UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009

 

OR

 

For the transition period from                 to                

 

Commission File Number: 001-14437

 

RTI INTERNATIONAL METALS, INC.

(Exact name of registrant as specified in its charter)

 

 

(412) 893-0026

Registrant’s telephone number, including area code:

 

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

Yes þ     No o

 

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 o     No o

 

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.

 

(Do not check if a smaller reporting company)

 

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

Yes o     No þ

 

Number of shares of the Corporation’s common stock (“Common Stock”) outstanding as of July 31, 2009
was 23,119,670.

 

 

RTI INTERNATIONAL METALS, INC AND CONSOLIDATED SUBSIDIARIES

 

As used in this report, the terms “RTI,” “Company,” “Registrant,” “we,” “our,” and “us,” mean RTI International Metals, Inc., its predecessors, and consolidated subsidiaries, taken as a whole, unless the context indicates otherwise.

 

 

INDEX

 

 

 

 

 

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

 

 

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

 

 

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

 

 

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

 

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements
(Unaudited)

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

 

Note 1—BASIS OF PRESENTATION:

 

The accompanying unaudited consolidated financial statements of RTI International Metals, Inc. and its subsidiaries (the “Company” or “RTI”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. In the opinion of management, these financial statements contain all of the adjustments of a normal and recurring nature considered necessary to state fairly the results for the interim periods presented. The results for the interim periods are not necessarily indicative of the results to be expected for the year.

 

The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these financial statements be read in conjunction with accounting policies and notes to consolidated financial statements included in the Company’s 2008 Annual Report on Form 10-K.

 

Note 2—ORGANIZATION:

 

The Company is a leading U.S. producer of titanium mill products and a global supplier of fabricated titanium and specialty metal components for the national and international market. 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 was reorganized into a holding company structure in 1998 under the symbol “RTI.”

 

The Company conducts business in three segments: the Titanium Group, the Fabrication Group, and the Distribution Group.

 

The Titanium Group melts and produces a complete range of titanium mill products, which are further processed by its customers for use in a variety of commercial aerospace, defense, and industrial applications. The titanium mill products consist of basic mill shapes including ingot, slab, bloom, billet, bar, plate, and sheet. The Titanium Group also produces ferro titanium alloys for steel-making customers.

 

The Fabrication Group is comprised of companies that fabricate, machine, and assemble titanium and other specialty metal parts and components. Its products, many of which are complex engineered parts and assemblies, serve commercial aerospace, defense, oil and gas, power generation, and chemical process industries, as well as a number of other industrial and consumer markets.

 

The Distribution Group stocks, distributes, finishes, cuts-to-size, and facilitates just-in-time delivery services of titanium, steel, and other specialty metal products, primarily nickel-based specialty alloys.

 

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements
(Unaudited)

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

 

 

Note 3—STOCK-BASED COMPENSATION:

 

Stock Options

 

A summary of the status of the Company’s stock options as of June 30, 2009, and the activity during the six months then ended, is presented below:

 

 

The fair value of stock options granted was estimated at the date of grant using the Black-Scholes option-pricing model based upon the assumptions noted in the following table:

 

 

Restricted Stock

 

A summary of the status of the Company’s nonvested restricted stock as of June 30, 2009, and the activity during the six months then ended, is presented below:

 

 

The fair value of restricted stock grants was calculated using the market value of the Company’s Common Stock on the date of issuance. The weighted-average grant date fair value of restricted stock awards granted during the six months ended June 30, 2009 was $14.46.

 

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements
(Unaudited)

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

 

Performance Share Awards

 

A summary of the Company’s performance share award activity during the six months ended June 30, 2009 is presented below:

 

 

The fair value of the performance share awards granted was estimated by the Company at the grant date using a Monte Carlo model. The weighted-average grant-date fair value of performance shares awarded during the six months ended June 30, 2009 was $20.65.

 

Note 4—INCOME TAXES:

 

Management evaluates the estimated annual effective income tax rate on a quarterly basis based on current and forecasted business levels and activities, including the mix of domestic and foreign results and enacted tax laws. This estimated annual effective tax rate is updated quarterly based upon actual results and updated operating forecasts. Items unrelated to current year ordinary income are recognized entirely in the period identified as a discrete item of tax. The quarterly income tax provision is comprised of tax on ordinary income at the most recent estimated annual effective tax rate, adjusted for the effect of discrete items.

 

For the six months ended June 30, 2009, the estimated annual effective tax rate applied to ordinary income was 83.3% compared to a rate of 37.2% for the six months ended June 30, 2008. These rates differ from the federal statutory rate of 35% principally as a result of the mix of domestic income and foreign losses benefited at lower tax rates. The lower level of income amplifies the rate impact of these mix effects in the current period compared to the comparable period last year.

 

Inclusive of discrete items, the Company recognized a provision for (benefit from) income taxes of $(2,801), or 104.7% of pretax income (loss), and $11,510, or 38.2% of pretax income for federal, state, and foreign income taxes for the three months ended June 30, 2009 and 2008, respectively. The current provision as a percentage of pretax income is higher than the comparable period principally as a result of the mix of domestic income and foreign losses benefited at lower tax rates. The lower level of income amplifies the rate impact of these mix effects compared to the comparable period. Discrete items recognized during each period were not material.

