheets at March 31, 2013 and June 30, 2013 are presented below.

Condensed Consolidated Statements of Operations:

 

    Three months ended March 31, 2013     Three months ended June 30, 2013     Six months ended June 30, 2013  
    As
Reported
    Restatement
Adjustment
    Revision
Adjustment
    As
Revised
    As
Reported
    Revision
Adjustment
    As
Revised
    As
Reported
    Revision
Adjustment
    As
Revised
 

Net sales

  $ 187,470      $ 4,430      $ (662   $ 191,238      $ 200,950      $ (206   $ 200,744      $ 392,850      $ (868   $ 391,982   

Cost and expenses:

                   

Cost of Sales

    149,381        2,605        (26     151,960        156,782        15        156,797        308,768        (11     308,757   

Operating income

    12,180        1,825        (636     13,369        20,545        (221     20,324        34,550        (857     33,693   

Income before income taxes

    7,974        1,825        (636     9,163        602        (221     381        10,401        (857     9,544   

Provision for income taxes

    2,470        512        (178     2,804        (878     (89     (967     2,104        (267     1,837   

Net income attributable to continuing operations

    5,504        1,313        (458     6,359        1,480        (132     1,348        8,297        (590     7,707   

Net income

    5,655        1,313        (458     6,510        1,173        (132     1,041        8,141        (590     7,551   

Earnings per share attributable to continuing operations:

                   

Basic

  $ 0.18      $ 0.04      $ (0.02   $ 0.21      $ 0.05      $ —        $ 0.04      $ 0.27      $ (0.02   $ 0.25   

Diluted

  $ 0.18      $ 0.04      $ (0.02   $ 0.21      $ 0.05      $ —        $ 0.04      $ 0.27      $ (0.02   $ 0.25   

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

Condensed Consolidated Balance Sheets:

 

    March 31, 2013     June 30, 2013  
    As Reported     Restatement
Adjustment
    Revision
Adjustment
    As Revised     As Reported     Revision
Adjustment
    As Revised  

Inventories, net

  $ 421,402      $ (6,430   $ (3,952   $ 411,020      $ 421,152      $ (4,265   $ 416,887   

Costs in excess of billings

    —          1,679        426        2,105        911        1,305        2,216   

Deferred income taxes

    28,962        1,222        926        31,110        30,675        1,015        31,690   

Other current assets

    11,115        634        —          11,749        21,990        —          21,990   

Total current assets

    648,540        (2,895     (2,600     643,045        941,246        (1,945     939,301   

Goodwill

    135,341        —          (5,260     130,081        134,823        (5,260     129,563   

Other noncurrent assets

    5,197        2,870        —          8,067        13,681        —          13,681   

Total assets

    1,245,229        (25     (7,860     1,237,344        1,541,554        (7,205     1,534,349   

Unearned revenues – current

    24,991        (1,151     (1,357     22,483        49,700        (570     49,130   

Total current liabilities

    154,604        (1,151     (1,357     152,096        166,703        (570     166,133   

Deferred income taxes

    51,400        —          (5,068     46,332        81,190        (5,068     76,122   

Unearned revenues – noncurrent

    9,922        2,870        —          12,792        12,496        —          12,496   

Total liabilities

    487,676        1,719        (6,425     482,970        746,783        (5,638     741,145   

Retained earnings

    329,236        (1,744     (1,435     326,057        328,665        (1,567     327,098   

Total shareholders’ equity

    757,553        (1,744     (1,435     754,374        794,771        (1,567     793,204   

Total liabilities and shareholders’ equity

    1,245,229        (25     (7,860     1,237,344        1,541,554        (7,205     1,534,349   

Condensed Consolidated Statements of Cash Flows:

 

    March 31, 2013  
    As
Reported
    Restatement
Adjustment
    Revision
Adjustment
    As
Revised
 

Net income

  $ 5,655      $ 1,313      $ (458   $ 6,510   

Adjustment for non-cash items included in net income:

       

Deferred income taxes

    2,838        512        (178     3,172   

Changes in assets and liabilities:

       

Receivables

    (9,994     —          (1,261     (11,255

Inventories

    (28,351     1,220        111        (27,020

Unearned revenue

    (1,042     (3,286     532        (3,796

Cost in excess of billings

    —          162        (7     155   

Other current assets and liabilities

    (10,447     (73     —          (10,520

Other assets and liabilities

    983        152        —          1,135   

Cash used in operating activities

    (30,723     —          —          (30,723

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

    June 30, 2013  
    As
Reported
    Revision
Adjustment
    As
Revised
 

Net income

  $ 8,141      $ (590   $ 7,551   

Adjustment for non-cash items included in net income:

     

Deferred income taxes

    1,810        (267     1,543   

Changes in assets and liabilities:

     

Receivables

    (3,054     (1,261     (4,315

Inventories

    (34,639     424        (34,215

Unearned revenue

    22,714        1,319        24,033   

Cost in excess of billings

    930        (886     44   

Cash used in operating activities

    619        —          619   

Note 3—ORGANIZATION:

The Company is a leading producer and global supplier of advanced titanium mill products and a manufacturer of fabricated titanium and specialty metals components for the international aerospace, defense, energy, medical device, and other consumer and industrial 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.

Effective January 1, 2013, the Company reorganized into two segments: the Titanium Segment and the Engineered Products and Services Segment. The restructuring reflects the ongoing strategic integration of the Company’s operations, allows it to better communicate its portfolio of capabilities to its customers, and positions management to maximize the Company’s innovation and engineering expertise, manufacturing capacity, and production capabilities. The new structure better reflects the Company’s transformation into an integrated supplier of advanced titanium products across the entire supply chain, and better aligns its resources to support the Company’s long-term growth strategy. In April 2013, the Company continued the strategic realignment of its business by divesting its non-core RTI Pierce Spafford subsidiary, a non-titanium service center that was formerly part of the Distribution Group. Refer to Note 4 of these Condensed Consolidated Financial Statements for further information.

The Titanium Segment melts, processes, produces, stocks, distributes, finishes, cuts-to-size and facilitates just-in-time delivery services of 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; Hermitage, Pennsylvania; Martinsville, Virginia; Garden Grove, California; Windsor, Connecticut; Tamworth, England; and Rosny-Sur-Seine, France, the Titanium Segment has overall responsibility for the production and distribution of primary mill products including, but not limited to, bloom, billet, sheet, and plate. In addition, the Titanium Segment produces ferro titanium alloys for its steel-making customers. The Titanium Segment 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 Engineered Products and Services Segment is comprised of companies with significant hard and soft-metal expertise that form, extrude, fabricate, machine, micro-machine, and assemble titanium, aluminum, and other specialty metal parts and components. Its products, many of which are complex engineered parts and assemblies, serve the commercial aerospace, defense, medical device, oil and gas, power generation, and chemical process industries, as well as a number of other industrial and consumer markets. With operations located in Minneapolis, Minnesota; Houston, Texas; Sullivan, Missouri; Washington, Missouri; Laval, Canada; and Welwyn Garden City, England, the Engineered Products and Services Segment provides value-added

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

products and services such as engineered tubulars and extrusions, fabricated and machined components and sub-assemblies, and components for the production of minimally invasive and implantable medical devices, as well as engineered systems for deepwater oil and natural gas exploration and production infrastructure.

The Engineered Products and Services Segment utilizes the Titanium Segment as its primary source of titanium mill products.

Note 4DISCONTINUED OPERATIONS:

The Company evaluates each of its subsidiaries on an ongoing basis to ensure that its resources are being utilized to optimize and advance the strategic vision of the Company as a whole. In an effort to continue to align the resources of the Company with its long-term growth strategy, during the nine months ended September 30, 2013, the Company sold one of its non-core service centers, and continued to evaluate strategic alternatives for the potential disposition of the second. The results of these two service centers were reported in the former Distribution Group prior to January 1, 2013. The evaluation of the Company’s non-core businesses resulted in a goodwill impairment of $484 during the three months ended March 31, 2013.

In April 2013, the Company completed the sale of its RTI Pierce Spafford subsidiary for approximately $10.5 million of cash and a receivable from escrow of approximately $1.9 million. The escrow funds will be released in October 2014 assuming no claims from the purchaser. The results of RTI Pierce Spafford have been presented as results from discontinued operations on the Company’s Condensed Consolidated Statements of Operations and the related assets and liabilities have been presented separately on the Company’s Condensed Consolidated Balance Sheets as assets and liabilities of discontinued operations at December 31, 2012. The Company’s Condensed Consolidated Financial Statements and the Notes thereto have been conformed to exclude amounts attributable to RTI Pierce Spafford. Management is continuing to evaluate alternatives for the other non-core service center and as a result, it did not qualify for held-for-sale accounting as of September 30, 2013. Its results are reported in the Titanium Segment.

The Company’s results from discontinued operations are summarized below:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
         2013              2012          2013     2012  

Net sales

   $ —         $ 7,228       $ 8,872      $ 23,477   

Income (loss) before income taxes

     —           594         (200     2,203   

Provision for (benefit from) income taxes

     —           205         (44     790   

Net income (loss) from discontinued operations

     —           389         (156     1,413   

 

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fRTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

Assets and liabilities of discontinued operations were comprised of the following at December 31, 2012:

 

     December 31,
2012
 

ASSETS

  

Accounts receivable, net

   $ 2,189   

Inventories, net

     11,124   

Property, plant and equipment, net

     47   

Goodwill

     1,381   
  

 

 

 

Total assets of discontinued operations

   $ 14,741   
  

 

 

 

LIABILITIES

  

Accounts payable

   $ 1,995   

Accrued wages and other employment costs

     337   
  

 

 

 

Total liabilities of discontinued operations

   $ 2,332   
  

 

 

 

Note 5ACCUMULATED OTHER COMPREHENSIVE LOSS:

The components of accumulated other comprehensive loss at September 30, 2013 and December 31, 2012 were as follows:

 

     Foreign
Currency
Translation
    Actuarial
Losses
on Benefit
Plans
    Unrealized
losses
on
Investments
    Total  

Balance at December 31, 2012

   $ 12,990      $ (57,712   $ —        $ (44,722

Other comprehensive income (loss) before reclassifications, net of tax

     (4,589     3,943        (4     (650

Amounts reclassified from other comprehensive loss, net of tax

     —          5,381        —          5,381   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated other comprehensive income (loss) at September 30, 2013

   $ 8,401      $ (48,388   $ (4   $ (39,991
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts reclassified from accumulated other comprehensive loss, net of tax, for the three and nine months ended September 30, 2013 are as follows:

 

     Three Months
Ended September 30, 2013
    Nine Months
Ended September 30, 2013
 

Amortization of Defined Benefit Pension Items

    

Actuarial losses and prior service costs

   $ 2,017      $ 6,463   

Special termination benefits

     —          2,214   

Tax expense

     (767     (3,296
  

 

 

   

 

 

 

Total reclassifications

   $ 1,250      $ 5,381   
  

 

 

   

 

 

 

These amounts have been used in the calculation of net periodic benefit cost for the three and nine months ended September 30, 2013. In addition to the amounts above, the Company recognized a gain of $3,943, net of tax, related to the remeasurement of pension plan assets during the nine months ended September 30, 2013, which is included in accumulated other comprehensive income at September 30, 2013. Refer to Note 14 of these Condensed Consolidated Financial Statements for further information about the Company’s benefit plans.

