10-K

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 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 of Incorporation)   (I.R.S. Employer Identification No.)

Westpointe Corporate Center One, 5th Floor

1550 Coraopolis Heights Road

Pittsburgh, Pennsylvania

 

15108-2973

(Zip code)

(Address of principal executive offices)  

Registrant’s telephone number, including area code:

(412) 893-0026

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  ¨        No   þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes  ¨        No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  þ        No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  þ        No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨        No   þ

The aggregate market value of the voting stock held by non-affiliates of the registrant was $832.7 million as of June 30, 2013. The closing price of the Company’s common stock (“Common Stock”) on June 28, 2013, as reported on the New York Stock Exchange, was $27.71.

The number of shares of Common Stock outstanding at February 28, 2014 was 30,660,052.

Documents Incorporated by Reference:

Selected Portions of the Proxy Statement for the 2014 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K.

 

 

 

 


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.

 

 

TABLE OF CONTENTS

 

          Page
   PART I   
Item 1.    Business    1
Item 1A.    Risk Factors    11
Item 1B.    Unresolved Staff Comments    19
Item 2.    Properties    20
Item 3.    Legal Proceedings    21
Item 4.    Mine Safety Disclosures    21
   PART II   
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    22
Item 6.    Selected Financial Data    23
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    24
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk    42
Item 8.    Financial Statements and Supplementary Data    44
Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    146
Item 9A.    Controls and Procedures    146
Item 9B.    Other Information    148
   PART III   
Item 10.    Directors, Executive Officers and Corporate Governance    148
Item 11.    Executive Compensation    149
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    149
Item 13.    Certain Relationships and Related Transactions, and Director Independence    149
Item 14.    Principal Accountant Fees and Services    149
   PART IV   
Item 15.    Exhibits, Financial Statement Schedules    150
   Signatures    155


EXPLANATORY NOTE

Restatement of Consolidated Financial Results

This Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (“Annual Report”) includes the restatement of our Consolidated Financial Statements and the related disclosures for the previously reported years ended December 31, 2012 and 2011, and for the interim periods in 2013 and 2012, resulting from the Company’s determination that a valuation allowance against its Canadian deferred tax asset should have been recorded as of December 31, 2010. The Company determined that it should have given greater weight to its Canadian subsidiary’s history of cumulative losses relative to its expectations of future taxable income. As a result of recording the valuation allowance, the Company has corrected the deferred tax assets at each balance sheet date and its provision for income taxes in each affected period. As a result, in this Annual Report, the Company has restated its Consolidated Balance Sheet as of December 31, 2012 and the related Consolidated Statements of Operations, Shareholders’ Equity, and Cash Flows for the years ended December 31, 2012 and December 31, 2011 and interim periods in fiscal year 2012 and March 31, June 30, and September 30, 2013. In addition, the following items of this Annual Report include restated financial data: (i) Part II, Item 6—Selected Financial Data; (ii) Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations; and (iii) Part II, Item 8—Financial Statements and Supplementary Data. We also have disclosure regarding the impact of the restatement on the adequacy of the Company’s internal control over financial reporting and disclosure controls and procedures for the relevant restatement periods in Part II, Item 9A.— Controls and Procedures.

We have not amended our previously-filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for any fiscal year or interim period affected by the restatement discussed above. Instead, the financial information that has been previously filed or otherwise reported for these periods is superseded by the information in this 2013 Annual Report, and the financial information contained in such previously-filed reports should no longer be relied upon.

PART I

Item 1.    Business

The Company

The Company is a leading producer and global supplier of titanium mill products, and a manufacturer of fabricated titanium and specialty metal components for the international aerospace, defense, energy, 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.

On October 1, 2013, the Company purchased all of the outstanding common stock of RTI Extrusions Europe, Limited (formerly the extrusions business of Osborn Metals Limited) (“RTI Extrusions Europe”) for consideration of approximately $16.2 million in cash and the assumption of approximately $4.2 million in liabilities. RTI Extrusions Europe manufactures extruded, hot-or-cold stretched steel and titanium parts for a number of markets including the aerospace and oil and gas markets, and is complementary to the Company’s existing titanium extrusion operation in Houston, Texas.

On January 22, 2014, the Company announced the acquisition of Directed Manufacturing, Inc. (“RTI Directed Manufacturing”), for $23.0 million in cash. RTI Directed Manufacturing is a leader in additive manufacturing of titanium, specialty metal and plastic components for both commercial production and engineering development applications in the commercial aerospace, medical and oil and gas markets. The acquisition provides potential solutions for the Company’s customers who seek near-net shape titanium parts and components.

 

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In April 2013, the Company completed the sale of its subsidiary, Pierce Spafford Metals Company, Inc. (“RTI Pierce Spafford”) for approximately $12.4 million of cash, of which $10.5 million has been received as of December 31, 2013, with the remainder due in late 2014. In addition, during December 2013 the Company entered into a letter of intent to sell the assets of its other non-titanium service center, Bow Steel Corporation (“RTI Connecticut”), which was subsequently completed in February, 2014. The results of RTI Pierce Spafford and RTI Connecticut have been presented as results from discontinued operations on the Company’s Consolidated Statements of Operations and the related assets and liabilities have been presented separately on the Company’s Consolidated Balance Sheets as assets and liabilities of discontinued operations. The Company’s Consolidated Financial Statements and the Notes thereto have been conformed to exclude amounts attributable to the aforementioned discontinued operations.

Industry Overview

Titanium’s physical characteristics include a high strength-to-weight ratio, ability to withstand extreme temperatures and maintain performance characteristics, and superior corrosion and erosion resistance. Relative to other metals, it is particularly effective in extremely harsh conditions. Given these properties, the scope of potential uses for titanium would be much broader than its current uses but for its higher cost of production as compared to other metals. The first major commercial application of titanium occurred in the early 1950’s when it was used in components in aircraft gas turbine engines. Subsequent applications were developed to use the material in other aerospace components and in airframe construction. Traditionally, a majority of the U.S. titanium industry’s output has been used in aerospace applications. The cyclical nature of the aerospace and defense industries have been the principal cause of the fluctuations in the demand for titanium-related products. In more recent years, increasing quantities of the industry’s output have been used in non-aerospace applications, such as the oil and gas exploration and production industry, medical products, geothermal energy production, chemical processing, consumer products, and non-aerospace military applications such as heavy artillery and armoring.

The U.S. titanium industry’s reported shipments were approximately 87 million pounds and 100 million pounds in 2012 and 2011, respectively, and are estimated to be approximately 98 million pounds in 2013. Shipments during 2013 increased as compared to 2012, due to continued high demand related to commercial aircraft build rates. Notwithstanding the current uncertainty in the defense industry related to the future of various defense programs, including the Lockheed Martin F-35 Joint Strike Fighter (“JSF”), demand for titanium is currently expected to increase in 2014 due to the ongoing aircraft build-rate increases expected from both Boeing and Airbus, as well as the continued ramp up of the Boeing 787 program and the expected beginning of deliveries for the Airbus’s A350XWB program.

Changes in titanium demand from the commercial aerospace industry typically precede increases or decreases in aircraft production. In the Company’s experience, aircraft manufacturers and their subcontractors generally order titanium mill products six to eighteen months in advance of final aircraft production. This long lead time is due to the time it takes to produce a final assembly or part that is ready for installation into an airframe or jet engine.

The following is a summary of the Company’s proportional sales to each of the three primary markets it serves and a discussion of events occurring within those markets:

 

     2013     2012     2011  

Commercial Aerospace

     55     55     58

Defense

     22     23     28

Energy, Medical, and Other

     23     22     14

 

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Commercial Aerospace

Historically, growth in the commercial aerospace market was the result of increased world-wide air travel, which drove not only increased aircraft production but also increased production of larger aircraft with higher titanium content than previous models. More recently and into the future, growth in the commercial aerospace market is expected to be driven by the need for more fuel efficient aircraft due to higher energy costs, as well as an expected replacement cycle of older aircraft. In response to these changing dynamics, Boeing is producing the new 787 Dreamliner family of aircraft. Airbus is producing the A350XWB, which completed its first test flight in 2013, to compete with Boeing’s 787 model, and Airbus continues to produce the largest commercial aircraft, the A380. The A350XWB is currently expected to go into service in late 2014. All three of these aircraft use substantially more titanium per aircraft than any other current commercial aircraft. As production of these aircraft increases, titanium demand is expected to grow to levels significantly above previous peak levels.

Collectively, Airbus and Boeing, reported a record aggregate backlog of 10,639 aircraft on order at the end of 2013, a 17% increase from the prior year. This increase was primarily driven by strong orders for the single aisle A320neo and 737 MAX aircraft, as well as continued strength in orders for Boeing’s 787 Dreamliner family of aircraft. This order backlog represents approximately nine years of production, at current build rates, for both Airbus and Boeing. According to Aerospace Market News, reported deliveries of large commercial aircraft by Airbus and Boeing totaled:

 

     2013      2012      2011  

Deliveries

     1,274         1,189         1,011   

Further, The Airline Monitor currently forecasts deliveries of large commercial jets for Airbus and Boeing of approximately:

 

     2016      2015      2014  

Forecasted deliveries

     1,550         1,490         1,410   

Defense

Military aircraft make extensive use of titanium and other specialty metals in their airframe structures and jet engines. These aircraft include U.S. fighters such as the F-22, F-18, F-15, and JSF, and European fighters such as the Mirage, Rafale, and Eurofighter-Typhoon. Military troop transports such as the A400M also use significant quantities of these metals.

The JSF is set to become the fighter for the 21st century with production currently expected to exceed 3,000 aircraft over the life of the program. In 2007, the Company was awarded a long-term contract extension from Lockheed Martin to supply up to eight million pounds annually of titanium mill product to support full-rate production of the JSF through 2020. The products supplied by the Company include titanium sheet, plate, billet, and ingot. Under the contract, the Company is currently supplying approximately two million pounds annually. While the JSF program has been the subject of budget discussions in recent years due to continuing defense budget pressures and the sequestration of the defense budget, the program is expected to consume in excess of two million pounds in 2014.

In addition to aerospace defense requirements, there are numerous titanium applications on ground vehicles and artillery, driven by its armoring (greater strength) and mobility (lighter weight) enhancements.

Energy, Medical, & Other

Sales to the energy, medical device, and other consumer and industrial markets consist primarily of shipments to the energy and medical device sectors by our Engineered Products and Services (“EP&S”) Segment, and sales of ferro titanium to the specialty steel industry from our Titanium Segment.

 

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In the energy sector, demand for the Company’s products for oil and natural gas extraction, including deepwater drilling exploration and production, increased in 2013. Demand for these products has grown due to increased deepwater oil and gas development from deepwater and difficult-to-reach locations around the globe. As the complexity of oil and gas exploration and production increases, the expected scope of potential uses for titanium-based structures and components is expected to increase, as well. Similar to the commercial aerospace market, titanium’s usage in the energy sector would be higher but for its relatively high production costs.

In the medical device sector, the Company collaboratively engineers innovative, precision-machined solutions with its customers in the minimally invasive surgical device and implantable device markets. The market for medical devices is focused primarily on North America, Western Europe, and Japan. Demand for these products is expected to increase as populations age and the healthcare industry’s focus on cost containment continues.

Growth in developing nations, such as China, India, and regions such as the Middle East, has stimulated increased demand from the chemical process industry for heat exchangers, tubing for power plant construction, and specialty metals for desalinization plants. While the Company does not currently participate in these markets due to the nature of its product line, increased demand for these products has resulted in increased titanium demand overall.

Products and Segments

Effective January 1, 2013, we conduct business in two segments: the Titanium Segment and the EP&S Segment. This structure 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.

Titanium Segment

The Titanium Segment melts, forges, 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 and Canton, Ohio; Martinsville, Virginia; Norwalk, California; Windsor, Connecticut; Tamworth, England; and Rosny-Sur-Seine, France, the Titanium Segment manufactures and distributes mill products that are fabricated into parts and utilized in aircraft structural sections such as landing gear, fasteners, tail sections, wing support and carry-through structures, and various engine components including rotor blades, vanes and discs, rings, and engine casings. Its titanium furnaces (as well as other processing equipment) and products are certified and approved for use by all major domestic and most international manufacturers of commercial and military airframes and jet engines. Attaining such certifications is often time consuming and expensive, and can serve as a barrier to entry into the titanium mill product market. 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 Titanium Segment’s mill products are sold to a customer base consisting primarily of manufacturing and fabrication companies in the supply chain for the commercial aerospace, defense, energy, medical device, and other consumer and industrial markets. Customers include prime aircraft manufacturers and their family of subcontractors including fabricators, forge shops, extruders, castings producers, fastener manufacturers, machine shops, and metal distribution companies. Titanium mill products are semi-finished goods and usually represent the raw or starting material for these customers who then form, fabricate, machine, or further process the products into semi-finished and finished parts. In 2013, approximately 21% of the Titanium Segment’s products were sold to the Company’s EP&S Segment, where value-added services are performed on such parts prior to their ultimate shipment to the customer, compared to 19% in 2012 and 18% in 2011. The increase in sales to the EP&S Segment in 2013 resulted from the Company’s efforts to source more of the titanium used in its fabricated components from its mill.

 

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Engineered Products and Services Segment

The EP&S Segment is comprised of companies with significant hard and soft-metal expertise that form, extrude, fabricate, machine, additively manufacture, 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 and Austin, Texas; Sullivan and Washington, Missouri; Laval, Canada; and Welwyn Garden City and Bradford, England, the EP&S 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.

Integrated Strategy

The Company believes that by providing its customers with a full-range of products and technologies, from mill products to assembled and kitted titanium components, it provides significant value to its customers.

When titanium products and fabrications are involved in a project, the Titanium Segment and the EP&S Segment coordinate their varied capabilities to provide the best materials solution for the Company’s customers. Examples of such coordinated activities include:

 

   

The use of Titanium Segment-sourced cut titanium sheet by the EP&S Segment’s forming facilities to manufacture hot and superplastically formed parts for various commercial aerospace and defense programs; and

 

   

The use of Titanium Segment-sourced billet for use by the EP&S Segment’s extrusion facilities to manufacture structured components, including the Boeing Pi Box seat track for the commercial aerospace market.

The Company’s consolidated net sales represented by each Segment for each of the past three years are summarized in the following table:

 

     2013     2012     2011  
(dollars in millions)    $      %     $      %     $      %  

Titanium Segment

   $ 346.6         44.2   $ 352.9         50.4   $ 324.9         66.5

Engineered Products and Services Segment

     436.7         55.8     347.1         49.6     163.5         33.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consolidated net sales

   $ 783.3         100.0   $ 700.0         100.0   $ 488.4         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Operating income (loss) contributed by each Segment for each of the past three years is summarized in the following table:

 

     2013     2012     2011  
(dollars in millions)    $      %     $      %     $     %  

Titanium Segment

   $ 59.0         95.2   $ 39.0         82.3   $ 36.1        154.3

Engineered Products and Services Segment

     3.0         4.8     8.4         17.7     (12.7     (54.3 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total consolidated operating income (loss)

   $ 62.0         100.0   $ 47.4         100.0   $ 23.4        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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The Company’s total consolidated assets identified with each Segment as of December 31 of each of the past three years are summarized in the following table:

 

(dollars in millions)    2013      2012
(as restated)
     2011
(as restated)
 

Titanium Segment

   $ 604.1       $ 566.4       $ 492.2   

Engineered Products and Services Segment

     585.8         544.9         272.5   

Assets of Discontinued Operations

     5.3         25.2         26.5   

General Corporate (1)

     310.3         83.6         309.4   
  

 

 

    

 

 

    

 

 

 

Total consolidated assets

   $ 1,505.5       $ 1,220.1       $ 1,100.6   
  

 

 

    

 

 

    

 

 

 

 

(1) Consists primarily of unallocated cash and short-term investments.

The Company’s long-lived assets by geographic area as of December 31 of each of the past three years are summarized in the following table:

 

(dollars in millions)    2013      2012
(as restated)
     2011
(as restated)
 

United States

   $ 438.2       $ 465.3       $ 278.5   

Canada

     69.4         67.7         71.3   

England

     57.9         37.7         37.1   

France

     1.4         0.8         0.5   
  

 

 

    

 

 

    

 

 

 

Total consolidated long-lived assets

   $ 566.9       $ 571.5       $ 387.4   
  

 

 

    

 

 

    

 

 

 

Exports

The Company’s exports consist primarily of titanium mill products, extrusions, and machined extrusions used in the aerospace markets. The Company’s export sales as a percentage of total net sales for each of the past three years were as follows:

 

       2013         2012         2011    

Export sales

     30     36     37

Such sales are made primarily to Europe, where the Company is a leader in supplying flat-rolled titanium alloy mill products. Most of the Company’s export sales are denominated in U.S. Dollars. For further information about geographic areas, see Note 13 to the Consolidated Financial Statements included in this Annual Report.

Backlog

The Company’s order backlog for all markets was approximately $516 million as of December 31, 2013, as compared to $543 million at December 31, 2012. Of the backlog at December 31, 2013, approximately $483 million is likely to be realized in 2014. The Company defines backlog as firm business scheduled for release into the production process for a specific delivery date. The Company has numerous contracts that extend multiple years, including the Airbus, JSF, and Boeing 787 long-term supply agreements, which are not included in backlog until a specific release into production or a firm delivery date has been established.