 

The Company recognized a provision for (benefit from) income taxes of $(3,002), or 69.2% of pretax income (loss), and $23,347, or 36.4% of pretax income for federal, state, and foreign income taxes for the six months ended June 30, 2009 and 2008, respectively. The provision for the current period as a percentage of pretax income is higher than the comparable period principally as a result of the mix of domestic income and foreign losses benefited at lower tax rates. The lower level of income amplifies the rate impact of these mix effects in the current period compared to the comparable period. Discrete items totaling $610 reduced the benefit from income taxes for the six months ended June 30, 2009 and were comprised primarily of adjustments to unrecognized tax benefits. Discrete items totaling $535 reduced the provision for income taxes for the six months ended June 30, 2008 and were comprised primarily of adjustments to the prior year state income tax provision.

 

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements
(Unaudited)

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

 

 

Note 5—EARNINGS PER SHARE:

 

Earnings per share amounts for each period are presented in accordance with Statement of Financial Standards (“SFAS”) No. 128, Earnings Per Share (“SFAS 128”), which requires the presentation of basic and diluted earnings per share. Basic earnings per share was computed by dividing net income (loss) by the weighted-average number of shares of Common Stock outstanding for each respective period. Diluted earnings per share was calculated by dividing net income (loss) by the weighted-average of all potentially dilutive shares of Common Stock that were outstanding during the periods presented.

 

Effective January 1, 2009, the Company adopted the provisions of FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 clarifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities to be included in the computation of earnings per share under the two-class method described in SFAS 128. The provisions of FSP EITF 03-6-1 are applied retrospectively. The Company’s restricted stock awards are considered participating securities under the provisions of FSP EITF 03-6-1. The adoption of FSP EITF 03-6-1 reduced basic EPS by $0.01 for both the three and six month periods ended June 30, 2008. There was no effect on diluted EPS.

 

Actual weighted-average shares of Common Stock outstanding used in the calculation of basic and diluted earnings per share for the three and six months ended June 30, 2009 and 2008 were as follows:

 

 

For the three and six months ended June 30, 2009, options to purchase 417,715 and 493,220 shares of Common Stock, at an average price of $35.16 and $31.66, respectively, have been excluded from the calculations of diluted earnings per share because their effects were antidilutive. For the three and six months ended June 30, 2008, options to purchase 187,040 and 118,129 shares of Common Stock, at an average price of $58.86 and $66.54, respectively, have been excluded from the calculation of diluted earnings per share because their effects were antidilutive.

 

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements
(Unaudited)

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

 

 

Note 6—INVENTORIES:

 

Inventories are valued at cost as determined by the last-in, first-out (“LIFO”) method for approximately 62% and 61% of the Company’s inventories as of June 30, 2009 and December 31, 2008, respectively. The remaining inventories are valued at cost determined by a combination of the first-in, first-out (“FIFO”) and weighted-average cost methods. Inventory costs generally include materials, labor, and manufacturing overhead (including depreciation). When market conditions indicate an excess of carrying cost over market value, a lower-of-cost-or-market provision is recorded. Inventories consisted of the following:

 

 

As of June 30, 2009 and December 31, 2008, the current cost of inventories exceeded their carrying value by $75,581 and $79,104, respectively. The Company’s FIFO inventory value approximates current costs.

 

Note 7—GOODWILL AND OTHER INTANGIBLE ASSETS:

 

Under SFAS 142, Goodwill and Other Intangible Assets (“SFAS 142”), goodwill is not amortized; however, the carrying amount of goodwill is tested, at least annually, for impairment. Absent any events throughout the year which would indicate a potential impairment has occurred, the Company performs its annual impairment testing during the fourth quarter.

 

There have been no impairments to date; however, uncertainties or other factors that could result in a potential impairment in future periods may include continued long-term production delays or a significant decrease in expected demand related to the Boeing 787 Dreamliner^® program, as well as any cancellation of one of the major aerospace programs the Company currently supplies, including the Joint Strike Fighter (“JSF”) program or the Airbus family of aircraft, including the A380 and A350XWB programs. In addition, the Company’s ability to ramp up its production of these programs in a cost efficient manner may also impact the results of a future impairment test.

 

In June 2009, Boeing announced a further delay in the first flight of the Boeing 787 Dreamliner^® test aircraft in order to strengthen small areas where the wings join the fuselage. Boeing has not released an updated flight schedule nor has it provided any information with regards to the length of production delays, if any, related to this latest issue. A significant further delay in the Boeing 787 Dreamliner^® production schedule is a specific uncertainty that may impact the results of a future impairment test.

 

Goodwill.  The carrying amount of goodwill attributable to each segment at December 31, 2008 and June 30, 2009 was as follows:

 

 

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements
(Unaudited)

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

 

Intangibles.  Intangible assets consist of customer relationships as a result of the Company’s 2004 acquisition of Claro Precision, Inc. (“Claro”). These intangible assets, which were valued at fair value, are being amortized over 20 years. In the event that long-term demand or market conditions change and the expected future cash flows associated with these assets is reduced, a write-down or acceleration of the amortization period may be required.

