SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1995
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 (I.R.S. Employer
incorporation or organization) Identification No.)
101 West Bern Street, Reading, Pennsylvania 19612-4662
(Address of principal executive offices) (Zip Code)
610-208-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(Name of each exchange
(Title of each class) on which registered)
- --------------------- ----------------------
Common stock, par value $5 per share......New York Stock Exchange
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 the filing
requirements for at least the past 90 days. Yes X . No .
--- ---
Indicate by check mark if disclosure of delinquent filers pur-
suant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of September 1, 1995, 16,419,590 shares of Common Stock of
Carpenter Technology Corporation were outstanding and the
aggregate market value of such Common Stock held by nonaffiliates
(based upon its closing transaction price on the Composite Tape
on such date) was $619,839,523. All share data has been restated
for the effect of a two-for-one common stock split that was
effective September 15, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain information from the
1995 definitive Proxy Statement.
The Exhibit Index appears on pages E-1 to E-6.
PART I
Item 1. Business
(a) General Development of Business:
Carpenter Technology Corporation, incorporated in
1904, and its subsidiaries are engaged in the
manufacture, fabrication, and marketing of specialty
metals and structural ceramics. There were no
significant changes in the form of organization or mode
of conducting business of Carpenter Technology
Corporation (hereinafter called the Company) during the
year ended June 30, 1995, except for the transaction
described below:
On July 22, 1994, the Company acquired all of the
outstanding shares of Certech, Inc. and an affiliated
company (Certech), for $16.7 million, including acquisition
costs, comprised of $13.5 million in cash and 106,248 shares
of Carpenter common stock. Certech, with plants in
New Jersey, Pennsylvania and the United Kingdom, is a
recognized leader in the technology and manufacturing of
structural ceramic products. The acquisition of Certech
enabled the Company to attain a substantial position in the
structural ceramics market. This investment was accounted
for using the purchase method of accounting.
(b) Financial Information About Industry Segments:
The Company is primarily engaged in one business
segment - the manufacture, fabrication and distribution of
specialty metals. The ceramics operations are not
significant for separate presentation as a segment.
(c) Narrative Description of Business:
(1) Products:
The Company processes basic raw materials such as
chromium, nickel, iron scrap and other metal alloying
elements through various melting, hot forming and cold
working facilities to produce finished products in the
form of billet, bar, rod, wire, narrow strip, special
shapes, and hollow forms in many sizes and finishes and
produces certain fabricated metal products. Sales of
finished products include:
STAINLESS STEELS -
A broad range of corrosion resistant alloys
including conventional stainless steels and many
proprietary grades for special applications.
SPECIAL ALLOYS -
Other special purpose alloys used in critical
components such as bearings and fasteners. Heat
resistant alloys that range from slight
modifications of the stainless steels to complex
nickel and cobalt base alloys. Alloys for
electronic, magnetic and electrical applications
with controlled thermal expansion characteristics,
or high electrical resistivity or special magnetic
characteristics. Fabrication of special stainless
steels and zirconium base alloys into tubular
products for the aircraft industry and nuclear
reactors.
TOOL STEELS -
Tool and die steels which are extremely hard
alloys used for tooling and other wear-resisting
components in metalworking operations such as
stamping, extrusion and machining.
OTHER STEEL -
Carbon steels purchased for distribution and other
miscellaneous products.
In addition to the above specialty metal products,
the Company manufactures structural ceramics. The
manufacture of structural ceramics applies proprietary
injection molding technologies in making ceramic cores
for use in castings for a wide range of products such
as aircraft engines, industrial gas turbines and
various consumer products.
The products of the Company are sold primarily in
the United States and principally through its own sales
organization with service centers and sales offices
located in many of the major cities of the country.
Sales outside of the United States, including export
sales, were $73.8 million, $67.1 million and $30.7
million in fiscal 1995, 1994 and 1993, respectively.
(2) Classes of Products:
The approximate percentage of the Company's
consolidated net sales contributed by the major classes
of products for the last three fiscal years are as
follows:
1995 1994 1993
---- ---- ----
Stainless Steel 56% 60% 60%
Special Alloys 33% 29% 33%
Tool and Other Steel 8% 11% 7%
Ceramics 3% - -
---- ---- ----
100% 100% 100%
==== ==== ====
(3) Raw Materials:
The Company depends on continued delivery of
critical raw materials for its day-to-day operations.
These raw materials are nickel, ferrochrome, cobalt,
molybdenum, manganese and scrap, both alloy and steel.
Some of these raw materials sources are located in
countries subject to potential interruptions of supply.
These potential interruptions could cause material
shortages and affect the availability and price.
The Company is in a strong raw material position
because of its long-term relationships with major
suppliers. These suppliers provide material
availability and competitive prices for these key raw
materials. The Company has also established and
maintains raw material inventory at appropriate levels
at the Reading plant.
(4) Patents and Licenses:
The Company and its subsidiaries and affiliates
own a number of United States and foreign patents and
have granted licenses under some or all of them.
Certain of the products produced by the Company are
covered by patents of other companies from whom
licenses have been obtained. The Company does not
consider its business to be materially dependent upon
any patent or patent rights.
(5) Seasonality of Business:
The Company's sales and earnings results are
normally influenced by seasonal factors. The first
fiscal quarter (three months ending September 30) is
typically the lowest - chiefly because of annual plant
vacation and maintenance shutdowns in this period by
the Company as well as by many of its customers. The
timing of major changes in the general economy can
alter this pattern, but over the longer time frame, the
historical patterns generally prevail. The chart below
shows the percent of net sales by quarters for the past
three fiscal years:
1995 1994 1993
---- ---- ----
Quarter Ended September 30 20% 21% 24%
Quarter Ended December 31 23% 23% 21%
Quarter Ended March 31 28% 28% 27%
Quarter Ended June 30 29% 28% 28%
---- ---- ----
100% 100% 100%
==== ==== ====
(6) Customers:
The Company is not dependent upon a single
customer, or a very few customers, to the extent that
the loss of any one or more would have a materially
adverse effect on the Company.
(7) Backlog:
As of August 31, 1995, the Company had a backlog
of orders, believed to be firm, of approximately $231.0
million, substantially all of which is expected to be
shipped within the current fiscal year. The backlog as
of August 31, 1994 was approximately $196.0 million.
(8) Competition:
The business of the Company is highly competitive.
It supplies materials to a wide variety of end-use and
geographic market segments, none of which consumes more
than about 20 percent of the Company's output, and
competes with various companies depending on end-use
segment, product or geography. There are 14 domestic
companies producing one or more similar specialty metal
products that are considered to be major competitors to
the Company in one or more product segments. The
Company also competes directly with several hundred
independent distributors of products similar to those
distributed by Carpenter's wholly owned distribution
system. Additionally, numerous foreign producers
import into the United States various specialty metal
products similar to those produced by the Company.
Furthermore, a number of different products may, in
certain instances, be substituted for the Company's
finished product.
Imports of foreign specialty steels have long been a
concern to the domestic steel industry because of the
potential for unfair pricing by foreign producers.
Such pricing practices have usually been supported by
foreign governments through direct and indirect
subsidies.
Because of these unfair trade practices, the
Company has been aggressive in filing trade actions
against foreign producers who have dumped their
specialty steel products into the United States. These
actions have been successful and have resulted in
dumping duties being assessed against imports of
stainless steel bar and stainless steel rod from
certain countries.
In February 1995, the International Trade
Commission (ITC) ruled that the domestic industry had
been injured by dumped stainless steel bar imports from
Brazil, India, Japan and Spain. As a result, the U.S.
Department of Commerce issued antidumping orders for
the collection of additional duties on all imports of
stainless steel bar from the four countries, at the
following rates:
Brazil - 19.43%
India - 3.87% to 21.02%
Japan - 61.47%
Spain - 7.74% to 62.85%
This ruling was the result of an antidumping petition
which the Company had filed in conjunction with six
other domestic producers in December 1993.
Previously, in January 1994, the U.S. Department
of Commerce had issued antidumping orders for the
collection of additional duties against all imports of
stainless steel rod from Brazil, France and India, at
the following rates:
Brazil - 24.6% to 26.5%
France - 24.59%
India - 48.8%
Under the provisions of the new General Agreement
Tariffs and Trade (GATT), the antidumping orders on
stainless steel bar and stainless steel rod will
continue in effect until the year 2000.
In a related matter, negotiations by the U.S.
Trade Representative with the major steel producing
nations of the world to develop a Multilateral Steel
Agreement (MSA) are continuing. The objective of the
MSA would be to reduce unfair trade in steel products
by establishing international commitments and
disciplines aimed at eliminating subsidies and other
trade-distortive practices.
(9) Research, Product and Process Development:
The Company's expenditures for company-sponsored
research and development were approximately $12.3
million, $13.6 million and $12.9 million in fiscal
1995, 1994 and 1993, respectively.
(10) Environmental Regulations:
The Company, as well as other steel producing and
manufacturing companies, is subject to various
stringent federal, state, and local environmental laws
and regulations. The liability for future
environmental remediation costs is evaluated on a
quarterly basis by management. The Company accrues
amounts for environmental remediation costs which
represent management's best estimate of the probable
and reasonably estimable costs relating to environ-
mental remediation. For further information on
environmental remediation, see the Commitments and
Contingencies section included in Item 7 "Management's
Discussion and Analysis of Financial Condition and
Results of Operations" and Note 16 to the consolidated
financial statements included in Item 8 "Financial
Statements and Supplementary Data".
The costs of maintaining and operating environ-
mental control equipment were about $7.3 million and
$8.5 million for fiscal 1995 and 1994, respectively.
The capital expenditures for environmental control
equipment were $.5 million for fiscal 1995 and 1994.
The Company anticipates spending approximately $6.0
million on major domestic environmental capital
projects over the next five fiscal years. Due to the
possibility of unanticipated factual or regulatory
developments, the amount of future capital expenditures
may vary.
(11) Employees:
As of August 31, 1995, the Company had 4,068 full-
time employees.
Item 2. Properties
The locations of the Company's principal specialty metals
manufacturing and fabrication plants are: Reading, Pennsylvania;
Orangeburg, South Carolina; and San Diego, California. The
Reading and Orangeburg plants are owned in fee. The San Diego
plant is owned, but the land is leased.
The Reading plant has an annual practical melting capacity
of approximately 207,000 ingot tons of its normal product mix.
The annual tons shipped will be considerably less than the tons
melted due to finishing losses. During the years ended June 30,
1995 and 1994, the plant operated at approximately 87 percent and
78 percent, respectively, of its melting capacity.
The location of the Company's ceramics manufacturing plants
are: Wood-Ridge, New Jersey; Wilkes-Barre, Pennsylvania; Corby,
United Kingdom; and Alpharetta, Georgia. The Corby plant is
owned and the Wood-Ridge, Wilkes-Barre and Alpharetta plants are
leased.