Raw Materials

The principal raw materials used in the production of titanium mill products are titanium sponge (a porous metallic material, so called due to its appearance), titanium scrap, and various alloying agents. The Company sources its raw materials from a number of domestic and foreign suppliers under long-term contracts and other

 

6


negotiated transactions. Currently, all of the Company’s titanium sponge requirements are sourced from foreign suppliers. Requirements for titanium sponge, scrap, alloys, and other metallics vary depending upon the exacting specification of the end market application. The Company’s cold-hearth and electron beam melting process provides it with the flexibility to consume a wider range of metallics, thereby reducing its need for purchased titanium sponge.

The Company currently has supply agreements in place for certain critical raw materials. These supply agreements are with suppliers located in, or for products produced in, Japan and the United States, and allow the Company to purchase certain quantities of raw materials at either annually negotiated prices or, in some cases, fixed prices that may be subject to certain underlying input cost adjustments. Purchases made under these contracts are denominated in U.S. Dollars; however, in some cases, the contract provisions include potential price adjustments to the extent that the Yen to U.S. Dollar exchange rate falls outside of a specified range. These contracts expire at various periods through 2021. The Company acquires the balance of its raw materials opportunistically on the spot market as needed. The Company currently believes it has adequate sources of supply for titanium sponge, titanium scrap, alloying agents, and other raw materials to meet its short and medium-term needs.

Business units in the EP&S Segment obtain the majority of their titanium mill product requirements from the Titanium Segment. Other metallic requirements are generally sourced from the best available supplier at competitive market prices.

Competition and Other Market Factors

The titanium metals industry is a highly-competitive and cyclical global business. Titanium competes with other materials, including certain stainless steel, other nickel-based high-temperature and corrosion resistant alloys, and composites. A metal manufacturing company with rolling and finishing facilities could participate in the mill product segment of the industry, although it would either need to acquire intermediate product from an existing source or further integrate to include vacuum melting and forging operations to provide the starting stock for further rolling. In addition, many end-use applications, especially in the aerospace industry, require rigorous testing, approvals, and customer certification prior to purchase, which requires a manufacturer to expend significant time and capital and possess extensive technical expertise, given the complexity of the specifications often required by customers.

Consumers of titanium products in the aerospace industry tend to be very large and highly concentrated. Boeing, Airbus, Lockheed Martin, Bombardier, and Embraer manufacture airframes. General Electric, Pratt & Whitney, Rolls Royce, MTU, and Snecma build jet engines. Direct purchases from these companies and their family of specialty subcontractors account for a majority of aerospace products manufactured for large commercial aerospace and defense applications.

Producers of titanium mill products are primarily located in the U.S., Japan, Russia, Europe, and China. The Company participates directly in the titanium mill product business primarily through its Titanium Segment. The Company’s principal competitors in the aerospace titanium mill product market are Allegheny Technologies Incorporated (NYSE: ATI) and Precision Castparts Corporation (NYSE: PCP), both based in the United States, and Verkhnaya Salda Metallurgical Production Organization (RU: VSMO), based in Russia. The Company competes with these companies primarily on the basis of price, quality of products, technical support, and the availability of products to meet customers’ delivery schedules.

The EP&S Segment competes with other companies primarily on the basis of price, quality, timely delivery, and customer service. The Company’s principal competitors in the aerospace titanium fabricated component market are GKN Aerospace PLC (LSE: GKN), Triumph Group Inc. (NYSE: TGI), LMI Aerospace (NASDAQ: LMIA), PCP, and Ducommun Inc. (NYSE: DCO). In the energy sector, the Company competes with 2H Offshore, Oil States International, Inc. (NYSE: OIS), Ameriforge Group, Inc., and Sheffield Offshore Services.

 

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In the medical device sector, the Company competes with Norwood Medical, Accellent, and Mountainside Medical. The Company believes that the business units in its EP&S Segment are well-positioned to continue to compete and grow due to the range of goods and services offered, their demonstrated expertise, and the increasing synergy with the Titanium Segment for product and technical support.

Trade and Legislative Factors

Imports of titanium mill products from countries that are subject to the normal trade relations (“NTR”) tariff rate are subject to a 15% tariff, whereas the countries not subject to the NTR tariff rate are subject to a 45% tariff. Additionally, a 15% tariff exists on unwrought titanium products entering the U.S., including titanium sponge. Currently, the Company imports titanium sponge from Japan, which is subject to this 15% tariff. Competitors of the Company that do not import titanium sponge are not subject to the additional 15% tariff in the cost of their products. In the past, the Company has sought relief from this tariff through the Offices of the U.S. Trade Representative but has been unsuccessful in having the tariff removed. The Company believes that the U.S. trade laws as currently applied to the domestic titanium industry create a competitive disadvantage to the Company.

U.S. Customs and Border Protection (“U.S. Customs”) administers a duty drawback program whereby duty paid on imported items can be recovered. In the event materials on which duty has been paid are used in the manufacture of products in the United States and such manufactured products are then exported, duties previously paid may be refunded as drawbacks, provided that various requirements are met. The Company participates in the U.S. Customs’ duty drawback program.

The United States Government is required by 10 U.S.C. §2533b, “Requirement to buy strategic materials critical to national security from American sources” (the “Specialty Metals Clause”), to use domestically-melted titanium for certain military applications. The law was comprehensively revised in the 2007 Defense Authorization Act, and further revised per the National Defense Authorization Act for Fiscal Year 2008 (“2008 Act”). The 2008 Act reflects a compromise on domestic source requirements for specialty metals.

As currently implemented, the Specialty Metals Clause applies to commercial off-the-shelf-items such as: specialty metals mill products like titanium bar, billet, slab, and sheet; forgings and castings of specialty metals (unless incorporated into a commercial off-the-shelf item or subassembly); and fasteners (unless incorporated into commercial off-the-shelf end items or subassemblies). The 2008 Act provides for a de minimis exception whereby defense agencies may accept an item containing up to 2% noncompliant metal, based on the total weight of all of the specialty metals in an item and revised the rules for granting compliance waivers when compliant materials are not available.

The Company believes that the compromises contained in the 2008 Act provided a fair and workable solution bridging the biggest concerns on both sides of the debate. The Company, together with the specialty metals industry as a whole, continues to monitor the application and enforcement of the 2008 Act to affirm that the Specialty Metals Clause continues to ensure a reliable, domestic source for products critical to national security.

Environmental Liabilities

The Company is subject to various environmental laws and regulations as well as certain health and safety laws and regulations that are subject to frequent modifications and revisions. While historically the cost of compliance for these matters has not had a material adverse impact on the Company, it is not possible to accurately predict the ultimate effect changing environmental health and safety laws and regulations may have on the Company in the future. The Company continually evaluates its obligations for environmental-related costs on a quarterly basis and makes adjustments as necessary. For further information on the Company’s environmental liabilities, see Note 14 to the Consolidated Financial Statements included in this Annual Report.

 

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Marketing and Distribution

The Company markets its titanium mill and related products and services worldwide. The majority of the Company’s sales are made through its own sales force. The Company’s sales force has offices in Pittsburgh, Pennsylvania; Niles, Ohio; Minneapolis, Minnesota; Houston and Austin, Texas; Norwalk, California; Sullivan and Washington, Missouri; Windsor, Connecticut; Bradford, Tamworth, and Welwyn Garden City, England; Jiangsu, China; and Laval, Canada. Technical Marketing personnel are available to service these offices. Customer support for new product applications and development is provided by the Company’s Customer Technical Service personnel at each business unit, as well as at the corporate-level through the Company’s Technical Business Development and Research and Development organizations located in Pittsburgh, Pennsylvania and Niles, Ohio, respectively.

Research, Technical, and Product Development

The Company conducts research, technical, and product development activities including not only new product development, but also new or improved technical and manufacturing processes.

The principal goals of the Company’s research programs are advancing technical expertise in the production of titanium mill and fabricated products, and developing innovative solutions to customer needs through new and improved mill and value-added products. The Company’s research, technical, and product development expenses for each of the past three years were as follows:

 

       2013          2012          2011    
(dollars in millions)                     

Research, technical and product development expenses

   $ 3.9       $ 4.2       $ 3.4   

Patents and Trademarks

The Company possesses a substantial body of technical know-how and trade secrets. The Company considers its expertise, trade secrets, and patent portfolio to be important to the conduct of its business, although no individual item is currently considered to be material to either the Company’s business as a whole or to an individual reporting segment. The Company’s Titanium Segment holds seven patents covering various manufacturing processes, most of which have not yet been commercialized, and the Company’s EP&S Segment holds eight patents related to its energy business. All of the Company’s patents have been issued between 2000 and 2013 and, assuming payment of all required maintenance fees, expire between 2020 and 2030.

Employees

At December 31, 2013, the Company and its subsidiaries had 2,437 employees, 913 of whom were classified as administrative and sales personnel. Of the total number of employees, 809 employees were in the Titanium Segment, 1,544 in the EP&S Segment, and 84 at RTI’s corporate headquarters.

The United Steelworkers of America (“USW”) represents approximately 345 of the hourly, clerical, and technical employees at the Company’s plant in Niles, Ohio. In 2012, the Company and the USW extended its current union contract through June 30, 2018. The Company’s facility in Washington, Missouri has 176 hourly employees who are represented by the International Association of Machinists and Aerospace Workers (“IAMAW”). The current labor contract with the IAMAW expires on February 19, 2015. No other Company employees are currently represented by a union.

 

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Executive Officers of the Registrant

Listed below are the executive officers of the Company, together with their ages and titles as of December 31, 2013.

 

Name

 

Age

 

Title

Dawne S. Hickton

  56   Vice Chair, President and Chief Executive Officer

James L. McCarley

  50   Executive Vice President—Operations

Patricia A. O’Connell

  51   Executive Vice President—Commercial

William T. Hull

  56   Senior Vice President and Chief Financial Officer

William F. Strome

  58   Senior Vice President—Finance and Administration

Chad Whalen

  39   General Counsel and Senior Vice President—Government Relations

Biographies

Ms. Hickton was appointed Vice Chair, President and Chief Executive Officer in October 2009. She had served as Vice Chair and Chief Executive Officer since April 2007, Senior Vice President and Chief Administrative Officer since July 2005, Corporate Secretary since April 2004, and Vice President and General Counsel since June 1997. Prior to joining the Company, Ms. Hickton had been an Assistant Professor of Law at the University of Pittsburgh School of Law, and was employed at U.S. Steel Corporation from 1983 through 1994.

Mr. McCarley was appointed Executive Vice President—Operations in May 2010. He had served as the Chief Executive Officer of General Vortex Energy, Inc., a private developer of engine and combustion technologies, from September 2009 to May 2010. From 1987 to 2009, Mr. McCarley served in a variety of management positions at Wyman Gordon, a division of Precision Castparts Corporation, a global manufacturer of complex metal components, most recently as Division President of Wyman Gordon—West from 2008 to 2009 and Vice President & General Manager from 2006 to 2008.

Ms. O’Connell was appointed Executive Vice President—Commercial in January 2013. Prior to joining RTI, Ms. O’Connell was President of Rolls-Royce’s North America Customer Business where she was responsible for leading and developing the new Customer Business organization in the United States. Ms. O’Connell has held senior leadership positions at GE Aviation as VP of Customer Management, Business and General Aviation and President Civil Aviation Systems, as well as key leadership roles at Rockwell Collins. Ms. O’Connell has over 20 years of experience in sales, new business development, operations, material and supply, international business, strategy and customer relations including 17 years in the aviation industry.

Mr. Hull was appointed Senior Vice President and Chief Financial Officer in April 2007. He had served as Vice President and Chief Accounting Officer since August 2005. Prior to joining the Company, Mr. Hull served as Corporate Controller of Stoneridge, Inc., a global designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the commercial vehicle, automotive, agricultural and off-highway vehicle markets, where he was employed since 2000. Mr. Hull is a Certified Public Accountant.

Mr. Strome was appointed Senior Vice President—Finance and Administration in October 2009. He had served as Senior Vice President of Strategic Planning and Finance since November 2007. Mr. Strome will be retiring from the Company effective April 15, 2014. Prior to joining the Company, Mr. Strome served as a Principal focusing on environmental development projects at Laurel Mountain Partners, L.L.C. Prior to joining Laurel in 2006, Mr. Strome served as Senior Managing Director and Group Head, Diversified Industrials at the investment banking firm Friedman, Billings, Ramsey & Co., Inc. From 1981 to 2001, Mr. Strome was employed by PNC Financial Services Group, Inc. in various legal capacities and most recently managed PNC’s corporate finance advisory activities and its mergers and acquisitions services.

 

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Mr. Whalen was appointed General Counsel & Senior Vice President—Government Relations in April 2013. He served as Vice President, General Counsel and Secretary from February 2007 to April 2013. Mr. Whalen practiced corporate law at the law firm of Buchanan Ingersoll & Rooney PC from 1999 until joining the Company. He is an active member of The Society of Corporate Secretaries and Government Professionals and the Business Law Section of the American Bar Association.

Available Information

Our Internet address is www.rtiintl.com. We make available, free of charge through our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such documents are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). All filings are available at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. In addition, all filings are available via the SEC’s website (www.sec.gov). We also make available on our website our corporate governance documents, including the Company’s Code of Ethical Business Conduct, governance guidelines, and the charters for various board committees.

Item 1A.    Risk Factors.

Our business is subject to various risks and uncertainties. Any of these individual risks described below, or any number of these risks occurring simultaneously, could have a material effect on our Consolidated Financial Statements, business, or results of operations. You should carefully consider these factors, as well as the other information contained in this document, when evaluating your investment in our securities.

We are subject to risks associated with global economic and political uncertainties.

Like other companies, we are susceptible to the effects of the prolonged economic downturn and slow recovery characterized by high unemployment and decreased consumer and business spending. Macroeconomic conditions in the United States and abroad may affect our performance and that of our customers and suppliers. Continued uncertainty about global economic conditions pose a risk, as customers may postpone or reduce spending in response to restraints on credit. Further, our ability to access the traditional bank and capital markets may be negatively impacted, which could adversely impact our ability to react to changing economic and business conditions. We remain subject to various domestic and international risks and uncertainties, including changing social conditions and uncertainties relating to the current and future political climate. Changes in policy resulting from the current political environment, fluctuations in global currencies, and continued worldwide political instability could have an adverse impact on the financial condition and the level of business activity of the defense industry or other market segments in which we participate. This may reduce our customers’ demand for our products and/or depress pricing of those products, resulting in a material adverse impact on our business, prospects, results of operations, revenues, and cash flows.

A substantial amount of our revenue is derived from the commercial aerospace and defense industries and a limited number of customers.

Approximately 77% of our current annual revenue is derived from the commercial aerospace and defense industries. Of this amount, Boeing, through multiple contracts with various Company subsidiaries covering varying periods, accounted for approximately 21% of our consolidated net sales in 2013. Although business with our largest customers is typically split into several contracts, the loss of all of the business from any of our primary customers (whether by cancellation of existing contracts or the failure to award us new business) could have a material adverse effect on our business, results of operations and financial position. Within the commercial aerospace and defense industries are a relatively small number of consumers of titanium products

 

11


that typically have strong purchasing power as a result of consolidation and other factors. Those industries have historically been highly cyclical, resulting in the potential for sudden and dramatic changes in expected production and spending that, as a partner in the supply chain, can negatively impact our operational plans and, ultimately, the demand for our products and services.

In addition, many of our customers are dependent on the commercial airline industry, which is subject to significant economic and political challenges due to threats or acts of terrorism, rising or volatile fuel costs, pandemics or other outbreaks of infectious diseases, aggressive competition, global economic slowdown, and other factors. Further, the new aerospace and defense platforms which use our products may be subject to production delays which affect the timing of the delivery of our products for such platforms. Any one or combination of these factors could occur suddenly and result in a reduction or cancellation in orders of new airplanes and parts which could have an adverse impact on our business. Neither we nor our customers may be able to project or plan in a timely manner for the impact of these events.

Continued U.S. budget deficits could result in continued defense spending cuts and/or reductions in defense programs, including the JSF program, which could adversely impact us.

Some of our customers are particularly sensitive to the level of government spending on defense-related products. Government programs are dependent upon the continued availability of appropriations, which are approved on an annual basis. Future reductions in defense spending could result from the current or future economic or political environment, such as recent sequestration of the defense budget, which could result in reductions in demand for defense-related titanium products. Further, changes to existing defense procurement laws and regulations, such as the domestic preference for specialty metals, could adversely affect our results of operations.

A significant amount of forecasted revenue is associated with the JSF program. Continued U.S. Federal budget deficits could result in significant pressure to reduce the annual defense budget, potentially including cancellations of, reductions in, or delays of major defense programs such as the JSF program. Delays in the ramp up of the JSF program, or a reduction in the total number of aircraft produced, could have a material adverse impact on our results of operations, financial position, and cash flows.

A significant amount of our future revenue is based on long-term contracts for new aircraft programs.

