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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1994
Commission file number 1-5828
CARPENTER TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 23-0458500
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 West Bern Street, Reading, Pennsylvania 19612-4662
(Address of principal executive offices) (Zip Code)
610-208-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
(Name of each exchange
(Title of each class) on which registered)
- - - --------------------- ----------------------
Common stock, par value $5 per share......New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days. Yes X . No .
--- ---
Indicate by check mark if disclosure of delinquent filers pur-
suant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of September 1, 1994, 8,152,965 shares of Common Stock of
Carpenter Technology Corporation were outstanding and the
aggregate market value of such Common Stock held by nonaffiliates
(based upon its closing transaction price on the Composite Tape
on such date) was $527,904,484.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain information from the
1994 definitive Proxy Statement.
The Exhibit Index appears on pages E-1 to E-5.
PART I
Item 1. Business
(a) General Development of Business:
Carpenter Technology Corporation, incorporated in
1904, and its subsidiaries are engaged in the
manufacture, fabrication, and marketing of specialty
metals and structural ceramics. There were no
significant changes in the form of organization or mode
of conducting business of Carpenter Technology
Corporation (hereinafter called the Company) during the
year ended June 30, 1994, except for the transactions
described below:
On July 28, 1993, the Company purchased all of the
capital stock (the "Stock") of Aceros Fortuna, S.A. de
C.V. and two related companies ("Fortuna"). Fortuna is
the largest distributor of specialty steel long
products (those in bar, rod, wire or strip forms) in
Mexico. Fortuna also operates a heat treatment
facility and a leasing company, in Mexico City. The
purchase price for the Stock was $20.4 million. In
addition, the Company paid $2.5 million for agreements
not to compete and paid acquisition costs. This
investment is being accounted for using the purchase
method of accounting.
On September 2, 1993, the Company acquired for $45.0
million in cash, 19 percent of the shares of
Walsin-CarTech Specialty Steel Corporation, a joint
venture with Walsin Lihwa Corporation in Taiwan. The
joint venture has constructed a facility and installed
equipment in this facility in Taiwan to manufacture and
distribute specialty steel. Initial production trial
runs of steel began in July 1994. The Company has an
option to acquire up to an additional 16 percent of the
outstanding shares of the joint venture from Walsin
Lihwa at any time until July 1, 1996. Alternatively,
the Company may require Walsin Lihwa to purchase its 19
percent ownership for the original purchase cost at any
time up to July 1, 1997. This investment is being
accounted for using the equity method of accounting.
In addition, on July 22, 1994, the Company acquired all
of the outstanding shares of Certech, Inc. and an affiliated
company (Certech), for $16.0 million comprised of $12.8
million in cash and the balance in shares of Carpenter
common stock. Certech, with plants in New Jersey,
Pennsylvania and the United Kingdom had sales of about $17
million in fiscal 1994. It is a recognized leader in the
technology and manufacturing of structural ceramic products.
The acquisition of Certech enabled the Company to quickly
attain a substantial position in the structural ceramics
market.
(b) Financial Information About Industry Segments:
The Company is primarily engaged in one business
segment, the manufacture, fabrication and marketing of
specialty metals.
(c) Narrative Description of Business:
(1) Products:
The Company processes basic raw materials such as
chromium, nickel, iron scrap and other metal alloying
elements through various melting, hot forming and cold
working facilities to produce finished products in the
form of billet, bar, rod, wire, narrow strip, special
shapes, and hollow forms in many sizes and finishes.
Sales of finished products include:
STAINLESS STEELS -
A broad range of corrosion resistant alloys
including conventional stainless steels and many
proprietary grades for special applications.
SPECIAL ALLOYS -
Other special purpose alloys used in critical
components such as bearings and fasteners. Heat
resistant alloys that range from slight
modifications of the stainless steels to complex
nickel and cobalt base alloys. Alloys for
electronic, magnetic and electrical applications
with controlled thermal expansion characteristics,
or high electrical resistivity or special magnetic
characteristics. Special stainless steels and
zirconium base alloys for nuclear reactors.
TOOL STEELS -
Tool and die steels which are extremely hard
alloys used for tooling and other wear-resisting
components in metalworking operations such as
stamping, extrusion and machining.
OTHER -
Carbon steels purchased for distribution and other
miscellaneous products.
The products of the Company are sold primarily in
the United States and principally through its own sales
organization with service centers and sales offices
located in many of the major cities of the country.
Sales outside of the United States, including export sales,
were $67.1 million, $30.7 million and $33.9 million in
fiscal 1994, 1993 and 1992, respectively.
(2) Classes of Products:
The approximate percentage of the Company's
consolidated net sales contributed by the major classes
of products for the last three fiscal years are as
follows:
1994 1993 1992
---- ---- ----
Stainless Steel 60% 60% 57%
Special Alloys 29% 33% 36%
Tool Steel 8% 7% 7%
Other 3% - -
---- ---- ----
100% 100% 100%
==== ==== ====
(3) Raw Materials:
The Company depends on continued delivery of
critical raw materials for its day-to-day operations.
These raw materials are nickel, ferrochrome, cobalt,
molybdenum, manganese and scrap, both alloy and steel.
Some of these raw materials sources are located in
countries subject to potential interruptions of supply.
These potential interruptions could cause material
shortages and affect the availability and price.
The Company is in a strong raw material position
because of its long-term relationships with major
suppliers. These suppliers provide material
availability and competitive prices for these key raw
materials.
The Company has also established and maintains raw
material inventory at appropriate levels at the Reading
plant. These raw materials inventory levels are
balanced to meet inventory targets while maintaining
continued operations during potential periods of
disruption.
(4) Patents and Licenses:
The Company and its subsidiaries and affiliates
own a number of United States and foreign patents and
have granted licenses under some or all of them.
Certain of the products produced by the Company are
covered by patents of other companies from whom
licenses have been obtained. The Company does not
consider its business to be materially dependent upon
any patent or patent rights.
(5) Seasonality of Business:
The Company's sales and earnings results are
normally influenced by seasonal factors. The first
fiscal quarter (three months ending September 30) is
typically the lowest - chiefly because of annual plant
vacation shutdowns in this period by the Company as
well as by many of its customers. The timing of major
changes in the general economy can alter this pattern,
but over the longer time frame, the historical patterns
generally prevail. The chart below shows the percent
of net sales by quarters for the past three fiscal
years:
1994 1993 1992
---- ---- ----
Quarter Ended September 30 21% 24% 22%
Quarter Ended December 31 23% 21% 23%
Quarter Ended March 31 28% 27% 29%
Quarter Ended June 30 28% 28% 26%
---- ---- ----
100% 100% 100%
==== ==== ====
(6) Customers:
The Company is not dependent upon a single
customer, or a very few customers, to the extent that
the loss of any one or more would have a materially
adverse effect on the Company.
(7) Backlog:
As of August 31, 1994, the Company had a backlog
of orders, believed to be firm, of approximately $196.0
million, substantially all of which is expected to be
shipped within the current fiscal year. The backlog as
of August 31, 1993 was approximately $122.0 million.
(8) Competition:
The business of the Company is highly competitive.
There are 14 major domestic companies producing one or
more similar specialty metal products in competition
with the Company. Furthermore, a number of different
products may, in certain instances, be substituted for
the Company's finished product. Additionally, numerous
foreign producers import into the United States various
specialty metal products similar to those produced by
the Company. Imports of foreign specialty steels have
long been a serious concern to the domestic steel
industry because of the potential for unfair pricing by
foreign producers. Such pricing practices have usually
been supported by foreign governments through direct
and indirect subsidies.
The Voluntary Restraint Arrangements (VRA's)
limiting the volume of foreign specialty steel products
which could be exported to the United States expired as
scheduled in 1992. The U.S. Government chose not to
extend the VRA's, leaving the domestic producers with
the alternative of filing unfair trade actions against
foreign specialty steel producers.
In January 1994, the International Trade
Commission (ITC) ruled that the domestic industry had
been injured by dumped stainless steel rod imports from
Brazil, France and India and the U.S. Department of
Commerce issued dumping orders against the three
countries targeted. As a result, additional duties
will be collected at margins ranging from 24.6% to
26.5% against Brazil, 24.59% against France and 48.8%
against India on all imports of stainless steel rod
from those countries.
On December 30, 1993, the Company joined with six
other domestic producers in filing new antidumping
actions against imports of stainless steel bar from
Brazil, India, Italy, Japan and Spain. In
February 1994, the ITC determined that there was a
preliminary indication of injury and, on July 28, 1994,
the U.S. Department of Commerce issued a preliminary
dumping determination against the five countries, with
margins ranging up to 61%. As a result, importers are
required to post bonds on cash deposits covering the
amounts of the potential additional duties. The final
determinations of dumping and injury are expected by
the end of calendar 1994.
Negotiations by the U.S. Trade Representative with
the major steel producing nations of the world to
develop a Multilateral Steel Agreement (MSA) are
continuing. The objective of the MSA would be to
reduce unfair trade in steel products by establishing
international commitments and disciplines aimed at
eliminating subsidies and other trade-distortive
practices.
(9) Research, Product and Process Development:
The Company's expenditures for company-sponsored
research and development were approximately $13.6
million, $12.9 million and $14.0 million in fiscal
1994, 1993 and 1992, respectively.
(10) Environmental Regulations:
The Company, as well as other steel companies, is
subject to various stringent federal, state, and local
environmental laws and regulations. The liability for
future environmental remediation costs is evaluated on
a quarterly basis by management. The Company accrues
amounts for environmental remediation costs which
represent management's best estimate of the probable
and reasonably estimable costs relating to environ-
mental remediation. For further information on
environmental remediation, see the Commitments and
Contingencies section included in Item 7 "Management's
Discussion and Analysis of Financial Condition and
Results of Operations" and Note 16 to the financial
statements included in Item 8 "Financial Statements and
Supplementary Data".
The costs of maintaining and operating environ-
mental control equipment were about $8.5 million and
$8.2 million for fiscal 1994 and 1993, respectively.
The capital expenditures for environmental control
equipment were about $.5 million and $2.6 million for
fiscal 1994 and 1993, respectively. The Company
anticipates spending approximately $15.0 million on
major domestic environmental capital projects over the
next five fiscal years. Due to the possibility of
unanticipated factual or regulatory developments, the
amount of future capital expenditures may vary.
(11) Employees:
As of August 31, 1994, the Company had 4,085 full-
time employees.
Item 2. Properties
The locations of the Company's principal manufacturing
plants are: Reading, Pennsylvania; Orangeburg, South Carolina;
and San Diego, California. The Reading and Orangeburg plants are
owned in fee. The San Diego plant is owned, but the land is
leased.
The Company has an annual practical melting capacity of
approximately 208,000 ingot tons of its normal product mix. The
annual tons shipped will be considerably less than the tons
melted due to finishing losses. During the years ended June 30,
1994 and 1993, the Company operated at approximately 78 percent
and 70 percent, respectively, of its melting capacity due to
significant reductions in its finished and process inventories.
The Company also operates sales offices and service centers,
most of which are owned, at 35 locations in 15 states and 8
foreign countries.
The plants, service centers and offices of the Company have
been acquired at various times over many years. There is an
active maintenance program to keep facilities in good condition.