The Company also operates sales offices and service centers,
most of which are owned, at 33 locations in 14 states and 8
foreign countries.
The plants, service centers and offices of the Company have
been acquired at various times over many years. There is an
active maintenance program to keep facilities in good condition.
In addition, the Company has had an active capital spending
program to replace equipment as needed to keep it technologically
competitive on a world-wide basis. The Company believes its
facilities are in good condition and suitable for its business
needs.
Item 3. Legal Proceedings
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which
the Company or any of its subsidiaries is a party or to which any
of their properties is subject. 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 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
Listed below are the names of corporate executive officers
as of fiscal year end, including those required to be listed as
executive officers for Securities and Exchange Commission
purposes, each of whom assumes office after the annual meeting of
the Board of Directors which immediately follows the Annual
Meeting of Shareholders. All of the corporate officers listed
below have held responsible positions with the registrant for
more than five years except for Robert W. Lodge.
Mr. Lodge served as Vice President of Human Resources for
Johnson Matthey, Inc. from 1988 to 1991 and in various
assignments in industrial relations and human resources with
Rockwell International Corporation from 1977 to 1988. There is
no family relationship between any of the officers.
Assumed
Present
Name Age Positions Position
- ---- --- --------- --------
Robert W. Cardy 59 Chairman, President &
Chief Executive Officer July 1992
Director November 1990
Donald C. Bristol 56 Senior Vice President -
Steel Division January 1993
G. Walton Cottrell 55 Sr. Vice President -
Finance & Chief
Financial Officer January 1993
Nicholas F. Fiore 55 Senior Vice President -
Strategic Businesses January 1993
Robert W. Lodge 52 Vice President - Human
& Admin. Services September 1991
John R. Welty 46 Vice President -
General Counsel &
Secretary January 1993
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
Common stock of the Company is listed on the New York Stock
Exchange. The ticker symbol is CRS. Here are the high and low
market prices of the Company's stock for the past two fiscal
years:
Quarter Ended: 1995 1994
- ---------------------------------------------------------------------
High Low High Low
September 30 $32-13/16 $29 $28-3/16 $24-11/16
December 31 $31-5/8 $26-9/16 $29-1/8 $25
March 31 $29-1/4 $26-5/8 $33-3/16 $28-1/4
June 30 $34-1/16 $27-3/4 $31-3/8 $28-1/4
- ---------------------------------------------------------------------
$34-1/16 $26-9/16 $33-3/16 $24-11/16
The Company has paid quarterly cash dividends on its common
stock for 89 consecutive years. The quarterly dividend rate has
been $.30 per share for each of the past three years.
The Company had 5,929 common shareholders of record as of
June 30, 1995. The balance of the information required by this
item is disclosed in Note 9 to the consolidated financial
statements included in Item 8 "Financial Statements and
Supplementary Data".
All share and per share data have been restated for the
effect of a two-for-one common stock split declared on
August 10, 1995. See Note 17 to the consolidated financial
statements included in Item 8 "Financial Statements and
Supplementary Data."
Item 6. Selected Financial Data
Five-Year Financial Summary
Dollar amounts in thousands, except per share data
(years ended June 30)
1995 1994 1993 1992 1991
- --------------------------------------------------------------------------
Summary of Operations
Net Sales $757,532 $628,795 $576,248 $570,200 $562,476
Income before extra-
ordinary charges &
cumulative effect
of changes in
accounting
principles $ 47,492 $ 38,289 $ 26,534 $ 14,884 $ 30,071
Extraordinary charges,
net of income taxes $ - $ (2,039) $ - $ (1,238) $ -
Cumulative effect of
changes in accounting
principles, net of
income taxes $ - $ - $(74,676) $ - $ -
Net income (loss) $ 47,492 $ 36,250 $(48,142) $ 13,646 $ 30,071
Financial Position
at Year-End
Total assets $831,775 $729,911 $699,565 $714,752 $716,995
Long-term debt, net $194,762 $158,070 $189,895 $196,604 $122,661
Per Share Data
Primary:
Income before extra-
ordinary charges &
cumulative effect
of changes in
accounting
principles $ 2.81 $ 2.28 $ 1.55 $ .81 $ 1.76
Net income (loss) $ 2.81 $ 2.15 $ (3.11) $ .74 $ 1.76
Fully Diluted:
Income before extra-
ordinary charges &
cumulative effect
of changes in
accounting
principles $ 2.70 $ 2.20 $ 1.51 $ .81 $ 1.76
Net income (loss) $ 2.70 $ 2.08 $ (2.88) $ .74 $ 1.76
Cash dividends-common $ 1.20 $ 1.20 $ 1.20 $ 1.20 $ 1.20
All share and per share data have been restated for the effect of
a two-for-one common stock split declared on August 10, 1995.
See Note 17 to the consolidated financial statements included in
Item 8 "Financial Statements and Supplementary Data."
See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for discussion of factors
that affect the comparability of the "Selected Financial Data".
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
MANAGEMENT'S DISCUSSION OF OPERATIONS
SUMMARY
Net sales and earnings trends for the past three fiscal years are
summarized below:
- ---------------------------------------------------------------------
(dollars in millions -
except per share) 1995 1994 1993
- ---------------------------------------------------------------------
Net sales $757.5 $628.8 $576.2
Income before extraordinary
charge and cumulative effect of
changes in accounting principles $ 47.5 $ 38.3 $ 26.5
Net income (loss) $ 47.5 $ 36.3 $(48.1)
Primary earnings per share before
extraordinary charge and
cumulative effect of changes in
accounting principles $ 2.81 $ 2.28 $ 1.55
Primary earnings (loss) per share $ 2.81 $ 2.15 $ (3.11)
=====================================================================
Earnings before the extraordinary charge and accounting changes
increased in each of the past two years as a result of the
improved economy, selling price increases and internal programs
for cost reduction, asset utilization and market share
enhancements. The sales and earnings results in 1995 were records
for the Company.
Fiscal 1994 results were adversely affected by an extraordinary
charge for debt retirement as described in Note 7 to the
financial statements. Fiscal 1993 results were reduced by a
large, one-time retroactive charge for the cumulative effect of
adopting two accounting changes as described in Note 1 to the
financial statements.
The chart below shows net sales by product line for the past
three fiscal years:
- ---------------------------------------------------------------------
(dollars in millions) 1995 1994 1993
- ---------------------------------------------------------------------
Sales % Sales % Sales %
- ---------------------------------------------------------------------
Stainless steel $424.7 56 $375.0 60 $342.9 60
Special alloys 249.0 33 182.4 29 190.3 33
Tool and other steel 61.2 8 71.4 11 43.0 7
Ceramics 22.6 3 - - - -
- ---------------------------------------------------------------------
Total $757.5 100 $628.8 100 $576.2 100
=====================================================================
The following table is the approximate breakdown of sales by
end-use markets (excludes sales of Aceros Fortuna and Certech):
- ---------------------------------------------------------------------
Years Ended June 30 1995 1994 1993
- ---------------------------------------------------------------------
Motor vehicles and equipment 14% 14% 13%
Electrical and electronic equipment 13 12 12
Aerospace 12 12 14
General industrial equipment 10 11 11
Metal producing and distribution 9 8 7
Power generation and distribution 7 8 7
Fabricated metal products 6 6 6
Metal working equipment 6 7 7
Chemical and petroleum processing 5 5 5
Consumer durables 5 5 5
Instruments and controls 4 4 4
Housing and construction 3 3 3
Miscellaneous 6 5 6
- ---------------------------------------------------------------------
100% 100% 100%
======================================================================
RESULTS OF OPERATIONS - FISCAL 1995 VERSUS FISCAL 1994
Sales were $757.5 million in fiscal 1995, a 20 percent increase
from the $628.8 million level in fiscal 1994. The sales
improvement was primarily due to an 8 percent increase in volume
and higher unit prices in the Steel Division. Demand for
specialty steel products has been at a high level since January
1994, especially in automotive, equipment and aerospace-related
markets. Unit selling prices for specialty steel shipments
increased by an average of 7 percent to offset higher labor and
supply costs, and a surcharge was established to offset sharply
rising raw material costs. Also, the product mix shifted toward
more premium-melted products and away from certain
commodity-priced products, resulting in a higher average selling
price.
Approximately 18 percent of the increase in sales was from the
inclusion, in fiscal 1995, of the results of Certech, Inc., and
its affiliates, a ceramics business which was acquired in July
1994 (described in Note 2 to the financial statements).
Cost of sales as a percentage of sales increased to 74 percent
versus 73 percent in fiscal 1994 because last year was favorably
affected by reductions in inventories valued using the LIFO
method. The LIFO method values inventory reductions at historical
costs which were lower than current costs. This favorable effect
on costs, before taxes and profit sharing impacts, was $24.9
million in fiscal 1994. There were no LIFO accounting effects in
fiscal 1995.
Raw material costs per unit purchased increased by 34 percent
during fiscal 1995 versus the year-earlier costs as a result of
large increases in the cost of nickel (42 percent), cobalt (52
percent) and molybdenum (77 percent). Also, in fiscal 1995, the
Company purchased at a premium semi-finished and finished
products to supplement internal capacity.
Labor costs for Steel Division production and maintenance
employees were up by 6 percent as a result of a base wage
increase in July 1994 and higher overtime and profit sharing
payments.
Natural gas costs per unit consumed decreased by 10 percent
versus fiscal 1994 costs, but electricity costs per unit
increased by 3 percent.
Selling and administrative expenses increased by $9.4 million
during fiscal 1995 due chiefly to the inclusion of Certech costs
in fiscal 1995 and increased salaried employment and severance
costs.
Interest expense was lower by $1.0 million in fiscal 1995
principally because of reduced interest rates due to the
retirement of the 12-7/8% debentures in March 1994.
The Company's 19 percent share of the losses of the
Walsin-CarTech joint venture, which became operational in January
1995, (described in Note 3 to the financial statements) increased
by $2.1 million in fiscal 1995. Prior to that date, pre-operating
costs were deferred by the joint venture.
Income taxes as a percent of pre-tax income (effective tax rate)
decreased to 36 percent in fiscal 1995 from 39 percent a year
earlier primarily because of the retroactive deferred tax effects
of an increase in the statutory federal rate in 1994. Both years'
tax rates were favorably affected by non-recurring adjustments of
deferred state taxes for changes in tax laws. A reconciliation of
the effective tax rate to the federal statutory rate is presented
in Note 15 to the financial statements.
RESULTS OF OPERATIONS - FISCAL 1994 VERSUS FISCAL 1993
Sales were $628.8 million in fiscal 1994, up 9 percent from the
fiscal 1993 level of $576.2 million. Approximately 60 percent of
the increase was from the inclusion, in fiscal 1994, of the
results of Aceros Fortuna, S.A. de C.V., a Mexican steel
distribution company, which was acquired in July 1993 (described
in Note 2 to the financial statements).