We have entered into several long-term contracts in recent years to produce titanium mill products and complex engineered assemblies for several new aircraft programs, including the Boeing 787 Dreamliner, the JSF, and the Airbus family of aircraft, including the A380, the A350XWB and the A400M military transport. In order to meet the delivery requirements under each of these contracts, we have invested in significant capital expansion projects. We have also experienced significant delays with respect to the ramp-up of certain of these long-term programs due to production problems or other concerns experienced by our customers. In the event any such delays were to reoccur, or if any of these programs were to be cancelled, such events could result in a material adverse impact on our business, prospects, results of operations, revenues, cash flows, and financial condition.

Integrating acquisitions may be more difficult, costly or time-consuming than expected, which may adversely affect our results and affect adversely the value of our stock following such acquisitions.

We have completed various acquisitions that we believe will be beneficial to the Company and our shareholders. The success of these acquisitions will depend, in part, on our ability to realize the anticipated benefits from integrating the businesses acquired. To realize these anticipated benefits, we must successfully integrate the businesses in an efficient and effective manner. If we are unable to achieve these objectives within the anticipated time frames, or at all, the anticipated benefits and cost savings of the acquisitions may not be realized fully, or at all, or may take longer to realize than expected, and as a result our results of operations, financial position, and cash flow may be adversely affected.

 

12


Specifically, issues that must be addressed in integrating the acquired companies into our operations in order to realize the anticipated benefits of the acquisitions include, among others:

 

   

integrating and optimizing the utilization of the properties and equipment of RTI and acquired businesses;

 

   

integrating the sales and information technology systems of RTI and the acquired businesses; and

 

   

conforming standards, controls, procedures and policies, business cultures and compensation structures between the companies.

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

Section 404 of the Sarbanes-Oxley Act of 2002 requires us to conduct a comprehensive evaluation of our internal control over financial reporting. To comply with this statute, we are required to document and test our internal control over financial reporting, our management is required to assess and issue a report concerning our internal control over financial reporting, and our independent registered public accounting firm is required to attest to and report on our assessment of the effectiveness of internal control over financial reporting. We have determined that certain material weaknesses, as described in Part II—Item 9A, Controls and Procedures, of this Annual Report existed as of December 31, 2013. Accordingly, we have concluded that our internal control over financial reporting and disclosure controls and procedures were not effective as of December 31, 2013.

Management, with oversight from the Audit Committee of the Board of Directors, has developed and presented a plan for the completion of remediation measures to address these weaknesses. Although we believe we are taking appropriate actions to remediate the control deficiencies we have previously identified, we cannot assure you that we will not discover other material weaknesses in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in implementation, could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our Consolidated Financial Statements, and substantial costs and resources may be required to rectify these or other internal control deficiencies. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, the market price of our common stock could decline significantly, and our business, financial condition, and reputation could be harmed.

Our failure to timely comply with our reporting obligations under the Exchange Act may have an adverse effect on our ability to raise capital.

As a result of our failure to timely comply with our reporting obligations under the Exchange Act in 2013, we are currently subject to restrictions regarding the registration of our securities, including our common stock, under federal securities laws. Although we have regained compliance with our reporting obligations under the Exchange Act, for a certain period of time in calendar year 2014 we will be unable to use a shorter and less costly registration statement on Form S-3. This restriction increases our costs to access capital markets, which may adversely affect our business.

The carrying value of goodwill and other intangible assets may not be recoverable.

As of December 31, 2013, we had goodwill of $117.6 million and other intangible assets of $53.8 million. Goodwill and other intangible assets are recorded at fair value on the date of acquisition. In accordance with applicable accounting guidance, we review goodwill and other indefinite-lived intangible assets at least annually for impairment, and definite-lived intangible assets when facts and circumstances warrant an impairment review. Impairment may result from, among other things, deterioration in performance, adverse market conditions, adverse changes in applicable laws or regulations, and a variety of other factors. The amount of any impairment would be charged immediately through our Consolidated Statement of Operations. Any future goodwill or other intangible asset impairment could have a material adverse effect on our results of operations and financial condition.

 

13


We are dependent on various third-party services that are subject to price and availability fluctuations.

We often rely on other companies to provide outside material processing services that may be critical to the manufacture of our products. We depend on these third parties to meet our contractual obligations to our customers and to conduct our operations. Our ability to meet our obligations to our customers may be adversely affected if these third parties do not provide the agreed-upon services in compliance with customer requirements and in a timely and cost-effective manner. Further, purchase prices and availability of these services are subject to volatility. At any given time, we may be unable to obtain these critical services on a timely basis, at acceptable prices, or on other acceptable terms, if at all. Further, if an outside processor is unable to produce to required specifications, our additional cost to cure may negatively impact our margins. Such third parties may be less likely than us to be able to quickly recover from natural disasters or other events beyond their control, and may be subject to additional risks such as financial problems that limit their ability to conduct their operations. Many factors outside of their or our control, including without limitation, raw material shortages, inadequate manufacturing capacity, labor disputes, transportation disruptions or weather conditions, could adversely affect their ability to return our products to us at favorable margins and in a timely manner.

If we are unable to protect our data and process control systems against data corruption, cyber-based attacks, or network security breaches, we could experience disruption to our operations, the compromise or corruption of confidential information, and/or damage to our reputation, relationship with customers, or physical assets, all of which could negatively impact our financial results.

We have in place a number of systems, processes, and practices designed to protect against intentional or unintentional misappropriation or corruption of our systems and information or disruption of our operations due to a cyber incident. Despite our security efforts, our information technology and infrastructure could be subject to attacks by hackers, computer viruses or physical or electronic breaches resulting from employee error, malfeasance or other disruptions, which could create system disruptions, shutdowns, or unauthorized disclosure of confidential information. If we are unable to prevent such security or privacy breaches, our operations could be disrupted or we may suffer loss of reputation, financial loss, legal claims or proceedings, property damage, and other regulatory penalties because of lost or misappropriated information. Furthermore, our customers are increasingly imposing more stringent contractual obligations on us relating to our information security protections and protocols. If we are unable to maintain protections and processes at a level commensurate with that required by our large customers, it could negatively affect our relationships with those customers and harm our business.

Demand for our products and services may be adversely affected by decreased demand for our customers’ products and services.

Our business is substantially derived from titanium mill products and fabricated metal parts, which are primarily used by our customers as components in the manufacture of their products. Our ability to meet our financial expectations could be directly impacted by our customers’ inabilities to meet their own financial expectations. A significant downturn in demand for our customers’ products and services could occur for reasons beyond their control such as unforeseen spending constraints, competitive pressures, rising prices, the inability to contain costs, and other domestic as well as global economic, environmental or political factors. Any resulting slowdown in demand by, or complete loss of business from, these customers as a result of decreased demand for their products could have a material impact on our results of operations and financial position, including, but not limited to, impairment of goodwill and long-lived assets, which could be material.

We are subject to competitive pressures.

The titanium metals industry is highly-competitive on a worldwide basis. Our competitors are located primarily in the U.S., Japan, Russia, Europe, and China. Our Russian competitor, in particular, has significantly greater capacity than us and others in our industry. Additionally, our industry has been experiencing a period of consolidation, which further enhances competitive pressures. Not only do we face competition for a limited

 

14


number of customers with other producers of titanium products, but we also must compete with producers of other generally less expensive materials of construction including stainless steel, nickel-based high temperature and corrosion resistant alloys, and composites.

Our competitors could experience more favorable operating conditions than us, including lower raw materials costs, more favorable labor agreements, or other factors which could provide them with competitive cost advantages in their ability to provide goods and services. Changes in costs or other factors related to the production and supply of titanium mill products, compared to costs or other factors related to the production and supply of other types of materials of construction, may negatively impact our business and the industry as a whole. New competitive forces unknown to us today could also emerge which could have an adverse impact on our financial performance. Our foreign competitors in particular may have the ability to offer goods and services to our customers at more favorable prices due to advantageous economic, environmental, political, or other factors.

In addition, the titanium industry is constantly evolving and there is significant competition to develop improved processes and uses for titanium. If the Company fails to develop new processes, uses, or markets for titanium, it could result in the loss of market share and key customers.

We may experience a lack of supply of raw materials at costs that provide us with acceptable margin levels.

The raw materials required for the production of titanium mill products (primarily titanium sponge and scrap) are acquired from a number of domestic and foreign suppliers. Although we have long-term contracts in place for the procurement of certain amounts of raw material, and we believe we have adequate sources of supply to meet our short and medium-term needs, we cannot guarantee that our suppliers will fulfill their contractual obligations, and they may be adversely impacted by events within or outside of their control that may adversely affect our business operations. We cannot guarantee that we will be able to obtain adequate amounts of raw materials from other suppliers in the event that our primary suppliers are unable to meet our needs. We may experience an increase in prices for raw materials which could have a negative impact on our profit margins if we are unable to adequately increase product pricing, and we may not be able to project the impact that an increase in costs may cause in a timely manner. We may be contractually obligated to supply products to our customers at price levels that do not achieve our expected margins due to unanticipated increases in the costs of raw materials. We may experience dramatic increases in demand and we cannot guarantee that we will be able to obtain adequate levels of raw materials at prices that are within acceptable cost parameters in order to fulfill that demand.

We are subject to changes in product pricing.

The titanium industry is highly cyclical. Consequently, excess supply and competition may periodically result in fluctuations in the prices at which we are able to sell certain products. Price reductions may have a negative impact on our operating results. In addition, our ability to implement price increases is dependent on market conditions, which are often beyond our control. Given the long manufacturing lead times for certain products, the realization of financial benefits from increased prices may be delayed.

We may experience a shortage in the supply of energy or an increase in energy costs to operate our plants.

Because our operations are reliant on energy sources from outside suppliers, we may experience significant increases in electricity and natural gas prices, unavailability of electrical power, natural gas, or other resources due to natural disasters, interruptions in energy supplies due to equipment failure or other causes or the inability to extend expiring energy supply contracts on favorable economic terms, any of which could have a material adverse impact on our results of operations. We own twenty-six natural gas wells which provide some but not all of the non-electrical energy required by our Niles, Ohio operations.

 

15


We may not be able to recover the carrying value of our long-lived assets, which could require us to record asset impairment charges.

As of December 31, 2013, we had net property, plant, and equipment of $372.3 million. We operate in a highly-competitive and highly-cyclical industry. In addition, we have invested heavily in new machinery and facilities in order to win new long-term supply agreements related to next-generation aircraft such as the Boeing 787, the Airbus family of commercial aircraft, and the JSF program. If we were unable to realize the benefits under these agreements, for whatever reason, we could be required to record material asset and asset-related impairment charges in future periods which could adversely affect our results of operations.

Many of our products are used in critical aircraft components and medical devices and must be manufactured to stringent quality standards.

Given the critical nature of many of the end uses for our products, including specifically their use in critical rotating parts of gas turbine engines and their use in medical devices, a quality issue could have a material adverse impact on our reputation in the marketplace. While we maintain product liability insurance, including aircraft grounding liability of $500 million, should a quality or warranty claim exceed this coverage, or should our coverage be denied, such liability could have a material adverse impact on our results of operations, cash flows, financial condition and reputation.

Healthcare legislation has and may continue to impact our business.

The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively the “Acts”) were passed and signed into law in March, 2010. Among other things, the Acts impose an individual mandate for obtaining health insurance coverage; require plans to be sold on a guaranteed issue basis, which eliminates pre-existing condition exclusions; prohibit annual and lifetime maximum limits on certain essential benefits; restricts the extent to which policies can be rescinded, and imposes new and significant taxes on health insurers and health care benefits. Provisions of the Acts become effective at various dates between their enactment in 2010 and the year 2020. The Department of Health and Human Services, the Department of Labor and the Treasury Department have issued and are continuing to issue the necessary enabling regulations and guidance with respect to the Acts, and the National Association of Insurance Commissioners continue to develop model regulations and best practices in connection with the Acts. Due to the breadth and complexity of the Acts, the fact that the implementing regulations and interpretive guidance are still being developed, and the phased-in nature of the Acts’ implementation, it is difficult to predict the overall impact of the Acts on our business. Depending on how and when the provisions of the Acts are implemented, our results of operations, financial position and cash flows could be materially adversely affected.

Our business could be harmed by strikes or work stoppages.

Approximately 345 hourly, clerical and technical employees at our Niles, Ohio facility are represented by the USW. Our current labor agreement with this union expires June 30, 2018. Approximately 176 hourly employees at our RTI Advanced Forming facility in Washington, Missouri are represented by the IAMAW. Our current labor agreement with this union expires February 19, 2015.

We cannot be certain that we will be able to negotiate new bargaining agreements upon expiration of the existing agreements on the same or more favorable terms as the current agreements, or at all, without production interruptions caused by a labor stoppage. If a strike or work stoppage were to occur in connection with the negotiation of a new collective bargaining agreement, or as a result of a dispute under our current collective bargaining agreements with the labor unions, our business, financial condition, cash flows, and results of operations could be materially adversely affected.

 

16


Our business is subject to the risks of international operations.

We operate subsidiaries and conduct business with suppliers and customers in foreign countries that expose us to various risks associated with international business activities including potentially volatile economic and labor conditions, political instability, expropriation, and changes in taxes, tariffs, and other regulatory costs. We are also exposed to and could be adversely affected by fluctuations in the exchange rate of the U.S. Dollar against other foreign currencies, particularly the Canadian Dollar, the Euro, and the British Pound. Although we are operating primarily in countries with relatively stable economic and political climates, there can be no assurance that our business will not be adversely affected by risks inherent to international operations. Furthermore, our international operations subject us to numerous U.S. and foreign laws and regulations. Failure by our employees or consultants to comply with these laws and regulations could result in certain liabilities, which could have a material adverse effect on our financial results.

Our success depends largely on our ability to attract and retain key personnel.

Much of our future success depends on the continued service and availability of skilled personnel, including members of our executive team, management, materials engineers and other technical specialists, and staff positions. The loss of key personnel could adversely affect our ability to perform until suitable replacements are found. There can be no assurance that we will be able to continue to successfully attract and retain key personnel.

The demand for our products and services may be affected by factors outside of our control.

War, terrorism, natural disasters, and public health issues including pandemics, whether in the U.S. or abroad, have caused and could cause damage or disruption to international commerce by creating economic and political uncertainties that may have a negative impact on the global economy as a whole. Our business operations, as well as our suppliers’ and customers’ business operations, are subject to interruption by those factors as well as other events beyond our control such as governmental regulations, fire, power shortages, and others. Although it is impossible to predict the occurrences or consequences of any such events, they could result in a decrease in demand for our products, make it difficult or impossible for us to deliver products to our customers or to receive materials from our suppliers, and create delays and inefficiencies in our supply chain. Our operating results and financial condition may be adversely affected by these events.

We are required to comply with changing laws and regulations and new laws and regulations, including those related to environmental, health, safety and securities, which may adversely affect our business and subject the Company to substantial costs and liabilities.

The Company is subject to numerous federal, state, local and international laws and regulations. Some of these laws and regulations are unclear, become effective over long periods of time, or require implementation of regulations by agencies.

We own and/or operate a number of manufacturing and other facilities. Our operations and properties are subject to various laws and regulations relating to the protection of the environment and health and safety matters, including those governing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. Some environmental laws can impose liability for all of the costs of a contaminated site without regard to fault or the legality of the original conduct. We could incur substantial costs, including fines, penalties, civil and criminal sanctions, investigation and cleanup costs, natural resource damages and third-party claims for property damage or personal injury, as a result of violations of or liabilities under environmental laws and regulations or the environmental permits required for our operations. Many of our properties have a history of industrial operations, including the use and storage of hazardous materials, and we are involved in remedial actions relating to some of our current and former properties and, along with other responsible parties, third-party sites. We have established reserves for such matters where appropriate. The ultimate costs of cleanup, and our share of such costs, however, are difficult to accurately predict and could exceed current reserves. We also could incur significant additional costs at these

 

17


or other sites if additional contamination is discovered, additional cleanup obligations are imposed and/or the failure of other responsible parties to participate or honor their financial responsibilities. In addition, while the cost of complying with environmental laws and regulations has not had a material adverse impact on our operations in the past, such laws and regulations are subject to frequent modifications and revisions, and more stringent compliance requirements, or more stringent interpretation or enforcement of existing requirements, may be imposed in the future on us or the industries in which we operate. As a result, we could incur significant additional costs complying with environmental laws and regulations in the future.

In addition, we are required to comply with various securities laws and regulations, including, but not limited to the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act, among other provisions, contains provisions to improve transparency and accountability concerning the supply of certain minerals originating from the Democratic Republic of Congo and adjoining countries that are believed to be benefitting armed groups (“Conflict Minerals”). While the Dodd-Frank Act does not prohibit companies from using Conflict Minerals, the SEC mandates due diligence, disclosure and reporting requirements for companies which manufacture products that include components containing such conflict minerals. Our efforts to comply with the Dodd-Frank Act and other evolving laws, regulations and standards are likely to result in increased costs and expenses.

Complying with all of these various laws and regulations is complex and cumbersome. Any modifications in these laws and regulations applicable to us, the enactment of new laws and regulations, or any failure to comply with, or enhanced enforcement activity of, such laws and regulations, could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our working capital requirements may negatively affect our liquidity and capital resources.

