RTI Q1 2003
RTI International Metals, Inc.
1st Quarter 2003
To Our Shareholders If we needed a reminder of the challenge that titanium companies face this year, it was provided by the first quarter.
RTI made $0.21 per share during the
quarter, but that included a $0.25 effect from a contractual payment from Boeing. Absent that payment, we had an operating loss for the quarter, our second in 8 years. Mill product shipments totaled only 1.4 million pounds, our lowest level in over 20 years. Demand for titanium from commercial aerospace markets, already weak in the wake of 9/11, has taken another blow from the war in Iraq and the outbreak of SARS. Air travel is down significantly from last year and, rather than adding aircraft, financially strapped airlines are reducing capacity. These conditions are likely to be with us for at least the balance of this year. Demand from defense markets, on the other hand, is increasing and is expected to continue. Since our last letter, RTI entered into long-term agreements with Lockheed and BAE Systems for the development phase of the Joint Strike Fighter program.
This market includes ground systems, as well.
Utilizing a
number of its diverse capabilities, RTI is providing machined titanium components and kitting service for the new 155 mm Titanium Howitzer. “Kitting” is preparing and packaging parts for assembly. The first release of 94 guns is now in production and the program calls for as many as 600 in total. Unfortunately, the gains in other titanium markets, including defense, are not as large as the drop in commercial aerospace, so our Titanium Group will be challenged to improve upon the cost reductions they achieved last year, despite lower volumes. The good news is that, if anyone can do it, they can.
RTI International Metals, Inc. Shareholder Letter
1st Quarter 2003
continued
The Fabrication & Distribution Group had a good first quarter, particularly in terms of profitability. Some of its units are affected by commercial aerospace, but none are as volume sensitive as our mill operations. Much of their business is non-titanium.
None of their markets are as depressed as commercial
aerospace. In fact some, like deepwater energy, are quite healthy. On balance, we expect this Group to provide the diversification for which it was intended, as we work our way through this cyclical downturn in titanium. Cash generation in the first quarter was good and is expected to remain so. You can expect RTI to continue to invest in its future through a combination of capital spending, research, acquisition and share repurchase, when warranted. When conditions improve, as they will, your company will be healthy and well positioned to benefit from the opportunities it will bring.
Robert M. Hernandez Chairman of the Board May, 2003
Timothy G. Rupert President and Chief Executive Officer
RTI International Metals, Inc.
1st Quarter 2003
Focus on...
Pension Plans
Part of RTI’s financial strength is the relative health of its pension plans. The continued weakness in the equity markets has taken a heavy toll on the value of retirement plan assets, but RTI’s plans have fared better than most due to the optional Company contributions made over the past several years. From a peak of more than $95 million in 1998, total plan assets stood at slightly over $83 million as of 12/31/02 indicating a 13% decrease over that 5-year period. Though significant, this reduction is less than half of what the entire market experienced over that same timeframe. At 12/31/02, the projected benefit obligation, that is the amount expected to be paid out in the future from current assets plus future contributions and earnings, stood at $103 million. This figure is calculated using current market data and certain assumptions are made relative to market returns, interest rates and inflation. We are required to reassess this obligation on a yearly basis and as conditions change so, too, will this liability. It is not only our stated policy but it is also our fiduciary responsibility to maintain funded programs that will meet the contractual obligations to our retirees. Despite the drop in plan asset values, our plans stand well in excess of required minimum levels and through 2002 we have contributed tax-deductible amounts up to the maximum permitted by law. Current indications are that no additional cash contributions will be required by ERISA for the next 5-year period. Nonetheless, in keeping with our practice of making contributions when cash flow is good rather than when required, RTI’s Board of Directors has just authorized a $3 million contribution to be made this month. Unlike many companies that will now have to forego other investment opportunities in order to make required pension contributions, RTI is in a position to control the timing of its funding obligations, including deferring them if business conditions warrant. That is good news not only for our employees and retirees but for RTI’s shareholders as well.