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

Note 6STOCK-BASED COMPENSATION:

Stock Options

A summary of the status of the Company’s stock options as of September 30, 2013, and the activity during the nine months then ended, is presented below:

 

Stock Options

   Options  

Outstanding at December 31, 2012

     590,850   

Granted

     98,831   

Forfeited

     (15,595

Expired

     (15,743

Exercised

     (97,432
  

 

 

 

Outstanding at September 30, 2013

     560,911   
  

 

 

 

Exercisable at September 30, 2013

     395,351   
  

 

 

 

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:

 

     2013  

Risk-free interest rate

     0.87

Expected dividend yield

     0.00

Expected lives (in years)

     5.0   

Expected volatility

     65.00

The weighted-average grant date fair value of stock option awards granted during the nine months ended September 30, 2013 was $15.80.

Restricted Stock

A summary of the status of the Company’s nonvested restricted stock as of September 30, 2013, and the activity during the nine months then ended, is presented below:

 

Nonvested Restricted Stock Awards

   Shares  

Nonvested at December 31, 2012

     182,179   

Granted

     116,856   

Vested

     (75,222

Forfeited

     (9,719
  

 

 

 

Nonvested at September 30, 2013

     214,094   
  

 

 

 

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 nine months ended September 30, 2013 was $28.90.

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

Performance Share Awards

A summary of the Company’s performance share awards as of September 30, 2013, and the activity during the nine months then ended, is presented below:

 

Performance Share Awards

   Awards
Activity
    Maximum Shares
Eligible to
Receive
 

Outstanding at December 31, 2012

     107,057        214,114   

Granted

     72,164        144,328   

Forfeited

     (22,472     (44,944
  

 

 

   

 

 

 

Outstanding at September 30, 2013

     156,749        313,498   
  

 

 

   

 

 

 

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 nine months ended September 30, 2013 was $41.02.

Note 7—INCOME TAXES (As Restated):

Management estimates the annual effective income tax rate quarterly, based on the most recent forecasted annual 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, adjusted for the tax effect of discrete items. The income tax provision for the three and nine months ended September 30, 2012 has been restated.

For the nine months ended September 30, 2013, the estimated annual effective tax rate applied to ordinary income from continuing operations was 30.9%, compared to a rate of 33.4% for the nine months ended September 30, 2012. The Company’s effective income tax rate decreased 2.5 percentage points from 2012 principally due to a change in the mix of foreign and domestic income between the periods and the larger benefit of the Manufacturing Deduction compared to 2012. These benefits were partially offset by the portion of debt extinguishment charges which were not deductible for income tax purposes.

Inclusive of discrete items, the Company recorded a provision for income taxes of $3,507, or 14.9% of pretax income, and $6,048 or 34.8% of pretax income, for federal, state, and foreign income taxes for the nine months ended September 30, 2013 and 2012, respectively. Discrete items for the nine months ended September 30, 2013 benefited the provision by $3,761 and were primarily related to the revaluation of certain deferred tax liabilities due to changes in state and U.K. tax laws and from the effective settlement of a tax audit during the period. These benefits were partially offset by adjustments for tax returns filed during the period. Discrete items for the nine months ended September 30, 2012 totaled $233 and were principally due to adjustments for tax returns filed during the period.

Note 8—EARNINGS PER SHARE:

Basic earnings per share was computed by dividing net income attributable to common shareholders 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 attributable to common shareholders by the weighted-

 

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

average of all potentially dilutive shares of Common Stock that were outstanding during the periods presented. The Company’s restricted stock awards are considered participating securities. As such, the Company uses the two-class method to compute basic and diluted earnings per share.

At September 30, 2013, the Company had $114.4 million aggregate principal amount of 3.000% Convertible Senior Notes due 2015 (the “2015 Notes”) and $402.5 million aggregate principal amount of 1.625% Convertible Senior Notes due 2019 (the “2019 Notes”) outstanding. The calculation of diluted earnings per share for the three months ended September 30, 2013 was calculated by adding back interest expense, net of tax, related to the 2019 Notes to the numerator and adding the shares underlying the 2019 Notes to the denominator using the “If Converted” method. Shares underlying the 2015 Notes and certain stock options were excluded from the calculation of earnings per share as their effects were antidilutive. Shares excluded from the calculation of earnings per share were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  

2015 Notes

     3,185,213         6,404,902         3,185,213         6,404,902   

2019 Notes

     —           —           9,885,561         —     

Anti-dilutive options (1)

     241,334         425,383         238,090         421,036   

 

(1) Average option price of shares excluded from calculation of earnings per share were $47.50 and $38.26 for the three months ended September 30, 2013 and 2012, respectively and $48.29 and $38.46 for the nine months ended September 30, 2013 and 2012, respectively.

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

The following illustrates the earnings allocation method utilized in the calculation of basic and diluted earnings per share. Actual weighted-average shares of Common Stock outstanding used in the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2013 and 2012 were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012
(As Restated)
    2013     2012
(As Restated)
 

Numerator—basic earnings per share:

        

Net income from continuing operations before allocation of earnings to participating securities

   $ 12,292      $ 3,199      $ 19,999      $ 11,350   

Less: Earnings allocated to participating securities

     (87     (20     (140     (67
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations attributable to common shareholders, after earnings allocated to participating securities used in calculation of basic earnings per share

   $ 12,205      $ 3,179      $ 19,859      $ 11,283   
  

 

 

   

 

 

   

 

 

   

 

 

 

Numerator—diluted earnings per share:

        

Net income from continuing operations before allocation of earnings to participating securities

   $ 12,292      $ 3,199      $ 19,999      $ 11,350   

Interest expense on 2019 Notes, net of tax

     2,853        N/A        N/A        N/A   

Less: Earnings allocated to participating securities

     (107     (20     (140     (67
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations attributable to common shareholders, after earnings allocated to participating securities used in calculation of diluted earnings per share

   $ 15,038      $ 3,179      $ 19,859      $ 11,283   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from discontinued operations before allocation of earnings to participating securities

   $ —        $ 389      $ (156   $ 1,413   

Less: Earnings allocated to participating securities

     —          (2     —          (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from discontinued operations attributable to common shareholders, after earnings allocated to participating securities

   $ —        $ 387      $ (156   $ 1,405   
  

 

 

   

 

 

   

 

 

   

 

 

 

Denominator:

        

Basic weighted-average shares outstanding

     30,325,662        30,137,187        30,285,004        30,117,204   

Effect of dilutive securities

     10,048,947        110,185        213,843        115,100   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted-average shares outstanding

     40,374,609        30,247,372        30,498,847        30,232,304   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share attributable to continuing operations:

        

Basic

   $ 0.40      $ 0.11      $ 0.66      $ 0.37   

Diluted

   $ 0.37      $ 0.11      $ 0.65      $ 0.37   

Earnings (loss) per share attributable to discontinued operations:

        

Basic

   $ —        $ 0.01      $ (0.01   $ 0.05   

Diluted

   $ —        $ 0.01      $ (0.01   $ 0.05   

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

Note 9—CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:

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 with original maturities of less than 90 days.

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.

Commercial paper

The Company invests in high-quality commercial paper issued by highly-rated corporations and governments. By definition, the stated maturity on commercial paper obligations cannot exceed 270 days.

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.

Cash, cash equivalents, and short-term investments consist of the following:

 

     September 30,
2013
     December 31,
2012
 

Cash and cash equivalents:

     

Cash

   $ 69,193       $ 37,473   

Cash equivalents:

     

Commercial paper

     128,448         32,642   

Money market mutual funds

     117,380         27,075   
  

 

 

    

 

 

 

Total cash and cash equivalents

     315,021         97,190   
  

 

 

    

 

 

 

Short-term investments:

     

Commercial paper

     36,398         —     

Corporate notes and bonds

     8,789         —     
  

 

 

    

 

 

 

Total short-term investments

     45,187         —     
  

 

 

    

 

 

 

Total cash, cash equivalents, and short-term investments

   $ 360,208       $ 97,190   
  

 

 

    

 

 

 

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

The Company had no investments at December 31, 2012. The Company’s investments at September 30, 2013 were as follows:

 

     Amortized
Cost
     Gross Unrealized         
        Gains      Losses      Fair Value  

As of September 30, 2013:

           

Commercial paper

   $ 36,397       $ 1       $ —         $ 36,398   

Corporate notes and bonds

     8,794         —           5         8,789   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 45,191       $ 1       $ 5       $ 45,187   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company typically purchases its available-for-sale debt securities either at a premium or a discount. The premium or discount is amortized over the remaining term of each security using the interest method. Amortization is recorded as either a decrease to interest income for premiums or an increase to interest income for discounts. For each of the three and six months ended September 30, 2013, net amortization of premiums and discounts was immaterial.

The Company classifies investments maturing within one year as short-term investments. Investments maturing in excess of one year are classified as noncurrent. All of the Company’s investments had contractual maturities of less than one year at September 30, 2013.

As of September 30, 2013, 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 September 30, 2013 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 10—FAIR VALUE MEASUREMENTS:

For certain of the Company’s financial instruments and account groupings, including cash, short-term investments, accounts receivable, accounts payable, accrued wages and other employee costs, unearned revenue, and other accrued liabilities, the carrying value approximates fair value due to their relative short-term nature.

Listed below are the Company’s assets, and their fair values, which are measured at fair value on a recurring basis, as of September 30, 2013. The Company uses trading prices near the balance sheet date to determine the fair value of its assets measured on a recurring basis. The Company held no investments measured at fair value on a recurring basis as of December 31, 2012. There were no transfers between levels for the three or nine months ended September 30, 2013.

 

     Quoted Market
Prices
(Level 1)
     Significant
Other Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Fair Value  

As of September 30, 2013:

           

Commercial paper

   $ —         $ 36,398       $ —         $ 36,398   

Corporate notes and bonds

     —           8,789         —           8,789   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 45,187       $ —         $ 45,187   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(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:

 

     September 30, 2013      December 31, 2012  
     Carrying
Amount
     Fair
Value
     Carrying
Amount
     Fair
Value
 

Cash and cash equivalents

   $ 315,021       $ 315,021       $ 97,190       $ 97,190   

Current portion of long-term debt

   $ 999       $ 999       $ 957       $ 957   

Long-term debt

   $ 419,249       $ 548,560       $ 198,337       $ 249,113   

The fair value of long-term debt was estimated based on the quoted market prices for the debt (Level 2).

Note 11—INVENTORIES:

Inventories are valued at cost as determined by the last-in, first-out (“LIFO”) method for approximately 57% and 55% of the Company’s inventories at September 30, 2013 and December 31, 2012, 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. As of September 30, 2013 and December 31, 2012, the current cost of inventories exceeded their carrying value by $58,609 and $58,598, respectively. Inventories consisted of the following:

 

     September 30,
2013
    December 31,
2012
(As Restated)
 

Raw materials and supplies

   $ 166,184      $ 160,627   

Work-in-process and finished goods

     312,825        283,087   

LIFO reserve

     (58,609     (58,598
  

 

 

   

 

 

 

Total inventories

   $ 420,400      $ 385,116   
  

 

 

   

 

 

 

Note 12—GOODWILL AND OTHER INTANGIBLE ASSETS:

The carrying amount of goodwill is tested at least annually for impairment. Absent any events throughout the year which would indicate that a potential impairment has occurred, the Company performs its annual impairment testing during the fourth quarter.