The remainder of the sales improvement was due to an 8 percent
increase in unit volume shipments of the Steel Division. Demand
for stainless bar and wire products was at a high level,
especially in the January to June 1994 period. Also, mill-direct
business in commodity-priced products was accepted to more fully
utilize production capability. This strategy and reduced sales of
high temperature alloys for the aerospace industry resulted in a
lower-priced sales mix. Unit selling prices for domestic
specialty steel shipments fell an average of 2 percent due to
lower nickel costs and continued competitive price pressures,
particularly from imported products.
Cost of sales as a percentage of sales decreased to 73 percent
versus 76 percent a year earlier. The improved cost ratio was
chiefly the result of the increased production level and
manufacturing efficiency gains for the Steel Division. These
favorable effects were partially offset by the lower unit selling
prices. Cost of sales in fiscal 1994 and 1993 was favorably
affected by reductions in inventories valued using the LIFO
method. This favorable effect on costs, before taxes and profit
sharing impacts, was $24.9 million in fiscal 1994 and $25.7
million in fiscal 1993.
Raw material costs per unit purchased decreased by 6 percent
during fiscal 1994 versus the year-earlier costs primarily
because of a 15 percent drop in the cost of nickel.
Labor costs for Steel Division production and maintenance
employees were up by 4 percent as a result of base wage increases
in July 1993 and higher profit sharing payments.
Natural gas costs per unit consumed increased by 27 percent over
fiscal 1993's level, but electricity costs per unit fell by 13
percent.
Selling and administrative expenses increased by $10.3 million
during fiscal 1994 due chiefly to the inclusion of Aceros Fortuna
costs in fiscal 1994 and increased salaried employment costs.
Interest expense was lower by $5.1 million in fiscal 1994
principally because of the capitalization of $3.6 million of
interest related to the investment in the Walsin-CarTech
Specialty Steel Corporation in Taiwan (described in Note 3 to the
financial statements). Also, interest rates were lower,
especially since the retirement of the 12-7/8% debentures in
March 1994.
Fiscal 1994 includes $.9 million of losses for the Company's 19
percent share of the losses of the Walsin-CarTech joint venture
(described in Note 3 to the financial statements).
Other income decreased by $5.1 million primarily because fiscal
1993 income included a $3.7 million award in a patent suit.
Income taxes as a percent of pre-tax income (effective tax rate)
increased to 39 percent in fiscal 1994 from 38 percent a year
earlier because of an increase in the federal statutory rate. A
reconciliation of the effective tax rate to the federal statutory
rate is presented in Note 15 to the financial statements.
During fiscal 1994, the Company retired at a premium, $55.3
million of its 12-7/8% debentures, and recorded an extraordinary
charge of $2.0 million including unamortized discount and issue
costs, net of $1.2 million of income tax benefits (described in
Note 7 to the financial statements).
MANAGEMENT'S DISCUSSION OF CASH FLOW AND FINANCIAL CONDITION
CASH FLOW
Cash flow from operations decreased in 1995 because of higher
working capital needs, but remained at a strong level.
Inventories increased $29.5 million in fiscal 1995, excluding
inventories relating to acquisitions, due to higher production
levels of the Steel Division. Inventories were significantly
reduced in fiscal 1994 and 1993 as a result of the Company's
Continuous Improvement process to reduce lead times while still
maintaining a high customer service level.
Accounts receivable increased $21.8 million and $1.9 million in
fiscal 1995 and 1994, respectively, excluding accounts receivable
relating to acquisitions, as a result of increased fourth quarter
sales each year. The average days sales outstanding in 1995 was
comparable to that of 1994.
Capital expenditures of $36.9 million, $26.6 million and $20.6
million in fiscal 1995, 1994 and 1993, respectively, were
concentrated in the Company's Reading, Pennsylvania, plant and
were used for normal replacements, modernization and incremental
capability. The major capital projects were the modernization of
wire finishing operations and the relocation and installation of
a second rotary forge.
During fiscal year 1995, the Company acquired the business of
Certech, Inc., and an affiliated company. During fiscal 1994,
Aceros Fortuna, S.A. de C.V., and affiliated companies were
acquired and an investment was made in Walsin-CarTech, a joint
venture in Taiwan. The cost of these acquisitions and investments
totaled $81.4 million in cash and $3.2 million in common stock.
Treasury shares were purchased to offset the shares issued in
this acquisition. Details of these transactions are included in
Notes 2 and 3 to the financial statements.
During fiscal 1995, $80.0 million of medium-term notes were
issued with a 7.4% average interest rate, and a portion of the
proceeds were used to retire borrowings under credit
arrangements. Details of debt and financing arrangements are
provided in Note 7 to the financial statements.
On March 1, 1994, the Company retired at a premium the entire
outstanding principal amount of $55.3 million of its 12-7/8%
debentures. The funding for this retirement came from the
Company's credit facilities.
The dividend payout rates on common and preferred stock were
maintained at $1.20 and $5,362.50 per share, respectively, and
totaled about $21.0 million in each of the past three years. The
Board of Directors declared on August 10, 1995, a 10 percent
increase in the common stock dividend to shareholders of record
on August 22, 1995.
In June 1989, the Board of Directors authorized the purchase of
up to 2,400,000 shares of Carpenter common stock, and in
September 1991, in conjunction with the establishment of an ESOP,
the Board of Directors authorized the purchase of 1,200,000
shares of common stock to offset the dilutive effect of the
issuance of convertible stock to the ESOP. Shares purchased under
these programs totaled 507,600 in fiscal 1993 for a total of
$11.6 million in cash. During fiscal 1993, the share repurchase
programs were suspended indefinitely.
FINANCIAL CONDITION
During the past three years, the Company maintained the ability
to provide adequate cash to meet its needs through strong cash
flow from operations, management of working capital and its
flexibility to use outside sources of financing to supplement
internally generated funds.
Fiscal 1995 ended in a sound liquidity position, with current
assets exceeding current liabilities by $106.3 million (a ratio
of 1.8 to 1). This favorable ratio is conservatively stated
because inventories are valued $153.6 million less than the
current cost as a result of using the LIFO method. Total debt at
June 30, 1995 was $222.2 million or 39.5 percent of total
capital, including deferred taxes, versus 35.7 percent of total
capital, including deferred taxes, at June 30, 1994.
Financing is available under a $150.0 million financing
arrangement with a number of banks, providing for $125.0 million
of revolving credit to January 1998 and lines of credit of $25.0
million.
At June 30, 1995, the Company had $20.0 million of medium-term
debt securities available for issuance under a Shelf Registration
on file with the Securities and Exchange Commission.
In summary, the Company believes that its present financial
resources, both from internal and external sources, are adequate
to meet our foreseeable short-term and long-term liquidity needs.
COMMITMENTS AND CONTINGENCIES
Environmental
The Company has environmental liabilities at some of its owned
operating facilities, and has been designated as a "potentially
responsible party" with respect to certain superfund waste
disposal sites. Additionally, the Company has been notified that
it may be a potentially responsible party with respect to other
superfund sites as to which no proceedings have been instituted
against the Company. Neither the exact amount of cleanup costs
nor the final method of their allocations among all designated
potentially responsible parties at these superfund sites has been
determined. The estimated range of the reasonably possible costs
of remediation at the Company-owned operating facilities and the
superfund sites is between $8.0 million and $18.0 million. The
Company has accrued for environmental remediation costs,
including remediation investigation and feasibility study costs,
which represent management's best estimate of the probable and
reasonably estimable remediation costs. Additional details are
provided in Note 16 to the financial statements. The Company does
not anticipate that its financial position will be materially
affected by additional environmental remediation costs, although
quarterly or annual operating results could be materially
affected by future developments.
Other
The Company is also defending various claims and legal actions,
and is subject to commitments and contingencies which are common
to its operations. The Company provides for costs relating to
these matters when a loss is probable and the amount is
reasonably estimable. Additional details are provided in Note 16
to the financial statements. 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 the Company's financial position or results of
operations and cash flows.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Supplementary Data
Page
----
Consolidated Financial Statements:
Report of Independent Accountants 20
Consolidated Statement of Income for the
Years Ended June 30, 1995, 1994 and 1993 21
Consolidated Statement of Cash Flows for the
Years Ended June 30, 1995, 1994 and 1993 22
Consolidated Balance Sheet as of
June 30, 1995 and 1994 23
Consolidated Statement of Changes in
Shareholders' Equity for the Years Ended
June 30, 1995, 1994 and 1993 24-25
Notes to Consolidated Financial Statements 26-45
Supplementary Data:
Quarterly Financial Data (Unaudited) 46
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS
AND SHAREHOLDERS OF
CARPENTER TECHNOLOGY CORPORATION:
We have audited the accompanying consolidated balance sheet of
Carpenter Technology Corporation and subsidiaries as of June 30,
1995 and 1994, and the related consolidated statements of income,
cash flows and changes in shareholders' equity for each of the
three years in the period ended June 30, 1995. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Carpenter Technology Corporation and
subsidiaries as of June 30, 1995 and 1994, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended June 30, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements,
the Company changed its methods of accounting for income taxes
and postretirement benefits other than pensions in the year ended
June 30, 1993.
