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, 1997
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 pursuant
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 August 29, 1997, 19,498,210 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 $873,763,536.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain information from the
1997 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, is engaged in the manufacture, fabrication, and
distribution of specialty metals and engineered
products. There were no significant changes in the
form of organization or mode of conducting business of
Carpenter Technology Corporation (hereinafter called
"the Company" or "Carpenter") during the year ended
June 30, 1997, except for the transactions described
below:
On June 19, 1997, Carpenter acquired the net assets of
Rathbone Precision Metals, Inc., for $9.6 million in cash,
including acquisition costs. Rathbone is a manufacturer of
custom, cold-drawn metal shapes. The acquisition of
Rathbone enables Carpenter to bridge the specialty metal
mill-form manufacturing business with the engineered
products manufacturing business while providing additional
value-added services to specialty metals customers. This
investment was accounted for using the purchase method of
accounting.
On February 28, 1997, Carpenter purchased all of the
common stock of Dynamet Incorporated in exchange for
approximately 2.8 million shares of its treasury common
stock with a fair market value of $99.5 million and $51.5
million of cash, including acquisition costs. In addition,
Carpenter paid $10.3 million for consulting and non-compete
agreements, a portion of which is payable over four years.
Dynamet is a manufacturer of titanium bar, wire and powder
products, predominantly used by the aerospace, medical and
sports products industries. The Dynamet acquisition allows
Carpenter to better satisfy the aerospace industry's needs
for a range of technically advanced materials, and to help
realize Carpenter's goal of profitable growth. This
investment was accounted for using the purchase method of
accounting.
(b) Financial Information About Industry Segments:
Carpenter is primarily engaged in one business segment
- the manufacture, fabrication and distribution of specialty
metals. Additionally, Carpenter manufactures certain
engineered products. The engineered products operations do
not qualify as a reportable segment and therefore are not
presented as a separate business segment.
(c) Narrative Description of Business:
(1) Products:
Carpenter primarily processes basic raw materials
such as chromium, nickel, titanium, 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 modifica-
tions 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 AND OTHER STEEL -
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
includes carbon steels purchased for distribution
and other miscellaneous products.
CERAMICS AND OTHER MATERIALS -
Certain engineered products, including ceramic
cores for casting ranging from small simple
configurations to large complex shapes. Also,
metal injected molded designs in a variety of
materials, ultra-hard parts, and precision welded
tubular products, as well as drawn solid tubular
shapes.
TITANIUM PRODUCTS -
A corrosion resistant, highly specialized metal
with a combination of high strength and low
density. Most common uses are in aircraft,
medical devices, sporting equipment and chemical
and petroleum processing.
Carpenter's products 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 $117.8 million, $96.5 million and $74.7
million in fiscal 1997, 1996 and 1995, respectively.
(2) Classes of Products:
The approximate percentage of Carpenter's
consolidated net sales contributed by the major classes
of products for the last three fiscal years are as
follows:
1997 1996 1995
---- ---- ----
Stainless steel 49% 58% 56%
Special alloys 34% 32% 33%
Tool and other steel 7% 7% 8%
Ceramics and other
materials 5% 3% 3%
Titanium products 5% - -
---- ---- ----
100% 100% 100%
==== ==== ====
(3) Raw Materials:
Carpenter depends on continued delivery of
critical raw materials for its day-to-day operations.
These raw materials are nickel, ferrochrome, cobalt,
molybdenum, titanium, manganese and scrap. 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.
Carpenter is in a strong raw material position
because of its long-term relationships with major
suppliers. These suppliers provide availability of
material and competitive prices for these key raw
materials to help Carpenter maintain the appropriate
levels of raw materials.
(4) Patents and Licenses:
Carpenter owns a number of United States and
foreign patents and has granted licenses under some or
all of them. Certain of the products produced by
Carpenter are covered by patents of other companies
from whom licenses have been obtained. Carpenter does
not consider its business to be materially dependent
upon any patent or patent rights.
(5) Seasonality of Business:
Carpenter'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
Carpenter 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 quarter for the past
three fiscal years:
Quarter Ended 1997 1996 1995
------------- ---- ---- ----
September 30 21% 21% 20%
December 31 22% 24% 23%
March 31 27% 27% 28%
June 30 30% 28% 29%
---- ---- ----
100% 100% 100%
==== ==== ====
Fiscal 1997 includes the acquisition of Dynamet on
February 28, 1997.
(6) Customers:
Carpenter 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.
(7) Backlog:
As of June 30, 1997, Carpenter had a backlog of
orders, believed to be firm, of approximately $265
million, substantially all of which is expected to be
shipped within the current fiscal year. The backlog as
of June 30, 1996 was approximately $215 million.
(8) Competition:
Carpenter's business is highly competitive. It
supplies materials to a wide variety of end-use market
segments, none of which consumes more than about 25
percent of Carpenter's output, and competes with
various companies depending on end-use segment, product
or geography.
There are approximately 20 domestic companies
producing one or more similar specialty metal products
that are considered to be major competitors to the
specialty metals operations in one or more product
segments. There are several dozen smaller producing
companies and converting companies in the United States
who are competitors. Carpenter 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 Carpenter. Furthermore, a number of
different products may, in certain instances, be
substituted for Carpenter'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, Carpenter
has been aggressive in filing trade actions against
foreign producers who have dumped their specialty steel
products into the United States. As a result of these
actions, the U.S. Department of Commerce has issued
antidumping orders for the collection of dumping duties
on imports of stainless bar from Brazil, India, Japan
and Spain at rates ranging up to about 61% of the value
and on imports of stainless rod from Brazil, France and
India at rates ranging up to about 49% of the value.
These antidumping orders will continue in effect until
the calendar year 2000, unless further extended.
On July 30, 1997, Carpenter joined with three
other domestic producers in filing new antidumping and
countervailing duty trade actions against imports of
stainless steel rod from seven countries - Germany,
Italy, Japan, Korea, Spain, Sweden and Taiwan. These
countries represent over 90% of current total imports
of stainless steel rod. The industry group alleges
that the foreign stainless steel rod is being dumped
into this country at prices which should require
antidumping margins ranging from about 10% up to about
47%. The U.S. Department of Commerce and the U.S.
International Trade Commission are expected to complete
their investigations of the unfair trade charges about
the middle of calendar year 1998. Preliminary dumping
determinations are expected in early 1998.
In a related matter, negotiations are continuing
between the U.S. government and the European Commission
(EC) for a Multilateral Specialty Steel Agreement
(MSSA). The objective of the MSSA would be to reduce
unfair trade in specialty steel products by establishing
international commitments and disciplines aimed at
eliminating subsidies and other trade-distortive
practices. The baseline for negotiations is an
agreement on principles and provisions developed
previously between the Specialty Steel Industry of
North America and the European steel industry group
known as Eurofer. The U.S. government would like to
expand the scope of the current negotiations with the
EC to include other countries as well.
(9) Research, Product and Process Development:
Carpenter's expenditures for company-sponsored
research and development were approximately $13.0
million, $13.8 million and $12.3 million in fiscal
1997, 1996 and 1995, respectively.
(10) Environmental Regulations:
Carpenter is subject to various stringent federal,
state, and local environmental laws and regulations.
The liability for future environmental remediation
costs is evaluated by management on a quarterly basis.
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. 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 17 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 $7.9 million and
$7.4 million for fiscal 1997 and 1996, respectively.
The capital expenditures for environmental control
equipment were $1.1 million and $.4 million for fiscal
1997 and 1996, respectively. Carpenter anticipates
spending approximately $2.5 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, 1997, Carpenter and its
affiliates had 5,081 employees.
Item 2. Properties
The primary locations of Carpenter's specialty metals
manufacturing and fabrication plants are: Reading, Pennsylvania;
Washington, Pennsylvania; Orangeburg, South Carolina; El Cajon,
California; and Clearwater, Florida. The Reading, Washington and
Orangeburg plants are owned in fee. The El Cajon and Clearwater
plants are owned, but the land is leased.
The primary locations of Carpenter's engineered products
manufacturing operations are: Wood-Ridge, New Jersey; Carlstadt,
New Jersey; Corby, England; Wilkes-Barre, Pennsylvania; Chicago,
Illinois; and Petaluma, California. The Corby and Chicago plants
are owned, while the rest of the locations are leased.
The Reading plant has an annual practical melting capacity
of approximately 226,000 ingot tons of its normal product mix.
The annual tons shipped will be considerably less than the tons
melted due to processing losses and finishing operations. During
the years ended June 30, 1997 and 1996, the plant operated at
approximately 90 percent and 93 percent, respectively, of its
melting capacity.
Carpenter also operates sales offices and distribution and
service centers, most of which are owned, at 37 locations in 14
states and 8 foreign countries.
The plants, service centers and offices of Carpenter have
been acquired at various times over many years. There is an
active maintenance program to keep facilities in good condition.