Uncertainties or other factors that could result in a potential goodwill impairment include, but are not limited to:

 

    further long-term production delays or a significant decrease in expected demand or component pricing related to the Boeing 787 Dreamliner® program,

 

    the cancellation of one of the other major aerospace or defense programs in which the Company currently participates, such as the Joint Strike Fighter program, the Airbus family of aircraft including the A380 and A350XWB, or the Boeing 747-8 program,

 

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

    a reduction in revenues from medical device customers due to pricing pressures or competing technologies, or

 

    the Company’s ability to ramp up its production 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, 2012 and September 30, 2013 was as follows:

 

     Titanium
Segment
    Engineered
Products and
Services
Segment
    Total  

December 31, 2012 (As Restated)

   $ 10,020      $ 120,590      $ 130,610   

Impairment (Note 4)

     (293     —          (293

Translation adjustment

     —          (479     (479
  

 

 

   

 

 

   

 

 

 

September 30, 2013

   $ 9,727      $ 120,111      $ 129,838   
  

 

 

   

 

 

   

 

 

 

Intangibles. Intangible assets consist primarily of customer relationships, trade names, and developed technology acquired through various business combinations. These intangible assets were valued at fair value at acquisition. In the event that long-term demand or market conditions change and the expected future cash flows associated with these assets are reduced, a write-down or acceleration of the amortization period may be required. Trade names are not amortized, as the Company believes that these assets have an indefinite life and currently intends to continue the use of the Remmele name indefinitely. Other intangible assets are being amortized over the following periods:

 

Intangible Asset

   Amortization
Period
 

Customer relationships

     15-20 years   

Developed technology

     12-20 years   

Backlog

     2 years   

There were no intangible assets attributable to the Titanium Segment at December 31, 2012 and September 30, 2013. The carrying amounts of intangible assets attributable to the Company’s Engineered Products and Services Segment at December 31, 2012 and September 30, 2013 were as follows:

 

     Intangible
Assets
 

December 31, 2012

   $ 56,495   

Amortization

     (2,349

Translation adjustment

     (1,104
  

 

 

 

September 30, 2013

   $ 53,042   
  

 

 

 

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

Note 13—LONG-TERM DEBT:

Long-term debt consisted of:

 

     Effective
Interest
Rate
    September 30,
2013
    December 31,
2012
 

$114.4 million aggregate principal 3.000% Convertible Senior Notes due 2015

     8.675   $ 101,714      $ 196,644   

$402.5 million aggregate principal amount 1.625% Convertible Senior Notes due 2019

     5.875     316,555        —     

Capital leases

     various        1,979        2,650   
    

 

 

   

 

 

 

Total debt

       420,248        199,294   

Less: Current portion of capital leases

       (999     (957
    

 

 

   

 

 

 

Total long-term debt

     $ 419,249      $ 198,337   
    

 

 

   

 

 

 

In April, 2013, the Company issued the 2019 Notes. Interest on the 2019 Notes is payable in arrears on April 15 and October 15 of each year, beginning on October 15, 2013, at a rate of 1.625% per annum. The 2019 Notes are the Company’s general unsecured obligations. The 2019 Notes are jointly and severally, fully and unconditionally (subject to the customary exceptions discussed below) guaranteed by several 100% owned subsidiaries (the “Guarantor Subsidiaries”) of RTI International Metals, Inc. (the “Parent”). Each Guarantor Subsidiary would be automatically released from its guarantee of the 2019 Notes if either (i) it ceased to be a guarantor under the Parent’s $150 million revolving credit facility under its Second Amended and Restated Credit Agreement (the “Credit Agreement”), which expires on May 23, 2017 or (ii) it ceased to be a direct or indirect subsidiary of the Parent. Refer to Note 18 of these Condensed Consolidated Financial Statements for additional information about the Guarantor Subsidiaries.

The 2019 Notes will be convertible at the applicable conversion rate at any time on or after April 15, 2019, until the close of business on the second scheduled trading day immediately preceding the maturity date. The current conversion rate for the 2019 Notes equals 24.5604 shares of common stock per $1,000 principal amount of 2019 Notes (equivalent to a conversion price of $40.72 per share of Common Stock). Upon conversion, holders of the 2019 Notes will receive, at the Company’s election, cash, shares of the Company’s Common Stock, or a combination of both.

The authoritative guidance of the Financial Accounting Standards Board (“FASB”) requires convertible notes that may be settled in cash to be bifurcated into a liability component and an equity component. The fair value of the liability component is determined by calculating the present value of the cash flows of the convertible note using the interest rate of a bond of similar size and rating without a conversion feature (i.e., straight-debt). The fair value of the equity component is the difference between the proceeds from the issuance and the fair value of the liability.

The Company determined similar straight-debt had an interest rate of 5.875% at the time the 2019 Notes were issued. As a result, the fair value of the liability component of the 2019 Notes was calculated to be $311.2 million and was recorded as long-term debt. The conversion component of the 2019 Notes has a fair value of $91.3 million and was recorded, net of deferred taxes, as additional paid-in capital. The debt component of the 2019 Notes will accrete to the 2019 Notes’ par value of $402.5 million over the 2019 Notes’ 6.5 year term. Debt accretion is recorded in the Company’s Consolidated Statement of Operations as a component of interest expense. The Company is accreting the long-term debt balance to par value using the interest method.

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

In conjunction with the issuance of the 2019 Notes, the Company incurred debt issuance costs totaling $12.4 million. Under the FASB’s authoritative guidance, debt issuance costs for the 2019 Notes should be allocated to the liability and equity components in proportion to their respective fair values. As such, $2.8 million of these costs were attributed to the conversion feature of the 2019 Notes and was recorded, net of deferred taxes, as additional paid-in capital. The remaining $9.6 million of debt issuance costs were attributed to the liability component of the 2019 Notes and were capitalized in the Company’s Condensed Consolidated Balance Sheet as a component of other current and noncurrent assets. The portion of the costs attributed to the debt component of the 2019 Notes is being amortized over the term of the 2019 Notes using the interest method. Amortization of these costs is included as a component of interest expense in the Company’s Condensed Consolidated Statement of Operations.

Commensurate with the issuance of the 2019 Notes, the Company repurchased, through individually negotiated private transactions, $115.6 million aggregate principal amount of its 2015 Notes for cash consideration of $133.4 million, including $1.3 million of accrued interest on the repurchased 2015 Notes. The FASB’s authoritative guidance regarding repurchases of convertible notes requires that the consideration paid be separated into a component to repurchase the debt instrument and a component to derecognize the equity component. The fair value of the liability component at repurchase is determined by calculating the present value of the cash flows of the note at a similar size and rating without a conversion feature as of the repurchase date. The fair value of the equity component is the difference between the consideration paid and the fair value of the liability component.

The Company determined similar straight-debt had an interest rate of 3.535% at the time the 2015 Notes were repurchased. Using this rate, the fair value of the liability component of the repurchased 2015 Notes was calculated to be $112.6 million while the equity component of the repurchased 2015 Notes was calculated to be $19.5 million. The book value of the liability component of the repurchased 2015 Notes was $100.4 million as of the repurchase date. The $12.2 million excess of consideration paid for the liability component of the repurchased 2015 Notes over their book value represents a debt extinguishment charge and was recorded as a component of interest expense in the Condensed Consolidated Statement of Operations. Unamortized debt issuance costs totaling $1.5 million related to the repurchased 2015 Notes were also expensed as a component of interest expense in conjunction with the repurchase.

During the three and nine months ended September 30, 2013, the Company recorded, as a component of interest expense, long-term debt discount amortization of $4,266 and $10,592, respectively. Interest expense from the amortization of debt issuance costs were $457 and $1,210 for the three and nine months ended September 30, 2013, respectively. The Company did not capitalize any interest during the three or nine months ended September 30, 2013.

During the three and nine months ended September 30, 2012, the Company recorded, as a component of interest expense, long-term debt discount amortization of $2,454 and $7,192, respectively. Interest expense from the amortization of debt issuance costs were $325 and $1,077 for the three and nine months ended September 30, 2012, respectively. The Company capitalized interest totaling $821 for the nine months ended September 30, 2012.

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

Note 14EMPLOYEE BENEFIT PLANS:

Components of net periodic pension and other post-retirement benefit costs for the three and nine months ended September 30, 2013 and 2012 for those salaried and hourly covered employees were as follows:

 

     Pension Benefits     Other Post-Retirement Benefits  
     Three Months
Ended September 30,
    Nine Months
Ended September 30,
    Three Months
Ended September 30,
     Nine Months
Ended September 30,
 
     2013     2012     2013     2012     2013      2012      2013      2012  

Service cost

   $ 594      $ 613      $ 1,879      $ 1,837      $ 177       $ 167       $ 570       $ 503   

Interest cost

     1,715        1,774        5,096        5,320        481         526         1,439         1,576   

Expected return on plan assets

     (2,615     (2,428     (7,814     (7,280     —           —           —           —     

Amortization of prior service cost

     248        245        744        735        304         303         911         911   

Amortization of actuarial loss

     1,412        1,341        4,614        4,021        53         40         194         118   

Special termination benefits

            —          2,052        —          —           —           162         —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost.

   $ 1,354      $ 1,545      $ 6,571      $ 4,633      $ 1,015       $ 1,036       $ 3,276       $ 3,108   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

The Company recorded an expense of $2,214 in net periodic benefit cost during the nine months ended September 30, 2013 related to the remeasurement of its qualified defined benefit pension plans and post-retirement medical plans as a result of a voluntary early retirement program initiated during the period.

The Company made contributions totaling $4,320 to its qualified defined benefit plans during the nine months ended September 30, 2013. The Company does not expect to make any additional contributions to its Company-sponsored pension plans during the remainder of 2013.

Note 15—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 Condensed 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 $631 to $2,103 in the aggregate. At September 30, 2013 and December 31, 2012, the amount accrued for future environmental-related costs was $1,264 and $1,277, respectively. Of the total amount accrued at September 30, 2013, $85 was expected to be paid within the next twelve months, and was included as a component of other accrued liabilities on the Company’s Condensed Consolidated Balance Sheet. The remaining $1,179 was recorded as a component of other noncurrent liabilities. During the three months ended September 30, 2013, the Company made payments of $14 related to its environmental liabilities.

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

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 16—SEGMENT REPORTING:

The Company has two reportable segments: the Titanium Segment and the Engineered Products and Services Segment. The Engineered Products and Services Segment utilizes the Titanium Segment as its primary source of titanium mill products. 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.

A summary of financial information by reportable segment is as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012
(As Restated)
    2013     2012
(As Restated)
 

Net sales:

      

Titanium Segment

   $ 89,661      $ 90,090      $ 273,664      $ 274,835   

Intersegment sales

     24,376        20,882        65,993        64,815   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Titanium Segment sales

     114,037        110,972        339,657        339,650   

Engineered Products and Services Segment

     106,871        92,455        314,850        246,242   

Intersegment sales.

     14,142        19,867        47,181        62,510   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Engineered Products and Services Segment sales

     121,013        112,322        362,031        308,752   

Eliminations

     38,518        40,749        113,174        127,325   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated net sales

   $ 196,532      $ 182,545      $ 588,514      $ 521,077   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income:

      

Titanium Segment before corporate allocations

   $ 21,472      $ 9,875      $ 58,648      $ 40,798   

Corporate allocations

     (4,641     (4,327     (14,051     (14,658
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Titanium Segment operating income

     16,831        5,548        44,597        26,140   

Engineered Products and Services Segment before corporate allocations

     9,953        7,510        26,682        14,993   

Corporate allocations

     (5,219     (3,762     (16,021     (10,991
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Engineered Products and Services Segment operating income

     4,734        3,748        10,661        4,002   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated operating income

   $ 21,565      $ 9,296      $ 55,258      $ 30,142   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense), net

     (294     16        965        318   

Interest expense, net

     (7,309     (4,690     (32,717     (13,062
  

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated income before income taxes

   $ 13,962      $ 4,622      $ 23,506      $ 17,398   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

25


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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

     September 30,
2013
     December 31,
2012

(As Restated)
 

Total assets:

     

Titanium Segment

   $ 616,376       $ 576,786   

Engineered Products and Services Segment.