s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
July 27, 1995, except for Note 17,
as to which the date is August 10, 1995
CONSOLIDATED STATEMENT OF INCOME
CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
for the years ended June 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------
(in thousands, except per share data) 1995 1994 1993
- -------------------------------------------------------------------------
Net sales $757,532 $628,795 $576,248
- -------------------------------------------------------------------------
Costs and expenses:
Cost of sales 564,169 457,473 436,057
Selling and administrative expenses 101,965 92,525 82,214
Interest expense 14,542 15,521 20,594
Equity in loss of joint venture 3,000 910 -
Other income, net (715) (362) (5,416)
- -------------------------------------------------------------------------
682,961 566,067 533,449
- -------------------------------------------------------------------------
Income before income taxes, extraordinary
charge and cumulative effect of changes
in accounting principles 74,571 62,728 42,799
Income taxes 27,079 24,439 16,265
- -------------------------------------------------------------------------
Income before extraordinary charge and
cumulative effect of changes in
accounting principles 47,492 38,289 26,534
Extraordinary charge - premium on
retirement of long-term debt,
net of income taxes - (2,039) -
Cumulative effect of changes in accounting
principles, net of income taxes - - (74,676)
- -------------------------------------------------------------------------
Net income (loss) $ 47,492 $ 36,250 $(48,142)
=========================================================================
Primary earnings (loss) per common share:
Income before extraordinary charge
and cumulative effect of changes
in accounting principles $ 2.81 $ 2.28 $ 1.55
Extraordinary charge - (.13) -
Cumulative effect of changes in
accounting principles - - (4.66)
- -------------------------------------------------------------------------
Earnings (loss) per common share $ 2.81 $ 2.15 $ (3.11)
=========================================================================
Weighted average common shares
outstanding 16,327 16,130 16,018
=========================================================================
Fully-diluted earnings (loss)
per common share:
Income before extraordinary
and cumulative effect of
changes in accounting principles $ 2.70 $ 2.20 $ 1.51
Extraordinary charge - (.12) -
Cumulative effect of changes
in accounting principles - - (4.39)
------------------------------------------------------------------------
Earnings (loss) per common share $ 2.70 $ 2.08 $ (2.88)
========================================================================
Weighted average common shares
outstanding 17,309 17,086 17,000
=========================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
for the years ended June 30, 1995, 1994 and 1993
- -------------------------------------------------------------------------
(in thousands) 1995 1994 1993
- -------------------------------------------------------------------------
OPERATIONS
Net income (loss) $ 47,492 $ 36,250 $(48,142)
Adjustments to reconcile net income (loss)
to net cash provided from operations:
Depreciation and amortization 32,479 29,887 26,947
Deferred income taxes 3,314 4,057 10,953
Prepaid pension cost (7,933) (11,563) (11,834)
Equity in loss of joint venture 3,000 910 -
Extraordinary charge - 2,039 -
Cumulative effect of changes in
accounting principles - - 74,676
Changes in working capital and other:
Receivables (21,819) (1,889) (12,497)
Inventories (29,480) 16,907 63,137
Accounts payable 15,111 10,480 (5,985)
Accrued current liabilities 6,800 1,984 (791)
Other, net (5,177) 10,404 (1,416)
- -------------------------------------------------------------------------
Net cash provided from operations 43,787 99,466 95,048
- -------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of plant and equipment (36,945) (26,604) (20,563)
Disposals of plant and equipment 1,424 3,144 405
Investment in joint venture (2,060) (49,196) -
Acquisitions of businesses,
net of cash received (13,032) (22,323) -
- -------------------------------------------------------------------------
Net cash used for investing activities (50,613) (94,979) (20,158)
- -------------------------------------------------------------------------
FINANCING ACTIVITIES
Provided by (payments on) short-term debt 20,145 (2,794) -
Proceeds from issuance of long-term debt 80,000 45,851 -
Payments on long-term debt (55,736) (71,271) (6,843)
Dividends paid (21,045) (20,824) (20,868)
Proceeds from issuance of common stock 1,745 4,245 955
Payments to acquire treasury stock (3,002) - (11,633)
- -------------------------------------------------------------------------
Net cash provided from (used for)
financing activities 22,107 (44,793) (38,389)
- -------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (565) (112) -
- -------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 14,716 (40,418) 36,501
- -------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 5,404 45,822 9,321
- -------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 20,120 $ 5,404 $ 45,822
=========================================================================
SUPPLEMENTAL DATA:
Interest payments, net of amts capitalized $ 15,441 $ 17,592 $ 22,195
Income tax payments, net of refunds $ 17,692 $ 18,066 $ 2,538
- -------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CONSOLIDATED BALANCE SHEET
CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
June 30, 1995 and 1994
- -------------------------------------------------------------------------
(in thousands, except share data) 1995 1994
- -------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 20,120 $ 5,404
Accounts receivable, net of allowance for
doubtful accounts ($1,034 and $619) 118,848 95,412
Inventories 91,383 65,262
Deferred income taxes 1,827 463
Other current assets 8,251 4,629
- -------------------------------------------------------------------------
Total current assets 240,429 171,170
- -------------------------------------------------------------------------
Property, plant and equipment, net 403,580 391,840
- -------------------------------------------------------------------------
Prepaid pension cost 81,182 73,185
- -------------------------------------------------------------------------
Investment in joint venture 49,085 48,576
- -------------------------------------------------------------------------
Goodwill, net 15,701 7,837
- -------------------------------------------------------------------------
Other assets 41,798 37,303
- -------------------------------------------------------------------------
Total assets $831,775 $729,911
=========================================================================
LIABILITIES
Current liabilities:
Short-term debt $ 20,145 $ -
Accounts payable 51,162 35,478
Accrued compensation 21,457 18,654
Accrued income taxes 5,442 616
Other accrued liabilities 28,684 28,153
Current portion of long-term debt 7,286 15,618
- -------------------------------------------------------------------------
Total current liabilities 134,176 98,519
- -------------------------------------------------------------------------
Long-term debt, net of current portion 194,762 158,070
- -------------------------------------------------------------------------
Accrued postretirement benefits 140,855 139,365
- -------------------------------------------------------------------------
Deferred income taxes 78,415 74,739
- -------------------------------------------------------------------------
Other liabilities and deferred income 19,622 20,074
- -------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, $5 par value -
authorized 2,000,000 shares 28,825 29,029
Common stock, $5 par value -
authorized 50,000,000 shares 96,690 48,061
Capital in excess of par value 6,801 50,882
Reinvested earnings 231,114 204,667
Common stock in treasury, at cost (67,002) (66,150)
Deferred compensation (25,461) (26,386)
Foreign currency translation adjustments (7,022) (959)
- -------------------------------------------------------------------------
Total shareholders' equity 263,945 239,144
- -------------------------------------------------------------------------
Total liabilities and shareholders' equity $831,775 $729,911
=========================================================================
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
for the years ended June 30, 1995, 1994 and 1993
- --------------------------------------------------------------------------------------------------------------
Foreign Total
Capital in Deferred Currency Share-
(in thousands, Preferred Common Excess of Reinvested Treasury Compen- Translation holders
except and per share data) Stock Stock Par Value Earnings Stock sation Adjustments Equity
- --------------------------------------------------------------------------------------------------------------
Balances at June 30, 1992 $ 29,150 $ 47,361 $ 44,573 $258,251 $(54,517) $(28,551) $ - $296,267
Distributions to ESOP (22) (22)
- --------------------------------------------------------------------------------------------------------------
Stock options exercised, net
of 6,068 shares exchanged 108 847 955
- --------------------------------------------------------------------------------------------------------------
Restricted shares issued 73 711 (784) -
- --------------------------------------------------------------------------------------------------------------
Shares purchased (11,633) (11,633)
- --------------------------------------------------------------------------------------------------------------
Net loss (48,142) (48,142)
- --------------------------------------------------------------------------------------------------------------
Cash dividends:
Preferred, $5,362.50 per
share, net of income taxes (1,629) (1,629)
- --------------------------------------------------------------------------------------------------------------
Common, $2.40 per share (19,239) (19,239)
- --------------------------------------------------------------------------------------------------------------
Reduction of ESOP note 613 613
- --------------------------------------------------------------------------------------------------------------
Accrued compensation 1,291 1,291
- --------------------------------------------------------------------------------------------------------------
Balances at June 30, 1993 29,128 47,542 46,131 189,241 (66,150) (27,431) - 218,461
Distributions to ESOP (99) 1 11 (87)
- --------------------------------------------------------------------------------------------------------------
Stock options exercised, net
of 10,308 shares exchanged 437 3,808 4,245
- --------------------------------------------------------------------------------------------------------------
Restricted shares issued,
net 81 900 (981) -
- --------------------------------------------------------------------------------------------------------------
Net income 36,250 36,250
- --------------------------------------------------------------------------------------------------------------
Cash dividends:
Preferred, $5,362.50 per
share, net of income taxes (1,606) (1,606)
- --------------------------------------------------------------------------------------------------------------
Common, $2.40 per share (19,218) (19,218)
- --------------------------------------------------------------------------------------------------------------
Reduction of ESOP note 941 941
- --------------------------------------------------------------------------------------------------------------
Accrued compensation 1,085 1,085
- --------------------------------------------------------------------------------------------------------------
Translation adjustments (959) (959)
- --------------------------------------------------------------------------------------------------------------
Other 32 32
- --------------------------------------------------------------------------------------------------------------
Balances at June 30, 1994 29,029 48,061 50,882 204,667 (66,150) (26,386) (959) 239,144
Distributions to ESOP (204) 1 9 (194)
- --------------------------------------------------------------------------------------------------------------
Stock options exercised, net
of 133 shares exchanged 176 1,569 1,745
- --------------------------------------------------------------------------------------------------------------
Restricted shares issued, net 107 1,238 (28) (1,317) -
- --------------------------------------------------------------------------------------------------------------
Shares purchased (3,002) (3,002)
- --------------------------------------------------------------------------------------------------------------
Shares issued to acquire
business 1,022 2,178 3,200
- --------------------------------------------------------------------------------------------------------------
Net income 47,492 47,492
- --------------------------------------------------------------------------------------------------------------
Cash dividends:
Preferred, $5,362.50 per
share, net of income taxes (1,599) (1,599)
- --------------------------------------------------------------------------------------------------------------
Common, $2.40 per share (19,446) (19,446)
- --------------------------------------------------------------------------------------------------------------
Reduction of ESOP note 1,071 1,071
- --------------------------------------------------------------------------------------------------------------
Accrued compensation
- --------------------------------------------------------------------------------------------------------------
Translation adjustments
- --------------------------------------------------------------------------------------------------------------
Other 426
- --------------------------------------------------------------------------------------------------------------
Effects of 2-for-1 stock split(1) 48,345 (48,345)
- --------------------------------------------------------------------------------------------------------------
Balances at June 30, 1995 $ 28,825 $ 96,690 $ 6,801 $231,114 $(67,002) $(25,461) $ (7,022) $263,945
==============================================================================================================
<FN>
<F1>See accompanying notes to consolidated financial statements.
<F2>(1)See Note 17 to the financial statements.