In addition, Carpenter has had an active capital spending program
to replace equipment as needed to keep it technologically
competitive on a world-wide basis. Carpenter 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
Carpenter 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
Carpenter, or any owner of more than five percent of any class of
voting securities of Carpenter, or any associate of any Director,
Officer, affiliate, or security holder of Carpenter, is a party
adverse to Carpenter or has a material interest adverse to the
interest of Carpenter 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 Carpenter (2) involves a claim for damages,
potential monetary sanctions or capital expenditures exceeding
ten percent of the current assets of Carpenter 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 Dennis M. Draeger.
Mr. Draeger, who was a director of Carpenter since 1992,
resigned as a member of the Board of Directors as of June 30,
1996. Mr. Draeger assumed his duties as Senior Vice President -
Specialty Alloys Operations for Carpenter effective July 1, 1996.
Prior to that he was President of Worldwide Floor Products
Operations for Armstrong World Industries, Inc. since 1994 and he
became Group Vice President for Armstrong in 1988.
Assumed
Present
Name Age Positions Position
- ---- --- --------- --------
Robert W. Cardy 61 Chairman, President &
Chief Executive Officer July 1992
Director November 1990
G. Walton Cottrell 57 Senior Vice President -
Finance & Chief
Financial Officer January 1993
Dennis M. Draeger 56 Senior Vice President -
Specialty Alloys
Operations July 1996
Nicholas F. Fiore 57 Senior Vice President -
Engineered Products
Group January 1993
Robert W. Lodge 54 Vice President -
Human Resources September 1991
John R. Welty 48 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 Carpenter is listed on the New York Stock
Exchange. The ticker symbol is CRS. Here are the high and low
market prices of Carpenter's stock for the past two fiscal years:
Quarter Ended: 1997 1996
- ---------------------------------------------------------------
High Low High Low
September 30 $37-5/8 $31-1/4 $41-3/16 $33-7/8
December 31 $36-3/4 $32 $44 $37-5/8
March 31 $39-1/4 $34-3/4 $42 $35-5/8
June 30 $48-1/8 $37-1/4 $40-1/8 $32
- ---------------------------------------------------------------
$48-1/8 $31-1/4 $44 $32
Carpenter has paid quarterly cash dividends on its common
stock for 91 consecutive years. The quarterly dividend rate was
$.33 per share for fiscal 1997 and 1996, and $.30 per share for
fiscal 1995.
Carpenter had 5,980 common shareholders of record as of
August 29, 1997. The balance of the information required by this
item is disclosed in Note 10 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)
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------
Summary of Operations
Net Sales $ 939,000 $865,324 $757,532 $628,795 $576,248
Income before extra-
ordinary charge &
cumulative effect
of changes in
accounting principles $ 59,993 $ 60,148 $ 47,492 $ 38,289 $ 26,534
Extraordinary charge,
net of income taxes $ - $ - $ - $ (2,039) $ -
Cumulative effect of
changes in accounting
principles, net of
income taxes $ - $ - $ - $ - $(74,676)
Net income (loss) $ 59,993 $ 60,148 $ 47,492 $ 36,250 $(48,142)
Financial Position
at Year-End
Total assets $1,223,001 $911,971 $831,775 $729,911 $699,565
Long-term debt, net $ 244,726 $188,024 $194,762 $158,070 $189,895
Per Share Data
Primary:
Income before extra-
ordinary charge &
cumulative effect
of changes in
accounting principles $ 3.30 $ 3.51 $ 2.81 $ 2.28 $ 1.55
Net income (loss) $ 3.30 $ 3.51 $ 2.81 $ 2.15 $ (3.11)
Fully Diluted:
Income before extra-
ordinary charge &
cumulative effect
of changes in
accounting principles $ 3.16 $ 3.38 $ 2.70 $ 2.20 $ 1.51
Net income (loss) $ 3.16 $ 3.38 $ 2.70 $ 2.08 $ (2.88)
Cash dividends-common $ 1.32 $ 1.32 $ 1.20 $ 1.20 $ 1.20
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:
(in millions - except per share) 1997 1996 1995
- -------------------------------- --------------------------
Net sales $939.0 $865.3 $757.5
Net income $ 60.0 $ 60.1 $ 47.5
Primary earnings per share $ 3.30 $ 3.51 $ 2.81
Net sales increased to a record level in fiscal 1997 primarily as a
result of including the operations of Dynamet since its acquisition
on February 28, 1997, and increased sales of ceramic products and of
the Mexican steel distribution operations. Net income was unchanged
in fiscal 1997 as the favorable effects from the inclusion of Dynamet,
the improved ceramic sales and lower losses related to the reduced
investment in Walsin-CarTech were offset by higher Specialty Alloys
Operations environmental costs and extended maintenance shutdown
costs at the beginning of fiscal 1997. Primary earnings per common
share decreased from a year ago because of increased common shares
outstanding.
Net sales and earnings increased in fiscal 1996 as a result of a
strong market for specialty metals, selling price increases, an
improved product mix and cost reduction efforts.
The chart below shows net sales by product line for the past
three fiscal years:
(in millions) 1997 1996 1995
- ------------- ----------------------------------
Sales % Sales % Sales %
----------------------------------
Stainless steel $461.5 49 $496.9 58 $424.7 56
Special alloys 317.9 34 273.4 32 249.0 33
Tool and other steel 69.4 7 62.8 7 59.5 8
Ceramics and other materials 45.8 5 29.3 3 22.6 3
Titanium products 44.4 5 2.9 - 1.7 -
----------------------------------
Total $939.0 100 $865.3 100 $757.5 100
==================================
Results of Operations - Fiscal 1997 Versus Fiscal 1996
Net sales were $939.0 million in fiscal 1997, a 9 percent
increase from the $865.3 million level in fiscal 1996. A majority
of the increase resulted from the inclusion of Dynamet's sales
since acquisition. Increased sales of ceramic products, an
improved mix of Specialty Alloys Operations products and
increased sales of the Mexican steel distribution operations also
added to the higher sales level in fiscal 1997.
Unit volume of Specialty Alloys Operations products was unchanged
from a year ago. Demand for specialty alloy products continued at
a high level across most of the product spectrum, especially
special alloys for aerospace and automotive applications. The
product mix shifted toward more premium-melted products and away
from certain commodity-priced products. Unit selling prices
remained relatively constant during fiscal 1997.
Cost of sales as a percentage of sales was 74 percent in both
years. In fiscal 1997, lower Specialty Alloys Operations raw
material costs were offset by higher labor, energy, maintenance
shutdown and environmental costs.
Specialty Alloys Operations raw material costs per unit purchased
decreased by 12 percent during fiscal 1997 versus the year-earlier
costs as a result of decreases in the cost of cobalt (26 percent),
nickel (11 percent), and chromium (10 percent). Also, the purchase
premium for semi-finished and finished products to supplement
internal capacity was lower in fiscal 1997.
Labor costs per hour for Specialty Alloys Operations production
and maintenance employees were up by 2 percent principally as a
result of a base wage increase in July 1996 which was partially
offset by lower profit sharing costs.
Specialty Alloys Operations natural gas and electric costs per
unit consumed increased by 14 percent and 6 percent versus fiscal
1996 costs, respectively.
Selling and administrative expenses were 13 percent of net sales
in fiscal years 1997 and 1996. Costs were higher by $13.5 million
primarily because of the inclusion of the costs for acquired
companies and increased usage of outside services for revising
computer systems to be year 2000 compliant.
Interest expense increased by $1.0 million in fiscal 1997 versus
fiscal 1996, as a result of a higher level of debt, primarily due
to the Dynamet acquisition, offset by an increased level of
capitalized interest on capital projects.
Equity in losses of the Walsin-CarTech joint venture decreased by
$5.8 million in fiscal 1997 due to the fiscal 1996 reduction of
the investment in Walsin-CarTech and an improvement in its
operating results (described in Note 4 to the consolidated
financial statements).
Income taxes as a percent of pre-tax income (effective tax rate)
increased to 39 percent in fiscal 1997 from 37 percent a year
earlier. The fiscal 1997 tax rate was negatively impacted by a
federal income tax law change relating to company-owned life
insurance programs, while the prior year's tax rate was favorably
affected by a state income tax rate change. A reconciliation of
the effective rate to the federal statutory rate is presented in
Note 16 to the consolidated financial statements.
Results of Operations - Fiscal 1996 Versus Fiscal 1995
Net sales were $865.3 million in fiscal 1996, a 14 percent increase
from the $757.5 million level in fiscal 1995. The sales improvement
was primarily due to higher unit prices and a shift toward higher
alloyed products in the Specialty Alloys Operations. Unit volume of
Specialty Alloys Operations products was slightly higher than in
fiscal 1995. Demand for specialty steel products was at a high level,
especially in automotive, aerospace, and chemical and petroleum
processing related products. Unit selling prices for specialty steel
shipments increased by an average of 8 percent to offset higher labor
and other costs and to restore profit margins which had eroded in
prior years. A raw material surcharge was established in fiscal
1995 to offset sharply rising raw material costs. The product mix
shifted toward more premium-melted products and away from certain
commodity-priced products.
Approximately 12 percent of the increase in net sales was from
the inclusion, in fiscal 1996, of Green Bay Supply Co., Inc., a
specialty metals master distributor which was acquired in
November 1995, and Parmatech Corporation, a metal injection
molded parts business which was acquired in October 1995.
