UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
| For the quarterly period ended March 31, 2001 |
| |
| OR
|
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
| For the transition period from ____ to ____ |
Commission File Number 1-5828
CARPENTER TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware | 23-0458500 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
1047 North Park Road, Wyomissing, Pennsylvania | 19610-1339 |
(Address of principal executive offices) | (Zip Code) |
610-208-2000
(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 X No
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of
April 30, 2001.
Common stock, $5 par value | 22,058,546 |
Class | Number of shares outstanding |
CARPENTER TECHNOLOGY CORPORATION
FORM 10-Q
INDEX
PART I
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET
March 31, 2001 and June 30, 2000
(in millions)
| | March 31,
2001 | June 30,
2000 |
| | (Unaudited) | |
| ASSETS | | |
| Current assets: | | |
| Cash and cash equivalents | $ 5.9 | $ 9.5 |
| Accounts receivable, net | 184.9 | 187.0 |
| Inventories | 270.1 | 270.2 |
| Other current assets | 18.4 | 16.3 |
| Total current assets | 479.3 | 483.0 |
| | | |
| Property, plant and equipment, net | 770.7 | 789.9 |
| Prepaid pension cost | 221.1 | 185.2 |
| Goodwill, net | 167.5 | 172.3 |
| Other assets | 106.5 | 115.5 |
| | |
| Total assets | $1,745.1 | $1,745.9 |
| | | |
| LIABILITIES | | |
| Current liabilities: | | |
| Short-term debt | $ 209.0 | $ 219.9 |
| Accounts payable | 81.3 | 97.3 |
| Accrued liabilities | 63.7 | 61.2 |
| Deferred income taxes | 8.4 | 5.6 |
| Current portion of long-term debt | 15.2 | 10.4 |
| Total current liabilities | 377.6 | 394.4 |
| | | |
| Long-term debt, net of current portion | 337.0 | 352.3 |
| Accrued postretirement benefits | 156.1 | 152.3 |
| Deferred income taxes | 172.4 | 158.0 |
| Other liabilities | 35.0 | 35.3 |
| | |
| Total liabilities | 1,078.1 | 1,092.3 |
| | |
| SHAREHOLDERS' EQUITY | | |
Convertible preferred stock -
authorized 2 million shares | 25.6 | 26.0 |
Common stock - authorized
100 million shares | 115.8 | 115.4 |
| Capital in excess of par value - common stock | 194.2 | 192.2 |
| Reinvested earnings | 401.0 | 388.0 |
| Common stock in treasury, at cost | (38.4) | (38.4) |
| Deferred compensation | (12.6) | (14.1) |
| Accumulated other comprehensive income | (18.6) | (15.5) |
| Total shareholders' equity | 667.0 | 653.6 |
| | |
| Total liabilities and shareholders' equity | $1,745.1 | $1,745.9 |
See accompanying notes to consolidated financial statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
for the three and nine months ended March 31, 2001 and 2000
(in millions, except per share data)
| | Three Months | Nine Months |
| | 2001 | 2000 | 2001 | 2000 |
| | | | | |
| Net sales | $311.8 | $301.5 | $878.2 | $797.2 |
| Costs and expenses: | | | | |
| Cost of sales | 243.5 | 236.5 | 678.2 | 619.5 |
Selling and administrative
expenses |
38.4
|
39.4
|
114.7
|
109.2
|
| Interest expense | 9.9 | 8.7 | 31.2 | 23.7 |
| Other income, net | - | (2.3) | (3.0) | (8.0) |
| Total costs and expenses | 291.8 | 282.3 | 821.1 | 744.4 |
| | | | | |
| Income before income taxes | 20.0 | 19.2 | 57.1 | 52.8 |
| | | | | |
| Income taxes | 8.4 | 7.3 | 21.1 | 18.0 |
| | | | | |
| Net income | $ 11.6 | $ 11.9 | $ 36.0 | $ 34.8 |
| | | | | |
| Earnings per common share: | | | | |
| Basic | $ .51 | $ .53 | $ 1.58 | $ 1.54 |
| Diluted | $ .50 | $ .52 | $ 1.55 | $ 1.51 |
| | | | | |
| Dividends per common share | $ .33 | $ .33 | $ .99 | $ .99 |
See accompanying notes to consolidated financial statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
for the three and nine months ended March 31, 2001 and 2000
(in millions)
| | Three Months | Nine Months |
| | 2001 | 2000 | 2001 | 2000 |
| Net income | $11.6 | $11.9 | $36.0 | $34.8 |
Cumulative effect of change in
accounting principle for derivatives
and hedging activities (SFAS 133),
net of tax |
-
|
-
|
0.8
|
-
|
Net losses on derivative instruments,
net of tax |
(0.5)
|
-
|
(2.8)
|
-
|
Unrealized loss on investment,
net of tax |
-
|
-
|
(0.1)
|
-
|
| Foreign currency translation, net of tax | (0.7) | 0.1 | (1.0) | - |
| | | | | |
| Comprehensive income | $10.4 | $12.0 | $32.9 | $34.8 |
See accompanying notes to consolidated financial statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
for the nine months ended March 31, 2001 and 2000
(in millions)
| | 2001 | 2000 |
| OPERATIONS | | |
| Net income | $36.0 | $34.8 |
Adjustments to reconcile net income to
net cash provided from operations: | | |
| Depreciation | 41.6 | 38.5 |
| Amortization of intangible assets | 12.3 | 11.2 |
| Deferred income taxes | 17.2 | 11.8 |
| Pension and postretirement costs, net | (31.1) | (28.7) |
| Net gain on asset disposals | (2.4) | (2.1) |
Changes in working capital and other,
net of acquisitions: | | |
| Receivables | 2.1 | (28.1) |
| Inventories | 0.1 | (23.4) |
| Accounts payable | (16.0) | 35.9 |
| Accrued current liabilities | (2.1) | (4.7) |
| Other, net | 11.5 | (9.1) |
| Net cash provided from operations | 69.2 | 36.1 |
| | | |
| INVESTING ACTIVITIES | | |