RTI International Metals, Inc.
1st Quarter 2003
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (Dollars in Thousands)
Sales ..................................................................................... $ Operating costs: Cost of sales.......................................................................... Selling, general and administrative expenses ....................... Research, technical and product development expenses ..... Total operating costs ........................................................
Quarter Ended March 31 2003 2002 58,532 $ 65,678 52,135 7,631 387 60,153
51,882 9,060 360 61,302
Operating income (loss) ........................................................
(1,621)
4,376
Other income, net ................................................................. Interest expense.................................................................... Income before income taxes ................................................. Provision for income taxes ................................................... Net income ............................................................................ $
8,777 (168) 6,988 2,655 4,333
$
8,936 (147) 13,165 5,134 8,031
0.21 0.21
$ $
Earnings per common share Net income: Basic.................................................................................... $ Diluted ................................................................................. $ Weighted average shares used to compute earnings per share: Basic.................................................................................... Diluted .................................................................................
20,811,856 20,902,590
0.39 0.38
20,767,586 20,898,346
RTI International Metals, Inc.
1st Quarter 2003
CONSOLIDATED BALANCE SHEET (Dollars in Thousands)
March 31, 2003 (Unaudited) Assets Assets: Cash and cash equivalents............................................. Receivables—less allowance for doubtful accounts of $1,170 and $1,205....................................................... Inventories, net .............................................................. Deferred income taxes.................................................... Other current assets ....................................................... Total current assets ..................................................... Property, plant and equipment, net................................. Goodwill .......................................................................... Noncurrent deferred income tax asset............................ Other noncurrent assets ................................................. Total assets ................................................................. Liabilities and Shareholders' Equity Liabilities: Accounts payable ........................................................... Accrued wages and other employee costs ..................... Billings in excess of costs and estimated revenues ....... Other accrued liabilities................................................... Total current liabilities .................................................. Long-term debt ............................................................... Accrued postretirement benefit cost ............................... Accrued pension cost ..................................................... Other noncurrent liabilities .............................................. Total liabilities .............................................................. Commitments and contingencies Shareholders' equity: Common stock, $0.01 par value, 50,000,000 shares authorized; 21,196,887 and 21,120,833 shares issued; 20,830,165 and 20,775,983 shares outstanding ......... Additional paid-in capital ................................................. Deferred compensation .................................................. Treasury stock, at cost; 366,722 and 344,850 shares .... Accumulated other comprehensive loss ......................... Retained earnings........................................................... Total shareholders' equity............................................ Total liabilities and shareholders' equity ....................
$
46,829
$
42,199 149,875 2,356 4,871 246,130 90,722 34,133 4,271 23,537 398,793
$
$
12,154 6,904 2,509 2,567 24,134 — 19,942 33,543 5,658 83,277
212 243,147 (2,523) (3,256) (19,015) 96,951 315,516 398,793
December 31, 2002
$
40,666
$
38,830 154,159 2,356 5,934 241,945 92,554 34,133 4,271 23,317 396,220
$
$
14,711 6,983 2,388 1,647 25,729 — 19,873 33,021 6,424 85,047
211 242,373 (1,982) (3,032) (19,015) 92,618 311,173 396,220
RTI International Metals, Inc.
1st Quarter 2003
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in Thousands)
Cash flows from operating activities: Net income ........................................................................... Adjustment for items not affecting funds from operations: Depreciation and amortization ........................................... Deferred income taxes ....................................................... Stock-based compensation and other................................
Three Months Ended March 31 2003 2002 $ 4,333
$ 8,031
3,057 — 306
3,143 (678) 1,000
Changes in assets and liabilities (excluding cash): Receivables........................................................................ Inventories.......................................................................... Accounts payable............................................................... Other current liabilities ....................................................... Other assets and liabilities ................................................. Cash provided by operating activities..............................
(3,417) 4,284 (2,557) 962 668 7,636
(8,522) (7,682) 239 13,103 (1,042) 7,592
Cash flows from investing activities: Capital expenditures .......................................................... Cash used in investing activities .....................................
