UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 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)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of December 31, 1997.
Common stock, $5 par value 19,630,028
Class Number of shares outstanding
The Exhibit Index appears on page E-1.
CARPENTER TECHNOLOGY CORPORATION
FORM 10-Q
INDEX
Page
----
Part I FINANCIAL INFORMATION
Consolidated Balance Sheet December 31, 1997 (Unaudited)
and June 30, 1997..................................... 3 - 4
Consolidated Statement of Income (Unaudited) for the
Three and Six Months Ended December 31, 1997 and 1996. 5
Consolidated Statement of Cash Flows (Unaudited) for the
Six Months Ended December 31, 1997 and 1996........... 6
Notes to Consolidated Financial Statements.............. 7 - 13
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................14 - 17
Forward-looking Statements.............................. 18
Part II OTHER INFORMATION................................19 - 23
Exhibit Index............................................. E-1
PART I
- ------ CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET (Page 1 of 2)
December 31, 1997 and June 30, 1997
(in thousands, except share data)
December 31 June 30
1997 1997
--------- --------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 34,965 $ 18,620
Accounts receivable, net 158,483 159,863
Inventories 278,689 211,483
Net assets held for sale 153,914 -
Other current assets 16,892 12,247
---------- ----------
Total current assets 642,943 402,213
Property, plant and equipment,
at cost 1,046,920 936,456
Less accumulated depreciation
and amortization 441,853 422,820
---------- ----------
605,067 513,636
Prepaid pension cost 110,803 99,748
Goodwill, net 160,615 104,610
Other assets 114,849 102,794
---------- ----------
Total assets $1,634,277 $1,223,001
========== ==========
See accompanying notes to consolidated financial statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET (Page 2 of 2)
December 31, 1997 and June 30, 1997
(in thousands, except share data)
December 31 June 30
LIABILITIES 1997 1997
- ----------- --------- --------
(Unaudited)
Current liabilities:
Short-term debt $ 131,128 $ 82,540
Accounts payable 85,744 78,962
Accrued compensation 17,110 26,932
Accrued income taxes 13,799 19,263
Deferred income taxes 26,851 5,601
Other accrued liabilities 53,958 41,375
Current portion of long-term debt 144,097 3,372
---------- ----------
Total current liabilities 472,687 258,045
Long-term debt, net of current portion 372,310 244,726
Accrued postretirement benefits 134,937 135,903
Deferred income taxes 119,227 110,780
Other liabilities 41,947 24,240
Minority interest 16,522 -
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock -
$5 par value, authorized 2,000,000
shares; issued 444.2 shares at
December 31, 1997 and 447.3 shares
at June 30, 1997 28,028 28,224
Common stock at $5 par value -
authorized 50,000,000 shares; issued
19,777,526 shares at December 31, 1997
and 19,642,920 shares at June 30,
1997 98,888 98,215
Capital in excess of par value -
common stock 58,461 54,338
Reinvested earnings 325,689 303,566
Common stock in treasury, at cost -
147,498 shares at December 31, 1997
and 160,605 shares at June 30, 1997 (3,394) (3,539)
Deferred compensation (19,077) (20,299)
Foreign currency translation
adjustments (11,948) (11,198)
---------- ----------
Total shareholders' equity 476,647 449,307
---------- ----------
Total liabilities and
shareholders' equity $1,634,277 $1,223,001
========== ==========
See accompanying notes to consolidated financial statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
for the three and six months ended December 31, 1997 and 1996
(in thousands, except per share data)
Three Months Six Months
------------------ ------------------
1997 1996 1997 1996
---- ---- ---- ----