 

There were no intangible assets attributable to our Titanium Group and Distribution Group at December 31, 2008 and June 30, 2009. The carrying amount of intangible assets attributable to our Fabrication Group at December 31, 2008 and June 30, 2009 was as follows:

 

 

Note 8—UNEARNED REVENUE:

 

The Company reported a liability for unearned revenue of $22,660 as of June 30, 2009 and $22,352 as of December 31, 2008. These amounts primarily represent payments received in advance from commercial aerospace, defense, and energy market customers on long-term orders, which the Company has not recognized as revenues.

 

Note 9—OTHER INCOME:

 

Other income (expense) for the three months ended June 30, 2009 and 2008 was $855 and $(975), respectively. Other income (expense) for the six months ended June 30, 2009 and 2008 was $1,754 and $(680), respectively. Other income (expense) consists primarily of foreign exchange gains and losses from international operations and fair value adjustments related to the Company’s foreign currency forward contracts. See Note 14 to the Company’s Condensed Consolidated Financial Statements for further information on the Company’s foreign currency forward contracts.

 

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements
(Unaudited)

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

 

 

Note 10—EMPLOYEE BENEFIT PLANS:

 

Components of net periodic pension and other post-retirement benefit cost for the three and six months ended June 30, 2009 and 2008 for those salaried and hourly covered employees were as follows:

 

 

The Company is required to make contributions totaling $2.6 million to its Company-sponsored pension plans in order to maintain its desired funding status; however, it is considering making contributions of up to $9.0 million.

 

Note 11—COMMITMENTS AND CONTINGENCIES:

 

From time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. In the Company’s opinion, the ultimate liability, if any, resulting from these matters will have no significant effect on its Consolidated Financial Statements. Given the critical nature of many of the aerospace end uses for the Company’s products, including specifically their use in critical rotating parts of gas turbine engines, the Company maintains aircraft products liability insurance of $350 million, which includes grounding liability.

 

Environmental Matters

 

The Company is subject to environmental laws and regulations as well as various health and safety laws and regulations that are subject to frequent modifications and revisions. While the costs of compliance for these matters have not had a material adverse impact on the Company in the past, it is impossible to accurately predict the ultimate effect these changing laws and regulations may have on the Company in the future. The Company continues to evaluate its obligation for environmental-related costs on a quarterly basis and make adjustments in accordance with provisions of Statement of Position 96-1, Environmental Remediation Liabilities and SFAS No. 5, Accounting for Contingencies.

 

Given the status of the proceedings at certain of the Company’s sites and the evolving nature of environmental laws, regulations, and remediation techniques, the Company’s ultimate obligation for investigative and remediation costs cannot be predicted. It is the Company’s policy to recognize environmental costs in the financial statements when an obligation becomes probable and a reasonable estimate of exposure can be determined. When a single

 

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements
(Unaudited)

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

 

estimate cannot be reasonably made, but a range can be reasonably estimated, the Company accrues the amount it determines to be the most likely amount within that range.

 

Based on available information, the Company believes that its share of possible environmental-related costs is in a range from $1,143 to $2,615 in the aggregate. At June 30, 2009 and December 31, 2008, the amounts accrued for future environmental-related costs were $1,775 and $2,259, respectively. Of the total amount accrued at June 30, 2009, $1,539 is expected to be paid out within one year and is included in the other accrued liabilities line of the balance sheet. The remaining $236 is recorded in other noncurrent liabilities. During the six months ended June 30, 2009, the Company made payments totaling $569 related to its environmental liabilities.

 

As these proceedings continue toward final resolution, amounts in excess of those already provided may be necessary to discharge the Company from its obligations for these sites which include the Ashtabula River and the Reserve Environmental Services Landfill.

 

Duty Drawback Investigation

 

The Company maintained a program through an authorized agent to recapture duty paid on imported titanium sponge as an offset against exports for products shipped outside the U.S. by the Company or its customers. The agent, who matched the Company’s duty paid with the export shipments through filings with U.S. Customs and Border Protection (“U.S. Customs”), performed the recapture process.

 

Historically, the Company recognized a credit to Cost of Sales when it received notification from its agent that a claim had been filed and received by U.S. Customs. For the period January 1, 2001 through March 31, 2007, the Company recognized a reduction to Cost of Sales totaling $14.5 million associated with the recapture of duty paid. This amount represents the total of all claims filed by the agent on the Company’s behalf.

 

During 2007, the Company received notice from U.S. Customs that it was under formal investigation with respect to $7.6 million of claims previously filed by the agent on the Company’s behalf. The investigation relates to discrepancies in, and lack of supporting documentation for, claims filed through the Company’s authorized agent. The Company revoked the authorized agent’s authority and is fully cooperating with U.S. Customs to determine the extent to which any claims may be invalid or may not be supportable with adequate documentation. In response to the investigation noted above, the Company suspended the filing of new duty drawback claims through the third quarter of 2007. The Company is fully engaged and cooperating with U.S. Customs in an effort to complete the investigation in an expeditious manner.

 

Concurrent with the U.S. Customs investigation, the Company has performed an internal review of the entire $14.5 million of drawback claims filed with U.S. Customs to determine to what extent any claims may have been invalid or may not have been supported with adequate documentation. As a result, the Company recorded charges totaling $8.0 million to Cost of Sales through December 31, 2008. The Company recorded charges totaling $0.2 million during the three months ended March 31, 2009. During the three months ended June 30, 2009, the Company recorded additional charges totaling $2.3 million, primarily as a result of U.S. Customs’ formal denial of certain of the Company’s previously filed direct claims. While the Company intends to continue to pursue these claims through the administrative process, it has fully reserved for these claims due to the inherent risks and uncertainties related to the protest process.