In addition, the Company has had an active capital spending
program to replace equipment as needed to keep it technologically
competitive on a world-wide basis. The Company believes its
facilities are in good condition and suitable for its business
needs.
Item 3. Legal Proceedings
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which
the Company or any of its subsidiaries is a party or to which any
of their properties is subject. There are no material
proceedings to which any Director, Officer, or affiliate of the
Company, or any owner of more than five percent of any class of
voting securities of the Company, or any associate of any
Director, Officer, affiliate, or security holder of the Company,
is a party adverse to the Company or has a material interest
adverse to the interest of the Company or its subsidiaries.
There is no administrative or judicial proceeding arising
under any Federal, State or local provisions regulating the
discharge of materials into the environment or primarily for the
purpose of protecting the environment that (1) is material to the
business or financial condition of the Company (2) involves a
claim for damages, potential sanctions or capital expenditures
exceeding ten percent of the current assets of the Company or (3)
includes a governmental authority as a party and involves
potential monetary sanctions in excess of $100,000.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
Listed below are the names of corporate and certain divisional
officers as of fiscal year end, including those required to be listed
as executive officers for Securities and Exchange Commission purposes,
each of whom assumes office after the annual meeting of the Board of
Directors which immediately follows the Annual Meeting of Shareholders.
All of the corporate officers listed below have held responsible
positions with the registrant for more than five years except for
Nicholas F. Fiore and Robert W. Lodge.
Dr. Fiore served as Managing Director of Materials and
Applied Physics for Arthur D. Little, Inc. in 1989, President of
Cabot Ceramics, Inc. from 1986 to 1989, Vice President - Cabot
High Performance Alloys from 1985 to 1986, Vice President and
General Manager - Cabot Specialty Materials from 1983 to 1985,
and Vice President and Corporate Director of Technology of Cabot
Corporation from 1982 to 1983. Before joining Cabot, Dr. Fiore
spent 15 years with the University of Notre Dame, serving as
Professor and Chairman of the Department of Metallurgy and
Materials Science from 1972 to 1981.
Mr. Lodge served as Vice President of Human Resources for
Johnson Matthey, Inc. from 1988 to 1991 and in various
assignments in industrial relations and human resources with
Rockwell International Corporation from 1977 to 1988. There is
no family relationship between any of the officers.
Assumed
Present
Name Age Positions Position
- - - ---- --- ---------- ---------
Robert W. Cardy 58 Chairman, President &
Chief Executive Officer July 1992
Director November 1990
Donald C. Bristol 55 Senior Vice President -
Steel Division January 1993
Edward B. Bruno 54 Controller October 1975
G. Walton Cottrell 54 Sr. Vice President -
Finance & Chief
Financial Officer January 1993
Nicholas F. Fiore 54 Senior Vice President -
Strategic Businesses January 1993
Robert W. Lodge 51 Vice President - Human
& Admin. Services September 1991
John A. Schuler 52 Treasurer November 1978
Robert J. Torcolini 43 Vice President -
Manufacturing Operations,
Steel Division January 1993
Richard J. Weiler 57 Vice President -
Sales and Marketing,
Steel Division January 1993
John R. Welty 45 Vice President -
General Counsel &
Secretary January 1993
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters
Common stock of the Company is listed on the New York Stock
Exchange. The ticker symbol is CRS. Here are the high and low
market prices of the Company's stock for the past two fiscal
years:
Quarter Ended: 1994 1993
________________________________________________________________
High Low High Low
September 30 $56-3/8 $49-3/8 $49-1/4 $41
December 31 $58-1/4 $50 $51-1/8 $43-3/8
March 31 $66-3/8 $56-1/2 $52-1/8 $48-3/8
June 30 $62-3/4 $56-1/2 $55-3/8 $47-3/8
________________________________________________________________
$66-3/8 $49-3/8 $55-3/8 $41
The Company has paid quarterly cash dividends on its common
stock for 88 consecutive years. The quarterly dividend rate has
been $.60 per share for each of the past three years.
The Company had 5,977 common shareholders of record as of
June 30, 1994. The balance of the information required by this
item is disclosed in Note 8 to the financial statements included
in Item 8 "Financial Statements and Supplementary Data".
Item 6. Selected Financial Data
Five-Year Financial Summary
Dollar amounts in thousands, except per share data
(years ended June 30)
1994 1993 1992 1991 1990
______________________________________________________________________
Summary of Operations
Net Sales $628,795 $576,248 $570,200 $562,476 $584,351
Income before extra-
ordinary charges &
cumulative effect
of changes in
accounting
principles $ 38,289 $ 26,534 $ 14,884 $ 30,071 $ 45,017
Extraordinary
charges net of
income taxes $ (2,039)$ - $ (1,238)$ - $ -
Cumulative effect of
changes in accounting
principles, net of
income taxes $ - $(74,676)$ - $ - $ -
Net income (loss) $ 36,250 $(48,142)$ 13,646 $ 30,071 $ 45,017
Financial Position
at Year-End
Total assets $729,911 $699,565 $714,752 $716,995 $695,419
Long-term debt, net $158,070 $189,895 $196,604 $122,661 $126,503
Per Share Data
Primary:
Income before extra-
ordinary charges &
cumulative effects
of changes in
accounting
principles $ 4.55 $ 3.11 $ 1.63 $ 3.52 $ 5.05
Net income (loss) $ 4.30 $ (6.21)$ 1.48 $ 3.52 $ 5.05
Fully Diluted:
Income before extra-
ordinary charges &
cumulative effects
of changes in
accounting
principles $ 4.40 $ 3.03 $ 1.63 $ 3.52 $ 5.05
Net income (loss) $ 4.16 $ (5.77)$ 1.48 $ 3.52 $ 5.05
Cash dividends-common $ 2.40 $ 2.40 $ 2.40 $ 2.40 $ 2.325
See Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for discussion of factors
that affect the comparability of the "Selected Financial Data".
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
MANAGEMENT'S DISCUSSION OF OPERATIONS
Summary
Net sales and earnings trends for the past three fiscal years are
summarized below:
(dollars in millions -
except per share) 1994 1993 1992
__________________________________________________________________
Net sales $628.8 $576.2 $570.2
Income before extraordinary
charges and cumulative effect of
changes in accounting principles $ 38.3 $ 26.5 $ 14.9
Net income (loss) $ 36.3 $(48.1) $ 13.6
Primary earnings per share before
extraordinary charges and
cumulative effect of changes
in accounting principles $ 4.55 $ 3.11 $ 1.63
Primary earnings (loss) per share $ 4.30 $ (6.21) $ 1.48
__________________________________________________________________
Fiscal 1994 and 1992 results were adversely affected by
extraordinary charges for debt retirement as described in Note 7
to the financial statements. Fiscal 1993 results were reduced by
a large, one-time retroactive charge for the cumulative effect of
adopting two accounting changes as described in Note 1 to the
financial statements.
Earnings before the extraordinary charges and accounting changes
improved in each of the past two years as a result of the
improved economy and internal programs for cost reduction, asset
utilization and market share enhancements.
The chart below shows net sales by product line for the past
three fiscal years:
1994 1993 1992
(dollars in millions) Sales % Sales % Sales %
__________________________________________________________________
Stainless steel $375.0 60 $342.9 60 $325.3 57
Special alloys 182.4 29 190.3 33 205.8 36
Tool steel 49.6 8 43.0 7 39.1 7
Other 21.8 3 - - - -
__________________________________________________________________
Total $628.8 100 $576.2 100 $570.2 100
==================================================================
The following table is the approximate breakdown of sales by end-
use markets (excludes sales of Aceros Fortuna in 1994):
Years Ended June 30 1994 1993 1992
________________________________________________________________
Metal producing and distribution 14% 13% 11%
Motor vehicles and equipment 14 13 13
Aerospace 12 14 16
Electrical and electronic equipment 12 12 12
General industrial equipment 11 11 11
Power generation and distribution 8 7 7
Metal working equipment 7 7 6
Chemical and petroleum processing 5 5 6
Consumer durables 5 5 5
Instruments and controls 4 4 5
Housing and construction 3 3 3
Miscellaneous 5 6 5
________________________________________________________________
100% 100% 100%
================================================================
Results of Operations - Fiscal 1994 Versus Fiscal 1993
Sales were $628.8 million in fiscal 1994, up 9 percent from the
fiscal 1993 level of $576.2 million. Approximately 60 percent of
the increase was from the inclusion, in fiscal 1994, of the
results of Aceros Fortuna, S.A. de C.V., a Mexican steel
distribution company, which was acquired in July 1993 (described
in Note 2 to the financial statements).
The remainder of the sales improvement was due to an 8 percent
increase in unit volume shipments of the Steel Division. Demand
for stainless bar and wire products was at a high level,
especially in the January to June 1994 period. Also, mill-direct
business in commodity-priced products was accepted to more fully
utilize production capability. This strategy and reduced sales
of high temperature alloys for the aerospace industry resulted in
a lower-priced sales mix. Unit selling prices for domestic
specialty steel shipments fell an average of 2 percent due to
lower nickel costs and continued competitive price pressures,
particularly from imported products.
Cost of sales as a percentage of sales decreased to 73 percent
versus 76 percent a year earlier. The improved cost ratio was
chiefly the result of the increased production level and
manufacturing efficiency gains for the Steel Division. These
favorable effects were partially offset by the lower unit selling
prices. Cost of sales in each of the last two fiscal years was
favorably affected by reductions in inventories valued using the
LIFO method. The LIFO method values inventory reductions at
historical costs which were lower than current costs. This
favorable effect on costs, before taxes and profit sharing
impacts, was $24.9 million in fiscal 1994 and $25.7 million in
fiscal 1993.
Raw material costs per unit purchased decreased by 6 percent
during fiscal 1994 versus the year-earlier costs primarily
because of a 15 percent drop in the cost of nickel. Labor costs
for Steel Division production and maintenance employees were up
by 4 percent as a result of base wage increases in July 1993 and
higher profit sharing payments. Excluding the Company's Mexican
operations, there was a decrease of about 40 salaried employees
during fiscal 1994, offsetting most of the increase in salaries
due to inflation.
Natural gas costs per unit consumed increased by 27 percent over
fiscal 1993's level, but electricity costs per unit fell by 13
percent.
Selling and administrative expenses increased by $10.3 million
during fiscal 1994 due chiefly to the inclusion of Aceros Fortuna
costs in fiscal 1994 and increased salaried employment costs.
Interest expense was lower by $5.1 million in fiscal 1994
principally because of the capitalization of $3.6 million of
interest related to the investment in the Walsin-CarTech
Specialty Steel Corporation in Taiwan (described in Note 3 to the
financial statements). Also, interest rates were lower,
especially since the retirement of the 12-7/8% debentures in
March 1994.
Fiscal 1994 includes $.9 million of losses for the Company's 19
percent share of the losses of the Walsin-CarTech joint venture
(described in Note 3 to the financial statements).
Other income decreased by $4.1 million primarily because fiscal
1993 income included a $3.7 million award in a patent suit.
Income taxes as a percent of pre-tax income (effective tax rate)
increased to 39 percent in fiscal 1994 from 38 percent a year
earlier because of an increase in the federal statutory rate. A
reconciliation of the effective tax rate to the federal statutory
rate is presented in Note 14 to the financial statements.