Net sales $279,956 $208,670 $529,451 $403,416
-------- -------- -------- --------
Costs and expenses:
Cost of sales 202,847 152,069 382,266 300,387
Selling and
administrative
expenses 39,141 29,623 75,350 59,178
Interest expense 8,165 4,476 14,013 8,902
Other income, net (1,438) (441) (1,360) (369)
-------- -------- -------- --------
248,715 185,727 470,269 368,098
-------- -------- -------- --------
Income before income
taxes 31,241 22,943 59,182 35,318
Income taxes 12,565 9,296 23,422 13,596
-------- -------- -------- --------
Net income $ 18,676 $ 13,647 $ 35,760 $ 21,722
======== ======== ======== ========
Earnings per common share:
Basic $ .93 $ .80 $ 1.79 $ 1.26
======== ======== ======== ========
Diluted $ .89 $ .75 $ 1.71 $ 1.20
======== ======== ======== ========
Weighted average common
shares outstanding 19,567 16,626 19,533 16,621
======== ======== ======== ========
Dividends per common
share $ .33 $ .33 $ .66 $ .66
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
for the six months ended December 31, 1997 and 1996
(in thousands)
1997 1996
---- ----
OPERATIONS
Net income $ 35,760 $ 21,722
Adjustments to reconcile net income
to net cash provided from operations:
Depreciation and amortization 25,495 18,472
Deferred income taxes 3,563 4,889
Pension credits (11,055) (5,416)
Changes in working capital and other,
net of acquisitions:
Receivables 20,476 28,575
Inventories (31,716) (24,458)
Accounts payable (6,280) (18,992)
Accrued current liabilities (10,363) (10,161)
Other, net 785 1,336
-------- --------
Net cash provided from operations 26,665 15,967
-------- --------
INVESTING ACTIVITIES
Purchases of plant and equipment (43,892) (51,262)
Disposals of plant and equipment 1,144 183
Acquisitions of businesses, net
of cash received (130,874) -
Net assets held for sale (6,195) -
-------- --------
Net cash used for investing activities (179,817) (51,079)
-------- --------
FINANCING ACTIVITIES
Provided by short-term debt 48,588 49,495
Proceeds from issuance of long-term debt 140,000 -
Payments on long-term debt (9,512) (3,829)
Dividends paid (13,637) (11,729)
Proceeds from issuance of common stock 4,058 260
-------- --------
Net cash provided from financing activities 169,497 34,197
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS - (107)
-------- --------
INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS 16,345 (1,022)
Cash and cash equivalents at
beginning of period 18,620 13,159
-------- --------
Cash and cash equivalents at end of period $ 34,965 $ 12,137
======== ========
Supplemental Data:
- -----------------
Non-Cash Investing Activities:
Treasury stock issued for business acquisition $ 1,036 $ -
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial
statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting only
of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for
the six months ended December 31, 1997 are not necessarily
indicative of the results that may be expected for the year
ending June 30, 1998. The June 30, 1997 condensed balance sheet
data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting
principles. For further information, refer to the consolidated
financial statements and footnotes included in Carpenter's 1997
Annual Report on Form 10-K.
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Certain reclassifications of prior years' amounts have
been made to conform with the current year's presentation.
2. Earnings Per Common Share
-------------------------
In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings Per Share," which specifies the
computation, presentation and disclosure requirements for
earnings per share. SFAS No. 128 requires companies to
adopt its provisions for interim and annual periods ending
after December 15, 1997, and requires restatement of all
prior earnings per share data presented.
