UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---- ----
Commission File Number 1-5828
CARPENTER TECHNOLOGY CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 23-0458500
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1047 North Park Road, Wyomissing, Pennsylvania 19610-1339
- ---------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
610-208-2000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
1
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 October 31, 2002.
Common stock, $5 par value 22,341,952
- -------------------------- ----------------------------
Class Number of shares outstanding
2
CARPENTER TECHNOLOGY CORPORATION
FORM 10-Q
INDEX
Page
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheet as of
September 30, 2002 (unaudited) and
June 30, 2002........................ 5
Consolidated Statement of Operations
(unaudited) for the Three Months
Ended September 30, 2002 and 2001.... 7
Consolidated Statement of Comprehensive
Loss (unaudited) for the Three Months
Ended September 30, 2002 and 2001... 9
Consolidated Statement of Cash Flows
(unaudited) for the Three Months
Ended September 30, 2002 and 2001.... 10
Notes to Consolidated Financial
Statements (unaudited) .............. 12-19
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 20-25
Forward-looking Statements............. 26
Item 3 Quantitative and Qualitative
Disclosures about Market Risk.......... 27
Item 4 Controls and Procedures................ 27
PART II OTHER INFORMATION
Item 1 Legal Proceedings..................... 28
3
Item 4 Submission of Matters to a Vote of
Security Holders...................... 29
Item 6 Exhibits and Reports on Form 8-K...... 29
Signature............................. 30
Certifications of Periodic Reports.... 30-34
4
PART I
- ------
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET
September 30, 2002 and June 30, 2002
(in millions)
September 30 June 30
2002 2002
------------ -------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 24.7 $ 18.7
Accounts receivable, net 117.0 133.7
Inventories 198.1 190.0
Other current assets 33.1 33.5
-------- --------
Total current assets 372.9 375.9
Property, plant and equipment, net 690.0 713.1
Prepaid pension cost 251.4 255.9
Goodwill 46.3 46.3
Trademarks and trade names, net 26.2 26.4
Other assets 60.0 61.9
-------- --------
Total assets $1,446.8 $1,479.5
======== ========
LIABILITIES
Current liabilities:
Short-term debt $ 15.5 $ 16.8
Accounts payable 73.3 76.8
Accrued liabilities 60.5 61.1
Deferred income taxes 5.0 5.9
Current portion of long-term debt 50.1 50.2
-------- --------
Total current liabilities 204.4 210.8
Long-term debt, net of current portion 367.6 375.8
Accrued postretirement benefits 170.8 167.8
Deferred income taxes 179.8 182.3
Other liabilities 43.0 34.5
-------- --------
Total liabilities 965.6 971.2
-------- --------
5
STOCKHOLDERS' EQUITY
Convertible preferred stock 9.2 24.4
Common stock 117.2 117.3
Capital in excess of par value 200.1 200.1
Reinvested earnings 210.3 229.0
Common stock in treasury, at cost (38.4) (38.3)
Deferred compensation (4.2) (11.7)
Accumulated other comprehensive income
(loss) (13.0) (12.5)
-------- --------
Total stockholders' equity 481.2 508.3
-------- --------
Total liabilities and stockholders'
equity $1,446.8 $1,479.5
======== ========
See accompanying notes to consolidated financial statements.
6
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
for the three months ended September 30, 2002 and 2001
(in millions, except per share data)
Three Months
------------------
2002 2001
------- --------
NET SALES $213.8 $ 251.1
------ -------
COSTS AND EXPENSES:
Cost of sales 180.2 198.3
Selling and administrative expenses 31.7 36.6
Special charge 14.2 --
Interest expense 8.0 8.9
Other income, net (0.3) (1.7)
------ -------
233.8 242.1
------ -------
Income (loss) before income taxes and
cumulative effect of accounting change (20.0) 9.0
Income taxes (benefit) (9.1) 3.1
------ -------
Income (loss) before cumulative effect of
accounting change (10.9) 5.9
Cumulative effect of accounting change -- (112.3)
------ -------
NET LOSS $(10.9) $(106.4)
====== =======
EARNINGS (LOSS) PER COMMON SHARE:
Basic:
Income (loss) before cumulative effect
of accounting change $(0.51) $ 0.24
Cumulative effect of accounting change -- (5.06)
------ -------
Net loss $(0.51) $ (4.82)
Diluted:
Income (loss) before cumulative effect
of accounting change $(0.51) $ 0.24
Cumulative effect of accounting change -- (5.06)
------ -------
Net loss $(0.51) $( 4.82)
====== =======
7
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 22.3 22.2
====== =======
Diluted 22.3 22.2
====== =======
Cash dividends per common share $ 0.33 $ 0.33
====== =======
See accompanying notes to consolidated financial statements.