During fiscal 1994, the Company retired at a premium, $55.3
million of its 12-7/8% debentures, and recorded an extraordinary
charge of $2.0 million including unamortized discount and issue
costs, net of $1.2 million of income tax benefits (described in
Note 7 to the financial statements).
Results of Operations - Fiscal 1993 Versus Fiscal 1992
Sales increased by 1 percent in fiscal 1993. Total unit volume
shipped increased by 6 percent while lower average selling prices
and product mix changes reduced average selling prices by 2
percent and 3 percent, respectively. Fiscal 1993 sales were
enhanced by securing additional mill-direct business for high
turnover items to help fill vacancies in mill schedules.
However, this additional business had lower than average selling
prices and profit margins. The aerospace markets continued to
weaken throughout the year. Selling prices were under continued
pressure due to a very competitive market, increased imports and
lower raw material costs.
Cost of sales as a percentage of sales decreased slightly in
fiscal 1993 due to a $25.7 million positive effect on earnings of
reductions in inventories valued using the LIFO method. This
benefit was partially offset by the unfavorable effect of
operating production facilities at lower capacity rates, a less
profitable sales mix and lower unit selling prices.
Raw material costs per unit purchased decreased by 10 percent in
fiscal 1993 from year-earlier levels. Nickel and chromium costs
decreased by 16 percent and 7 percent, respectively.
Labor costs per-hour-worked for Steel Division production and
maintenance employees increased by 14 percent in fiscal 1993. An
average base wage increase of 4 percent on July 1, 1992, higher
profit sharing payments and increased costs for retiree medical
expenses were the chief factors. The salaried staff level was
reduced by approximately 130 people as a result of a cost
reduction program.
Other income increased by $5.0 million as a result of a $3.7
million award in a patent suit and an increase in interest
income.
Interest expense increased in fiscal 1993 by 5 percent to $20.6
million due to a full-year effect of the fiscal 1992 refinancing
of short-term debt to long-term debt at higher interest rates.
Income taxes as a percent of pre-tax income (effective tax rate)
increased to 38 percent in fiscal 1993 from 34.8 percent in
fiscal 1992 due to increased state income taxes.
MANAGEMENT'S DISCUSSION OF CASH FLOW AND FINANCIAL CONDITION
Cash Flow
Cash flow from operations remained at high levels throughout the
past three fiscal years due to strong income before extraordinary
charges and the cumulative effect of accounting changes and
because of significant inventory reductions. A $10.0 million
lump sum royalty payment received from Walsin-CarTech also
improved cash flow during fiscal 1994 (see Note 3 to the
financial statements).
Excluding the Aceros Fortuna inventory acquired, inventories
decreased by $41.8 million in terms of current costs during
fiscal 1994 as a result of the Company's Continuous Improvement
process to reduce lead times while still maintaining a high
customer service level. Since most of this reduction was in
inventories accounted for on the LIFO method, the reduction was
only $16.9 million in terms of historical costs for accounting
purposes. The $24.9 million differential was reflected as a
reduction in cost of sales during fiscal 1994. The Company's
Continuous Improvement process also helped reduce inventories
during fiscal 1993 by $88.9 million in terms of current costs.
Accounts receivable increased $1.9 million in fiscal 1994,
excluding the Aceros Fortuna accounts receivable acquired, and
$12.5 million in fiscal 1993, as a result of increased fourth
quarter sales each year. The average days sales outstanding in
1994 was comparable to 1993.
Capital expenditures of $26.6 million in fiscal 1994 were
concentrated in the Company's Reading, Pennsylvania, plant for
normal replacements, modernization and incremental capability.
The major capital projects were for the modernization of wire
finishing operations and the purchase and installation of a
second rotary forge.
On July 28, 1993, the Company acquired all of the outstanding
shares of Aceros Fortuna and two affiliated companies for cash of
$20.4 million and paid $2.5 million for agreements not to compete
(described in Note 2 to the financial statements). On
September 2, 1993, the Company acquired, for $45.0 million in
cash, 19 percent of the shares of the Walsin-CarTech joint
venture (described in Note 3 to the financial statements).
On March 1, 1994, the Company retired at a premium, the entire
outstanding principal amount of $55.3 million of its 12-7/8%
debentures. The funding for this retirement came from the
Company's credit facilities, but is intended to be replaced with
long-term debt in the future (described in Note 7 to the
financial statements). Payments made on other long-term debt
totaled $13.4 million and $6.8 million in fiscal 1994 and 1993,
respectively.
The dividend payout rates on common and preferred stock were
maintained at $2.40 and $5,362.50 per share, respectively, and
totaled about $21.0 million in each of the past three years.
Dividends on common stock will continue to be reviewed
periodically in light of projected earnings trends and cash
requirements.
In June 1989, the Board of Directors authorized the purchase of
up to 1,200,000 shares of Carpenter common stock, and in
September 1991, in conjunction with the establishment of an ESOP,
the Board of Directors authorized the purchase of 600,000 shares
of common stock to avoid the dilutive effect of the issuance of
convertible stock to the ESOP. Shares purchased under these
programs totaled 346,217 in fiscal 1992 and 253,800 in fiscal
1993 for a total of $28.3 million in cash. During fiscal 1993
and 1994, share repurchases were suspended in order to conserve
cash for the investments discussed earlier.
Financial Condition
During fiscal 1992 through 1994, the Company maintained the
ability to provide adequate cash to meet its needs through strong
cash flow from operations, management of working capital and its
flexibility to use outside sources of financing to supplement
internally generated funds.
Fiscal 1994 ended in a sound liquidity position, with current
assets exceeding current liabilities by $72.7 million (a ratio of
1.7 to 1). This favorable ratio is conservatively stated because
inventories are valued $125.7 million less than the current cost
as a result of using the LIFO method. Total debt at June 30,
1994 was $173.7 million or 35.7 percent of total capital,
including deferred taxes, versus 41.0 percent of total capital,
including deferred taxes, at June 30, 1993.
In January 1994, the Company entered into a $150.0 million
financing arrangement with a number of banks, providing for the
availability of $125.0 million of revolving credit to
January 1998 and lines of credit of $25.0 million. This facility
was used to fund the cash portion of the acquisition of Certech,
Inc. (described in Note 17 to the financial statements).
Interest is based on short-term market rates or competitive bids.
This financing arrangement replaced a previous revolving credit
and lines of credit arrangement.
In summary, we believe that our present financial resources, both
from internal and external sources, are adequate to meet our
foreseeable short-term and long-term liquidity needs.
Commitments and Contingencies
Environmental
The Company has environmental liabilities at some of its owned
operating facilities, and has been designated as a "potentially
responsible party" with respect to certain superfund waste
disposal sites. Additionally, the Company has been notified that
it may be a potentially responsible party with respect to other
superfund sites as to which no proceedings have been instituted
against the Company. Neither the exact amount of cleanup costs
nor the final method of their allocations among all designated
potentially responsible parties at these superfund sites has been
determined. The estimated range of the reasonably possible costs
of remediation at the Company-owned operating facilities and the
superfund sites is between $7.0 million and $15.0 million. The
Company has accrued for environmental remediation costs which
represent management's best estimate of the probable and
reasonably estimable remediation costs. Additional details are
provided in Note 16 to the financial statements. The Company
does not anticipate that its financial position will be
materially affected by additional environmental remediation
costs, although quarterly or annual operating results could be
materially affected by future developments.
Other
The Company is also defending various claims and legal actions,
and is subject to commitments and contingencies which are common
to its operations. The Company provides for costs relating to
these matters when a loss is probable and the amount is reason-
ably estimable. Additional details are provided in Note 16 to
the financial statements. While it is not feasible to determine
the outcome of these matters, in the opinion of management, any
total ultimate liability will not have a material effect on the
Company's financial position.
[This page intentionally left blank]
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Supplementary Data
Page
----
Financial Statements:
Report of Independent Accountants 20
Consolidated Statement of Income for the Years Ended
June 30, 1994, 1993 and 1992 21
Consolidated Statement of Cash Flows for the
Years Ended June 30, 1994, 1993 and 1992 22
Consolidated Balance Sheet as of June 30, 1994 and 1993 23
Consolidated Statement of Changes in Shareholders'
Equity for the Years Ended June 30, 1994,
1993, and 1992 24-25
Notes to Financial Statements 26-42
Supplementary Data:
Quarterly Financial Data (Unaudited) 43-44
Report of Independent Accountants
To the Shareholders of
Carpenter Technology Corporation:
We have audited the accompanying consolidated financial statements of
Carpenter Technology Corporation and subsidiaries listed in the index
on page 19 of this Form 10-K. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Carpenter Technology Corporation and
subsidiaries as of June 30, 1994 and 1993, and the consolidated
results of their operations and their cash flows for each of the
three years in the period ended June 30, 1994, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements,
the Company changed its methods for accounting for income taxes
and postretirement benefits other than pensions in the year ended
June 30, 1993.
s/Coopers & Lybrand
COOPERS & LYBRAND
2400 Eleven Penn Center
Philadelphia, Pennsylvania
July 26, 1994
Consolidated Statement of Income
Carpenter Technology Corporation and Subsidiaries
for the years ended June 30, 1994, 1993 and 1992
(in thousands, except per share data)
_________________________________________________________________
1994 1993 1992
Net sales $628,795 $576,248 $570,200
_________________________________________________________________
Costs and expenses:
Cost of sales 458,473 436,057 439,785
Selling and administrative
expenses 92,525 82,214 80,829
Interest expense 15,521 20,594 19,637
Equity in loss of joint venture 910 - -
Special charge - - 7,500
Other income, net (1,362) (5,416) (378)
_________________________________________________________________
566,067 533,449 547,373
_________________________________________________________________
Income before income taxes, extraordinary
charges and cumulative effect of
changes in accounting principles 62,728 42,799 22,827
Income taxes 24,439 16,265 7,943
_________________________________________________________________
Income before extraordinary charges and
cumulative effect of changes in
accounting principles 38,289 26,534 14,884
Extraordinary charges - premium on
retirement of long-term debt, net of
income taxes (2,039) - (1,238)
Cumulative effect of changes in
accounting principles, net of
income taxes - (74,676) -
_________________________________________________________________
Net income (loss) $ 36,250 $(48,142) $ 13,646
=================================================================
Primary earnings (loss) per common share:
Income before extraordinary charges
and cumulative effect of changes
in accounting principles $ 4.55 $ 3.11 $ 1.63
Extraordinary charges (.25) - (.15)
Cumulative effect of changes in
accounting principles - (9.32) -
_________________________________________________________________
Earnings (loss) per common share $ 4.30 $ (6.21) $ 1.48
=================================================================
Weighted average common shares
outstanding 8,065 8,009 8,342
=================================================================
Fully-diluted earnings (loss) per
common share:
Income before extraordinary charges
and cumulative effect of changes in
accounting principles $ 4.40 $ 3.03 $ 1.63
Extraordinary charges (.24) - (.15)
Cumulative effect of changes in
accounting principles - (8.80) -
_________________________________________________________________
Earnings (loss) per common share $ 4.16 $ (5.77) $ 1.48
=================================================================
Weighted average common shares
outstanding 8,543 8,500 8,721
=================================================================
See accompanying notes to consolidated financial statements.