 

These abovementioned charges were determined in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies, and represent the Company’s current best estimate of

 

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements
(Unaudited)

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

 

probable loss. Of this amount, $9.5 million was recorded as a contingent current liability and $1.0 million was recorded as a write-off of an outstanding receivable representing claims filed which had not yet been paid by U.S. Customs. Through December 31, 2008, the Company repaid to U.S. Customs $1.1 million for invalid claims. The Company made additional repayments totaling $0.2 million during the six months ended June 30, 2009. As a result of these payments, the Company’s liability totaled $8.1 million as of June 30, 2009.

 

While the ultimate outcome of the U.S. Customs investigation and the Company’s own internal review is not yet known, the Company believes there is an additional possible risk of loss between $0 and $3.0 million based on current facts, exclusive of amounts imposed for interest and penalties, if any, which cannot be quantified at this time. This possible risk of future loss relates primarily to indirect duty drawback claims filed with U.S. Customs by several of the Company’s customers as the ultimate exporter of record in which we shared in a portion of the revenue.

 

Other Matters

 

The Company is also the subject of, or a party to, a number of other pending or threatened legal actions involving a variety of matters incidental to its business. The Company is of the opinion that the ultimate resolution of these matters will not have a material adverse effect on the results of the operations, cash flows, or the financial position of the Company.

 

Note 12—LONG-TERM DEBT:

 

Long-term debt consisted of:

 

 

Note 13—SEGMENT REPORTING:

 

The Company has three reportable segments: the Titanium Group, the Fabrication Group, and the Distribution Group.

 

The Titanium Group manufactures and sells a wide range of titanium mill products to a customer base consisting primarily of manufacturing and fabrication companies in the commercial aerospace and nonaerospace markets. Titanium mill products are sold primarily to customers such as metal fabricators, forge shops, and, to a lesser extent, metal distribution companies. Titanium mill products are usually raw or starting material for these customers, who then form, fabricate, or further process mill products into finished or semi-finished components or parts.

 

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements
(Unaudited)

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

 

The Fabrication Group is comprised of companies with significant hard-metal expertise that fabricate, machine, and assemble titanium and other specialty metal parts and components. Its products, many of which are complex engineered parts and assemblies, serve the commercial aerospace, defense, oil and gas, power generation, medical device, and chemical process industries, as well as a number of other industrial and consumer markets.

 

The Distribution Group stocks, distributes, finishes, cuts-to-size, and facilitates just-in-time delivery services of titanium, steel, and other specialty metal products.

 

Intersegment sales are accounted for at prices which are generally established by reference to similar transactions with unaffiliated customers. Reportable segments are measured based on segment operating income after an allocation of certain corporate items such as general corporate overhead and expenses. Assets of general corporate activities include unallocated cash and deferred taxes.

 

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements
(Unaudited)

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

 

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

 

 

 

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements
(Unaudited)

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

 

 

Note 14—FINANCIAL INSTRUMENTS:

 

When appropriate, the Company uses derivatives to manage its exposure to changes in interest rates. The interest differential to be paid or received is recorded as interest expense. SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”), defines derivatives, requires that derivatives be carried at fair value on the balance sheet, and provides for hedge accounting when certain conditions are met. In accordance with this standard, the Company’s derivative financial instruments are recognized on the balance sheet at fair value. Changes in the fair value of derivative instruments designated as “cash flow” hedges under SFAS 133, to the extent the hedges are highly effective, are recorded in other comprehensive income, net of tax effects. The ineffective portions of “cash flow” hedges, if any, are recorded into current period earnings. Amounts recorded in other comprehensive income are reclassified into current period earnings when the hedged transaction affects earnings. Changes in the fair value of derivative instruments designated as “fair value” hedges under SFAS 133, along with corresponding changes in the fair values of the hedged assets or liabilities, are recorded in current period earnings.

 

As of June 30, 2009, the Company maintained several interest rate swap agreements (the “swap agreements”), with notional amounts totaling $146.3 million. The swap agreements effectively convert, from floating-rate to fixed-rate, the first 65% of interest payments on the Company’s $225.0 million term loan. The swap agreements amortize proportionally with the amortization of the term loan and allow the Company to convert a portion of its interest expense from one-month LIBOR to a fixed rate. The swap agreements expire on September 27, 2012. The swap agreements are accounted for as “cash flow” hedges under the provisions of SFAS 133 as they are highly effective at offsetting the cash flows related to interest payments on the Company’s $225.0 million term loan. The fair value of the swap agreements is recorded in Accumulated other comprehensive income. Amounts recorded in Accumulated other comprehensive income are reclassified into Interest expense in the period the transaction affects earnings.

 

As of June 30, 2009, the Company maintained several foreign currency forward contracts, with notional amounts totaling €9.7 million, that are used to manage foreign currency exposure related to equipment purchases associated with the Company’s ongoing capital expansion projects. These forward contracts settle throughout fiscal 2009. They have not been designated as hedging instruments under SFAS 133. Changes in the fair value of these forward contracts are recorded in current period earnings within Other income (expense).

