-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O02xELMGytrHW5u1MPjTXrYEYT9nTV61iN7ucB9jPd1bh+jQDMR7Y6zAB6nQGx+j 9w0zCkqj+H5Rr0CX9uHSzw== 0000017843-95-000018.txt : 19951002 0000017843-95-000018.hdr.sgml : 19951002 ACCESSION NUMBER: 0000017843-95-000018 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950927 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARPENTER TECHNOLOGY CORP CENTRAL INDEX KEY: 0000017843 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 230458500 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05828 FILM NUMBER: 95576358 BUSINESS ADDRESS: STREET 1: 101 W BERN ST CITY: READING STATE: PA ZIP: 19612 BUSINESS PHONE: 2152082000 MAIL ADDRESS: STREET 1: P O BOX 14662 CITY: READING STATE: PA ZIP: 19612-4662 10-K 1 FISCAL 1995 10-K 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, 1995 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, 1995, 16,419,590 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 $619,839,523. All share data has been restated for the effect of a two-for-one common stock split that was effective September 15, 1995. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates by reference certain information from the 1995 definitive Proxy Statement. The Exhibit Index appears on pages E-1 to E-6. 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, 1995, except for the transaction described below: On July 22, 1994, the Company acquired all of the outstanding shares of Certech, Inc. and an affiliated company (Certech), for $16.7 million, including acquisition costs, comprised of $13.5 million in cash and 106,248 shares of Carpenter common stock. Certech, with plants in New Jersey, Pennsylvania and the United Kingdom, is a recognized leader in the technology and manufacturing of structural ceramic products. The acquisition of Certech enabled the Company to attain a substantial position in the structural ceramics market. This investment was accounted for using the purchase method of accounting. (b) Financial Information About Industry Segments: The Company is primarily engaged in one business segment - the manufacture, fabrication and distribution of specialty metals. The ceramics operations are not significant for separate presentation as a segment. (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 and produces certain fabricated metal products. 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. Fabrication of special stainless steels and zirconium base alloys into tubular products for the aircraft industry and 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 STEEL - Carbon steels purchased for distribution and other miscellaneous products. In addition to the above specialty metal products, the Company manufactures structural ceramics. The manufacture of structural ceramics applies proprietary injection molding technologies in making ceramic cores for use in castings for a wide range of products such as aircraft engines, industrial gas turbines and various consumer 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 $73.8 million, $67.1 million and $30.7 million in fiscal 1995, 1994 and 1993, 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: 1995 1994 1993 ---- ---- ---- Stainless Steel 56% 60% 60% Special Alloys 33% 29% 33% Tool and Other Steel 8% 11% 7% Ceramics 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. (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 and maintenance 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: 1995 1994 1993 ---- ---- ---- Quarter Ended September 30 20% 21% 24% Quarter Ended December 31 23% 23% 21% Quarter Ended March 31 28% 28% 27% Quarter Ended June 30 29% 28% 28% ---- ---- ---- 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, 1995, the Company had a backlog of orders, believed to be firm, of approximately $231.0 million, substantially all of which is expected to be shipped within the current fiscal year. The backlog as of August 31, 1994 was approximately $196.0 million. (8) Competition: The business of the Company is highly competitive. It supplies materials to a wide variety of end-use and geographic market segments, none of which consumes more than about 20 percent of the Company's output, and competes with various companies depending on end-use segment, product or geography. There are 14 domestic companies producing one or more similar specialty metal products that are considered to be major competitors to the Company in one or more product segments. The Company also competes directly with several hundred independent distributors of products similar to those distributed by Carpenter's wholly owned distribution system. Additionally, numerous foreign producers import into the United States various specialty metal products similar to those produced by the Company. Furthermore, a number of different products may, in certain instances, be substituted for the Company's finished product. Imports of foreign specialty steels have long been a 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. Because of these unfair trade practices, the Company has been aggressive in filing trade actions against foreign producers who have dumped their specialty steel products into the United States. These actions have been successful and have resulted in dumping duties being assessed against imports of stainless steel bar and stainless steel rod from certain countries. In February 1995, the International Trade Commission (ITC) ruled that the domestic industry had been injured by dumped stainless steel bar imports from Brazil, India, Japan and Spain. As a result, the U.S. Department of Commerce issued