     633,093         577,317   

General corporate assets

     302,912         83,637   

Assets of discontinued operations

     —           14,741   
  

 

 

    

 

 

 

Total consolidated assets

   $ 1,552,381       $ 1,252,481   
  

 

 

    

 

 

 

Note 17—NEW ACCOUNTING STANDARDS:

In July 2013, the FASB issued Accounting Standards Update (“ASU”) 2013-11, “Income Taxes – Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” This ASU prescribes the Balance Sheet presentation for unrecognized tax benefits in the presence of a net operating loss carryforward, tax loss or tax credit carryforward. The amendments in the ASU do not require any new recurring disclosures, and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The Company does not expect this guidance to have a material impact on the Condensed Consolidated Financial Statements.

In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters – Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” This ASU clarifies the applicable guidance for the release of the cumulative translation adjustment under current U.S. GAAP. The amendments in this ASU are effective prospectively for annual and interim reporting periods beginning after December 15, 2013. The Company does not expect this guidance to have a material impact on the Condensed Consolidated Financial Statements.

In February 2013, the FASB issued ASU 2013-04, “Liabilities – Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date.” This ASU provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the ASU is fixed at the reporting date. The amendments in this ASU are effective prospectively for annual and interim reporting periods beginning after December 15, 2013. The Company does not expect this guidance to have a material impact on the Condensed Consolidated Financial Statements.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income – Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income.” This ASU added disclosure requirements for amounts reclassified out of accumulated other comprehensive income for interim and annual reporting periods. The amendments in this ASU are effective prospectively for all reporting periods beginning after December 15, 2012. The Company adopted this guidance during the first quarter of 2013. The adoption of this guidance during the nine months ended September 30, 2013 did not have a material impact on the Condensed Consolidated Financial Statements.

In January 2013, the FASB issued ASU 2013-01, “Balance Sheet – Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” This ASU clarified the types of instruments to which ASU 2011-11 applied. This update is effective for annual reporting periods beginning on or after January 1, 2013. The adoption of this guidance during the nine months ended September 30, 2013 did not have a material impact on the Condensed Consolidated Financial Statements.

 

26


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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

In July 2012, the FASB issued ASU No. 2012-02, “Intangibles – Goodwill and Other – Testing Indefinite – Lived Intangible Assets for Impairment.” This ASU added an optional qualitative analysis to the yearly testing for indefinite-lived intangible asset impairment. Depending on the outcome of this analysis, the quantitative process could be eliminated for the year the analysis is performed. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this guidance did not have a material impact on the Condensed Consolidated Financial Statements.

In December 2011, the FASB issued ASU No. 2011-11 “Balance Sheet – Disclosures about Offsetting Assets and Liabilities.” This new guidance requires the disclosure of both net and gross information in the notes for relevant assets and liabilities that are offset. This update is effective for annual reporting periods beginning on or after January 1, 2013. The adoption of this guidance during the nine months ended September 30, 2013 did not have a material impact on the Condensed Consolidated Financial Statements.

Note 18GUARANTOR SUBSIDIARIES:

The 2015 Notes and the 2019 Notes are jointly and severally, fully and unconditionally (subject to the customary exceptions discussed below) guaranteed by several of the Parent’s 100% owned subsidiaries. Each Guarantor Subsidiary would be automatically released from its guarantee of the 2015 Notes and the 2019 Notes if either (i) it ceased to be a guarantor under the Parent’s Credit Agreement or (ii) it ceased to be a direct or indirect subsidiary of the Parent. Separate financial statements of the Parent and each of the Guarantor Subsidiaries are not presented because the guarantees are full and unconditional (subject to the aforementioned customary exceptions) 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 2015 Notes or the 2019 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 Guarantor Subsidiary under its guarantee will be limited to the maximum amount as will result in obligations of such Guarantor Subsidiary 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.

The Condensed Consolidating Financial Statements have been restated to reflect the correction of an error in the Company’s revenue recognition policy for certain long-term contracts mainly related to energy-market projects. Refer to Note 2 of the Condensed Consolidated Financial Statements for further details on the restatement. The Condensed Consolidating Financial Statements present the statements as restated and recast. There was no impact on previously reported amounts in the Condensed Consolidating Statements of Cash Flows. Amounts Labeled “Previously Reported” represent the balances as originally filed on the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2012, filed with the SEC on November 6, 2012, and the Company’s Annual Report on Form 10-K for the period ended December 31, 2012, as filed with the SEC on February 22, 2013.

The Condensed Consolidating Financial Statements for the three months ended March 31, 2013 and June 30, 2013, and the six months ended June 30, 2013 will be revised in future filings. The reconciling items for the Condensed Consolidating Financial Statements as filed in the Company’s Amended Quarterly Report on Form 10-Q/A for the period ended March 31, 2013 and the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2013, as filed with the SEC on September 24, 2013, are detailed in Note 2. All revision adjustments are to the Non-Guarantor Subsidiaries, with the exception of the goodwill adjustment related to the Remmele purchase price adjustment, which impacts the Guarantor Subsidiaries. The goodwill adjustment at both March 31, 2013 and June 30, 2013 increases current deferred tax assets $192, while decreasing goodwill and non-current deferred tax liabilities by $5,260 and $5,068, respectively.

 

27


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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

Condensed Consolidating Statement of Operations

Three Months Ended September 30, 2013

 

     RTI International
Metals, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ —        $ 128,285      $ 116,754      $ (48,507   $ 196,532   

Costs and expenses:

          

Cost of sales

     —          103,808        96,134        (48,507     151,435   

Selling, general, and administrative expenses

     712        10,808        10,971        —          22,491   

Research, technical, and product development expenses

     —          1,037        4        —          1,041   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     (712     12,632        9,645        —          21,565   

Other income (expense), net

     4,120        (2,520     (1,894     —          (294

Interest income (expense), net

     (5,488     (1,571     (250     —          (7,309

Equity in earnings (loss) of subsidiaries

     11,876        (439     532        (11,969     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     9,796        8,102        8,033        (11,969     13,962   

Provision for (benefit from) income taxes

     (2,496     2,665        1,501        —          1,670   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to continuing operations

   $ 12,292      $ 5,437      $ 6,532      $ (11,969   $ 12,292   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 16,251      $ 6,561      $ 9,224      $ (15,785   $ 16,251   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

Condensed Consolidating Statement of Operations and Comprehensive Income

Three Months Ended September 30, 2012

 

    RTI International
Metals, Inc.
    Guarantors     Non-Guarantors     Eliminations     Consolidated  
    Previously
Reported
    As
Restated
    Previously
Reported
    As
Restated
    Previously
Reported
    As
Restated
    Previously
Reported
    As
Restated
    Previously
Reported
    As
Restated
 

Net Sales

  $ —        $ —        $ 131,132      $ 131,132      $ 110,148      $ 103,618      $ (52,205   $ (52,205   $ 189,075      $ 182,545   

Cost and expenses:

                   

Cost of sales

    —          —          114,706        114,706        88,627        86,394        (52,205     (52,205     151,128        148,895   

Selling, general, and administrative expenses (1)

    (1,442     (1,442     12,048        12,048        11,828        11,119        —          —          22,434        21,725   

Research, technical, and product development expenses

    —          —          1,000        1,000        12        12        —          —          1,012        1,012   

Asset and asset-related charges

    —          —          1,617        1,617        —          —          —          —          1,617        1,617   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    1,442        1,442        1,761        1,761        9,681        6,093        —          —          12,884        9,296   

Other income (expense), net

    (3     (3     20        20        15        (1     —          —          32        16   

Interest income (expense), net

    (4,358     (4,358     36        36        (368     (368     —          —          (4,690     (4,690

Equity in earnings of subsidiaries (2)

    7,460        5,034        —          1,231        —          374        (7,460     (6,639     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

    4,541        2,115        1,817        3,048        9,328        6,098        (7,460     (6,639     8,226        4,622   

Provision for (benefit from) income taxes

    (1,084     (1,084     705        705        2,980        1,802        —          —          2,601        1,423   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to continuing operations

    5,625        3,199        1,112        2,343        6,348        4,296        (7,460     (6,639     5,625        3,199   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to discontinued operations, net of tax

    —          389        —          —          —          389        —          (389     —          389   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 5,625      $ 3,588      $ 1,112      $ 2,343      $ 6,348      $ 4,685      $ (7,460   $ (7,028   $ 5,625      $ 3,588   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 11,334      $ 9,297      $ 2,163      $ 3,394      $ 10,856      $ 9,193      $ (13,019   $ (12,587   $ 11,334      $ 9,297   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(1) The Parent allocates SG&A to the subsidiaries based upon its budgeted annual expenses.
(2) Amounts in equity in earnings of subsidiaries have been revised to conform to current year presentation, which reflects the Company’s legal structure. Previously, the Company did not present equity in earnings of subsidiaries in the guarantor or non-guarantor subsidiaries columns. These amounts have been revised for 2012 to present $1,231 and $374, respectively, as equity in earnings of subsidiaries. This change had no impact on covenants or other obligations under the 2015 Notes or 2019 Notes.

 

29


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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

Condensed Consolidating Statement of Operations

Nine Months Ended September 30, 2013

 

     RTI
International
Metals, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ —        $ 401,236      $ 343,492      $ (156,214   $ 588,514   

Costs and expenses:

          

Cost of sales

     —          325,858        290,548        (156,214     460,192   

Selling, general, and administrative expenses

     2,416        33,550        34,074        —          70,040   

Research, technical, and product development expenses

     —          3,020        4        —          3,024   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     (2,416     38,808        18,866        —          55,258   

Other income (expense), net

     4,230        (3,800     535        —          965   

Interest income (expense), net

     (15,510     (10,210     (6,997     —          (32,717

Equity in earnings (loss) of subsidiaries

     26,681        (549     1,485        (27,617     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
         .       

Income before income taxes

     12,985        24,249        13,889        (27,617     23,506   

Provision for (benefit from) income taxes

     (7,014     7,541        2,980        —          3,507   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to continuing operations

     19,999        16,708        10,909        (27,617     19,999   

Net loss attributable to discontinued operations

     (156     —          (156     156        (156
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 19,843      $ 16,708      $ 10,753      $ (27,461   $ 19,843   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 24,574      $ 25,089      $ 6,164      $ (31,253   $ 24,574   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

Condensed Consolidating Statement of Operations and Comprehensive Income

Nine Months Ended September 30, 2012

 

    RTI International
Metals, Inc.
    Guarantors     Non-Guarantors     Eliminations     Consolidated  
    Previously
Reported
    As
Restated
    Previously
Reported
    As
Restated
    Previously
Restated
    As
Restated
    Previously
Reported
    As
Restated
    Previously
Reported
    As
Restated
 

Net Sales

  $ —        $ —        $ 378,866      $ 378,866      $ 329,847      $ 308,722      $ (166,511   $ (166,511   $ 542,202      $ 521,077   

Cost and expenses:

                   

Cost of sales

    —          —          323,939        323,939        274,626        263,473        (166,511     (166,511     432,054        420,901   

Selling, general, and administrative expenses (1)

    (2,477     (2,477     33,372        33,372        36,619        34,341        —          —          67,514        65,236   

Research, technical, and product development expenses

    95        95        3,024        3,024        62        62        —          —          3,181        3,181   

Asset and asset-related charges

    —          —          1,617        1,617        —          —          —          —          1,617        1,617   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    2,382        2,382        16,914        16,914        18,540        10,846        —          —          37,836        30,142   

Other income (expense), net

    (48     (48     301        301        81        65        —          —          334        318   

Interest income (expense), net (2)

    (12,275     (12,275     195        195        (982     (982     —          —          (13,062     (13,062

Equity in earnings of subsidiaries

    21,377        16,314        —          5,185        —          1,990        (21,377     (23,489     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

    11,436        6,373        17,410        22,595        17,639        11,919        (21,377     (23,489     25,108        17,398   

Provision for (benefit from) income taxes

    (4,977     (4,977     6,673        6,673        6,999        4,352        —          —          8,695        6,048   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to continuing operations

    16,413        11,350        10,737        15,922        10,640        7,567        (21,377     (23,489     16,413        11,350   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to discontinued operations, net of tax

    —          1,413        —          —          —          1,413        —          (1,413     —          1,413   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 16,413      $ 12,763      $ 10,737      $ 15,922      $ 10,640      $ 8,980      $ (21,377   $ (24,902   $ 16,413      $ 12,763   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 24,152      $ 20,502      $ 13,898      $ 19,083      $ 14,763      $ 13,103      $ (28,661   $ (32,186   $ 24,152      $ 20,502   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The Parent allocates SG&A to the subsidiaries based upon its budgeted annual expenses. A credit in Parent SG&A is offset by an equal debit amount in the subsidiaries’ SG&A.
(2) Amounts in equity in earnings of subsidiaries have been revised to conform to current year presentation, which reflects the Company’s legal structure. Previously, the Company did not present equity in earnings of subsidiaries in the guarantor or non-guarantor subsidiaries columns. These amounts have been revised for 2012 to present $5,185 and $1,990, respectively, as equity in earnings of subsidiaries. This change had no impact on covenants or other obligations under the 2015 Notes or 2019 Notes.