Consolidated Statement of Cash Flows
Carpenter Technology Corporation and Subsidiaries
for the years ended June 30, 1994, 1993 and 1992
_________________________________________________________________
(in thousands) 1994 1993 1992
OPERATIONS
Net income (loss) $ 36,250 $(48,142) $ 13,646
Adjustments to reconcile net income
(loss) to net cash provided from
operations:
Depreciation and amortization 28,983 26,947 25,657
Deferred income taxes 4,057 10,953 3,125
Prepaid pension cost (11,563) (11,834) (9,875)
Equity in loss of joint venture 910 - -
Extraordinary charges 2,039 - 1,238
Cumulative effect of changes in
accounting principles - 74,676 -
Special charge - - 7,500
Changes in working capital and other:
Receivables (1,889) (12,497) 4,030
Inventories 16,907 63,137 29,644
Other, net 23,772 (8,192) (13,154)
_________________________________________________________________
Net cash provided from operations 99,466 95,048 61,811
_________________________________________________________________
INVESTING ACTIVITIES
Purchases of plant and equipment (26,604) (20,563) (35,042)
Disposals of plant and equipment 3,144 405 1,762
Investment in joint venture (49,196) - -
Acquisition of wholly-owned
subsidiaries, net of cash
received (22,323) - -
_________________________________________________________________
Net cash used for investing
activities (94,979) (20,158) (33,280)
_________________________________________________________________
FINANCING ACTIVITIES
Payments on short-term debt (2,794) - (60,231)
Proceeds from issuance of
long-term debt 45,851 - 99,485
Payments on long-term debt (71,271) (6,843) (24,492)
Dividends paid (20,824) (20,868) (21,339)
Proceeds from issuance of common
stock 4,245 955 211
Payments to acquire treasury stock - (11,633) (16,700)
Preferred stock issuance cost - - (850)
_________________________________________________________________
Net cash used for financing
activities (44,793) (38,389) (23,916)
_________________________________________________________________
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (112) - -
_________________________________________________________________
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (40,418) 36,501 4,615
_________________________________________________________________
Cash and cash equivalents at
beginning of year 45,822 9,321 4,706
_________________________________________________________________
Cash and cash equivalents at
end of year $ 5,404 $ 45,822 $ 9,321
=================================================================
Supplemental Data:
Interest payments, net of amounts
capitalized $ 17,592 $ 22,195 $ 19,809
Income tax payments, net of
refunds $ 18,066 $ 2,538 $ 4,129
_________________________________________________________________
See accompanying notes to consolidated financial statements.
Consolidated Balance Sheet
Carpenter Technology Corporation and Subsidiaries
June 30, 1994 and 1993
_________________________________________________________________
(in thousands, except share data) 1994 1993
ASSETS
Current Assets:
Cash and cash equivalents $ 5,404 $ 45,822
Accounts receivable, net 95,412 90,426
Inventories 65,262 70,590
Deferred income taxes 463 2,737
Other current assets 4,629 7,120
_________________________________________________________________
Total current assets 171,170 216,695
_________________________________________________________________
Property, plant and equipment, net 391,840 391,129
_________________________________________________________________
Prepaid pension cost 73,185 61,602
_________________________________________________________________
Investment in joint venture 48,576 -
_________________________________________________________________
Other assets 45,140 30,139
_________________________________________________________________
Total assets $729,911 $699,565
=================================================================
LIABILITIES
Current liabilities:
Accounts payable $ 35,478 $ 24,328
Accrued compensation 18,654 14,457
Accrued income taxes 616 2,080
Other accrued liabilities 28,153 25,951
Current portion of long-term debt 15,618 6,617
_________________________________________________________________
Total current liabilities 98,519 73,433
_________________________________________________________________
Long-term debt, net of current portion 158,070 189,895
_________________________________________________________________
Accrued postretirement benefits 139,365 143,876
_________________________________________________________________
Deferred income taxes 74,739 66,765
_________________________________________________________________
Other liabilities and deferred income 20,074 7,135
_________________________________________________________________
SHAREHOLDERS' EQUITY
Preferred stock, $5 par value - authorized
2,000,000 shares 29,029 29,128
Common stock, $5 par value - authorized
50,000,000 shares 48,061 47,542
Capital in excess of par value 50,882 46,131
Reinvested earnings 204,667 189,241
Common stock in treasury, at cost (66,150) (66,150)
Deferred compensation (26,386) (27,431)
Foreign currency translation adjustments (959) -
_________________________________________________________________
Total shareholders' equity 239,144 218,461
_________________________________________________________________
Total liabilities and shareholders' equity $729,911 $699,565
=================================================================
See accompanying notes to consolidated financial statements.
Consolidated Statement of Changes in Shareholders' Equity
Carpenter Technology Corporation and Subsidiaries
for the years ended June 30, 1994, 1993 and 1992
Foreign Total
Capital in Deferred Currency Share-
(in thousands, except Preferred Common Excess of Reinvested Treasury Compen- Translation holders'
share & per share data) Stock Stock Par Value Earnings Stock sation Adjustemnts Equity
- - - -----------------------------------------------------------------------------------------------------------------------
Balances at June 30, 1991 $ - $ 47,334 $ 44,392 $ 265,944 $ (37,817) $ $ - $319,583
Stock issued to ESOP, net
of issuance costs 29,150 29,150
_______________________________________________________________________________________________________________________
Stock options exercised, net
of 8,623 shares exchanged 27 181 208
_______________________________________________________________________________________________________________________
Shares purchased (16,700) (16,700)
_______________________________________________________________________________________________________________________
Net income 13,646 13,646
_______________________________________________________________________________________________________________________
Cash dividends:
Preferred, $4,385.00 per
share, net of income
taxes (1,335) (1,355)
_______________________________________________________________________________________________________________________
Common, $2.40 per share (20,004) (20,004)
_______________________________________________________________________________________________________________________
Note receivable from ESOP (29,998) (29,998)
_______________________________________________________________________________________________________________________
Reduction of ESOP note 500 500
________________________________________________________________________________________________________________________
Accrued compensation 947 947
_______________________________________________________________________________________________________________________
Balances at June 30, 1992 29,150 47,361 44,573 258,251 (54,517) (28,551) - 296,267
Stock retirement and
conversion (22) (22)
_______________________________________________________________________________________________________________________
Stock options exercised, net 955
of 6,068 shares exchanged 108 847
_______________________________________________________________________________________________________________________
Restricted shares issued 73 711 (784) -
_______________________________________________________________________________________________________________________
Shares purchased (11,633) (11,633)
_______________________________________________________________________________________________________________________
Net loss (48,142) (48,142)
_______________________________________________________________________________________________________________________
Cash dividends:
Preferred, $5,362.50 per
share, net of income
taxes (1,629) (1,629)
_______________________________________________________________________________________________________________________
Common, $2.40 per share (19,239) (19,239)
_______________________________________________________________________________________________________________________
Reduction of ESOP note 613 613
_______________________________________________________________________________________________________________________
Accrued compensation 1,291 1,291
_______________________________________________________________________________________________________________________
Balances at June 30, 1993 29,128 47,542 46,131 189,241 (66,150) (27,431) - 218,461
Stock retirement and
conversion (99) 1 11 (87)
_______________________________________________________________________________________________________________________
Stock options exercised, net
of 10,308 shares exchanged 437 3,808 4,245
_______________________________________________________________________________________________________________________
Restricted shares issued,
net 81 900 (981) -
_______________________________________________________________________________________________________________________
Net income 36,250 36,250
______________________________________________________________________________________________________________________
Cash dividends:
Preferred, $5,362.50 per
share, net of income
taxes (1,606) (1,606)
_______________________________________________________________________________________________________________________
Common, $2.40 per share (19,218) (19,218)
_______________________________________________________________________________________________________________________
Reduction of ESOP note 941 941
_______________________________________________________________________________________________________________________
Accrued compensation 1,085 1,085
_______________________________________________________________________________________________________________________
Translation adjustments (959) (959)
_______________________________________________________________________________________________________________________
Other 32 32
_______________________________________________________________________________________________________________________
Balances at June 30, 1994 $ 29,029 $ 48,061 $ 50,882 $ 204,667 $ (66,150) $ (26,386) $ (959) $ 239,144
=======================================================================================================================
See accompanying notes to consolidated financial statements.
Consolidated Statement of Changes in Shareholders' Equity (continued)
Share Data
-----------------------------------------------------
Common Shares
Preferred -------------------------------------------
Shares Net
Issued Issued Treasury Outstanding
- - - ------------------------------------------------------------------------------------
Balance at June 30, 1991 9,466,730 (922,567) 8,544,163
Stocks issued to ESOP, net
of issuance costs 461.5
____________________________________________________________________________________
Stock options exercised, net
of 8,623 shares exchanged 5,473 5,473
____________________________________________________________________________________
Shares purchased (346,217) (346,217)
____________________________________________________________________________________
Net income
____________________________________________________________________________________
Cash dividends:
Preferred $4,385.00 per
share, net of income
taxes
_____________________________
Common, $2.40 per share
_____________________________
Note receivable from ESOP
_____________________________
Reduction of ESOP note
_____________________________
Accrued compensation
____________________________________________________________________________________
Balances at June 30, 1992 461.5 9,472,203 (1,268,784) 8,203,419
Stock retirement and
conversion (0.3) 30 30
____________________________________________________________________________________
Stock options exercised, net
of 6,068 shares exchanged 21,642 21,642
____________________________________________________________________________________
Restricted shares issued 14,480 14,480
____________________________________________________________________________________
Shares purchased (253,800) (253,800)
____________________________________________________________________________________
Net loss
_____________________________
Cash dividends:
Preferred, $5,362.50 per
share, net of income
taxes
_____________________________
Common, $2.40 per share
_____________________________
Reduction of ESOP note
_____________________________
Accrued compensation
____________________________________________________________________________________
Balances at June 30, 1993 461.2 9,508,355 (1,522,584) 7,985,771
Stock retirement and
conversion (1.3) 215 215
____________________________________________________________________________________
Stock options exercised, net
of 10,308 shares exchanged 87,351 87,351
____________________________________________________________________________________
Restricted shares issued,
net 16,260 (20) 16,240
____________________________________________________________________________________
Net income
_____________________________
Cash dividends:
Preferred, $5,362.50 per
share, net of income
taxes
_________________________________________________________________________________
Common, $2.40 per share
_____________________________
Reduction of ESOP note
_____________________________
Accrued compensation
_____________________________
Translation adjustments
_____________________________
Other
_____________________________
Balances at June 30, 1994 459.9 9,612,181 (1,522,604) 8,089,577
====================================================================================
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts
of the Company and all majority-owned subsidiaries. All
significant intercompany accounts and transactions are
eliminated. The equity method of accounting is used when
the Company has less than a 50% interest in other entities.
Under the equity method, original investments are recorded
at cost and adjusted by the Company's share of undistributed
earnings or losses of these entities.
Business Segment
The Company is engaged in one business segment, the
manufacture, fabrication and distribution of specialty
metals.
Cash Equivalents
Cash equivalents consist of highly liquid instruments with
maturities at the time of acquisition of three months or
less. Cash equivalents are stated at cost, which
approximates market.
