UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission File Number 1-5828
CARPENTER TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 23-0458500
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 West Bern Street, Reading, Pennsylvania 19612-4662
(Address of principal executive offices) (Zip Code)
610-208-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of April 30, 1998.
Common stock, $5 par value 22,837,713
Class Number of shares outstanding
The Exhibit Index appears on page E-1.
<PAGE>
CARPENTER TECHNOLOGY CORPORATION
FORM 10-Q
INDEX
Page
Part I FINANCIAL INFORMATION
Consolidated Balance Sheet March 31, 1998 (Unaudited)
and June 30, 1997..................................... 3 & 4
Consolidated Statement of Income (Unaudited) for the
Three and Nine Months Ended March 31, 1998 and 1997... 5
Consolidated Statement of Cash Flows (Unaudited) for the
Nine Months Ended March 31, 1998 and 1997............. 6
Notes to Consolidated Financial Statements.............. 7 - 14
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................15 - 18
Forward-looking Statements.............................. 19
Part II OTHER INFORMATION................................20 - 24
Exhibit Index............................................. E-1
<PAGE>
PART I
- ------ CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET (Page 1 of 2)
March 31, 1998 and June 30, 1997
(in thousands, except share data)
March 31 June 30
1998 1997
--------- --------
(Unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 12,499 $ 18,620
Accounts receivable, net 176,464 159,863
Inventories 269,689 211,483
Net assets held for sale 185,564 -
Other current assets 13,758 12,247
---------- ----------
Total current assets 657,974 402,213
Property, plant and equipment,
at cost 1,070,773 936,456
Less accumulated depreciation
and amortization 448,824 422,820
---------- ----------
621,949 513,636
Prepaid pension cost 116,580 99,748
Goodwill, net 174,455 104,610
Other assets 115,553 102,794
---------- ----------
Total assets $1,686,511 $1,223,001
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEET (Page 2 of 2)
March 31, 1998 and June 30, 1997
(in thousands, except share data)
March 31 June 30
LIABILITIES 1998 1997
- ----------- --------- --------
(Unaudited)
Current liabilities:
Short-term debt $ 131,214 $ 82,540
Accounts payable 83,579 78,962
Accrued compensation 27,545 26,932
Accrued income taxes 14,402 19,263
Deferred income taxes 23,782 5,601
Other accrued liabilities 49,839 41,375
Current portion of long-term debt 35,908 3,372
---------- ----------
Total current liabilities 366,269 258,045
Long-term debt, net of current portion 372,145 244,726
Accrued postretirement benefits 135,395 135,903
Deferred income taxes 133,341 110,780
Other liabilities 40,701 24,240
SHAREHOLDERS' EQUITY
- --------------------
Preferred stock -
$5 par value, authorized 2,000,000
shares; issued 443.1 shares at
March 31, 1998 and 447.3 shares
at June 30, 1997 27,960 28,224
Common stock at $5 par value - authorized
100,000,000 shares at March 31, 1998 and
50,000,000 shares at June 30, 1997; issued
22,969,281 shares at March 31, 1998 and
19,642,920 shares at June 30, 1997 114,846 98,215
Capital in excess of par value -
common stock 188,548 54,338
Reinvested earnings 340,896 303,566
Common stock in treasury, at cost -
147,670 shares at March 31, 1998
and 160,605 shares at June 30, 1997 (3,399) (3,539)
Deferred compensation (18,363) (20,299)
Foreign currency translation
adjustments (11,828) (11,198)
---------- ----------
Total shareholders' equity 638,660 449,307
---------- ----------
Total liabilities and
shareholders' equity $1,686,511 $1,223,001
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
for the three and nine months ended March 31, 1998 and 1997
(in thousands, except per share data)
Three Months Nine Months
------------------ ------------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales $328,999 $250,869 $858,450 $654,285
-------- -------- -------- --------
Costs and expenses:
Cost of sales 241,151 188,953 623,417 489,340
Selling and
administrative
expenses 41,862 31,019 117,212 90,197
Interest expense 8,340 5,225 22,353 14,127
Other (income)
expense, net 454 536 (906) 167
-------- -------- -------- --------
291,807 225,733 762,076 593,831
-------- -------- -------- --------
Income before income
taxes 37,192 25,136 96,374 60,454
Income taxes 15,129 9,642 38,551 23,238
-------- -------- -------- --------
Net income $ 22,063 $ 15,494 $ 57,823 $ 37,216
======== ======== ======== ========
Earnings per common share:
Basic $ 1.07 $ .86 $ 2.86 $ 2.12
======== ======== ======== ========
Diluted $ 1.02 $ .84 $ 2.73 $ 2.04
======== ======== ======== ========
Weighted average common
shares outstanding:
Basic 20,306 17,638 19,787 16,955
======== ======== ======== ========
Diluted 21,503 18,722 21,004 18,041
======== ======== ======== ========
Dividends per common
share $ .33 $ .33 $ .99 $ .99
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
for the nine months ended March 31, 1998 and 1997
(in thousands)
1998 1997
---- ----
OPERATIONS
Net income $ 57,823 $ 37,216
Adjustments to reconcile net income
to net cash provided from operations:
Depreciation and amortization 41,056 28,475
Deferred income taxes 5,398 8,146
Pension credits (16,832) (8,339)
Changes in working capital and other,
net of acquisitions:
Receivables 2,495 1,903
Inventories (21,741) (14,202)
Accounts payable (8,445) (10,139)
