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, 1997 Commission File Number 1-5828 Carpenter Technology Corporation (Exact name of Registrant as specified in its Charter) Delaware 23-0458500 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 101 West Bern Street, Reading, Pennsylvania 19612-4662 (Address of principal executive offices) (Zip Code) 610-208-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of March 31, 1997. Common stock, $5 par value 19,439,069 Class Number of shares outstanding The Exhibit Index appears on page E-1.
Carpenter Technology Corporation FORM 10-Q INDEX Page ---- Part I FINANCIAL INFORMATION Consolidated Balance Sheet as of March 31, 1997 (Unaudited) and June 30, 1996......................... 3 & 4 Consolidated Statement of Income (Unaudited) for the Three and Nine Months Ended March 31, 1997 and 1996... 5 Consolidated Statement of Cash Flows (Unaudited) for the Nine Months Ended March 31, 1997 and 1996............. 6 Notes to Consolidated Financial Statements.............. 7 - 9 Management's Discussion and Analysis of Results of Operations.........................................10 & 11 Part II OTHER INFORMATION................................12 & 13 Exhibit Index............................................. E-1
PART I - ------ Carpenter Technology Corporation Consolidated Balance Sheet (Page 1 of 2) March 31, 1997 and June 30, 1996 (in thousands, except share data) March 31 June 30 1997 1996 --------- --------- (Unaudited) ASSETS - ------ Current assets: Cash and cash equivalents $ 26,487 $ 13,159 Accounts receivable, net 153,751 137,103 Inventories 206,653 160,452 Deferred income taxes - 2,113 Other current assets 13,465 11,643 ---------- ---------- Total current assets 400,356 324,470 Property, plant and equipment, at cost 919,226 809,697 Less accumulated depreciation and amortization 415,088 390,225 ---------- ---------- 504,138 419,472 Prepaid pension cost 99,813 91,474 Investment in joint venture 8,813 9,760 Goodwill, net 99,152 18,792 Other assets 89,391 48,003 ---------- ---------- Total assets $1,201,663 $ 911,971 ========== ========== See accompanying notes to consolidated financial statements.
Carpenter Technology Corporation Consolidated Balance Sheet (Page 2 of 2) March 31, 1997 and June 30, 1996 (in thousands, except share data) March 31 June 30 LIABILITIES 1997 1996 - ----------- --------- --------- (Unaudited) Current liabilities: Short-term debt $ 101,870 $ 18,964 Accounts payable 72,836 75,811 Accrued compensation 19,700 26,088 Accrued income taxes 8,806 13,656 Other accrued liabilities 33,490 30,446 Deferred income taxes 6,474 - Current portion of long-term debt 3,443 7,010 ---------- ---------- Total current liabilities 246,619 171,975 Long-term debt, net of current portion 247,784 188,024 Accrued postretirement benefits 138,705 137,738 Deferred income taxes 110,882 84,460 Other liabilities and deferred income 25,982 20,697 SHAREHOLDERS' EQUITY - -------------------- Preferred stock - $5 par value, authorized 2,000,000 shares; issued 450.0 shares at March 31, 1997 and 453.1 shares at June 30, 1996 28,405 28,581 Common stock at $5 par value - authorized 50,000,000 shares; issued 19,599,224 shares at March 31, 1997 and 19,545,751 shares at June 30, 1996 97,996 97,729 Capital in excess of par value - common stock 52,976 13,498 Reinvested earnings 287,578 267,956 Common stock in treasury, at cost - 160,155 shares at March 31, 1997 and 2,930,074 shares at June 30, 1996 (3,526) (64,483) Deferred compensation (20,901) (22,830) Foreign currency translation adjustments (10,837) (11,374) ---------- ---------- Total shareholders' equity 431,691 309,077 ---------- ---------- Total liabilities and shareholders' equity $1,201,663 $ 911,971 ========== ========== See accompanying notes to consolidated financial statements.