Basic 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
outstanding during the period. On a diluted basis, shares
outstanding are adjusted for common share equivalents, and
both net earnings and shares outstanding are adjusted to
assume the conversion of the convertible preferred stock.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
------------------------------------------
2. Earnings Per Common Share, continued
-------------------------
The calculations of earnings per share are as follows:
Three Months Six Months
1997 1997
------------------- -------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income $ 18,676 $ 18,676 $ 35,760 $ 35,760
Dividends accrued on
convertible preferred stock,
net of tax benefits (388) - (778) -
Assumed shortfall between
common and preferred dividend - (139) - (319)
-------- -------- -------- --------
Earnings available for common
shareholders $ 18,288 $ 18,537 $ 34,982 $ 35,441
======== ======== ======== ========
Weighted average number of
common shares outstanding 19,567 19,567 19,533 19,533
Assumed conversion of
preferred shares - 891 - 891
Effect of shares issuable
under stock option plans - 263 - 263
-------- -------- -------- --------
Weighted average common shares 19,567 20,721 19,533 20,687
======== ======== ======== ========
Earnings per share $ 0.93 $ 0.89 $ 1.79 $ 1.71
======== ======== ======== ========
Three Months Six Months
1996 1996
------------------- -------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income $ 13,647 $ 13,647 $ 21,722 $ 21,722
Dividends accrued on
convertible preferred stock,
net of tax benefits (407) - (798) -
Assumed shortfall between
common and preferred dividend - (222) - (444)
-------- -------- -------- --------
Earnings available for common
shareholders $ 13,240 $ 13,425 $ 20,924 $ 21,278
======== ======== ======== ========
Weighted average number of
common shares outstanding 16,626 16,626 16,621 16,621
Assumed conversion of
preferred shares - 904 - 904
Effect of shares issuable
under stock option plans - 154 - 154
-------- -------- -------- --------
Weighted average common shares 16,626 17,684 16,621 17,679
======== ======== ======== ========
Earnings per share $ 0.80 $ 0.75 $ 1.26 $ 1.20
======== ======== ======== ========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
------------------------------------------
3. Inventories
-----------
December 31 June 30
1997 1997
-------- --------
(in thousands)
Finished and purchased products $149,209 $121,532
Work in process 205,097 177,650
Raw materials and supplies 63,234 51,152
-------- --------
Total at current cost 417,540 350,334
Less excess of current cost
over LIFO values 138,851 138,851
-------- --------
Inventory per Balance Sheet $278,689 $211,483
======== ========
The current cost of LIFO-valued inventories was $377
million at December 31, 1997 and $318 million at June 30,
1997.
4. Acquisitions of Businesses
--------------------------
On December 5, 1997, Carpenter acquired approximately
75 percent of the outstanding common and preferred stock of
Talley Industries, Inc. ("Talley") for $142 million of cash,
including acquisition costs, and assumed Talley debt with a
principal amount of $125 million and a fair market value of
$137 million. The transaction was financed by short-term
debt issued under a recently-expanded revolving credit
agreement. Based upon a preliminary valuation, $52 million
of the purchase price was allocated to goodwill which will
be amortized on a straight-line basis over 40 years, the
estimated life of the goodwill.
Carpenter plans to acquire the balance of Talley's
outstanding shares in a merger to be completed on
February 19, 1998, when Talley's shareholders are scheduled
to vote on the approval of the sale of the remaining shares
to Carpenter for a total of $45 million in cash.
Talley is a diversified manufacturer that operates in three
segments: stainless steel products segment, a government products and
services segment and an industrial products segment. Talley
had revenues of $503 million and net income of approximately $19 million
in calendar 1996. The stainless steel products segment had
sales of $136 million and operating income, before income taxes and
corporate expenses of approximately $11 million in calendar 1996.
Carpenter intends to retain the companies in the stainless steel products
segment, but divest the companies in the government products and services
and industrial products segments. Carpenter believes these
segments will be sold within one year of acquisition.
Accordingly, the segments to be divested are reflected at
their estimated fair market value as net assets held for
sale in the accompanying financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
------------------------------------------
4. Acquisitions of Businesses, continued
--------------------------
On October 31, 1997, Carpenter acquired the net assets
of Shalmet Corporation and its affiliates for $9 million in
stock and cash, including acquisition costs, and assumed $4
million of Shalmet's debt. Shalmet converts "black" coil
and bar to "bright" round bar and coil products, and had
sales of approximately $12 million in 1996. Based upon a
preliminary valuation, the fair value of the net assets
acquired approximates the acquisition cost, and accordingly
no goodwill has been recorded.
On September 30, 1997, Carpenter acquired four of the
operating units of ICI Australia, Ltd. in exchange for $16
million of cash, including acquisition costs. These four
operating units manufacture structural ceramic components
and powder products, and had sales of approximately $21
million for the year ended September 30, 1997. Based upon a
preliminary valuation, $5 million of the purchase price was
allocated to goodwill, which will be amortized on a
straight-line basis over 20 years.
On July 9, 1997, Carpenter acquired all of the
outstanding common shares of Aceromex Atlas S.A. de C.V., a
specialty metals distributor in Mexico, for $3 million in
cash. Aceromex had sales of approximately $4 million for
calendar year 1996. Based upon a preliminary valuation, $1
million of the purchase price was allocated to goodwill, which
is being amortized on a straight-line basis over 20 years.