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

Condensed Consolidating Balance Sheet

As of September 30, 2013

 

     RTI
International
Metals, Inc.
     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ —         $ 263,561       $ 51,460       $ —        $ 315,021   

Short-term investments

     —           45,187         —           —          45,187   

Receivables, net

     716         64,790         76,167         (22,846     118,827   

Inventories, net

     —           252,499         167,901         —          420,400   

Costs in Excess of Billings

     —           —           3,425         —          3,425   

Deferred income taxes

     26,478         2,629         2,299         —          31,406   

Other current assets

     16,361         1,676         5,004           23,041   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     43,555         630,342         306,256         (22,846     957,307   

Property, plant, and equipment, net

     2,124         297,308         68,417         —          367,849   

Investments

     —           —           —           —          —     

Goodwill

     —           93,665         36,173         —          129,838   

Other intangible assets, net

     —           33,226         19,816         —          53,042   

Deferred income taxes

     —           27,604         34,239         (32,408     29,435   

Other noncurrent assets

     10,982         201         3,727           14,910   

Intercompany investments

     1,285,935         26,265         5,221         (1,317,421     —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 1,342,596       $ 1,108,611       $ 473,849       $ (1,372,675   $ 1,552,381   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

             

Current liabilities:

             

Accounts payable

   $ 1,256       $ 55,171       $ 41,458       $ (22,846   $ 75,039   

Accrued wages and other employee costs

     5,763         15,594         8,444         —          29,801   

Unearned revenue

     —           —           38,467         —          38,467   

Other accrued liabilities

     9,596         8,054         8,387         —          26,037   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     16,615         78,819         96,756         (22,846     169,344   

Long-term debt

     418,269         980         —           —          419,249   

Intercompany debt

     —           350,821         111,758         (462,579     —     

Liability for post-retirement benefits

     —           44,112         —           —          44,112   

Liability for pension benefits

     6,856         3,281         160           10,297   

Deferred income taxes

     81,383         21,587         3,320         (32,408     73,882   

Unearned Revenue

     —           —           12,033         —          12,033   

Other noncurrent liabilities

     8,143         3,753         238         —          12,134   

Total liabilities

     531,266         503,353         224,265         (517,833     741,051   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Shareholders’ equity

     811,330         605,258         249,584         (854,842     811,830   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,342,596       $ 1,108,611       $ 473,849       $ (1,372,675   $ 1,552,381   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

Condensed Consolidating Balance Sheet

As of December 31, 2012

 

    RTI International
Metals, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  
    As
Reported
    As
Restated
    As
Reported
    As
Restated
    As
Reported
    As
Restated
    As
Reported
    As
Restated
    As
Reported
    As
Restated
 

ASSETS

                   

Current assets:

                   

Cash and cash equivalents

  $ —        $ —        $ 87,283      $ 87,283      $ 9,907      $ 9,907      $ —        $ —        $ 97,190      $ 97,190   

Receivables, net

    126        126        72,773        72,773        63,089        59,639        (27,221     (27,221     108,767        105,317   

Inventories, net

    —          —          221,174        220,989        184,115        164,127        —          —          405,289        385,116   

Cost in excess of billings

    —          —          —          —          —          2,260        —          —          —          2,260   

Deferred income taxes

    26,478        26,478        2,351        2,543        70        2,359        —          —          28,899        31,380   

Assets of discontinued operations

    —          —          —          —          —          14,741        —          —          —          14,741   

Other current assets

    5,410        5,410        2,072        2,072        3,227        3,788        —          —          10,709        11,270   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    32,014        32,014        385,653        385,660        260,408        256,821        (27,221     (27,221     650,854        647,274   

Property, plant, and equipment, net

    1,327        1,327        308,467        308,467        66,202        66,155        —          —          375,996        375,949   

Goodwill

    —          —          98,925        93,665        38,326        36,945        —          —          137,251        130,610   

Other intangible assets, net

    —          —          35,152        35,152        21,343        21,343        —          —          56,495        56,495   

Deferred income taxes

    —          —          32,757        32,757        33,433        33,433        (32,903     (32,903     33,287        33,287   

Other noncurrent assets

    4,117        4,117        892        892        835        3,857        —          —          5,844        8,866   

Intercompany investments

    984,901        980,867        26,814        26,814        3,736        3,736        (1,015,451     (1,011,417     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 1,022,359      $ 1,018,325      $ 888,660      $ 883,407      $ 424,283      $ 422,290      $ (1,075,575   $ (1,071,541   $ 1,259,727      $ 1,252,481   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

         

Current liabilities:

                   

Accounts payable

  $ 1,177      $ 1,177      $ 70,086      $ 70,086      $ 49,614      $ 47,619      $ (27,221   $ (27,221   $ 93,656      $ 91,661   

Accrued wages and other employee costs

    6,519        6,519        16,368        16,368        11,546        11,209        —          —          34,433        34,096   

Unearned revenue

    —          —          689        689        25,475        24,309        —          —          26,164        24,998   

Liabilities of discontinued operations

    —          —          —          —          —          2,332        —          —          —          2,332   

Other accrued liabilities

    3,669        3,669        9,197        9,197        9,684        9,684        —          —          22,550        22,550   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    11,365        11,365        96,340        96,340        96,319        95,153        (27,221     (27,221     176,803        175,637   

Long-term debt

    196,644        196,644        1,693        1,693        —          —          —          —          198,337        198,337   

Intercompany debt

    —          —          118,229        118,229        104,084        104,084        (222,313     (222,313     —          —     

Liability for post-retirement benefits

    —          —          45,066        45,066        —          —          —          —          45,066        45,066   

Liability for pension benefits

    6,419        6,419        14,133        14,133        159        159        —          —          20,711        20,711   

Deferred income taxes

    54,222        54,222        26,658        21,590        3,475        3,475        (32,903     (32,903     51,452        46,384   

Unearned revenue

    —          —          —          —          9,991        13,013        —          —          9,991        13,013   

Other noncurrent liabilities

    8,140        8,140        3,434        3,434        224        224        —          —          11,798        11,798   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    276,790        276,790        305,553        300,485        214,252        216,108        (282,437     (282,437     514,158        510,946   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shareholders’ equity

    745,569        741,535        583,107        582,922        210,031        206,182        (793,138     (789,104     745,569        741,535   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

  $ 1,022,359      $ 1,018,325      $ 888,660      $ 883,407      $ 424,283      $ 422,290      $ (1,075,575   $ (1,071,541   $ 1,259,727      $ 1,252,481   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2013

 

    RTI International
Metals, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash provided by (used in) operating activities

  $ 3,413      $ 8,745      $ (5,818   $ —        $ 6,340   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

         

Capital expenditures

    (946     (19,229     (6,182     —          (26,357

Acquisitions, net of cash acquired

    —          —          10,475        —          10,475   

Investments in subsidiaries, net

    (34,492     —          —          34,492        —     

Proceeds from disposal of property, plant, and equipment

    —          —          —          —          —     

Investments, net

    —          (45,367     —          —          (45,367
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by (used in) investing activities

    (35,438     (64,596     4,293        34,492        (61,249
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

         

Proceeds from exercise of employee stock options

    1,960        —          —          —          1,960   

Excess tax benefits from stock-based compensation activity

    405        —          —          —          405   

Financing fees

    (12,370     —          —          —          (12,370

Parent company investments, net of distributions

    —          99        34,393        (34,492     —     

Borrowings on long-term debt

    402,500        —          —          —          402,500   

Repayments on long-term debt

    (119,917     (673     —          —          (120,590

Intercompany debt

    (240,154     232,703        7,451        —          —     

Purchase of common stock held in treasury

    (399     —          —          —          (399
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by financing activities

    32,025        232,129        41,844        (34,492     271,506   

Effect of exchange rate changes on cash and cash equivalents

    —          —          1,234        —          1,234   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase in cash and cash equivalents

    —          176,278        41,553        —          217,831   

Cash and cash equivalents at beginning of period

    —          87,283        9,907        —          97,190   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ —        $ 263,561      $ 51,460      $ —        $ 315,021   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(In thousands, except share and per share amounts, unless otherwise indicated)

 

Condensed Consolidating Statement of Cash Flows

Nine Months Ended September 30, 2012

 

    RTI International
Metals, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash provided by (used in) operating activities

  $ 16,383      $ (15,922   $ (25,911   $ —        $ (25,450
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

         

Investments in subsidiares, net

    181,533        —          —          (181,533     —     

Acquisitions, net of cash acquired

    (182,811     —          —          —          (182,811

Capital expenditures

    (897     (43,736     (3,246     —          (47,879

Investments, net

    —          172,772        —          —          172,772   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by (used in) investing activities

    (2,175     129,036        (3,246     (181,533     (57,918
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

         

Proceeds from exercise of employee stock options

    335        —          —          —          335   

Excess tax benefits from stock-based compensation activity

    100        —          —          —          100   

Financing fees

    (823     —          —          —          (823

Parent company investments/dividends, net

    —          (194,783     13,250        181,533        —     

Repayments on long-term debt

    —          (543     —          —          (543

Intercompany debt, net

    (13,078     7,848        5,230        —          —     

Purchase of common stock held in treasury

    (742     —          —          —          (742
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash provided by (used in) financing activities

    (14,208     (187,478     18,480        181,533        (1,673

Effect of exchange rate changes on cash and cash equivalents

    —          —          1,588        —          1,588   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Decrease in cash and cash equivalents

    —          (74,364     (9,089     —          (83,453

Cash and cash equivalents at beginning of period

    —          144,271        12,571        —          156,842   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period.