antidumping orders for the collection of additional duties on all imports of stainless steel bar from the four countries, at the following rates: Brazil - 19.43% India - 3.87% to 21.02% Japan - 61.47% Spain - 7.74% to 62.85% This ruling was the result of an antidumping petition which the Company had filed in conjunction with six other domestic producers in December 1993. Previously, in January 1994, the U.S. Department of Commerce had issued antidumping orders for the collection of additional duties against all imports of stainless steel rod from Brazil, France and India, at the following rates: Brazil - 24.6% to 26.5% France - 24.59% India - 48.8% Under the provisions of the new General Agreement Tariffs and Trade (GATT), the antidumping orders on stainless steel bar and stainless steel rod will continue in effect until the year 2000. In a related matter, 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 $12.3 million, $13.6 million and $12.9 million in fiscal 1995, 1994 and 1993, respectively. (10) Environmental Regulations: The Company, as well as other steel producing and manufacturing 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 consolidated financial statements included in Item 8 "Financial Statements and Supplementary Data". The costs of maintaining and operating environ- mental control equipment were about $7.3 million and $8.5 million for fiscal 1995 and 1994, respectively. The capital expenditures for environmental control equipment were $.5 million for fiscal 1995 and 1994. The Company anticipates spending approximately $6.0 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, 1995, the Company had 4,068 full- time employees. Item 2. Properties The locations of the Company's principal specialty metals manufacturing and fabrication 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 Reading plant has an annual practical melting capacity of approximately 207,000 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, 1995 and 1994, the plant operated at approximately 87 percent and 78 percent, respectively, of its melting capacity. The location of the Company's ceramics manufacturing plants are: Wood-Ridge, New Jersey; Wilkes-Barre, Pennsylvania; Corby, United Kingdom; and Alpharetta, Georgia. The Corby plant is owned and the Wood-Ridge, Wilkes-Barre and Alpharetta plants are leased. The Company also operates sales offices and service centers, most of which are owned, at 33 locations in 14 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 executive 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 Robert W. Lodge. 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 59 Chairman, President & Chief Executive Officer July 1992 Director November 1990 Donald C. Bristol 56 Senior Vice President - Steel Division January 1993 G. Walton Cottrell 55 Sr. Vice President - Finance & Chief Financial Officer January 1993 Nicholas F. Fiore 55 Senior Vice President - Strategic Businesses January 1993 Robert W. Lodge 52 Vice President - Human & Admin. Services September 1991 John R. Welty 46 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: 1995 1994 - --------------------------------------------------------------------- High Low High Low September 30 $32-13/16 $29 $28-3/16 $24-11/16 December 31 $31-5/8 $26-9/16 $29-1/8 $25 March 31 $29-1/4 $26-5/8 $33-3/16 $28-1/4 June 30 $34-1/16 $27-3/4 $31-3/8 $28-1/4 - --------------------------------------------------------------------- $34-1/16 $26-9/16 $33-3/16 $24-11/16 The Company has paid quarterly cash dividends on its common stock for 89 consecutive years. The quarterly dividend rate has been $.30 per share for each of the past three years. The Company had 5,929 common shareholders of record as of June 30, 1995. The balance of the information required by this item is disclosed in Note 9 to the consolidated financial statements included in Item 8 "Financial Statements and Supplementary Data". All share and per share data have been restated for the effect of a two-for-one common stock split declared on August 10, 1995. See Note 17 to the consolidated 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) 1995 1994 1993 1992 1991 - -------------------------------------------------------------------------- Summary of Operations Net Sales $757,532 $628,795 $576,248 $570,200 $562,476 Income before extra- ordinary charges & cumulative effect of changes in accounting principles $ 47,492 $ 38,289 $ 26,534 $ 14,884 $ 30,071 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) $ 47,492 $ 36,250 $(48,142) $ 13,646 $ 30,071 Financial Position at Year-End Total assets $831,775 $729,911 $699,565 $714,752 $716,995 Long-term debt, net $194,762 $158,070 $189,895 $196,604 $122,661 Per Share Data Primary: Income before extra- ordinary charges & cumulative effect of changes in accounting principles $ 2.81 $ 2.28 $ 1.55 $ .81 $ 1.76 Net income (loss) $ 2.81 $ 2.15 $ (3.11) $ .74 $ 1.76 Fully Diluted: Income before extra- ordinary charges & cumulative effect of changes in accounting principles $ 2.70 $ 2.20 $ 1.51 $ .81 $ 1.76 Net income (loss) $ 2.70 $ 2.08 $ (2.88) $ .74 $ 1.76 Cash dividends-common $ 1.20 $ 1.20 $ 1.20 $ 1.20 $ 1.20 All share and per share data have been restated for the effect of a two-for-one common stock split declared on August 10, 1995. See Note 17 to the consolidated financial statements included in Item 8 "Financial Statements and Supplementary Data." 