Accrued current liabilities (3,497) (15,085)
Other, net 3,204 (2,679)
-------- --------
Net cash provided from operations 59,461 25,296
-------- --------
INVESTING ACTIVITIES
Purchases of plant and equipment (66,368) (74,095)
Disposals of plant and equipment 2,989 576
Acquisitions of businesses, net
of cash received (175,996) (50,654)
Net assets held for sale (23,032) -
-------- --------
Net cash used for investing activities (262,407) (124,173)
-------- --------
FINANCING ACTIVITIES
Provided by short-term debt 48,674 72,906
Proceeds from issuance of long-term debt 140,000 60,000
Payments on long-term debt (121,391) (4,009)
Proceeds from issuance of common stock 150,035 1,009
Dividends paid (20,493) (17,594)
-------- --------
Net cash provided from financing activities 196,825 112,312
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS - (107)
-------- --------
INCREASE (DECREASE)IN CASH AND CASH EQUIVALENTS (6,121) 13,328
Cash and cash equivalents at beginning of period 18,620 13,159
-------- --------
Cash and cash equivalents at end of period $ 12,499 $ 26,487
======== ========
Supplemental Data:
- -----------------
Non-Cash Investing Activities:
Treasury stock issued for business acquisitions $ 1,036 $ 99,517
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial
statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting only
of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for
the nine months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year
ending June 30, 1998. The June 30, 1997 condensed balance
sheet data was derived from audited financial statements,
but does not include all disclosures required by generally
accepted accounting principles. For further information,
refer to the consolidated financial statements and footnotes
included in Carpenter's 1997 Annual Report on Form 10-K.
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
Certain reclassifications of prior year's amounts have
been made to conform with the current year's presentation.
2. Earnings Per Common Share
In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings Per Share," which specifies the
computation, presentation and disclosure requirements for
earnings per share. SFAS No. 128 requires companies to
adopt its provisions for interim and annual periods ending
after December 15, 1997, and requires restatement of all
prior earnings per share data presented.
Basic earnings per common share are computed by
dividing net income (less preferred dividends net of tax
benefits) by the weighted average number of common shares
outstanding during the period. On a diluted basis, shares
outstanding are adjusted for common share equivalents, and
both net earnings and shares outstanding are adjusted to
assume the conversion of the convertible preferred stock.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
------------------------------------------
2. Earnings Per Common Share, continued
-------------------------
The calculations of earnings per share are as follows:
(in thousands, except Three Months Nine Months
per share data) 1998 1998
------------------- -------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income $ 22,063 $ 22,063 $ 57,823 $ 57,823
Dividends accrued on conver-
tible preferred stock, net
of tax benefits (390) - (1,168) -
Assumed shortfall between
common and preferred dividend - (154) - (473)
-------- -------- -------- --------
Earnings available for
common shareholders $ 21,673 $ 21,909 $ 56,655 $ 57,350
======== ======== ======== ========
Weighted average number of
common shares outstanding 20,306 20,306 19,787 19,787
Assumed conversion
of preferred shares - 890 - 890
Effect of shares issuable
under stock option plans - 307 - 327
-------- -------- -------- --------
Weighted average common shares 20,306 21,503 19,787 21,004
======== ======== ======== ========
Earnings per share $ 1.07 $ 1.02 $ 2.86 $ 2.73
======== ======== ======== ========
Three Months Nine Months
1997 1997
------------------- -------------------
Basic Diluted Basic Diluted
----- ------- ----- -------
Net income $ 15,494 $ 15,494 $ 37,216 $ 37,216
Dividends accrued on conver-
tible preferred stock, net
of tax benefits (390) - (1,188) -
Assumed shortfall between
common and preferred dividend - (36) - (480)
-------- -------- -------- --------
Earnings available for
common shareholders $ 15,104 $ 15,458 $ 36,028 $ 36,736
======== ======== ======== ========
Weighted average number of
common shares outstanding 17,638 17,638 16,955 16,955
Assumed conversion
of preferred shares - 901 - 903
Effect of shares issuable
under stock option plans - 183 - 183
-------- -------- -------- --------
Weighted average common shares 17,638 18,722 16,955 18,041
======== ======== ======== ========
Earnings per share $ 0.86 $ 0.84 $ 2.12 $ 2.04
======== ======== ======== ========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
------------------------------------------
3. Inventories
-----------
March 31 June 30
1998 1997
-------- --------
(in thousands)
Finished and purchased products $158,501 $121,532
Work in process 198,819 177,650
Raw materials and supplies 51,220 51,152
-------- --------
Total at current cost 408,540 350,334
Excess of current cost
over LIFO values 138,851 138,851
-------- --------
Inventory per Balance Sheet $269,689 $211,483
======== ========
The current cost of LIFO-valued inventories was $369
million at March 31, 1998 and $318 million at June 30, 1997.