8
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(Unaudited)
for the three months ended September 30, 2002 and 2001
(in millions)
2002 2001
------- --------
Net loss $(10.9) $(106.4)
Net losses on derivative instruments, net
of tax (0.4) (4.0)
Foreign currency translation, net of tax (0.1) (0.4)
------ --------
Comprehensive loss $(11.4) $(110.8)
====== =======
See accompanying notes to consolidated financial statements.
9
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
for the three months ended September 30, 2002 and 2001
(in millions)
2002 2001
------- --------
OPERATIONS:
Net loss $(10.9) $(106.4)
Adjustments to reconcile net income to
net cash provided from operations:
Depreciation 13.7 14.1
Amortization of intangible assets 2.2 3.3
Goodwill impairment charge -- 112.3
Deferred income taxes (3.0) 2.2
Net pension credit (1.1) (4.3)
Net loss (gain) on asset disposals 0.1 (0.2)
Special charge 14.2 --
Changes in working capital and other:
Receivables 16.7 24.1
Inventories (8.1) (17.9)
Accounts payable (3.5) 2.6
Accrued current liabilities (2.3) (1.6)
Income tax refund 11.0 --
Other, net (10.0) (4.5)
------ -------
Net cash provided from operations 19.0 23.7
------ -------
INVESTING ACTIVITIES:
Purchases of plant, equipment and
software (3.1) (9.8)
Proceeds from disposals of plant and
equipment 0.2 0.2
------ -------
Net cash used for investing activities (2.9) (9.6)
------ -------
NET CASH PROVIDED BEFORE FINANCING
ACTIVITIES 16.1 14.1
------ -------
10
FINANCING ACTIVITIES:
Net change in short-term debt (1.3) (90.3)
Net proceeds from issuance of long-term
debt -- 98.8
Payments on long-term debt (1.0) (15.0)
Dividends paid (7.8) (7.8)
Proceeds from issuance of common stock -- 0.5
------ -------
Net cash used for financing activities (10.1) (13.8)
------ -------
INCREASE IN CASH AND CASH EQUIVALENTS 6.0 0.3
Cash and cash equivalents at beginning of
period 18.7 7.8
------ -------
Cash and cash equivalents at end of period $ 24.7 $ 8.1
====== =======
See accompanying notes to consolidated financial statements.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial
information and the instructions to Form 10-Q.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting
principles for complete financial statements. In the
opinion of management, all adjustments of a normal and
recurring nature necessary for a fair presentation have
been included. Operating results for the three months
ended September 30, 2002 are not necessarily indicative of
the results that may be expected for the year ending
June 30, 2003. The June 30, 2002 condensed balance sheet
data were derived from audited financial statements, but do
not include all disclosures required by generally accepted
accounting principles. These unaudited consolidated
financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto
included in Carpenter's fiscal year 2002 Annual Report on
Form 10-K.
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Certain reclassifications of prior year's amounts have
been made to conform with the current year's presentation.
2. Earnings Per Common Share
-------------------------
The calculations of earnings (loss) per share for the
three months ended September 30, 2002 and 2001 are shown
12
below. No calculations are presented for the diluted
earnings (losses) per share for the three months ended
September 30, 2002 or 2001, since the assumed conversion of
preferred shares and the exercise of stock options are
anti-dilutive.
(in millions, except per share data)
Three Months Ended
September 30
------------------
2002 2001
------- --------
Basic:
- -----
Net income (loss) before cumulative effect
of accounting change $(10.9) $ 5.9
Dividends accrued on convertible preferred
stock, net of tax benefits (0.4) (0.5)
------ -------
Earnings (loss) available for common
stockholders (11.3) 5.4
Cumulative effect of accounting change -- (112.3)
------ -------
Net loss available for common stockholders $(11.3) $(106.9)
====== =======
Weighted average number of common shares
outstanding 22.3 22.2
Earnings (loss) per share before cumulative
effect of accounting change $(0.51) $0.24
Cumulative effect of accounting change -- (5.06)
------ ------
Basic net loss per share $(0.51) $(4.82)
====== ======
Diluted:
- -------
Earnings (loss) per share before cumulative
effect of accounting change $(0.51) $0.24
Cumulative effect of accounting change -- (5.06)
------ ------
Diluted net loss per share $(0.51) $(4.82)
====== ======
13
3. Special Charge
--------------
During the first quarter of fiscal 2003, Carpenter
incurred a special charge of $14.2 million before taxes.