 

A summary of the Company’s derivative instrument portfolio as of June 30, 2009, is below:

 

 

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements
(Unaudited)

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

 

 

Note 15—FAIR VALUE MEASUREMENTS:

 

SFAS No. 157, Fair Value Measurements (“SFAS 157”) clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, SFAS 157 establishes a three-tier fair value hierarchy that prioritizes the inputs utilized in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data and which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including its cash equivalents.

 

The Company’s cash equivalents consist of highly liquid Money Market Funds that are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The Company’s interest rate swap agreements are estimated utilizing the terms of the interest rate swap agreements and available market yield curves. The Company’s foreign currency forward contracts are estimated utilizing the terms of the contracts and available forward pricing information. However, because these derivative contracts are unique and not actively traded, the fair values are classified as Level 2 estimates under the provision of SFAS 157.

 

Listed below are the Company’s assets and liabilities, and their fair values, that are measured at fair value on a recurring basis as of June 30, 2009.

 

 

As of June 30, 2009, the Company did not have any financial assets or liabilities that were measured on a nonrecurring basis.

 

Note 16—NEW ACCOUNTING STANDARDS:

 

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree, and the goodwill acquired. SFAS 141(R) also establishes additional disclosure requirements related to the financial effects of a business combination. SFAS 141(R) became effective as of January 1, 2009. The adoption of SFAS 141(R) did not have a material effect on the Company’s Consolidated Financial Statements.

 

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements
(Unaudited)

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

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51 (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interest in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interest of the parent and the interests of the noncontrolling owners. SFAS 160 became effective as of January 1, 2009. The adoption of SFAS 160 did not have a material effect on the Company’s Consolidated Financial Statements.

 

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 provides for additional disclosure requirements for derivative instruments and hedging activities, including disclosures as to how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133 and how derivative instruments and related hedged items affect a company’s financial position, financial performance, and cash flows. SFAS 161 became effective as of January 1, 2009. The adoption of SFAS 161 did not have a material effect on the Company’s Consolidated Financial Statements. See Note 14 to the Company’s Condensed Consolidated Financial Statements for further information on the Company’s derivative instruments.

 

In June 2008, the FASB issued FSP EITF 03-6-1. FSP EITF 03-6-1 clarifies that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities to be included in the computation of earnings per share under the two-class method described in SFAS 128. The provisions of FSP EITF 03-6-1 became effective as of January 1, 2009, and required retrospective application. The adoption of FSP EITF 03-6-1 did not have a material impact on the Company’s Consolidated Financial Statements. See Note 5 to the Company’s Condensed Consolidated Financial Statements for further information on the Company’s earnings per share.

 

In December 2008, the FASB issued FASB Staff Position No FAS 132(R)-1, Employers’ Disclosure about Postretirement Benefit Plan Assets (“FSP SFAS 132(R)-1”). FSP SFAS 132(R)-1 provides guidance on an employers’ disclosures about plan assets of a defined benefit or other postretirement plan, to include investment policies and strategies; associated and concentrated risks; major asset categories and their fair values; inputs and valuation techniques used to measure fair-value of plan assets; and the net periodic benefit costs recognized for each annual period. FSP SFAS 132(R)-1 is effective for reporting periods ending after December 15, 2009. The Company is currently evaluating the potential impact the adoption of FSP SFAS 132(R)-1 will have on its Consolidated Financial Statements.

 

In April 2009, the FASB issued FSP No. 107-1 and APB Opinion No. 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP SFAS 107-1 and APB 28-1”). FSP SFAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements and amends APB Opinion No. 28, Interim Financial Reporting, to require disclosures in summarized financial information at interim reporting periods. FSP SFAS 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009. The adoption of FSP SFAS 107-1 and APB 28-1 did not have a material effect on the Company’s Consolidated Financial Statements.

 

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Additionally, SFAS 165 requires disclosure of the date through

 

RTI INTERNATIONAL METALS, INC. AND SUBSIDIARIES

Condensed Notes to Consolidated Financial Statements
(Unaudited)

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

 

which subsequent events have been evaluated. The adoption of SFAS 165 did not have a material impact on the Company’s Consolidated Financial Statements.

 

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (“SFAS 168”). SFAS 168 identifies the FASB Accounting Standards Codification (the “Codification”) as the sole source of US GAAP recognized by the FASB. The Codification identifies only two levels of GAAP: authoritative and nonauthoritative. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of SFAS 168 to have a material effect on its Consolidated Financial Statements.

 

Note 17—SUBSEQUENT EVENTS:

 

The Company evaluated subsequent events through August 10, 2009, the date the financial statements were issued. On July 31, 2009, the Company prepaid $78.8 million on its $225.0 million term loan in order to reduce its interest expense.

 

Forward-Looking Statements

 

The following discussion should be read in connection with the information contained in the Consolidated Financial Statements and Condensed Notes to Consolidated Financial Statements. The following information contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and is subject to the safe harbor created by that Act. Such forward-looking statements may be identified by their use of words like “expects,” “anticipates,” “intends,” “projects,” or other words of similar meaning. Forward-looking statements are based on expectations and assumptions regarding future events. In addition to factors discussed throughout this quarterly report, the following factors and risks should also be considered, including, without limitation:

 

 

Because such forward-looking statements involve risks and uncertainties, there are important factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements. These and other risk factors are set forth in this, as well as in other filings filed with or furnished to the Securities and Exchange Commission (“SEC”) over the last 12 months, copies of which are available from the SEC or may be obtained upon request from the Company.