Cost of sales as a percentage of sales was 74 percent in both
years. Higher Specialty Alloys Operations raw material, labor and
other costs were offset by increased selling prices.
Raw material costs per unit purchased increased by 11 percent
during fiscal 1996 versus the year-earlier costs as a result of
increases in the cost of nickel (9 percent), chromium (22
percent) and cobalt (6 percent). Also, in both fiscal years,
Carpenter purchased at a premium semi-finished and finished
products to supplement internal capacity.
Labor costs per hour for Specialty Alloys Operations production
and maintenance employees were up by 4 percent, principally as a
result of a base wage increase in July 1995 and higher profit
sharing costs, partially offset by lower medical costs and higher
pension credits.
Specialty Alloys Operations natural gas costs per unit consumed
decreased by 2 percent versus fiscal 1995 costs, and electricity
costs per unit decreased by 3 percent.
Selling and administrative expenses fell to 13 percent of net
sales versus 14 percent in fiscal 1995, primarily because these
costs tend to change less rapidly than sales. Costs were higher
by $9.6 million primarily because of increased usage of outside
services, additional travel costs and costs of acquired
companies.
Interest expense increased by $4.4 million in fiscal 1996 versus
fiscal 1995, principally as a result of lower capitalized
interest and a higher level of debt.
Equity in losses of the Walsin-CarTech joint venture increased to
$7.0 million in fiscal 1996 versus a loss of $3.0 million in
fiscal 1995. Lower sales volume, reduced selling prices and lower
production levels were the primary reasons for the increased
loss. The fiscal 1996 loss was partially offset by a pre-tax gain
of $2.7 million on the sale of a portion of Carpenter's interest
in the joint venture. The gain is included in other income on the
consolidated statement of income (described in Note 4 to the
consolidated financial statements).
Income taxes as a percent of pre-tax income (effective tax rate)
increased to 37 percent in fiscal 1996 from 36 percent a year
earlier. A reconciliation of the effective tax rate to the
federal statutory rate is presented in Note 16 to the
consolidated financial statements.
Management's Discussion of Cash Flow and Financial Condition
Cash Flow
Cash flow from operations was very strong over the past three fiscal
years despite working capital needs to support growth in sales.
Inventories, excluding amounts acquired through purchases of
businesses, increased $17.3 million, $59.6 million and $29.5
million in fiscal 1997, 1996 and 1995, respectively, due to
higher sales levels and a higher valued product mix of the
Specialty Alloys Operations.
Accounts receivable, excluding amounts relating to acquisitions,
increased $3.1 million, $14.8 million and $21.8 million in fiscal
1997, 1996 and 1995, respectively, as a result of increased fourth
quarter sales each year. The average days of sales outstanding at
the end of fiscal 1997 was comparable to that of the past two fiscal
years.
Capital expenditures of $93.6 million, $48.6 million and $36.9
million in fiscal 1997, 1996 and 1995, respectively, were
concentrated in the Specialty Alloys Operations' Reading,
Pennsylvania, plant and were used for increased capacity, normal
replacements and modernization. Fiscal 1997 and 1996 major
projects included a 20-metric ton vacuum induction degassing and
pouring furnace, two vacuum arc remelting furnaces, and annealing
facilities. Work has begun on construction of a bar finishing
cell and a major rebuild of the 3,000-ton press.
During fiscal 1997, Carpenter acquired Rathbone Precision Metals,
Inc., and Dynamet Incorporated. During fiscal 1996, the businesses
of Green Bay Supply Co., Inc., and Parmatech Corporation were
acquired and in fiscal 1995, Carpenter acquired Certech, Inc., and
an affiliated company. Fiscal 1996 and 1995 also include other less
significant acquisitions. The cost of all acquisitions totaled $86.6
million in cash and $107.2 million in common stock. Details of these
transactions are included in Note 3 to the consolidated financial
statements.
During fiscal 1996, Carpenter sold a portion of its interest in
Walsin-CarTech Specialty Steel Corporation, reducing its
ownership interest from 19 percent to 5 percent. Carpenter
received $32.7 million in cash from the sale which resulted in a
$2.7 million pre-tax gain. Details of this transaction are
included in Note 4 to the consolidated financial statements.
During fiscal 1997, total debt increased by $106.4 million,
excluding debt of acquired companies, primarily to finance
acquisitions of businesses and the higher level of capital
expenditures. During fiscal 1995, $80 million of medium-term
notes were issued with a 7.4 percent 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 8 to the consolidated financial statements.
The dividend payout rate on common stock was $1.32 per share for
both fiscal 1997 and fiscal 1996 versus $1.20 in fiscal 1995. The
preferred stock dividend was maintained at $5,362.50 per share in
each of the past three fiscal years. Total dividend payments were
$24.4 million, $23.3 million and $21.0 million in fiscal 1997,
1996 and 1995, respectively.
Financial Condition
During the past three fiscal years, Carpenter 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.
Carpenter ended fiscal 1997 in a sound liquidity position, with
current assets exceeding current liabilities by $144.2 million (a
ratio of 1.6 to 1). This favorable ratio is conservatively stated
because certain inventories are valued $138.9 million less than
the current cost as a result of using the LIFO method.
Total debt at June 30, 1997, was $330.6 million, or 36.9 percent
of total capital, including deferred taxes, versus 35.3 percent
of total capital, including deferred taxes, at June 30, 1996.
Financing is available under a $200 million financing arrangement
with a number of banks, providing for $150 million of revolving
credit to February 2002 and lines of credit of $50 million.
Borrowings under this agreement serve as back-up to Carpenter's
commercial paper program. Carpenter limits the aggregate
commercial paper and credit facility borrowings at any one time
to a maximum of $200 million. As of June 30, 1997, $57.5 million
was available under the credit facility and commercial paper
program.
At June 30, 1997, Carpenter had $20 million of medium-term debt
securities available for issuance under a Shelf Registration on
file with the Securities and Exchange Commission.
In summary, Carpenter believes that its present financial
resources, both from internal and external sources, are adequate
to meet its foreseeable short-term and long-term liquidity needs.
Commitments and Contingencies
Environmental
Carpenter has environmental liabilities at some of its owned
operating facilities, and has been designated as a potentially
responsible party ("PRP") with respect to certain superfund waste
disposal sites. Additionally, Carpenter has been notified that it
may be a PRP with respect to other superfund sites as to which no
proceedings have been instituted against Carpenter. Neither the
exact amount of cleanup costs nor the final method of their
allocation among all designated PRPs at these superfund sites has
been determined. The estimated range of the reasonably possible
future costs of remediation at Carpenter-owned operating
facilities and the superfund sites is between $11.2 million and
$23.3 million. Carpenter has accrued amounts 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. Recoveries of expenditures are recognized as a receivable
when they are estimable and probable. The estimated range of the
anticipated recoveries for environmental costs is between $7.2
million and $7.5 million. Additional details are provided in Note
17 to the consolidated financial statements. Carpenter 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
Carpenter also is defending various claims and legal actions, and
is subject to commitments and contingencies that are common to
its operations. Carpenter provides for costs relating to these
matters when a loss is probable and the amount is reasonably
estimable. Additional details are provided in Note 17 to the
consolidated 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 Carpenter's financial position or results of operations
and cash flows.
Forward-Looking and Other Statements
This Management Discussion and Analysis of Financial Condition
and Results of Operations and other sections of this Annual
Report on Form 10-K contain various "Forward-Looking Statements"
within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements, which represent Carpenter's
expectations or beliefs concerning various future events,
include, among other matters, statements concerning future
revenues and continued growth in various market segments. These
statements are based on current expectations that involve a
number of risks and uncertainties which could cause actual
results to differ from those of such forward-looking statements.
These risks include the following: 1) the cyclical nature of the
specialty materials business which are subject to changes in the
general economic conditions; 2) the critical importance of
certain raw materials used by Carpenter to produce specialty
materials that can only be acquired from foreign sources, some of
which are located in countries which may be subject to unstable
political and economic conditions which may affect the prices of
these materials; 3) the susceptibility of export sales to the
effects of export controls, changes in legal and regulatory
requirements, policy changes affecting the markets, changes in
tax laws and tariffs, exchange rate fluctuations, political and
economic instability, and accounts receivable collection; and 4)
the effects on operations of changes in domestic and foreign
governmental laws and public policy, including environmental
regulations. Any of these factors could have an adverse and/or
fluctuating effect on Carpenter's results of operations.
Additional risk factors may be described from time to time with
Carpenter's filings with the Securities and Exchange Commission.
Carpenter undertakes no obligation to update any forward-looking
statements whether as a result of new information, future events
or otherwise.