These actions were taken as part of the Company's strategy
to reduce costs and improve operational effectiveness. The
components of this special charge are indicated below.
- Reductions in workforce of approximately 235 salaried
positions as part of the Company's strategy to reduce
cost and improve operational effectiveness. As of
September 30, 2002, the salaried workforce reduction was
substantially complete. The pre-tax charge of $11.3
million consisted primarily of various personnel-related
costs to cover severance payments, enhanced pension
benefits, medical coverage and related items.
Approximately $9.2 million of the charge will be paid
from the qualified pension plan and, accordingly, this
portion of the special charge reduced the prepaid
pension cost account on the balance sheet.
- Writedown of $2.9 million pre-tax of certain assets
reclassified as held-for-sale. Assets held-for-sale are
included within other current assets on the consolidated
balance sheet and are included within Corporate Assets
within the segment data. Prior to the writedown, the
net book value of these assets was $5.2 million. These
assets are expected to be sold during fiscal year 2003.
As of September 30, 2002, depreciation on these assets
has ceased.
14
4. Inventories
-----------
September 30, June 30,
2002 2002
------------- --------
(in millions)
Finished and purchased products $104.9 $102.4
Work in process 155.6 145.6
Raw materials and supplies 45.9 51.0
------ ------
Total at current cost 306.4 299.0
Less excess of current cost over LIFO
values 108.3 109.0
------ ------
Total inventory $198.1 $190.0
====== ======
The current cost of LIFO-valued inventories was
$245.8 million at September 30, 2002 and $233.9 million at
June 30, 2002.
5. Property, Plant and Equipment
-----------------------------
September 30, June 30,
2002 2002
------------- --------
(in millions)
Property, plant and equipment at cost $1,343.0 $1,354.9
Less accumulated depreciation and
amortization 653.0 641.8
-------- --------
$ 690.0 $ 713.1
======== ========
6. Goodwill and Other Intangible Assets
------------------------------------
The $112.3 million cumulative effect of accounting
change is a non-cash, non-operating charge recognized for
impairment of goodwill. Fair values of the reporting units
were estimated on July 1, 2001 based upon discounted cash
flow analyses and the use of market multiples. The fair
value of certain reporting units was less than their
15
carrying value. There was no movement in goodwill during
the three months ended September 30, 2002. At September 30,
2002, the Specialty Metals Segment and the Engineered
Products Segment accounted for $34.6 million and
$11.7 million of goodwill, respectively.
7. Stockholders' Equity Data
-------------------------
September 30, June 30,
2002 2002
------------- --------
Preferred shares issued 384.4 388.4
========== ==========
Common shares issued 23,449,919 23,450,019
Common shares in Treasury (1,107,967) (1,104,295)
---------- ----------
Net common shares outstanding 22,341,952 22,345,724
========== ==========
8. Contingencies
-------------
Environmental
Carpenter is subject to various stringent federal,
state, local and foreign environmental laws and regulations
relating to pollution, protection of public health and the
environment, natural resource damages and occupational
safety and health. Although compliance with these laws and
regulations may affect the costs of Carpenter's operations,
compliance costs to date have not been material. Carpenter
has environmental remediation liabilities at some of its
owned operating facilities and has been designated as a
potentially responsible party ("PRP") with respect to
certain third-party Superfund waste disposal sites and
other third party owned 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
remediation costs nor the final method of their allocation
among all designated PRPs at these Superfund sites have
been determined. The liability for future environmental
remediation costs is evaluated by management on a quarterly
basis. Carpenter accrues amounts for environmental
16
remediation costs that represent management's best estimate
of the probable and reasonably estimable costs related to
environmental remediation. No additional accrual was made
during the three months ended September 30, 2002 and
September 30, 2001. The liability recorded for
environmental remediation costs at Superfund sites, at
other third party-owned sites and at Carpenter-owned
operating facilities remaining at September 30, 2002 was
$5.3 million. A compliance status report is currently
being prepared by an outside consultant to determine what,
if any, potential remediation costs there may be at a
former manufacturing site of a Talley Industries, Inc.
subsidiary that was sold prior to Carpenter's acquisition
of Talley Industries, Inc. The estimated range at
September 30, 2002 of the reasonably possible future costs
of remediation at Superfund sites, at other third party-
owned sites and at Carpenter-owned operating facilities is
between $5.3 million and $12.1 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, the
identification of currently unknown remediation sites and
the allocation of costs among the PRP's. Based upon
information currently available, such future costs are not
expected to have a material effect on Carpenter's
competitive or financial position. However, such costs
could be material to results of operations in a particular
future quarter or year.