Overview

 

RTI International Metals, Inc. (the “Company,” “RTI,” “we,” “us,” or “our”) is a leading U.S. producer and supplier of titanium mill products and a supplier of fabricated titanium and specialty metal parts for the global market.

 

The Titanium Group melts, processes, and produces a complete range of titanium mill products which are further processed by its customers for use in a variety of commercial aerospace, defense, and industrial and consumer applications. With operations in Niles, Ohio; Canton, Ohio; and Hermitage, Pennsylvania, the Titanium Group has overall responsibility for the production of primary mill products including, but not limited to, bloom, billet, sheet, and plate. This Group also focuses on the research and development of evolving technologies relating to raw materials, melting and other production processes, and the application of titanium in new markets.

 

The Fabrication Group is comprised of companies with significant hard-metal expertise that extrude, fabricate, machine, and assemble titanium and other specialty metal parts and components. Its products, many of which are complex engineered parts and assemblies, serve commercial aerospace, defense, oil and gas, power generation, and chemical process industries, as well as a number of other industrial and consumer markets. With operations located in Houston, Texas; Washington, Missouri; Laval, Quebec; and a representative office in China, the Fabrication Group concentrates its efforts on offering value-added products and services such as engineered tubulars and extrusions, fabricated and machined components and sub-assemblies, as well as engineered systems for energy-related markets by accessing the Titanium Group as its primary source of mill products.

 

The Distribution Group stocks, distributes, finishes, cuts-to-size, and facilitates just-in-time delivery services of titanium, steel, and other specialty metal products, primarily nickel-based specialty alloys. With operations in Garden Grove, California; Windsor, Connecticut; Sullivan, Missouri; Staffordshire, England; and Rosny-Sur-Seine, France; the Distribution Group services a variety of commercial aerospace, defense, and industrial and consumer customers.

 

During the first quarter of 2009, we closed our distribution facility located in Indianapolis, Indiana. We closed our Houston, Texas, distribution facility during the second quarter of 2009. Both of these closures were done as part of our ongoing cost rationalization strategy within the Distribution Group in light of current market conditions. These closures did not have a material impact on our Consolidated Financial Statements.

 

Both the Fabrication and Distribution Groups access the Titanium Group as their primary source of mill products. For the three months ended June 30, 2009 and 2008, approximately 57% and 45%, respectively, of the Titanium Group’s sales were to the Fabrication and Distribution Groups. For the six months ended June 30, 2009 and 2008, approximately 55% and 46%, respectively, of the Titanium Group’s sales were to the Fabrication and Distribution Groups.

 

Our net income for the three months ended June 30, 2009 totaled $0.1 million, or $0.01 per diluted share, on sales of $104.4 million, compared with net income totaling $18.6 million, or $0.81 per diluted share, on sales of $159.8 million for the three months ended June 30, 2008. Our net loss for the six months ended June 30, 2009 totaled $(1.3) million, or $(0.06) per diluted share, on sales of $210.4 million, compared with net income of $40.9 million, or $1.76 per diluted share, on sales of $310.5 million for the six months ended June 30, 2008.

 

Trends and Uncertainties

 

Our business has been significantly impacted by the global economic crisis. This impact was exacerbated by the severe global credit crisis that started in September 2008. Our primary market, the commercial aerospace industry, has been hit especially hard by these crises as most aircraft purchases are financed over long periods of time. The result of these two crises combined with the long-term delays in the Boeing 787 Dreamliner^® program, is that our industry is left with a significant oversupply of inventory and a severe contraction in demand. As a result, our spot sales of titanium mill products have been minimal. Somewhat offsetting these impacts has been our focus

on removing some of the cyclicality of the industry by signing longer-term contracts for specific quantities of material. These contracts have allowed us to maintain a level of volumes in excess of those seen during the last market downturn following September 11, 2001.

 

In such market downturns, we strive to reduce our variable costs to counteract such declines in spot sales, although we cannot always do so as quickly as sales levels decline. We continue to balance our expectations of future business with our need to contain costs.

 

Production delays related to the Boeing 787 Dreamliner^® program continue to hamper our Fabrication and Distribution Groups as well. The 787, which was initially scheduled to begin customer deliveries in late 2007, currently has a first delivery date of early 2010. We have invested a significant amount of capital into our facilities to prepare for the ramp up of 787 production. As such, while we attempt to reduce our own variable expenses (primarily labor, outside processing, overtime, and supplies) to match the reduced near-term demand from Boeing, our fixed costs cannot be reduced. While we expect to receive the anticipated volumes from this program, it will be difficult to predict in what period they will occur given the uncertainly in the program’s production schedule.