Our working capital requirements can vary significantly, depending in part on the timing of our delivery obligations under various customer contracts and the payment terms with our customers and suppliers. If our working capital needs exceed our cash flows from operations, we would look to our cash balances and availability for borrowings under our existing credit facility to satisfy those needs, as well as potential sources of additional capital, which may not be available on satisfactory terms and in adequate amounts, if at all.

The price of our Common Stock has fluctuated and may continue to fluctuate, which may affect the price at which one could sell the shares of our Common Stock, and the sale of substantial amounts of our Common Stock could adversely affect the price of our Common Stock.

The market price and trading volume of our Common Stock have been and may continue to be subject to significant fluctuations due not only to general stock market conditions, but also to a change in sentiment in the market regarding our industry operations, business prospects or liquidity. During the period for the 12 months ended December 31, 2013, our Common Stock has fluctuated from a high of $36.09 per share to a low of $26.05 per share. In addition to the risk factors discussed in this Annual Report, the price and volume volatility of our Common Stock may be affected by operating results that vary from expectations of management, analysts or investors, developments in or regulatory changes affecting our business or industry generally, announcements of strategic developments, acquisitions and other material events by us, our customers or our competitors, and changes in global financial and economic markets and general market conditions.

Any volatility of or a significant decrease in the market price of our Common Stock could also negatively affect our ability to make acquisitions using Common Stock. Further, if we were to be the object of securities class action litigation as a result of volatility in our Common Stock price or for other reasons, it could result in substantial costs and diversion of our management’s attention and resources, which could negatively affect our financial results. In addition, in recent years, the global equity markets have experienced substantial price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies. The price of our Common Stock could fluctuate based upon factors that have little or nothing to do with our Company, and these fluctuations could materially reduce our stock price.

 

18


We may not generate sufficient cash flow from our business to service our debt obligations.

Our business has not generated significant cash flow from operations in recent years. Our ability to make scheduled payments of the principal of, or to refinance, our current indebtedness, depends on our ability to generate cash flow from operations in the future. Our ability to generate cash flows from our operations is subject to economic, financial, competitive and other factors, some of which are beyond our control. Our business may continue to not generate cash flow from operations in the future sufficient to service our debt and make necessary capital expenditures or accretive acquisitions. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at the time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our existing debt obligations.

Item 1B.    Unresolved Staff Comments.

The Company received written comments from the SEC in July 2013 relating to its Annual Report on Form 10-K for the fiscal year ended December 31, 2012. One comment from the July 2013 comment letter currently remains unresolved, which relates to the Company’s treatment of its Canadian net deferred tax asset at its Canadian subsidiary, as discussed throughout this Annual Report. Following discussion with the Staff of the SEC regarding the comment, the Company reconsidered its position and determined that a valuation allowance against the Company’s Canadian deferred tax asset should have been recorded as of December 31, 2010. The Company determined that it should have given greater weight to its Canadian subsidiary’s history of cumulative losses relative to its expectations of future taxable income. As a result of recording the valuation allowance, the Company has corrected the deferred tax assets at each balance sheet date and its provision for income taxes in each affected period, as reflected in this Annual Report. The Company believes that this outstanding comment will be considered resolved by the SEC upon filing of this Annual Report.

 

19


Item 2.    Properties.

Manufacturing Facilities

The Company has approximately 2.3 million square feet of manufacturing facilities, exclusive of distribution facilities and office space. Set forth below are the Company’s principal manufacturing plants, the principal products produced at each location, and each plant’s aggregate capacities.

Facilities

 

Location

 

Owned /
Leased

 

Products Produced

  Annual  Rated
Capacity
 

Titanium Segment

     

Niles, OH

  Owned   Ingot (million pounds)     49.0   

Niles, OH

  Owned   Mill products (million pounds)     22.0   

Canton, OH

  Leased   Ferro titanium and specialty alloys (million pounds)     16.0   

Martinsville, VA

  Owned   Titanium forging (million pounds)     10.5   

Tamworth, England

  Leased   Cut parts and components (thousand man hours)     45.0   

Rosny-Sur-Seine, France

  Leased   Cut parts and components (thousand man hours)     16.0   

Norwalk, CA

  Leased   Metal warehousing and distribution     N/A   

Windsor, CT

  Leased   Metal warehousing and distribution     N/A   

EP&S Segment

     

Washington, MO

  Owned   Hot and superplastically formed parts (thousand press hours)     50.0   

Welwyn Garden City, England

  Leased   Hot and superplastically formed parts (thousand man hours)     60.0   

Sullivan, MO

  Leased   Cut parts and components (thousand man hours)     23.0   

Houston, TX

  Leased   Extruded, hot stretch formed products (million pounds)     4.2   

Bradford, England

  Owned   Extruded, hot and cold-stretch formed products (million pounds)     2.7   

Houston, TX

  Owned   Machining/fabricating oil/gas products (thousand man hours)     200.0   

Laval, Canada

  Owned   Machining/assembly of aerospace parts (thousand man hours)     400.0   

Austin, TX

  Leased   Additively manufactured parts (thousand man hours)     20.0   

Big Lake, MN

  Owned   Machining/assembly of aerospace and defense parts (thousand man hours)     203.0   

New Brighton, MN

  Owned   Machining/assembly of aerospace and defense parts (thousand man hours)     192.0   

Coon Rapids, MN

  Owned   Machining/assembly of medical device components (thousand machine hours)     212.0   

Big Lake, MN

  Owned   Machining/assembly of medical device components (thousand machine hours)     436.0   

In addition to the leased facilities noted above, the Company leases certain buildings and property at the Washington, Missouri and Canton, Ohio operations, as well as our corporate headquarters in Pittsburgh, Pennsylvania. All other facilities are owned. The plants have been constructed at various times over a long period. Many of the buildings have been remodeled or expanded and additional buildings have been constructed from time to time.

 

20


Item 3.    Legal Proceedings.

From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. There are currently no material pending or threatened claims against the Company.

Item 4.    Mine Safety Disclosure.

Not applicable.

 

21


PART II

Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Range of High and Low Stock Prices of Common Stock

 

     2013      2012  

Quarter

   High      Low      High      Low  

First

   $ 32.43       $ 27.40       $ 27.60       $ 21.62   

Second

   $ 31.80       $ 26.05       $ 26.96       $ 20.29   

Third

   $ 33.06       $ 27.53       $ 26.00       $ 21.12   

Fourth

   $ 36.09       $ 30.88       $ 27.82       $ 22.17   

Principal market for Common Stock: New York Stock Exchange

Holders of record of Common Stock at February 28, 2014: 567

The Company has not historically paid dividends on its Common Stock and does not currently anticipate paying any cash dividends in the foreseeable future.

The following table sets forth repurchases of our Common Stock during the three months ended December 31, 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)
 

October 1 — 31, 2013

           $               $ 2,973   

November 1 — 30, 2013

                             2,973   

December 1 — 31, 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.

 

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Item 6.    Selected Financial Data.

The following table sets forth selected historical financial data and should be read in conjunction with the Consolidated Financial Statements and related Notes to the Consolidated Financial Statements.

The selected historical data was derived from our Consolidated Financial Statements (in thousands, except per share data):

 

     Years Ended December 31,  
     2013      2012
(As Restated)
(1)(2)
     2011
(As Restated)
(1)
    2010
(As Restated)
(1)
    2009  

Income Statement Data:

            

Net sales

   $ 783,273       $ 699,987       $ 488,352      $ 398,163      $ 385,439   

Operating income (loss)

     62,015         47,417         23,382        14,423        (85,843

Income (loss) before income taxes

     22,796         29,138         7,793        12,182        (94,621

Net income (loss) from continuing operations

     15,657         13,453         (2,308     (18,122     (66,419

Basic earnings (loss) per share —continuing operations

   $ 0.51       $ 0.44       $ (0.08   $ (0.61   $ (2.63

Diluted earnings (loss) per share —continuing operations

   $ 0.51       $ 0.44       $ (0.08   $ (0.61   $ (2.63

 

     December 31,  
     2013      2012
(As Restated)
     2011
(As Restated)
     2010
(As Restated)
     2009  

Balance Sheet Data:

              

Working capital

   $ 791,143       $ 472,084       $ 586,965       $ 638,519       $ 389,495   

Total assets

     1,505,545         1,220,092         1,100,996         1,089,606         854,332   

Long-term debt

     430,300         198,337         186,981         178,107         81   

Total shareholders’ equity

     773,974         708,239         694,640         696,529         678,914   

 

(1) Restated to establish a valuation allowance against the Company’s Canadian net deferred tax asset as of December 31, 2010 and for all subsequent periods.
(2) In 2012, the Company acquired Remmele.

 

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations (as restated).

Forward-Looking Statements

The following discussion should be read in connection with the information contained in the Consolidated Financial Statements and the Notes to Consolidated Financial Statements. The following information contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created by that Act. Such forward-looking statements may be identified by their use of words like “expects,” “anticipates,” “believes,” “intends,” “estimates,” “projects,” other words of similar meaning, or other statements contained herein that are not historical facts. Forward-looking statements are based on expectations and assumptions regarding future events. In addition to factors discussed throughout this Annual Report, 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,

 

   

changes in defense spending and cancellation or changes in defense programs or initiatives, including the JSF program,

 

   

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,

 

   

our ability to successfully integrate newly acquired businesses,

 

   

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

 

   

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

 

   

our dependence on products and services that are subject to price and availability fluctuations,

 

   

our ability to protect our data and systems against corruption and cyber-security threats and attacks,

 

   

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

 

   

our ability to execute on new business awards,

 

   

demand for our products,

 

   

competition in the titanium industry,

 

   

the future availability and prices of raw materials,

 

   

the historic cyclicality of the titanium and commercial aerospace industries,

 

   

energy shortages or cost increases,

 

   

labor matters,

 

   

risks related to international operations,

 

   

our ability to attract and retain key personnel,

 

   

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

 

   

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

 

   

the fluctuation of the price of our Common Stock, and

 

   

our ability to generate sufficient cash flow to satisfy our debt obligations.

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

 

24


statements. These and other risk factors are set forth in this filing, as well as in other filings filed with or furnished to the SEC, copies of which are available from the SEC or may be obtained upon request from the Company. Except as may be required by applicable law, we undertake no duty to update our forward-looking information.

Restatement and Revision of Previously Reported Audited Annual and Unaudited Interim Consolidated Financial Information

The accompanying Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to certain restatement adjustments made to the previously reported audited Consolidated Financial Statements for the years ended December 31, 2012 and 2011 and the unaudited interim periods in 2013 and 2012, as well as revision adjustments made to the previously reported unaudited Condensed Consolidated Financial Statements for the quarterly and year-to-date periods ended March 31, 2013 and June 30, 2013. Refer to the Explanatory Note preceding Part 1, Item 1 of this Annual Report and Notes 2 and 18 in the Notes to the Consolidated Financial Statements included in this Annual Report for additional details regarding the aforementioned restatement and revision adjustments.

Overview

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

Effective January 1, 2013, we conduct business in two segments: the Titanium Segment and the EP&S Segment. This structure 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.

The Titanium Segment melts, forges, 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 and Canton, Ohio; Martinsville, Virginia; Norwalk, California; Windsor, Connecticut; Tamworth, England; and Rosny-Sur-Seine, France, the Titanium Segment produces and distributes primary mill products including, but not limited to, bloom, billet, sheet, and plate. In addition, the Titanium Segment produces ferro titanium alloys for its steelmaking customers. The Titanium Segment also focuses on the research and development of evolving technologies relating to raw materials, melting, and other production processes, as well as the application of titanium in new markets.

The EP&S Segment is comprised of companies with significant hard and soft-metal expertise that form, extrude, fabricate, additively manufacture, 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 and Austin, Texas; Sullivan and Washington, Missouri; Laval, Canada; and Welwyn Garden City and Bradford, England, the EP&S Segment provides value-added products and services such as engineered tubulars and extrusions, fabricated and machined components and subassemblies, 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 EP&S Segment accesses the Titanium Segment as its primary source of titanium mill products. For the years ended December 31, 2013, 2012, and 2011, approximately 21%, 19%, and 18%, respectively, of the Titanium Segment’s sales were to the EP&S Segment.

 

25


Trends and Uncertainties

The commercial aerospace industry, which represents our largest market, continues to strengthen as the ramp in production activity stays on track to support the largest commercial jet backlog in history. We see opportunities within this space to win additional sales through the spectrum of products and services that we offer within our EP&S Segment. We also continue to increase the use of titanium produced at our mill in these commercial aerospace applications, which we anticipate will drive margin benefits at an enterprise level.

We expect short-term difficulties in our energy and medical device markets; however we continue to see long-term profitable growth within these markets. Our energy market business has benefitted in the past from developmental-type projects for major oil and gas equipment OEMs, and while we anticipate more of this business, it is dependent on the ability to find titanium applications that are cost-effective for our customers. Within our medical device business, short-term pricing pressures related to the Patient Protection and Affordable Care Act (the “Healthcare Acts”) are expected to be overcome by long-term growth resulting from aging populations and continued advances in medical technology.

U.S. defense spending continues to be a source of uncertainty, but we continue to see support for key programs such as the JSF and other aircraft, as well as a radar modernization program, which we believe provides stability for our defense market sales.

Executive Summary

In 2013, we generated record sales of $783.3 million, with our EP&S Segment contributing more than half of those sales. We generated operating income of $62.0 million, a 31% improvement over 2012. This performance continues to demonstrate our emergence as an integrated supplier of advanced titanium products.

During the year, we completed the acquisition of RTI Extrusions Europe, which together with our extrusion facility in Houston, TX, gives us extrusion capacity in both the U.S. and Europe, which we believe gives us greater ability to win extrusion packages around the globe. Also within the EP&S Segment, in December 2013, we achieved a ten ship set per month rate in deliveries of Boeing 787 Pi Box product, which helped increase the EP&S Segment’s profitability.

Within our Titanium Segment, we signed a long-term agreement to supply rotor-grade quality titanium to Pratt & Whitney as our electron-beam furnace launch customer, which marks our re-entry into the engine market.

Results of Operations

For the Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

Net Sales.    Net sales for our reportable segments, excluding intersegment sales, for the years ended December 31, 2013 and 2012 are summarized in the following table:

 

     Years Ended December 31,      $ Increase/
(Decrease)
    % Increase/
(Decrease)
 
(Dollars in millions)        2013              2012           

Titanium Segment

   $ 346.6       $ 352.9       $ (6.3     (1.8 )% 

EP&S Segment

     436.7         347.1         89.6        25.8
  

 

 

    

 

 

    

 

 

   

 

 

 

Total consolidated net sales

   $ 783.3       $ 700.0       $ 83.3        11.9
  

 

 

    

 

 

    

 

 

   

 

 

 

The decrease in the Titanium Segment’s net sales was the result of lower defense market sales of $5.3 million, as well as decreased sales to specialty metal markets of $0.4 million. These decreases were partially offset by higher conversion and aerospace sales of $1.7 million and $0.8 million, respectively. Shipments of prime mill product to trade customers decreased to 7.5 million pounds for the year ended December 31, 2013

 

26


from 7.9 million pounds for the year ended December 31, 2012, which resulted in a sales decrease of $7.4 million. This decrease was offset by a 5.6% increase in average realized selling prices to $18.41 per pound from $17.43 per pound.

The increase in the EP&S Segment’s sales was primarily attributable to the ramp up of activity related to the Boeing 787, which increased sales by $45.3 million, while sales to our other commercial aerospace customers increased $1.0 million. Our acquisition of RTI Extrusions Europe contributed $4.9 million to the increase, while the full year contribution of Remmele Engineering, Inc. (“Remmele”), acquired in February 2012, increased sales $17.0 million. Sales into the energy sector increased $20.5 million due to strong demand early in the year.

Gross Profit.    Gross profit for our reportable segments for the years ended December 31, 2013 and 2012 is summarized in the following table:

 

     Years Ended
December 31,
              
     2013     2012               
(Dollars in millions)    $      % of
Sales
    $      % of
Sales
    $ Increase      % Increase  

Titanium Segment

   $ 98.0         28.3   $ 78.2         22.2   $ 19.8         25.3

EP&S Segment

     75.9         17.4     60.3         17.4     15.6         25.9
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consolidated gross profit

   $ 173.9         22.2   $ 138.5         19.8   $ 35.4         25.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The increase in the Titanium Segment’s gross profit was primarily attributable to a 5% decrease in mill product costs per pound to $13.29 per pound from $13.99 per pound in 2012, primarily driven by lower scrap prices, which increased gross profit $11.0 million, and a $10.3 million increase in duty drawback recoveries. A favorable margin product mix at our titanium service centers and contributions from higher conversion sales increased gross profit by $0.7 million and $0.6 million, respectively. These items were partially offset by softening demand and pricing in the specialty metals market which impacted gross profit $2.5 million, and a $1.6 million charge related to the voluntary early retirement program enacted during the year. Gross profit for the year ended December 31, 2012 was negatively impacted $0.8 million due to a transformer fire at our Canton melting facility.

The increase in the EP&S Segment’s gross profit was primarily due to higher Boeing 787 volumes, which increased gross profit $12.2 million, and higher duty drawback recoveries of $6.8 million. These increases were partially offset by a $7.7 million decrease in other aerospace and defense programs. Incremental gross profit resulting from higher energy market sales was $2.2 million, while the October 1, 2013 acquisition of RTI Extrusions Europe and the February 2012 acquisition of Remmele contributed $0.6 million and $1.0 million, respectively.