| Purchases of plant, equipment and software | (39.6) | (75.1) |
| Proceeds from disposals of plant and equipment | 8.7 | 7.8 |
| Acquisitions of businesses, net of cash received | - | (6.7) |
| Net cash used for investing activities | (30.9) | (74.0) |
| | | |
| FINANCING ACTIVITIES | | |
| Net change in short-term debt | (10.9) | 71.0 |
| Payments on long-term debt | (10.5) | (15.4) |
| Proceeds from issuance of long-term debt | - | 7.6 |
| Dividends paid | (23.0) | (22.7) |
| Proceeds from issuance of common stock | 2.5 | 0.3 |
Net cash provided from (used for)
financing activities |
(41.9)
|
40.8
|
| | | |
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS | (3.6) | 2.9 |
| Cash and cash equivalents at beginning of period | 9.5 | 5.5 |
| Cash and cash equivalents at end of period | $ 5.9 | $ 8.4 |
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments necessary for a fair presentation have been included. Operating results for the nine months ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ending June 30, 2001. The June 30, 2000 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in Carpenter's Fiscal Year 2000 Annual Report on Form 10-K.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain reclassifications of prior year's amounts have been made to conform with the current year's presentation. These reclassifications did not affect reported net income. See Note 9 to Consolidated Financial Statements regarding adoption of EITF00-10.
2. Earnings Per Common Share
The calculations of earnings per share for the periods ended March 31, 2001
and 2000 are as follows:
(in millions, except
per share data) |
Three Months
|
Nine Months
|
| | 2001 | 2001 |
| | Basic | Diluted | Basic | Diluted |
| Net income | $11.6 | $11.6 | $36.0 | $36.0 |
Dividends accrued
on convertible preferred
stock, net of tax benefits |
(0.4)
|
-
|
(1.3)
|
-
|
Assumed shortfall between
common and preferred dividend |
-
|
(0.1)
|
-
|
(0.5)
|
Earnings available for
common shareholders |
$11.2
|
$11.5
|
$34.7
|
$35.5
|
| | | | | |
Weighted average number
of common shares outstanding |
22.1
|
22.1
|
22.0
|
22.0
|
Assumed conversion of
preferred shares |
-
|
0.8
|
-
|
0.8
|
Effect of shares issuable
under stock option plans |
-
|
0.1
|
-
|
0.1
|
| Weighted average common shares | 22.1 | 23.0 | 22.0 | 22.9 |
| | | | | |
| Earnings per share | $ .51 | $ .50 | $1.58 | $1.55 |
| | Three Months | Nine Months |
| | 2000 | 2000 |
| | Basic | Diluted | Basic | Diluted |
| Net income | $11.9 | $11.9 | $34.8 | $34.8 |
Dividends accrued on
convertible preferred stock,
net of tax benefits |
(0.3)
|
-
|
(1.0)
|
-
|
Assumed shortfall between
common and preferred dividend |
-
|
(0.1)
|
-
|
(0.5)
|
Earnings available for common
shareholders |
$11.6
|
$11.8
|
$33.8
|
$34.3
|
| | | | | |
Weighted average number of
common shares outstanding |
22.0
|
22.0
|
22.0
|
22.0
|
Assumed conversion of preferred
shares |
-
|
0.8
|
-
|
0.8
|
Effect of shares issuable under
stock option plans |
-
|
-
|
-
|
-
|
| Weighted average common shares | 22.0 | 22.8 | 22.0 | 22.8 |
| | | | | |
| Earnings per share | $ .53 | $ .52 | $1.54 | $1.51 |
3. Inventories
| | March 31,
2001 | June 30,
2000 |
| | (In Millions) |
| Finished and purchased products | $ 139.1 | $ 138.1 |
| Work in process | 206.3 | 211.9 |
| Raw materials and supplies | 51.2 | 46.2 |
| Total at current cost | 396.6 | 396.2 |
Less excess of current cost over
LIFO values |
126.5
|
126.0
|
| Total inventory | $ 270.1 | $ 270.2 |
The current cost of LIFO-valued inventories was $326.4 million at
March 31, 2001 and $331.9 million at June 30, 2000.
4. Property, Plant and Equipment
| | March 31,
2001 | June 30,
2000 |
| | (In Millions) |
| Property, plant and equipment at cost | $1,377.8 | $1,341.4 |
Less accumulated depreciation and
amortization |
607.1
|
551.5
|
| | $ 770.7 | $ 789.9 |
5. Shareholders' Equity Data
| | March 31,
2001 | June 30,
2000 |
| | |
| Preferred shares issued | 406.0 | 413.1 |
| | | |
| Common shares issued | 23,166,793 | 23,071,635 |
| Common shares in Treasury | (1,108,247) | (1,107,200) |
| | | |
| Net common shares outstanding | 22,058,546 | 21,964,435 |
6. Commitments and Contingencies
Environmental
Carpenter is subject to various stringent federal, state and local environmental laws and regulations. The liability for future environmental remediation costs is evaluated by management on a quarterly basis. Carpenter accrues amounts for environmental remediation costs which represent management's best estimate of the probable and reasonably estimable costs relating to environmental remediation. For the nine months ended March 31, 2001, the liability for environmental remediation costs was increased by $.6 million, which was included in cost of sales. For the nine months ended March 2000, the liability for environmental remediation costs was reduced by $.8 million which was included in other income. The liability for environmental remediation costs remaining at March 31, 2001 was $8.1 million. The estimated range of the reasonably possible future costs of remediation at superfund sites and at Carpenter-owned operating facilities is between $8.1 million and $11.3 million.