  $      $ 69,907      $ 3,482      $      $ 73,389   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note 19—SUBSEQUENT EVENTS:

On October 1, 2013, the Company acquired 100% of the outstanding stock of the Osborn Steel Extrusions business unit of Osborn Metals Limited for approximately $15 million in cash. The acquired unit will operate under the name RTI Extrusions Europe Limited as part of the Engineered Products and Services Segment. RTI Extrusions Europe Limited specializes in the manufacture of less than six-inch diameter extruded titanium and stainless steel hollows and near-net shape profile parts. RTI Extrusions Europe Limited provides its products principally to the commercial aerospace, energy, power generation, and defense markets. An allocation of the purchase price has not been presented as the acquisition closed on October 1, 2013.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

The following discussion should be read in connection with the information contained in the Condensed Consolidated Financial Statements and Notes to the Condensed 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 on Form 10-Q, the following factors and risks should also be considered, including, without limitation:

 

    global economic and political uncertainties,

 

    a significant portion of our revenue is concentrated within the commercial aerospace and defense industries and the limited number of potential customers within those industries,

 

    the future availability and prices of raw materials,

 

    the historic cyclicality of the titanium and commercial aerospace industries,

 

    the impact of recent consolidation within our industry,

 

    changes in defense spending, including the impact of sequestration on the U.S. defense budget, and cancellation or changes in defense programs or initiatives, including the Joint Strike Fighter program,

 

    our ability to successfully integrate newly acquired businesses,

 

    long-term supply agreements and the impact if another party to a long-term supply agreement fails to fulfill its requirements under existing contracts or successfully manage its future development and production schedule,

 

    if our internal controls are not effective, investors could lose confidence in our financial reporting,

 

    the impact of the current titanium inventory overhang throughout our supply chain,

 

    our ability to recover the carrying value of goodwill and other intangible assets,

 

    competition in the titanium industry,

 

    our ability to attract and retain key personnel,

 

    our ability to obtain access to financial markets and to maintain current covenant requirements,

 

    legislative challenges to the Specialty Metals Clause, which requires that titanium for U.S. defense programs be produced in the U.S.,

 

    labor matters,

 

    risks related to international operations,

 

    our ability to execute on new business awards,

 

    potential costs for violations of applicable environmental, health, and safety laws,

 

    our order backlog and the conversion of that backlog into revenue,

 

    fluctuations in our income tax obligations and effective income tax rate, and

 

    demand for our products.

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

 

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and other risk factors are set forth in this filing, in our second amended Annual Report on Form 10-K/A for the year ended December 31, 2012, filed with the Securities and Exchange Commission (“SEC”) on November 12, 2013, as well as in other filings filed with or furnished to the SEC over the last 12 months, copies of which are available from the SEC or may be obtained upon request from RTI International Metals, Inc. (the “Company,” “RTI,” “we,” “us,” or “our”). Any forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date hereof, and we caution you not to unduly rely on them. Except as may be required by applicable law, we undertake no duty to update our forward-looking information.

Overview

Overview

We are a leading producer and global supplier of advanced titanium mill products and supplier of fabricated titanium and specialty metal components for the international aerospace, defense, medical device, energy, and other consumer and industrial markets.

As of January 1, 2013, we restructured our global operations into two segments: the Titanium Segment and the Engineered Products and Services Segment. This new structure better reflects our transformation into an integrated supplier of advanced titanium products across the entire supply chain, and better aligns our resources to support our long-term growth strategy. Historic results have been conformed to reflect our restructured two-segment format.

The Titanium Segment melts, processes, produces, stocks, distributes, finishes, cuts-to-size and facilitates just-in-time delivery services of 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; Hermitage, Pennsylvania; Martinsville, Virginia; Garden Grove, California; Windsor, Connecticut; Tamworth, England; and Rosny-Sur-Seine, France, the Titanium Segment has overall responsibility for the production and distribution of primary mill products including, but not limited to, bloom, billet, sheet, and plate. In addition, the Titanium Segment produces ferro titanium alloys for its steel-making customers. The Titanium Segment 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 Engineered Products and Services Segment is comprised of companies with significant hard and soft-metal expertise that form, extrude, fabricate, machine, micro-machine, and assemble titanium, aluminum, and other specialty metal parts and components. Its products, many of which are complex engineered parts and assemblies, serve commercial aerospace, defense, medical device, oil and gas, power generation, and chemical process industries, as well as a number of other industrial and consumer markets. With operations located in Minneapolis, Minnesota; Houston, Texas; Sullivan, Missouri; Washington, Missouri; Laval, Canada; and Welwyn Garden City, England, the Engineered Products and Services Segment provides value-added products and services such as engineered tubulars and extrusions, fabricated and machined components and sub-assemblies, and components for the production of minimally invasive and implantable medical devices, as well as engineered systems for deepwater oil and gas exploration and production infrastructure.

The Engineered Products and Services Segment utilizes the Titanium Segment as its primary source of titanium mill products. For the three months ended September 30, 2013 and 2012, approximately 21% and 19%, respectively, of the Titanium Segment’s sales were to the Engineered Products and Services Segment. For the nine months ended September 30, 2013 and 2012, approximately 19% of the Titanium Segment’s sales were to the Engineered Products and Services Segment for each period.

 

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Trends and Uncertainties

The commercial aerospace market continues to strengthen, as Boeing is progressing with its schedule for production of the 787 platform, a major consumer of titanium. Production delays or a failure to meet this ramp, either on our part or in another part of the supply chain, could place pressure on the market for titanium products. The defense sector continues to face uncertainties due to overall budget pressures and the impact of sequestration on Department of Defense appropriations. We continue to see long-term strength in the energy and medical device markets; however, the impact of the medical device tax is causing ordering delays in the near-term.

Notwithstanding these pressures, we believe that overall end-market titanium demand will continue to accelerate over the next several years, driven largely by commercial aircraft production by Airbus and Boeing and strong jet engine market activity. In addition, our recent acquisitions are furthering our move toward becoming an integrated supplier of advanced titanium products. We continue to win incremental, value-add packages in both the commercial aerospace and defense markets, and have diversified into the medical device and energy production markets, supporting our move further up the value chain.

Results of Operations

The following discussion contains restated numbers for the three and nine months ended September 30, 2012. Refer to Note 2 of the Footnotes to the Condensed Consolidated Financial Statements for further detail.

Three Months Ended September 30, 2013 Compared To Three Months Ended September 30, 2012

Net Sales. Net sales for our reportable segments, excluding intersegment sales, for the three months ended September 30, 2013 and 2012 were as follows:

 

     Three Months Ended
September 30,
              
(In millions except percentages)    2013      2012
(As Restated)
     $ Increase/
(Decrease)
    % Increase/
(Decrease)
 

Titanium Segment

   $ 89.6       $ 90.1       $ (0.5     (0.6 %) 

Engineered Products and Services Segment

     106.9         92.4         14.5        15.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total consolidated net sales

   $ 196.5       $ 182.5       $ 14.0        7.7
  

 

 

    

 

 

    

 

 

   

 

 

 

The decrease in the Titanium Segment’s net sales was the result of a 13.5% decrease in prime mill product shipments to trade customers to 1.9 million pounds for the quarter ended September 30, 2013 from 2.2 million pounds for the quarter ended September 30, 2012, partially offset by higher average realized selling prices of $17.80 per pound in the current period as compared to $16.81 per pound in the prior period. Also contributing to the sales decrease was lower defense market shipments from our titanium service centers of $0.6 million. This decrease was partially offset by higher shipments from our European service centers, increased conversion sales, and strengthening specialty metals demand of $2.2 million, $0.8 million, and $0.2 million, respectively.

The increase in the Engineered Products and Services Segment’s net sales was primarily related to the continuing ramp up of the Boeing 787 Pi Box program and continued strong demand from the commercial aerospace and defense markets, which contributed increases of $14.3 million, $2.6 million, and $1.2 million, respectively, to net sales for the three months ended September 30, 2013. These increases were partially offset by lower demand from our medical device and energy market customers, which decreased net sales by $1.9 million and $1.7 million respectively for the three months ended September 30, 2013.

 

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Gross Profit. Gross profit for our reportable segments for the three months ended September 30, 2013 and 2012 was as follows:

 

     Three Months Ended
September 30,
              
     2013     2012
(As Restated)
              
(In millions except percentages)    $      % of
Sales
    $      % of
Sales
    $ Increase/
(Decrease)
     % Increase/
(Decrease)
 

Titanium Segment

   $ 26.7         29.8   $ 16.7         18.5   $ 10.0         59.9

Engineered Products and Services Segment

     18.4         17.2     17.0         18.4     1.4         8.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consolidated gross profit

   $ 45.1         23.0   $ 33.7         18.5   $ 11.4         33.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The increase in the Titanium Segment’s gross profit was primarily attributable to favorable raw material input costs and duty drawback recoveries of $6.8 million and $2.7 million, respectively. Favorable mill product mix resulted in lower cost per pound for the three months ended September 30, 2013, which improved gross margin $0.7 million. Softer specialty metal prices and a lower-margin product mix at our titanium service centers unfavorably impacted gross profit by $0.8 million and $0.2 million, respectively. Additionally, the three months ended September 30, 2012 included a loss of $0.8 million due a transformer fire at our Canton melting facility.

Increased sales volume, principally related to higher deliveries of Boeing 787 Pi Box, duty drawback recoveries, and favorable foreign exchange impacts contributed $2.4 million, $1.5 million, and $0.7 million, respectively, to the increase in the Engineered Products and Services Segment’s gross profit during the three months ended September 30, 2013. Partially offsetting these increases in were higher production costs of $1.5 million, and lower prices in the medical device market, which decreased gross profit $1.4 million.

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses (“SG&A”) for our reportable segments for the three months ended September 30, 2013 and 2012 were as follows:

 

     Three Months Ended
September 30,
              
     2013     2012
(As Restated)
              
(In millions except percentages)    $      % of
Sales
    $      % of
Sales
    $ Increase/
(Decrease)
     % Increase/
(Decrease)
 

Titanium Segment

   $ 8.9         9.9   $ 8.5         9.4   $ 0.4         4.7

Engineered Products and Services Segment

     13.6         12.7     13.2         14.3     0.4         3.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consolidated SG&A

   $ 22.5         11.5   $ 21.7         11.9   $ 0.8         3.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The $0.8 million increase in SG&A was primarily driven by higher professional service fees and higher wages during the current period.

Research, Technical, and Product Development Expenses. Research, technical, and product development expenses were $1.0 million for each of the three month periods ended September 30, 2013 and 2012. This spending reflects our continued efforts to develop advanced titanium alloys as well as to make productivity and quality improvements to our manufacturing process.

 

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Operating Income. Operating income for our reportable segments for the three months ended September 30, 2013 and 2012 was as follows:

 

     Three Months Ended
September 30,
              
     2013     2012
(As Restated)
              
(In millions except percentages)    $      % of
Sales
    $      % of
Sales
    $ Increase/
(Decrease)
     % Increase/
(Decrease)
 

Titanium Segment

   $ 16.8         18.8     5.6         6.2   $ 11.2         200.0

Engineered Products and Services Segment

     4.8         4.5     3.7         4.0     1.1         29.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consolidated operating income

   $ 21.6         11.0   $ 9.3         5.1   $ 12.3         132.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The increase in the Titanium Segment’s operating income was primarily attributable to favorable raw material pricing and duty drawback recoveries, partially offset by increased SG&A costs.

The increase in the Engineered Products and Services Segment’s operating income was primarily attributable to higher gross profit driven by increased Boeing 787 Pi Box deliveries, duty drawback recoveries, and favorable foreign exchange impacts, partially offset by increased production costs and higher SG&A.

Other Income (Expense), Net. Other income (expense), net, was $(0.3) million for the three months ended September 30, 2013 and immaterial for the three months ended September 30, 2012. Other expense, net, consisted of foreign exchange gains and losses from our international operations and realized gains on the sale of available-for-sale securities.