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) 1995 1994 1993 - --------------------------------------------------------------------- Net sales $757.5 $628.8 $576.2 Income before extraordinary charge and cumulative effect of changes in accounting principles $ 47.5 $ 38.3 $ 26.5 Net income (loss) $ 47.5 $ 36.3 $(48.1) Primary earnings per share before extraordinary charge and cumulative effect of changes in accounting principles $ 2.81 $ 2.28 $ 1.55 Primary earnings (loss) per share $ 2.81 $ 2.15 $ (3.11) ===================================================================== Earnings before the extraordinary charge and accounting changes increased in each of the past two years as a result of the improved economy, selling price increases and internal programs for cost reduction, asset utilization and market share enhancements. The sales and earnings results in 1995 were records for the Company. Fiscal 1994 results were adversely affected by an extraordinary charge 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. The chart below shows net sales by product line for the past three fiscal years: - --------------------------------------------------------------------- (dollars in millions) 1995 1994 1993 - --------------------------------------------------------------------- Sales % Sales % Sales % - --------------------------------------------------------------------- Stainless steel $424.7 56 $375.0 60 $342.9 60 Special alloys 249.0 33 182.4 29 190.3 33 Tool and other steel 61.2 8 71.4 11 43.0 7 Ceramics 22.6 3 - - - - - --------------------------------------------------------------------- Total $757.5 100 $628.8 100 $576.2 100 ===================================================================== The following table is the approximate breakdown of sales by end-use markets (excludes sales of Aceros Fortuna and Certech): - --------------------------------------------------------------------- Years Ended June 30 1995 1994 1993 - --------------------------------------------------------------------- Motor vehicles and equipment 14% 14% 13% Electrical and electronic equipment 13 12 12 Aerospace 12 12 14 General industrial equipment 10 11 11 Metal producing and distribution 9 8 7 Power generation and distribution 7 8 7 Fabricated metal products 6 6 6 Metal working equipment 6 7 7 Chemical and petroleum processing 5 5 5 Consumer durables 5 5 5 Instruments and controls 4 4 4 Housing and construction 3 3 3 Miscellaneous 6 5 6 - --------------------------------------------------------------------- 100% 100% 100% ====================================================================== RESULTS OF OPERATIONS - FISCAL 1995 VERSUS FISCAL 1994 Sales were $757.5 million in fiscal 1995, a 20 percent increase from the $628.8 million level in fiscal 1994. The sales improvement was primarily due to an 8 percent increase in volume and higher unit prices in the Steel Division. Demand for specialty steel products has been at a high level since January 1994, especially in automotive, equipment and aerospace-related markets. Unit selling prices for specialty steel shipments increased by an average of 7 percent to offset higher labor and supply costs, and a surcharge was established to offset sharply rising raw material costs. Also, the product mix shifted toward more premium-melted products and away from certain commodity-priced products, resulting in a higher average selling price. Approximately 18 percent of the increase in sales was from the inclusion, in fiscal 1995, of the results of Certech, Inc., and its affiliates, a ceramics business which was acquired in July 1994 (described in Note 2 to the financial statements). Cost of sales as a percentage of sales increased to 74 percent versus 73 percent in fiscal 1994 because last year 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. There were no LIFO accounting effects in fiscal 1995. Raw material costs per unit purchased increased by 34 percent during fiscal 1995 versus the year-earlier costs as a result of large increases in the cost of nickel (42 percent), cobalt (52 percent) and molybdenum (77 percent). Also, in fiscal 1995, the Company purchased at a premium semi-finished and finished products to supplement internal capacity. Labor costs for Steel Division production and maintenance employees were up by 6 percent as a result of a base wage increase in July 1994 and higher overtime and profit sharing payments. Natural gas costs per unit consumed decreased by 10 percent versus fiscal 1994 costs, but electricity costs per unit increased by 3 percent. Selling and administrative expenses increased by $9.4 million during fiscal 1995 due chiefly to the inclusion of Certech costs in fiscal 1995 and increased salaried employment and severance costs. Interest expense was lower by $1.0 million in fiscal 1995 principally because of reduced interest rates due to the retirement of the 12-7/8% debentures in March 1994. The Company's 19 percent share of the losses of the Walsin-CarTech joint venture, which became operational in January 1995, (described in Note 3 to the financial statements) increased by $2.1 million in fiscal 1995. Prior to that date, pre-operating costs were deferred by the joint venture. Income taxes as a percent of pre-tax income (effective tax rate) decreased to 36 percent in fiscal 1995 from 39 percent a year earlier primarily because of the retroactive deferred tax effects of an increase in the statutory federal rate in 1994. Both years' tax rates were favorably affected by non-recurring adjustments of deferred state taxes for changes in tax laws. A reconciliation of the effective tax rate to the federal statutory rate is presented in Note 15 to the financial statements. 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 fiscal 1994 and 1993 was favorably affected by reductions in inventories valued using the LIFO method. 