The acquisitions described above were accounted for
using the purchase method of accounting and accordingly, the
operating results of these acquired businesses which
Carpenter intends to retain have been included in Carpenter's
consolidated statement of income from the dates of
acquisition. The operating results of the segments which
will be sold are being accounted for as net assets held for sale
and will be excluded from Carpenter's consolidated statement
of income for up to one year following their acquisition.
The purchase prices of the businesses acquired during
fiscal 1998 have been allocated to the assets purchased and
liabilities assumed based upon the fair values on the dates
of acquisition as follows:
Working capital, other than cash $ 31,054
Property, plant and equipment 70,602
Other assets 16,191
Goodwill 58,053
Non-current liabilities and minority interest (43,990)
--------
$131,910
========
Debt and deferred tax liabilities included in the above
allocation were $138 million and $26 million, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
------------------------------------------
4. Acquisitions of Businesses, continued
--------------------------
On the basis of an unaudited pro forma consolidation of
Carpenter's results of operations as if the acquisition of the
75% of Talley which Carpenter now owns and the fiscal 1997
acquisitions had taken place at the beginning of fiscal
1997, consolidated net sales would have been $575 million
for the six months ended December 31, 1997 and $523 million
for the six months ended December 31, 1996. Unaudited
consolidated pro forma net income and basic earnings per
share would have been $35 million and $1.74 for the six
months ended December 31, 1997, and $26 million and $1.28
for the six months ended December 31, 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 1997. The results of the other
companies acquired in fiscal 1998 were excluded from these
proforma calculations because their inclusion would not have
had a significant effect.
5. Debt Arrangements
-----------------
In October 1997, Carpenter amended its existing
financial arrangements with a number of banks to increase
the revolving credit agreement from $150 million to $400
million. The expanded credit agreement was used to finance
the acquisition of Talley, back up Carpenter's outstanding
commercial paper, and meet other short-term cash requirements.
In December 1997, Carpenter amended its existing
financing arrangements with four banks to increase the
revolving credit agreement from $400 million to $500
million. The expanded credit agreement was used in January
1998 to finance the purchase of a portion of Talley
Manufacturing and Technology Inc.'s 10.75% Senior Notes
(see Note 8). It is planned that prior to September 30, 1998,
the revolving credit commitment will be reduced from $500
million to $200 million as a result of cash expected to be
generated from the sale of the Talley companies to be divested
(see Note 4) as well as cash provided by an issuance of Carpenter
common stock planned for March 1998 (see Note 8).
Interest on borrowings under the revolving credit
agreement is based on short-term market rates and
competitive bids. Carpenter has also retained the
availability of $50 million under lines of credit
arrangements with two banks. At December 31, 1997, $200 million of
short-term debt was classified as long-term debt because Carpenter
has the intent and ability to refinance this debt on a long-term
basis through its existing credit facilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
------------------------------------------
6. Commitments and Contingencies - Environmental
---------------------------------------------
Carpenter accrues amounts for environmental remediation
costs which represent management's best estimate of the
probable and reasonably estimable costs relating to
environmental remediation. For the three and six months
ended December 31, 1997, $4 million and $6 million,
respectively, were charged to operations for environmental
remediation costs. The liability for environmental
remediation costs at December 31, 1997 was $16 million.
The estimated range of the reasonably possible future costs
of remediation at Carpenter operating facilities and
superfund sites is between $16 million and $24 million.
Carpenter entered into additional settlements of
litigation relating to insurance coverages for certain
superfund sites and recognized income before income taxes of
$4 million for the three and six months ended December 31,
1997. During December 1997, $8 million of cash was received
under these settlements for the superfund sites, leaving the
remaining discounted receivable for recoveries from these
settlements at December 31, 1997 at $3 million.
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 potentially responsible
parties. Based upon information presently available, such
future costs are not expected to have a material effect on
Carpenter's competitive or financial position. However,
such costs could be material to results of operations in a
particular future quarter or year.