</FN>
CONSOLIDATED STATEMENT CHANGES IN SHAREHOLDERS' EQUITY
CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
for the years ended June 30, 1995, 1994 and 1993
- ---------------------------------------------------------------------------------
Share Data
------------------------------------------------
Common Shares
--------------------------------------
Preferred
Shares Net
Issued Issued Treasury Outstanding
- ---------------------------------------------------------------------------------
Balances at June 30, 1992 461.5 9,472,203 (1,268,784) 8,203,419
Distributions to ESOP (0.3) 30 30
- ---------------------------------------------------------------------------------
Stock options exercised, net
of 6,068 shares exchanged 21,642 21,642
- ---------------------------------------------------------------------------------
Restricted shares issued - 14,480 14,480
- ---------------------------------------------------------------------------------
Shares purchased (253,800) (253,800)
- ---------------------------------------------------------------------------------
Net loss
- ---------------------------------------------------------------------------------
Cash dividends:
Preferred, $5,362.50 per
share, net of income taxes
- ---------------------------------------------------------------------------------
Common, $2.40 per share
- ---------------------------------------------------------------------------------
Reduction of ESOP note
- ---------------------------------------------------------------------------------
Accrued compensation
- ---------------------------------------------------------------------------------
Balances at June 30, 1993 461.2 9,508,355 (1,522,584) 7,985,771
Distribution to ESOP (1.3) 215 215
- ---------------------------------------------------------------------------------
Stock options exercised, net
of 10,308 shares exchanged 87,351 87,351
- ---------------------------------------------------------------------------------
Restricted shares issued,
net 16,260 (20) 16,240
- ---------------------------------------------------------------------------------
Net income
- ---------------------------------------------------------------------------------
Cash dividends:
Preferred, $5,362.50 per
share, net of income taxes
- ---------------------------------------------------------------------------------
Common, $2.40 per share
- ---------------------------------------------------------------------------------
Reduction of ESOP note
- ---------------------------------------------------------------------------------
Accrued compensation
- ---------------------------------------------------------------------------------
Translation adjustments
- ---------------------------------------------------------------------------------
Other
- ---------------------------------------------------------------------------------
Balances at June 30, 1994 459.9 9,612,181 (1,522,604) 8,089,577
Distributions to ESOP (3.2) 179 179
- ---------------------------------------------------------------------------------
Stock options exercised, net
of 133 shares exchanged 35,272 35,272
- ---------------------------------------------------------------------------------
Restricted shares issued,
net 21,350 (500) 20,850
- ---------------------------------------------------------------------------------
Shares purchased (53,124) (53,124)
- ---------------------------------------------------------------------------------
Shares issued to acquire
business 53,124 53,124
- ---------------------------------------------------------------------------------
Net income
- ---------------------------------------------------------------------------------
Cash dividends:
Preferred, $5,362.50 per
share, net of income taxes
- ---------------------------------------------------------------------------------
Common, $2.40 per share
- ---------------------------------------------------------------------------------
Reduction of ESOP note
- ---------------------------------------------------------------------------------
Accrued compensation
- ---------------------------------------------------------------------------------
Translation adjustments
- ---------------------------------------------------------------------------------
Other
- ---------------------------------------------------------------------------------
Effects of 2-for-1 stock split(1) 9,668,982 (1,523,104) 8,145,878
- ---------------------------------------------------------------------------------
Balances at June 30, 1995 456.7 19,337,964 (3,046,208) 16,291,756
- ---------------------------------------------------------------------------------
<FN>
<F1>See accompanying notes to consolidated financial statements.
<F2>(1)See Note 17 to the financial statements.
</FN>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation - The consolidated financial
statements include the accounts of the Company and all
majority-owned subsidiaries. All significant intercompany
accounts and transactions are eliminated. The equity method
of accounting is used when the Company has a 20%-50%
interest in other entities, and for investments in corporate
joint ventures. Under the equity method, the original
investment is recorded at cost and adjusted by the Company's
share of undistributed earnings or losses of the entity. All
other investments are carried at cost.
Business Segments - The Company is primarily engaged in one
business segment - the manufacture, fabrication and
distribution of specialty metals. The ceramics operations
are not significant for separate presentation as a business
segment.
Cash Equivalents - Cash equivalents consist of highly liquid
instruments with maturities at the time of acquisition of
three months or less. Cash equivalents are stated at cost,
which approximates market.
Inventories - Inventories are valued at the lower of cost or
market. Cost for inventories is principally determined by
the Last-In, First-Out (LIFO) method. The Company also uses
the First-In, First-Out (FIFO) and average cost methods.
Depreciation - Depreciation for financial reporting purposes
is computed by the straight-line method. This method
allocates depreciation equally over the estimated useful
lives of the assets. Depreciation for income tax purposes is
computed using accelerated methods.
Goodwill - Goodwill, representing the excess of the purchase
price over the estimated fair value of the net assets of
companies acquired to date, is being amortized on a
straight-line basis over periods not to exceed 20 years, the
estimated life of the goodwill. The Company's policy is to
record an impairment loss against the goodwill in the period
when it is determined that the carrying amount of the asset
may not be recoverable. This determination includes
evaluation of factors such as current market value, future
asset utilization, business climate and future cash flows
expected to result from the use of the net assets.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Environmental Expenditures - Environmental expenditures that
pertain to current operations or relate to future revenues
are expensed or capitalized consistent with the Company's
capitalization policy. Expenditures that result from the
remediation of an existing condition caused by past
operations and that do not contribute to current or future
revenues are expensed. Liabilities are recognized for
remedial activities, including remediation investigation and
feasibility study costs, when the cleanup is probable and
the cost can be reasonably estimated. Recoveries of
expenditures are recognized as a receivable when they are
estimable and probable.
Foreign Currency Translation - The functional currency for
the majority of the Company's international operations is
the local currency, and, accordingly, the respective assets
and liabilities are translated at year-end exchange rates,
while the income and expense components are translated at
average exchange rates prevailing during the year. The
resulting translation adjustments are accumulated in a
separate section of shareholders' equity on the consolidated
balance sheet. All gains and losses resulting from foreign
currency transactions are reflected in income.
Futures Contracts and Commodity Price Swaps - In connection
with the anticipated purchase of nickel for certain
fixed-price sales arrangements, the Company enters into
nickel futures contracts and commodity price swaps to reduce
the risk of nickel cost increases. These futures contracts
and commodity price swaps are accounted for as hedges, and,
accordingly, gains and losses are deferred and included in
cost of sales as part of the nickel cost in the periods when
the nickel purchases are made.
Earnings per Common Share - Primary earnings per common
share are computed by dividing net income (less preferred
dividends net of tax benefits) by the weighted average
number of common shares and common share equivalents
outstanding during the period. On a fully-diluted basis,
both net earnings and shares outstanding are adjusted to
assume the conversion of the convertible preferred stock.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Changes in Accounting Principles - During fiscal 1993, the
Company adopted two financial accounting standards,
"Employers' Accounting for Postretirement Benefits Other
than Pensions" (SFAS 106) and "Accounting for Income Taxes"
(SFAS 109).
SFAS 106 requires companies to accrue the cost of
postretirement benefits over the years employees provide
services to the date of their full eligibility for such
benefits. Previously, these costs were expensed as claims
were incurred. The Company elected to immediately recognize
the transition obligation for benefits earned as of July 1,
1992, resulting in a non-cash charge of $146.8 million
pre-tax ($87.1 million after taxes or $5.43 per share),
representing the cumulative effect of the change in
accounting.
SFAS 109 changes the method of accounting for income taxes
from the deferral method to the asset/liability method.
Under this method, deferred income taxes are determined
based on enacted tax laws and rates, which are applied to
the differences between the financial statement bases and
tax bases of assets and liabilities. The adoption of this
statement resulted in a credit to income of $12.4 million
($.77 per share) principally for the cumulative effect of
restating deferred taxes as of July 1, 1992 to current tax
rates.
Company-Owned Life Insurance Program - During fiscal 1994,
the Company established a company-owned life insurance
program covering essentially all of the U.S.-based
employees. At June 30, 1995 and 1994, the cash surrender
values, $54.4 million and $27.4 million, and the insurance
policy loans, $53.9 million and $27.2 million, respectively,
were netted and included in other assets on the consolidated
balance sheet. The purpose of the program is to provide cash
to fund employee benefit obligations and for other corporate
purposes.
Reclassifications - Certain reclassifications of prior
years' amounts have been made to conform with the current
year's presentation.
2. ACQUISITIONS OF BUSINESSES
During fiscal 1995 and 1994, the Company acquired the
entities described below, which were accounted for by the
purchase method of accounting:
On July 22, 1994, the Company acquired all of the
outstanding shares of Certech, Inc., and an affiliated
company, for $16.7 million, including acquisition
costs, comprised of $13.5 million in cash and 106,248
shares of treasury common stock. Certech manufactures a
broad line of complex injection molded ceramics parts.
The excess of purchase price over the fair values of
the net assets acquired was $8.2 million and has been
recorded as goodwill, which is being amortized on a
straight-line basis over 20 years.
On July 28, 1993, the Company acquired all of the
outstanding shares of Aceros Fortuna, S.A. de C.V., a
Mexican steel distribution company, and two affiliated
companies for cash of $20.4 million, paid $2.5 million
for agreements not to compete, and paid acquisition
costs. In addition,the Company acquired equipment from
an affiliated company in Mexico for $5.1 million. The
excess of the purchase price over the fair values of
the net assets acquired was $8.2 million and has been
recorded as goodwill, which is being amortized on a
straight-line basis over 20 years.
Fiscal 1995 also includes other acquisitions which are
immaterial.
The purchase prices have been allocated to the assets
purchased and the liabilities assumed based upon the fair
values on the dates of acquisition, as follows:
----------------------------------------------------------
(in thousands) 1995 1994
----------------------------------------------------------
Working capital, other than cash $ 1,894 $ 6,552
Property, plant and equipment 10,200 6,634
Other assets 1,740 2,661
Goodwill 8,154 8,213
Other liabilities (5,756) (1,737)
----------------------------------------------------------
Purchase price, net of cash received $16,232 $22,323
===========================================================
2. ACQUISITIONS OF BUSINESSES (continued)
The operating results of these acquired businesses have been
included in the consolidated statement of income from the
dates of acquisition. On the basis of a pro forma
consolidation of the results of operations as if the
acquisitions had taken place at the beginning of fiscal
1994, consolidated net sales would have been $759.0 million
for fiscal 1995, and $654.0 million for fiscal 1994.
Consolidated pro forma income and earnings per share, before
the extraordinary charge, would not have been materially
different from the reported amounts for fiscal 1995 and
1994. Such pro forma amounts are not necessarily indicative
of what the actual consolidated results of operations might
have been if the acquisitions had been effective at the
beginning of fiscal 1994.
3. INVESTMENT IN JOINT VENTURE
On September 2, 1993, the Company acquired for $45.0 million
in cash, 19 percent of the shares of Walsin-CarTech
Specialty Steel Corporation, a corporate joint venture in
Taiwan with Walsin Lihwa Corporation. During fiscal 1994,
the joint venture constructed a facility and installed
equipment to manufacture and distribute specialty steel. In
January 1995, the joint venture became operational,
producing and shipping steel products to customers.
The Company has an option to acquire up to an additional 16
percent of the outstanding shares of the joint venture from
Walsin Lihwa at any time before July 1, 1996. Additionally,
the Company may require Walsin Lihwa to purchase its 19
percent ownership for the original purchase cost at any time
before July 1, 1997.
This investment is being accounted for using the equity
method of accounting. The investment account has been
increased for interest costs capitalized during the
pre-operating period of $2.1 million and $3.6 million in
fiscal 1995 and 1994, respectively, and for acquisition
costs. As these costs are amortized, the investment account
is reduced. The Company's share of the joint venture's
foreign currency translation adjustments is reflected in
both the investment account and shareholders' equity on the
consolidated balance sheet.