Selling, General, and Administrative Expenses.    Selling, general, and administrative expenses (“SG&A”) for our reportable segments for the years ended December 31, 2013 and 2012 are summarized in the following table:

 

     Years Ended
December 31,
             
     2013     2012              
(Dollars in millions)    $      % of
Sales
    $      % of
Sales
    $ Increase/
(Decrease)
    % Increase/
(Decrease)
 

Titanium Segment

   $ 35.4         10.2   $ 36.7         10.4   $ (1.3     (3.5 )% 

EP&S Segment

     57.5         13.2     49.9         14.4     7.6        15.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total consolidated SG&A

   $ 92.9         11.9   $ 86.6         12.4   $ 6.3        7.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

27


The $6.3 million increase in SG&A expenses was primarily related to increases in professional fees related to the sale of RTI Pierce Spafford and increased fees related to our efforts to remediate material weaknesses in internal control, as well as salary increases across the organization. The acquisition of RTI Extrusions Europe added $0.5 million of SG&A expenses.

Research, Technical, and Product Development Expenses.    Research, technical, and product development expenses for the Company were $3.9 million and $4.2 million for the years ended December 31, 2013 and 2012, respectively. This spending, primarily related to our Titanium Segment, reflected the Company’s continued efforts to make productivity and quality improvements to current manufacturing processes, as well as new product development.

Goodwill and Other Intangible Asset Impairment.    The Company’s Medical Device Fabrication reporting unit, a component of the EP&S Segment, recognized a goodwill impairment of $14.0 million during the year-ended December 31, 2013. This impairment was driven by operational issues as well as uncertainty in the medical device market as a result of the Healthcare Acts, including a 2.3% excise tax on medical devices, and increased regulations on medical device manufacturers from the U.S. Food and Drug Administration (the “FDA”). Related to this impairment, we recognized a $1.4 million impairment of our Remmele trade name during the year-ended December 31, 2013. There were no impairments of goodwill or other intangible assets in 2012.

Asset and Asset-related Charges (Income).    Asset and asset-related charges (income) for the year-ended December 31, 2013 and 2012 were $(0.4) million and $0.4 million, respectively. Income during the year was attributable to insurance recoveries from the fire at our Canton melting facility in 2012, while prior year charges were attributable to asset impairments resulting from the same fire.

Operating Income.    Operating income for our reportable segments for the years ended December 31, 2013 and 2012 is summarized in the following table:

 

     Years Ended
December 31,
             
     2013     2012              
(Dollars in millions)    $      % of
Sales
    $      % of
Sales
    $ Increase/
(Decrease)
    % Increase/
(Decrease)
 

Titanium Segment

   $ 59.0         17.0   $ 39.0         11.1   $ 20.0        51.3

EP&S Segment

   $ 3.0         0.7     8.4         2.4     (5.4     (64.3 )% 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total consolidated operating income

   $ 62.0         7.9   $ 47.4         6.8   $ 14.6        30.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

The Titanium Segment’s operating income increased primarily as a result of the decrease in average cost per pound which increased gross profit $11.0 million, increased duty drawback recoveries of $10.3 million, and decreased SG&A of $1.2 million, partially offset by decreases of $2.5 million related to lower pricing and lower sales of specialty metals during the year.

Excluding the impact of the $15.4 million impairment of goodwill and other intangible assets discussed above, the EP&S Segment’s operating income increased $10.0 million in 2013 as compared to 2012. This increase was driven by the ramp up of the Boeing 787 Pi Box program, which increased operating income by $12.2 million, higher energy market sales, which increased operating income by $2.2 million, and higher duty drawback receipts totaling $6.8 million. Offsetting these increases were lower sales on non-787 commercial aerospace and defense sales, and increased SG&A expense of $7.6 million.

Other Income (Expense).    Other income (expense) for the year ended December 31, 2013 and 2012 was $0.9 million and $(0.5) million, respectively. Other income (expense) consisted primarily of foreign exchange gains and losses from our international operations.

Interest Income and Interest Expense.    Interest income for the years ended December 31, 2013 and 2012 was $0.2 million and $0.1 million, respectively. The increase was principally related to higher average cash and investment balances, compared to the prior year.

 

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Interest expense was $40.4 million and $17.9 million for the years ended December 31, 2013 and 2012, respectively. The increase in interest expense was primarily due to the issuance of our $402.5 million aggregate principal amount of 1.625% Convertible Senior Notes due October 2019 (the “2019 Notes”), and a debt extinguishment charge of $13.7 million related to the repurchase, through individually negotiated, private transactions, of $115.6 million principal amount of our 3.000% Convertible Senior Notes due December 2015 (the “2015 Notes”) in April 2013. Included in interest expense for the years ended December 31, 2013 and 2012, is $15.0 million and $9.7 million of debt discount amortization and $1.5 million and $1.1 million of debt issuance cost amortization, respectively, associated with the convertible notes outstanding during each period.

Provision for (Benefit from) Income Tax (as restated).    We recognized income tax expense of $7.1 million, or 31.3% of pretax income from continuing operations, in 2013 compared to $15.7 million, or 53.8% of pretax income, in 2012 for federal, state, and foreign income taxes. Our effective income tax rate decreased 22.5 percentage points from 2012, principally due to a reduction of certain deferred tax liabilities due to changes in state laws, the effects of foreign operations, partially offset by the impairment to goodwill and other intangible assets.

The reconciliation of our 2012 effective income tax rate to our 2013 effective income tax rate is as follows:

 

2012 effective income tax rate

       53.8

Changes in effective income tax rate:

    

Effects of foreign operations

     (19.1 )%   

State taxes

     (17.2 )%   

Goodwill and other intangible asset impairment

     17.3  

Adjustments to prior years’ income taxes

     (4.3 )%   

Other

     0.8     (22.5 )% 
    

 

 

 

2013 effective income tax rate

       31.3
    

 

 

 

Refer to Note 7 to our accompanying Consolidated Financial Statements for a reconciliation between our effective tax rate and the statutory tax rate.

In February 2014, we determined that we should have recorded a valuation allowance against our Canadian deferred tax asset as of December 31, 2010. As a result of this determination, we have restated our provision for (benefit from) income taxes for each of the three month periods ended March 31, June 30, and September 30 of 2013 and 2012. In addition to the restatement, the provision for income taxes has been revised for the three month periods ended March 31 and June 30, 2013 for errors related to the calculation of revenue recognition on certain long-term contracts, as disclosed in our Quarterly Report for the period ended September 30, 2013 as filed with the SEC on November 12, 2013. A reconciliation of our provision for (benefit from) income taxes for each of those periods is presented below:

 

     Provision for (Benefit from) Income Taxes  

(in 000’s)

Three Months Ended

   As
Reported
    Revision
Adjustment
    As
Revised
    Valuation
Allowance
Adjustment
    As
Corrected
    Discontinued
Operations
    Currently
Reported
 

September 30, 2013

   $ 1,670      $      $ 1,670      $ (3   $ 1,667      $ 34      $ 1,701   

June 30, 2013

   $ (878   $ (89   $ (967   $ 371      $ (596   $ 75      $ (521

March 31, 2013

   $ 2,982      $ (178   $ 2,804      $ 1,625      $ 4,429      $ 44      $ 4,473   

September 30, 2012

   $ 1,423      $      $ 1,423      $ 813      $ 2,236      $      $ 2,326   

June 30, 2012

   $ 2,538      $      $ 2,538      $ 1,521      $ 4,059      $ (38   $ 4,021   

March 31, 2012

   $ 2,087      $      $ 2,087      $ 2,061      $ 4,148      $ (78   $ 4,070   

 

29


For the Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011

Net Sales.    Net sales for our reportable segments, excluding intersegment sales, for the years ended December 31, 2012 and 2011 are summarized in the following table:

 

     Years Ended
December 31,
     $ Increase      % Increase  
(Dollars in millions)    2012      2011        

Titanium Segment

   $ 352.9       $ 324.9       $ 28.0         8.6

EP&S Segment

     347.1         163.5         183.6         112.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consolidated net sales

   $ 700.0       $ 488.4       $ 211.6         43.3
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in the Titanium Segment’s net sales was primarily the result of higher sales volumes at our titanium service centers, driven by increased demand for our titanium products in the commercial aerospace and defense markets. These volume improvements resulted in higher net sales of $19.9 million, while higher average selling prices caused by a favorable product mix during 2012 also impacted sales at our titanium service centers $5.3 million. Prime mill product shipments increased 2.6% to 7.9 million pounds for the year ended December 31, 2012 from 7.7 million pounds for the year ended December 31, 2011. The increased volume was primarily driven by higher aircraft build rates by both Boeing and Airbus. These increases were partially offset by a $0.10 per pound decrease in average realized selling prices of prime mill products to $17.43 per pound, lower ferro-alloy demand from our specialty steel customers, and a reduction in demand for the outside processing of titanium forgings.

The increase in the EP&S Segment’s net sales was primarily attributable to our two acquisitions, Remmele in February 2012 and RTI Advanced Forming, Ltd in November 2011, which increased net sales $144.1 million. Additionally, strong demand from our energy market and commercial aerospace customers, due to increasing oil and gas exploration and aircraft build rates, resulted in a $45.2 million and $9.7 million increase in net sales, respectively. These increases were partially offset by a decline in our military shipments for the F-15, F-22, and various helicopter programs.

Gross Profit.    Gross profit for our reportable segments for the years ended December 31, 2012 and 2011 is summarized in the following table:

 

     Years Ended
December 31,
    $ Increase/
(Decrease)
     % Increase/
(Decrease)
 
     2012     2011       
(Dollars in millions)    $      % of
Sales
    $      % of
Sales
      

Titanium Segment

   $ 78.2         22.2   $ 72.9         22.4   $ 5.3         7.3

EP&S Segment

     60.3         17.4     18.0         11.0     42.3         235.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consolidated gross profit

   $ 138.5         19.8   $ 90.9         18.6   $ 47.6         52.4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Excluding the $3.0 million benefit from a duty drawback accrual reversal in 2012 and the $1.1 million benefit from the settlement of the Tronox supply contract dispute in 2011, the Titanium Segment’s gross profit increased $3.4 million. The increase in the Titanium Segment’s gross profit was principally due to higher margin sales mix and higher volumes at our titanium service centers, driven primarily by higher commercial aerospace demand. The Titanium Segment’s gross profit was further benefited by higher sales volumes and flat average costs per pound at $13.99. These improvements were partially offset by lower average realized selling prices and the impact of the electrical transformer fire at our Canton, Ohio facility, which collectively reduced gross profit by $2.1 million.

The increase in the EP&S Segment’s gross profit was primarily attributable to our two acquisitions, which benefited gross profit $25.0 million. Additionally, the incremental margins on increased sales volumes for the energy market and commercial aerospace customers, due to increasing oil and gas exploration and aircraft build rates, resulted in a $17.3 million increase in gross profit.

 

30


Selling, General, and Administrative Expenses.    SG&A for our reportable segments for the years ended December 31, 2012 and 2011 are summarized in the following table:

 

     Years Ended
December 31,
    $ Increase      % Increase  
     2012     2011       
(Dollars in millions)    $      % of
Sales
    $      % of
Sales
      

Titanium Segment

   $ 36.7         10.4   $ 35.5         10.9   $ 1.2         3.4

EP&S Segment

     49.9         14.4     30.2         18.5     19.7         65.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total consolidated SG&A

   $ 86.6         12.4   $ 65.7         13.5   $ 20.9         31.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The $20.9 million increase in SG&A expenses was primarily related to our two recent acquisitions, which increased SG&A expenses $19.1 million. Additionally, SG&A expenses were impacted by moderate increases in salary, benefit and incentive-related expense and higher professional fees. However, SG&A expenses decreased as a percentage of sales due to the leverage gained through the increase in net sales.

Research, Technical, and Product Development Expenses.    Research, technical, and product development expenses for the Company were $4.2 million and $3.4 million for the years ended December 31, 2012 and 2011, respectively. This spending, primarily related to our Titanium Segment, reflected the Company’s continued efforts to make productivity and quality improvements to current manufacturing processes, as well as new product development.

Asset and Asset-related Charges (Income).    Asset and asset-related charges (income) for the years ended December 31, 2012 and 2011 were $0.4 million and $(1.5) million, respectively. In 2012, these charges related to the impairment of assets destroyed in an electrical transformer fire at our Canton, Ohio facility in September, net of related insurance recoveries. In 2011, asset and asset-related income consisted of favorable settlements related to the accrued contractual commitments associated with our indefinitely delayed titanium sponge plant, offset in part by the write-down of sponge plant-related assets related to these settlements as our contractors were able to return certain assets to their vendors for refunds.

Operating Income (Loss).    Operating income (loss) for our reportable segments for the years ended December 31, 2012 and 2011 is summarized in the following table:

 

     December 31,     $ Increase      % Increase  
     2012     2011       
(Dollars in millions)    $      % of
Sales
    $     % of
Sales
      

Titanium Segment

   $ 39.0         11.1   $ 36.1        11.1   $ 2.9         8.0

EP&S Segment

     8.4         2.4     (12.7     (7.8 )%      21.1         166.1
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total consolidated operating income (loss)

   $ 47.4         6.8   $ 23.4        4.8   $ 24.0         102.6
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Excluding the $3.0 million benefit from the duty drawback accrual reversal in 2012 and $1.1 million benefit from the settlement of the Tronox supply contract dispute in 2011, the Titanium Segment’s operating income increased $1.0 million. The increase was the result of higher gross profit, due to a higher margin sales mix as well as higher volumes at our titanium service centers, driven primarily by strengthening commercial aerospace demand. Largely offsetting these increases were lower average realized selling prices and the impact of the electrical transformer fire at our Canton, Ohio facility, and the 2011 benefit from asset and asset-related charges (income). Increased SG&A unfavorably impacted the Titanium Segment $1.2 million.

The EP&S Segment’s operating income increased compared to 2011 due to the favorable impact of the acquisitions of Remmele in February 2012 and RTI Advanced Forming, Ltd in November 2011. The EP&S Segment’s operating income also benefited from higher sales to the energy and commercial aerospace markets.

 

31


Other Income (Expense).    Other income (expense) for the year ended December 31, 2012 was $(0.5) million and was $0.1 million for the year ended December 31, 2011. Other income (expense) consisted primarily of foreign exchange gains and losses from our international operations.

Interest Income and Interest Expense.    Interest income for the years ended December 31, 2012 and 2011 was $0.1 million and $1.2 million, respectively. The decrease was principally related to lower average cash and investment balances, compared to the prior year.

Interest expense was $17.9 million and $16.8 million for the years ended December 31, 2012 and 2011, respectively. The increase in interest expense was partially attributable to capitalized leases, which accounted for $0.2 million of interest expense in 2012, and increased principal accretion on our 2015 Notes. Included in interest expense for the years ended December 31, 2012 and 2011, are $9.7 million and $8.9 million, respectively, of debt discount amortization and $1.1 million of debt issuance cost amortization, for each period, associated with the 2015 Notes.

Provision for (Benefit from) Income Tax (as restated).    We recognized income tax expense of $15.7 million, or 53.8% of pretax income from continuing operations, in 2012 compared to $10.1 million, or 129.6% of pretax income, in 2011 for federal, state, and foreign income taxes. Our effective income tax rate decreased 75.8 percentage points from 2011, principally due to the increase in the valuation allowance against the 2011 net operating loss at our Canadian subsidiary, adjustments to prior year income taxes, and the higher level of pretax income in 2012.

The reconciliation of our 2011 effective income tax rate to our 2012 effective income tax rate is as follows:

 

2011 effective income tax rate

       129.6

Changes in effective income tax rate:

    

Effects of foreign operations

     (50.7 )%   

State taxes

     4.4  

Adjustments to prior years’ income taxes

     (16.6 )%   

Non-deductible acquisition costs/officer compensation

     (9.8 )%   

Other

     (3.1 )%      (75.8 )% 
    

 

 

 

2012 effective income tax rate

       53.8
    

 

 

 

Refer to Note 7 to our accompanying Consolidated Financial Statements for a reconciliation between our effective tax rate and the statutory tax rate.

Liquidity and Capital Resources

On October 1, 2013, the Company purchased all of the outstanding common stock of RTI Extrusions Europe for total consideration of approximately $20.4 million, including $16.2 million in cash and the assumption of approximately $4.2 million in liabilities. The purchase was financed through cash on hand.

We issued our 2019 Notes in April 2013. 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.

Our Second Amended and Restated Credit Agreement (the “Credit Agreement”) provides a revolving credit facility of $150 million and expires on May 23, 2017. Borrowings under the Credit Agreement bear interest, at

 

32


our option, at a rate equal to the London Interbank Offered Rate (the “LIBOR Rate”) plus an applicable margin or the base rate plus an applicable margin. Both the applicable margin and a 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 during the years ended December 31, 2013 or 2012.

Provided we continue to meet our financial covenants under the Credit Agreement, we expect that our cash and cash equivalents of $343.6 million and our undrawn credit facility, combined with internally generated funds, will provide us sufficient liquidity to meet our current projected operating needs for the next twelve months.