4. Acquisitions of Businesses
--------------------------
On February 19, 1998, Carpenter completed the
acquisition of Talley Industries, Inc. ("Talley"), when
Talley shareholders approved the merger resulting in
Carpenter owning 100 percent of the Talley common and preferred
shares. Previously, Carpenter owned approximately 75
percent of the outstanding shares of Talley, which were
purchased in a tender offer concluded in December 1997.
Carpenter acquired the outstanding common and preferred
stock of Talley for $187 million of cash, including
acquisition costs, and assumed Talley debt with a principal
amount of $125 million and a fair market value of $137
million. The transaction was financed by short-term debt
issued under a recently-expanded revolving credit agreement.
Based upon a preliminary valuation, $67 million of the
purchase price was allocated to goodwill which will be
amortized on a straight-line basis over 40 years, the
estimated life of the goodwill.
Talley is a diversified manufacturer composed of a
stainless steel products segment, a government products and
services segment and an industrial products segment. Talley
had revenues of $503 million and net income of $19 million
in calendar 1996. The stainless steel products segment had
sales and operating income, before income taxes and
corporate expenses, of $136 million and $11 million in
calendar 1996, respectively. Carpenter intends to retain
the companies in the stainless steel products segment, but
divest the companies in the government products and services
and industrial products segments. Carpenter believes these
segments will be sold within one year of acquisition.
Accordingly, the segments to be divested are reflected in
the accompanying financial statements at their estimated
fair market value as net assets held for sale.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
------------------------------------------
4. Acquisitions of Businesses, continued
--------------------------
On October 31, 1997, Carpenter acquired the net assets
of Shalmet Corporation and its affiliates for $9 million in
stock and cash, including acquisition costs, and assumed $4
million of Shalmet's debt. Shalmet converts "black" coil
and bar to "bright" round bar and coil products, and had
sales of approximately $12 million in 1996. Based upon a
preliminary valuation, the fair value of the net assets
acquired approximates the purchase price, and accordingly
no goodwill has been recorded.
On September 30, 1997, Carpenter acquired four of the
operating units of ICI Australia, Ltd. in exchange for $16
million of cash, including acquisition costs. These four
operating units manufacture structural ceramic components
and powder products, and had sales of approximately $21
million for the year ended September 30, 1997. Based upon a
preliminary valuation, $5 million of the purchase price was
allocated to goodwill, which will be amortized on a
straight-line basis over 20 years.
On July 9, 1997, Carpenter acquired all of the
outstanding common shares of Aceromex Atlas S.A. de C.V., a
specialty metals distributor in Mexico, for $3 million in
cash. Aceromex had sales of approximately $4 million for
calendar year 1996. Based upon a preliminary valuation, $1
million of the purchase price was allocated to goodwill, which
is being amortized on a straight-line basis over 20 years.
The acquisitions described above were accounted for
using the purchase method of accounting and accordingly, the
operating results of these acquired businesses which
Carpenter intends to retain have been included in the
consolidated statement of income from the dates of acquisition.
The operating results of the segments which will be sold are
being accounted for as net assets held for sale and will be
excluded from Carpenter's consolidated statement of income for
up to one year following their acquisition.
The purchase prices of the businesses acquired during
fiscal 1998 have been allocated to the assets purchased and
liabilities assumed based upon the fair values on the dates
of acquisition as follows:
(Dollars in thousands)
Working capital, other than cash $ 42,874
Property, plant and equipment 79,991
Other assets 17,219
Goodwill 73,236
Non-current liabilities (36,288)
--------
$177,032
========
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
------------------------------------------
4. Acquisitions of Businesses, continued
--------------------------
Debt and deferred tax liabilities included in the
allocation were $141 million and $35 million, respectively.
On the basis of an unaudited pro forma consolidation of
the results of operations as if the Talley and fiscal 1997
acquisitions had taken place at the beginning of fiscal
1997, consolidated net sales would have been $904 million
for the nine months ended March 31, 1998 and $826 million
for the nine months ended March 31, 1997. Unaudited
consolidated pro forma net income and basic earnings per
share would have been $56 million and $2.79 for the nine
months ended March 31, 1998, and $42 million and $2.11 for
the nine months ended March 31, 1997, respectively. Such
pro forma amounts are not necessarily indicative of what the
actual consolidated results of operations might have been if
the acquisitions had been effective at the beginning of
fiscal 1997. The results of the other companies acquired in
fiscal 1998 were excluded from these proforma calculations
because their inclusion would not have had a significant
effect.