(1,255) (1,255)
(1,464) (1,464)
Cash flows from financing activities: Exercise of employee stock options................................... Purchase of common stock held in treasury ...................... Cash provided by (used in) financing activities ............... Increase (decrease) in cash and cash equivalents ......... Cash and cash equivalents at beginning of period......... Cash and cash equivalents at end of period ...................
6 (224) (218) 6,163 40,666 $ 46,829
18 — 18 6,146 8,036 $14,182
Supplemental cash flow information: Cash paid for interest, net of amounts capitalized ............. Cash paid for income taxes................................................
$ 101 $ 2,554
$ $
79 365
Noncash financing activities: Issuance of common stock for restricted stock awards...... Capital lease obligations incurred ......................................
$ $
$ $
479 —
769 6
RTI International Metals, Inc.
1st Quarter 2003
SEGMENT REPORTING (Unaudited) (Dollars in Thousands)
Quarter Ended March 31 2003 2002
Total sales Titanium Group ............................................................................. $ 32,742 Fabrication & Distribution Group ................................................... 46,049 Total ...................................................................................... 78,791 Inter and intra segment sales Titanium Group ............................................................................. Fabrication & Distribution Group ................................................... Total ......................................................................................
$50,204 47,732 97,936
18,507 1,752 20,259
28,442 3,816 32,258
Total sales to external customers Titanium Group ............................................................................. 14,235 Fabrication & Distribution Group ................................................... 44,297 Total ...................................................................................... $ 58,532
21,762 43,916 $ 65,678
Operating income (loss) Titanium Group ............................................................................. $ (1,776) Fabrication & Distribution Group ................................................... 155 Total ...................................................................................... (1,621)
$ 4,261 115 4,376
Reconciliation of operating income (loss) to reported income before taxes: Other income (loss)-net................................................................. Interest expense............................................................................ Reported Income before taxes ...................................................... $
8,936 147 $ 13,165
8,777 168 6,988
1st Quarter 2003
To Our Shareholders If we needed a reminder of the challenge that titanium companies face this year, it was provided by the first quarter.
RTI made $0.21 per share during the
quarter, but that included a $0.25 effect from a contractual payment from Boeing. Absent that payment, we had an operating loss for the quarter, our second in 8 years. Mill product shipments totaled only 1.4 million pounds, our lowest level in over 20 years. Demand for titanium from commercial aerospace markets, already weak in the wake of 9/11, has taken another blow from the war in Iraq and the outbreak of SARS. Air travel is down significantly from last year and, rather than adding aircraft, financially strapped airlines are reducing capacity. These conditions are likely to be with us for at least the balance of this year. Demand from defense markets, on the other hand, is increasing and is expected to continue. Since our last letter, RTI entered into long-term agreements with Lockheed and BAE Systems for the development phase of the Joint Strike Fighter program.
This market includes ground systems, as well.
Utilizing a
number of its diverse capabilities, RTI is providing machined titanium components and kitting service for the new 155 mm Titanium Howitzer. “Kitting” is preparing and packaging parts for assembly. The first release of 94 guns is now in production and the program calls for as many as 600 in total. Unfortunately, the gains in other titanium markets, including defense, are not as large as the drop in commercial aerospace, so our Titanium Group will be challenged to improve upon the cost reductions they achieved last year, despite lower volumes. The good news is that, if anyone can do it, they can.
RTI International Metals, Inc. Shareholder Letter
1st Quarter 2003
continued
The Fabrication & Distribution Group had a good first quarter, particularly in terms of profitability. Some of its units are affected by commercial aerospace, but none are as volume sensitive as our mill operations. Much of their business is non-titanium.
None of their markets are as depressed as commercial
aerospace. In fact some, like deepwater energy, are quite healthy. On balance, we expect this Group to provide the diversification for which it was intended, as we work our way through this cyclical downturn in titanium. Cash generation in the first quarter was good and is expected to remain so. You can expect RTI to continue to invest in its future through a combination of capital spending, research, acquisition and share repurchase, when warranted. When conditions improve, as they will, your company will be healthy and well positioned to benefit from the opportunities it will bring.