Interest Income and Interest Expense. Interest income was not material for each of the three months ended September 30, 2013 and 2012. Interest expense for each of the three months ended September 30, 2013 and 2012 was $7.4 million and $4.7 million, respectively. The increase in interest expense was primarily the result of the issuance of $402.5 million aggregate principal amount of 1.625% Convertible Senior Notes due 2019 (the “2019 Notes”), partially offset by the reduction in the outstanding principal amount of the 3.000% Convertible Senior Notes due 2015, of which $115.6 million was repurchased in the second quarter of 2013 through individual, privately negotiated transactions.

Provision for Income Taxes. We recognized a provision for income taxes of $1.7 million, or 12.0% of pretax income, and a provision for income taxes of $1.4 million, or 30.8% of pretax income, for federal, state, and foreign income taxes on continuing operations for the three months ended September 30, 2013 and 2012, respectively. Discrete items of tax for the three months ended September 30, 2013 totaled $2.6 million and were primarily due to a reduction of certain deferred tax liabilities due to changes in state and U.K. tax laws. Discrete items for the three months ended September 30, 2012 were not material.

The provision for income taxes as a percentage of pretax income for the three months ended September 30, 2013 decreased 18.8 percentage points compared to the third quarter 2012. The 18.8 percentage point decrease is illustrated in the table below:

 

Provision for income taxes as a percentage of pretax income for the three months ended September 30, 2012

       30.8

Changes in income taxes as a percentage of pretax income:

    

State tax law changes

     (14.7  

UK law change

     (3.8  

Other

     (0.3     (18.8
  

 

 

   

 

 

 

Provision for income taxes as a percentage of pretax income for the three months ended September 30, 2013

       12.0
    

 

 

 

 

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Refer to Note 7 of the accompanying Condensed Consolidated Financial Statements for additional information regarding income taxes.

Nine Months Ended September 30, 2013 Compared To Nine Months Ended September 30, 2012

Net Sales. Net sales for our reportable segments, excluding intersegment sales, for the nine months ended September 30, 2013 and 2012 were as follows:

 

     Nine Months Ended
September 30,
              
(In millions except percentages)    2013      2012
(As Restated)
     $ Increase/
(Decrease)
    $ Increase/
(Decrease)
 

Titanium Segment

   $ 273.7       $ 274.8       $ (1.1     (0.4 %) 

Engineered Products and Services Segment

     314.8         246.3         68.5        27.8
  

 

 

    

 

 

    

 

 

   

 

 

 

Total consolidated net sales

   $ 588.5       $ 521.1       $ 67.4        12.9
  

 

 

    

 

 

    

 

 

   

 

 

 

The decrease in the Titanium Segment’s net sales was the result of a decrease in sales by our titanium service centers to the defense market by $4.8 million, and the softening demand and pricing in certain specialty metals markets, which decreased net sales $1.9 million. Higher average realized selling prices of prime mill product to $18.26 per pound from $17.28 per pound, partially offset by a 0.1 million pound decrease in shipments from 6.0 to 5.9 million pounds, offset the decrease in sales $4.1 million. Increased conversion and other miscellaneous sales also offset the decrease by $1.5 million.

The increase in the Engineered Products and Services Segment’s net sales was the result of higher demand from our commercial aerospace, energy, and defense markets which contributed $26.7 million, $17.1 million, and $3.9 million to the increase in net sales. The ramp up in the 787 Pi Box program was the main driver of the increased sales to the commercial aerospace market. Our acquisition of Remmele Engineering in February of 2012 contributed $20.8 million to the increase in sales during the nine months ending September 30, 2013.

Gross Profit. Gross profit for our reportable segments for the nine months ended September 30, 2013 and 2012 was as follows:

 

     Nine Months Ended
September 30,
              
     2013     2012
(As Restated)
              
(In millions except percentages)    $      % of
Sales
    $      % of
Sales
    $ Increase/
(Decrease)
     % Increase/
(Decrease)
 

Titanium Segment

   $ 74.7         27.3   $ 58.9         21.4   $ 15.8         26.8

Engineered Products and Services Segment

     53.6         17.0     41.3         16.8     12.3         29.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consolidated gross profit

   $ 128.3         21.8   $ 100.2         19.2   $ 28.1         28.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The increase in the Titanium Segment’s gross profit was primarily attributable to a 4% decrease in mill product costs per pound and higher average-realized selling prices, which increased gross profit $9.1 million. A favorable margin product mix at our titanium service centers and duty drawback recoveries increased gross profit by $1.1 million and $8.7 million, respectively. Additionally, the nine months ended September 30, 2012 included a loss of $0.8 million due a transformer fire at our Canton melting facility. These items were partly offset by softening demand and pricing in the specialty metals market which impacted gross profit $2.7 million, and a $1.6 million charge related to the voluntary early retirement option enacted during the nine months ended September 30, 2013.

 

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The increase in the Engineered Products and Services Segment’s gross profit was primarily due to a $15.5 million increase from higher net sales, principally related to higher deliveries of Boeing 787 Pi Box, and $6.1 million of duty drawback recoveries during the period. Partially offsetting these increases were unfavorable sales mix, higher production costs, and the impact from the strengthening U.S. dollar on our Canadian subsidiary.

Selling, General, and Administrative Expenses. SG&A for our reportable segments for the nine months ended September 30, 2013 and 2012 were as follows:

 

     Nine Months Ended
September 30,
             
     2013     2012
(As Restated)
             
(In millions except percentages)    $      % of
Sales
    $      % of
Sales
    $ Increase/
(Decrease)
    % Increase/
(Decrease)
 

Titanium Segment

   $ 27.1         9.9   $ 28.2         10.3   $ (1.1     (3.9 )% 

Engineered Products and Services Segment

     42.9         13.6     37.0         15.0     5.9        15.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total consolidated SG&A

   $ 70.0         11.9   $ 65.2         12.5   $ 4.8        7.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

The $4.8 million increase in SG&A expenses was partially attributable to the acquisition of Remmele in February 2012, which increased SG&A $2.2 million for the nine months ended September 30, 2013, as well as higher wages and stock-based compensation expenses during the period.

Research, Technical, and Product Development Expenses. Research, technical, and product development expenses were $3.0 million and $3.2 million for the nine month periods ended September 30, 2013 and 2012, respectively. This spending reflects our continued efforts to develop advanced titanium alloys a well as to make productivity and quality improvements to our manufacturing process.

Operating Income. Operating income for our reportable segments for the nine months ended September 30, 2013 and 2012 was as follows:

 

     Nine Months Ended
September 30,
              
     2013     2012
(As Restated)
              
(In millions except percentages)    $      % of
Sales
    $      % of
Sales
    $ Increase/
(Decrease)
     % Increase/
(Decrease)
 

Titanium Segment

   $ 44.6         16.3   $ 26.1         9.5   $ 18.5         70.9

Engineered Products and Services Segment..

     10.7         3.4     4.0         1.6     6.7         167.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consolidated operating income

   $ 55.3         9.4   $ 30.1         5.8   $ 25.2         83.7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The increase in the Titanium Segment’s gross profit was primarily attributable to lower raw material costs, increased duty drawback recoveries, and lower SG&A expenses during the nine months ended September 30, 2013.

The increase in the Engineered Products and Services Segment’s operating income was primarily attributable to higher gross profit, primarily driven by the ramp up in Boeing 787 Pi Box deliveries and higher duty drawback recoveries. These increases were partially offset by higher production costs, unfavorable foreign exchange impacts and higher SG&A.

Other Income (Expense), Net. Other income (expense), net, was $1.0 million and $0.3 million for the nine months ended September 30, 2013 and 2012, respectively. Other income consisted of foreign exchange gains and losses from our international operations and realized gains on the sales of available-for-sale securities.

 

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Interest Income and Interest Expense. Interest income was not material for each of the nine months ended September 30, 2013 and 2012. Interest expense for the nine months ended September 30, 2013 and 2012 was $32.9 million and $13.2 million, respectively. The increase in interest expense was primarily driven by a $13.7 million debt extinguishment charge related to the repurchase of $115.6 million of our 2015 Notes in April 2013, through individually negotiated, private transactions, and the issuance of our 2019 Notes.

Provision for Income Taxes. We recognized a provision for income taxes of $3.5 million, or 14.9% of pretax income, and $6.0 million, or 34.8% of pretax income, for federal, state, and foreign income taxes on continuing operations for the nine months ended September 30, 2013 and 2012, respectively. Discrete items for the nine months ended September 30, 2013 provided a benefit of $3.8 million and were primarily due to the revaluation of certain deferred tax liabilities related to changes in state and U.K. tax law and the effective settlement of a tax audit during the period. These benefits were partially offset by adjustments to the provision for filed returns. Discrete items for the nine months ended September 30, 2012 totaled $0.2 million and were principally due to adjustments for tax returns filed during the period.

The 19.9 percentage point decrease in our tax rate is illustrated in the table below:

 

Provision for income taxes as a percentage of pretax income for the nine months ended September 30, 2012

       34.8

Changes in income taxes as a percentage of pretax income:

    

Reversal of prior year income taxes due to audit settlement

     (9.0  

State tax law changes

     (8.7  

UK law change

     (2.3  

Other

     0.1        (19.9
  

 

 

   

 

 

 

Provision for income taxes as a percentage of pretax income for the nine months ended September 30, 2013

       14.9
    

 

 

 

Refer to Note 7 of the accompanying Condensed Consolidated Financial Statements for additional information regarding income taxes.

Liquidity and Capital Resources

In April 2013, we issued the 2019 Notes. Interest on the 2019 Notes is payable semiannually in arrears on April 15 and October 15 of each year, beginning October 15, 2013, at a rate of 1.625% per annum. The 2019 Notes are the Company’s senior unsecured obligations.

Commensurate with the receipt of the proceeds from the 2019 Notes, we repurchased, through individually negotiated private transactions, approximately $115.6 million aggregate principal amount of our 2015 Notes for $133.4 million, including $1.3 million of accrued interest. Following the completion of these repurchases, approximately $114.4 million aggregate principal of our 2015 Notes remains outstanding.

During May 2013, one of our customers provided us a prepayment totaling $31.7 million to provide working capital during our production ramp to meet their accelerated production schedule. This prepayment was to be applied to deliveries to our customer starting July 2013. Through September 2013, $12.6 million has been utilized. We currently anticipate the remaining $19.1 million will be fully utilized prior to December 31, 2013.

We maintain a $150 million revolving credit facility under our Second Amended and Restated Credit Agreement (the “Credit Agreement”), which expires on May 23, 2017. Borrowings under the Credit Agreement bear interest, at our option, at a rate equal to LIBOR plus an applicable margin or the base rate plus an applicable margin. Both the applicable margin and the facility fee vary based upon our consolidated net debt to consolidated EBITDA ratio, as defined in the Credit Agreement. We had no borrowings outstanding under the Credit Agreement at any time during the nine months ended September 30, 2013 or 2012.

 

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Provided we continue to meet our financial covenants under the Credit Agreement, we expect that our cash, cash equivalents, and short-term investments of $360.2 million and our undrawn credit facility, combined with internally generated funds, will provide us sufficient liquidity to meet our current projected operating needs and capital plans.

The financial covenants contained in our Credit Agreement are described below:

 

    Our leverage ratio (the ratio of Net Debt to Consolidated EBITDA, as defined in the Credit Agreement) was 1.3 to 1 at September 30, 2013. If this ratio were to exceed 3.50 to 1, we would be in default under our Credit Agreement and our ability to borrow under our Credit Agreement would be impaired.

 

    Our interest coverage ratio (the ratio of Consolidated EBITDA to Net Interest, as defined in the Credit Agreement) was 14.3 to 1 at September 30, 2013. If this ratio were to fall below 2.0 to 1, we would be in default under our Credit Agreement and our ability to borrow under the Credit Agreement would be impaired.