Inventories
Inventories are valued at the lower of cost or market. Cost
for inventories is principally determined by the Last-In,
First-Out (LIFO) method.
Depreciation
Depreciation for financial reporting purposes is computed by
the straight-line method. This method allocates
depreciation equally over the estimated lives of the assets,
which principally are 45 years for buildings and 20 years
for machinery and equipment. Depreciation for income tax
purposes is computed using accelerated methods.
Goodwill and Covenants Not to Compete
Other assets include goodwill and covenants not to compete
arising from the acquisition of Aceros Fortuna. The
covenants are being amortized on a straight-line basis over
their 4 year contractual life. Goodwill, representing the
excess of the purchase price over the estimated fair value
of the net assets of Aceros Fortuna, is being amortized on a
straight-line basis over 20 years. The Company's policy is
to record an impairment loss against the goodwill in the
period when it is determined that the carrying amount of the
asset may not be recoverable. This determination includes
evaluation of factors such as current market value, future
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
asset utilization, business climate and future cash flows
expected to result from the use of the net assets.
Environmental Expenditures
Environmental expenditures that pertain to current
operations or relate to future revenues are expensed or
capitalized consistent with the Company's capitalization
policy. Expenditures that result from the remediation of an
existing condition caused by past operations, that do not
contribute to current or future revenues, are expensed.
Liabilities are recognized for remedial activities when the
cleanup is probable and the cost can be reasonably
estimated. Recoveries of expenditures are recognized as a
receivable only when they are estimable and probable.
Foreign Currency Translation
The functional currency for the majority of the Company's
international operations is the local currency, and,
accordingly, the respective assets and liabilities are
translated at year-end exchange rates, while the income and
expense components are translated at average exchange rates
prevailing during the year. The resulting translation
adjustments are accumulated in a separate section of
shareholders' equity on the consolidated balance sheet. All
gains and losses resulting from foreign currency
transactions are reflected in income.
Futures Contracts and Commodity Price Swaps
In connection with the anticipated purchase of nickel for
certain future sales, the Company enters into nickel futures
contracts and commodity price swaps to reduce the risk of
nickel cost increases. These futures contracts and
commodity price swaps are accounted for as hedges, and,
accordingly, gains and losses are deferred and included in
cost of sales as part of the nickel cost in the periods when
the nickel purchases are made. At June 30, 1994, the
Company had entered into contracts hedging future commodity
purchases of approximately $19.7 million. The fair market
value of these contracts was $21.3 million.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings per Common Share
Primary earnings per common share are computed by dividing
net income (less preferred dividends net of tax benefits) by
the weighted average number of common shares and common
share equivalents outstanding during the period. On a
fully-diluted basis, both net earnings and shares
outstanding are adjusted to assume the conversion of the
convertible preferred stock.
Changes in Accounting Principles
During fiscal 1993, the Company adopted two financial
accounting standards, "Employers' Accounting for
Postretirement Benefits Other than Pensions" (SFAS 106) and
"Accounting for Income Taxes" (SFAS 109).
SFAS 106 requires companies to accrue the cost of
postretirement benefits over the years employees provide
services to the date of their full eligibility for such
benefits. Previously, these costs were expensed as claims
were incurred. The Company elected to immediately recognize
the transition obligation for benefits earned as of July 1,
1992, resulting in a non-cash charge of $146.8 million
pre-tax ($87.1 million after taxes or $10.87 per share),
representing the cumulative effect of the change in
accounting. The expense accrued in fiscal 1993 under the
new method exceeded the amount under the previous method by
$7.4 million pre-tax ($4.3 million after taxes or $.54 per
share).
SFAS 109 changes the method of accounting for income taxes
from the deferral method to the asset/liability method.
Under this method, deferred income taxes are determined
based on enacted tax laws and rates, which are applied to
the differences between the financial statement bases and
tax bases of assets and liabilities. The adoption of this
statement resulted in a credit to income of $12.4 million
($1.55 per share) principally for the cumulative effect of
restating deferred taxes as of July 1, 1992 to current tax
rates. This new standard also increased the deferred taxes
provided during fiscal 1993 by $1.8 million ($.23 per
share).
Financial statements of years prior to fiscal 1993 were not
restated for the adoption of these new standards.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Company-Owned Life Insurance Program
During fiscal 1994, the Company established a Company-Owned
Life Insurance program covering essentially all of the U.S.
based employees. At June 30, 1994, the cash surrender value
($27.4 million) and the insurance policy loans ($27.2
million) were netted and included in other assets on the
consolidated balance sheet. The purpose of the program is to
provide cash to fund employee benefit obligations and for
other corporate purposes.
2. ACQUISITION OF WHOLLY-OWNED SUBSIDIARIES
On July 28, 1993, the Company acquired all of the
outstanding shares of Aceros Fortuna, S.A. de C.V., a
Mexican steel distribution company, and two affiliated
companies for cash of $20.4 million, paid $2.5 million for
agreements not to compete, and paid acquisition costs. In
addition, the Company acquired equipment from an affiliated
company in Mexico for $5.1 million.
The acquisition has been accounted for using the purchase
method of accounting, and, accordingly, the purchase price
has been allocated to the assets purchased and the
liabilities assumed based upon the fair values at the date
of acquisition. The excess of the purchase price over the
fair values of the net assets acquired was $8.2 million and
has been recorded as goodwill, which is being amortized on a
straight-line basis over 20 years. The amount of goodwill
amortization for fiscal 1994 was $.4 million.
The net purchase price was allocated as follows:
(in thousands)
Working capital, other than cash $ 6,552
Property, plant and equipment 6,634
Other assets 2,661
Goodwill 8,213
Other liabilities (1,737)
--------
Purchase price, net of cash received $ 22,323
========
The operating results of these acquired businesses have been
included in the consolidated statement of income from the
date of acquisition. On the basis of a pro forma
consolidation of the results of operations as if the
acquisition had taken place at the beginning of fiscal 1993
rather than at July 28, 1993, consolidated net sales would
have been $631.5 million for fiscal 1994, and $609.8 million
for fiscal 1993. Consolidated pro forma income and earnings
2. ACQUISITION OF WHOLLY-OWNED SUBSIDIARIES (continued)
per share, before the cumulative effect of accounting
changes and extraordinary charge, would not have been
materially different from the reported amounts for fiscal
1994 and 1993. Such pro forma amounts are not necessarily
indicative of what the actual consolidated results of
operations might have been if the acquisition had been
effective at the beginning of fiscal 1993.
3. INVESTMENT IN JOINT VENTURE
On September 2, 1993, the Company acquired for $45.0 million
in cash, 19 percent of the shares of Walsin-CarTech
Specialty Steel Corporation, a joint venture with Walsin
Lihwa Corporation in Taiwan. The joint venture has
constructed a facility and installed equipment in this
facility in Taiwan to manufacture and distribute specialty
steel. The Company has an option to acquire up to an
additional 16 percent of the outstanding shares of the joint
venture from Walsin Lihwa at any time until July 1, 1996.
Alternatively, the Company may require Walsin Lihwa to
purchase its 19 percent ownership for the original purchase
cost at any time up to July 1, 1997.
This investment is being accounted for using the equity
method of accounting. The investment account has been
increased for interest costs capitalized during the
preoperating period, totaling $3.6 million, and for
acquisition costs. The Company's share of the joint
venture's foreign currency translation adjustments is
reflected in both the investment account and shareholders'
equity on the consolidated balance sheet.
Condensed financial information of the joint venture for
fiscal 1994 is summarized below:
(in thousands)
--------------
Condensed Financial Information:
Current assets $ 17,334
Non-current assets $277,878
Current liabilities $ 62,331
Shareholders' equity $232,881
Loss for the year $ 4,789
A separate agreement also provides for the Company to
provide marketing and technical assistance to the joint
venture in exchange for an initial lump sum royalty payment
of $10.0 million, received in October 1993, and continuing
royalties based on sales over the 10-year term of the
agreement. The initial lump sum royalty has been deferred
and is being recognized as income over the term of the
agreement.
3. INVESTMENT IN JOINT VENTURE (continued)
In addition, the joint venture and the Company entered into
distribution agreements establishing the joint venture as
the exclusive distributor of the Company's Steel Division
products in countries throughout Asia and the Company as the
exclusive distributor of the joint venture's products in
North, Central and South America.
4. INVENTORIES
June 30
___________________
(in thousands) 1994 1993
___________________________________________________________
Finished $ 76,187 $ 97,129
Work in process 85,247 80,072
Raw materials and supplies 29,558 31,472
___________________________________________________________
Total at current cost 190,992 208,673
___________________________________________________________
Less excess of current cost
over LIFO values 125,730 138,083
___________________________________________________________
$ 65,262 $ 70,590
===========================================================
Current cost of LIFO-valued inventories was $165.8 million
at June 30, 1994 and $192.7 million at June 30, 1993.
Reductions in LIFO-valued inventories resulted in an
increase in income before extraordinary charge and
cumulative effect of changes in accounting principles of
approximately $12.1 million or $1.50 per share and $13.4
million or $1.67 per share in the years ended June 30, 1994
and 1993, respectively.
5. PROPERTY, PLANT AND EQUIPMENT
June 30
___________________
(in thousands) 1994 1993
___________________________________________________________
Land $ 8,304 $ 6,907
Buildings and building equipment 143,714 140,411
Machinery and equipment 554,449 545,708
Construction in progress 17,253 6,243
___________________________________________________________
Total at cost 723,720 699,269
___________________________________________________________
Less accumulated depreciation
and amortization 331,880 308,140
___________________________________________________________
$391,840 $391,129
===========================================================
6. OTHER ACCRUED LIABILITIES
June 30
___________________
(in thousands) 1994 1993
___________________________________________________________
Medical expenses $ 11,455 $ 6,414
Interest 3,417 5,840
Environmental costs 2,427 3,550
Other 10,854 10,147
___________________________________________________________
$ 28,153 $ 25,951
===========================================================
7. DEBT ARRANGEMENTS
In January 1994, the Company entered into a $150.0 million
financing arrangement with a number of banks, providing for
the availability of $125.0 million of revolving credit to
January 1998 and lines of credit of $25.0 million. Interest
is based on short-term market rates or competitive bids.
This financing arrangement replaced a previous revolving
credit and lines of credit arrangement.
At June 30, 1994, the Company had on file a Form S-3
registration statement ("Shelf Registration") with the
Securities and Exchange Commission to provide for the
issuance of up to $100.0 million of medium-term debt
securities. The net proceeds from any offering under this
Shelf Registration will be added to the Company's working
capital and be available for general corporate purposes.
For the years ended June 30, 1994, 1993 and 1992, interest
cost totaled $19.6 million, $21.8 million and $20.6 million,
of which $4.1 million, $1.2 million, and $1.0 million,
respectively, was capitalized.
Long-term debt outstanding at June 30, 1994 and 1993, is
summarized as follows:
(in thousands) 1994 1993
________________________________________________________________________
9% Sinking fund debentures due 2022;
sinking fund requirements are $5.0 million
annually from 2003 to 2021 $ 99,525 $99,508
12-7/8% Sinking fund debentures due 2014 - 55,561
Borrowings under credit arrangements at
4.4% to 4.7% 39,339 -
9.4% Notes due in annual installments of
$3.6 million through 1997 10,714 14,286
9.89% Senior notes, series A, due in 1995 9,000 9,000
10.45% Senior notes, series B, due in annual
installments of $3.0 million through 1999 15,000 18,000
Capitalized lease obligations at 8.3% to
9.5% due in installments through 1998 110 157
_______________________________________________________________________
173,688 196,512
Less amounts due within one year 15,618 6,617
_______________________________________________________________________
$158,070 $189,895
=======================================================================
Aggregate maturities of long-term debt for the four years
subsequent to June 30, 1995 are $6.6 million in fiscal 1996
and $3.0 million in fiscal 1997 through 1999. The fair
value of long-term debt as of June 30, 1994, determined by
using current interest rates and market values of similar
issues, was approximately $179.0 million.
During fiscal 1994, the Company used proceeds from the
revolving credit facilities to retire at a premium $55.3
million of its 12-7/8% debentures originally due in
2014. This retirement resulted in an extraordinary charge
of $2.0 million including unamortized discount and issue
costs, net of $1.2 million of income tax benefits, or $.25
per share. Although the funding for the retirement
principally came from the Company's credit facilities, it is
intended to be replaced with long-term debt in the future.
Consequently, such debt of $39.3 million at June 30, 1994
was classified as long-term debt on the consolidated balance
sheet.
During fiscal 1992, the Company used proceeds from short-
term borrowings to retire at a premium $18.4 million of its
12-7/8% debentures originally due in 2014. This retirement
resulted in an extraordinary charge of $1.2 million
including unamortized discount and issue costs, net of $.7
million of income tax benefits, or $.15 per share.
The Company's financing arrangements contain restrictions
which, among other things, limit the aggregate amount of the
Company's dividends. Reinvested earnings available for
dividends at June 30, 1994 were approximately $62.5 million.
8. COMMON STOCK PURCHASE RIGHTS
The Company has issued one common stock purchase right
("Right") for every outstanding share of common stock. The
Rights will become exercisable and separate Rights
certificates will be distributed to the shareholders: (1) 10
days following the acquisition of 20 percent or more of the
Company's common stock, (2) 10 business days (or such later
date as the Board may determine) following the commencement
of a tender or exchange offer for 20 percent or more of the
Company's common stock, or (3) 10 days after the Company's
Board of Directors determines that a holder of 15 percent or
more of the Company's shares has an interest adverse to
those of the Company or its shareholders (an "adverse
person"). Upon distribution, each Right would then entitle
a holder to buy from the Company one newly issued share of
its common stock for an exercise price of $90. After
distribution, upon: (1) any person acquiring 20 percent of
the outstanding stock (other than pursuant to a fair offer
as determined by the Board), (2) a 20 percent holder
engaging in certain self-dealing transactions, (3) the
determination of an adverse person, or (4) certain mergers
or similar transactions between the Company and holder of 20
percent or more of the Company's common stock, each Right
(other than those held by the acquiring party) entitles the
holder to purchase shares of common stock of either the
acquiring company or the Company (depending on the
circumstances) having a market value equal to twice the
exercise price of the Right. The Rights may be redeemed by
the Company for $.05 per Right at any time before they
become exercisable and expire June 26, 1996.
9. COMMON STOCK OPTIONS
The Company has three incentive stock option plans for
officers and key employees: a 1993 plan, a 1982 plan and a
1977 plan.
The 1993 plan provides that the Board of Directors may grant
incentive stock options, non-qualified stock options, stock
appreciation rights and restricted stock, and will determine
the terms and conditions of each grant. Option grants under
this plan must be at no less than market value on the date
of grant, are exercisable after one year of employment
following the date of grant, and will expire no more than
ten years after the date of grant. Incentive stock options
granted during the ten-year term of the plan may not exceed
500,000 shares plus any shares canceled or expired. The
number of shares available annually for awards under this
plan is limited to one percent of the common shares
outstanding at the end of the preceding fiscal year plus
shares available, but not awarded, during the preceding two
years and any shares or options forfeited, expired or
terminated. Restricted stock awards vest equally at the end
of each year of employment for the five-year period from the
date of grant. When the restricted shares are issued,
deferred compensation is recorded in the shareholders'
equity section of the consolidated balance sheet. The
deferred compensation is charged to expense over the vesting
period. During fiscal 1994, $.2 million was charged to
expense. As of June 30, 1994 and 1993, 10,582 and 7,864
shares, respectively, were reserved for options and
restricted stock which may be granted under this plan.
The 1982 plan expired in June 1992; however, all outstanding
unexpired options granted prior to that date remain in
effect. Under the 1982 and 1977 plans, options are granted
at the market value on the date of grant, and are
exercisable after one year of employment following the date
of grant. Options granted under the 1982 plan expire five
years after grant if granted prior to August 9, 1990, and
all the options granted since that date expire ten years
after grant. Options granted under the 1977 plan expire ten
years after grant. At June 30, 1994 and 1993, 142,360
shares were reserved for options which may be granted under
the 1977 plan.
The Company also has a stock option plan which provides for
the granting of stock options to non-employee Directors.
Options are granted at the market value on the date of the
grant and are exercisable after one year of Board service
following the date of grant. Options expire ten years after
the date of grant. At June 30, 1994 and 1993, 51,000 and
58,500 shares, respectively, were reserved for options which
may be granted under this plan.
A summary of the options and transactions for the past three
years follows:
Number Option Price
of Shares per Share
___________________________________________________________
Balance June 30, 1991 309,340 $38.00-$51.50
(93,365 shares exercisable)
Granted 103,640 $47.63-$52.00
Exercised (14,096) $38.00-$46.00
Cancelled (20,044) $38.00-$51.00
___________________________________________________________
Balance June 30, 1992 378,840 $38.00-$52.00
(275,200 shares exercisable)
Granted 65,690 $44.75-$54.13
Exercised (27,710) $38.00-$51.00
Cancelled (23,785) $45.00-$51.00
___________________________________________________________
Balance June 30, 1993 393,035 $38.00-$54.13
(327,345 shares exercisable)
Granted 68,380 $53.75-$60.38
Exercised (97,659) $38.00-$51.50
Cancelled (1,580) $48.25-$54.13
___________________________________________________________
Balance June 30, 1994
(293,796 shares exercisable) 362,176 $38.00-$60.38
===========================================================
Of the 362,176 options outstanding at June 30, 1994, 120,470
relate to the 1993 plan, 147,876 relate to the 1982 plan,
61,830 relate to the 1977 plan and 32,000 relate to the plan
for non-employee Directors. No adjustments to income are
made with respect to options granted or exercised under the
plans.
10. PENSION PLANS
The Company has several noncontributory defined benefit
pension plans, which cover substantially all employees. The
benefits are based primarily upon employees' years of
service and average earnings prior to retirement. The
Company's funding policy for the domestic plans is to
contribute, at a minimum, amounts sufficient to meet ERISA
requirements. Plan assets are held in trust, and consist
primarily of publicly traded common stocks and fixed income
instruments. The underfunded plans include the pension plan
of the Company's Mexican operations and several supplemental
retirement plans for certain key employees and outside
Directors.
Net pension credits included the following components:
(in thousands) 1994 1993 1992
___________________________________________________________
Service cost of
benefits earned $ 9,891 $ 8,950 $ 7,649
Interest cost on projected
benefit obligation 25,576 24,765 24,250
Return on plan assets:
Actual (8,351) (47,148) (60,077)
Deferred (34,297) 6,771 23,113
Net amortization and
deferral (3,304) (4,435) (4,139)
___________________________________________________________
Net pension credits $(10,485) $(11,097) $ (9,204)
===========================================================
Principal actuarial assumptions:
Discount rate 7.5% 8.0% 8.5%
Long-term rate of
compensation increase 4.5% 4.5% 4.4%
Long-term rate of return
on plan assets 9.0% 9.0% 9.0%
===========================================================
The .5% reductions in the discount rates increased expense
$1.8 million in both fiscal 1994 and 1993.
The funded status of these plans at June 30, 1994 and 1993, is
summarized as follows:
Overfunded Underfunded
(in thousands) 1994 1993 1994 1993
_____________________________________________________________________
Actuarial present value of
benefit obligations:
Vested benefit obligation $260,008 $278,224 $ 6,523 $4,499
Accumulated benefit
obligation 293,755 308,739 7,738 4,562
Projected benefit obli-
gation for service
rendered to date 341,646 343,183 11,298 5,490
Plan assets at fair value 467,144 482,752 2,395 163
Plan assets in excess of
(less than) projected
benefit obligation 125,498 139,569 (8,903) (5,327)
Unrecognized net (gain)
loss - experience different
from assumptions (36,793) (60,643) 2,113 792
Unrecognized transition
(asset) obligation (20,283) (23,179) 347 232
Unrecognized prior service
cost 4,763 5,855 702 106
_____________________________________________________________________
Prepaid (accrued) pension
cost $ 73,185 $ 61,602 $ (5,741) $(4,197)
=====================================================================
Principal actuarial assumptions:
Discount rate 8.0% 7.5% 9.0% 7.5%
Long-term rate of
compensation increase 4.5% 4.5% 7.5% 6.8%
=====================================================================
The actuarial present value of the projected benefit
obligation is computed assuming the continuing existence of
the plans. The obligation to fund these plans would be
substantially higher than the accumulated benefit obligation
if the plans were terminated.
The Company also maintains a defined contribution pension
and savings plan for substantially all domestic employees.
The Company contributions, equal to 3% of each participant's
base pay, were $3.7 million in fiscal 1994, $3.6 million in
fiscal 1993 and $3.7 million in fiscal 1992.
11. POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS
In addition to pension plan benefits, the Company provides
certain health care and life insurance benefits for retired
employees and covered dependents. Substantially all
domestic employees become eligible for these benefits upon
normal retirement.
In fiscal 1993, the Company adopted Statement of Financial
Accounting Standards No. 106 (SFAS 106) "Employers'
Accounting for Postretirement Benefits Other Than Pensions"
(see Note 1).
Expense of postretirement medical and life insurance
benefits in fiscal years 1994 and 1993 included the
following components:
(in thousands) 1994 1993
___________________________________________________________
Service cost of benefits earned $ 2,803 $ 2,511
Interest cost on accumulated
postretirement benefit obligation 10,622 11,457
Return on plan assets:
Actual 370 53
Deferred loss (1,341) (552)
___________________________________________________________
Postretirement medical and
life insurance benefits expense $ 12,454 $ 13,469
===========================================================
Principal actuarial assumptions:
Discount rate 7.5% 8.0%
Return on plan assets 9.0% 9.0%
Trend rate - beginning* 12.0% 14.0%
Trend rate - ultimate 6.0% 6.0%
*Declines 1% per year to the ultimate rate.
===========================================================
The .5% reduction of the discount rate increased expense $.6
million in fiscal 1994.
Financial statements of years prior to fiscal 1993 were not
restated for the adoption of SFAS 106. Postretirement
medical and life insurance claims incurred for fiscal 1992
totaled $7.1 million.
The funded status of the postretirement medical and life
insurance benefit plans at June 30, 1994 and 1993, is
summarized as follows:
(in thousands) 1994 1993
___________________________________________________________
Accumulated postretirement
benefit obligation (APBO):
Retirees $ 84,913 $ 95,530
Fully eligible active
plan participants 18,337 10,493
Other active plan
participants 28,669 39,148
________________________
Total APBO 131,919 145,171
Plan assets at fair value 14,275 9,959
___________________________________________________________
APBO in excess of plan assets 117,644 135,212
Unrecognized net gain 30,047 8,664
Unrecognized prior service cost (1,552) -
___________________________________________________________
Accrued postretirement benefits $146,139 $143,876
===========================================================
Principal actuarial assumptions:
Discount rate 8.0% 7.5%
Trend rate - beginning* 11.0% 12.0%
Trend rate - ultimate 6.0% 6.0%
*Declines 1% per year to the ultimate rate.
===========================================================
The health-care cost trend rate assumption has a significant
effect on the amounts reported. If the assumed health-care
cost trend rate was increased by 1 percent, the APBO at
June 30, 1994 would increase by $18.0 million and the net
periodic postretirement benefit expense for fiscal 1994
would have increased by $2.0 million.
The Company established a Voluntary Employee Benefit Trust
(VEBA) in fiscal 1992 to begin funding its obligation under
the postretirement health-care plan. Contributions of $5.0
million per year beginning in fiscal 1992 were made to the
VEBA Trust. The VEBA Trust assets have been invested in
trust-owned life insurance.
12. EMPLOYEE STOCK OWNERSHIP PLAN
In fiscal 1992, the Board of Directors established a
leveraged employee stock ownership plan ("ESOP") to assist
current employees with their future retiree medical
obligations. The Company issued 461.5 shares of a new class
of convertible preferred stock at $65,000.00 per share to
the ESOP in exchange for a $30.0 million 15-year, 9.345%
note which is included in the shareholders' equity section
of the consolidated balance sheet as deferred compensation.
The preferred stock is recorded net of related issuance
costs.
Principal and interest obligations on the note will be
satisfied by the ESOP as the Company makes contributions to
the ESOP and dividends are paid on the preferred stock. As
payments are made on the note, shares of preferred stock
will be allocated to participating employees' accounts
within the ESOP. The Company contributed $.9 million in
fiscal 1994, $.6 million in fiscal 1993 and $.4 million in
fiscal 1992 to the ESOP. Compensation expense related to
the plan was $2.1 million in fiscal 1994, $2.0 million in
fiscal 1993 and $1.3 million in fiscal 1992.
The preferred stock is initially convertible into
approximately 461,500 shares of common stock, at a
conversion price of $65.00 per share of common stock. The
shares of preferred stock pay a cumulative annual dividend
of $5,362.50 per share, are entitled to vote together with
the common stock as a single class and have 1,300 votes per
share. The stock is redeemable by the Company at any time
after September 5, 1996 at an initial price of $67,600.00
per share.
13. RESEARCH AND DEVELOPMENT
Research and development expenses aggregated $13.6 million
in fiscal 1994, $12.9 million in fiscal 1993 and $14.0
million in fiscal 1992.
14. INCOME TAXES
In fiscal 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109) "Accounting for
Income Taxes" (see Note 1).
14. INCOME TAXES (continued)
Provisions for income taxes consisted of the following:
(in thousands) 1994 1993 1992
___________________________________________________________
Current:
Federal $18,040 $ 4,345 $ 4,984
State 798 968 (166)
Foreign 1,544 - -
Deferred:
Federal 4,937 9,867 2,616
State (128) 1,085 509
Foreign (752) - -
___________________________________________________________
$24,439 $16,265 $ 7,943
===========================================================
The following is a reconciliation of the statutory federal
income tax rate to the actual effective income tax rate:
(% of pre-tax income) 1994 1993 1992
____________________________________________________________
Federal tax rate 35.0% 34.0% 34.0%
Increase in taxes resulting
from:
State income taxes, net of
federal tax benefit 1.7 4.4 1.1
Federal and state tax rate
changes 1.4 - -
Other, net 0.9 (0.4) (0.3)
____________________________________________________________
Effective tax rate 39.0% 38.0% 34.8%
============================================================
Deferred taxes under SFAS 109 are recorded based upon
temporary differences between financial statement and tax
bases of assets and liabilities. The following deferred tax
liabilities and assets were recorded as of June 30, 1994 and
1993:
(in thousands) 1994 1993
___________________________________________________________
Deferred tax liabilities:
Depreciation and amortization $111,356 $110,512
Prepaid pensions 24,167 19,175
Other 12,731 6,385
___________________________________________________________
Total deferred tax liabilities 148,254 136,072
___________________________________________________________
Deferred tax assets:
Postretirement provisions 57,230 58,607
Other reserve provisions 17,217 12,882
Alternative minimum tax credit
carryforward - 1,019
Valuation allowance (469) (464)
___________________________________________________________
Total deferred tax assets 73,978 72,044
___________________________________________________________
Net deferred tax liability $ 74,276 $ 64,028
===========================================================
15. SPECIAL CHARGE
In June 1992, a provision of $7.5 million ($4.9 million
after taxes or $.59 per share) was established for the
anticipated costs of a planned program to reduce salaried
personnel. Affected employees were provided severance pay,
temporary health care, and life insurance coverage.
16. COMMITMENTS AND CONTINGENCIES
Environmental
The Company, as well as other steel companies, is subject to
various stringent federal, state, and local environmental
laws and regulations. The liability for future
environmental remediation costs is evaluated on a quarterly
basis by management. The Company accrues amounts for
environmental remediation costs which represent management's
best estimate of the probable and reasonably estimable costs
relating to environmental remediation. For the years ended
June 30, 1994 and 1992, $1.2 million and $2.2 million,
respectively, were charged to operations for environmental
cleanup costs (no expense was recognized in fiscal 1993).
The liability for environmental cleanup costs remaining at
June 30, 1994 and 1993, was $4.7 million, while the amount of
recoveries recorded as a receivable was $.8 million at
June 30, 1994. As a result of factors such as the
continuing evolution of environmental laws and regulatory
requirements, the availability and application of
technology, the identification of presently unknown
remediation sites and the allocation of costs among
potentially responsible parties, estimated costs for future
environmental compliance and remediation are necessarily
imprecise and it is not possible to predict the amount or
timing of future costs of environmental remediation
requirements which may subsequently be determined. Based
upon information presently available, such future costs are
not expected to have a material adverse effect on the
Company's competitive or financial position. However, such
costs could be material to results of operations in a
particular future quarter or year.
Other
The Company is also defending various claims and legal
actions, and is subject to commitments and contingencies
which are common to its operations. The Company provides
for costs relating to these matters when a loss is probable
and the amount is reasonably estimable. The effect of the
outcome of these matters on the Company's future results of
operations and liquidity cannot be predicted because any
such effect depends on future results of operations and the
amount of timing (both as to recording future charges to
operations and cash expenditures) of the resolution of such
matters. While it is not feasible to determine the outcome
of these matters, in the opinion of management, any total
ultimate liability will not have a material effect on the
Company's financial position.
17. SUBSEQUENT EVENT
On July 22, 1994, the Company acquired all of the
outstanding shares of Certech, Inc. and an affiliated
company, for $16.0 million comprised of $12.8 million in
cash and the balance in shares of Carpenter common stock.
Certech manufactures a broad line of complex injection
molded ceramics parts.
Quarterly Financial Data (Unaudited)
Our quarterly sales and earnings results are usually influenced
by seasonal factors. The first fiscal quarter (three months
ending September 30) is typically the lowest because of annual
plant vacation shutdowns in this period by Carpenter and by many
of our customers. This seasonal pattern can be disrupted by
major economic cycles or special accounting adjustments.
(dollars in thousands - except per share amounts)
First Second Third Fourth Fiscal
Quarter Quarter Quarter Quarter Year
____________________________________________________________________________
Results of Operations
Fiscal 1994
Net sales $129,429 $147,127 $174,347 $177,892 $628,795
Gross profits $ 31,724(1) $ 38,593(1)$ 50,170(1)$ 49,835 $170,322
Income before
extraordinary
charge(2) $ 2,772 $ 7,360 $ 12,825 $ 15,332 $ 38,289
Net income $ 2,772 $ 7,360 $ 10,786(3)$ 15,332 $ 36,250
____________________________________________________________________________
Fiscal 1993
Net sales $139,386 $123,026 $155,370 $158,466 $576,248
Gross profits $ 29,109 $ 28,134 $ 41,867 $ 41,081 $140,191
Income before cumu-
lative effect of
changes in
accounting
principles(2) $ 2,652 $ 1,914 $ 10,202 $ 11,766 $ 26,534
Net income (loss) $(72,024)(4)$ 1,914 $ 10,202 $ 11,766 $(48,142)
____________________________________________________________________________
Per Common Share
Fiscal 1994
Primary earnings:
Income before
extraordinary
charge $ .30 $ .86 $ 1.54 $ 1.85 $ 4.55
Net income $ .30 $ .86 $ 1.29(3)$ 1.85 $ 4.30
Fully-diluted earnings:
Income before
extraordinary
charge $ .30 $ .84 $ 1.49 $ 1.77 $ 4.40
Net income $ .30 $ .84 $ 1.25(3)$ 1.77 $ 4.16
____________________________________________________________________________
Fiscal 1993
Primary earnings:
Income before cumu-
lative effect of
changes in
accounting
principles $ .28 $ .19 $ 1.22 $ 1.42 $ 3.11
Net income (loss) $ (9.04)(4)$ .19 $ 1.22 $ 1.42 $ (6.21)
Fully-diluted earnings:
Income before cumu-
lative effect of
changes in
accounting
principles $ .28 $ .19 $ 1.19 $ 1.37 $ 3.03
Net income (loss) $ (8.52)(4)$ .19 $ 1.19 $ 1.37 $ (5.77)
____________________________________________________________________________
See notes on page 44.
Notes to Quarterly Financial Data (Unaudited)
(1) Restated for the reclassification of depreciation expense
resulting in a reduction of gross profit of $.4 million.
(2) Reductions in LIFO-valued inventories resulted in increases
in income before extraordinary charge and cumulative effect
of changes in accounting principles of $2.1 million, $1.5
million, $5.5 million and $3.0 million for the first,
second, third and fourth quarters of fiscal 1994,
respectively, and $.3 million, $.3 million, $6.4 million and
$6.4 million for the first, second, third and fourth
quarters of fiscal 1993, respectively.
(3) Includes extraordinary charge for retirement of 12-7/8%
debentures at a premium ($2.0 million after taxes, or
$.25 and $.24 for primary and fully-diluted earnings per
share, respectively).
(4) Includes cumulative effect of changes in accounting
principles ($74.7 million after taxes or $9.32 and $8.80 for
primary and fully-diluted earnings per share, respectively).
Item 9. Disagreements on Accounting and Financial Disclosure
Not Applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required as to directors is incorporated
herein by reference to the "Election of Directors" section of the
1994 definitive Proxy Statement.
Information concerning the Company's executive officers
appears in Part I of this Annual Report on Form 10-K.
Item 11. Executive Compensation
The information required by this item is incorporated herein
by reference from the 1994 definitive Proxy Statement under the
"Election of Directors" section.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The security ownership of directors and officers as a group
is described in the 1994 definitive Proxy Statement under
"Security Ownership of Directors and Officers" section. Such
information is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated herein
by reference from the 1994 definitive Proxy Statement under the
"Election of Directors" section.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Filed as Part of this Report:
(1) The following consolidated financial statement
schedules should be read in conjunction with the
consolidated financial statements (see Item 8. Financial
Statements):
Report of Independent Accountants
V - Property, Plant and Equipment
VI - Accumulated Depreciation and Amortization of
Property, Plant and Equipment
VIII - Valuation and Qualifying Accounts
IX - Short-Term Borrowings
X - Supplementary Income Statement Information
All other schedules are omitted because they are not
applicable or the required information is contained in the
consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS OF
CARPENTER TECHNOLOGY CORPORATION
Our report on the consolidated financial statements of
Carpenter Technology Corporation and subsidiaries is included on
page 20 of the 1994 Annual Report on Form 10-K. In connection with
our audits of such financial statements, we have also audited the
related financial statement schedules listed in Item 14(a) of
this Form 10-K.
In our opinion, the financial statement schedules referred
to above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
s/Coopers & Lybrand
COOPERS & LYBRAND
2400 Eleven Penn Center
Philadelphia, Pennsylvania
July 26, 1994
(2) The following documents are filed as exhibits:
3. Articles of Incorporation and By-Laws of the
Company
4. Instruments Defining the Rights of Security
Holders, Including Indentures
10. Material Contracts
11. Statement re Computation of Per Share Earnings
23. Consent of Experts and Counsel
24. Power of Attorney
27. Financial Data Schedule
99. Additional Exhibits
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K
dated May 18, 1994, with respect to the execution of
two Agreements and Plans of Merger to acquire all of
the issued and outstanding capital stock of two
affiliated companies, Certech, Incorporated, a
Pennsylvania corporation, and Certech, Inc., a
New Jersey corporation (jointly, "Certech"). The
purchase price was not disclosed. Certech manufactures
a broad line of complex injection molded ceramic parts
and was profitable in the fiscal year ended April 30,
1994, on sales of approximately $17.0 million. The
closing of the transaction occurred on July 22, 1994,
at which time the Company paid approximately 80 percent
of the purchase price in cash and 20 percent in common
stock.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CARPENTER TECHNOLOGY CORPORATION
By s/G. Walton Cottrell
______________________________
G. Walton Cottrell
Sr. Vice President - Finance &
Chief Financial Officer
Date: September 27, 1994
Pursuant to the requirements of the Securities Exchange Act
of 1934, this Report has been signed by the following persons on
behalf of the registrant in the capacities and on the dates
indicated.
s/Robert W. Cardy Chairman, President & September 27, 1994
_____________________ Chief Executive Officer
Robert W. Cardy and Director (Principal
Executive Officer)
s/G. Walton Cottrell Sr. Vice President - September 27, 1994
_____________________ Finance & Chief
G. Walton Cottrell Financial Officer
s/Edward B. Bruno Controller (Principal September 27, 1994
_____________________ Accounting Officer)
Edward B. Bruno
* Director September 27, 1994
_____________________
Marcus C. Bennett
* Director September 27, 1994
_____________________
Dennis M. Draeger
* Director September 27, 1994
_____________________
C. McCollister Evarts, M.D.
* Director September 27, 1994
_____________________
Carl R. Garr
* Director September 27, 1994
_____________________
William J. Hudson, Jr.
* Director September 27, 1994
_____________________
Arthur E. Humphrey
* Director September 27, 1994
_____________________
Edward W. Kay
* Director September 27, 1994
_____________________
Frederick C. Langenberg
* Director September 27, 1994
_____________________
Mylle Bell Mangum
* Director September 27, 1994
_____________________
Marlin Miller, Jr.
* Director September 27, 1994
_____________________
Paul R. Roedel
Original Powers of Attorney authorizing John R. Welty to sign
this Report on behalf of: Marcus C. Bennett, Dennis M. Draeger,
C. McCollister Evarts, M.D., Carl R. Garr, William J. Hudson,
Jr., Arthur E. Humphrey, Edward W. Kay, Frederick C. Langenberg,
Mylle Bell Mangum, Marlin Miller, Jr., Paul R. Roedel, are being
filed with the Securities and Exchange Commission.
*By s/John R. Welty
________________________________
John R. Welty
Attorney-in-fact
CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
SCHEDULE V. PROPERTY, PLANT AND EQUIPMENT
(in thousands)
Col. A Col. B Col. C Col. D Col. E Col. F
_______ _______ _______ _______ _______ _______
Balance
at Beg- Balance
inning Addi- at End
of tions Retire- of
Classification Period at Cost(1) ments Other(2) Period
________________ _______ _______ _______ _______ _______
Year ended
June 30, 1994:
Land $ 6,907 $ 1,565 $ (1) $ (167) $ 8,304
Buildings &
building
equipment 140,411 4,665 (102) (1,260) 143,714
Machinery &
equipment 545,708 15,994 (6,387) (866) 554,449
Construction
in progress 6,243 11,014(3) - (4) 17,253
________ ________ ________ ________ ________
Total $699,269 $ 33,238(4)$ (6,490) $ (2,297) $723,720
======== ======== ======== ======== ========
Year ended
June 30, 1993:
Land $ 6,907 $ - $ - $ - $ 6,907
Buildings &
building
equipment 135,914 4,538 (41) - 140,411
Machinery &
equipment 520,809 26,735 (1,836) - 545,708
Construction
in progress 16,953 (10,710)(3) - - 6,243
________ ________ ________ ________ ________
Total $680,583 $ 20,563 $ (1,877) $ - $699,269
======== ======== ======== ======== ========
Year ended
June 30, 1992:
Land $ 6,810 $ 101 $ (4) $ - $ 6,907
Buildings &
building
equipment 132,734 3,463 (283) - 135,914
Machinery &
equipment 499,575 25,601 (4,367) - 520,809
Construction
in progress 11,076 5,877(3) - - 16,953
________ ________ ________ ________ ________
Total $650,195 $ 35,042 $ (4,654) $ - $680,583
======== ======== ======== ======== ========
See notes on page F-3.
CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
SCHEDULE VI. ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT(5)
(in thousands)
Col. A Col. B Col. C Col. D Col. E Col. F
_______ _______ _______ _______ _______ _______
Accumulated
Depreciation
by Classifi- Balance
cations of at Beg- Balance
Property as inning Addi- at End
Listed in of tions Retire- of
Schedule V Period at Cost ments Other(2) Period
___________ _______ _______ _______ _______ ________
Year ended
June 30, 1994:
Buildings &
building
equipment $ 54,597 $ 3,535 $ (32) $ (412) $ 57,688
Machinery &
equipment 253,543 25,448 (4,234) (565) 274,192
________ ________ ________ ________ ________
Total $308,140 $ 28,983 $ (4,266) $ (977) $331,880
======== ======== ======== ======== ========
Year ended
June 30, 1993:
Buildings &
building
equipment $ 51,413 $ 3,192 $ (8) $ - $ 54,597
Machinery &
equipment 231,252 23,755 (1,464) - 253,543
________ ________ ________ ________ ________
Total $282,665 $ 26,947 $ (1,472) $ - $308,140
======== ======== ======== ======== ========
Year ended
June 30, 1992:
Buildings &
building
equipment $ 48,461 $ 3,091 $ (139) $ - $ 51,413
Machinery &
equipment 211,439 22,566 (2,753) - 231,252
________ ________ ________ ________ ________
Total $259,900 $ 25,657 $ (2,892) $ - $282,665
======== ======== ======== ======== ========
See notes on page F-3.
CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
SCHEDULE V. PROPERTY, PLANT AND EQUIPMENT (continued)
and
SCHEDULE VI. ACCUMULATED DEPRECIATION AND AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT (continued)
Notes: (1) Additions relate principally to expansion and
replacement of existing production and related
facilities.
(2) Includes foreign currency translation adjustments
and reclassifications to other assets of properties
held for sale.
(3) Net of transfers to other classifications upon completion.
(4) Includes $6.6 million of net assets of Aceros Fortuna acquired
on July 28, 1993.
(5) Depreciation is computed by the straight-line
method. The estimated lives of the assets are as
follows:
. Buildings and building equipment:
Land improvements, 20 years
Buildings and equipment, 20 to 45 years
. Machinery and equipment:
Machinery and equipment, 5 to 20 years
Autos and trucks, 3 to 6 years
Office furniture & equipment, 4 to 10 years
CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
SCHEDULE VIII. VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Column A Column B Column C Column D Column E
________ ________ _________________ ________ ________
Balance Additions
at Beg- Charged Charged Balance
inning to to at End
of Costs & Other Deduc- of
Description Period Expenses Accounts(1) tions(2) Period
___________ _______ ________ ________ ________ ________
Year ended
June 30, 1994:
Allowance for
doubtful
accounts
receivable $ 500 $ 470 $ 316 $ (667) $ 619
====== ====== ====== ====== ======
Year ended
June 30, 1993:
Allowance for
doubtful
accounts
receivable $ 500 $ 617 $ 337 $ (954) $ 500
====== ====== ====== ====== ======
Year ended
June 30, 1992:
Allowance for
doubtful
accounts
receivable $ 500 $ 553 $ 216 $ (769) $ 500
====== ====== ====== ====== ======
(1) Recoveries of accounts previously written off, net of
collection expenses.
(2) Doubtful accounts written off.
CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
SCHEDULE IX. SHORT-TERM BORROWINGS
(in thousands)
Col. A Col. B Col. C Col. D Col. E Col. F
______ _______ _______ _______ _______ _______
Maximum Average Weighted
Amount Amount Average
Out- Out- Interest
Category of Weighted standing standing Rate
Aggregate Balance Average During During During
Short-Term at End Interest the the the
Borrowings(1) Period Rate Period Period(2) Period(3)
___________ _______ ________ ________ ________ ________
Year ended
June 30, 1994:
Bank
Borrowings $ - - $ 19,620 $ 4,096 4.8%
Commercial
Paper $ - - $ 20,000 $ 5,585 3.4%
Year ended
June 30, 1993:
Bank
Borrowings $ - - $ 4,500 $ 2,139 3.8%
Commercial
Paper $ - - $ - $ 279 3.6%
Year ended
June 30, 1992:
Bank
Borrowings $ - - $ 50,000 $ 29,064 5.3%
Commercial
Paper $ - - $ 60,411 $ 38,656 5.6%
Notes: (1) For details of debt arrangements, see Note 7 to
the financial statements included in Item 8
"Financial Statements and Supplementary Data."
(2) The average amount outstanding during the period
was computed by multiplying the principal amount
outstanding by the number of days outstanding and
dividing the total by the number of days in the
year.
(3) The weighted average interest rate during the
period was computed by dividing the actual
interest expense by the average short-term debt
outstanding.
CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
SCHEDULE X. SUPPLEMENTARY INCOME STATEMENT INFORMATION
for the Years Ended June 30, 1994, 1993, and 1992
(in thousands)
Charged to Costs and Expenses
__________________________________
1994 1993 1992
________ ________ ________
Maintenance and Repairs $ 42,862 $ 38,380 $ 38,861
======== ======== ========