3. INVESTMENT IN JOINT VENTURE (continued)
Condensed financial information of the joint venture is
summarized below:
-----------------------------------------------------------
(in thousands) 1995 1994
-----------------------------------------------------------
Condensed Balance Sheet Information:
Current assets $ 93,452 $ 17,334
Non-current assets $331,171 $277,878
Current liabilities $136,536 $ 62,331
Non-current liabilities $ 62,545 $ -
Shareholders' equity $225,542 $232,881
Condensed Income Statement Information:
Net sales $ 60,455 $ -
Net loss $ 15,789 $ 4,789
Company equity in net loss $ 3,000 $ 910
===========================================================
A separate agreement also provides for the Company to
provide marketing and technical assistance to the joint
venture in exchange for an initial lump sum royalty payment
of $10.0 million, received in October 1993, and continuing
royalties based on sales of stainless steel over the 10-year
term of the agreement. The initial lump sum royalty has been
deferred and is being recognized as income over the term of
the agreement.
In addition, the joint venture and the Company entered into
distribution agreements establishing the joint venture as
the exclusive distributor of the Company's stainless steel
products in countries throughout Asia and the Company as the
exclusive distributor of the joint venture's products in
North, Central and South America.
4. INVENTORIES
June 30
-----------------------------------------------------------
(in thousands) 1995 1994
-----------------------------------------------------------
Finished $ 92,930 $ 76,187
Work in process 110,468 85,247
Raw materials and supplies 41,602 29,558
-----------------------------------------------------------
Total at current cost 245,000 190,992
-----------------------------------------------------------
Less excess of current cost
over LIFO values 153,617 125,730
-----------------------------------------------------------
$ 91,383 $ 65,262
============================================================
4. INVENTORIES (continued)
Current cost of LIFO-valued inventories was $219.7 million
at June 30, 1995 and $165.8 million at June 30, 1994.
Reductions in LIFO-valued inventories resulted in an
increase in income before the extraordinary charge and the
cumulative effect of changes in accounting principles of
approximately $12.1 million or $.75 per share and $13.4
million or $.84 per share in the years ended June 30, 1994
and 1993, respectively. There were no LIFO accounting
effects in the year ended June 30, 1995.
5. PROPERTY, PLANT AND EQUIPMENT
June 30
------------------------------------------------------------
(in thousands) 1995 1994
------------------------------------------------------------
Land $ 7,222 $ 8,304
Buildings and building equipment 151,151 143,714
Machinery and equipment 594,579 554,449
Construction in progress 10,803 17,253
------------------------------------------------------------
Total at cost 763,755 723,720
------------------------------------------------------------
Less accumulated depreciation
and amortization 360,175 331,880
------------------------------------------------------------
$403,580 $391,840
============================================================
The estimated useful lives are principally 45 years for
buildings and 20 years for machinery and equipment. The
ranges are as follows:
Classification Expected Useful Lives
------------------------------------------------------------
Buildings and building equipment:
Land improvements 20 years
Buildings and equipment 20 to 45 years
Machinery and equipment:
Machinery and equipment 5 to 20 years
Autos and trucks 3 to 6 years
Office furniture and equipment 4 to 10 years
------------------------------------------------------------
For the years ended June 30, 1995, 1994 and 1993,
depreciation expense was $31.2 million, $29.0 million and
$26.9 million, respectively.
6. OTHER ACCRUED LIABILITIES
June 30
-----------------------------------------------------------
(in thousands) 1995 1994
-----------------------------------------------------------
Medical expenses $ 10,645 $ 11,455
Interest 4,872 3,417
Environmental costs 1,593 2,603
Other 11,574 10,678
-----------------------------------------------------------
$ 28,684 $ 28,153
===========================================================
7. DEBT ARRANGEMENTS
During fiscal 1995, the Company issued $80.0 million of
medium-term debt securities with a 7.38% average interest
rate under a Form S-3 registration statement ("Shelf
Registration") on file with the Securities and Exchange
Commission. The proceeds were used to retire borrowings
under credit arrangements. At June 30, 1995, the Company had
an additional $20.0 million of medium-term debt securities
available for issuance under the Shelf Registration.
In January 1994, the Company entered into a $150.0 million
financing arrangement with a number of banks, providing for
the availability of $125.0 million of revolving credit to
January 1998 and lines of credit of $25.0 million. Interest
is based on short-term market rates or competitive bids.
There were no borrowings outstanding at June 30, 1995 under
this arrangement. Short-term debt at June 30, 1995 consisted
primarily of commercial paper.
For the years ended June 30, 1995, 1994 and 1993, interest
cost totaled $17.8 million, $19.6 million and $21.8 million,
of which $3.3 million, $4.1 million and $1.2 million,
respectively, was capitalized.
The weighted average interest rates for short-term
borrowings during fiscal 1995 and 1994 were 6.1% and 4.0%,
respectively.
7. DEBT ARRANGEMENTS (continued)
Long-term debt outstanding at June 30, 1995 and 1994,
consisted of the following:
-----------------------------------------------------------
(in thousands) 1995 1994
-----------------------------------------------------------
9% Sinking fund debentures due 2022;
sinking fund requirements are
$5.0 million annually from 2003
to 2021 $ 99,542 $ 99,525
Medium-term notes at 6.78% to 7.80%
due from 1998 to 2005 80,000 -
Borrowings under credit arrangements
at 4.4% to 4.7% - 39,339
9.4% Notes due in annual installments
of $3.6 million through 1997 7,143 10,714
9.89% Senior notes, series A - 9,000
10.45% Senior notes, series B,
due in annual installments
of $3.0 million through 1999 12,000 15,000
Capitalized lease obligations at
7.6% to 10.1% due in installments
through 2006 2,351 110
Other 1,012 -
-----------------------------------------------------------
Total 202,048 173,688
-----------------------------------------------------------
Less amounts due within one year 7,286 15,618
-----------------------------------------------------------
$194,762 $158,070
===========================================================
Aggregate maturities of long-term debt for the four years
subsequent to June 30, 1996 are $7.0 million in fiscal 1997,
$3.2 million in 1998, $13.1 million in 1999, and $15.1
million in 2000.
During fiscal 1994, the Company used proceeds from the
revolving credit facilities to retire at a premium $55.3
million of its 12-7/8% debentures originally due in 2014.
This retirement resulted in an extraordinary charge after
taxes of $2.0 million including unamortized discount and
issue costs, or $.13 per share. Although the funding for the
retirement originally came from the Company's credit
facilities, it was replaced with the medium-term debt
securities described above. Consequently, such debt of $39.3
million at June 30, 1994 was classified as long-term debt on
the consolidated balance sheet.
The Company's financing arrangements contain restrictions
which, among other things, limit the aggregate amount of the
Company's dividends. Reinvested earnings available for
dividends at June 30, 1995 were approximately $90.3 million.
8. FINANCIAL INSTRUMENTS
The Company's financial instrument portfolio is comprised of
cash and cash equivalents, nickel futures contracts and
commodity price swaps, company-owned life insurance, and
short- and long-term debt instruments.
The carrying amounts for cash, cash equivalents, and
short-term debt approximate their respective fair values due
to the short maturities of these instruments. The carrying
amount for company-owned life insurance is based on cash
surrender values determined by the insurance carriers.
The fair value of long-term debt as of June 30, 1995 and
1994, determined by using current interest rates and market
values of similar issues, was approximately $208.7 million
and $179.0 million, respectively.
The fair value of nickel futures contracts and commodity
price swaps is based on quoted market prices for these
instruments. At June 30, 1995 and 1994, the Company had
entered into contracts hedging future commodity purchases of
approximately $9.1 million and $19.7 million, respectively.
The fair market value of these contracts was $12.2 million
and $21.3 million, respectively.
9. COMMON STOCK PURCHASE RIGHTS
The Company has issued one common stock purchase right
("Right") for every outstanding share of common stock. The
Rights will become exercisable and separate Rights
certificates will be distributed to the shareholders: (1) 10
days following the acquisition of 20 percent or more of the
Company's common stock, (2) 10 business days (or such later
date as the Board may determine) following the commencement
of a tender or exchange offer for 20 percent or more of the
Company's common stock, or (3) 10 days after the Company's
Board of Directors determines that a holder of 15 percent or
more of the Company's shares has an interest adverse to
those of the Company or its shareholders (an "adverse
person"). Upon distribution, each Right would then entitle a
holder to buy from the Company one newly issued share of its
common stock for an exercise price of $45. After distribu-
tion, upon: (1) any person acquiring 20 percent of the
outstanding stock (other than pursuant to a fair offer as
determined by the Board), (2) a 20 percent holder engaging
in certain self-dealing transactions, (3) the determination
of an adverse person, or (4) certain mergers or similar
transactions between the Company and holder of 20 percent or
more of the Company's common stock, each Right (other than
those held by the acquiring party) entitles the holder to
purchase shares of common stock of either the acquiring
9. COMMON STOCK PURCHASE RIGHTS (continued)
company or the Company (depending on the circumstances)
having a market value equal to twice the exercise price of
the Right. The Rights may be redeemed by the Company for
$.025 per Right at any time before they become exercisable
and expire June 26, 1996.
10. COMMON STOCK OPTIONS
The Company has three incentive stock option plans for
officers and key employees: a 1993 plan, a 1982 plan and a
1977 plan.
The 1993 plan provides that the Board of Directors may grant
incentive stock options, non-qualified stock options, stock
appreciation rights and restricted stock, and will determine
the terms and conditions of each grant. Option grants under
this plan must be at no less than market value on the date
of grant, are exercisable after one year of employment
following the date of grant, and will expire no more than
ten years after the date of grant. Incentive stock options
granted during the ten-year term of the plan may not exceed
1,000,000 shares plus any shares cancelled or expired. The
number of shares available annually for awards under this
plan is limited to one percent of the common shares
outstanding at the end of the preceding fiscal year plus
shares available, but not awarded, during the preceding two
years and any shares or options forfeited, expired or
terminated. Restricted stock awards vest equally at the end
of each year of employment for the five-year period from the
date of grant. When the restricted shares are issued,
deferred compensation is recorded in the shareholders'
equity section of the consolidated balance sheet. The
deferred compensation is charged to expense over the vesting
period. During fiscal 1995 and 1994, $.3 million and $.2
million, respectively, were charged to expense for vested
restricted shares. As of June 30, 1995 and 1994, 10,186 and
21,164 shares, respectively, were reserved for options and
restricted stock which may be granted under this plan.
The 1982 plan expired in June 1992; however, all outstanding
unexpired options granted prior to that date remain in
effect. Under the 1982 and 1977 plans, options are granted
at the market value on the date of grant, and are
exercisable after one year of employment following the date
of grant. Under the 1982 plan, options granted since August
9, 1990 expire ten years after grant, while options granted
prior to that date have expired. Options granted under the
1977 plan expire ten years after grant. At June 30, 1995 and
1994, 284,720 shares were reserved for options which may be
granted under the 1977 plan.
10. COMMON STOCK OPTIONS (continued)
The Company also has a stock option plan which provides for
the granting of stock options to non-employee Directors.