7. Accounting Pronouncements
-------------------------
The Financial Accounting Standards Board issued SFAS
130, "Reporting Comprehensive Income", and SFAS 131,
"Disclosures about Segments of an Enterprise and Related
Information" which will be effective for Carpenter's fiscal
year 1999. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full
set of general-purpose financial statements. SFAS 131
establishes standards for methods by which public business
enterprises report information about operating segments in
annual financial statements and requires them to report
selected information about operating segments in interim
financial reports issued to shareholders. It also
establishes standards for related disclosure about products
and services, geographic areas, and major customers. The
impact of these new standards on Carpenter's future
financial statements and disclosures has not been
determined.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
------------------------------------------
8. Subsequent Events
-----------------
In January 1998, Carpenter filed a shelf registration
statement with the Securities and Exchange Commission to
register $350 million of its common stock and debt securities.
Carpenter believes that the initial offering thereunder will be a
$125 million common stock offering. Carpenter intends to
grant to the underwriters an option to purchase up to 15%
of the amount of the shares issued in the public offering
to cover overallotments, if any. Carpenter previously
announced it was considering a common stock offering to
refinance the debt incurred in conjunction with its acquisition
of Talley.
On January 23, 1998, Talley Manufacturing and
Technology, Inc., a wholly-owned subsidiary of Talley,
purchased approximately 82% of its outstanding 10.75% Senior
Notes pursuant to a tender offer. The Notes were purchased
at a price of 108.79% of their principal amount, together
with accrued interest, or a total of $105 million, which
approximated the fair value assigned to the debt in the
determination of the purchase price for Talley (see Note 4).
In connection with the offer, consents have been received to effect
certain amendments to the indenture for the Senior Notes to enhance
financial and operating flexibility for Talley and Carpenter.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Results of Operations - Quarter Ended December 31, 1997 vs.
- -----------------------------------------------------------
Quarter Ended December 31, 1996:
- -------------------------------
Net income for the quarter ended December 31, 1997 was $19 million,
a 37% increase compared to $14 million for the same quarter last year.
Basic earnings per share were $.93 per share for the quarter compared to
$.80 per share for the same period a year ago. The improved results
were primarily because of higher shipments, reduced raw material costs,
and the inclusion of the results of businesses acquired during the last
year. The impact of higher net income on basic earnings per share for
the three months ended December 31, 1997 was partially offset by an
increase in the number of common shares outstanding because Carpenter
issued 2.8 million shares of treasury common stock for the purchase of
Dynamet Incorporated.
Sales were $280 million, an increase of 34% from $209 million in
the same period last year. Excluding the sales of businesses acquired
since last year, sales increased 11% primarily as a result of higher
unit volume shipments of the Specialty Alloys Operations.
The core Specialty Alloys Operations unit volume of stainless steel
products increased by 12% and special alloys were up by 13%, as a result
of strong demand from most end-use markets, especially those for aerospace
applications.
Cost of sales as a percent of net sales decreased slightly to 72%
in the current year's second quarter versus 73% a year ago primarily
because of lower raw material costs.
Selling and administrative costs were higher by $10 million
primarily due to the inclusion of costs of newly acquired companies.
Interest expense was higher by $4 million due to the increased debt
level required to finance the business acquisitions made during the past
year.
Other income increased by $1 million primarily due to a change
in the estimate of realizable value of a former plant site in Union,
New Jersey, which is held for sale, and included in other assets in
the Consolidated Balance Sheet.
Results of Operations - Six Months Ended December 31, 1997 vs.
- --------------------------------------------------------------
Six Months Ended December 31, 1996:
- ----------------------------------
Net income for the six months ended December 31, 1997 was $36 million,
up 65% compared to $22 million for the same period a year ago. Basic
earnings per share increased to $1.79 in the first six months, compared
with $1.26 for the six months ended December 31, 1996. The improved
results were primarily a result of higher sales and operating levels of the
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS, continued
-------------------------
Results of Operations - Six Months Ended December 31, 1997 vs.
- --------------------------------------------------------------
Six Months Ended December 31, 1996, continued:
- ----------------------------------
Specialty Alloys Operations and Engineered Products Group and the inclusion
of the results of Dynamet Incorporated, which was acquired in February 1997.
The impact of higher net income on basic earnings per share for the six
months ended December 31, 1997 was partially offset by an increase in the
number of common shares outstanding because Carpenter issued 2.8 million
shares of treasury common stock for the purchase of Dynamet Incorporated.