Other
Carpenter is also defending various claims and legal
actions, and is subject to 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. The effect of the outcome of these
matters on Carpenter's future results of operations and
liquidity cannot be predicted because any such effect
depends on future results of operations and the amount and
timing (both as to recording future charges to operations
and cash expenditures) of the resolution of such matters.
While it is not feasible to determine the outcome of these
17
matters, management believes that any total ultimate
liability will not have a material effect on Carpenter's
financial position, results of operations or cash flows.
9. Employee Stock Ownership Plan
-----------------------------
Carpenter has a leveraged employee stock ownership
plan ("ESOP") to assist certain employees with their future
retiree medical obligations. Carpenter issued 461.5 shares
of convertible preferred stock in fiscal 1992 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 stockholders'
equity section of the consolidated balance sheet as
deferred compensation. At September 30, 2002, the ESOP
held 384.425 shares of convertible preferred stock. Each
preferred share is convertible into at least 2,000 shares
of common stock.
As a provision of the ESOP, participants are
guaranteed a common share price of $32.50 per share upon
conversion. At September 30, 2002, a net $8.2 million was
reclassified from shareholders' equity to other liabilities
representing the amount that the actual common stock share
value is below the guaranteed conversion share value. The
$8.2 million was comprised of a reduction in convertible
preferred stock of $15.0 million offset by a reduction in
deferred compensation of $6.8 million.
10. Business Segments
-----------------
Carpenter is organized on a product basis: Specialty
Alloys Operations, Dynamet, Carpenter Powder Products and
Engineered Products. For segment reporting, the Specialty
Alloys Operations, Dynamet and Carpenter Powder Products
segments have been aggregated into one reportable segment,
Specialty Metals, because of the similarities in products,
processes, customers, distribution methods and economic
characteristics. Carpenter's sales are not materially
dependent on a single customer or small group of customers.
18
Three Months Ended
September 30
------------------
2002 2001
------- -------
(in millions)
Net sales:
Specialty Metals $186.0 $215.7
Engineered Products 28.4 35.7
Intersegment (0.6) (0.3)
------ ------
Consolidated net sales $213.8 $251.1
Operating income:
Specialty Metals $ 2.9 $ 12.3
Engineered Products 2.2 3.9
Net pension credit 1.1 4.3
Corporate costs (4.3) (4.3)
Special charge (14.2) --
Interest expense (8.0) (8.9)
Other income, net 0.3 1.7
------ ------
Consolidated income (loss) before
income taxes and cumulative effect of
accounting change $(20.0) $ 9.0
====== ======
September 30, June 30,
2002 2002
------------- --------
(in millions)
Total assets:
Specialty Metals $1,015.1 $1,057.7
Engineered Products 90.1 90.4
Corporate assets 341.6 331.4
-------- --------
Consolidated total assets $1,446.8 $1,479.5
======== ========
19
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations - Three Months Ended September 30, 2002
- -------------------------------------------------------------
vs. Three Months Ended September 30, 2001:
- -----------------------------------------
The first quarter net loss was $10.9 million or $.51 per
diluted share, compared to a net loss of $106.4 million or $4.82
per diluted share a year ago. Last year's first quarter
included a $112.3 million charge, or $5.06 per diluted share,
related to the adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."
The net loss in the current year first quarter included a
pre-tax special charge of $14.2 million ($8.5 million after-tax)
related primarily to severance costs associated with the
elimination of salaried positions. Carpenter's net loss before
the special charge was $2.4 million or $.13 per diluted share.
Net sales for the first fiscal quarter ended September 30,
2002 were $213.8 million, or 14.9 percent, lower than the same
period a year ago. Sales were negatively impacted by a steep
decline in demand for aerospace and power generation related
materials. The decline in sales also reflects inventory
adjustments taking place within the supply chain due to expected
lower deliveries for commercial jet aircraft and industrial gas
turbines. Partially offsetting the reduced demand from the
aerospace and power generation markets were sales increases in
several product lines of Carpenter's industrial and consumer
markets. Sales to the automotive market were similar to last
year's level. Despite increased stainless volumes from a year
ago, Carpenter's sales were adversely affected by a shift in
product mix towards lower value materials. In addition,
specialty metals pricing continues to be impacted by weak
demand, excess global capacity and the availability of low-
priced imported stainless bar, rod and wire.