Options are granted at the market value on the date of the
grant and are exercisable after one year of Board service
following the date of grant. Options expire ten years after
the date of grant. At June 30, 1995 and 1994, 89,000 and
102,000 shares, respectively, were reserved for options
which may be granted under this plan.
A summary of the options and transactions for the past three
years follows:
-----------------------------------------------------------
Number of Option Price
Shares per Share
-----------------------------------------------------------
Balance June 30, 1992
(550,400 shares exercisable) 757,680 $19.00-$26.00
Granted 131,380 $22.38-$27.06
Exercised (55,420) $19.00-$25.50
Cancelled (47,570) $22.50-$25.50
-----------------------------------------------------------
Balance June 30, 1993
(654,690 shares exercisable) 786,070 $19.00-$27.06
Granted 136,760 $26.88-$30.19
Exercised (195,318) $19.00-$25.75
Cancelled (3,160) $24.12-$27.06
-----------------------------------------------------------
Balance June 30, 1994
(587,592 shares exercisable) 724,352 $19.00-$30.19
Granted 144,000 $28.32-$32.56
Exercised (70,810) $22.38-$30.19
Cancelled (3,390) $24.12-$30.19
-----------------------------------------------------------
Balance June 30, 1995
(650,152 shares exercisable) 794,152 $19.00-$32.56
===========================================================
Of the options outstanding at June 30, 1995, 363,220 relate
to the 1993 plan, 238,152 relate to the 1982 plan, 120,980
relate to the 1977 plan and 71,800 relate to the plan for
non-employee Directors. No adjustments to income are made
with respect to options granted or exercised under the
plans.
11. PENSION PLANS
The Company has several noncontributory defined benefit
pension plans, which cover most of its employees. The bene-
fits are based primarily upon employees' years of service
and average earnings prior to retirement. The Company's
funding policy for the domestic plans is to contribute, at a
minimum, amounts sufficient to meet ERISA requirements. Plan
assets are held in trust, and consist primarily of publicly
traded common stocks and fixed income instruments.
11. PENSION PLANS (continued)
The underfunded plans include the pension plan of the
Company's Mexican operations and several supplemental
retirement plans for certain key employees and outside
Directors. During fiscal 1995, the Company established a
company-owned life insurance program covering certain key
employees and outside Directors. The purpose of the program
is to provide for the Company's obligation under the
above-mentioned supplemental retirement plans. As of June
30, 1995, the cash surrender value of $2.0 million was
included in other assets on the consolidated balance sheet.
Net pension credits included the following components:
----------------------------------------------------------------
(in thousands) 1995 1994 1993
----------------------------------------------------------------
Service cost of benefits earned $ 9,852 $ 9,891 $ 8,950
Interest cost on projected
benefit obligation 27,255 25,576 24,765
Return on plan assets:
Actual (83,917) (8,351) (47,148)
Deferred gain (loss) 42,733 (34,297) 6,771
Net amortization and deferral (2,727) (3,304) (4,435)
----------------------------------------------------------------
Net pension credits $ (6,804) $(10,485) $(11,097)
================================================================
Principal actuarial assumptions:
Discount rate 8.0% 7.5% 8.0%
Long-term rate of compensation
increase 4.5% 4.5% 4.5%
Long-term rate of return on
plan assets 9.0% 9.0% 9.0%
================================================================
The .5% discount rate changes increased the pension credit
by $.7 million in fiscal 1995 and decreased the pension
credit by $1.8 million in fiscal 1994.
11. PENSION PLANS (continued)
The funded status of these plans at June 30, 1995 and 1994
is summarized as follows:
Overfunded Plans Underfunded Plans
-----------------------------------------------------------------------
(in thousands) 1995 1994 1995 1994
Plan assets at fair value $527,009 $467,144 $ 1,378 $ 2,395
-----------------------------------------------------------------------
Actuarial present value of
benefit obligations:
Vested 271,332 260,008 7,214 6,523
Non-vested 55,694 33,747 332 1,215
-----------------------------------------------------------------------
Accumulated benefit
obligation 327,026 293,755 7,546 7,738
Effect of future com-
pensation increases 58,225 47,891 3,393 3,560
Projected benefit obligation 385,251 341,646 10,939 11,298
-----------------------------------------------------------------------
Plan assets in excess of
(less than) projected
benefit obligation $141,758 $125,498 $ (9,561) $ (8,903)
-----------------------------------------------------------------------
Unrecognized net (gain) loss -
experience different from
assumptions (47,565) (36,793) 3,008 2,113
Unrecognized transition
(asset) obligation (17,387) (20,283) 463 347
Unrecognized prior service cost 4,376 4,763 717 702
-----------------------------------------------------------------------
Prepaid (accrued) pension cost $ 81,182 $ 73,185 $ (5,373) $ (5,741)
=======================================================================
Principal actuarial assumptions:
Discount rate 7.5% 8.0% 7.1% 9.0%
Long-term rate of
compensation increase 4.5% 4.5% 6.0% 7.5%
=======================================================================
The actuarial present value of the projected benefit
obligation is computed assuming the continuing existence of
the plans. The obligation to fund these plans would be
substantially higher than the accumulated benefit obligation
if the plans were terminated.
The Company also maintains defined contribution pension and
savings plans for substantially all domestic employees. The
Company contributions were $4.5 million in fiscal 1995, $3.7
million in fiscal 1994, and $3.6 million in fiscal 1993.
12. POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS
In addition to pension plan benefits, the Company provides
health care and life insurance benefits for certain retired
employees and covered dependents. Eligible employees receive
these benefits upon normal retirement.
Expense of postretirement medical and life insurance
benefits included the following components:
---------------------------------------------------------------------
(in thousands) 1995 1994 1993
---------------------------------------------------------------------
Service cost of benefits earned $ 2,287 $ 2,803 $ 2,511
Interest cost on accumulated
postretirement benefit obligation 10,317 10,622 11,457
Return on plan assets:
Actual (6,023) 370 53
Deferred gain (loss) 4,675 (1,341) (552)
Net amortization and deferral (1,031) - -
---------------------------------------------------------------------
Postretirement medical and
life insurance benefits expense $ 10,225 $ 12,454 $ 13,469
=====================================================================
Principal actuarial assumptions:
Discount rate 8.0% 7.5% 8.0%
Return on plan assets 9.0% 9.0% 9.0%
Trend rate - beginning* 11.0% 12.0% 14.0%
Trend rate - ultimate 6.0% 6.0% 6.0%
*Declines 1% per year to the
ultimate rate.
=====================================================================
The .5% discount rate changes decreased expense $.8 million
in fiscal 1995 and increased expense $.6 million in fiscal
1994.
12. POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS
(continued)
The funded status of the postretirement medical and life
insurance benefit plans at June 30, 1995 and 1994, is
summarized as follows:
-----------------------------------------------------------------
(in thousands) 1995 1994
-----------------------------------------------------------------
Accumulated postretirement
benefit obligation (APBO):
Retirees $ 83,879 $ 84,913
Fully eligible active
plan participants 20,702 18,337
Other active plan participants 28,555 28,669
-----------------------------------------------------------------
Total APBO 133,136 131,919
Plan assets at fair value 24,586 14,275
-----------------------------------------------------------------
APBO in excess of plan assets 108,550 117,644
Unrecognized net gain 38,477 30,047
Unrecognized prior service cost (1,441) (1,552)
-----------------------------------------------------------------
Accrued postretirement benefits $145,586 $146,139
=================================================================
Principal actuarial assumptions:
Discount rate 7.5% 8.0%
Trend rate - beginning* 10.0% 11.0%
Trend rate - ultimate 6.0% 6.0%
*Declines 1% per year to
the ultimate rate.
=================================================================
The health-care cost trend rate assumption has a significant
effect on the amounts reported. If the assumed health-care
cost trend rate was increased by 1 percent, the APBO at June
30, 1995 would increase by $16.8 million and the
postretirement benefit expense for fiscal 1995 would have
increased by $1.6 million.
Plan assets are held in a Voluntary Employee Benefit Trust
(VEBA) and are invested in trust-owned life insurance.
13. EMPLOYEE STOCK OWNERSHIP PLAN
In fiscal 1992, the Board of Directors established a
leveraged employee stock ownership plan ("ESOP") to assist
current employees with their future retiree medical
obligations. The Company issued 461.5 shares of a new class
of convertible preferred stock at $65,000.00 per share to
the ESOP in exchange for a $30.0 million 15-year, 9.345%
note which is included in the shareholders' equity section
of the consolidated balance sheet as deferred compensation.
The preferred stock is recorded net of related issuance
costs.
13. EMPLOYEE STOCK OWNERSHIP PLAN (continued)
Principal and interest obligations on the note will be
satisfied by the ESOP as the Company makes contributions to
the ESOP and dividends are paid on the preferred stock. As
payments are made on the note, shares of preferred stock
will be allocated to participating employees' accounts
within the ESOP. The Company contributed $1.1 million in
fiscal 1995, $.9 million in fiscal 1994, and $.6 million in
fiscal 1993 to the ESOP. Compensation expense related to the
plan was $2.0 million in fiscal 1995, $2.1 million in fiscal
1994, and $2.0 million in fiscal 1993.
As of June 30, 1995, the ESOP held 456.7 shares of the
convertible preferred stock, consisting of 90.0 allocated
shares and 366.7 unallocated shares. Each preferred share is
convertible into 2,000 shares of common stock. The shares of
preferred stock pay a cumulative annual dividend of
$5,362.50 per share, are entitled to vote together with the
common stock as a single class and have 2,600 votes per
share. The stock is redeemable at the Company's option at
any time after September 5, 1996 at an initial price of
$67,600.00 per share, declining to $65,000.00 per share by
2001.