Sales were $529 million, up 31% from $403 million in the same
period last year. The increase in sales was primarily the result of
an improvement in Specialty Alloys Operations unit volume, and the
inclusion of Dynamet Incorporated, Rathbone Precision Metals, Inc.,
Shalmet Corporation, Aceromex Atlas, S.A. de C.V. and ICI Australia, Ltd.'s
ceramics business, which were acquired subsequent to December 31, 1996.
The core Specialty Alloys Operations unit volume of stainless
products increased by 10% and special alloys shipments were higher
by 14%. Demand for aerospace products increased strongly while
automotive and industrial product demand remained at high levels.
Cost of sales as a percent of net sales decreased to 72% from
74% last year. The effect of increased environmental remediation
charges on this ratio was more than offset by lower raw material
costs and higher sales. The first six months of last year were
adversely affected by an extended maintenance shutdown which resulted
in lower manufacturing levels and higher repair expenses.
Selling and administrative costs were higher by $16 million
primarily due to newly acquired companies, higher sales levels,
and higher costs for professional services.
Interest expense was $14 million, or $5 million higher than
the same period last year primarily because of borrowings to
finance recent business acquisitions, and higher inventory levels of the
Specialty Alloys Operations.
Other income increased by $1 million primarily due to a
change in the estimate of realizable value of a former plant site
in Union, New Jersey which is held for sale, and included in other
assets in the Consolidated Balance Sheet.
In March 1996, Carpenter began to assess the impact that
Year 2000 issues might have on future operating capabilities.
Based on its remediation efforts through December 31, 1997,
Carpenter believes that the costs of such efforts will not be
material to its net income or the trends of its net income. In
addition, Carpenter has an ongoing remedial program to correct
on a timely basis any issues which may arise so that future
operations will not be materially impacted.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS, continued
-------------------------
Results of Operations - Six Months Ended December 31, 1997 vs.
- --------------------------------------------------------------
Six Months Ended December 31, 1996, continued:
- ----------------------------------
The Financial Accounting Standards Board issued SFAS 130, "Reporting
Comprehensive Income," and SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" which will be effective for Carpenter's
fiscal year 1999. The impact of these new standards on Carpenter's future
financial statements and disclosures has not been determined.
Cash Flow and Financial Condition:
- ---------------------------------
During the six months ended December 31, 1997, Carpenter's
cash and cash equivalents increased by $16 million, as shown in
the Consolidated Statement of Cash Flows.
Net cash generated from operating activities was $27 million
despite working capital needs to support the growth in sales.
Excluding amounts acquired through purchases of businesses,
accounts receivable decreased $20 million, accounts payable and
accrued current liabilities decreased $17 million, and
inventories increased $32 million, primarily as a result of
normal seasonal trends.
Investing activities consumed $180 million in cash during the first
six months of fiscal 1998. Total spending for business acquisitions, net
of cash received, was $131 million. Capital expenditures remained at
increased levels as Carpenter continues its capital expenditure program
to invest for future business requirements, including manufacturing
capacity. As of December 31, 1997, the total capital improvement
projects in excess of $1 million approved by Carpenter's Board of
Directors was approximately $223 million of which approximately $31 million
was spent as of December 31, 1997. The major projects include modernization
of its strip finishing facility ($87 million), a new 4500 ton forging press
($42 million), four new vacuum arc remelt furnaces( $22 million), and
annealing expansion ($16 million). Total capital expenditures anticipated for
fiscal 1998 are $108 million of which $44 million was spent as of
December 31, 1997.
Total debt, excluding debt of acquired businesses, increased by
$179 million since June 30, 1997 to a level of $648 million or 50% of
total capital employed, including deferred taxes. Current year borrowings
were in the form of short-term debt. At December 31, 1997, $200 million
of short-term debt was classified as long-term debt because Carpenter
has the intent and ability to refinance this debt on a long-term basis
through existing credit facilities.