Carpenter entered into partial settlements of litigation relating to insurance coverages for certain environmental remediation sites and recognized income before income taxes of $.6 million and $.5 million for the nine months ended March 31, 2001 and 2000, respectively.
Estimates of the amount and timing of future costs of environmental remediation requirements are necessarily imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of presently unknown remediation sites and the allocation of costs among the potentially responsible parties. Based upon information presently available, such future costs are not expected to have a material effect on Carpenter's competitive or financial position. However, such costs could be material to results of operations in a particular future quarter or year.
Other
On August 6, 1999, the Bridgeport, Connecticut Port Authority filed a Certificate of Taking, acquiring fee simple ownership of Carpenter's former plant site in that city. The proposed compensation for the site is $2.5 million and the Port Authority has stated its intention to seek reimbursement of any additional site remediation costs. The carrying value for the site on Carpenter's books was approximately $14.5 million (prior to the receipt of $2.2 million in the third quarter from the Port Authority) and was based upon a recent appraisal and arms-length negotiated selling prices with interested parties. Carpenter has begun legal proceedings in court to obtain a fair value for the property and a declaratory judgment absolving Carpenter from any remediation costs caused by the Port Authority's development efforts. Trial on this matter commenced in April 2001 in the U.S. District Court for the District of Connecticut. While the ultimate outcome of the trial is undeterminable at this time, in the opinion of management, the Port Authority's proposed compensation and remediation reimbursement are unreasonable and will not be upheld. Accordingly, no adjustment has been made for an impairment in carrying value.
6. Commitments and Contingencies (continued)
Carpenter is also defending various claims and legal actions, and is subject to contingencies which are common to its operations. Carpenter provides for costs relating to these matters when a loss is probable and the amount is reasonably estimable. The effect of the outcome of these matters on Carpenter's future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount and timing (both as to recording future charges to operations and cash expenditures) of the resolution of such matters. While it is not feasible to determine the outcome of these matters, in the opinion of management, any total ultimate liability will not have a material effect on Carpenter's financial position, results of operations or cash flows.
7. Business Segments
Statement of Financial Accounting Standards (SFAS) 131, "Disclosures about Segments of an Enterprise and Related Information," requires companies to disclose segment information on the same basis as that used internally by executive management to evaluate segment performance. Carpenter is organized on a product basis and managed in three segments: Specialty Alloys, Titanium Alloys and Engineered Products. For the following segment reporting, the Specialty Alloys and Titanium Alloys (Dynamet) segments have been aggregated into one reportable segment (Specialty Metals) because of the similarities in products, processes, customers, distribution methods and economic characteristics.
Specialty Metals includes the manufacture and distribution of stainless, titanium, high temperature, electronic, tool and other alloys in bar, wire, rod, and strip forms. Sales are distributed both directly from producing plants and from Carpenter's distribution network.
Engineered Products includes structural ceramic products, ceramic cores for the casting industry, metal-injection molded products, tubular metal products for nuclear and aerospace applications, custom shaped bar and ultra hard wear materials.
Carpenter evaluates segment performance based upon income before interest and income taxes (EBIT) and return on assets. Both of these measures include the allocation of certain corporate costs. Sales between the segments are generally made at market-related prices.
The pension credit represents the income relating to Carpenter's overfunded defined benefit pension plans. None of the pension credit is allocated to the business segments. The corporate costs primarily represent the unallocated portion of the operating costs of the finance, information services, law and human resource departments and corporate management staff. Corporate assets are primarily cash and cash equivalents, prepaid pension cost, certain assets held for sale, life insurance, other investments and corporate operating assets.
7. Business Segments (continued)
Carpenter's sales are not materially dependent on a single customer or small group of customers.