The gross profit of 15.7 percent for the quarter was lower
than last year's 21.0 percent. This decrease was chiefly due to
20
reduced shipment levels of higher valued specialty alloys and
products to the aerospace and power generation markets,
sustained pricing pressures on stainless products, increased
sales of lower valued stainless wire and rod products and a
reduced net pension credit. These negatives were partially
offset by lower labor, benefits and energy expenses.
Selling and administrative expenses were down $4.9 million
compared with a year ago because of lower salaries and benefits
expenses, depreciation and amortization, telecommunication and
travel and entertainment costs which were partially offset by a
reduced net pension credit. As a percent of sales, selling and
administrative expenses were 14.8 percent compared to 14.6
percent last year due in part to the lower sales volume.
In the first quarter of fiscal 2003, a pre-tax special
charge of $14.2 million ($8.5 million after taxes or $0.38 per
diluted share) was incurred for severance payments, enhanced
pension benefits and medical coverage of eliminating
approximately 235 salaried positions ($6.8 million after-tax)
and for an estimated loss on asset disposals ($1.7 million
after-tax). These actions were taken as part of the Company's
strategy to reduce costs and improve operational effectiveness.
These charges will not materially affect cash flow since the
severance costs will be paid predominately from the Company's
overfunded pension plan.
Interest expense of $8.0 million is lower than last year by
$0.9 million due to lower current-year debt levels and lower
interest rates.
Carpenter's effective tax rate, income taxes (benefit) as a
percent of income (loss) before taxes, for the quarter ended
September 30, 2002 was (45.5) percent versus 34.4 percent a year
ago. Income tax benefits in the current year first quarter
include a $1.3 million benefit from research and development
credits.
Business Segment Results:
- ------------------------
Specialty Metals Segment
Net sales for the quarter ended September 30, 2002 for the
Specialty Metals segment, which includes the Specialty Alloys
21
Operations (SAO), Dynamet, and Carpenter Powder Products (CPP)
business units, were $186.0 million or $29.7 million lower than
in the same quarter a year ago. SAO sales decreased by 12
percent due to a significantly weaker sales mix and reduced
selling prices. SAO volume was 14 percent higher than last year
due mainly to increased sales of lower valued stainless wire and
rod products. However, the weaker sales mix that resulted,
combined with decreased shipment levels of higher valued
specialty alloys to the aerospace and power generation markets
and sustained pricing pressures on stainless products, adversely
impacted sales. Dynamet's sales decreased 37 percent in the
first quarter versus a year ago, primarily due to lower volumes
to the aerospace market. CPP's sales were about equal to last
year.
Operating income for the Specialty Metals segment was $2.9
million, which was $9.4 million lower than last year. This
decrease was due primarily to SAO's weaker sales mix and
Dynamet's reduced sales volumes, partially offset by improved
operating efficiencies and by lower selling and administrative
expenses.
Engineered Products Segment
Net sales for this segment, which includes sales of ceramic
cores and complex shapes made from a wide variety of materials,
were $28.4 million as compared to $35.7 million a year ago.
Last year's first quarter included $1.7 million in sales from
businesses that were subsequently divested. This group of
companies was largely affected by a slowdown in the aerospace
and industrial gas turbine markets. The operating income for
the Engineered Products segment was $2.2 million in the first
quarter versus $3.9 million a year ago. The decline in
operating income was primarily due to lower volumes as a result
of reduced demand from key markets.
Net Pension Credit:
- ------------------
The net pension credit represents income relating to
Carpenter's overfunded defined benefit pension plan, less the
expense for the post-retirement benefit plans and the other
underfunded defined benefit pension plans. The net pension
credit is classified in cost of sales and selling and
administrative expenses in the consolidated statement of
22
operations. The net pension credit was $1.1 million in the
first quarter versus $4.3 million last year. The net pension
credit is chiefly a result of the overfunded position of
Carpenter's largest defined benefit pension plan. The lower
level of the net pension credit versus the prior year was due
primarily to the equity markets' investment losses on the
pension and post-retirement plan assets as of June 30, 2002.
This unfavorable variance from the previous year's level of net
pension credits will continue for the balance of fiscal 2003.