In October 1997, Carpenter amended its existing financial arrangements
with a number of banks to increase the revolving credit agreement from
$150 million to $400 million. The expanded credit agreement was used to
finance the acquisition of Talley, back up Carpenter's outstanding commercial
paper, and meet other short-term cash requirements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS, continued
-------------------------
In December 1997, Carpenter amended its existing financing arrangements
with four banks to increase the revolving credit agreement from $400 million
to $500 million. The expanded credit agreement was used in January 1998 to
finance the purchase of Talley Manufacturing's 10.75% Senior Notes. It is
planned that prior to September 30, 1998, the revolving credit commitment
will be reduced from $500 million to $200 million as a result of cash expected
to be generated from the sale of the Talley companies to be divested (see
Note 4) as well as cash provided by Carpenter common stock planned to be
issued in March 1998.
At December 31, 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.
At December 31, 1997, Carpenter was in a sound liquidity position, with
current assets exceeding current liabilities by $170 million (a ratio of 1.4
to 1). This favorable ratio is conservatively stated because certain
inventories are valued $139 million less that the current cost as a result of
using the LIFO method.
In summary, Carpenter believes that its present financial resources,
both from internal and external sources, including the anticipated proceeds
from the sales of the Talley segments, will be adequate to meet its foreseeable
short-term and long-term liquidity needs.
Forward-looking Statements
--------------------------
This Form 10-Q contains various "Forward-looking Statements"
within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements are based on current expectations
regarding future events that involve a number of risks and
uncertainties which could cause actual results to differ from
those of such forward-looking statements. Such risks and
uncertainties include those set forth in other filings made by
the Company under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, and also include the
following factors: environmental expenses may exceed those
currently projected and recoveries from other parties may be less
than expected; the planned public offering of Carpenter common
stock and sales of two business segments of Talley are subject to
various uncertainties including general economic and financial
market conditions and completion of the Talley acquisition.
The forward-looking statements in this document are intended to be
subject to the safe harbor protection provided by Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.
-------------------------
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which
the Company or any of its subsidiaries is a party or to which any
of their properties is subject or which is known by the Company
to be contemplated by governmental authorities. There are no
material proceedings to which any Director, Officer, or affiliate
of the Company, or any owner of more than five percent of any
class of voting securities of the Company, or any associate of
any Director, Officer, affiliate, or security holder of the
Company, is a party adverse to the Company or has a material
interest adverse to the interest of the Company or its
subsidiaries. There is no administrative or judicial proceeding
arising under any Federal, State or local provisions regulating
the discharge of materials into the environment or primarily for
the purpose of protecting the environment that (1) is material to
the business or financial condition of the Company, (2) involves
a claim for damages, potential sanctions or capital expenditures
exceeding ten percent of the current assets of the Company or (3)
includes a governmental authority as a party and involves
potential monetary sanctions in excess of $100,000.
Item 2. Changes in Securities.
------------------------------
a. There has been no material modification of any class of
registered securities.
b. All outstanding indebtedness under the Note Agreement
dated August 1, 1988, among the Company, Massachusetts Mutual
Life Insurance Company and Berkshire Life Insurance Company, was
prepaid in full effective November 17, 1997, including all
outstanding principal in the amount of $6,000,000 accrued
interest and a premium of $254,000. The Note Agreement and the
restrictions upon payment of dividends set forth therein have
been terminated.
Item 4. Submission of Matters to a Vote of Security Holders.
-----------------------------------------------------------
a. The Annual Meeting of Stockholders of the Company was
held on October 20, 1997.
b. Information required by this paragraph is omitted since
(i) proxies for the Annual Meeting were solicited pursuant to
Regulation 14 under the Securities Exchange Act, (ii) there was
no solicitation in opposition to the management's nominees as
listed in the proxy statement and (iii) all of such nominees were
elected.
c. Set forth below is a description of the matters voted
upon at the Annual Meeting and the number of votes cast for,
against or withheld, as well as the number of abstentions and
broker nonvotes, as applicable to each such matter.
I. Election Of Directors. The following four
---------------------
directors were elected to the Board of Directors of the Company.
There were no other nominees for director.