Segment Data
| (In Millions) | Three Months Ended
March 31, | Nine Months Ended
March 31, |
| | 2001 | 2000 | 2001 | 2000 |
| Net sales: | | | | |
| Specialty Metals | $276.1 | $270.2 | $771.8 | $706.3 |
| Engineered Products | 36.0 | 32.3 | 107.7 | 93.2 |
| Intersegment | (0.3) | (1.0) | (1.3) | (2.3) |
| Consolidated net sales | $311.8 | $301.5 | $878.2 | $797.2 |
| | | | | |
| Income before income taxes: | | | | |
| Specialty Metals | $ 22.1 | $ 23.1 | $ 64.0 | $ 55.9 |
| Engineered Products | 2.7 | 1.4 | 8.6 | 3.8 |
| Pension credit | 12.0 | 11.5 | 36.0 | 34.3 |
| Corporate costs | (7.3) | (8.7) | (22.4) | (19.4) |
| Consolidated EBIT | 29.5 | 27.3 | 86.2 | 74.6 |
| Interest expense | (9.9) | (8.7) | (31.2) | (23.7) |
| Interest income | 0.4 | 0.6 | 2.1 | 1.9 |
Consolidated income
before income taxes |
$ 20.0
|
$ 19.2
|
$ 57.1
|
$ 52.8
|
| | | | | |
| | | | | |
| | | | March 31,
2001 | June 30,
2000 |
| | | | | |
| Total assets: | | | | |
| Specialty Metals | | | $1,347.9 | $1,360.8 |
| Engineered Products | | | 115.1 | 121.0 |
| Corporate assets | | | 282.1 | 264.1 |
| Consolidated total assets | | | $1,745.1 | $1,745.9 |
8. Adoption of SFAS 133
Carpenter adopted SFAS 133, as amended, "Accounting for Derivative Instruments and Hedging Activities", on July 1, 2000. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in earnings or other comprehensive income, depending on the type of hedging instrument and the effectiveness of the hedges. In accordance with the transition provisions of SFAS 133, Carpenter recorded a cumulative positive adjustment to other comprehensive income of $.8 million, after taxes, to recognize the fair value of its derivative instruments as of the date of adoption.
Carpenter’s current risk management strategies include the use of derivative instruments to reduce certain risks. These strategies are:
The use of foreign currency forwards and options to hedge a portion of anticipated future sales denominated in foreign currencies, principally the Euro and Pound Sterling, in order to offset the effect of changes in exchange rates.
The use of foreign currency forwards and options to hedge certain foreign currency denominated intercompany receivables, primarily in Euros and Pound Sterling, to offset the effect on earnings of changes in exchange rates until these receivables are collected.
The use of commodity swaps and options to fix the price of a portion of anticipated future purchases of nickel and cobalt to offset the effects of changes in the costs of those commodities.
The use of interest rate swaps to fix the interest rate on certain floating rate debt to stabilize interest rates.
All of the derivatives used by Carpenter in its risk management strategies are highly effective hedges because all of the critical terms of the derivative instruments match those of the hedged item. All of the described derivative instruments except for hedges of receivables have been designated as cash flow hedges at the time of adoption of SFAS 133 or at the time they were executed, if later than July 1, 2000. The hedges of intercompany receivables do not qualify for hedge accounting. All derivatives are adjusted to their fair market values at the end of each calendar quarter. Unrealized net gains and losses for cash flow hedges are recorded in other comprehensive income. At the time the anticipated transactions occur, any unrealized gains and losses on the related hedge are reclassified from other comprehensive income to the Statement of Income, thus offsetting the income effects of the anticipated transactions to which they relate. Amounts reclassified to the Statement of Income are included in cost of sales (commodity hedges), interest expense (interest rate swaps) and sales (foreign exchange hedges of anticipated sales). All unrealized gains or losses on hedges of intercompany receivables are recorded in income each quarter, as are changes in the value of the receivables. If an anticipated transaction is no longer expected to occur, unrealized gains and losses on the related hedge are reclassified to the Statement of Income. Cash flow hedges at March 31, 2001 have various settlement dates, the latest of which is December 2003.
Carpenter evaluates all derivative instruments each quarter to determine that they are highly effective. Any ineffectiveness is recorded in the Statement of Income. The ineffectiveness for existing derivative instruments for the quarter ending March 31, 2001 was primarily related to option premiums and was immaterial. During the quarter ended March 31, 2001, unrealized net losses totaling $1.0 million after taxes were recorded in other comprehensive income and $.5 million of expense, net of taxes was reclassified from other comprehensive income to the Statement of Income. During the nine months ended March 31, 2001, unrealized net losses totaling $1.7 million after taxes were recorded in other comprehensive income, including the $.8 million cumulative effect as of July 1, 2000, and $.3 million of income was reclassified from other comprehensive income to the Statement of Income, net of income taxes. There were no reclassifications from other comprehensive income to earnings during the quarter or nine months ended March 31, 2001 that were caused by anticipated transactions which are no longer expected to occur.
As of March 31, 2001, $2.0 million of net losses from derivative instruments was included in accumulated other comprehensive income, $1.7 million of which is expected to be reclassified to the Statement of Income within one year.
9. Other Accounting Pronouncements
The Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board issued EITF00-10 at the end of July 2000 regarding the classification of freight and handling costs billed to customers. EITF00-10 requires freight and handling costs billed separately to be included as part of sales on the Statement of Income. In addition, the preferred classification of freight and handling costs expensed on the Statement of Income is to include them in cost of sales. Carpenter adopted this requirement effective July 1, 2000. Reclassification of the prior year's third quarter resulted in increasing sales by $3.4 million, increasing cost of sales by $12.0 million and decreasing selling and administrative expenses by $8.6 million. Reclassification of the prior year's nine months resulted in increasing sales by $9.7 million, increasing cost of sales by $30.5 million and decreasing selling and administrative expenses by $20.8 million.
The Securities and Exchange Commission has issued Staff Accounting Bulletin 101 (SAB 101) and interpretive releases, setting forth the SEC's guidance on revenue recognition. This bulletin will be effective for Carpenter in the fourth quarter of fiscal year 2001 (June 2001 quarter), with retroactive effect to the beginning of fiscal year 2001. In accordance with the guidance of SAB 101, Carpenter will be required to change its revenue recognition policies retroactive to July 1, 2000. Carpenter's standard terms and conditions of sale for most of its sales include a provision that title to the goods is retained as a security interest until payment is received, even though the risks and benefits of ownership are passed to the customer at the time of shipment. Under SAB 101, except for certain foreign units, revenue cannot be recognized until title passes to the customer, which in Carpenter's case, is when payment is received.