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. 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 $5.1 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 15 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). MANAGEMENT'S DISCUSSION OF CASH FLOW AND FINANCIAL CONDITION CASH FLOW Cash flow from operations decreased in 1995 because of higher working capital needs, but remained at a strong level. Inventories increased $29.5 million in fiscal 1995, excluding inventories relating to acquisitions, due to higher production levels of the Steel Division. Inventories were significantly reduced in fiscal 1994 and 1993 as a result of the Company's Continuous Improvement process to reduce lead times while still maintaining a high customer service level. Accounts receivable increased $21.8 million and $1.9 million in fiscal 1995 and 1994, respectively, excluding accounts receivable relating to acquisitions, as a result of increased fourth quarter sales each year. The average days sales outstanding in 1995 was comparable to that of 1994. Capital expenditures of $36.9 million, $26.6 million and $20.6 million in fiscal 1995, 1994 and 1993, respectively, were concentrated in the Company's Reading, Pennsylvania, plant and were used for normal replacements, modernization and incremental capability. The major capital projects were the modernization of wire finishing operations and the relocation and installation of a second rotary forge. During fiscal year 1995, the Company acquired the business of Certech, Inc., and an affiliated company. During fiscal 1994, Aceros Fortuna, S.A. de C.V., and affiliated companies were acquired and an investment was made in Walsin-CarTech, a joint venture in Taiwan. The cost of these acquisitions and investments totaled $81.4 million in cash and $3.2 million in common stock. Treasury shares were purchased to offset the shares issued in this acquisition. Details of these transactions are included in Notes 2 and 3 to the financial statements. During fiscal 1995, $80.0 million of medium-term notes were issued with a 7.4% average interest rate, and a portion of the proceeds were used to retire borrowings under credit arrangements. Details of debt and financing arrangements are provided in Note 7 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. The dividend payout rates on common and preferred stock were maintained at $1.20 and $5,362.50 per share, respectively, and totaled about $21.0 million in each of the past three years. The Board of Directors declared on August 10, 1995, a 10 percent increase in the common stock dividend to shareholders of record on August 22, 1995. In June 1989, the Board of Directors authorized the purchase of up to 2,400,000 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 1,200,000 shares of common stock to offset the dilutive effect of the issuance of convertible stock to the ESOP. Shares purchased under these programs totaled 507,600 in fiscal 1993 for a total of $11.6 million in cash. During fiscal 1993, the share repurchase programs were suspended indefinitely. FINANCIAL CONDITION During the past three years, 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 1995 ended in a sound liquidity position, with current assets exceeding current liabilities by $106.3 million (a ratio of 1.8 to 1). This favorable ratio is conservatively stated because inventories are valued $153.6 million less than the current cost as a result of using the LIFO method. Total debt at June 30, 1995 was $222.2 million or 39.5 percent of total capital, including deferred taxes, versus 35.7 percent of total capital, including deferred taxes, at June 30, 1994. Financing is available under a $150.0 million financing arrangement with a number of banks, providing for $125.0 million of revolving credit to January 1998 and lines of credit of $25.0 million. At June 30, 1995, the Company had $20.0 million of medium-term debt securities available for issuance under a Shelf Registration on file with the Securities and Exchange Commission. In summary, the Company believes that its 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 $8.0 million and $18.0 million. The Company has accrued for environmental remediation costs, including remediation investigation and feasibility study 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 reasonably 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 or results of operations and cash flows. Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements and Supplementary Data Page ---- Consolidated Financial Statements: Report of Independent Accountants 20 Consolidated Statement of Income for the Years Ended June 30, 1995, 1994 and 1993 21 Consolidated Statement of Cash Flows for the Years Ended June 30, 1995, 1994 and 1993 22 Consolidated Balance Sheet as of June 30, 1995 and 1994 23 Consolidated Statement of Changes in Shareholders' Equity for the Years Ended June 30, 1995, 1994 and 1993 24-25 Notes to Consolidated Financial Statements 26-45 Supplementary Data: Quarterly Financial Data (Unaudited) 46 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CARPENTER TECHNOLOGY CORPORATION: We have audited the accompanying consolidated balance sheet of Carpenter Technology Corporation and subsidiaries as of June 30, 1995 and 1994, and the related consolidated statements of income, cash flows and changes in shareholders' equity for each of the three years in the period ended June 30, 1995. 