A. Dr. C. McCollister Evarts
Shares voted for: 17,374,814
Shares voted against or withheld: 184,312
Abstentions: N/A
Broker nonvotes: N/A
B. William J. Hudson, Jr.
Shares voted for: 17,413,365
Shares voted against or withheld: 145,761
Abstentions: N/A
Broker nonvotes: N/A
C. Peter C. Rossin
Shares voted for: 17,337,736
Shares voted against or withheld: 221,390
Abstentions: N/A
Broker nonvotes: N/A
D. Kenneth L. Wolfe
Shares voted for: 17,411,667
Shares voted against or withheld: 147,459
Abstentions: N/A
Broker nonvotes: N/A
II. The accounting firm of Coopers & Lybrand L.L.P. was
elected independent accountants for the year ending June 30, 1998.
Shares voted for: 17,441,071
Shares voted against or withheld: 79,871
Abstentions: N/A
Broker nonvotes: N/A
III. An Amendment and Restatement to the Non-Qualified
Stock Option Plan for Non-Employee Directors to establish the
Stock Based Compensation Plan for Non-Employee Directors as
described in the Proxy Statement was approved.
Shares voted for: 16,504,889
Shares voted against: 856,429
Abstentions: 197,808
Broker nonvotes: None
Item 6. Exhibits and Reports on Form 8-K.
----------------------------------------
a. The following documents are filed as exhibits:
27. Financial Data Schedule.
99. Additional exhibits
i. Amendment and Restatement No. 2 to Credit
Agreement dated as of October 23,1997 among
the Company, the Banks listed on the signature
page thereof, Mellon Bank, N.A. as Syndication
Agent and Morgan Guaranty Trust Company, as
Agent, is incorporated herein by reference to
Item II, Exhibit (b)(2) of Amendment No. 6
dated October 27, 1997 to the Company's
Schedule 14D-1.
ii. Amendment and Restatement No. 3 to Credit
Agreement dated as of December 23, 1997 among
the Company, the Banks listed on the signature
page thereof and Morgan Guaranty Trust Company,
as Agent.
b. The Company filed the following Reports on Form
8-K for events occurring during the quarter of the
fiscal year covered by this report.
I. Current Report on Form 8-K dated December 5,
1997 reporting on Items 2 and 7 as amended by Form
8-K/A filed on January 22, 1998. The amendment
included the following financial statements:
Financial Statements of Talley Industries, Inc. as
of and for the year ended December 31, 1996:
(1) Report of Independent Accountants
(2) Consolidated Statement of Earnings -
Years ended December 31, 1996, 1995 and
1994.
(3) Consolidated Balance Sheet - December 31,
1996 and 1995.
Item 6. Exhibits and Reports on Form 8-K, continued
----------------------------------------
(4) Consolidated Statement of Changes in
Stockholders' Equity - Years ended
December 31, 1996, 1995 and 1994.
(5) Consolidated Statement of Cash Flows -
Years ended December 31, 1996, 1995 and
1994.
(6) Notes to Consolidated Financial
Statements, including Summary of Segment
Operations.
Unaudited Financial Statements of Talley
Industries, Inc. as of and for the three and nine
months ended September 30, 1997:
(1) Consolidated Balance Sheet-September 30,
1997 and December 31, 1996.
(2) Consolidated Statement of Earnings -
Three Months and Nine Months Ended
September 30, 1997 and 1996.
(3) Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1997 and
1996.
(4) Consolidated Statement of Changes in
Stockholders' Equity - Nine Months Ended
September 30, 1997 and 1996.
(5) Notes to Consolidated Financial
Statements.
Unaudited Pro Forma Financial Information to
reflect the registrant's acquisition of Talley
Industries Inc.
(1) Unaudited Pro Forma Condensed Combined
Balance Sheet as of September 30, 1997.
(2) Unaudited Pro Forma Condensed Combined
Statements of Income for the Year Ended
June 30, 1997 and the Three Months Ended
September 30, 1997.
(3) Notes to Pro Forma Condensed Combined
Financial Statements.
Items 3 and 5 are omitted as the answer is negative or the
items are not applicable.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CARPENTER TECHNOLOGY CORPORATION
--------------------------------
(Registrant)
Date: February 12, 1998 s/ G. Walton Cottrell
------------------- -----------------------------------
G. Walton Cottrell
Sr. Vice President - Finance
and Chief Financial Officer