On April 1, 2001, Carpenter changed its terms and conditions of sale so that revenue can be recognized when product is shipped, in accordance with its historical practice. This will have the effect of increasing fourth quarter sales and earnings beyond a normal quarter's level. The net effect of the change in terms and conditions of sales in the fourth quarter and the restatement of the first three quarters under SAB 101 on full fiscal year 2001 earnings per share is estimated to be minimal. However, the change in accounting will result in a negative cumulative adjustment as of July 1, 2001, of approximately $14 million after taxes, or $.62 per diluted share, and the restatement of the results for the first three quarters of fiscal 2001. Carpenter plans to provide disclosures to show the impacts on its quarterly results caused by the change in accounting and revision of its terms and conditions of sales.
The Financial Accounting Standards Board has issued an exposure draft on accounting for goodwill and intangible assets. The current draft requires that goodwill and certain intangible assets no longer be amortized. Should this exposure draft be finalized in its present form, the elimination of amortization would increase Carpenter's earnings by an estimated $.30 per share on a non-cash basis annually. The effective date of this proposed standard has not yet been set.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations - Three Months Ended March 31, 2001 vs.
Three Months Ended March 31, 2000:
Net income for the quarter ended March 31, 2001 was $11.6 million compared with $11.9 million in the prior year period. Diluted earnings per share were $.50 compared with $.52 a year ago.
Net sales for the quarter rose 3 percent to $311.8 million, up from $301.5 million for the same period a year ago. The increase in sales for the quarter was due to higher shipments to the aerospace and power generation markets which impacted the Specialty Metals and Engineered Products segments. Sales for Specialty Alloys Operations (SAO) were similar to last year's quarter, with higher aerospace and power generation sales offset by lower stainless steel shipments.
The gross margin of 21.9 percent for the third quarter was slightly higher than last year's 21.6 percent. This reflects the benefit of an improved sales mix and lower raw material costs, partially offset by the effect of lower stainless shipments, higher natural gas and electricity costs and lower production volume in the Specialty Metals segment.
Selling and administrative expenses as a percent of sales declined to 12.3 percent from 13.1 percent last year. In absolute terms, selling and administrative expenses were down $1.0 million compared with the same quarter a year ago due to reduced staff levels and lower annual compensation expense.
Although short-term debt was reduced during the quarter by $15 million, interest expense increased by $1.2 million, compared with the same quarter last year due to less interest expense being capitalized on construction in progress.
Other income was $2.3 million less favorable than a year ago, primarily because of higher gains on the sales of warehouses in last year's third quarter and foreign exchange losses recognized in this year's third quarter.
Carpenter's effective tax rate (income taxes as a percent of income before taxes) for the quarter ended March 31, 2001 was 42.1 percent. This rate was higher in this year's quarter in order to bring the year-to-date effective rate in line with a revised forecasted rate for the year of 38 percent, due to foreign income in lower taxed jurisdictions being less than anticipated.
Business Segment Results
Specialty Metals Segment
Net sales for the quarter ended March 31, 2001 for this segment, which aggregates the Specialty Alloys Operations (SAO) and Dynamet units of Carpenter were $276.1 million, which was 2 percent higher than in the same quarter a year ago. The sales of SAO were similar to the prior year's quarter. SAO unit volume decreased by 15 percent but was offset by improved pricing and product mix. Dynamet's sales increased 21 percent compared to the same quarter last year. The aerospace and power generation market sectors were stronger than a year ago while stainless steel shipments were lower for SAO because of reduced shipments to the automotive market and the effects of higher imports of stainless bar and rod products.
Earnings before interest and taxes (EBIT) for the Specialty Metals segment were $22.1 million which was 4 percent lower than in last year's third quarter. This decrease was due primarily to SAO's decreased unit volume, higher energy costs and lower production levels, offset by lower raw material costs and an improved sales mix.
Engineered Products Segment
Net sales for this segment were $36 million which was 11 percent higher than the same quarter of last year. EBIT was $2.7 million which was $1.3 million higher than the third quarter of last year. The profit growth was primarily due to higher sales volume. Most units within the segment had sales improvements with the ceramic cores products for aerospace, and industrial gas turbine applications and nuclear fuel channels showing the most growth.
Pension Credits
Pension credits, which result from the significant overfunded position of Carpenter's defined benefit pension plans, were $12.0 million in the March 2001 quarter versus $11.5 million in the same quarter a year ago. This slightly higher level of credits was due primarily to the investment returns on the pension plan assets during fiscal 2000. This favorable variance from the previous year's level of pension credits will continue for the balance of fiscal 2001. Carpenter has other retirement obligations such as post-retirement medical benefits and supplemental employee retirement plans that are not included in this pension credit. The net impact of all retirement plans on Carpenter's Statement of Income for the March 2001 quarter was $10.0 million of income before taxes compared to $9.2 million for the same quarter last year.
Results of Operations - Nine Months Ended March 31, 2001 vs.
Nine Months Ended March 31, 2000:
Net income for the nine months ended March 31, 2001, was $36.0 million compared to $34.8 million for the same period a year ago. Diluted earnings per share were $1.55 per share compared to $1.51 per share for the year-earlier period.
Net sales were $878.2 million compared to $797.2 million for the first nine months of last fiscal year. This was primarily the result of the Specialty Metals segment's improved product sales mix and increased raw material surcharge revenues and sales volume improvement in the Engineered Products Segment.