Robert M. Hernandez Chairman of the Board May, 2003
Timothy G. Rupert President and Chief Executive Officer
RTI International Metals, Inc.
1st Quarter 2003
Focus on...
Pension Plans
Part of RTI’s financial strength is the relative health of its pension plans. The continued weakness in the equity markets has taken a heavy toll on the value of retirement plan assets, but RTI’s plans have fared better than most due to the optional Company contributions made over the past several years. From a peak of more than $95 million in 1998, total plan assets stood at slightly over $83 million as of 12/31/02 indicating a 13% decrease over that 5-year period. Though significant, this reduction is less than half of what the entire market experienced over that same timeframe. At 12/31/02, the projected benefit obligation, that is the amount expected to be paid out in the future from current assets plus future contributions and earnings, stood at $103 million. This figure is calculated using current market data and certain assumptions are made relative to market returns, interest rates and inflation. We are required to reassess this obligation on a yearly basis and as conditions change so, too, will this liability. It is not only our stated policy but it is also our fiduciary responsibility to maintain funded programs that will meet the contractual obligations to our retirees. Despite the drop in plan asset values, our plans stand well in excess of required minimum levels and through 2002 we have contributed tax-deductible amounts up to the maximum permitted by law. Current indications are that no additional cash contributions will be required by ERISA for the next 5-year period. Nonetheless, in keeping with our practice of making contributions when cash flow is good rather than when required, RTI’s Board of Directors has just authorized a $3 million contribution to be made this month. Unlike many companies that will now have to forego other investment opportunities in order to make required pension contributions, RTI is in a position to control the timing of its funding obligations, including deferring them if business conditions warrant. That is good news not only for our employees and retirees but for RTI’s shareholders as well.
RTI International Metals, Inc.
1st Quarter 2003
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (Dollars in Thousands)
Sales ..................................................................................... $ Operating costs: Cost of sales.......................................................................... Selling, general and administrative expenses ....................... Research, technical and product development expenses ..... Total operating costs ........................................................
Quarter Ended March 31 2003 2002 58,532 $ 65,678 52,135 7,631 387 60,153
51,882 9,060 360 61,302
Operating income (loss) ........................................................
(1,621)
4,376
Other income, net ................................................................. Interest expense.................................................................... Income before income taxes ................................................. Provision for income taxes ................................................... Net income ............................................................................ $
8,777 (168) 6,988 2,655 4,333
$
8,936 (147) 13,165 5,134 8,031
0.21 0.21
$ $
Earnings per common share Net income: Basic.................................................................................... $ Diluted ................................................................................. $ Weighted average shares used to compute earnings per share: Basic.................................................................................... Diluted .................................................................................
20,811,856 20,902,590
0.39 0.38
20,767,586 20,898,346
RTI International Metals, Inc.
1st Quarter 2003
CONSOLIDATED BALANCE SHEET (Dollars in Thousands)
March 31, 2003 (Unaudited) Assets Assets: Cash and cash equivalents............................................. Receivables—less allowance for doubtful accounts of $1,170 and $1,205....................................................... Inventories, net .............................................................. Deferred income taxes.................................................... Other current assets ....................................................... Total current assets ..................................................... Property, plant and equipment, net................................. Goodwill .......................................................................... Noncurrent deferred income tax asset............................ Other noncurrent assets ................................................. Total assets ................................................................. Liabilities and Shareholders' Equity Liabilities: Accounts payable ........................................................... Accrued wages and other employee costs ..................... Billings in excess of costs and estimated revenues ....... Other accrued liabilities................................................... Total current liabilities .................................................. Long-term debt ............................................................... Accrued postretirement benefit cost ............................... Accrued pension cost ..................................................... Other noncurrent liabilities .............................................. Total liabilities .............................................................. Commitments and contingencies Shareholders' equity: Common stock, $0.01 par value, 50,000,000 shares authorized; 21,196,887 and 21,120,833 shares issued; 20,830,165 and 20,775,983 shares outstanding ......... Additional paid-in capital ................................................. Deferred compensation .................................................. Treasury stock, at cost; 366,722 and 344,850 shares .... Accumulated other comprehensive loss ......................... Retained earnings........................................................... Total shareholders' equity............................................ Total liabilities and shareholders' equity ....................