The financial covenants and ratios under our Credit Agreement are described below:

 

   

Our leverage ratio (the ratio of Net Debt to Consolidated EBITDA, as defined in the Credit Agreement) was 1.35 to 1 at December 31, 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 13.69 to 1 at December 31, 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. As of December 31, 2013, we were in compliance with our financial covenants under the Credit Agreement.

Cash provided by operating activities.    Cash provided by operating activities for the years ended December 31, 2013 and 2012 was $12.2 million and $8.1 million (restated), respectively. The increase in cash provided by operating activities is primarily due to improved operational performance in 2013 excluding the non-cash goodwill and other intangible asset impairments totaling $15.4 million, offset by activity in working capital accounts, primarily inventory and accounts payable.

Cash provided by operating activities for the years ended December 31, 2012 and 2011 was $8.1 million (restated) and $14.8 million (restated), respectively. This decrease was primarily due to the increase in our working capital, principally in raw material and work-in-process inventories.

Cash used in investing activities.    Cash used in investing activities for the years ended December 31, 2013 and 2012 was $37.7 million and $67.6 million, respectively. Cash used in investing activities was primary for capital expenditures, totaling $32.4 million during the year, and the purchase of RTI Extrusions Europe for approximately $16.2 million in cash, partially offset by $10.5 million of cash received from the sale of RTI Pierce Spafford. The decrease in investing outflows was mainly due to a decrease of $29.2 in capital expenditures in 2013.

Cash used in investing activities for the years ended December 31, 2012 and 2011 was $67.6 million and $235.0 million, respectively. The change in investing outflows was due primarily to net investment activity in short-term investments and marketable securities in each of the years. This activity was primarily offset by our Remmele acquisition of $182.6 million and capital expenditures of $61.5 million during 2012.

Cash provided by (used in) financing activities.    Cash provided by (used in) financing activities for the years ended December 31, 2013 and 2012 was $272.1 million and $(1.4) million, respectively. The increase in cash provided by financing activities was due primarily to the issuance of the $402.5 million 2019 Notes, offset by $12.4 million in costs related with the issuance of the 2019 Notes and the repurchase of $115.6 million aggregate par value of 2015 Notes, for approximately $119.9 million through individually negotiated private transactions. Debt-related outflows in 2012 consisted of a $0.8 million payment of debt issuance costs related to

 

33


the refinancing of the Credit Agreement. Cash inflows related to employee stock activity increased $2.2 million from 2012 to 2013.

Cash provided by (used in) financing activities for the years ended December 31, 2012 and 2011 was $(1.4) million and $0.4 million, respectively. The financing outflow during 2012 was primarily driven by financing fees of $0.8 million related to the Credit Agreement and payments of $0.7 million related to capital leases at our Remmele facilities, of which there were none in 2011.

Cash balances at foreign subsidiaries.    At December 31, 2013, of our cash and cash equivalents of $343.6 million, approximately $32.1 million was held at our foreign subsidiaries. Management believes that these balances represent the funds necessary for each subsidiary’s ongoing operations and at this time, has no intention, nor a foreseeable need, to repatriate these cash balances. Repatriation of these cash balances could result in additional U.S. Federal tax obligations.

Backlog.    Our order backlog for all markets was approximately $516 million as of December 31, 2013, compared to $543 million at December 31, 2012. Of the backlog at December 31, 2013, approximately $483 million is likely to be realized during 2014. We define backlog as firm business scheduled for release into our production process for a specific delivery date. We have numerous contracts that extend over multiple years, including the Airbus, JSF and Boeing 787 long-term supply agreements, which are not included in backlog until a specific release into production or a firm delivery date has been established.

Contractual Obligations, Commitments and Other Post-Retirement Benefits

Following is a summary of the Company’s contractual obligations, commercial commitments, and other post-retirement benefit obligations as of December 31, 2013 (in millions):

 

     Contractual Obligations  
     2014      2015      2016      2017      2018      Thereafter      Total  

Notes (1)

   $ 10.0       $ 124.1       $ 6.5       $ 6.5       $ 6.5       $ 409.0       $ 562.6   

Operating leases (2)

     5.7         5.4         5.1         4.3         4.1         4.8         29.4   

Capital leases (2)

     2.3         1.9         1.5         1.3         1.0         3.2         11.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 18.0       $ 131.4       $ 13.1       $ 12.1       $ 11.6       $ 417.0       $ 603.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Commercial Commitments  
     Amount of Commitment Expiration per Period  
     2014      2015      2016      2017      2018      Thereafter      Total  

Long-term supply agreements (3)(4)(5)

   $ 103.7       $ 103.5       $ 105.2       $ 49.0       $ 49.7       $ 97.0       $ 508.1   

Purchase obligations (6)

     56.6         0.2                                         56.8   

Standby letters of credit (7)

     1.1                                                 1.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial commitments

   $ 161.4       $ 103.7       $ 105.2       $ 49.0       $ 49.7       $ 97.0       $ 566.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Pension and Post-Retirement Benefits  
     2014      2015      2016      2017      2018      Thereafter      Total  

Other post-retirement benefits (8)(9)

   $ 3.0       $ 3.2       $ 3.1       $ 2.9       $ 3.0       $ 31.2       $ 46.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Tax Obligations  
     2014      2015      2016      2017      2018      Thereafter      Total  

Uncertain tax positions (10)

   $       $       $       $       $       $ 7.2       $ 7.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Commitments for the Notes include principal and interest payable through the Notes’ maturity. See Note 15 to the Consolidated Financial Statements included in this Annual Report.

 

34


(2) See Note 10 to the Consolidated Financial Statements included in this Annual Report.
(3) Amounts represent commitments for which contractual terms exceed twelve months.
(4) In February 2007, the Company entered into a new contract for the long-term supply of titanium sponge, the primary raw material for our Titanium Segment, with a Japanese supplier. This agreement, which began in 2009, runs through 2016 and provides the Company with supply of up to 13.5 million pounds of titanium sponge annually. For the remaining term of this agreement the Company has agreed to minimum purchase requirements, ranging from 7.0 million to 9.0 million pounds. Future obligations were determined based on current prices as prices are negotiated annually. Purchases under the contract are denominated in U.S. Dollars.
(5) In December 2009, the Company entered into two new contracts with two Japanese suppliers for the long-term supply of titanium sponge for delivery between 2012 and 2021. The contracts provide the Company with the supply of up to 19.2 million pounds of titanium sponge annually. The price of the titanium sponge is fixed, subject to certain underlying input cost adjustments and potential price adjustments based on the Yen to U.S. Dollar exchange rate. Future obligations were determined based on the fixed price and minimum volumes.
(6) Amounts primarily represent purchase commitments under purchase orders.
(7) Amounts represent standby letters of credit primarily related to commercial performance and insurance guarantees.
(8) The Company does not fund its other post-retirement employee benefits obligation but instead pays amounts when billed. However, these estimates are based on current benefit plan coverage and are not contractual commitments inasmuch as the Company retains the right to modify, reduce, or terminate any such coverage in the future. Amounts shown in the years 2014 through 2018 are based on actuarial estimates of expected future cash payments, and exclude the impacts of benefits associated with the Medicare Part D Act of 2003.
(9) Commitments for pension plans are not presented due to the uncertain nature of the amounts and timing of future contributions
(10) These amounts are included in the “Thereafter” column as it cannot be reasonably estimated when these amounts may be settled.

Other non-current liabilities on the Consolidated Balance Sheet is primarily composed of liabilities for workers’ compensation, environmental remediation, asset retirement obligations, and long-term tax reserves. These amounts are not included within the preceding table due to the uncertain nature regarding the timing of the settlement of these obligations.

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.

New Accounting Standards

In July 2013, the Financial Accounting Standards Board (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 Company’s 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. generally accepted accounting principles (“GAAP”). The amendments in this ASU are effective prospectively for annual and interim reporting periods

 

35


beginning after December 15, 2013. The Company does not expect this guidance to have a material impact on the Company’s 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 Company’s 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 did not have a material impact on the Company’s 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 did not have a material impact on the Company’s 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 were 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 Company’s 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 did not have a material impact on the Company’s Consolidated Financial Statements

Critical Accounting Policies

Our Consolidated Financial Statements are prepared in accordance with GAAP. These principles require management to make estimates and assumptions that have a material impact on the amounts recorded for assets and liabilities and resulting revenue and expenses. Management estimates are based on historical evidence and other available information, which in management’s opinion provide the most reasonable and likely result under the current facts and circumstances. Under different facts and circumstances expected results may differ materially from the facts and circumstances applied by management.

Of the accounting policies described in Note 4 of the Consolidated Financial Statements included in this Annual Report and others not expressly stated but adopted by management as the most appropriate and reasonable under the current facts and circumstances, the effect upon the Company of the policy of carrying values of accounts receivable, inventories, property, plant, and equipment, intangible assets, goodwill, pensions, post-retirement benefits, worker’s compensation, environmental liabilities, and income taxes would be most critical if management estimates were incorrect. GAAP requires management to make estimates and assumptions

 

36


that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities. Actual results could differ from these estimates.

Revenue Recognition.    Product and service revenues are recognized when persuasive evidence of an arrangement exists, product delivery has occurred or services have been rendered, pricing is fixed or determinable, and collection is reasonably assured. Service revenues are recognized as services are rendered.

Revenue under long-term contracts is recorded on a percentage-of-completion method measured on the cost-to-cost basis for construction-type contracts and the units-of-delivery basis for production-type contracts. Revenues and costs under contracts measured on the cost-to-cost basis are primarily recognized using the zero profit method under ASC 605-35 until the period that we can estimate the remaining revenues and costs, at which point the cumulative contract gross profit earned to date is recorded. This generally occurs when the primary deliverable under the contract is delivered. We will continue to use this methodology until such time as a reliable process for estimating total contract revenues and costs is implemented, at which time we will recognize contract revenues in proportion to costs.

Provisions for anticipated losses on long-term contracts are recorded in full when such losses become evident. Such losses were not material at December 31, 2013, 2012, or 2011.

Revenues from contracts with multiple element arrangements are recognized as each element is earned based on the relative fair value of each element provided the delivered elements have value to customers on a stand-alone basis. Amounts allocated to each element are based on its objectively determined fair value, such as the sales price for the product or service when it is sold separately.

Value added taxes collected on sales are excluded from revenue and recorded as a liability on the Consolidated Balance Sheet until remitted to the taxing authority.

Inventories.    Inventories are valued at cost as determined by the last-in, first-out (“LIFO”), 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. At December 31, 2013 and 2012, approximately 56% and 55%, respectively, of our inventory was valued utilizing the LIFO costing methodology. The remaining inventories are valued at cost determined by a combination of the FIFO and weighted-average cost methods.

Goodwill and Intangible Assets.    The carrying value of goodwill at December 31, 2013 and 2012 was $117.6 million and $130.3 million, respectively. Goodwill and intangible assets were originally valued at fair value at the date of acquisition.

We evaluate the recoverability of goodwill at the reporting unit level at least annually as of October 1 and whenever events or circumstances indicate the carrying value may not be recoverable. The carrying value of goodwill at our four reporting units as of our October 1, 2013 annual impairment test is as follows:

The carrying value of goodwill at our four reporting units as of our October 1, 2013 annual impairment test is as follows:

 

(in millions)    Goodwill  

Titanium reporting unit

   $ 9.7   

Fabrication reporting unit

     63.6   

Medical Device Fabrication reporting unit

     58.7   

Energy Fabrication reporting unit

       
  

 

 

 

Total Goodwill

   $ 132.0   
  

 

 

 

 

37


In Step One of the evaluation, the fair value of each reporting unit was determined using the weighted average of a discounted cash flow analysis based on historical and projected financial information (i.e., an income approach) and a market valuation approach. The discounted cash flow analysis provides a fair value estimate based upon each reporting unit’s long-term operating and cash flow performance. This approach also considers the impact of cyclical downturns that occur in the titanium and aerospace industries. The market valuation approach applies market multiples such as EBITDA and revenue multiples developed from a set of peer group companies to each reporting unit to determine its fair value. Based on these analyses, we determined that the fair value of the Titanium reporting unit and the Fabrication reporting unit each exceeded their respective carrying values by a significant margin, and that the carrying value of the Medical Device Fabrication reporting unit, including goodwill, exceeded its fair value, which was an indication of potential impairment and required us to perform Step Two of the impairment evaluation.

In Step Two of the evaluation, we assigned fair value to all of the assets and liabilities of the Medical Device Fabrication reporting unit as if it was to be acquired in a business combination. The difference between the fair value of the reporting unit, as determined in Step One, and the fair value assigned to the assets and liabilities represents the implied fair value of goodwill. The implied fair value of goodwill was then compared to its carrying value, and any excess of carrying value over the implied fair value represents the non-cash impairment charge. We determined the carrying value of the Medical Device Fabrication reporting unit’s goodwill exceeded its implied fair value by $14.0 million. As a result of this goodwill impairment charge, $44.8 million of goodwill remained in the Medical Device Fabrication reporting unit at December 31, 2013.

The impairment of the Medical Device Fabrication reporting unit’s goodwill was primarily driven by operational issues and the impact of the 2.3% medical device excise tax enacted under the Healthcare Acts that is resulting in significant pricing pressures, our inability to attain cost reduction targets to offset these pricing pressures, and FDA regulations imposing new requirements on medical device contract manufacturers. As a result of these factors, we reduced our long-term estimates of the Medical Device Fabrication reporting unit’s forecasted operating results and cash flows. If the Medical Device Fabrication reporting unit’s operational performance does not improve, the remaining goodwill at the reporting unit could be at risk for further impairment.

In order to validate the reasonableness of the estimated fair values of the reporting units as of the valuation date, we reconciled the aggregate fair value of all of the reporting units to our market capitalization, including a reasonable control premium.

The carrying value of the Energy Fabrication reporting unit’s goodwill was fully impaired in 2009. Excluding the impairment of goodwill at the Energy and Medical Device Fabrication reporting units, and immaterial impairments of goodwill related to the disposition of our non-titanium service centers, there have been no other goodwill impairments to date at our other reporting units. See Note 4 for further details of our annual impairment analysis.

Management evaluates the recovery of indefinite-lived intangible assets, at least annually, by comparing the fair value of the indefinite lived intangible asset under a discounted cash flow model to its carrying value. As a part of the annual impairment test, we determined the fair value of the Remmele trade name was $6.2 million, resulting in an impairment of $1.4 million.

Long-Lived Assets.    Management evaluates the recoverability of property, plant, and equipment whenever events or changes in circumstances indicate the carrying amount of any such asset may not be fully recoverable. Changes in circumstances may include technological changes, changes in our business model, capital structure, economic conditions, or operating performance. If applicable, our evaluation would be based upon, among other items, our assumptions about the estimated undiscounted cash flows these assets are expected to generate. When

 

38


the sum of the undiscounted cash flows is less than the carrying value, we will recognize an impairment loss. Management applies its best judgment when performing these evaluations to determine the timing of the testing, the undiscounted cash flows associated with the assets, and the fair value of the asset.

Income Taxes (as restated).    The likelihood of realization of deferred tax assets is reviewed by management on a quarterly basis, giving consideration to all current facts and circumstances. Based upon this review, management records the appropriate valuation allowance 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 because of unfavorable changes in the facts and circumstances, or that the current valuation allowance is no longer required due to favorable changes in the facts and circumstances, there would be a corresponding charge or credit to income tax expense.

Our Canadian subsidiary has generated taxable losses totaling $155.0 million from 2005 through 2013, resulting in a Canadian net deferred tax asset of $32.7 million as of December 31, 2013. We have recorded a full valuation allowance against our Canadian net deferred tax asset as of December 31, 2010, and for each subsequent period thereafter. The realization of our Canadian deferred tax assets is dependent upon our ability to generate future taxable income at our Canadian subsidiary. We concluded that the objective and verifiable negative evidence of our Canadian subsidiary’s cumulative losses over a number of years outweighed the more subjective positive evidence of anticipated future income under our long-term contract. We will continue to review whether a valuation allowance against our Canadian net deferred tax asset is required. If we determine that the realization of some or all of our Canadian net deferred tax assets are more likely than not, we will reduce some or all of our valuation allowance. Refer to Notes 2 and 18 of the Consolidated Financial Statements included within this Annual Report for details of the restatement adjustments made to establish the valuation allowance.

Tax benefits related to uncertain tax provisions taken or expected to be taken on a tax return are recorded when such benefits meet a more-likely-than-not threshold. Otherwise, these tax benefits are recorded when a tax position has been effectively settled, which means that either the appropriate taxing authority has completed their examination even though the statute of limitations remains open or the statute of limitations has expired. Interest and penalties related to uncertain tax positions are recognized as part of the provision for income taxes and are accrued beginning in the period that such interest and penalties would be applicable under relevant tax law until such time that the related tax benefits are recognized.

Employee Benefit Plans.    Included in our accounting for defined benefit pension plans are assumptions on future discount rates, the expected return on assets, and the rate of future compensation changes. Discount rates are also utilized in our accounting for our post-retirement medical plan. We consider current market conditions, including changes in interest rates and plan asset investment returns, as well as longer-term factors in determining these assumptions. Actuarial assumptions may differ materially from actual results due to changing market and economic conditions or higher or lower withdrawal rates. These differences may result in a significant impact to the amount of net pension expense or income recorded in the future.