The gross margin of 22.8 percent for the nine months ended March 31, 2001 was slightly higher than last year's 22.3 percent. This increase was primarily due to an improved sales mix and lower nickel costs of the Specialty Metals segment and a sales volume improvement in the Engineered Products segment. Significant natural gas and electricity cost increases and lower production levels partially offset the favorable gross margin effects.
Selling and administrative expenses as a percentage of sales decreased to 13.1 percent compared to 13.7 percent last year. However, total selling and administrative expenses increased $5.5 million from the prior year period primarily because of costs of e-business initiatives, increased consulting and legal fees and the inclusion of costs of an acquired company.
Other income was less favorable than a year ago by $5.0 million, primarily due to the lower market valuation of investments in life insurance policies and more favorable effects reported in the prior year for adjustments to liabilities for environmental remediation, worker's compensation and other matters related to the acquisition of Talley Industries, Inc.
The effective tax rate was 37 percent for the nine months ended March 31, 2001, and 34 percent for the year-earlier period. The rates in both periods were lower than a normal annual rate of approximately 39 percent because of adjustments related to certain state and foreign tax issues for which tax expense had been provided in prior years.
Business Segment Results
Specialty Metals Segment
Net sales for this segment, which aggregates the Specialty Alloys Operations (SAO) and Dynamet units of Carpenter, were $771.8 million which was 9 percent higher than those for the same period a year ago. The increase was primarily due to an increase in SAO sales, resulting from an improved product mix and improved raw material surcharge revenues offset by lower unit volume. Dynamet's sales increased by 10 percent as a result of the inclusion of an acquired company and an increase in titanium product sales volume.
EBIT was $64.0 million compared to $55.9 million for the same period last year. This $8.1 million increase was due primarily to SAO's improved sales mix and lower nickel costs. Higher natural gas and electricity costs and lower production levels partially offset these favorable profit effects.
Engineered Products Segment
Net sales for this segment were $107.7 million which was 16 percent higher than the same period last year. Increased demand for ceramic tubular and metal injection molded products accounted for most of the sales improvement.
EBIT was $8.6 million compared to $3.8 million for the first nine months of last year. This profit improvement was primarily due to higher sales volume.
Pension Credits
Pension credits were $36.0 million for the nine months ending March 31, 2001 compared to $34.3 million for the same period a year ago. The improved level of credits was due primarily to the significant investment returns on the pension plan assets during fiscal 2000. This favorable variance from the previous year's level will continue for the balance of fiscal 2001 because the amount of the credit is based upon an actuarial valuation at the beginning of each fiscal year and changed annually. The net impact of all retirement plans on Carpenter's Statement of Income for the nine months ended March 31, 2001 was $30.2 million of income before taxes compared to $27.6 million for the same period last year. Amounts shown in the Consolidated Statement of Cash Flows for pension and postretirement benefits are net of cash payments of approximately $1 million made to the plans.
Cash Flow and Financial Condition:
Carpenter has maintained the ability to provide adequate cash to meet its needs through cash flow from operations, management of working capital and the flexibility to use outside sources of financing to supplement internally generated funds.
During the nine months ended March 31, 2001, Carpenter's free cash flow (cash flow after capital expenditures and disposals and dividends) was $15 million. Cash from operations was $69.2 million for the current nine month period as compared to $36.1 million a year ago.
Investing activities for plant, equipment and software consumed $39.6 million in cash during the first nine months of fiscal 2001 and $75.1 million for the same year ago period. This decrease in capital expenditures reflects the completion of a five-year capital investment program. Total capital expenditures for all of fiscal 2001 are anticipated to be about $50 million. In addition, $8.7 million in proceeds was received primarily due to the sale of non-operating assets.
Total debt decreased $21.4 million since June 30, 2000 to a level of $561.2 million or 39.8 percent of total capital employed, including deferred taxes, compared to 41.6 percent at June 30, 2000.
Financing of $275 million is available under revolving credit agreements with four banks. Carpenter limits the aggregate commercial paper and credit facility borrowings at any one time to a maximum of $275 million. As of March 31, 2001, $66.0 million was available under the credit facility and commercial paper program.
At March 31, 2001, current assets exceeded current liabilities by $101.7 million (a ratio of 1.3 to 1). The current ratio is conservatively stated because certain inventories are valued $126.5 million less than the current cost as a result of using the LIFO method.
Carpenter believes that its present financial resources, both from internal and external sources, will be adequate to meet its foreseeable short-term and long-term liquidity needs.
Other Matters
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" requires that derivative instruments be recorded on the balance sheet at their fair value and that changes in fair value be recorded each period in current earnings or comprehensive income. The adoption of SFAS 133 resulted in recording a cumulative adjustment as of July 1, 2000 for this required change in accounting. This adjustment increased current assets by $1.2 million and other comprehensive income, net of tax, by $.8 million (see note 8 to the consolidated financial statements).
The Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board issued EITF00-10 at the end of July 2000 regarding the classification of freight and handling costs billed to customers. EITF00-10 requires freight and handling costs billed separately to be included as part of sales on the Statement of Income. In addition, the preferred classification of freight and handling costs expensed on the Statement of Income is to include them in cost of sales. Carpenter adopted this requirement effective July 1, 2000. Reclassification of the prior year's third quarter resulted in increasing sales by $3.4 million, increasing cost of sales by $12.0 million and decreasing selling and administrative expenses by $8.6 million. Reclassification of the prior year's nine months resulted in increasing sales by $9.7 million, increasing cost of sales by $30.5 million and decreasing selling and administrative expenses by $20.8 million.