14. SUPPLEMENTAL DATA
-----------------------------------------------------------------
(in thousands) 1995 1994 1993
-----------------------------------------------------------------
Research and development $ 12,302 $ 13,597 $ 12,900
Repairs and maintenance $ 49,305 $ 42,862 $ 38,380
-----------------------------------------------------------------
15. INCOME TAXES
Provisions for income taxes consisted of the following:
-----------------------------------------------------------------
(in thousands) 1995 1994 1993
-----------------------------------------------------------------
Current:
Federal $ 20,117 $ 18,040 $ 4,345
State 2,488 798 968
Foreign 1,160 1,544 -
Deferred:
Federal 4,332 4,937 9,867
State (1,437) (128) 1,085
Foreign 419 (752) -
-----------------------------------------------------------------
$ 27,079 $ 24,439 $ 16,265
=================================================================
15. INCOME TAXES (continued)
The following is a reconciliation of the statutory federal
income tax rate to the actual effective income tax rate:
-----------------------------------------------------------------
(% of pre-tax income) 1995 1994 1993
-----------------------------------------------------------------
Federal tax rate 35.0% 35.0% 34.0%
Increase in taxes
resulting from:
State income taxes,
net of federal tax
benefit 4.1 1.7 4.4
Federal and state tax
rate changes (2.0) 1.4 -
Other, net (0.8) 0.9 (0.4)
-----------------------------------------------------------------
Effective tax rate 36.3% 39.0% 38.0%
=================================================================
Deferred taxes under SFAS 109 are recorded based upon
temporary differences between financial statement and tax
bases of assets and liabilities. The following deferred tax
liabilities and assets were recorded as of June 30, 1995 and
1994:
-----------------------------------------------------------------
(in thousands) 1995 1994
-----------------------------------------------------------------
Deferred tax liabilities:
Depreciation and amortization $110,921 $111,356
Prepaid pensions 26,578 24,167
Other 15,755 12,731
-----------------------------------------------------------------
Total deferred tax liabilities 153,254 148,254
-----------------------------------------------------------------
Deferred tax assets:
Postretirement provisions 56,000 57,230
Other reserve provisions 21,168 17,217
Valuation allowance (502) (469)
-----------------------------------------------------------------
Total deferred tax assets 76,666 73,978
-----------------------------------------------------------------
Net deferred tax liability $ 76,588 $ 74,276
=================================================================
16. COMMITMENTS AND CONTINGENCIES
Environmental
The Company, as well as other steel companies, is subject to
various stringent federal, state, and local environmental
laws and regulations. The liability for future environmental
remediation costs is evaluated on a quarterly basis by
management. The Company 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 years ended June 30, 1995
and 1994, $1.0 million and $1.2 million, respectively, were
charged to operations for environmental remediation costs
(no expense was recognized in fiscal 1993). The liability
recorded for environmental cleanup costs, including remedi-
ation investigation and feasibility study costs, remaining
at June 30, 1995 and 1994, was $5.9 million and $4.9
million, while the amount of recoveries recorded as a
receivable was $1.2 million and $.8 million, respectively.
Estimates of the amount and timing of future costs of
environmental remediation requirements are necessarily
imprecise because of the continuing evolution of environ-
mental laws and regulatory requirements, the availability
and application of technology and 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 the Company's
competitive or financial position. However, such costs could
be material to results of operations in a particular future
quarter or year.
Other
The Company is also defending various claims and legal
actions, and is subject to commitments and contingencies
which are common to its operations. The Company 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 the Company'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 the
Company's financial position or results of operations and
cash flows.
17. SUBSEQUENT EVENT
On August 10, 1995, the Board of Directors of the Company
declared a two-for-one common stock split which will be
distributed to shareholders of record on September 1, 1995.
The par value of common shares remained at $5 per share. The
Board also declared a ten percent increase in the common
stock dividend, effective with the quarterly dividend to
shareholders of record on August 22, 1995.
The effect of the stock split has been retroactively
reflected as of June 30, 1995, in the consolidated balance
sheet and statement of changes in shareholders' equity, but
activity for fiscal 1995 and prior periods was not restated
in those statements. All references to the number of common
shares and per share amounts elsewhere in the consolidated
financial statements and related footnotes have been
restated to reflect the effect of the split for all periods
presented.
Quarterly Financial Data (Unaudited)
Our quarterly sales and earnings results are usually influenced by
seasonal factors. The first fiscal quarter (three months ending
September 30) is typically the lowest because of annual plant
vacation and maintenance shutdowns in this period by Carpenter and
by many of our customers. This seasonal pattern can be disrupted
by major economic cycles or special accounting adjustments.
(dollars in thousands - First Second Third Fourth Fiscal
except per share amounts) Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------
Results of Operations
Fiscal 1995
Net sales $156,084 $172,400 $211,636 $217,412 $757,532
Gross profits $ 34,516 $ 44,483 $ 57,535 $ 56,829 $193,363
Net income $ 4,932 $ 9,827 $ 15,363 $ 17,370(1)$ 47,492
- -------------------------------------------------------------------------------
Fiscal 1994
Net sales $129,429 $147,127 $174,347 $177,892 $628,795
Gross profits $ 31,924 $ 38,863 $ 50,440 $ 50,095 $171,322
Income before
extraordinary charge(2) $ 2,772 $ 7,360 $ 12,825 $ 15,332 $ 38,289
Net income $ 2,772(1)$ 7,360 $ 10,786(3)$ 15,332(1)$ 36,250
- -------------------------------------------------------------------------------
Per Common Share
Fiscal 1995
Primary earnings $ .28 $ .58 $ .91 $ 1.04 $ 2.81
Fully-diluted earnings $ .27 $ .56 $ .89 $ .98 $ 2.70
- -------------------------------------------------------------------------------
Fiscal 1994
Primary earnings:
Income before
extraordinary charge(2)$ .15 $ .43 $ .77 $ .93 $ 2.28
Net income $ .15 $ .43 $ .64(3)$ .93 $ 2.15
Fully-diluted earnings:
Income before
extraordinary charge $ .15 $ .42 $ .74 $ .89 $ 2.20
Net income $ .15 $ .42 $ .62(3)$ .89 $ 2.08
- -------------------------------------------------------------------------------
(1) Changes in Pennsylvania income tax laws resulted in
increases to income of $1.5 million or $.09 per share and
$.7 million or $.04 per share during the fourth quarters of
fiscal 1995 and 1994, respectively, for the restatement of
deferred tax liabilities. Deferred taxes were also restated
during the first quarter of fiscal 1994 for an increase in
the Federal tax rate resulting in a decrease in net income
of $1.5 million or $.09 per share.
(2) Reductions in LIFO-valued inventories resulted in increases in
income before an extraordinary charge of $2.1 million or $.13
per share, $1.5 million or $.09 per share, $5.5 million or $.34
per share and $3.0 million or $.19 per share for the first,
second, third and fourth quarters of fiscal 1994, respectively.
(3) Includes extraordinary charge for retirement of 12-7/8% deben-
tures at a premium ($2.0 million after taxes, or $.13 and $.12
for primary and fully-diluted earnings per share, respectively).
All share and per share data have been restated for the effect of
a two-for-one common stock split declared on August 10, 1995. See
Note 17 to the consolidated financial statements.
Item 9. Disagreements on Accounting and Financial Disclosure
Not Applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required as to directors is incorporated
herein by reference to the "Election of Directors" section of the
1995 definitive Proxy Statement.
Information concerning the Company's executive officers
appears in Part I of this Annual Report on Form 10-K.
Item 11. Executive Compensation
The information required by this item is incorporated herein
by reference from the 1995 definitive Proxy Statement under the
"Election of Directors" section.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The security ownership of directors and officers as a group
is described in the 1995 definitive Proxy Statement under
"Security Ownership of Directors and Officers" section. Such
information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein
by reference from the 1995 definitive Proxy Statement under the
"Election of Directors" section.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
(a) Documents Filed as Part of this Report:
(1) The following consolidated financial statement schedule
should be read in conjunction with the consolidated
financial statements (see Item 8. Financial Statements):
Report of Independent Accountants on Schedule VIII
Schedule VIII - Valuation and Qualifying Accounts
All other schedules are omitted because they are not
applicable or the required information is contained in the
consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
OF CARPENTER TECHNOLOGY CORPORATION
Our report on the consolidated financial statements of
Carpenter Technology Corporation and subsidiaries is included on
page 20 of the 1995 Annual Report on Form 10-K. In connection
with our audits of such financial statements, we have also
audited the related financial statement schedule listed in Item
14(a) of this Form 10-K.
In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
July 27, 1995, except for Note 17,
as to which the date is August 10, 1995
(2) The following documents are filed as exhibits:
3. Articles of Incorporation and By-Laws of the
Company
4. Instruments Defining the Rights of Security
Holders, Including Indentures
10. Material Contracts
11. Statement re Computation of Per Share Earnings
23. Consent of Experts and Counsel
24. Power of Attorney
27. Financial Data Schedule
99. Additional Exhibits
(b) Reports on Form 8-K:
The Company filed no reports on Form 8-K for the
period covered by this filing.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By s/G. Walton Cottrell
-------------------------------
G. Walton Cottrell
Sr. Vice President - Finance &
Chief Financial Officer
Date: September 27, 1995
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report has been signed by the following persons on
behalf of the registrant in the capacities and on the dates
indicated.
s/Robert W. Cardy Chairman, President & September 27, 1995
- --------------------- Chief Executive Officer
Robert W. Cardy and Director (Principal
Executive Officer)
s/G. Walton Cottrell Sr. Vice President - September 27, 1995
- --------------------- Finance & Chief
G. Walton Cottrell Financial Officer
s/Edward B. Bruno Controller (Principal September 27, 1995
- --------------------- Accounting (Officer)
Edward B. Bruno
* Director September 27, 1995
- ---------------------
Marcus C. Bennett
* Director September 27, 1995
- ---------------------
Dennis M. Draeger
* Director September 27, 1995
- ---------------------
C. McCollister Evarts, M.D.
* Director September 27, 1995
- ---------------------
Carl R. Garr
* Director September 27, 1995
- ---------------------
William J. Hudson, Jr.
* Director September 27, 1995
- ---------------------
Arthur E. Humphrey
* Director September 27, 1995
- ---------------------
Edward W. Kay
* Director September 27, 1995
- ---------------------
Frederick C. Langenberg
* Director September 27, 1995
- ---------------------
Marlin Miller, Jr.
* Director September 27, 1995
- ---------------------
Paul R. Roedel
* Director September 27, 1995
- ---------------------
Kathryn C. Turner
* Director September 27, 1995
- ---------------------
Kenneth L. Wolfe
Original Powers of Attorney authorizing John R. Welty to sign this Report on
behalf of: Marcus C. Bennett, Dennis M. Draeger, C. McCollister Evarts, M.D.,
Carl R. Garr, William J. Hudson, Jr., Arthur E. Humphrey, Edward W. Kay,
Frederick C. Langenberg, Marlin Miller, Jr., Paul R. Roedel,
Kathryn C. Turner, Kenneth L. Wolfe, are being filed with the Securities and
Exchange Commission.
*By s/John R. Welty
--------------------
John R. Welty
Attorney-in-fact
CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
SCHEDULE VIII. VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Additions
Balance --------------------
at Beg- Charged Charged Balance
inning to to at End
of Costs & Other Deduc- of
Description Period Expenses Accounts(1) tions(2) Period
- ----------- ------ -------- -------- ------ ------
Year ended
June 30, 1995:
Allowance for
doubtful
accounts
receivable $ 619 $ 578 $ 338 $ (501) $1,034
====== ====== ====== ====== ======
Year ended
June 30, 1994:
Allowance for
doubtful
accounts
receivable $ 500 $ 470 $ 316 $ (667) $ 619
====== ====== ====== ====== ======
Year ended
June 30, 1993:
Allowance for
doubtful
accounts
receivable $ 500 $ 617 $ 337 $ (954) $ 500
====== ====== ====== ====== ======
(1) Includes beginning balances of acquired businesses and
recoveries of accounts previously written off, net of
collection expenses.
(2) Doubtful accounts written off.