 

39


A discount rate is used to determine the present value of future payments. In general, our liability increases as the discount rate decreases and decreases as the discount rate increases. The discount rate was determined by taking into consideration a dedicated bond portfolio model in order to select a discount rate that best matches the expected payment streams of the future payments. Under this model, a hypothetical bond portfolio is constructed with cash flows that are expected to settle in the same timeline as the benefit payment stream from the plans. The portfolio is developed using bonds with a Moody’s or Standard & Poor’s rating of “Aa” or better based on the bonds available as of the measurement date. The appropriate discount rate is then selected based on the resulting yield from this portfolio. The discount rates used to determine our future benefit obligations were as follows at December 31, 2013 and 2012:

 

     2013     2012  

Qualified pension plans

     4.8     4.1

Non-qualified pension plans

     3.7     4.1

Post-retirement medical plan

     4.8     4.1

The discount rate is a significant factor in determining the amounts reported. A change of one-quarter of a percentage point in the discount rates used at December 31, 2013 would have the following effect on the defined benefit plans:

 

     –.25%      +.25%  

Effect on total projected benefit obligation (PBO) (in millions)

   $ 4.5       $ (4.2

Effect on subsequent years periodic pension expense (in millions)

   $ 0.3       $ (0.3

A one quarter percent change in the discount rate used at December 31, 2013 would have the following effect on the postretirement medical plan:

 

     –.25%      +.25%  

Effect on total net periodic benefit cost (in millions)

   $ 0.1       $ (0.1

Effect on accumulated postretirement benefit obligation (in millions)

   $ 1.3       $ (1.2

We developed the expected return on plan assets by considering various factors which include targeted asset allocation percentages, historical returns, and expected future returns. We assumed an expected rate of return of 7.5% in both 2013 and 2012. A change of one-quarter of a percentage point in the expected rate of return would have the following effect on the defined benefit plans:

 

     –.25%      +.25%  

Effect on subsequent years periodic pension expense (in millions)

   $ 0.4       $ (0.4

A change of one percentage point in the health cost trend rate of 6.78% used at December 31, 2013 would have the following effect on the postretirement medical plan:

 

     –1.00%     +1.00%  

Effect on total service cost and interest cost components (in millions)

   $ (0.1   $ 0.1   

Effect on accumulated postretirement benefit obligation (in millions)

   $ (2.6   $ 2.9   

 

40


The fair value of the Company’s defined benefit pension plan assets as of December 31, 2013 and 2012 were as follows:

 

Investment category (in millions)    2013      2012  

U.S. government securities

   $ 25.0       $ 22.0   

Corporate bonds

     40.6         37.5   

Equities

     88.9         81.4   

Short-term investment funds

     1.5         0.6   

Real estate funds

     3.8         3.5   

Timberlands

     1.9         1.7   

Other

     1.0           
  

 

 

    

 

 

 

Total

   $ 162.7       $ 146.7   
  

 

 

    

 

 

 

Of the total plan assets, approximately $9.7 million and $9.2 million were measured using significant unobservable inputs (level 3) at December 31, 2013 and 2012, and are comprised of investments in private equities, real estate funds, and timberlands. The fair value of private equity funds and real estate funds are determined by the fair value of the underlying investments in the funds plus working capital, adjusted for liabilities, currency translation and estimated performance incentives. Various methods of determining the fair value of the underlying assets in each fund are used which may include, but are not limited to, expected cash flows, multiples of earnings, discounted cash flow models, direct capitalization analyses, third-party appraisals and other market-based information. Valuations are reviewed utilizing available market data to determine whether or not any fair value adjustments are necessary. The value of the timberlands investment is based upon the appraised value of the timberlands plus net working capital. It is based upon inventory obtained pursuant to a review of this inventory at the time of acquisition, updated periodically based upon a cash projection model for a 50-year period using real prices and a real discount rate based upon current market activity.

The Company’s target asset allocation as of December 31, 2013 by asset category was as follows:

 

     2013  

Investment Category

  

Equity securities

     55

Debt securities and other short-term investments

     43

Cash

     2
  

 

 

 

Total

     100
  

 

 

 

Our investment policy for the defined benefit pension plans includes various guidelines and procedures designed to ensure assets are invested in a manner necessary to meet expected future benefits earned by participants. The investment guidelines consider a broad range of economic conditions. Central to the policy are target allocation ranges (shown above) by major asset categories. The objectives of the target allocations are to maintain investment portfolios that diversify risk through prudent asset allocation parameters, achieve asset returns that meet or exceed the plans’ actuarial assumptions, and achieve asset returns that are competitive with like institutions employing similar investment strategies. Within these broad investment categories, our investment policy places certain restrictions on the types and amounts of plan investments. For example, no individual stock may account for more than 5% of total equities, no single corporate bond issuer rated below AA may equal more than 10% of the total bond portfolio, non-investment grade bonds may not exceed 10% of the total bond portfolio, and private equity and real estate investments may not exceed 8% of total plan assets.

We periodically review the investment policy along with our designated third-party fiduciary. The policy is established and administered in a manner so as to comply at all times with applicable government regulations.

 

41


The following pension and post-retirement benefit payments, which reflect expected future service, as appropriate, are expected to be paid (in millions) :

 

     Pension
Benefit
Plans
     Post-Retirement
Benefit Plan
(including Plan D
subsidy)
     Post-Retirement
Benefit Plan
(not including Plan
D subsidy)
 

2014

   $ 12.7       $ 3.0       $ 3.2   

2015

     11.4         3.2         3.5   

2016

     11.6         3.1         3.4   

2017

     11.7         2.9         3.2   

2018

     12.1         3.0         3.4   

2019 to 2023

     62.3         18.0         20.3   

During the years ended December 31, 2013 and 2012, we made cash contributions, net of settlement charges, totaling $4.3 million and $18.2 million, respectively, to our Company-sponsored pension plans. In light of current market conditions, we are assessing our future funding requirements. We expect to make cash contributions of approximately $9.4 million during 2014 to maintain our desired funding status.

Environmental Liabilities.    We are subject to environmental laws and regulations as well as various health and safety laws and regulations that are subject to frequent modifications and revisions. During each of the years ended 2013, 2012, and 2011, respectively, the Company paid approximately $0.1 million against previously recorded liabilities for environmental remediation, compliance, and related services. While the costs of compliance for these matters have not had a material adverse impact on the Company in the past, it is not possible to accurately predict the ultimate effect these changing laws and regulations may have on the Company in the future. We continue to evaluate our obligations for environmental-related costs on a quarterly basis and make adjustments as necessary.

Given the evolving nature of environmental laws, regulations, and remediation techniques, our ultimate obligation for investigative and remediation costs cannot be predicted. It is our policy to recognize environmental costs in the financial statements when an obligation becomes probable and a reasonable estimate of exposure can be determined. When a single estimate cannot be reasonably made, but a range can be reasonably estimated, we accrue the amount we determine to be the most likely amount within that range. If no single amount is more likely than others within the range, we accrue the lowest amount within the range.

Based on available information, we believe that our share of possible environmental-related costs is in a range from $0.6 million to $2.1 million in the aggregate. At each of December 31, 2013 and 2012, the amount accrued for future environmental-related costs was $1.3 million. Of the total amount accrued at December 31, 2013, approximately $0.1 million is expected to be paid out within one year and is included as a component of other accrued liabilities in our Consolidated Balance Sheet. The remaining $1.2 million is recorded as a component of other noncurrent liabilities in our Consolidated Balance Sheet.

As these proceedings continue toward final resolution, amounts in excess of those already provided may be necessary to discharge us from our obligations for these sites.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

Commodity Price Risk

We are exposed to market risk arising from changes in commodity prices as a result of our long-term purchase and supply agreements with certain suppliers and customers. These agreements, which offer various fixed or formula-determined pricing arrangements, effectively obligate us to bear the risk of (i) increased raw material and other costs to us that cannot be passed on to our customers through increased product prices or (ii) decreasing raw material costs to our suppliers that are not passed on to us in the form of lower raw material prices.

 

42


Interest Rate Risk

Our outstanding borrowings at December 31, 2013 are at fixed annual interest rates of 1.625% and 3.000%; therefore we are not subject to material cash flow risk arising from the fluctuation of interest rates.

Foreign Currency Exchange Risk

We are subject to foreign currency exchange exposure for purchases of raw materials, equipment, and services, including wages, which are denominated in currencies other than the U.S. Dollar, as well as non-U.S. Dollar denominated sales. However, the majority of our sales are made in U.S. Dollars, which minimizes our exposure to foreign currency fluctuations. From time to time, we may use forward exchange contracts to manage these transaction risks.

In addition to these transaction risks, we are subject to foreign currency exchange exposure for our non-U.S. Dollar denominated assets and liabilities of our foreign subsidiaries whose functional currency is the U.S. Dollar. From time to time, we may use forward exchange contracts to manage these translation risks. We had no foreign currency forward exchange contracts outstanding at December 31, 2013.

 

43


Item 8.    Financial Statements and Supplementary Data.

Index to Financial Statements

 

     Page  

Report of Independent Registered Public Accounting Firm

     45   

Financial Statements:

  

Consolidated Statements of Operations for the years ended December  31, 2013, 2012 (As Restated), and 2011 (As Restated)

     47   

Consolidated Statements of Comprehensive Income (Loss) for the years ended December  31, 2013, 2012 (As Restated), and 2011 (As Restated)

     48   

Consolidated Balance Sheets at December 31, 2013 and 2012 (As Restated)

     49   

Consolidated Statements of Cash Flows for the years ended December  31, 2013, 2012 (As Restated), and 2011 (As Restated)

     50   

Consolidated Statements of Shareholders’ Equity for the years ended December  31, 2013, 2012 (As Restated), and 2011 (As Restated)

     51   

Notes to Consolidated Financial Statements

     52   

Financial Statement Schedules:

  

Schedule II — Valuation and Qualifying Accounts (As Restated)

     S-1   

All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.

 

44


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

RTI International Metals, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows present fairly, in all material respects, the financial position of RTI International Metals, Inc. and its subsidiaries at December 31, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also, in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because material weaknesses in internal control over financial reporting related to (i) revenue recognition under percentage of completion accounting, (ii) the annual goodwill and indefinite-lived intangible asset impairment analysis, and (iii) realizability of certain deferred tax assets existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management’s report on internal control over financial reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the 2013 consolidated financial statements and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements. The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in management’s report referred to above. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 2 to the consolidated financial statements, and discussed in the Note to the financial statement schedule listed in the accompanying index, the Company has restated its 2011 and 2012 consolidated financial statements and financial statement schedule to correct errors.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made

 

45


only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management’s report on internal control over financial reporting, management has excluded RTI Extrusions Europe Limited from its assessment of internal control over financial reporting as of December 31, 2013 because it was acquired by the Company in a purchase business combination during 2013. We have also excluded RTI Extrusions Europe Limited from our audit of internal control over financial reporting. RTI Extrusions Europe Limited is a wholly-owned subsidiary whose total assets and total revenues represent 1% and 0.6%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2013.

 

LOGO

Pittsburgh, Pennsylvania

March 18, 2014

 

46


RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except share and per share amounts)

 

     Years Ended December 31,  
     2013     2012
(As Restated)
    2011
(As Restated)
 

Net sales

   $ 783,273      $ 699,987      $ 488,352   

Cost and expenses:

      

Cost of sales

     609,419        561,418        397,429   

Selling, general, and administrative expenses

     92,921        86,621        65,650   

Research, technical, and product development expenses

     3,931        4,164        3,392   

Goodwill and other intangible asset impairment

     15,359                 

Asset and asset-related charges (income)

     (372     367        (1,501
  

 

 

   

 

 

   

 

 

 

Operating income

     62,015        47,417        23,382   

Other income (expense), net

     938        (501     56   

Interest income

     223        148        1,151   

Interest expense

     (40,380     (17,926     (16,796
  

 

 

   

 

 

   

 

 

 

Income before income taxes

     22,796        29,138        7,793   

Provision for income taxes

     7,139        15,685        10,101   
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to continuing operations

   $ 15,657      $ 13,453      $ (2,308
  

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to discontinued operations

   $ (1,584   $ 1,487      $ 2,258   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 14,073      $ 14,940      $ (50
  

 

 

   

 

 

   

 

 

 

Earnings (loss) per share attributable to continuing operations:

      

Basic

   $ 0.51      $ 0.44      $ (0.08
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.51      $ 0.44      $ (0.08
  

 

 

   

 

 

   

 

 

 

Earnings (loss) per share attributable to discontinued operations:

      

Basic

   $ (0.05   $ 0.05      $ 0.08   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.05   $ 0.05      $ 0.08   
  

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding:

      

Basic

     30,303,328        30,127,275        30,017,677   
  

 

 

   

 

 

   

 

 

 

Diluted

     30,530,501        30,257,688        30,017,677   
  

 

 

   

 

 

   

 

 

 

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

 

47


RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(In thousands, except share and per share amounts)

 

     Years Ended December 31,  
     2013     2012
(As Restated)
    2011
(As Restated)
 

Net income (loss)

   $ 14,073      $ 14,940      $ (50

Other comprehensive income (loss):

      

Foreign currency translation

     (6,928     1,915        (1,515

Unrealized gain (loss) on investments, net of tax of $0, $0, and $(19)

                   (35

Realized (gain) loss on investments net of tax of $0, $4, and $0

            8          

Benefit plan amortization gain (loss), net of tax of $6,919, $(4,920), and $(2,861)

     11,535        (8,077     (4,963
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     4,607        (6,154     (6,513
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 18,680      $ 8,786      $ (6,563
  

 

 

   

 

 

   

 

 

 

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

 

48


RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

     December 31,  
     2013     2012
(As Restated)
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 343,637      $ 97,190   

Receivables, less allowance for doubtful accounts of $820 and $721

     105,271        104,354   

Inventories, net

     430,088        375,441   

Costs in excess of billings

     5,377        3,825   

Deferred income taxes

     32,032        31,380   

Assets of discontinued operations

     5,274        25,168   

Other current assets

     16,947        11,270   
  

 

 

   

 

 

 

Total current assets

     938,626        648,628   

Property, plant, and equipment, net

     372,340        375,819   

Goodwill

     117,578        130,252   

Other intangible assets, net

     53,754        56,495   

Other noncurrent assets

     23,247        8,898   
  

 

 

   

 

 

 

Total assets

   $ 1,505,545      $ 1,220,092   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 79,039      $ 90,735   

Accrued wages and other employee costs

     29,787        33,996   

Unearned revenues

     15,625        25,864   

Liabilities of discontinued operations

     458        3,431   

Other accrued liabilities

     22,574        22,518   
  

 

 

   

 

 

 

Total current liabilities

     147,483        176,544   

Long-term debt

     430,300        198,337   

Liability for post-retirement benefits

     43,447        45,066   

Liability for pension benefits

     13,787        20,711   

Deferred income taxes

     74,078        46,384   

Unearned revenues

     10,470        13,013   

Other noncurrent liabilities

     12,006        11,798   
  

 

 

   

 

 

 

Total liabilities

     731,571        511,853   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 14)

    

Shareholders’ equity:

    

Common stock, $0.01 par value; 50,000,000 shares authorized; 31,399,661 and 31,136,899 shares issued; 30,593,251 and 30,354,324 shares outstanding

     314        311   

Additional paid-in capital

     532,249        484,798   

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

     (18,798     (18,399

Accumulated other comprehensive loss

     (40,397     (45,004

Retained earnings

     300,606        286,533   
  

 

 

   

 

 

 

Total shareholders’ equity

     773,974        708,239   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,505,545      $ 1,220,092   
  

 

 

   

 

 

 

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

 

49


RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

 

    Years Ended December 31,  
    2013     2012
(As Restated)
    2011
(As Restated)
 

OPERATING ACTIVITIES:

     

Net income (loss)

  $ 14,073      $ 14,940      $ (50

Adjustment for non-cash items:

     

Depreciation and amortization

    43,885        41,170        22,488   

Deferred income taxes, net

    (12,264     6,633        14,179   

Stock-based compensation

    6,026        4,797        4,599   

Excess tax benefits from stock-based compensation activity

    (552     (196     (302

(Gain) loss on disposal of property, plant, and equipment, net

    (547     (4     70   

Amortization of debt issuance costs

    1,666        1,403        1,471   

Amortization of discount on long-term debt

    14,956        9,683        8,900   

Write-off of debt issuance costs

    1,498        —          —     

Amortization of premiums paid for short-term investments and marketable securities, net

    174        —          2,012   

Goodwill and other intangible asset impairment

    15,908        —          —     

Write-down of assets of discontinued operations

    1,058        —          —     

Other

    300        434        (462

Changes in assets and liabilities:

     

Receivables

    3,236        (1,818     (32,440

Inventories

    (47,139     (106,565     3,810   

Accounts payable

    (8,613     32,133        6,271   

Income taxes payable

    (13,675     3,767        67   

Unearned revenue

    (10,509     10,059        (2,606

Costs in excess of billings

    (3,118     459        (300

Liability for pension benefits

    (12,486     (12,295     (22,066

Other current assets and liabilities, net

    2,969        (3,479     5,217   

Other noncurrent assets and liabilities, net

    15,322        6,945        3,977   
 

 