The Securities and Exchange Commission has issued SAB 101 and interpretive releases, setting forth the SEC's guidance on revenue recognition. This bulletin will be effective for Carpenter in the fourth quarter of fiscal year 2001 (June 2001 quarter), with retroactive effect to the beginning of fiscal year 2001. In accordance with the guidance of SAB 101, Carpenter will be required to change its revenue recognition policies retroactive to July 1, 2000. Carpenter's standard terms and conditions of sale for most of its sales include a provision that title to the goods is retained as a security interest until payment is received, even though the risks and benefits of ownership are passed to the customer at the time of shipment. Under SAB 101, except for certain foreign units, revenue cannot be recognized until title passes to the customer, which in Carpenter's case is when payment is received.
On April 1, 2001, Carpenter changed its terms and conditions of sale so that revenue can be recognized when product is shipped, in accordance with its historical practice. This will have the effect of increasing fourth quarter sales and earnings beyond a normal quarter's level. The net effect of the change in terms and conditions of sales in the fourth quarter and the restatement of the first three quarters under SAB 101 on full fiscal year 2001 earnings per share is estimated to be minimal. However, the change in accounting will result in a negative cumulative adjustment as of July 1, 2001, of approximately $14 million after taxes, and the restatement of the results for the first three quarters of fiscal 2001. Carpenter plans to provide disclosures to show the impacts on its quarterly results caused by the change in accounting and revision of its terms and conditions of sales.
Environmental
Carpenter is subject to various stringent federal, state and local environmental laws and regulations. The liability for future environmental remediation costs is evaluated by management on a quarterly basis. Carpenter accrues amounts for environmental remediation costs which represent management's best estimate of the probable and reasonably estimable costs relating to environmental remediation. For the nine months ended March 31, 2001, the liability for environmental remediation costs was increased by $.6 million, which was included in cost of sales. For the nine months ended March 31, 2000, the liability for environmental remediation costs was reduced by $.8 million, which was included in other income. The liability for environmental remediation costs remaining at March 31, 2001 was $8.1 million. The estimated range of the reasonably possible future costs of remediation at superfund sites and at Carpenter-owned operating facilities is between $8.1 million and $11.3 million.
Carpenter entered into partial settlements of litigation relating to insurance coverages for certain environmental remediation sites and recognized income before income taxes of $.6 million and $.5 million for the nine months ended March 31, 2001 and 2000, respectively.
Estimates of the amount and timing of future costs of environmental remediation requirements are necessarily imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of presently unknown remediation sites and the allocation of costs among the potentially responsible parties. Based upon information presently available, such future costs are not expected to have a material effect on Carpenter's competitive or financial position. However, such costs could be material to results of operations in a particular future quarter or year.
Future Outlook
SAO's sales backlogs for aerospace and power generation products continue at historically high levels, and manufacturing facilities for these products are operating at near full capacity. At the same time, the demand for stainless bar and rod for the automotive and fastener markets has declined sharply due to the U. S. economic slowdown and the effect of increased imports. In addition, continuing high energy costs and the effect of lower operating levels to reduce inventories will continue to negatively impact margins. Carpenter now anticipates that earnings per share for the fourth fiscal quarter will be in the range of $.55 to $.60 per diluted share and for the full fiscal year ending June 30, 2001, will be in the range of $2.10 to $2.15 per diluted share.
Carpenter anticipates a positive free cash flow in excess of $50 million for fiscal year 2001, which will be used to reduce debt.
Fiscal 2002 Pension Credit
Under present accounting rules, Carpenter's after-tax pension credit of $1.25 per diluted share for fiscal year 2001 and after-tax post-retirement medical cost of $.14 per diluted share for fiscal year 2001 are largely non-cash effects for the fiscal year, which are based on valuations of the preceding year. These must be re-calculated for fiscal year 2002, based on pension trust asset values and other actuarial assumptions as of June 30, 2001.
Given the decline in the equity markets from June 30, 2000, to March 31, 2001, it is likely this pension income will decline and the post-retirement medical cost will increase for fiscal year 2002. To illustrate the impact that the current market volatility could have on Carpenter's earnings in the next fiscal year, pro-forma estimates of a range of impact using interim market values have been made.
For example, if the calculation of these non-cash items was made using asset values at December 31, 2000, and March 31, 2001, and no other actuarial changes were made, the earnings effect of the pension income would decline to $.67 and $.37 per share, respectively, and the postretirement medical cost would increase to $.25 and $.31 per share, respectively. The actual calculation and related earnings impact of these non-cash items for fiscal 2002 cannot be made until the assets are valued at June 30, 2001, and all actuarial assumptions are reevaluated.
Goodwill Accounting
The Financial Accounting Standards Board has issued an exposure draft on accounting for goodwill and intangible assets. The current draft requires that goodwill and certain intangible assets no longer be amortized. Should this exposure draft be finalized in its present form, the elimination of amortization would increase Carpenter's earnings by an estimated $.30 per share on a non-cash basis annually. The effective date of this proposed standard has not yet been set.