Cash Flow and Financial Condition:
- ---------------------------------
Carpenter has maintained the ability to provide cash to
meet its needs through cash flow from operations, management of
working capital and the flexibility to use outside sources of
financing to supplement internally generated funds.
During the three months ended September 30, 2002,
Carpenter's free cash flow (cash flow provided before financing
activities less dividends paid) was $8.3 million versus $6.3
million a year ago. Cash from operations was $19.0 million for
the current quarter as compared to $23.7 million a year ago.
Included in the current year cash flow was an $11.0 million tax
refund.
Capital expenditures for plant, equipment and software
consumed $3.1 million in cash during the first three months of
fiscal 2003 versus $9.8 million for the same year ago period.
Total debt, net of cash and including amounts outstanding
under the Company's receivables purchase facility, was reduced
to $418.5 million at September 30, 2002 or 46.5 percent of
capital. This net debt level is $15.6 million lower than at the
end of the previous quarter.
A component of Carpenter's debt refinancing strategy is to
maintain a certain level of floating rate debt relative to its
fixed rate debt. In order to achieve this targeted level, the
Company uses interest rate swaps. These instruments will
obligate the Company to pay a swap counterparty either a
floating rate of interest in return for it receiving a fixed
rate of interest or obligate the Company to pay a fixed rate of
interest in return for it receiving a floating rate of interest.
23
At September 30, 2002, Carpenter had entered into interest rate
swaps with a notional principal amount of $62.6 million.
Carpenter believes that its current financial resources,
both from internal and external sources, will be more than
adequate to meet its foreseeable needs. At the end of the first
quarter, Carpenter had approximately $135.0 million available
under its credit facilities.
Contingencies:
- -------------
Environmental
Carpenter is subject to various stringent federal, state,
local and foreign environmental laws and regulations relating to
pollution, protection of public health and the environment,
natural resource damages and occupational safety and health.
Although compliance with these laws and regulations may affect
the costs of Carpenter's operations, compliance costs to date
have not been material. Carpenter has environmental remediation
liabilities at some of its owned operating facilities and has
been designated as a potentially responsible party ("PRP") with
respect to certain third-party Superfund waste disposal sites
and other third party owned 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 remediation
costs nor the final method of their allocation among all
designated PRPs at these Superfund sites have been determined.
The liability for future environmental remediation costs is
evaluated by management on a quarterly basis. Carpenter accrues
amounts for environmental remediation costs that represent
management's best estimate of the probable and reasonably
estimable costs related to environmental remediation. No
additional accrual was made during the three months ended
September 30, 2002 and September 30, 2001. The liability
recorded for environmental remediation costs at Superfund sites,
at other third party-owned sites and at Carpenter-owned
operating facilities remaining at September 30, 2002 was $5.3
million. A compliance status report is currently being prepared
by an outside consultant to determine what, if any, potential
remediation costs there may be at a former manufacturing site of
a Talley Industries, Inc. subsidiary that was sold prior to
Carpenter's acquisition of Talley Industries,
24
Inc. The estimated range at September 30, 2002 of the
reasonably possible future costs of remediation at Superfund
sites, at other third party-owned sites and at Carpenter-owned
operating facilities is between $5.3 million and $12.1 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, the identification of currently unknown remediation
sites and the allocation of costs among the PRP's. Based upon
information currently available, such future costs are not
expected to have a material effect on Carpenter's competitive or
financial position. However, such costs could be material to
results of operations in a particular future quarter or year.
Other
Carpenter is also defending various claims and legal
actions, and is subject to 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. The effect of the outcome of these matters on
Carpenter's future results of operations and liquidity cannot be
predicted because any such effect depends on future results of
operations and the amount and timing (both as to recording
future charges to operations and cash expenditures) of the
resolution of such matters. While it is not feasible to
determine the outcome of these matters, management believes that
any total ultimate liability will not have a material effect on
Carpenter's financial position, results of operations or cash
flows.
Future Outlook:
- --------------
As part of its cost reduction initiatives announced on
September 30, 2002, Carpenter will incur an after-tax special
charge in the second quarter of approximately $6.0 million
related primarily to the costs of early retirement incentives.
The special charges incurred in the first and second quarters
will not materially affect Carpenter's operating cash flow since
the severance costs will be funded predominately from its
overfunded pension plan.