 

   

 

 

   

 

 

 

Cash provided by operating activities

    12,168        8,066        14,835   
 

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES:

     

Purchase of investments

    (128,281     (4,037     (309,820

Maturity/sale of investments

    128,107        180,808        149,411   

Capital expenditures

    (32,374     (61,538     (38,845

Acquisitions, net of cash acquired

    (16,214     (182,811     (35,812

Divestitures

    10,475        —          —     

Proceeds from disposal of property, plant, and equipment

    561        10        20   
 

 

 

   

 

 

   

 

 

 

Cash used in investing activities

    (37,726     (67,568     (235,046
 

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES:

     

Borrowings on long-term debt

    402,500        —          —     

Repayments on long-term debt

    (120,820     (758     (25

Debt issuance costs

    (12,370     (823     —     

Proceeds from employee stock activity

    2,637        729        367   

Excess tax benefits from stock-based compensation activity

    552        196        302   

Purchase of common stock held in treasury

    (399     (742     (294
 

 

 

   

 

 

   

 

 

 

Cash provided by (used in) financing activities

    272,100        (1,398     350   

Effect of exchange rate changes on cash and cash equivalents

    (95     1,248        (248
 

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

    246,447        (59,652     (220,109

Cash and cash equivalents at beginning of period

    97,190        156,842        376,951   
 

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ 343,637      $ 97,190      $ 156,842   
 

 

 

   

 

 

   

 

 

 

Supplemental cash flow information:

     

Cash paid for interest

  $ 7,223      $ 7,496      $ 7,148   
 

 

 

   

 

 

   

 

 

 

Cash paid (refund received) for income taxes

  $ 4,672      $ 5,333      $ (10,191
 

 

 

   

 

 

   

 

 

 

Non-cash investing and financing activities:

     

Issuance of common stock for restricted stock awards

  $ 3,443      $ 2,028      $ 1,985   
 

 

 

   

 

 

   

 

 

 

Capital leases

  $ 7,898      $ 575      $ —     
 

 

 

   

 

 

   

 

 

 

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

 

50


RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Consolidated Statement of Shareholders’ Equity

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

 

    Common Stock     Additional
Paid-In
Capital
    Treasury
Stock
    Retained
Earnings

(1)
    Accumulated
Other
Comprehensive
Loss
    Total  
     Shares
Outstanding
    Amount            

Balance at December 31, 2010 (As Restated)

    30,123,519      $ 309      $ 474,277      $ (17,363   $ 271,643      $ (32,337   $ 696,529   

Net income (As Restated)

                                (50            (50

Other comprehensive loss

                                       (6,513     (6,513

Shares issued for directors’ compensation

    14,273                                             

Shares issued for restricted stock award plans

    54,665                                             

Stock-based compensation expense recognized

                  4,599                             4,599   

Treasury stock purchased at cost

    (10,423                   (294                   (294

Exercise of employee options

    13,653               178                             178   

Forfeiture of restricted stock awards

    (3,800                                          

Tax benefits from stock-based compensation activity

                  2                             2   

Shares issued for employee stock purchase plan

    6,893               189                             189   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011 (As Restated)

    30,198,780      $ 309      $ 479,245      $ (17,657   $ 271,593      $ (38,850   $ 694,640   

Net income (As Restated)

                                14,940               14,940   

Other comprehensive loss (As Restated)

                                       (6,154     (6,154

Shares issued for directors’ compensation

    26,153                                             

Shares issued for restricted stock award plans

    56,173        1                                    1   

Shares issued for performance award plans

    54,315        1                                    1   

Stock-based compensation expense recognized

                  4,797                             4,797   

Treasury stock purchased at cost

    (29,946                   (742                   (742

Exercise of employee options

    41,422               494                             494   

Forfeiture of restricted stock awards

    (3,200                                          

Tax benefits from stock-based compensation activity

                  27                             27   

Shares issued for employee stock purchase plan

    10,627               235                             235   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012 (As Restated)

    30,354,324      $ 311      $ 484,798      $ (18,399   $ 286,533      $ (45,004   $ 708,239   

Net income

                                14,073               14,073   

Other comprehensive loss

                                       4,607        4,607   

Shares issued for directors’ compensation.

    26,455                                             

Shares issued for restricted stock award plans

    92,282        1        1                             2   

Stock-based compensation expense recognized

                  6,026                             6,026   

Treasury stock purchased at cost

    (14,116                   (399                   (399

Exercise of employee options

    131,607        2        2,286                             2,288   

Forfeiture of restricted stock awards

    (9,719                                          

Tax benefits from stock-based compensation activity

                  (45                          (45

Shares issued for employee stock purchase plan

    12,418               350                             350   

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

                  (13,854                          (13,854
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

    30,593,251      $ 314      $ 532,249      $ (18,798   $ 300,606      $ (40,397   $ 773,974   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  

 

(1) Adjustments to the opening balance of Retained Earnings total $(21,732), and result from the establishment of a full valuation allowance against the Company’s deferred tax asset at its Canadian subsidiary. Refer to Note 2 for further information.

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

 

51


RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

Note 1—ORGANIZATION AND OPERATIONS:

The accompanying Consolidated Financial Statements of RTI International Metals, Inc. and its subsidiaries (the “Company” or “RTI”) include the financial position and results of operations for the Company.

The Company is a leading producer and global supplier of advanced titanium mill products and a manufacturer of fabricated titanium and specialty metal 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.

On October 1, 2013, the Company completed its acquisition of all of the issued and outstanding common stock of RTI Extrusions Europe (Holdings) Limited, which directly owns all of the issued and outstanding capital stock of RTI Extrusions Europe Limited (formerly Osborn Steel Extrusions, a subsidiary of Osborn Metals Limited) (“RTI Extrusions Europe”). RTI Extrusions Europe manufactures extruded, hot-or-cold stretched steel and titanium parts for a number of markets including the aerospace and petrochemical markets.

In April 2013, the Company completed the sale of its subsidiary, Pierce-Spafford Metals Company, Inc. (“RTI Pierce Spafford”), for approximately $12.4 million of cash, of which $10.5 million has been received in cash as of December 31, 2013, with the remainder due in late 2014. In addition, during December 2013 the Company determined that its other non-titanium service center Bow Steel Corporation, (“RTI Connecticut”), qualified for held-for-sale treatment at December 31, 2013. The results of RTI Pierce Spafford and RTI Connecticut have been presented as results from discontinued operations on the Company’s Consolidated Statements of Operations and the related assets and liabilities have been presented separately on the Company’s Consolidated Balance Sheets as assets and liabilities of discontinued operations. The Company’s Consolidated Financial Statements and the Notes thereto for prior periods have been conformed to exclude amounts attributable to the aforementioned discontinued operations.

The Company conducts business in two segments: the Titanium Segment and the Engineered Products and Services (“EP&S”) Segment. The structure 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.

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 and Canton, Ohio; Martinsville, Virginia; Norwalk, 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 steelmaking 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 EP&S Segment is comprised of companies with significant hard and soft-metal expertise that form, extrude, fabricate, additively manufacture, 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

 

52


RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

industries, as well as a number of other industrial and consumer markets. With operations located in Minneapolis, Minnesota; Houston and Austin, Texas; Sullivan and Washington, Missouri; Laval, Canada; and Welwyn Garden City and Bradford, England, the EP&S Segment provides value-added products and services such as engineered tubulars and extrusions, fabricated and machined components and subassemblies, 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 EP&S Segment utilizes the Titanium Segment as its primary source of titanium mill products.

Note 2—RESTATEMENTS AND REVISIONS:

As previously disclosed in its Form 10-Q for the quarterly period ended September 30, 2013, the Company’s treatment of its deferred tax asset at its Canadian subsidiary had been under discussion with the Staff of the Securities and Exchange Commission (“SEC”). In considering these discussions, the Company reconsidered its position and determined that a valuation allowance against the Company’s Canadian deferred tax asset should have been recorded as of December 31, 2010. The Company determined that it should have given greater weight to its Canadian subsidiary’s history of cumulative losses relative to its expectations of future taxable income. As a result of recording the valuation allowance, the Company has corrected the deferred tax assets at each balance sheet date and its provision for income taxes in each affected period.

In addition to the restatement related to the valuation allowance recorded against the Canadian deferred tax assets, the Company disclosed in its Form 10-Q for the quarterly period ended September 30, 2013 that it intended to revise its future filings for revenue recognition errors associated with its accounting for certain long-term contracts and opening balance sheet corrections related to deferred taxes and goodwill related to its acquisition of RTI Remmele Engineering (“Remmele”) for the quarterly and year-to-date periods ended March 31, 2013 and June 30, 2013. Refer to Note 18 for detail on the restatement and revision adjustments for the interim periods in 2013 and 2012.

 

53


RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

The following tables set forth the impact of the recognition of the above-mentioned corrections, as well as adjustments for the presentation of RTI Connecticut as a discontinued operation, on the Company’s Consolidated Statements of Operations, Consolidated Balance Sheets, and Consolidated Statements of Cash Flows as of and for the periods presented below. Refer to Note 3 for additional information on discontinued operations.

 

     Year Ended December 31, 2012  
      Previously
Reported (1)
     Restatement
Adjustment
    As
Corrected
     Discontinued
Operations
    Currently
Reported
 

Consolidated Statement of Operations

            

Net sales

   $ 708,090       $      $ 708,090       $ (8,103   $ 699,987   

Cost of Sales

     568,462                568,462         (7,044     561,418   

Operating income

     47,111                47,111         306        47,417   

Income before income taxes

     28,832                28,832         306        29,138   

Provision for income taxes

     10,392         5,200        15,592         93        15,685   

Net income attributable to continuing operations

     18,440         (5,200     13,240         213        13,453   

Net income attributable to discontinued operations, net of tax

     1,700                1,700         (213     1,487   

Net income

     20,140         (5,200     14,940                14,940   

Earnings per share attributable to continuing operations:

            

Basic

   $ 0.61       $ (0.17   $ 0.44       $ 0.01      $ 0.44   

Diluted

   $ 0.61       $ (0.17   $ 0.44       $ 0.01      $ 0.44   

Earnings per share attributable to discontinued operations:

            

Basic

   $ 0.06       $      $ 0.06       $ (0.01   $ 0.05   

Diluted

   $ 0.06       $      $ 0.06       $ (0.01   $ 0.05   

 

     Year Ended December 31, 2011  
      Previously
Reported (1)
     Restatement
Adjustment
    As
Corrected
    Discontinued
Operations
    Currently
Reported
 

Consolidated Statement of Operations

           

Net sales

   $ 501,288       $      $ 501,288      $ (12,936   $ 488,352   

Cost of Sales

     407,660                407,660        (10,231     397,429   

Operating income

     24,052                24,052        (670     23,382   

Income before income taxes

     8,463                8,463        (670     7,793   

Provision for income taxes

     4,269         6,082        10,351        (250     10,101   

Net income (loss) attributable to continuing operations

     4,194         (6,082     (1,888     (420     (2,308

Net income attributable to discontinued operations, net of tax

     1,838                1,838        420        2,258   

Net income (loss)

     6,032         (6,082     (50            (50

Earnings (loss) per share attributable to continuing operations:

           

Basic

   $ 0.14       $ (0.20   $ (0.06   $ (0.01   $ (0.08

Diluted

   $ 0.14       $ (0.20   $ (0.06   $ (0.01   $ (0.08

Earnings per share attributable to discontinued operations:

           

Basic

   $ 0.06       $      $ 0.06      $ 0.01      $ 0.08   

Diluted

   $ 0.06       $      $ 0.06      $ 0.01      $ 0.08   

 

54


RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

 

(1): Previously reported balances represent the amounts reported in the Consolidated Statement of Operations in the Company’s Second Amended Annual Report on Form 10-K/A for the annual period ended December 31, 2012 as filed with the SEC on November 12, 2013.

 

     December 31, 2012  
      Previously
Reported (1)
    Restatement
Adjustment
    As
Corrected
    Discontinued
Operations
    Currently
Reported
 

Consolidated Balance Sheets

          

Receivables

   $ 105,317      $      $ 105,317      $ (963   $ 104,354   

Inventories, net

     384,417               384,417        (8,976     375,441   

Assets of discontinued operations

     14,741               14,741        10,427        25,168   

Total current assets

     648,140               648,140        488        648,628   

Property, plant, and equipment, net

     375,949               375,949        (130     375,819   

Goodwill

     130,610               130,610        (358     130,252   

Deferred income taxes

     33,287        (33,287                     

Other noncurrent assets

     8,866        32        8,898               8,898   

Total assets

     1,253,347        (33,255     1,220,092               1,220,092   

Accounts payable

     91,661               91,661        (926     90,735   

Accrued wages and other employee costs

     34,096               34,096        (100     33,996   

Unearned revenues

     25,864               25,864               25,864   

Liabilities of discontinued operations

     2,332               2,332        1,099        3,431   

Other accrued liabilities

     22,550        41        22,591        (73     22,518   

Total current liabilities

     176,503        41        176,544               176,544   

Deferred income taxes

     46,384               46,384               46,384   

Unearned revenues

     13,013               13,013               13,013   

Total liabilities

     511,812        41        511,853               511,853   

Accumulated other comprehensive loss

     (44,722     (282     (45,004            (45,004

Retained earnings

     319,547        (33,014     286,533               286,533   

Total shareholders’ equity

     741,535        (33,296     708,239               708,239   

Total liabilities and shareholders’ equity

     1,253,347        (33,255     1,220,092               1,220,092   

 

(1): Previously reported balances represent the amounts reported in the Consolidated Balance Sheet in the Company’s Second Amended Annual Report on Form 10-K/A for the annual period ended December 31, 2012 as filed with the SEC on November 12, 2013. The previously reported balances of inventory, cost in excess of billings, and deferred revenue have been adjusted by $(699), $1,565, and $866 to correct the prior presentation.

 

55


RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

     December 31, 2012  
     Previously
Reported (1)
     Restatement
Adjustment
    As
Corrected
 

Consolidated Statements of Cash Flow (2)

       

Operating Activities:

       

Net income

   $ 20,140       $ (5,200   $ 14,940   

Adjustment for non-cash items included in net income:

       

Deferred income taxes

     1,433         5,200        6,633   
     December 31, 2011  
     Previously
Reported (1)
     Restatement
Adjustment
    As
Corrected
 

Consolidated Statements of Cash Flow (2)

       

Operating Activities:

       

Net income (loss)

   $ 6,032       $ (6,082   $ (50

Adjustment for non-cash items included in net income:

       

Deferred income taxes

     8,097         6,082        14,179   

 

(1): Previously reported balances represent the amounts reported in the Consolidated Balance Sheet in the Company’s Second Amended Annual Report on Form 10-K/A for the annual period ended December 31, 2012 as filed with the SEC on November 12, 2013.
(2): The Company does not present cash flows from discontinued operations, consistent with the FASB’s authoritative guidance. Restatement adjustments did not have an impact on cash flows from investing and financing activities.

 

56


RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

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

 

The following presents the restated Condensed Consolidating Statements of Operations and Condensed Consolidating Balance Sheets of RTI International Metals, Inc. and its Guarantor and Non-Guarantor Subsidiaries as of and for the periods presented below. The “As Restated” amounts primarily reflect the impact of the restatement on the provision for income tax, deferred tax assets, and all related subtotals, as well as the presentation of RTI Connecticut as a discontinued operation, which is reflected in the Non-Guarantors columns. The restatement adjustments only affected net income (loss) and deferred income taxes on the Condensed Consolidating Statements of Cash Flows, and as such they have not been presented given the condensed presentation. The Previously Reported amounts represent the corrected balances reported in the Second Amendment to the Company’s Annual Report on Form 10-K/A for the period ended December 31, 2012, as filed with the SEC on November 12, 2013. Refer to Note 17 for further information. For information on the impact of restatement on the interim Condensed Consolidating Financial Statements, refer to Note 18.

Condensed Consolidating Statements of Operations and Comprehensive Income—Restatement Adjustments

Year Ended December 31, 2012

 

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

Net sales

  $      $      $ 503,018      $ 503,018      $ 417,573      $ 409,470      $ (212,501   $ (212,501   $ 708,090      $ 699,987   

Costs and expenses:

                   

Cost of sales

                  426,268        426,268        354,695        347,651        (212,501     (212,501     568,462        561,418   

Operating income

    3,006        3,006        27,060        27,060        17,045        17,351                      47,111        47,417   

Equity in earnings of subsidiaries

    25,832        20,741        5,419        5,419        2,138        2,138        (33,389     (28,298              

Income before income taxes

    12,136        7,045        32,722        32,722        17,363        17,669        (33,389     (28,298     28,832        29,138   

Provision for (benefit from) income taxes

    (6,304     (6,408     10,726        10,726        5,970        11,367                      10,392        15,685   

Net income attributable to continuing operations

    18,440        13,453        21,996        21,996        11,393        6,302        (33,389     (28,298     18,440        13,453   

Net income attributable to discontinued operations, net of tax

    1,700