Forward-looking Statements
This Form 10-Q contains various "Forward-looking Statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements, which represent Carpenter's expectation or beliefs concerning various future events, include statements concerning future revenues and continued growth in various market segments. These statements are based on current expectations regarding future events that involve a number of risks and uncertainties which could cause actual results to differ from those of such forward-looking statements. These risks and uncertainties include those set forth in other filings made by Carpenter under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and also include the following factors: 1) the cyclical nature of the specialty materials business and certain end-use markets, (including, but not limited to, aerospace, automotive and consumer durables), all of which are subject to changes in general economic and financial market conditions, such as the decline in demand for stainless steel for the automotive and fastener markets due to the general economic slowdown in the U.S.; 2) Carpenter's lower operating levels in order to reduce inventories and the continuing high levels of imports of stainless steel products and the excess inventories of these products in the distributor supply chain; 3) the ability of Carpenter to recoup increased costs of electricity, fuel, such as natural gas, and raw material through increased prices and surcharges; 4) worldwide excess capacity for certain alloys which Carpenter produces and fluctuations in currency exchange rates, resulting in increased competition and downward pricing pressure on Carpenter products; 5) stock market fluctuations which could impact the valuation of the assets in Carpenter's pension trusts and the accounting for pension benefits; 6) the criticality of certain raw materials acquired from foreign sources, some of which are located in countries that may be subject to unstable political and economic conditions, potentially affecting the prices of these materials; 7) the level of export sales impacted by political and economic instability, particularly in Asia, Eastern Europe and Latin America, resulting in lower global demand for stainless steel products; 8) the ability of Carpenter, along with other domestic producers of stainless steel products, to obtain and retain favorable rulings in dumping and countervailing duty claims against foreign producers; 9) the level of sales impacted by export controls, changes in legal and regulatory requirements, policy changes affecting the markets, changes in tax laws and tariffs, exchange rate fluctuations and accounts receivable collection; 10) the effects on operations of changes in U.S. and foreign governmental laws and public policy, including environmental regulations; and 11) the outcome of the litigation between the City of Bridgeport, Connecticut and the Bridgeport Port Authority and Carpenter concerning the value of the Corporation's former steel plant site in Bridgeport and responsibility for site remediation costs caused by the Port Authority's development efforts; if the cash received in either a settlement or final judgment is considerably less than the carrying value, a non-cash charge to earnings would be made. Any of these factors could have an adverse and/or fluctuating effect on Carpenter's results of operations. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Carpenter undertakes no obligation to update or revise any forward-looking statements.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On August 6, 1999, the Bridgeport, Connecticut Port Authority filed a Certificate of Taking, acquiring fee simple ownership of Carpenter's former plant site in that city. The proposed compensation for the site is $2.5 million and the Port Authority has stated its intention to seek reimbursement of any additional site remediation costs. The carrying value for the site on Carpenter's books was approximately $14.5 million (prior to the receipt of $2.2 million in the third quarter from the Port Authority) and was based upon a recent appraisal and arms-length negotiated selling prices with interested parties. Carpenter has begun legal proceedings in court to obtain a fair value for the property and a declaratory judgment absolving Carpenter from any remediation costs caused by the Port Authority's development efforts. Trial on this matter commenced in April 2001 in the U.S. District Court for the District of Connecticut. While the ultimate outcome of the trial is undeterminable at this time, in the opinion of management, the Port Authority's proposed compensation and remediation reimbursement are unreasonable and will not be upheld. Accordingly, no adjustment has been made for an impairment in carrying value.
Other pending legal proceedings involve ordinary routine litigation incidental to the business of Carpenter. There are no material proceedings to which any Director, Officer, or affiliate of the Company, or any owner of more than five percent of any class of voting securities of the Company, or any associate of any Director, Officer, affiliate, or security holder of the Company, is a party adverse to the Company or has a material interest adverse to the interest of the Company or its subsidiaries. There is no administrative or judicial proceeding arising under any Federal, State or local provisions regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment that (1) is material to the business or financial condition of the Company, (2) involves a claim for damages, potential sanctions or capital expenditures exceeding ten percent of the current assets of the Company or (3) includes a governmental authority as a party and involves potential monetary sanctions in excess of $100,000.
Item 5. Other Information
Effective March 1, 2001, Edward B. Bruno, then Vice President and Corporate Controller, was
elected to the Corporate Officer position of Vice President - Financial Analysis and Richard D. Chamberlain,
then Controller, Specialty Alloys Operations, was elected to the Corporate Officer position of Vice President
and Corporate Controller. Mr. Bruno has announced that he will be retiring June 30, 2001. Jaime Vasquez, who had been Vice President and Treasurer of Pillowtex Corporation, was elected to the Corporate Officer position of Vice President and Treasurer, effective March 12, 2001. Mr. Vasquez replaced Robert J. Dickson,
who resigned in January 2001.
On March 22, 2001, the Board of Directors increased the number of Directors to 14 members and elected Stephen M. Ward, Jr., as a Director, effective immediately, to serve in Class III and to stand for election with his respective Class at the 2001 Annual Meeting of Stockholders. Mr. Ward, who is qualified for audit committee service under the New York Stock Exchange listing requirements, was appointed to the Audit and Corporate Governance Committees of the Board.
Item 6. Exhibits and Reports on Form 8-K.
- The following documents are filed as Exhibits:
10. Material Contracts
- The Company did not file any Reports on Form 8-K for events occurring during
the quarter of the fiscal year covered by this report.
Items 2, 3 and 4 are omitted as the answer is negative or the items are not applicable.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Carpenter Technology Corporation |
| (Registrant) |
| Date: May 7, 2001 | s/Terrence E. Geremski
Terrence E. Geremski
Senior Vice President - Finance
and Chief Financial Officer |