$
46,829
$
42,199 149,875 2,356 4,871 246,130 90,722 34,133 4,271 23,537 398,793
$
$
12,154 6,904 2,509 2,567 24,134 — 19,942 33,543 5,658 83,277
212 243,147 (2,523) (3,256) (19,015) 96,951 315,516 398,793
December 31, 2002
$
40,666
$
38,830 154,159 2,356 5,934 241,945 92,554 34,133 4,271 23,317 396,220
$
$
14,711 6,983 2,388 1,647 25,729 — 19,873 33,021 6,424 85,047
211 242,373 (1,982) (3,032) (19,015) 92,618 311,173 396,220
RTI International Metals, Inc.
1st Quarter 2003
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in Thousands)
Cash flows from operating activities: Net income ........................................................................... Adjustment for items not affecting funds from operations: Depreciation and amortization ........................................... Deferred income taxes ....................................................... Stock-based compensation and other................................
Three Months Ended March 31 2003 2002 $ 4,333
$ 8,031
3,057 — 306
3,143 (678) 1,000
Changes in assets and liabilities (excluding cash): Receivables........................................................................ Inventories.......................................................................... Accounts payable............................................................... Other current liabilities ....................................................... Other assets and liabilities ................................................. Cash provided by operating activities..............................
(3,417) 4,284 (2,557) 962 668 7,636
(8,522) (7,682) 239 13,103 (1,042) 7,592
Cash flows from investing activities: Capital expenditures .......................................................... Cash used in investing activities .....................................
(1,255) (1,255)
(1,464) (1,464)
Cash flows from financing activities: Exercise of employee stock options................................... Purchase of common stock held in treasury ...................... Cash provided by (used in) financing activities ............... Increase (decrease) in cash and cash equivalents ......... Cash and cash equivalents at beginning of period......... Cash and cash equivalents at end of period ...................
6 (224) (218) 6,163 40,666 $ 46,829
18 — 18 6,146 8,036 $14,182
Supplemental cash flow information: Cash paid for interest, net of amounts capitalized ............. Cash paid for income taxes................................................
$ 101 $ 2,554
$ $
79 365
Noncash financing activities: Issuance of common stock for restricted stock awards...... Capital lease obligations incurred ......................................
$ $
$ $
479 —
769 6
RTI International Metals, Inc.
1st Quarter 2003
SEGMENT REPORTING (Unaudited) (Dollars in Thousands)
Quarter Ended March 31 2003 2002
Total sales Titanium Group ............................................................................. $ 32,742 Fabrication & Distribution Group ................................................... 46,049 Total ...................................................................................... 78,791 Inter and intra segment sales Titanium Group ............................................................................. Fabrication & Distribution Group ................................................... Total ......................................................................................
$50,204 47,732 97,936
18,507 1,752 20,259
28,442 3,816 32,258
Total sales to external customers Titanium Group ............................................................................. 14,235 Fabrication & Distribution Group ................................................... 44,297 Total ...................................................................................... $ 58,532
21,762 43,916 $ 65,678
Operating income (loss) Titanium Group ............................................................................. $ (1,776) Fabrication & Distribution Group ................................................... 155 Total ...................................................................................... (1,621)
$ 4,261 115 4,376
Reconciliation of operating income (loss) to reported income before taxes: Other income (loss)-net................................................................. Interest expense............................................................................ Reported Income before taxes ...................................................... $
8,936 147 $ 13,165
8,777 168 6,988