Consolidated EBITDA, as defined in the Credit Agreement, allows for adjustments related to unusual gains and losses, certain noncash items, and certain non-recurring charges. At September 30, 2013, we were in compliance with the financial covenants under our Credit Agreement.

Off-balance sheet arrangements. There are no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.

Cash provided by (used in) operating activities. Cash provided by (used in) operating activities for the nine months ended September 30, 2013 and 2012 was $6.3 million and $(25.5) million, respectively. The increased operating inflows during the nine months ended September 30, 2013 were driven primarily by lower inventory purchases during the current year. In the prior year, cash used in operating activities was principally for working capital, including accounts receivable and inventories, partially offset by increases in accounts payable and unearned revenue.

Cash used in investing activities. Cash used in investing activities for the nine months ended September 30, 2013 and 2012 was $61.2 million and $57.9 million, respectively. For the nine months ended September 30, 2013, investing activities consisted primarily of the net outflow of $45.3 million related to the purchase and sale of short-term, available-for-sale investments, and capital expenditures of $26.4 million. Partially offsetting the investing outflows was $10.5 million of proceeds received from the sale of our Pierce Spafford subsidiary during the period. For the nine months ended September 30, 2012, investing activities consisted primarily of the purchase of Remmele, which included net cash consideration of $182.8 million, net available-for-sale investments activity which provided $176.8 million as we sold available-for-sale investments to fund the purchase of Remmele, and capital expenditures of $47.9 million.

Cash provided by (used in) financing activities. Financing activities provided $271.5 million during the nine months ended September 30, 2013, compared to a use of $1.7 million for the same period in 2012. The increase in cash provided by financing activities was driven primarily by the generation of $402.5 million from our issuance of the 2019 Notes during the period, offset by the payment of $12.4 million in deferred financing costs related to the issuance of the 2019 Notes, the repurchase of $115.6 million of aggregate principal amount of our 2015 Notes and normal stock-based compensation activity and scheduled payments on capital leases. During the nine months ended September 30, 2013, financing activities consisted of normal stock-based compensation activity and scheduled payments on capital leases.

 

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Backlog

The Company’s order backlog for all markets was approximately $524 million as of September 30, 2013, compared to $545 million at December 31, 2012. Of the backlog at September 30, 2013, approximately $212 million is expected to be realized over the remainder of 2013. We define backlog as firm business scheduled for release into our production process for a specific delivery date. We have numerous contracts that extend multiple years, including the Airbus, Joint Strike Fighter Program, and Boeing 787 Dreamliner® long-term supply agreements, which are not included in backlog until a specific release into production or a firm delivery date has been established.

Environmental Matters

Based on available information, we believe our share of possible environmental-related costs range from $0.6 million to $2.1 million in the aggregate. At both September 30, 2013 and December 31, 2012, the amount accrued for future environmental-related costs was $1.3 million. Of the amount accrued at September 30, 2013, $1.2 million is recorded in other noncurrent liabilities. During the three and nine months ended September 30, 2013, payments related to our environmental liabilities were immaterial.

Income Taxes

The likelihood of realization of our deferred tax assets is reviewed by management as of each financial reporting period, giving consideration to all available evidence. Based upon this review, management records a valuation allowance when appropriate to reduce the value of the deferred tax assets to the amount more likely than not to be realized. Should management determine in a future period that an additional valuation allowance is required due to unfavorable changes in the facts and circumstances, there would be a corresponding charge to income tax expense.

The Company’s Canadian subsidiary has generated taxable losses of approximately $159.0 million through December 31, 2012. Approximately $0.5 million of these loss carry-forwards will expire in 2015, with the remaining loss carry-forwards expiring between 2026 and 2032. Although recent losses generally indicate a risk that tax loss carry-forwards may be impaired, management believes firm sales contracts, including a significant supply contract with a major aerospace manufacturer that will be substantially sourced from its Canadian subsidiary, and other anticipated business will generate sufficient taxable income to permit utilization of the loss carry-forwards. No other jurisdictions have material net deferred tax asset balances. This conclusion is currently under discussion with the Staff of the Securities and Exchange Commission.

Goodwill and Intangible Assets

In the case of goodwill and intangible assets, 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 or acceleration of the amortization period may be required. Intangible assets were originally valued at fair value at the date of acquisition with the assistance of outside experts.

Concurrent with the acquisition of Remmele, the Medical Device Fabrication reporting unit was formed. Due to the proximity to acquisition date, the Medical Device Fabrication reporting unit does not have a large excess of fair value over book value. As such, this reporting unit is most at risk for potential future impairment charges.

New Accounting Standards

In July 2013, the FASB issued ASU 2013-11, “Income Taxes – Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.”

 

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This ASU prescribes the Balance Sheet presentation for unrecognized tax benefits in the presence of a net operating loss carryforward, tax loss or tax credit carryforward. The amendments in the ASU do not require any new recurring disclosures, and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We do not expect this guidance to have a material impact on the Condensed Consolidated Financial Statements.

In March 2013, the FASB issued ASU 2013-05, “Foreign Currency Matters – Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” This ASU clarifies the applicable guidance for the release of the cumulative translation adjustment under current U.S. GAAP. The amendments in this ASU are effective prospectively for annual and interim reporting periods beginning after December 15, 2013. We do not expect this guidance to have a material impact on our Condensed Consolidated Financial Statements.

In February 2013, the FASB issued ASU 2013-04, “Liabilities – Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date.” This ASU provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the ASU is fixed at the reporting date. The amendments in this ASU are effective prospectively for annual and interim reporting periods beginning after December 15, 2013. We do not expect this guidance to have a material impact on the Condensed Consolidated Financial Statements.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income – Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income.” This ASU added disclosure requirements for amounts reclassified out of accumulated other comprehensive income for interim and annual reporting periods. The amendments in this ASU are effective prospectively for all reporting periods beginning after December 15, 2012. The adoption of this guidance during the Nine months ended September 30, 2013 did not have a material impact on our Condensed Consolidated Financial Statements.

In January 2013, the FASB issued ASU 2013-01, “Balance Sheet – Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” This ASU clarified the types of instruments to which ASU 2011-11 applied. This update is effective for annual reporting periods beginning on or after January 1, 2013. The adoption of this guidance during the nine months ended September 30, 2013 did not have a material impact on our Condensed Consolidated Financial Statements.

In July 2012, the FASB issued ASU No. 2012-02, “Intangibles – Goodwill and Other – Testing Indefinite – Lived Intangible Assets for Impairment.” This ASU added an optional qualitative analysis to the yearly testing for indefinite-lived intangible asset impairment. Depending on the outcome of this analysis, the quantitative process could be eliminated for the year the analysis is performed. The amendments in this ASU are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements.

In December 2011, the FASB issued ASU No. 2011-11 “Balance Sheet – Disclosures about Offsetting Assets and Liabilities.” This guidance requires the disclosure of both net and gross information in the notes for relevant assets and liabilities that are offset. This update is effective for annual reporting periods beginning on or after January 1, 2013. The adoption of this guidance during the nine months ended September 30, 2013 did not have a material impact on our Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

There have been no significant changes in our exposure to market risk from the information provided in Item 7A. Quantitative Disclosures about Market Risk in our Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the SEC on February 22, 2013.

 

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Item 4. Controls and Procedures.

The Company’s management, under the supervision of and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2013 due to the material weaknesses in internal control over financial reporting reported in the Company’s amended Annual Report on Form 10-K/A for the year ended December 31, 2012 as filed with the SEC on November 12, 2013. These material weaknesses relate to controls to assess whether certain customer contracts should be accounted for using a percentage of completion model, the Company’s risk assessment process, the Company’s accounting for recently acquired businesses, internal controls at the Company’s recently acquired Advanced Forming division, and the Company’s controls over its annual goodwill impairment analysis. These material weaknesses continued to exist as of September 30, 2013. The material weakness in revenue recognition for certain customer contracts resulted in the first and second restatements of the Company’s Consolidated Financial Statements for the year ended December 31, 2012 and the Condensed Consolidated Financial Statements for the interim periods in 2012, and with respect to the first restatement each of the three months ended March 31, 2011 and June 30, 2011, as well as revisions to the December 31, 2011 and 2010 Consolidated Financial Statements, the Condensed Consolidated Financial Statements for the six months ended June 30, 2011 and for the three and nine months ended September 30, 2011. The other material weaknesses did not result in a material misstatement to the Company’s Consolidated Financial Statements; however, these material weaknesses could result in a material misstatement to the annual or interim Consolidated Financial Statements that would not be prevented or detected.

There were no changes in the Company’s internal control over financial reporting implemented during the three months ended September 30, 2013 that have materially affected or are reasonably likely to affect the Company’s internal control over financial reporting. The Company has started the evaluation process associated with remediation of the material weaknesses that have been described above. The Company will continue to take measures, including engaging service providers, that may be necessary and advisable so as to institute measures to address these material weaknesses.

PART II —OTHER INFORMATION

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our amended Annual Report on Form 10-K/A for the year ended December 31, 2012 as filed with the SEC on September 24, 2013, which could materially affect our business, financial condition, financial results, or future performance. Reference is made to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements” of this Quarterly Report on Form 10-Q which is incorporated herein by reference.

 

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table sets forth repurchases of our Common Stock during the three months ended September 30, 2013.

 

     Total Number
of Shares
Purchased (1)
     Average Price
Paid Per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs
     Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plans or
Programs
(in thousands) (2)
 

July 1—31, 2013

         —         $     —               —         $ 2,973   

August 1—31, 2013

     —           —           —           2,973   

September 1—30, 2013

     —           —           —           2,973   
  

 

 

    

 

 

    

 

 

    

Total

     —         $ —           —        
  

 

 

    

 

 

    

 

 

    

 

(1) Reflects shares that were repurchased under a program that allows employees to surrender shares to the Company to pay tax liabilities associated with the vesting of restricted stock awards and the payout of performance share awards under the Company’s 2004 Stock Plan.
(2) Amounts in this column reflect amounts remaining under the Company’s $15 million share repurchase program.

Employees may surrender shares to the Company to pay tax liabilities associated with the vesting of restricted stock awards under the 2004 Stock Plan. There were no shares of Common Stock surrendered to satisfy tax liabilities for the three months ended September 30, 2013. In addition, the Company may repurchase shares of Common Stock under the RTI International Metals, Inc. share repurchase program approved by the Company’s Board of Directors on April 30, 1999. The repurchase program authorizes the repurchase of up to $15 million of RTI Common Stock. No shares were purchased under the program during the three months ended September 30, 2013. At September 30, 2013, approximately $3 million of the $15 million remained available for repurchase. There is no expiration date specified for the share repurchase program.

Item 6. Exhibits.

The exhibits listed on the Index to Exhibits are filed herewith and incorporated herein by reference.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

RTI INTERNATIONAL METALS, INC.

Dated: November 12, 2013

By   /S/    WILLIAM T. HULL          

William T. Hull

Senior Vice President and Chief Financial Officer

(principal accounting officer)

 

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INDEX TO EXHIBITS

 

Exhibit

No.

  

Description

  31.1    Certification of Chief Executive Officer required by Item 307 of Regulation S-K as promulgated by the Securities and Exchange Commission and pursuant to Section 302 of Sarbanes-Oxley Act of 2002, filed herewith.
  31.2    Certification of Principal Financial Officer required by Item 307 of Regulation S-K as promulgated by the Securities and Exchange Commission and pursuant to Section 302 of Sarbanes-Oxley Act of 2002, filed herewith.
  32.1    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.
  32.2    Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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