25
The Company is cautious about the timing of an economic
recovery, as some recent indicators point to continued sluggish
conditions in the U.S. manufacturing sector. Sales to the power
generation market are expected to recover before sales to the
aerospace market, which may be depressed at least until calendar
year 2004. Actions have been taken to further reduce costs so
that Carpenter can be profitable, continue to generate free cash
flow and to pay down debt. On October 28, 2002, the Company
announced a quarterly cash dividend of $0.0825 per share, a
reduction of the previous level of $0.33 per share.
In the current market environment, Carpenter expects to
return to profitability in the second half of fiscal 2003 and to
generate free cash flow in excess of $40 million for fiscal
2003.
Forward-looking Statements
- --------------------------
This Form 10-Q contains various "Forward-looking
Statements" pursuant to the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. These
statements, which represent Carpenter's expectations or beliefs
concerning various future events, include statements concerning
future revenues and various market segments. These forward-
looking statements are subject to risks and uncertainties that
could cause actual results to differ from those projected,
anticipated or implied. The most significant of these
uncertainties are described in Carpenter's Form 10-K for the
year ended June 30, 2002, and its most recent registration
statement on Form S-4, filed on October 12, 2001, as amended on
November 29, 2001. They include but are not limited to: 1) the
cyclical nature of the specialty materials business and certain
end-use markets, including aerospace, automotive and consumer
durables, which are subject to changes in general economic and
financial market conditions; 2) the ability of Carpenter to
recoup increased costs of electricity, natural gas and raw
materials, such as nickel, through increased prices and
surcharges; 3) worldwide excess manufacturing capacity for
certain alloys that Carpenter produces; 4) fluctuations in
currency exchange rates, resulting in increased competition and
downward pricing pressure on certain Carpenter products; 5) the
degree of success of government trade actions; and 6)
fluctuations in stock markets that could impact the valuation of
the assets in Carpenter's pension trusts and the accounting for
26
pension assets. Any of these factors could have an adverse
and/or fluctuating effect on Carpenter's results of operations.
The forward-looking statements in this document are intended to
be subject to the safe harbor protection provided by Section 27A
of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. Carpenter
undertakes no obligation to update or revise any forward-looking
statements.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk
Carpenter uses derivative financial instruments to reduce
certain types of financial risks. Raw material cost
fluctuations for the Specialty Metals Segment are normally
offset by selling price adjustments, primarily through the use
of surcharge mechanisms and base price adjustments. Firm price
sales contracts involve a risk of profit margin decline in the
event of raw material increases. Carpenter reduces this risk on
certain raw materials and energy by entering into commodity
forward contracts and commodity price swaps on a portion of its
requirements that are effective hedges of the risk.
Fluctuations in foreign currency exchange rates subject
Carpenter to risk of losses on anticipated future cash flows
from its foreign operations. Foreign currency forward contracts
are used to hedge this foreign exchange risk. These hedging
strategies are reviewed and approved by senior financial
management before being implemented. Senior financial
management has established policies regarding the use of
derivative instruments which prohibit the use of speculative or
leveraged derivatives. Market valuations are performed at least
quarterly to monitor the effectiveness of Carpenter's risk
management programs.
Item 4. Controls and Procedures
- ---------------------------------
Within ninety days prior to filing this report, the
Company, under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and
the Chief Financial Officer, evaluated the effectiveness of the
design and operation of the Company's disclosure controls and
procedures. Based on that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective.
27
There were no significant changes to the Company's internal
controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.
Securities and Exchange Commission Rule 13a-14 defines
"disclosure controls and procedures" as controls and other
procedures of an issuer that are designed to ensure that
information required to be disclosed by the issuer in the
reports that it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the Commission's rules and
forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that such
information is accumulated and communicated to the issuer's
management, including its principal executive officer and
principal financial officer, as appropriate to allow timely
decisions regarding required disclosure.
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.
- ---------------------------
Pending legal proceedings involve ordinary routine
litigation incidental to the business of Carpenter. There are no
material proceedings to which any Director, Officer, or
affiliate of the Company, or any owner of more than five percent
of any class of voting securities of the Company, or any
associate of any Director, Officer, affiliate, or security
holder of the Company, is a party adverse to the Company or has
a material interest adverse to the interest of the Company or
its subsidiaries. There is no administrative or judicial
proceeding arising under any Federal, State or local provisions
regulating the discharge of materials into the environment or
primarily for the purpose of protecting the environment that (1)
is material to the business or financial condition of the
Company, (2) involves a claim for damages, potential sanctions
or capital expenditures exceeding ten percent of the current
assets of the Company or (3) includes a governmental authority
as a party and involves potential monetary sanctions in excess
of $100,000.