 

Three Months Ended June 30, 2009 Compared To Three Months Ended June 30, 2008

 

Net Sales.  Net sales for our reportable segments, excluding intersegment sales, for the three months ended June 30, 2009 and 2008 were as follows:

 

 

The combination of a 4% decrease in the average realized selling prices of prime mill products and a 44% decrease in prime mill shipments to our trade customers resulted in a $21.2 million reduction in the Titanium Group’s net sales. The decrease in average realized selling prices was primarily due to changes in the sales mix between periods, with the mix in 2009 consisting of a higher percentage of sales related to long-term supply agreements, which generally carry lower overall sales prices and are subject to annual pricing adjustments. Furthermore, excess inventory in the market due to the ongoing Boeing 787 Dreamliner^® program delays and the lower overall titanium demand profile resulted in a reduction in spot market volume and a decrease in realized selling prices on spot sales compared to the prior period. Additionally, decreasing demand from the specialty steel industry resulted in a $3.8 million reduction in ferro titanium sales.

 

The decrease in the Fabrication Group’s net sales principally relates to the relatively low price of oil compared to the prior year, which has led to a slow down in orders from our energy market customers, resulting in a $9.9 million decrease in net sales compared to the prior year. In addition, continued delays in the Boeing 787 Dreamliner^® program, as well as the general downturn in the commercial aerospace market, resulted in a reduction in net sales totaling $4.2 million compared to the prior year.

 

The decrease in the Distribution Group’s net sales was principally related to lower demand resulting from the global economic downturn and the slow down in the commercial aerospace market which has resulted in higher levels of titanium inventory throughout the supply chain. Lower demand and lower realized pricing for the Group’s titanium products resulted in a $10.2 million reduction in net sales. Lower demand and lower realized pricing for the Group’s specialty alloys products resulted in a $5.3 million reduction in net sales.

Gross Profit (Loss).  Gross profit (loss) for our reportable segments, for the three months ended June 30, 2009 and 2008 were as follows:

 

 

Excluding the $2.3 million charge in the current period associated with the U.S. Customs’ investigation of our previously filed duty drawback claims, gross profit for the Titanium Group decreased $15.1 million compared to the prior year. The decrease in the Titanium Group’s gross margin was largely the result of lower sales levels, which reduced gross profit by $5.7 million. In addition, lower average realized selling prices and a lower margin sales mix reduced gross profit by $3.5 million. Higher raw material costs and lower absorption of production overhead due to the lower level of production in the current period reduced gross profit $1.4 million. Furthermore, gross profit at the Titanium Group was unfavorably impacted $0.6 million by reduced sales of Titanium Group-sourced inventory by our Fabrication Group and Distribution Group business.

 

The decrease in gross profit for the Fabrication Group was driven by several factors, including reduced sales volumes which reduced gross profit by $3.0 million and continued cost overruns related to certain energy market projects which negatively impacted gross profit by $6.0 million. In addition, production execution issues at one of the Fabrication Group’s facilities negatively impacted its ability to deliver orders and lower than expected material yields at that same location resulted in higher than expected material costs. These issues, although largely corrected by the end of the current period, reduced gross profit by $3.7 million compared to the prior year. Additionally, ongoing uncertainty and delays in the ramp up of the Boeing 787 Dreamliner^® program continue to result in lower utilization and other operational inefficiencies despite significant actions taken to manage costs in line with demand.

 

The decrease in gross profit for the Distribution Group was principally related to lower sales coupled with a decrease in realized selling prices for certain specialty metals that exceeded our decline in product cost. This decrease was partially offset by our actions taken to rationalize our domestic Distribution Group facilities and to reduce logistics costs.

 

Selling, General, and Administrative Expenses.  Selling, general, and administrative expenses (“SG&A”) for our reportable segments for the three months ended June 30, 2009 and 2008 were as follows:

 

 

The $3.2 million decrease in SG&A was primarily related to a $2.2 million reduction in salary and incentive related expenses, driven by a reduction in expected cash incentive compensation in the current year compared to the prior year. Additionally there was a $0.7 million reduction in pension related expenses and a $0.6 million reduction in professional and consulting expenses. The decreases reflect management’s focus on reducing expenses during the current economic downturn while continuing to position the Company for growth in the future.

Research, Technical, and Product Development Expenses.  Research, technical, and product development expenses (“R&D”) were $0.5 million for both the three month periods ended June 30, 2009 and June 30, 2008, respectively. This spending reflects our continued focus on productivity and quality enhancements to our operations.

 

Operating Income (Loss).  Operating income (loss) for our reportable segments for the three months ended June 30, 2009 and 2008 was as follows:

 

 

Excluding the $2.3 million charge in the current period associated with the U.S. Customs investigation of our previously filed duty drawback claims, operating income for the Titanium Group decreased $14.0 million. The decrease was primarily attributable to lower gross profit, largely due to unfavorable volume and lower realized selling prices, which were partially offset by a reduction in SG&A expenses.

 

The decrease in the Fabrication Group’s operating income was the result of lower sales to both the energy and aerospace markets, along with continuing cost overruns on certain energy market projects and manufacturing execution issues at one of the Fabrication Group’s facilities, although these issues were largely corrected during the current period. Further, the Fabrication Group experienced lower utilization as well as increased operating inefficiencies, which in part were driven by the ongoing delays in the Boeing 787 Dreamliner^® program and global economic slow down affecting the commercial aerospace market, partially offset by reductions in compensation, professional and consulting expenses during the period.

 

The decrease in operating income for the Distribution Group was largely due to lower demand in both the titanium and specialty alloys markets. The lower demand resulted in decreased realized selling prices for certain specialty metals that exceeded our decline in product cost. This decrease was slightly offset by a decrease in compensation-related expenses and other cost management actions.