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, 1997, 1996 and 1995 21
Consolidated Statement of Cash Flows for the
Years Ended June 30, 1997, 1996 and 1995 22
Consolidated Balance Sheet as of
June 30, 1997 and 1996 23
Consolidated Statement of Changes in
Shareholders' Equity for the Years Ended
June 30, 1997, 1996 and 1995 24-25
Notes to Consolidated Financial Statements 26-47
Supplementary Data:
Quarterly Financial Data (Unaudited) 48
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,
1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles.
s/Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
July 28, 1997
Consolidated Statement of Income
Carpenter Technology Corporation
for the years ended June 30, 1997, 1996 and 1995
(in thousands, except
per share data) 1997 1996 1995
- --------------------- ----------------------------
Net sales $939,000 $865,324 $757,532
----------------------------
Costs and expenses:
Cost of sales 697,892 636,783 564,169
Selling and administrative
expenses 126,357 112,893 103,269
Interest expense 19,930 18,935 14,542
Equity in loss of joint venture 1,188 7,025 3,000
Other income, net (4,238) (5,482) (2,019)
----------------------------
841,129 770,154 682,961
----------------------------
Income before income taxes 97,871 95,170 74,571
Income taxes 37,878 35,022 27,079
----------------------------
Net income $ 59,993 $ 60,148 $ 47,492
============================
Earnings per common share:
Primary $ 3.30 $ 3.51 $ 2.81
Fully diluted $ 3.16 $ 3.38 $ 2.70
Weighted average common
shares outstanding:
Primary 17,703 16,677 16,327
Fully diluted 18,760 17,604 17,309
See accompanying notes to consolidated financial statements.
Consolidated Statement of Cash Flows
Carpenter Technology Corporation
for the years ended June 30, 1997, 1996 and 1995
(in thousands) 1997 1996 1995
- -------------- ---------------------------------
OPERATIONS
Net income $ 59,993 $ 60,148 $ 47,492
Adjustments to reconcile net income
to net cash provided from operations:
Depreciation and amortization 40,985 35,226 32,479
Deferred income taxes 7,144 4,527 3,314
Pension credits (11,064) (10,292) (7,933)
Equity in loss of joint venture 1,188 7,025 3,000
Gain on sale of partial interest
in joint venture - (2,650) -
Changes in working capital and other,
net of acquisitions:
Receivables (3,097) (14,754) (21,819)
Inventories (17,264) (59,619) (29,480)
Accounts payable (4,192) 21,265 15,111
Accrued current liabilities 11,174 16,244 6,800
Other, net (10,799) (7,083) (5,177)
--------------------------------
Net cash provided from operations 74,068 50,037 43,787
INVESTING ACTIVITIES --------------------------------
Purchases of plant and equipment (93,614) (48,621) (36,945)
Disposals of plant and equipment 1,429 2,060 1,424
Acquisitions of businesses,
net of cash received (60,233) (13,301) (13,032)
Investment in joint venture - - (2,060)
Proceeds from sale of partial
interest in joint venture - 32,672 -
--------------------------------
Net cash used for investing activities (152,418) (27,190) (50,613)
--------------------------------
FINANCING ACTIVITIES
Provided by (payments on) short-term debt 53,576 (1,884) 20,145
Proceeds from issuance of long-term debt 60,000 - 80,000
Payments on long-term debt (7,138) (9,023) (55,736)
Dividends paid (24,383) (23,306) (21,045)
Proceeds from issuance of common stock 1,863 4,590 1,745
Payments to acquire treasury stock - - (3,002)
--------------------------------
Net cash provided from (used for)
financing activities 83,918 (29,623) 22,107
--------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (107) (185) (565)
--------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 5,461 (6,961) 14,716
Cash and cash equivalents at beginning of year 13,159 20,120 5,404
--------------------------------
Cash and cash equivalents at end of year $ 18,620 $ 13,159 $ 20,120
SUPPLEMENTAL DATA: ================================
Cash paid during the year for:
Interest payments, net of amounts capitalized $ 18,705 $ 17,900 $ 15,441
Income tax payments, net of refunds $ 23,915 $ 20,942 $ 17,692
Non-cash investing activities:
Treasury stock issued for business acquisitions $ 99,517 $ 4,500 $ 3,200
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheet
Carpenter Technology Corporation
June 30, 1997 and 1996
(in thousands, except share data) 1997 1996
- --------------------------------- -----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 18,620 $ 13,159
Accounts receivable, net of allowance for
doubtful accounts ($1,385 and $1,249) 159,863 137,103
Inventories 211,483 160,452
Deferred income taxes - 2,113
Other current assets 12,247 11,643
-----------------------
Total current assets 402,213 324,470
Property, plant and equipment, net 513,636 419,472
Prepaid pension cost 99,748 91,474
Goodwill, net 104,610 18,792
Other assets 102,794 57,763
-----------------------
Total assets $1,223,001 $911,971
=======================
LIABILITIES
Current liabilities:
Short-term debt $ 82,540 $ 18,964
Accounts payable 78,962 75,811
Accrued compensation 26,932 26,088
Accrued income taxes 19,263 13,656
Deferred income taxes 5,601 -
Other accrued liabilities 41,375 30,446
Current portion of long-term debt 3,372 7,010
-----------------------
Total current liabilities 258,045 171,975
Long-term debt, net of current portion 244,726 188,024
Accrued postretirement benefits 135,903 137,738
Deferred income taxes 110,780 84,460
Other liabilities 24,240 20,697
SHAREHOLDERS' EQUITY
Preferred stock - authorized 2,000,000 shares 28,224 28,581
Common stock - authorized 50,000,000 shares 98,215 97,729
Capital in excess of par value - common stock 54,338 13,498
Reinvested earnings 303,566 267,956
Common stock in treasury, at cost (3,539) (64,483)
Deferred compensation (20,299) (22,830)
Foreign currency translation adjustments (11,198) (11,374)
-----------------------
Total shareholders' equity 449,307 309,077
-----------------------
Total liabilities and shareholders' equity $1,223,001 $911,971
========================
See accompanying notes to consolidated financial statements.
Consolidated Statement of Changes in Shareholders' Equity
Carpenter Technology Corporation
for the years ended June 30, 1997, 1996 and 1995
Common Stock
Preferred -----------------------
Stock Capital in
(in thousands, except Par Value Par Value Excess of Reinvested Treasury
share and per share data) of $5 of $5 Par Value Earnings Stock
- ----------------------------------------------------------------------------------------
Balances at June 30, 1994 $ 29,029 $ 48,061 $ 50,882 $204,667 $(66,150)
Distributions to ESOP (204) 1 9
Stock options exercised, net
of 133 shares exchanged 176 1,569
Restricted shares issued, net 107 1,238 (28)
Shares purchased (3,002)
Shares issued to acquire
business 1,022 2,178
Net income 47,492
Cash dividends:
Preferred, $5,362.50 per
share, net of income taxes (1,599)
Common, $2.40 per share (19,446)
Reduction of ESOP note
Accrued compensation
Translation adjustments
Other 426
Effects of 2-for-1 common
stock split 48,345 (48,345)
Balances at June 30, 1995 28,825 96,690 6,801 231,114 (67,002)
Distributions to ESOP (244) 36 206
Stock options exercised, net
of 41,010 shares exchanged 1,003 3,587
Restricted shares cancelled (138)
Shares issued to acquire
business 1,843 2,657
Net income 60,148
Cash dividends:
Preferred, $5,362.50 per
share, net of income taxes (1,572)
Common, $1.32 per share (21,734)
Reduction of ESOP note
Accrued compensation
Translation adjustments, net
Other 1,061
Balances at June 30, 1996 28,581 97,729 13,498 267,956 (64,483)
Distributions to ESOP (357) 52 285
Stock options exercised, net
of 45,826 shares exchanged 434 1,429
Restricted shares cancelled (79)
Shares issued to acquire
business 38,494 61,023
Net income 59,993
Cash dividends:
Preferred, $5,362.50 per
share, net of income taxes (1,578)
Common, $1.32 per share (22,805)
Reduction of ESOP note
Accrued compensation
Translation adjustments
Other 632
Balances at June 30, 1997 $ 28,224 $ 98,215 $ 54,338 $303,566 $ (3,539)
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
Consolidated Statement of Changes in Shareholders' Equity
Carpenter Technology Corporation
for the years ended June 30, 1997, 1996 and 1995
Share Data
--------------------------------------------
Foreign Total Common Shares
Deferred Currency Share- Preferred-----------------------------------
Compen- Translation holders' Shares Net
sation Adjustments Equity Issued Issued Treasury Outstanding
--------------------------------- --------------------------------------------
Balances at June 30, 1994 $(26,386) $ (959) $239,144 459.9 9,612,181 (1,522,604) 8,089,577
Distributions to ESOP (194) (3.2) 179 179
Stock options exercised, net
of 133 shares exchanged 1,745 35,272 35,272
Restricted shares issued, net (1,317) - 21,350 (500) 20,850
Shares purchased (3,002) (53,124) (53,124)
Shares issued to acquire
business 3,200 53,124 53,124
Net income 47,492
Cash dividends:
Preferred, $5,362.50 per
share, net of income taxes (1,599)
Common, $2.40 per share (19,446)
Reduction of ESOP note 1,071 1,071
Accrued compensation 1,171 1,171
Translation adjustments (6,063) (6,063)
Other 426
Effects of 2-for-1 common
stock split - 9,668,982 (1,523,104) 8,145,878
Balances at June 30, 1995 (25,461) (7,022) 263,945 456.7 19,337,964 (3,046,208) 16,291,756
Distributions to ESOP (2) (3.6) 7,251 7,251
Stock options exercised, net
of 41,010 shares exchanged 4,590 200,536 200,536
Restricted shares cancelled 138 - (4,652) (4,652)
Shares issued to acquire
business 4,500 120,786 120,786
Net income 60,148
Cash dividends:
Preferred, $5,362.50 per
share, net of income taxes (1,572)
Common, $1.32 per share (21,734)
Reduction of ESOP note 1,209 1,209
Accrued compensation 1,284 1,284
Translation adjustments, net (4,352) (4,352)
Other 1,061
Balances at June 30, 1996 (22,830) (11,374) 309,077 453.1 19,545,751 (2,930,074) 16,615,677
Distributions to ESOP (20) (5.8) 10,400 10,400
Stock options exercised, net
of 45,826 shares exchanged 1,863 86,769 86,769
Restricted shares cancelled 79 - (2,590) (2,590)
Shares issued to acquire
business 99,517 2,772,059 2,772,059
Net income 59,993
Cash dividends:
Preferred, $5,362.50 per
share, net of income taxes (1,578)
Common, $1.32 per share (22,805)
Reduction of ESOP note 1,355 1,355
Accrued compensation 1,097 1,097
Translation adjustments 176 176
Other 632
Balances at June 30, 1997 $(20,299) $(11,198) $449,307 447.3 19,642,920 (160,605) 19,482,315
<FN>
<F1>
See accompanying notes to consolidated financial statements.