5. Common Stock Offering
---------------------
During January 1998, Carpenter filed a shelf Registration
Statement to register $350 million of its common stock and debt
securities. During March 1998, Carpenter completed a public
offering of 3.2 million shares of its common stock at a price of
$48 1/16 per share. Net proceeds from the sale were used
principally to repay debt incurred to finance the acquisition of
Talley.
6. Debt Arrangements
-----------------
On March 31, 1998, Carpenter filed with the Securities
and Exchange Commission a Prospectus Supplement to the
Prospectus dated February 13, 1998 in order to issue up to
$198 million of medium-term notes with expected maturities
ranging from 5 to 20 years (see Note 9). Carpenter intends
to use the proceeds to reduce its outstanding short-term
borrowings, which were incurred principally to finance the
acquisition of Talley.
On January 23, 1998, Talley Manufacturing and
Technology, Inc., a wholly-owned subsidiary of Talley,
purchased approximately 82% of its outstanding 10.75% Senior
Notes pursuant to a tender offer. The Notes were purchased
at a price of 108.79% of their principal amount, together
with accrued interest, or a total of $105 million, which
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
------------------------------------------
6. Debt Arrangements, continued
------------------
approximated the fair value assigned to the debt in the
determination of the purchase price for Talley.
7. Commitments and Contingencies - Environmental
---------------------------------------------
Carpenter accrues amounts for environmental remediation
costs which represent management's best estimate of the
probable and reasonably estimable costs relating to
environmental remediation. For the three and nine months
ended March 31, 1998, $2 million and $8 million,
respectively, were charged to operations for environmental
remediation costs. The liability for environmental
remediation costs at March 31, 1998 was $16 million.
The estimated range of the reasonably possible future costs
of remediation at Carpenter-owned operating facilities and
superfund sites is between $16 million and $20 million.
During fiscal 1998, Carpenter entered into additional
settlements of litigation relating to insurance coverages for
certain superfund sites and recognized income before income
taxes of $4 million for the nine months ended March 31, 1998.
During fiscal 1998, about $9 million of cash was received under
these settlements for the superfund sites, leaving the
remaining discounted receivable for recoveries from these
settlements at March 31, 1998 at $2 million.
Estimates of the amount and timing of future costs of
environmental remediation requirements are necessarily
imprecise because of the continuing evolution of
environmental laws and regulatory requirements, the
availability and application of technology and the
identification of presently unknown remediation sites and
the allocation of costs among the potentially responsible
parties. Based upon information presently available, such
future costs are not expected to have a material effect on
Carpenter's competitive or financial position. However,
such costs could be material to results of operations in a
particular future quarter or year.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
------------------------------------------
8. Accounting Pronouncements
-------------------------
The Financial Accounting Standards Board has issued
SFAS 130, "Reporting Comprehensive Income", SFAS 131,
"Disclosures about Segments of an Enterprise and Related
Information" and SFAS 132, "Employers' Disclosure about
Pensions and Other Postretirement Benefits" which will be
effective for Carpenter's fiscal year 1999. SFAS 130
establishes standards for reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. SFAS 131 establishes
standards for methods by which public business enterprises
report information about operating segments in annual
financial statements and requires them to report selected
information about operating segments in interim financial
reports issued to shareholders. It also establishes
standards for related disclosure about products and
services, geographic areas, and major customers. SFAS 132
revises disclosure requirements for pension and other
postretirement benefit plans, with the intent of improving
the understandability of benefit disclosures, eliminating
unnecessary requirements, and standardizing footnote
disclosures. The impacts of these new standards on
Carpenter's future financial statements and disclosures have
not been determined.
During March 1998, the American Institute of Certified
Public Accountants (AICPA) issued Statement of Position (SOP)
No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", which provides
guidance on accounting for these costs. Carpenter will
adopt this statement during the fourth quarter of fiscal
1998, and does not expect that the adoption will have a
material effect on its financial position or results of
operations.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting
on the Costs of Start-Up Activities," which requires costs of
start-up activities and organization costs to be charged to
expense as incurred, and will be effective for Carpenter's
fiscal 2000. The impact of this new SOP on Carpenter's future
financial statements and disclosures has not been determined.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
------------------------------------------
9. Subsequent Events
-----------------
On April 7, 1998, Carpenter acquired the majority
interest (51 percent) in Parmaco AG, a privately held Swiss
firm that makes metal injection molded parts. The
investment was financed by the conversion of a $1.5 million
note receivable from Parmaco AG into shares of common stock.
Carpenter has the option to acquire the remaining 49 percent
of the company by December 31, 2000.
During April, 1998, $176 million of medium-term notes
were issued with an average interest rate of 6.6%, and
maturities ranging from 5 to 20 years (see Note 6). The
proceeds were used to repay short-term debt.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
------------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Results of Operations - Quarter Ended March 31, 1998 vs.
- --------------------------------------------------------
Quarter Ended March 31, 1997:
- ----------------------------
Net income for the quarter ended March 31, 1998 was $22 million, a 42%
increase compared to $15 million for the same quarter last year. Diluted
earnings per share were $1.02 for the quarter compared to $.84 per share for
the prior year quarter. The improved results were primarily because of higher
shipments, reduced raw material costs, and the inclusion of the results of
businesses acquired during the last year. The impact of higher net income on
diluted earnings per share for the three months ended March 31, 1998 was
partially offset by an increased number of outstanding shares due to the 3.2
million common share offering during March 1998 as well as the 2.8 million
shares of treasury common stock issued in February 1997 for the purchase of
Dynamet Incorporated.
Sales were $329 million, an increase of 31% from $251 million in the
same period last year. Excluding the sales of businesses acquired since last
year, sales increased 5%, primarily as a result of higher unit volume
shipments of the Specialty Alloys Operations.
The core Specialty Alloys Operations' unit volume sales of stainless
steel products increased 4% versus the same quarter a year ago and special
alloys sales volume was up by 8%. Demand was strong from most end-use
markets, especially those for aerospace applications.
Sales outside of the United States increased by 67% to $51 million,
of which $15 million were exported by domestic operations.
Cost of sales as a percent of net sales decreased to 73% from 75% during
last year's third quarter primarily because of lower nickel and other raw
material costs and production efficiencies in Specialty Alloys Operations.
Selling and administrative costs were higher by $11 million
primarily due to the inclusion of costs of newly acquired companies.
Interest expense was higher by $3 million chiefly due to the
increased debt level required to finance the business
acquisitions made during the past year.
The effective tax rate for the three months ended March 31, 1998
was 40.7% versus 38.4% last year, primarily due to increased amortization
of goodwill, which is not tax deductible, and higher state income taxes.
Results of Operations - Nine Months Ended March 31, 1998 vs.
- ------------------------------------------------------------
Nine Months Ended March 31, 1997:
- --------------------------------
Net income for the nine months ended March 31, 1998 was $58
million, up 55% compared to $37 million for the same period a
year ago. Diluted earnings per share increased to $2.73 in the
first nine months, compared with $2.04 for the nine months ended
March 31, 1997. The improved results were primarily a result of
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS, continued
-------------------------
Results of Operations - Nine Months Ended March 31, 1998 vs.
- ------------------------------------------------------------
Nine Months Ended March 31, 1997, continued:
- --------------------------------
higher sales and operating levels of the Specialty Alloys Operations and
Engineered Products Group and the inclusion of the results of acquisitions
made during the past year. The impact of higher net income on diluted
earnings per share for the nine months ended March 31, 1998 was partially
offset by an increased number of outstanding shares due to the 2.8 million
treasury common shares issued in February 1997 for the purchase of Dynamet
Incorporated as well as the 3.2 million common share offering during
March 1998.
Net sales for the nine months were $858 million, up 31% from
$654 million in the same period last year. The increase in sales
was a result of an 8% improvement in Specialty Alloys Operations
unit volume, and acquisitions made since last year, including
Dynamet Incorporated, which was acquired in February 1997, and
Talley Industries, Inc.'s stainless steel products segment,
acquired in December 1997.
The core Specialty Alloys Operations' unit volume sales of
stainless steel products increased 8% versus the nine months
ended March 31, 1997, and special alloys sales volume was up by
9%. Demand was strong from most end-use markets, especially
those for aerospace applications.
Sales outside of the United States increased by 60% to $128
million, of which $44 million were exported by domestic
operations.
Cost of sales as a percent of net sales decreased to 73%
from 75% last year. The effect of increased environmental
remediation charges on this ratio was more than offset by lower
unit raw material costs and higher sales. The first nine months
of last year were adversely affected by an extended maintenance
shutdown which resulted in lower manufacturing levels and higher
repair expenses.
Selling and administrative expenses were higher by $27
million primarily because of costs of newly acquired companies,
higher sales levels, and higher costs for professional services.
Interest expense was $22 million, or $8 million higher than
the same period last year primarily because of borrowings to
finance business acquisitions.
The effective tax rate for the nine months ended March 31,
1998 was 40.0% versus 38.4% last year, primarily due to increased
amortization of goodwill, which is not tax deductible, and higher
state income taxes.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS, continued
-------------------------
Results of Operations - Nine Months Ended March 31, 1998 vs.
- ------------------------------------------------------------
Nine Months Ended March 31, 1997, continued:
- --------------------------------
In March 1996, Carpenter began to assess the impact that
Year 2000 issues might have on future operating capabilities.
Based on its remediation efforts through March 31, 1998,
Carpenter believes that the costs of such efforts will not be
material to its net income or the trends of its net income. In
addition, Carpenter believes it has identified the major problems
within its systems and has an ongoing remedial program to correct
such problems on a timely basis so that future operations will
not be materially impacted.
The Financial Accounting Standards Board has issued SFAS 130,
"Reporting Comprehensive Income," SFAS 131, "Disclosures about
Segments of an Enterprise and Related Information" and SFAS 132,
"Employer's Disclosures about Pensions and Other Postretirement
Benefits", which will be effective for Carpenter's fiscal year 1999.
The impact of these new standards on Carpenter's future financial
statements and disclosures has not been determined.
The AICPA issued SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Carpenter
will adopt this statement during the fourth quarter of fiscal 1998,
and does not expect that the adoption will have a material effect on
its financial position or results of operations.
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the
Costs of Start-Up Activities," which requires costs of start-up
activities and organization costs to be charged to expense as incurred,
and will be effective for Carpenter's fiscal 2000. The impact of this
new SOP on Carpenter's future financial statements and disclosures has
not been determined.
Cash Flow and Financial Condition:
- ---------------------------------
During the nine months ended March 31, 1998, Carpenter's
cash and cash equivalents decreased by $6 million, as shown in
the Consolidated Statement of Cash Flows.
Net cash generated from operating activities was $59 million
despite working capital needs. Excluding amounts acquired
through purchases of businesses, accounts receivable decreased $2
million, accounts payable and accrued current liabilities
decreased $12 million, and inventories increased $22 million,
primarily as a result of normal seasonal trends.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS, continued
-------------------------
Cash Flow and Financial Condition, continued:
- ---------------------------------
Investing activities consumed $262 million in cash during
the first nine months of fiscal 1998. Total spending for
business acquisitions, net of cash received, was $176 million.
Capital expenditures remained at high levels as Carpenter
continues its capital expenditure program to invest for future
business requirements, including manufacturing capacity. As of
March 31, 1998, the total approved capital improvement projects
in excess of $1 million was approximately $240 million of which
approximately $45 million has been spent. These projects are to
upgrade and increase production capabilities, reduce costs of
production, increase the throughput and quality of existing
facilities, and make environmental improvements. The major
projects include modernization of the strip finishing facility
($87 million), a new 4500 ton forging press ($42 million), four
new vacuum arc remelt furnaces ($22 million), and annealing
expansion ($16 million). Total capital expenditures anticipated
for fiscal 1998 are approximately $102 million of which $66
million was spent as of March 31, 1998.
Total debt, excluding debt of acquired businesses, increased
by $67 million since June 30, 1997 to a level of $539 million or
40% of total capital employed. Current year borrowings were in
the form of short-term debt. During fiscal 1998 and 1997,
short-term borrowings of $140 million and $60 million,
respectively, were classified as long-term debt because Carpenter
has the intent and ability to refinance this debt on a long-term
basis through existing credit facilities. During March 1998,
Carpenter used the proceeds from its common stock offering principally
to repay debt incurred to finance the acquisition of Talley. In
addition, a public offering of up to $198 million of medium-term
notes is in progress and expected to be completed by June 30, 1998.
The proceeds of this offering will be used to repay short-term debt.
In April 1998, $176 million of medium-term notes were issued in
connection with this offering.
At March 31, 1998, Carpenter was in a sound liquidity
position, with current assets exceeding current liabilities by
$292 million (a ratio of 1.8 to 1). This favorable ratio is
conservatively stated because certain inventories are valued $139
million less than the current cost as a result of using the LIFO
method.
Carpenter believes that its present financial resources,
both from internal and external resources, including the
anticipated proceeds from the sales of the Talley segments, will
be adequate to meet its foreseeable short-term and long-term
liquidity needs.
<PAGE>
Forward-looking Statements
--------------------------
This Form 10-Q contains various "Forward-looking Statements"
within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements are based on current expectations
regarding future events that involve a number of risks and
uncertainties which could cause actual results to differ from
those of such forward-looking statements. Such risks and
uncertainties include those set forth in other filings made by
the Company under the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, and also include the
following factors: demand for certain products, such as stainless
steel, is sensitive to general economic conditions; the
substantial quantities of raw materials such as nickel, chromium,
cobalt and titanium purchased by the Company are subject to
supply interruption and increases in costs; environmental
expenses may exceed those currently projected and recoveries from
other parties may be less than expected; the liquidity of the
Company is dependent in part upon access to capital upon
acceptable terms, collections from numerous customers and the
solvency of the Company's lending institutions; the sales of two
business segments of Talley are subject to various uncertainties
including general economic and financial market conditions and
the ability of the Company to effectively manage these business
segments prior to sale. The forward-looking statements in this
document are intended to be subject to the safe harbor protection
provided by Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934,
as amended.
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.
-------------------------
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which
the Company or any of its subsidiaries is a party or to which any
of their properties is subject or which is known by the Company
to be contemplated by governmental authorities. There are no
material proceedings to which any Director, Officer, or affiliate
of the Company, or any owner of more than five percent of any
class of voting securities of the Company, or any associate of
any Director, Officer, affiliate, or security holder of the
Company, is a party adverse to the Company or has a material
interest adverse to the interest of the Company or its
subsidiaries. There is no administrative or judicial proceeding
arising under any Federal, State or local provisions regulating
the discharge of materials into the environment or primarily for
the purpose of protecting the environment that (1) is material to
the business or financial condition of the Company, (2) involves
a claim for damages, potential sanctions or capital expenditures
exceeding ten percent of the current assets of the Company or (3)
includes a governmental authority as a party and involves
potential monetary sanctions in excess of $100,000.
On January 23, 1998, Talley, certain former Talley Board
members and Carpenter entered into a Stipulation and Agreement of
Compromise, Settlement and Release with respect to various
shareholder class action lawsuits which alleged violations of
federal and state laws in Carpenter's acquisition of Talley. On
April 9, 1998, the Delaware Court of Chancery approved the
settlement which had required the defendants to publish and
disseminate supplemental disclosures to Talley shareholders. In
addition, the Court approved plaintiffs' application for
attorney's fees and costs in the amount of $330,000. The
settlement had been opposed by Messrs. Saad A. Alissa and
Ralph A. Rockow, two former Talley shareholders.
Item 6. Exhibits and Reports on Form 8-K.
-----------------------------------------
a. The following documents are filed as exhibits:
2. Plan of Acquisition, Reorganization, Arrangement,
Liquidation or Succession
(a) Agreement and Plan of Merger among Carpenter
Technology Corporation, Score Acquisition
Corp. and Talley Industries, Inc. dated
September 25, 1997 is incorporated herein by
reference to Exhibit (c)(1) to Schedule 14d-1
relating to Talley Industries, Inc. filed on
October 2, 1997 by Carpenter and Score
Acquisition Corp.
<PAGE>
4. Instruments Defining Rights of Security Holders,
Including Indentures
(a) Restated Certificate of Incorporation is
incorporated herein by reference to
Exhibit 3A of Carpenter's 1987 Annual Report
on Form 10-K.
(b) By-Laws, amended as of December 5, 1996, are
incorporated herein by reference to Exhibit 3
of Carpenter's Form 10-Q Quarterly Report for
the quarter ended December 31, 1996.
(c) Registration Statement No. 333-44757, as
filed on Form S-3 on January 22, 1998 and
amended on February 13, 1998 and Prospectus
dated February 13, 1998 relating to the
registration and issuance of common stock and
debt securities are incorporated herein by
reference.
(d) Prospectus Supplement dated March 10, 1998
and filed March 11, 1998 relating to the
issuance of common stock is incorporated
herein by reference.
(e) Prospectus Supplement dated and filed on
March 31, 1998 relating to the Medium Term
Note Program for issuance of up to
$198,000,000 of unsecured debt securities is
incorporated herein by reference.
(f) Indenture for debt securities dated
January 12, 1994 between Carpenter and U.S.
Bank Trust of New York, National Association,
formerly known as First Trust of New York,
National Association, as successor Trustee is
incorporated by reference to Exhibit 4c to
Carpenter's S-3 filed January 6, 1994.
12. Statement re: Computations of Ratios of Earnings
to Fixed Charges
27. Financial Data Schedule
<PAGE>
b. The Company filed the following Reports on Form 8-K for
events occurring during the quarter of the fiscal year
covered by this Report:
I. Current Report on Form 8-K dated December 5, 1997
as amended by Amendment No. 1 thereto on Form
8-K/A filed on January 22, 1998 and further
amended by Amendment No. 2 thereto on Form 8-K/A
filed on February 12, 1998, reporting Items 2 and
7. Amendment No. 2 included the following
financial statements:
Financial Statements of Talley Industries, Inc. as
of and for the year ended December 31, 1996:
(1) Report of Independent Accountants
(2) Consolidated Statement of Earnings - Years
ended December 31, 1996, 1995 and 1994
(3) Consolidated Balance Sheet - December 31,
1996 and 1995
(4) Consolidated Statement of Changes in
Stockholders' Equity - Years ended
December 31, 1996, 1995 and 1994
(5) Consolidated Statement of Cash Flows - Years
ended December 31, 1996, 1995 and 1994
(6) Notes to Consolidated Financial Statements,
including Summary of Segment Operations
Unaudited Financial Statements of Talley Industries,
Inc. as of and for the nine months ended September 30,
1997:
(1) Consolidated Balance Sheet - September 30,
1997 and December 31, 1996
(2) Consolidated Statement of Earnings - Nine
Months Ended September 30, 1997 and 1996
(3) Consolidated Statement of Cash Flows - Nine
Months Ended September 30, 1997 and 1996
(4) Consolidated Statement of Changes in
Stockholders' Equity - Nine Months Ended
September 30, 1997 and 1996
(5) Notes to Consolidated Financial Statements
<PAGE>
Unaudited Pro Forma Financial Information to reflect
the registrant's acquisition of Talley Industries,
Inc.:
(1) Unaudited Pro Forma Condensed Combined
Balance Sheet as of December 31, 1997
(2) Unaudited Pro Forma Condensed Combined
Statements of Income for the Year Ended
June 30, 1997 and the Six Months Ended
December 31, 1997
(3) Notes to Pro Forma Condensed Combined
Financial Statements
II. Current Report on Form 8-K dated February 19, 1998
and filed on February 26, 1998 reporting on Items
2 and 7.
III. Current Report on Form 8-K dated March 9, 1998 and
filed on March 16, 1998 as amended by Amendment
No. 1 thereto on Form 8-K/A filed on March 19,
1998 reporting on Items 5 and 7.
IV. Current Report on Form 8-K dated March 31, 1998
and filed on April 15, 1998 reporting on Items 5
and 7.
Items 2, 3, 4, and 5 are omitted as the answer is negative
or the items are not applicable.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
CARPENTER TECHNOLOGY CORPORATION
--------------------------------
(Registrant)
Date: May 14, 1998 s/ G. Walton Cottrell
------------------- -----------------------------------
G. Walton Cottrell
Sr. Vice President - Finance
and Chief Financial Officer
<PAGE>
EXHIBIT INDEX
-------------
Exhibit No. Title Page
- ----------- ----- ----
12. Statement regarding Computations of
Ratios of Earnings to Fixed Charges E-2
27. Financial Data Schedule. E-3
E-1
<PAGE>
Exhibit 12
CARPENTER TECHNOLOGY CORPORATION
COMPUTATIONS OF RATIOS OF EARNINGS TO FIXED CHARGES -- unaudited
Five Years Ended June 30 and
Nine Months Ended March 31, 1998
(dollars in thousands)
Nine
Months
Ended Year Ended June 30
03/31/98 ---------------------------------------------
-------- 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Fixed charges
Interest costs (a) $ 23,783 $ 22,330 $ 19,275 $ 17,797 $ 19,651 $ 21,759
Interest component of
non-capitalized lease
rental expense (b) 1,937 2,419 2,074 2,452 2,522 2,532
-------- -------- -------- -------- -------- --------
Total fixed charges $ 25,720 $ 24,749 $ 21,349 $ 20,249 $ 22,173 $ 24,291
======== ======== ======== ======== ======== ========
Earnings as defined:
Income before income
taxes, extraordinary
charge and cumulative
effect of changes in
accounting principles $ 96,374 $ 97,871 $ 95,170 $ 74,571 $ 62,728 $ 42,799
Add: Loss in less-than-
fifty-percent-owned
persons 677 1,188 7,025 3,000 910 -
Less: Gain on sale of
partial interest in
less-than-fifty-
percent-owned persons - - (2,650) - - -
Fixed charges less
interest capitalized 24,290 22,349 21,009 16,994 18,043 23,126
Amortization of
capitalized interest 1,455 1,879 2,074 1,952 1,788 1,725
-------- -------- -------- -------- -------- --------
Earnings as defined $122,796 $123,287 $122,628 $ 96,517 $ 83,469 $ 67,650
======== ======== ======== ======== ======== ========
Ratio of earnings
to fixed charges 4.8x 5.0x 5.7x 4.8x 3.8x 2.8x
======== ======== ======== ======== ======== ========
(a) Includes interest capitalized relating to significant construction
projects and amortization of debt discount and debt expense.
(b) One-third of rental expense which approximates the interest component of
non-capitalized leases.
E-2<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> $12,499
<SECURITIES> $0
<RECEIVABLES> $176,464
<ALLOWANCES> $0
<INVENTORY> $269,689
<CURRENT-ASSETS> $657,974
<PP&E> $1,070,773
<DEPRECIATION> $448,824
<TOTAL-ASSETS> $1,686,511
<CURRENT-LIABILITIES> $366,269
<BONDS> $372,145
$0
$27,960
<COMMON> $114,846
<OTHER-SE> $495,854
<TOTAL-LIABILITY-AND-EQUITY> $1,686,511
<SALES> $858,450
<TOTAL-REVENUES> $858,450
<CGS> $623,417
<TOTAL-COSTS> $623,417
<OTHER-EXPENSES> $(906)
<LOSS-PROVISION> $0
<INTEREST-EXPENSE> $22,353
<INCOME-PRETAX> $96,374
<INCOME-TAX> $38,551
<INCOME-CONTINUING> $57,823
<DISCONTINUED> $0
<EXTRAORDINARY> $0
<CHANGES> $0
<NET-INCOME> $57,823
<EPS-PRIMARY> $2.86
<EPS-DILUTED> $2.73
</TABLE>