Carpenter Technology Corporation Consolidated Statement of Income (Unaudited) for the three and nine months ended March 31, 1997 and 1996 (in thousands, except per share data) Three Months Nine Months ------------------ ------------------ 1997 1996 1997 1996 ---- ---- ---- ---- Net sales $250,869 $233,274 $654,285 $627,869 -------- -------- -------- -------- Costs and expenses: Cost of sales 188,953 174,575 489,340 468,009 Selling and administrative expenses 31,019 28,379 90,197 81,675 Interest expense 5,225 5,010 14,127 14,413 Equity in loss of joint venture 206 3,955 922 6,320 Other (income) expense, net 330 (2,815) (755) (3,610) -------- -------- -------- -------- 225,733 209,104 593,831 566,807 -------- -------- -------- -------- Income before income taxes 25,136 24,170 60,454 61,062 Income taxes 9,642 9,444 23,238 22,137 -------- -------- -------- -------- Net income $ 15,494 $ 14,726 $ 37,216 $ 38,925 ======== ======== ======== ======== Earnings per common share: Primary $ .86 $ .86 $ 2.11 $ 2.27 ======== ======== ======== ======== Fully diluted $ .84 $ .83 $ 2.04 $ 2.19 ======== ======== ======== ======== Weighted average common shares outstanding 17,768 16,735 17,064 16,657 ======== ======== ======== ======== Dividends per common share $ .33 $ .33 $ .99 $ .99 ======== ======== ======== ======== See accompanying notes to consolidated financial statements.
Carpenter Technology Corporation Consolidated Statement of Cash Flows (Unaudited) for the nine months ended March 31, 1997 and 1996 (in thousands) 1997 1996 ---- ---- OPERATIONS Net income $ 37,216 $ 38,925 Adjustments to reconcile net income to net cash provided from operations: Depreciation and amortization 28,475 26,407 Deferred income taxes 8,146 4,596 Prepaid pension cost (8,339) (7,810) Equity in loss of joint venture 922 6,320 Gain on sale of partial interest in joint venture - (2,650) Changes in working capital and other, net of acquisitions: Receivables 1,903 (9,464) Inventories (14,202) (43,913) Accounts payable (10,139) 4,248 Accrued current liabilities (15,085) (1,190) Other, net (3,601) 161 -------- -------- Net cash provided from operations 25,296 15,630 INVESTING ACTIVITIES -------- -------- Purchases of plant and equipment (74,095) (25,269) Disposals of plant and equipment 576 1,185 Acquisitions of businesses, net of cash received (50,654) (10,584) Proceeds from sale of partial interest in joint venture - 32,672 -------- -------- Net cash used for investing activities (124,173) (1,996) -------- -------- FINANCING ACTIVITIES Provided by short-term debt 72,906 23,824 Proceeds from issuance of long-term debt 60,000 - Payments on long-term debt (4,009) (6,112) Dividends paid (17,594) (17,457) Proceeds from issuance of common stock 1,009 4,104 -------- -------- Net cash provided from financing activities 112,312 4,359 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (107) (177) -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 13,328 17,816 Cash and cash equivalents at beginning of period 13,159 20,120 -------- -------- Cash and cash equivalents at end of period $ 26,487 $ 37,936 ======== ======== Supplemental Data: - ----------------- Non-Cash Investing Activities: Treasury stock issued for business acquisitions $ 99,517 $ 4,500 See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements ------------------------------------------ 1. Basis of Presentation --------------------- The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months ended March 31, 1997 are not necessarily indicative of the results that may be expected for the year ending June 30, 1997. For further information, refer to the consolidated financial statements and footnotes included in the Company's 1996 Annual Report on Form 10-K. The June 30, 1996 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. 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. 2. 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. 3. Inventories ----------- March 31 June 30 1997 1996 -------- -------- (in thousands) Finished and purchased products $134,244 $129,184 Work in process 177,979 134,751 Raw materials and supplies 56,301 58,388 -------- -------- Total at current cost 368,524 322,323 Less excess of current cost over LIFO values 161,871 161,871 -------- -------- Inventory per Balance Sheet $206,653 $160,452 ======== ======== The current cost of LIFO-valued inventories was $335.5 million at March 31, 1997 and $295.4 million at June 30, 1996.
Notes to Consolidated Financial Statements ------------------------------------------ (continued) 4. Acquisition of Business ----------------------- On February 28, 1997, the Company purchased all of the common stock of Dynamet Incorporated in exchange for approximately 2.8 million shares of its treasury common stock with a fair market value of $99.5 million and $51.5 million of cash, including acquisition costs. Dynamet is a manufacturer of titanium bar, wire and powder products, with sales for calendar year 1996 of approximately $100 million. The acquisition of Dynamet Incorporated has been accounted for using the purchase method of accounting. The purchase price allocation is based upon preliminary appraisal values and management estimates and is subject to reclassifications and adjustments in the future. The purchase price has been allocated as follows: (in thousands) Working capital, other than cash $ 24,011 Property, plant and equipment 37,804 Other assets 27,264 Goodwill 81,079 Noncurrent liabilities (19,987) -------- Purchase price, net of cash received $150,171 ======== Deferred tax liabilities included in the allocation totaled $27.0 million. The operating results of Dynamet Incorporated have been included in the Consolidated Statement of Income from the date of acquisition. On the basis of a pro forma combination of the results of operations as if Dynamet and the companies acquired during fiscal 1996 had been acquired at the beginning of fiscal 1996, combined net sales would have been approximately $728.7 million for the nine months ended March 31, 1997, and $699.1 million for the nine months ended March 31, 1996, respectively. Consolidated pro forma net income and primary earnings per share would have been $43.9 million and $2.18 for the nine months ended March 31, 1997, and $42.1 million and $2.11 for the nine months ended March 31, 1996, respectively. Such pro forma amounts are not necessarily indicative of what the actual combined results of operations might have been if the acquisition had been effective at the beginning of fiscal 1996.
Notes to Consolidated Financial Statements ------------------------------------------ (continued) 5. Potential Acquisitions of Businesses ------------------------------------ On January 23, 1997, the Company announced its plan to acquire all of the common stock of Global Technology, Inc. for approximately $8.5 million of Company common stock, $1.1 million of cash and the assumption of approximately $8.4 million of Global Technology debt. Global Technology has two primary businesses: conversion services for processing bar and wire products made of stainless steel, super alloys, titanium and carbon steel; and the design and manufacture of coil and bar processing equipment. Global Technology's sales for calendar year 1996 were approximately $30 million. On March 31, 1997, the Company announced its plan to acquire the assets of Rathbone Precision Metals, Inc., a manufacturer of custom, cold-drawn metal shapes. Rathbone's sales for the year ended September 29, 1996 were approximately $10 million. These potential acquisitions are subject to due diligence review and negotiation of final terms and conditions. Assuming the acquisitions are made, the cash required for these two acquisitions will be funded from the Company's existing financing arrangements. These transactions will be accounted for using the purchase method of accounting. 6. Debt Arrangements ----------------- In February 1997, the Company renegotiated its existing financing arrangements with a number of banks to increase its credit facilities from $150 million to $200 million, lower the costs of the facilities and extend the term to February 2002. The arrangements provide for the availability of $150 million of revolving credit and lines of credit of $50 million. Interest is based on short-term market rates or competitive bids. This financing arrangement replaces the previous revolving credit and lines of credit arrangement. 7. Remeasurement of Mexican Operations ----------------------------------- Effective January 1, 1997, the Company's operation in Mexico was considered to operate in a highly inflationary economy as defined by Statement of Financial Accounting Standard ("SFAS") 52. When a foreign entity operates in a highly inflationary economy, the U.S. dollar is used as the functional currency rather than the local currency. Nonmonetary assets and liabilities and related expenses are translated into U.S. dollars at historical exchange rates. All other income statement amounts are translated using average exchange rates for the period. Monetary assets and liabilities are translated at end-of-period exchange rates. Gains or losses on translation are reported in income. The effect on income of the above translation was not material for the three months ended March 31, 1997.
Management's Discussion & Analysis of Results of Operations ----------------------------------------------------------- Third Quarter Results: - --------------------- Net income for the quarter ended March 31, 1997 was $15.5 million versus $14.7 million in the same quarter last year. Primary earnings per share of $.86 were the same as in the third quarter a year ago. The improved results were primarily a result of higher shipments, the inclusion of the operations of Dynamet Incorporated since the date of acquisition on February 28, 1997, and lower losses related to the reduced investment in Walsin-CarTech, Carpenter's Taiwanese joint venture. Sales were $250.9 million, up 8% from $233.3 million in the same period last year. This increase in sales was primarily the result of the inclusion of the operations of Dynamet and increased sales of ceramic products and the Mexican steel distribution operations. Core Steel Division unit volume shipments were up 4 percent. Cost of sales was 75 percent of net sales in both periods. The effect on this ratio of a reduced Steel Division production level to adjust inventories was offset by lower raw material costs. Selling and administrative costs were higher by $2.6 million, primarily as a result of increased depreciation and amortization and the inclusion of costs for Dynamet. Other income decreased by $3.1 million, primarily as a result of a prior year gain of $2.7 million from the sale of the Company's partial interest in Walsin-CarTech. Nine Month Results: - ------------------ Net income for the nine months ended March 31, 1997 was $37.2 million, compared with $38.9 million for the same period last year. Primary earnings per share were $2.11 compared with $2.27 for the same period a year ago. The decrease in earnings was primarily a result of a 2 percent decrease in core Steel Division unit volume, an extended maintenance shutdown period in the September 1996 quarter which resulted in lower manufacturing levels and higher repair spending, and a lower plant utilization level in the second and third quarter. These adverse effects were partially offset by lower raw material costs and reduced losses related to the investment in Walsin-CarTech. Sales were $654.3 million, a 4 percent increase from $627.9 million last year. The increase in sales was primarily the result of the inclusion of the operations of Dynamet and increased sales of ceramic products and the Mexican steel distribution operations. The sales increases were partially offset by a 2 percent decrease in core Steel Division unit volume shipments.
Management's Discussion & Analysis of Results of Operations ----------------------------------------------------------- (continued) Nine Month Results, continued: - ------------------ Cost of sales was 75 percent of net sales in both periods. The effect on this ratio of a reduced Steel Division production level to adjust inventories and the extended maintenance shutdown was offset by lower raw material costs. Selling and administrative costs were higher by $8.5 million, primarily as a result of increased depreciation and amortization and the inclusion of costs for the companies acquired. Other income decreased by $2.9 million, primarily as a result of a prior year gain of $2.7 million from the sale of the Company's partial interest in Walsin-CarTech. The effective tax rate for the nine months ended March 31, 1997 was higher than last year, primarily due to changes in state income tax estimates and a federal income tax law change relating to company-owned life insurance programs.
PART II - OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings. ------------------------- There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or to which any of their properties is subject or which is known by the Company to be contemplated by governmental authorities. There are no material proceedings to which any Director, Officer, or affiliate of the Company, or any owner of more than five percent of any class of voting securities of the Company, or any associate of any Director, Officer, affiliate, or security holder of the Company, is a party adverse to the Company or has a material interest adverse to the interest of the Company or its subsidiaries. There is no administrative or judicial proceeding arising under any Federal, State or local provisions regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment that (1) is material to the business or financial condition of the Company, (2) involves a claim for damages, potential sanctions or capital expenditures exceeding ten percent of the current assets of the Company or (3) includes a governmental authority as a party and involves potential monetary sanctions in excess of $100,000. Item 2. Changes in Securities. ----------------------------- The Company hereby incorporates by reference Item 2 of its Current Report on Form 8-K dated February 28, 1997 (as amended by Form 8-KA filed on May 13, 1997), related to the Company's acquisition of Dynamet Incorporated. Item 5. Other Information. ------------------------- On January 22, 1997, the Board of Directors of the Company elected Dr. J. Michael Fitzpatrick as a director to serve until the Annual Stockholders' Meeting in 1999 at which time he will stand for election to serve in Class One. On February 28, 1997, Peter Rossin became a director to serve until the Annual Stockholders' Meeting on October 20, 1997 at which time he will stand for election to serve in Class Two. On April 24, 1997, the Board of Directors of the Company elected Robert J. Lawless as a director to serve until the Annual Stockholders' Meeting in 1998 at which time he will stand for election to serve in Class Three. Item 6. Exhibits and Reports on Form 8-K. ---------------------------------------- a. The following documents are filed as exhibits: 11. Statement re Computations of Per Share Earnings. 12. Statement re Computations of Ratios of Earnings to Fixed Charges. 27. Financial Data Schedule.
99. Additional Exhibits. (i) Press Release dated January 22, 1997 (ii) Press Release dated April 24, 1997 b. The Company filed two (2) Current Reports on Form 8-K for events occurring during the quarter of the fiscal year covered by this report. The reports, one dated January 6, 1997 and the other dated February 28, 1997 (as amended by Form 8-KA filed on May 13, 1997), related to the Company's acquisition of Dynamet Incorporated. Items 3 and 4 are omitted as the answer is negative or the item is not applicable. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CARPENTER TECHNOLOGY CORPORATION -------------------------------- (Registrant) Date: May 15, 1997 s/G. Walton Cottrell --------------------- ----------------------------------- G. Walton Cottrell Sr. Vice President - Finance and Chief Financial Officer