</FN>
Notes to Consolidated Financial Statements
__________
1. Summary of Significant Accounting Policies
Description of Business - The Company is primarily engaged
in one business segment - the manufacture, fabrication and
distribution of specialty metals. Sales of finished products
include stainless steels, special alloys, tool steels and
titanium in the forms of bar, rod, wire and strip.
Additionally, the Company manufactures certain engineered
products including structural ceramics, metal injection
molded products and ultra-hard wear parts. The engineered
products do not qualify as a reportable segment and
therefore are not presented as a separate business segment.
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 $117.8 million, $96.5
million and $74.7 million in fiscal 1997, 1996 and 1995,
respectively.
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.
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 and Amortization - 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.
The costs of intangible assets other than goodwill, which
are included in other assets on the consolidated balance
sheet, are comprised principally of agreements not to
compete, patents, trademarks and tradenames and are
amortized on a straight-line basis over their respective
estimated useful lives, ranging from 4 to 30 years.
1. Summary of Significant Accounting Policies (continued)
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 30 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.
Long-Lived Assets - Effective July 1, 1996, the Company
adopted Statement of Financial Accounting Standards (SFAS)
121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." SFAS 121 requires
that long-lived assets, including related goodwill, be
reviewed for impairment and written down to fair value
whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. The Company
evaluates long-lived assets for impairment by individual
business unit. There was no cumulative effect resulting from
the adoption of SFAS 121 in fiscal 1997.
Environmental Expenditures - Environmental expenditures that
pertain to current operations or 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 receivables when they are
estimable and probable.
In October 1996, Statement of Position 96-1, "Environmental
Remediation Liabilities," was issued and is effective for
fiscal 1998. This statement provides guidance for
recognizing, measuring and disclosing environmental
remediation liabilities. The Company does not expect this
statement to have a material effect on its financial
position or results of operations.
1. Summary of Significant Accounting Policies (continued)
Foreign Currency Translation and Remeasurement - Assets and
liabilities of foreign operations, where the functional
currency is the local currency, are translated into U.S.
dollars at the fiscal year end exchange rate. The related
translation adjustments are recorded as cumulative
translation adjustments, a separate component of
shareholders' equity. Revenues and expenses are translated
using average exchange rates prevailing during the year.
Foreign currency exchange gains and losses are included in
net income. Realized and unrealized foreign currency
exchange gains and losses for the years presented were not
material.
Non-monetary assets and liabilities of foreign operations,
where the functional currency is the U.S. dollar or whose
economic environment is highly inflationary as defined by
SFAS 52, are translated at historical exchange rates. All
other assets and liabilities are translated at year-end
rates. Inventories charged to cost of sales and depreciation
are translated at historical exchange rates. All other
income and expense items are translated at average rates of
exchange prevailing during the year. Gains and losses that
result from translation are included in earnings. Effective
January 1, 1997, the Company's operations in Mexico were
considered to operate in a highly inflationary economy as
defined by SFAS 52.
Futures Contracts and Commodity Price Swaps - In connection
with the anticipated purchase of raw materials for certain
fixed-price sales arrangements, the Company enters into
futures contracts and commodity price swaps to reduce the
risk of cost increases. The contracts do not have leveraged
features and generally are not entered into for speculative
purposes. The significant characteristics and terms of the
anticipated purchase of raw materials are identifiable, and
the contracts are designated and effective as hedges,
because of the high correlation between the contracts and
the items being hedged. As such, they are accounted for as
hedges and unrealized gains and losses are deferred and
included in cost of sales in the periods when the related
transactions are completed.
Foreign Currency Forward Contracts - In connection with
certain future payments between the Company and its various
European subsidiaries, foreign currency forward contracts
are used to reduce the risk of foreign currency exposures.
The Company's primary foreign currency exposures are in
France. The foreign currency forward contracts do not
qualify as hedges for financial reporting purposes, as the
1. Summary of Significant Accounting Policies (continued)
anticipated cash flows are not definitive. Therefore, the
contracts are marked to market and any related gain or loss
is included in income on a current basis. Gains and losses
for the years presented were not material to the Company's
results of operations or cash flows.
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.
The Financial Accounting Standards Board (FASB) issued SFAS
128, "Earnings Per Share," which becomes effective for
periods ending after December 15, 1997. The Company will
adopt this statement effective with the quarter ending
December 31, 1997. SFAS 128 specifies the computation,
presentation and disclosure requirements for earnings per
share. The adoption of SFAS 128 will not have a material
effect on the Company's future presentation and disclosure
requirements of earnings per share as compared to the
current presentation and disclosure requirements.
Use of Estimates - The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Company-Owned Life Insurance Program - The Company has a
company-owned life insurance program covering essentially
all of the U.S.-based employees. The purpose of the program
is to provide cash to fund employee benefit obligations and
for other corporate purposes. At June 30, 1997 and 1996, the
cash surrender values, $81.2 million and $81.4 million, and
the insurance policy loans, $80.6 million and $80.7 million,
respectively, were netted and included in other assets on
the consolidated balance sheet.
Reclassifications - Certain reclassifications of prior
years' amounts have been made to conform with the current
year's presentation.
1. Summary of Significant Accounting Policies (continued)
Other Accounting Pronouncements - The FASB issued SFAS 130,
"Reporting Comprehensive Income," and SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information,"
which will be effective for the Company's fiscal year 1999.
The impact of these new standards on the Company's future
financial statements and disclosures has not been
determined.
2. Two-for-One Common Stock Split
On August 10, 1995, the Board of Directors of the Company
declared a two-for-one common stock split which was
distributed to shareholders of record on September 1, 1995.
The par value of common shares remained at $5 per share.
The effect of the stock split has been retroactively
reflected as of June 30, 1995, in the statement of changes
in shareholders' equity, but activity for fiscal 1995 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
reflect the effect of the split for all periods presented.
3. Acquisitions of Businesses
During the past three fiscal years, the Company acquired the
entities described below, which were accounted for by the
purchase method of accounting:
Fiscal 1997
On June 19, 1997, the Company acquired the net assets
of Rathbone Precision Metals, Inc., for $9.6 million in
cash, including acquisition costs. Rathbone is a manu-
facturer of custom, cold-drawn metal shapes. The pur-
chase price included goodwill of $6.8 million, which is
being amortized on a straight-line basis over 20 years.
On February 28, 1997, the Company purchased all of the
common stock of Dynamet Incorporated in exchange for
approximately 2.8 million shares of its treasury common
stock with a fair market value of $99.5 million and
$51.5 million of cash, including acquisition costs. In
addition, the Company entered into consulting and
non-competition agreements for $10.3 million, a portion
of which is payable over four years. Dynamet is a
manufacturer of titanium bar, wire and powder products.
Based upon a preliminary allocation, the excess of
purchase price over the estimated fair values of the
net assets acquired was $80.7 million and has been
recorded as goodwill, which is being amortized on a
straight-line basis over 30 years.
3. Acquisitions of Businesses (continued)
Fiscal 1996
On November 9, 1995, the Company acquired the net
assets of Green Bay Supply Co., Inc., for $10.8 million
in cash, including acquisition costs. Green Bay is a
master distributor which purchases specialty metal
products globally and resells them to independent
distributors in the United States. The purchase price
approximated the fair value of the assets acquired.
On October 26, 1995, the Company acquired all of the
outstanding shares of Parmatech Corporation in exchange
for 120,786 shares of treasury common stock with a fair
value of $4.5 million and paid acquisition costs.
Parmatech manufactures complex, net or near-net shape
parts from a powder metal slurry using an injection
molding process. The excess of purchase price over the
fair values of the net assets acquired was $4.1 million
and has been recorded as goodwill, which is being
amortized on a straight-line basis over 20 years.
Fiscal 1995
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.
Fiscal 1996 and 1995 also include 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) 1997 1996 1995
----------------------------
Working Capital,
other than cash $ 26,504 $ 9,457 $ 1,894
Property, plant and
equipment 38,800 4,612 10,200
Other assets 27,264 2,158 1,740
Goodwill 87,499 4,094 8,154
Noncurrent liabilities (20,317) (2,520) (5,756)
----------------------------
Purchase price, net of
cash received $159,750 $17,801 $16,232
============================
3. Acquisitions of Businesses (continued)
Deferred tax liabilities included in the allocation totaled
$27.0 million in fiscal 1997 and $1.3 million in fiscal 1996
and 1995.
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 an unaudited pro forma
consolidation of the results of operations as if the
acquisitions in fiscal 1997 and 1996 had taken place at the
beginning of fiscal 1996, consolidated net sales would have
been $1,022.8 million for fiscal 1997 and $970.3 million for
fiscal 1996. Unaudited consolidated pro forma net income and
primary earnings per share would have been $66.7 million and
$3.29 for the year ended June 30, 1997, and $66.4 million
and $3.32 for the year ended June 30, 1996, respectively.
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 1996.
As a result of the acquisition of Dynamet Incorporated, Mr.
Peter C. Rossin became a director of the Company. He and his
wife own of record or beneficially a total of 2,434,494
shares of the Company's common stock or approximately 12% of
the shares outstanding as of June 30, 1997. These shares are
subject to a Standstill Agreement which provides for certain
limitations on either the increase or disposal of their
interest in the Company's common stock, solicitation of
proxies, involvement in tender offers, business combinations
or restructuring of voting securities affecting the Company
and on their ability to seek control of or influence the
Company's Board of Directors or management. In addition, the
Standstill Agreement provides that the Board will recommend
the election, as a director of the Company, of Mr. Rossin or
another person that he and the other former Dynamet
shareholders designate, if, after consultation, the Board
determines such person is reasonably acceptable. The
Standstill Agreement expires in 2007, unless terminated
earlier as a result of a change in control of the Company or
a reduction of the voting power of the former Dynamet
shareholders below 5% of the Company's outstanding shares.
4. Investment in Joint Venture
The Company's investment in Walsin-CarTech Specialty Steel
Corporation, a corporate joint venture in Taiwan with Walsin
Lihwa Corporation, was $8.6 million at June 30, 1997, and
$9.8 million at June 30, 1996, and is included in other
assets on the consolidated balance sheet. This investment is
being accounted for using the equity method of accounting.
From inception on September 2, 1993, through March 19, 1996,
the Company owned a 19 percent interest in the joint
venture, which became operational in January 1995. On
March 19, 1996, the Company sold a portion of its interest
in the joint venture to Walsin Lihwa Corporation, reducing
its ownership interest to 5 percent. The Company received
$32.7 million in cash from the sale which resulted in a $2.7
million pre-tax gain, which is included in other income on
the consolidated statement of income for fiscal 1996.
Additionally, Walsin Lihwa may acquire the Company's
remaining 5 percent interest for the original purchase cost,
plus interest at any time prior to March 19, 1998, and holds
the right of first refusal should the Company seek to sell
its remaining interest in the joint venture.
5. Inventories
June 30
(in thousands) 1997 1996
------------------
Finished and purchased products $121,532 $129,184
Work in process 177,650 134,751
Raw materials and supplies 51,152 58,388
------------------
Total at current cost 350,334 322,323
------------------
Less excess of current cost
over LIFO values 138,851 161,871
------------------
$211,483 $160,452
==================
Current cost of LIFO-valued inventories was $317.6 million
at June 30, 1997, and $295.4 million at June 30, 1996.
The acquisition of Dynamet Incorporated in fiscal 1997
resulted in a new basis of accounting for Dynamet's LIFO
inventories which are greater than those reportable for
federal income tax purposes by $17.2 million at June 30,
1997.
6. Property, Plant and Equipment
June 30
(in thousands) 1997 1996
------------------
Land $ 8,871 $ 7,374
Buildings and building equipment 183,506 154,871
Machinery and equipment 707,051 620,153
Construction in progress 37,028 27,299
------------------
Total at cost 936,456 809,697
------------------
Less accumulated depreciation
and amortization 422,820 390,225
------------------
$513,636 $419,472
==================
6. Property, Plant and Equipment (continued)
The estimated useful lives are principally 45 years for
buildings and 20 years for machinery and equipment. The
ranges are as follows:
Estimated 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 3 to 10 years
For the years ended June 30, 1997, 1996 and 1995,
depreciation expense was $36.8 million, $33.7 million and
$31.2 million, respectively.
7. Other Accrued Liabilities
June 30
(in thousands) 1997 1996
-----------------
Medical expenses $11,031 $10,690
Environmental costs 7,403 1,298
Interest 6,065 5,557
Other 16,876 12,901
-----------------
$41,375 $30,446
=================
8. Debt Arrangements
In February 1997, the Company renegotiated its existing
financing arrangements with a number of banks to increase
its credit facilities from $150 million to $200 million,
lower the costs of the facilities and extend the term to
February 2002. The arrangements provide for the availability
of $150 million of revolving credit and lines of credit of
$50 million and serve as back-up to the Company's commercial
paper borrowings. The Company limits the aggregate
commercial paper and credit facility borrowings at any one
time to a maximum of $200 million. Interest is based on
short-term market rates or competitive bids. This financing
arrangement replaced the previous revolving credit and lines
of credit arrangement. As of June 30, 1997, there were no
borrowings outstanding under the revolving credit agreement,
$13.5 million outstanding under the lines of credit and
$129.0 million of commercial paper outstanding. At June 30,
1997, $60.0 million of short-term debt was classified as
long-term debt because the Company has the ability and
intent to refinance it on a long-term basis through existing
credit facilities. There was $19.0 million of short-term
debt outstanding under the previous financing arrangement as
of June 30, 1996.
8. Debt Arrangements (continued)
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, 1997, the Company has
an additional $20.0 million of medium-term debt securities
available for issuance under the Shelf Registration.
For the years ended June 30, 1997, 1996 and 1995, interest
cost totaled $22.3 million, $19.3 million and $17.8 million,
of which $2.4 million, $.4 million and $3.3 million,
respectively, were capitalized.
The weighted average interest rates for short-term
borrowings during fiscal 1997 and 1996 were 5.9% and 6.0%,
respectively.
Long-term debt outstanding at June 30, 1997 and 1996,
consists of the following:
(in thousands) 1997 1996
------------------
9% Sinking fund debentures
due 2022; sinking fund
requirements are $5.0 million
annually from 2003 to 2021 $ 99,577 $ 99,559
Medium-term notes at
6.78% to 7.80% due from
October 1998 to 2005 80,000 80,000
Short-term debt classified as
long-term debt at 5.9% to 6.0% 60,000 -
10.45% Senior notes, series B,
due in annual installments
of $3.0 million through 1999 6,000 9,000
9.4% Notes - 3,571
Capitalized lease obligations
at 7.6% to 10.1% due in
installments through 2006 2,088 2,233
Other 433 671
------------------
Total 248,098 195,034
------------------
Less amounts due within one year 3,372 7,010
------------------
$244,726 $188,024
==================
Aggregate maturities of long-term debt for the four years
subsequent to June 30, 1998, are $13.2 million in fiscal
1999, $15.1 million in fiscal 2000, $10.1 million in fiscal
2001, and $85.2 million in fiscal 2002.
8. Debt Arrangements (continued)
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, 1997, were approximately $208.2
million.
9. Financial Instruments
The Company's financial instrument portfolio is comprised of
cash and cash equivalents, company-owned life insurance,
short-term and long-term debt instruments, raw material
futures contracts and commodity price swaps and foreign
currency forward contracts.
The carrying amounts and estimated fair values of the
Company's financial instruments were as follows:
June 30
(in thousands) 1997 1996
------------------ ------------------
Carrying Fair Carrying Fair
Value Value Value Value
------------------ ------------------
Cash and cash equivalents $ 18,620 $ 18,620 $ 13,159 $ 13,159
Company-owned life insurance $ 88,327 $ 88,327 $ 85,611 $ 85,611
Short-term debt $ 82,540 $ 82,540 $ 18,964 $ 18,964
Long-term debt $248,098 $259,841 $195,034 $205,475
Futures contracts (buy) $ - $ - $ - $ -
Foreign currency forward
contracts (sell) $ 910 $ 910 $ 7 $ 7
The contract values and estimated fair value of contracts
were as follows:
June 30
(in thousands) 1997 1996
------------------ ------------------
Fair Fair
Contract Value of Contract Value of
Value Contracts Value Contracts
------------------ ------------------
Futures contracts (buy) $21,671 $19,909 $21,610 $20,300
Foreign currency forward
contracts (sell) $ 8,180 $ 7,270 $ 4,944 $ 4,937
The carrying amounts for cash, cash equivalents and
short-term debt approximate their 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, 1997 and
1996, was determined by using current interest rates and
market values of similar issues.
9. Financial Instruments (continued)
The fair value of raw material futures contracts and
commodity price swaps was based on quoted market prices for
these instruments. These financial instruments have various
maturity dates ranging from 1997 to 1999.
The fair value of foreign currency forward contracts
represents the amount to be exchanged if the existing
contracts were settled at year end, based on market quotes.
The foreign currency forward contracts have various maturity
dates ranging from 1997 to 1998.
The Company is exposed to credit risk related to its
financial instruments in the event of non-performance by the
counterparties. The Company does not generally require
collateral or other security to support these financial
instruments. However, the counterparties to these
transactions are major institutions deemed credit worthy by
the Company. The Company does not anticipate non-performance
by the counterparties.
10. Common Stock Purchase Rights
The Company has issued one common stock purchase right
("Right") for every outstanding share of common stock.
Except as otherwise provided in the Rights Agreement, the
Rights will become exercisable and separate Rights certifi-
cates 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 $145. 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
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.
The Rights Agreement expires on June 26, 2006.
11. Stock-Based Compensation
Effective July 1, 1996, the Company adopted the
disclosure-only provisions of SFAS 123, "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost
has been recognized for the stock option plans. Had
compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for
awards in accordance with the provisions of SFAS 123, net
income would have been reduced by $.9 million or $.05 per
share in fiscal 1997. There would have been no effect on net
income or earnings per share in fiscal 1996. These pro forma
adjustments were calculated using the Black-Scholes option
pricing model to value all stock options granted since
July 1, 1995, using the following assumptions:
1997 1996
-----------------
Risk free interest rate 6.4% 5.8%
Expected volatility 20.6% 20.6%
Expected life of options 5 years 5 years
Expected dividends 4.2% 4.2%
The Company has three stock-based compensation plans for
officers and key employees: a 1993 plan, a 1982 plan and a
1977 plan.
1993 Plan:
The 1993 plan provides that the Board of Directors may grant
incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock and performance share
awards, and determine the terms and conditions of each
grant. As of June 30, 1997 and 1996, 1,358,455 and 1,545,965
shares, respectively, were reserved for options and share
awards which may be granted under this plan.
Stock 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.
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
1997, 1996 and 1995, $.6 million, $.6 million and
$.3 million, respectively, were charged to expense for
vested restricted shares.
11. Stock-Based Compensation (continued)
Performance share awards are earned only if the Company
achieves certain performance levels over a three-year
period. The awards are payable in shares of common stock and
expensed over the three-year performance period. In June
1997 and 1996, 25,700 and 18,400 performance share awards,
respectively, were granted contingent on performance over
the three fiscal years after grant. During fiscal 1997,
$.3 million was charged to expense for earned performance
shares. There was no charge to expense for these awards in
fiscal 1996.
1982 and 1977 Plans:
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, 1997 and 1996, 48,520 and 164,620 shares,
respectively, were reserved for options which may be granted
under the 1977 plan.
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, 1997 and 1996, 129,000 and
157,000 shares, respectively, were reserved for options
which may be granted under this plan.
A summary of the option activity under all plans for the
past three years follows:
Number of Option Price
Shares per Share
----------------------------
Balance June 30, 1994 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 794,152 $19.00-$32.56
Granted 270,500 $33.00-$39.12
Exercised (241,546) $19.00-$30.19
Cancelled (9,600) $28.32-$32.56
----------------------------
Balance June 30, 1996 813,506 $19.00-$39.12
Granted 315,600 $31.63-$45.56
Exercised (132,595) $22.38-$33.00
Cancelled (7,100) $33.00-$39.12
----------------------------
Balance June 30, 1997 989,411 $19.00-$45.56
============================
11. Stock-Based Compensation (continued)
At June 30, 1997, 673,811 of the 989,411 options outstanding
were exercisable. Of the options outstanding at June 30,
1997, 513,618 relate to the 1993 plan, 108,931 relate to the
1982 plan, 266,860 relate to the 1977 plan and 100,002
relate to the plan for non-employee Directors.
12. Pension Plans
The Company has several noncontributory defined benefit
pension plans, which cover a majority of its employees. The
benefits 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.
Net pension credits included the following components:
(in thousands) 1997 1996 1995
--------------------------------
Service cost of benefits earned $ 13,442 $ 11,439 $ 9,852
Interest cost on projected
benefit obligation 32,696 28,852 27,255
Return on plan assets:
Actual (150,206) (96,868) (83,917)
Deferred gain 97,291 50,363 42,733
Net amortization and deferral (2,309) (2,240) (2,727)
--------------------------------
Net pension credits $ (9,086) $ (8,454) $ (6,804)
================================
Principal actuarial assumptions:
Discount rate 7.5% 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 change decreased the pension credit by
$.8 million in fiscal 1996.
12. Pension Plans (continued)
The funded status of these plans at June 30, 1997 and 1996
is summarized as follows:
Overfunded Plans Underfunded Plans
(in thousands) 1997 1996 1997 1996
---------------------------------------
Plan assets at fair value $718,638 $598,648 $ 2,380 $ 1,888
Actuarial present value of
benefit obligations:
Vested 391,068 310,648 11,181 9,006
Non-vested 203 60,433 382 397
---------------------------------------
Accumulated benefit
obligation 391,271 371,081 11,563 9,403
Effect of future
compensation increases 76,676 64,531 2,934 3,248
---------------------------------------
Projected benefit obligation 467,947 435,612 14,497 12,651
---------------------------------------
Plan assets in excess of
(less than) projected
benefit obligation 250,691 163,036 (12,117) (10,763)
Unrecognized net (gain) loss-
experience different from
assumptions (171,082) (90,990) 3,436 3,527
Unrecognized transition
(asset) obligation (11,595) (14,491) 370 417
Unrecognized prior service
cost 31,734 33,919 272 294
---------------------------------------
Prepaid (accrued) pension
cost $ 99,748 $ 91,474 $ (8,039) $ (6,525)
=======================================
Principal actuarial assumptions:
Discount rate 7.5% 7.5% 8.0% 8.1%
Long-term rate of
compensation increase 4.5% 4.5% 7.0% 6.8%
During fiscal 1997 the Company established a separate
account within a pension plan to fund certain postretirement
medical benefits. As a result, all active employees became
fully vested in their accrued pension benefits.
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.
12. Pension Plans (continued)
The underfunded plans include the pension plan of the
Company's Mexican operations, Rathbone Precision Metals,
Inc., and several supplemental retirement plans for certain
key employees and outside directors. The Company has a
company-owned life insurance program covering certain key
employees and outside directors, the purpose of which is to
provide for the Company's obligation under the supplemental
retirement plans. As of June 30, 1997 and 1996, the cash
surrender values of $7.2 million and $4.2 million,
respectively, were included in other assets on the
consolidated balance sheet.
The Company also maintains defined contribution pension and
savings plans for substantially all domestic employees.
Company contributions were $5.3 million in fiscal 1997, $4.8
million in fiscal 1996 and $4.5 million in fiscal 1995.
There were 1,357,110 common shares reserved for issuance
under the savings plans at June 30, 1997.
13. Postretirement Medical and Life Insurance Benefits
In addition to pension plan benefits, the Company provides
health care and life insurance benefits for a majority of
its retired employees and covered dependents. Eligible
employees receive these benefits upon normal retirement.
Expense of postretirement medical and life insurance
benefits consisted of the following components:
(in thousands) 1997 1996 1995
-----------------------------
Service cost of benefits earned $ 2,382 $ 2,317 $ 2,287
Interest cost on accumulated
postretirement benefit obligation 10,590 9,767 10,317
Return on plan assets:
Actual (9,217) (4,548) (6,023)
Deferred gain 6,159 2,274 4,675
Net amortization and deferral (1,200) (1,575) (1,031)
-----------------------------
Postretirement medical and
life insurance
benefits expense $ 8,714 $ 8,235 $10,225
=============================
Principal actuarial assumptions:
Discount rate 7.5% 7.5% 8.0%
Return on plan assets 9.0% 9.0% 9.0%
Trend rate - beginning* 9.0% 10.0% 11.0%
Trend rate - ultimate 6.0% 6.0% 6.0%
* Declines 1% per year to the ultimate rate.
The .5% discount rate change increased expense by $.7 million in
fiscal 1996.
13. Postretirement Medical and Life Insurance Benefits
(continued)
The funded status of the postretirement medical and life
insurance benefit plans at June 30, 1997 and 1996, is
summarized as follows:
(in thousands) 1997 1996
--------------------
Accumulated postretirement
benefit obligation (APBO):
Retirees $ 86,904 $ 90,669
Fully eligible active
plan participants 24,534 24,751
Other active plan participants 29,339 28,968
--------------------
Total APBO 140,777 144,388
Plan assets at fair value 45,588 33,624
--------------------
APBO in excess of plan assets 95,189 110,764
Unrecognized net gain 48,796 35,074
Unrecognized prior service cost (1,948) (2,111)
--------------------
Accrued postretirement benefits $142,037 $143,727
====================
Principal actuarial assumptions:
Discount rate 7.5% 7.5%
Trend rate - beginning* 8.0% 9.0%
Trend rate - ultimate 6.0% 6.0%
*Declines 1% per year to the ultimate rate.
The Company has been voluntarily contributing amounts into a
Voluntary Employee Trust Fund (VEBA) since fiscal 1992. Plan
assets are invested in trust-owned life insurance.