 

Other Income (Expense).  Other income (expense) for the three months ended June 30, 2009 and 2008 was $0.9 million and $(1.0) million, respectively. Other income (expense) consists primarily of foreign exchange gains and losses from our international operations and fair value adjustments related to our foreign currency forward contracts.

 

Interest Income and Interest Expense.  Interest income for the three months ended June 30, 2009 and 2008 was $0.4 million and $0.5 million, respectively. The decrease was principally related to lower returns on invested cash compared to the prior year period. Interest expense was $2.4 and $0.3 million for the three months ended June 30, 2009 and 2008, respectively. The increase in interest expense was primarily attributable to the increase in our long-term debt compared to the prior year as a result of the closing of our $225 million term loan in September 2008.

 

Provision for (Benefit from) Income Taxes.  We recognized a provision for (benefit from) income taxes of $(2.8) million, or 104.7% of pretax loss, and $11.5 million, or 38.2% of pretax income, for federal, state, and foreign income taxes for the three months ended June 30, 2009 and 2008, respectively. Discrete items recognized during each period were not material. Income taxes, as a percentage of pretax income or loss, increased year over year primarily as a result of the mix of domestic income and foreign losses benefited at lower rates. The lower level of income amplifies the rate impact of these mix effects in the current period compared to the comparable period.

Six Months Ended June 30, 2009 Compared To Six Months Ended June 30, 2008

 

Net Sales.  Net sales for our reportable segments, excluding intersegment sales, for the six months ended June 30, 2009 and 2008 were as follows:

 

 

The combination of a 9% decrease in the average realized selling prices of prime mill products and a 41% decrease in prime mill shipments to our trade customers resulted in a $44.8 million reduction in the Titanium Group’s net sales. The decrease in average realized selling prices was primarily due to changes in the sales mix between periods, with the mix in 2009 consisting of lower priced products. In addition, a higher percentage of our sales in the current period were related to long-term supply agreements, which generally carry lower overall sales prices and are subject to annual pricing adjustments. Furthermore, excess inventory in the market due to the ongoing Boeing 787 Dreamliner^® program delays and the lower overall titanium demand profile resulted in a reduction in spot market volume and a decrease in realized selling prices on spot sales compared to the prior period. Additionally, decreasing demand from the specialty steel industry resulted in a $5.5 million reduction in ferro titanium sales.

 

The decrease in the Fabrication Group’s net sales principally relates to the relatively low price of oil compared to the prior year, which has led to a slow down in orders from our energy market customers, resulting in $8.6 million decrease in net sales compared to the prior year. In addition, the general downturn in the commercial aerospace market, combined with production inefficiencies at one of our facilities, resulted in a reduction in net sales totaling $10.2 million compared to the prior year.

 

The decrease in the Distribution Group’s net sales was principally related to lower demand resulting from the global economic downturn and the slow down in the commercial aerospace market which has resulted in higher levels of titanium inventory throughout the supply chain. Lower demand and lower realized pricing for the Group’s titanium products resulted in a $22.3 million reduction in net sales. Lower demand and lower realized pricing for the Group’s specialty alloys products resulted in a $9.2 million reduction in net sales.

 

Gross Profit (Loss).  Gross profit (loss) for our reportable segments, for the six months ended June 30, 2009 and 2008 was as follows:

 

 

Excluding the $2.5 million charge in the current period associated with the U.S. Customs investigation of our previously filed duty drawback claims, gross profit for the Titanium Group decreased $38.9 million compared to the prior year. The decrease in the Titanium Group’s gross margin was largely the result of lower sales levels, which reduced gross profit $13.7 million. In addition, lower average realized selling prices and a lower margin sales mix reduced gross profit $9.5 million. Higher raw material costs and lower absorption of production overhead due to the

lower level of production in the current period reduced gross profit $4.9 million. Deterioration in ferro-alloys margins due to weakening steel markets reduced gross profit $2.1 million compared to the prior year. Furthermore, gross profit at the Titanium Group was unfavorably impacted $2.1 million by reduced sales of Titanium Group-sourced inventory by our Fabrication Group and Distribution Group businesses.

 

The decrease in gross profit for the Fabrication Group was driven by several factors, including reduced sales volumes which reduced gross profit by $4.3 million and continued cost overruns related to certain energy market projects which negatively impacted gross profit by $6.7 million. In addition, production execution issues at one of the Fabrication Group’s facilities negatively impacted its ability to deliver orders and lower than expected material yields at that same location resulted in higher than expected material costs. These issues, although largely corrected by the end of the current period, reduced gross profit by $6.2 million compared to the prior year. Additionally, ongoing uncertainty and delays in the ramp up of the Boeing 787 Dreamliner^® program continue to result in lower utilization and other operational inefficiencies despite significant actions taken to manage costs in line with demand.

 

The decrease in gross profit for the Distribution Group was principally related to lower sales coupled with a decrease in realized selling prices for certain specialty metals that exceeded our decline in product cost. This decrease was partially offset by our actions taken to rationalize our domestic Distribution Group facilities and to reduce logistics costs.

 

Selling, General, and Administrative Expenses.  SG&A expenses for our reportable segments for the six months ended June 30, 2009 and 2008 were as follows: