RTI Q3 2001
2 0 0 1
Q U A R T E R
3
RTI International Metals, Inc.
To Our Shareholders Both of our operating groups had good results in the third quarter. The Titanium Group improved margins on its highest mill product shipping level in 12 quarters, increasing 10% over the previous quarter. The Fabrication & Distribution Group continued its profitable operations, led by domestic distribution and RTI Energy Systems, Inc. As a result, RTI posted earnings of $0.11 per share for the quarter on sales of $76 million. The overriding event of the third quarter was, of course, the tragic events of September 11th. Fortunately, none of our employees was directly affected by the terrorist attacks. We are thankful for that and our prayers are with those who were. However, the aftermath will undoubtedly have an impact on our Company. Commercial aerospace, from which we derive approximately 40% of our revenue, is driven by the profits of worldwide airlines and their ability to buy airplanes. The losses currently being sustained by the airline industry will likely result in reduced orders for new aircraft and the cancellation of others already ordered. The major aircraft producers, Boeing and Airbus, are predicting preliminary build rate reductions averaging 30%. This will lead to a corresponding reduction in mill product demand from this market. Conversely, it is expected that demand from military markets, which was on the rise prior to September 11th, will be stimulated further by the increased focus on national security. Defense applications make up approximately 30% of our business. RTI supplies titanium and other specialty metals to virtually all military aerospace programs and some land-based systems, such as the new titanium howitzer. However, while we expect titanium shipments to this sector to increase in 2002, it is not likely that they will entirely offset the decline in commercial aerospace. It is too early to quantify the effect that the damage that has been done to our economy will have on industrial markets for our products. At this point, we have seen little effect, particularly as it relates to our energy-related markets (discussed on the opposite page). We still expect RTI Energy Systems, Inc. to have a record revenue year in 2001 and break that record again next year. Clearly, the diversification away from commercial aerospace that we have achieved over the past several years will serve us well in the coming months. We wish all of you a safe and happy holiday season.
Robert M. Hernandez Chairman of the Board November, 2001
Timothy G. Rupert President and Chief Executive Officer
Focus on... Energy Markets In our last few quarterly reports, we have focused on key strategies. This report will “Focus on...” our strategy of diversification and growth into energy markets, particularly the oil & gas sector. Energy is a growing market for RTI that has improved significantly over the last year. The war against terrorism will only increase the demand for American energy exploration and production with a reduced dependence on Middle East sources. Titanium is now being specified for various applications, such as risers, stress joints, and other fabrications to assist in deepwater locations, where the primary requirements are lighter weight and enhanced flexibility. When we began expanding into this market some years ago, titanium's capabilities and potential were still untested. Today, after a number of successes, titanium has become the material of choice where the specifications demand high performance. Our primary focus in this sector is deepwater offshore drilling (3,000 feet and deeper). At these depths, exploration experts hope to tap so-called “elephant finds” which they believe can be successfully exploited for as little as $5 a barrel, thus securing the long-range economic viability of these fields. RTI Energy Systems, located in Houston, Texas, engineers and manufactures offshore components that best meet the challenges presented by these deepwater wells. RTI Energy Systems has the capability to offer the best system for the required application, be that titanium, steel, or any other metallic material, thus enhancing its value as a supplier. While there is growing interest in titanium, its full potential is far from realized in this marketplace, much as it was 50 years ago in the aerospace industry. At present, various oil companies are engaged in joint industry projects with RTI toward a goal of gaining a better understanding of where titanium can be used to its full advantage in exploration and production in oil & gas extraction. We expect strong continued growth from RTI Energy Systems for the foreseeable future. This bodes well for our Company and our goal of market diversification. The RTI family continues to provide our customers with “A World of Possibilities”.
As part of our ongoing effort to reduce costs, we will discontinue the printing and mailing of Quarterly Reports to shareholders after this issue. Beginning with the first quarter of 2002, our Quarterly Reports will be posted only on the Company's website at www.rti-intl.com. Our Annual Report will continue to be mailed to you.
RTI International Metals, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (Dollars in Thousands) Quarter Ended September 30 2001 2000 Sales............................................................ $ 76,047 $ 61,723 Operating costs: Cost of sales ............................................... 64,067 53,089 Selling, general and administrative expenses ................................................. 7,674 6,667 Research, technical and product development expenses ......................... 454 270 Total operating costs ................................ 72,195 60,026 Operating income ..................................... 3,852 1,697 Other income, net .................................... 85 159 Interest expense ....................................... 174 619 Income before income taxes ................... 3,763 1,237 Provision for income taxes ...................... 1,476 839 Income before cumulative effect of change in accounting principle .......... 2,287 398 Cumulative effect of change in accounting principle ........................ — — Net income.................................................$ 2,287 $ 398 Earnings per common share Income before cumulative effect of change in accounting principle: Basic........................................................ $ 0.11 $ 0.02 Diluted .................................................... $ 0.11 $ 0.02 Net Income: Basic........................................................ $ 0.11 $ 0.02 Diluted .................................................... $ 0.11 $ 0.02 Weighted average shares used to compute earnings per share: Basic........................................................ 20,879,036 20,852,898 21,089,808 Diluted .................................................... 21,028,092
Nine Months Ended September 30 2001 2000 $ 217,154 $ 195,576
$
185,475
167,256
24,363
20,602
1,354 211,192 5,962 5,966 497 11,431 4,457
1,019 188,877 6,699 6,812 1,755 11,756 4,938
6,974
6,818
(191) 6,783 $
— 6,818
$ $
0.33 0.33
$ $
0.33 0.32
$ $
0.32 0.32
$ $
0.33 0.32
20,888,470 21,113,102
20,847,372 21,000,257
SEGMENT REPORTING (Unaudited) (Dollars in Thousands) The Company’s reportable segments are the Titanium Group and the Fabrication and Distribution Group. Segment information for the three and nine-month periods ended September 30, 2001 and 2000 is as follows: Quarter Ended September 30 2001 2000 Net sales: Titanium Trade ....................................................... $ Intersegment ......................................... Fabrication and Distribution Trade ....................................................... Intersegment .........................................
35,360 10,604 45,964
$
32,628 11,058 43,686
37,442 24,893 266 71 37,708 24,964 Other operations....................................... 3,245 4,202 Adjustments and eliminations................ (10,870) (11,129) Total net sales .................................... $ 76,047 $ 61,723 Operating income: Titanium..................................................... $ 2,486 $ 495 Fabrication and distribution................... 1,180 937 Other operations....................................... 186 265 Total operating income..................... 3,852 1,697 Reconciliation of operating income to reported income before taxes: Other income—net............................... 85 159 Interest expense.................................... 174 619 Reported income before taxes......... $ 3,763 $ 1,237
Nine Months Ended September 30 2001 2000
$
96,663 $ 35,996 132,659
100,272 38,100 138,372
109,969 82,995 883 269 110,852 83,264 10,522 12,309 (36,879) (38,369) $ 217,154 $ 195,576 $
$
1,873 3,560 529 5,962
5,966 497 11,431
$
$
4,678 1,349 672 6,699
6,812 1,755 11,756
RTI International Metals, Inc.
CONSOLIDATED BALANCE SHEET (Dollars in Thousands) September 30, December 31, 2001 2000 (Unaudited) Assets Assets: Cash and cash equivalents ............................................................................ $ 3,137 Receivables—less allowance for doubtful accounts of $1,035 and $926 ........................................................................................... 56,986 Inventories, net............................................................................................... 161,777 Deferred income taxes................................................................................... 9,269 Other current assets....................................................................................... 11,834 Total current assets............................................................................................ 243,003 Property, plant and equipment, net............................................................. 99,483 Goodwill ........................................................................................................... 34,489 Other noncurrent assets................................................................................ 13,248 Total assets.......................................................................................................... $ 390,223
$
6,374
$
46,417 165,210 9,146 10,235 237,382 97,989 35,736 15,172 386,279
Liabilities and Shareholders’ Equity Liabilities: Accounts payable ............................................................................................ $ 20,727 $ 18,199 Accrued wages and other employee costs................................................... 9,381 5,646 Other accrued liabilities................................................................................ 14,666 5,149 Total current liabilities............................................................................... 44,774 28,994 Long-term debt ................................................................................................... 1,600 19,800 Accrued postretirement benefit cost............................................................... 20,436 19,986 Deferred income taxes ...................................................................................... 2,555 2,555 Accrued pension cost......................................................................................... 7,106 7,106 Other noncurrent liabilities.............................................................................. 5,869 5,979 Total liabilities............................................................................................. 82,340 84,420 Commitments and contingencies .................................................................... — — Shareholders’ equity: Common stock, $0.01 par value, 50,000,000 shares authorized; 21,032,579 and 20,946,712 shares issued; 20,727,729 and 20,851,962 shares outstanding ....................................... 210 208 Additional paid-in capital.............................................................................. 241,568 240,527 Deferred compensation ................................................................................. (2,223) (2,187) Treasury stock, at cost; 304,850 and 94,750 shares.................................... (2,612) (846) Accumulated other comprehensive (loss) ................................................. (1,258) (1,258) Retained earnings........................................................................................... 72,198 65,415 Total shareholders’ equity................................................................................. 307,883 301,859 Total liabilities and shareholders’ equity................................................. $ 390,223 $ 386,279
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in Thousands) Nine Months Ended September 30 2001 2000 Cash flows from operating activities: Net income .......................................................................................................... $ Adjustment for items not affecting funds from operations: Depreciation and amortization..................................................................... Deferred income taxes................................................................................... Other, net ......................................................................................................... Changes in assets and liabilities (excluding cash): Receivables...................................................................................................... Inventories....................................................................................................... Accounts payable ............................................................................................ Other current liabilities................................................................................. Other assets and liabilities............................................................................ Cash provided by operating activities ...................................................... Cash flows from investing activities: Capital expenditures...................................................................................... Cash used in investing activities............................................................... Cash flows from financing activities: Exercise of employee stock options............................................................. Net borrowings and repayments under revolving credit agreement....... Purchase of common stock held in treasury............................................... Cash used in financing activities .............................................................. Decrease in cash and cash equivalents ....................................................... Cash and cash equivalents at beginning of period.................................... Cash and cash equivalents at end of period............................................... Supplemental cash flow information: Cash paid for interest, net of amounts capitalized.................................... Cash paid for income taxes ........................................................................... Noncash financing activities Issuance of common stock for restricted stock awards............................ Capital lease obligations incurred ...............................................................
6,783
$
9,942 (123) 1,434
6,818 8,732 — 646
(11,077) 3,433 2,528 13,252 357 26,529
798 17,557 (8,175) (5,249) 125 21,252
(10,109) (10,109)
(6,983) (6,983)
309 136 (18,200) (15,300) (1,766) (406) (19,657) (15,570) (3,237) (1,301) 6,374 3,664 $ 3,137 $ 2,363 $ $ $ $
787 $ 2,287 $ 731 311
$ $
2,159 2,143 557 —
Q U A R T E R
3
RTI International Metals, Inc.
To Our Shareholders Both of our operating groups had good results in the third quarter. The Titanium Group improved margins on its highest mill product shipping level in 12 quarters, increasing 10% over the previous quarter. The Fabrication & Distribution Group continued its profitable operations, led by domestic distribution and RTI Energy Systems, Inc. As a result, RTI posted earnings of $0.11 per share for the quarter on sales of $76 million. The overriding event of the third quarter was, of course, the tragic events of September 11th. Fortunately, none of our employees was directly affected by the terrorist attacks. We are thankful for that and our prayers are with those who were. However, the aftermath will undoubtedly have an impact on our Company. Commercial aerospace, from which we derive approximately 40% of our revenue, is driven by the profits of worldwide airlines and their ability to buy airplanes. The losses currently being sustained by the airline industry will likely result in reduced orders for new aircraft and the cancellation of others already ordered. The major aircraft producers, Boeing and Airbus, are predicting preliminary build rate reductions averaging 30%. This will lead to a corresponding reduction in mill product demand from this market. Conversely, it is expected that demand from military markets, which was on the rise prior to September 11th, will be stimulated further by the increased focus on national security. Defense applications make up approximately 30% of our business. RTI supplies titanium and other specialty metals to virtually all military aerospace programs and some land-based systems, such as the new titanium howitzer. However, while we expect titanium shipments to this sector to increase in 2002, it is not likely that they will entirely offset the decline in commercial aerospace. It is too early to quantify the effect that the damage that has been done to our economy will have on industrial markets for our products. At this point, we have seen little effect, particularly as it relates to our energy-related markets (discussed on the opposite page). We still expect RTI Energy Systems, Inc. to have a record revenue year in 2001 and break that record again next year. Clearly, the diversification away from commercial aerospace that we have achieved over the past several years will serve us well in the coming months. We wish all of you a safe and happy holiday season.
Robert M. Hernandez Chairman of the Board November, 2001
Timothy G. Rupert President and Chief Executive Officer
Focus on... Energy Markets In our last few quarterly reports, we have focused on key strategies. This report will “Focus on...” our strategy of diversification and growth into energy markets, particularly the oil & gas sector. Energy is a growing market for RTI that has improved significantly over the last year. The war against terrorism will only increase the demand for American energy exploration and production with a reduced dependence on Middle East sources. Titanium is now being specified for various applications, such as risers, stress joints, and other fabrications to assist in deepwater locations, where the primary requirements are lighter weight and enhanced flexibility. When we began expanding into this market some years ago, titanium's capabilities and potential were still untested. Today, after a number of successes, titanium has become the material of choice where the specifications demand high performance. Our primary focus in this sector is deepwater offshore drilling (3,000 feet and deeper). At these depths, exploration experts hope to tap so-called “elephant finds” which they believe can be successfully exploited for as little as $5 a barrel, thus securing the long-range economic viability of these fields. RTI Energy Systems, located in Houston, Texas, engineers and manufactures offshore components that best meet the challenges presented by these deepwater wells. RTI Energy Systems has the capability to offer the best system for the required application, be that titanium, steel, or any other metallic material, thus enhancing its value as a supplier. While there is growing interest in titanium, its full potential is far from realized in this marketplace, much as it was 50 years ago in the aerospace industry. At present, various oil companies are engaged in joint industry projects with RTI toward a goal of gaining a better understanding of where titanium can be used to its full advantage in exploration and production in oil & gas extraction. We expect strong continued growth from RTI Energy Systems for the foreseeable future. This bodes well for our Company and our goal of market diversification. The RTI family continues to provide our customers with “A World of Possibilities”.
As part of our ongoing effort to reduce costs, we will discontinue the printing and mailing of Quarterly Reports to shareholders after this issue. Beginning with the first quarter of 2002, our Quarterly Reports will be posted only on the Company's website at www.rti-intl.com. Our Annual Report will continue to be mailed to you.
RTI International Metals, Inc.
CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) (Dollars in Thousands) Quarter Ended September 30 2001 2000 Sales............................................................ $ 76,047 $ 61,723 Operating costs: Cost of sales ............................................... 64,067 53,089 Selling, general and administrative expenses ................................................. 7,674 6,667 Research, technical and product development expenses ......................... 454 270 Total operating costs ................................ 72,195 60,026 Operating income ..................................... 3,852 1,697 Other income, net .................................... 85 159 Interest expense ....................................... 174 619 Income before income taxes ................... 3,763 1,237 Provision for income taxes ...................... 1,476 839 Income before cumulative effect of change in accounting principle .......... 2,287 398 Cumulative effect of change in accounting principle ........................ — — Net income.................................................$ 2,287 $ 398 Earnings per common share Income before cumulative effect of change in accounting principle: Basic........................................................ $ 0.11 $ 0.02 Diluted .................................................... $ 0.11 $ 0.02 Net Income: Basic........................................................ $ 0.11 $ 0.02 Diluted .................................................... $ 0.11 $ 0.02 Weighted average shares used to compute earnings per share: Basic........................................................ 20,879,036 20,852,898 21,089,808 Diluted .................................................... 21,028,092
Nine Months Ended September 30 2001 2000 $ 217,154 $ 195,576
$
185,475
167,256
24,363
20,602
1,354 211,192 5,962 5,966 497 11,431 4,457
1,019 188,877 6,699 6,812 1,755 11,756 4,938
6,974
6,818
(191) 6,783 $
— 6,818
$ $
0.33 0.33
$ $
0.33 0.32
$ $
0.32 0.32
$ $
0.33 0.32
20,888,470 21,113,102
20,847,372 21,000,257
SEGMENT REPORTING (Unaudited) (Dollars in Thousands) The Company’s reportable segments are the Titanium Group and the Fabrication and Distribution Group. Segment information for the three and nine-month periods ended September 30, 2001 and 2000 is as follows: Quarter Ended September 30 2001 2000 Net sales: Titanium Trade ....................................................... $ Intersegment ......................................... Fabrication and Distribution Trade ....................................................... Intersegment .........................................
35,360 10,604 45,964
$
32,628 11,058 43,686
37,442 24,893 266 71 37,708 24,964 Other operations....................................... 3,245 4,202 Adjustments and eliminations................ (10,870) (11,129) Total net sales .................................... $ 76,047 $ 61,723 Operating income: Titanium..................................................... $ 2,486 $ 495 Fabrication and distribution................... 1,180 937 Other operations....................................... 186 265 Total operating income..................... 3,852 1,697 Reconciliation of operating income to reported income before taxes: Other income—net............................... 85 159 Interest expense.................................... 174 619 Reported income before taxes......... $ 3,763 $ 1,237
Nine Months Ended September 30 2001 2000
$
96,663 $ 35,996 132,659
100,272 38,100 138,372
109,969 82,995 883 269 110,852 83,264 10,522 12,309 (36,879) (38,369) $ 217,154 $ 195,576 $
$
1,873 3,560 529 5,962
5,966 497 11,431
$
$
4,678 1,349 672 6,699
6,812 1,755 11,756
RTI International Metals, Inc.
CONSOLIDATED BALANCE SHEET (Dollars in Thousands) September 30, December 31, 2001 2000 (Unaudited) Assets Assets: Cash and cash equivalents ............................................................................ $ 3,137 Receivables—less allowance for doubtful accounts of $1,035 and $926 ........................................................................................... 56,986 Inventories, net............................................................................................... 161,777 Deferred income taxes................................................................................... 9,269 Other current assets....................................................................................... 11,834 Total current assets............................................................................................ 243,003 Property, plant and equipment, net............................................................. 99,483 Goodwill ........................................................................................................... 34,489 Other noncurrent assets................................................................................ 13,248 Total assets.......................................................................................................... $ 390,223
$
6,374
$
46,417 165,210 9,146 10,235 237,382 97,989 35,736 15,172 386,279
Liabilities and Shareholders’ Equity Liabilities: Accounts payable ............................................................................................ $ 20,727 $ 18,199 Accrued wages and other employee costs................................................... 9,381 5,646 Other accrued liabilities................................................................................ 14,666 5,149 Total current liabilities............................................................................... 44,774 28,994 Long-term debt ................................................................................................... 1,600 19,800 Accrued postretirement benefit cost............................................................... 20,436 19,986 Deferred income taxes ...................................................................................... 2,555 2,555 Accrued pension cost......................................................................................... 7,106 7,106 Other noncurrent liabilities.............................................................................. 5,869 5,979 Total liabilities............................................................................................. 82,340 84,420 Commitments and contingencies .................................................................... — — Shareholders’ equity: Common stock, $0.01 par value, 50,000,000 shares authorized; 21,032,579 and 20,946,712 shares issued; 20,727,729 and 20,851,962 shares outstanding ....................................... 210 208 Additional paid-in capital.............................................................................. 241,568 240,527 Deferred compensation ................................................................................. (2,223) (2,187) Treasury stock, at cost; 304,850 and 94,750 shares.................................... (2,612) (846) Accumulated other comprehensive (loss) ................................................. (1,258) (1,258) Retained earnings........................................................................................... 72,198 65,415 Total shareholders’ equity................................................................................. 307,883 301,859 Total liabilities and shareholders’ equity................................................. $ 390,223 $ 386,279
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in Thousands) Nine Months Ended September 30 2001 2000 Cash flows from operating activities: Net income .......................................................................................................... $ Adjustment for items not affecting funds from operations: Depreciation and amortization..................................................................... Deferred income taxes................................................................................... Other, net ......................................................................................................... Changes in assets and liabilities (excluding cash): Receivables...................................................................................................... Inventories....................................................................................................... Accounts payable ............................................................................................ Other current liabilities................................................................................. Other assets and liabilities............................................................................ Cash provided by operating activities ...................................................... Cash flows from investing activities: Capital expenditures...................................................................................... Cash used in investing activities............................................................... Cash flows from financing activities: Exercise of employee stock options............................................................. Net borrowings and repayments under revolving credit agreement....... Purchase of common stock held in treasury............................................... Cash used in financing activities .............................................................. Decrease in cash and cash equivalents ....................................................... Cash and cash equivalents at beginning of period.................................... Cash and cash equivalents at end of period............................................... Supplemental cash flow information: Cash paid for interest, net of amounts capitalized.................................... Cash paid for income taxes ........................................................................... Noncash financing activities Issuance of common stock for restricted stock awards............................ Capital lease obligations incurred ...............................................................
6,783
$
9,942 (123) 1,434
6,818 8,732 — 646
(11,077) 3,433 2,528 13,252 357 26,529
798 17,557 (8,175) (5,249) 125 21,252
(10,109) (10,109)
(6,983) (6,983)
309 136 (18,200) (15,300) (1,766) (406) (19,657) (15,570) (3,237) (1,301) 6,374 3,664 $ 3,137 $ 2,363 $ $ $ $
787 $ 2,287 $ 731 311
$ $
2,159 2,143 557 —