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, 1997 would increase by $17.1 million and the
postretirement benefit expense for fiscal 1997 would have
increased by $1.6 million.
14. Employee Stock Ownership Plan
The Company has a leveraged employee stock ownership plan
("ESOP") to assist a majority of its employees with their
future retiree medical obligations. The Company issued 461.5
shares of convertible preferred stock at $65,000 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.
14. Employee Stock Ownership Plan (continued)
Principal and interest obligations on the note are 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 are
allocated to participating employees' accounts within the
ESOP. The Company contributed $1.3 million in fiscal 1997
and 1996, and $1.1 million in fiscal 1995 to the ESOP.
Compensation expense related to the plan was $1.9 million in
fiscal 1997 and $2.0 million in fiscal 1996 and 1995.
As of June 30, 1997, the ESOP held 447.3 shares of the
convertible preferred stock, consisting of 140.3 allocated
shares and 307.0 unallocated shares. Each preferred share is
convertible into 2,000 shares of common stock. There are
894,558 common shares reserved for issuance under the ESOP
at June 30, 1997. 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 $67,600 per share,
declining to $65,000 per share by 2001.
15. Supplemental Data
(in thousands) 1997 1996 1995
---------------------------
Research and development $12,986 $13,825 $12,302
Repairs and maintenance $58,295 $53,369 $49,305
16. Income Taxes
Provisions for income taxes consisted of the following:
(in thousands) 1997 1996 1995
----------------------------
Current:
Federal $25,886 $28,057 $20,117
State 2,407 2,018 2,488
Foreign 2,441 420 1,160
Deferred:
Federal 4,888 3,589 4,332
State 1,844 (211) (1,437)
Foreign 412 1,149 419
---------------------------
$37,878 $35,022 $27,079
===========================
16. 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) 1997 1996 1995
----------------------------
Federal tax rate 35.0% 35.0% 35.0%
Increase (decrease) in
taxes resulting from:
State income taxes, net
of federal tax benefit 2.8 2.0 4.1
Goodwill amortization 0.7 0.4 0.4
Federal and state tax
rate changes 0.3 (0.5) (2.0)
Other, net (0.1) (0.1) (1.2)
----------------------------
Effective tax rate 38.7% 36.8% 36.3%
============================
Deferred taxes 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, 1997 and 1996:
(in thousands) 1997 1996
------------------
Deferred tax liabilities:
Depreciation and amortization $124,396 $109,846
Prepaid pensions 34,144 30,659
Intangible assets 11,515 1,060
Inventories 10,206 4,660
Other 11,269 9,954
------------------
Total deferred tax liabilities 191,530 156,179
------------------
Deferred tax assets:
Postretirement provisions 53,809 54,557
Other reserve provisions 22,278 20,576
Valuation allowance (938) (1,301)
------------------
Total deferred tax assets 75,149 73,832
------------------
Net deferred tax liability $116,381 $ 82,347
==================
The change in the valuation allowances relate to
pre-acquisition net operating loss carryforwards of an
acquired company.
17. Commitments and Contingencies
Environmental
The Company is subject to various stringent federal, state
and local environmental laws and regulations. The liability
for future environmental remediation costs is evaluated by
management on a quarterly basis. The Company accrues amounts
for environmental remediation costs which represent
17. Commitments and Contingencies (continued)
management's best estimate of the probable and reasonably
estimable costs relating to environmental remediation. For
the years ended June 30, 1997 and 1995, $5.9 million and
$1.0 million, respectively, were charged to operations for
environmental remediation costs (no expense was recognized
in fiscal 1996). The liability recorded for environmental
cleanup costs, including remediation investigation and
feasibility study costs, remaining at June 30, 1997 and
1996, was $11.2 million and $5.6 million, respectively.
During fiscal years 1997 and 1996, the Company entered into
partial settlements of litigation relating to insurance
coverages for certain superfund sites and recognized income
of $3.0 million and $4.1 million, respectively. The
discounted amounts receivable for recoveries from these
settlements and from potentially responsible parties
("PRPs") at June 30, 1997 and 1996, were $7.2 million and
$4.2 million, respectively.
Estimates of the amount and timing of future costs of
environmental remediation requirements are necessarily
imprecise because of the continuing evolution of
environmental laws and regulatory requirements, the
availability and application of technology and the
identification of presently unknown remediation sites and
the allocation of costs among the PRPs. 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.
17. Commitments and Contingencies (continued)
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.
SUPPLEMENTARY DATA
Quarterly Financial Data (Unaudited)
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 its customers.
This seasonal pattern can be disrupted by major economic cycles or special
accounting adjustments.
(dollars in thousands - First Second Third Fourth
except per share amounts) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------
Results of Operations
Fiscal 1997
Net sales $194,746 $208,670 $250,869 $284,715
Gross profits $ 46,428 $ 56,601 $ 61,916 $ 76,163
Net income $ 8,075 $ 13,647 $ 15,494 $ 22,777
- --------------------------------------------------------------------------
Fiscal 1996
Net sales $184,469 $210,126 $233,274 $237,455
Gross profits $ 48,264 $ 52,897 $ 58,699 $ 68,681
Net income $ 11,906 $ 12,293 $ 14,726 $ 21,223
- --------------------------------------------------------------------------
Per Common Share
Fiscal 1997
Primary earnings $ .46 $ .79 $ .86 $ 1.14
Fully diluted earnings $ .45 $ .75 $ .84 $ 1.10
- --------------------------------------------------------------------------
Fiscal 1996
Primary earnings $ .70 $ .71 $ .86 $ 1.24
Fully diluted earnings $ .67 $ .69 $ .83 $ 1.19
- --------------------------------------------------------------------------
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
1997 definitive Proxy Statement.
Information concerning Carpenter'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 1997 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 1997 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 1997 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
Schedule II - 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 1997 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, presents 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 28, 1997
(2) The following documents are filed as exhibits:
2. Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession
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
12. Statement re Computation of Ratios
23. Consent of Experts and Counsel
24. Powers of Attorney
27. Financial Data Schedule
99. Additional Exhibits
(b) Reports on Form 8-K:
On May 13, 1997, Carpenter filed Form 8-K/A, Amendment
to Current Report as an amendment to Carpenter's Current
Report on Form 8-K dated February 28, 1997 and filed March 27,
1997, with respect to preparation of pro forma financial
statements of Dynamet Incorporated related to Carpenter's
acquisition of that company. Such Form 8-K/A is
incorporated by reference herein.
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 19, 1997
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 19, 1997
- ---------------------
Robert W. Cardy Chief Executive Officer
and Director (Principal
Executive Officer)
s/G. Walton Cottrell Sr. Vice President - September 19, 1997
- ---------------------
G. Walton Cottrell Finance & Chief
Financial Officer
s/Edward B. Bruno Controller (Principal September 19, 1997
- ---------------------
Edward B. Bruno Accounting Officer)
* Director September 19, 1997
- ---------------------
Marcus C. Bennett
* Director September 19, 1997
- ---------------------
William S. Dietrich II
* Director September 19, 1997
- ---------------------
C. McCollister Evarts, M.D.
* Director September 19, 1997
- ---------------------
J. Michael Fitzpatrick
* Director September 19, 1997
- ---------------------
Carl R. Garr
* Director September 19, 1997
- ---------------------
William J. Hudson, Jr.
* Director September 19, 1997
- ---------------------
Arthur E. Humphrey
* Director September 19, 1997
- ---------------------
Edward W. Kay
* Director September 19, 1997
- ---------------------
Frederick C. Langenberg
* Director September 19, 1997
- ---------------------
Robert J. Lawless
* Director September 19, 1997
- ---------------------
Marlin Miller, Jr.
* Director September 19, 1997
- ---------------------
Paul R. Roedel
* Director September 19, 1997
- ---------------------
Peter C. Rossin
* Director September 19, 1997
- ---------------------
Kathryn C. Turner
* Director September 19, 1997
- ---------------------
Kenneth L. Wolfe
Original Powers of Attorney authorizing John R. Welty to sign this
Report on behalf of: Marcus C. Bennett, William S. Dietrich II,
C. McCollister Evarts, M.D., J. Michael Fitzpatrick, Carl R. Garr,
William J. Hudson, Jr., Arthur E. Humphrey, Edward W. Kay,
Frederick C. Langenberg, Robert J. Lawless, Marlin Miller, Jr.,
Paul R. Roedel, Peter C. Rossin, 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 II. 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, 1997:
Allowance for
doubtful
accounts
receivable $1,249 $ 276 $ 441 $ (581) $1,385
====== ======= ======= ======= ======
Year ended
June 30, 1996:
Allowance for
doubtful
accounts
receivable $1,034 $ 440 $ 472 $ (697) $1,249
====== ======= ======= ======= ======
Year ended
June 30, 1995:
Allowance for
doubtful
accounts
receivable $ 619 $ 578 $ 338 $ (501) $1,034
====== ======= ======= ======= ======
(1) Includes beginning balances of acquired businesses and recoveries
of accounts previously written off, net of collection expenses.
(2) Doubtful accounts written off.
F-1