28
Item 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
a. On October 28, 2002, Carpenter Technology Corporation held
its 2002 Annual Meeting of Stockholders.
b. At the 2002 Annual Meeting, stockholders of Carpenter
elected Dennis M. Draeger, J. Michael Fitzpatrick,
Marillyn A. Hewson and Gregory A. Pratt to be Directors for
a three-year term which will expire at the 2005 Annual
Meeting of Stockholders. Voting was as follows:
For Withheld
Dennis M. Draeger 19,690,336 689,029
J. Michael Fitzpatrick 19,843,838 535,530
Marillyn A. Hewson 19,862,317 517,049
Gregory A. Pratt 19,841,731 537,640
The following are the other Directors whose terms continued
following the 2002 Annual Meeting: William J. Hudson,
Robert J. Lawless, Robert N. Pokelwaldt, Peter C. Rossin,
Robert J. Torcolini, Kathryn C. Turner, Stephen M.
Ward, Jr. and Kenneth L. Wolfe.
c. Stockholders also approved the appointment of
PricewaterhouseCoopers LLP as independent public
accountants for Carpenter for fiscal 2003. The voting on
this matter was as follows:
<table>
<caption>
For Against Abstain
<s> <c> <c> <c>
Appointment of
PricewaterhouseCoopers LLP 19,062,503 1,224,915 91,944
</table>
Item 6. Exhibits and Reports on Form 8-K.
- -----------------------------------------
a. Current Reports on Form 8-K were filed on behalf of
Carpenter on September 23, 2002 and September 30, 2002.
The Reports were dated September 23, 2002 and September 30,
2002, respectively. The September 23, 2002 Report covered
Item 7, Financial Statements and Exhibits, and Item 9,
29
Regulation FD Disclosure, and included sworn statements
pursuant to Securities and Exchange Commission Order No. 4-
460. The September 30, 2002 Report covered Item 5, Other
Events. No financial statements were filed with these
Reports.
Items 2, 3 and 5 are omitted as the answer is negative or
the items are not applicable.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
by the undersigned duly authorized officer, on its behalf and in
the capacity indicated.
Carpenter Technology Corporation
--------------------------------
(Registrant)
Date: November 13, 2002 /s/ Terrence E. Geremski
--------------------------------
Terrence E. Geremski
Senior Vice President - Finance
and Chief Financial Officer
CERTIFICATIONS OF PERIODIC REPORTS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
----------------------------------------------
Certification
- -------------
I, Dennis M. Draeger, Chairman and Chief Executive Officer
of Carpenter Technology Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Carpenter Technology Corporation;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
30
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
(a) designed such disclosure controls and procedures
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
"Evaluation Date"); and
(c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
31
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ Dennis M. Draeger
--------------------------------
Dennis M. Draeger
Chairman and Chief Executive
Officer
Certification
- -------------
I, Terrence E. Geremski, Senior Vice President - Finance
and Chief Financial Officer of Carpenter Technology Corporation,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Carpenter Technology Corporation;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and
other financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
32
(a) designed such disclosure controls and procedures
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
"Evaluation Date"); and
(c) presented in this quarterly report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's auditors
any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective
33
actions with regard to significant deficiencies and material
weaknesses.
Date: November 13, 2002
/s/ Terrence E. Geremski
--------------------------------
Terrence E. Geremski
Senior Vice President - Finance
and Chief Financial Officer
CERTIFICATION OF PERIODIC FINANCIAL REPORTS PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Carpenter
Technology Corporation (the "Issuer") on Form 10-Q for the
quarter ended September 30, 2002, as filed with the Securities
and Exchange Commission on the date hereof (the "Periodic
Report"), I, Dennis M. Draeger, Chairman and Chief Executive
Officer of the Issuer, and I, Terrence E. Geremski, Vice
President - Finance and Chief Financial Officer of the Issuer,
each hereby certify, pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
the Periodic Report containing the financial statements fully
complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and that information contained
in the Periodic Report fairly presents, in all material
respects, the financial condition and result of operations of
the Issuer.
/s/ Dennis M. Draeger /s/ Terrence E. Geremski
- ---------------------------- ----------------------------
Dennis M. Draeger Terrence E. Geremski
Chairman and Chief Executive Senior Vice President -
Officer Finance and Chief Financial
Officer
Date: November 13, 2002
34