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, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its methods of accounting for income taxes and postretirement benefits other than pensions in the year ended June 30, 1993. s/Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania July 27, 1995, except for Note 17, as to which the date is August 10, 1995 CONSOLIDATED STATEMENT OF INCOME CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES for the years ended June 30, 1995, 1994 and 1993 - ------------------------------------------------------------------------- (in thousands, except per share data) 1995 1994 1993 - ------------------------------------------------------------------------- Net sales $757,532 $628,795 $576,248 - ------------------------------------------------------------------------- Costs and expenses: Cost of sales 564,169 457,473 436,057 Selling and administrative expenses 101,965 92,525 82,214 Interest expense 14,542 15,521 20,594 Equity in loss of joint venture 3,000 910 - Other income, net (715) (362) (5,416) - ------------------------------------------------------------------------- 682,961 566,067 533,449 - ------------------------------------------------------------------------- Income before income taxes, extraordinary charge and cumulative effect of changes in accounting principles 74,571 62,728 42,799 Income taxes 27,079 24,439 16,265 - ------------------------------------------------------------------------- Income before extraordinary charge and cumulative effect of changes in accounting principles 47,492 38,289 26,534 Extraordinary charge - premium on retirement of long-term debt, net of income taxes - (2,039) - Cumulative effect of changes in accounting principles, net of income taxes - - (74,676) - ------------------------------------------------------------------------- Net income (loss) $ 47,492 $ 36,250 $(48,142) ========================================================================= Primary earnings (loss) per common share: Income before extraordinary charge and cumulative effect of changes in accounting principles $ 2.81 $ 2.28 $ 1.55 Extraordinary charge - (.13) - Cumulative effect of changes in accounting principles - - (4.66) - ------------------------------------------------------------------------- Earnings (loss) per common share $ 2.81 $ 2.15 $ (3.11) ========================================================================= Weighted average common shares outstanding 16,327 16,130 16,018 ========================================================================= Fully-diluted earnings (loss) per common share: Income before extraordinary and cumulative effect of changes in accounting principles $ 2.70 $ 2.20 $ 1.51 Extraordinary charge - (.12) - Cumulative effect of changes in accounting principles - - (4.39) ------------------------------------------------------------------------ Earnings (loss) per common share $ 2.70 $ 2.08 $ (2.88) ======================================================================== Weighted average common shares outstanding 17,309 17,086 17,000 ========================================================================= See accompanying notes to consolidated financial statements. CONSOLIDATED STATEMENT OF CASH FLOWS CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES for the years ended June 30, 1995, 1994 and 1993 - ------------------------------------------------------------------------- (in thousands) 1995 1994 1993 - ------------------------------------------------------------------------- OPERATIONS Net income (loss) $ 47,492 $ 36,250 $(48,142) Adjustments to reconcile net income (loss) to net cash provided from operations: Depreciation and amortization 32,479 29,887 26,947 Deferred income taxes 3,314 4,057 10,953 Prepaid pension cost (7,933) (11,563) (11,834) Equity in loss of joint venture 3,000 910 - Extraordinary charge - 2,039 - Cumulative effect of changes in accounting principles - - 74,676 Changes in working capital and other: Receivables (21,819) (1,889) (12,497) Inventories (29,480) 16,907 63,137 Accounts payable 15,111 10,480 (5,985) Accrued current liabilities 6,800 1,984 (791) Other, net (5,177) 10,404 (1,416) - ------------------------------------------------------------------------- Net cash provided from operations 43,787 99,466 95,048 - ------------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of plant and equipment (36,945) (26,604) (20,563) Disposals of plant and equipment 1,424 3,144 405 Investment in joint venture (2,060) (49,196) - Acquisitions of businesses, net of cash received (13,032) (22,323) - - ------------------------------------------------------------------------- Net cash used for investing activities (50,613) (94,979) (20,158) - ------------------------------------------------------------------------- FINANCING ACTIVITIES Provided by (payments on) short-term debt 20,145 (2,794) - Proceeds from issuance of long-term debt 80,000 45,851 - Payments on long-term debt (55,736) (71,271) (6,843) Dividends paid (21,045) (20,824) (20,868) Proceeds from issuance of common stock 1,745 4,245 955 Payments to acquire treasury stock (3,002) - (11,633) - ------------------------------------------------------------------------- Net cash provided from (used for) financing activities 22,107 (44,793) (38,389) - ------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (565) (112) - - ------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,716 (40,418) 36,501 - ------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 5,404 45,822 9,321 - ------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 20,120 $ 5,404 $ 45,822 ========================================================================= SUPPLEMENTAL DATA: Interest payments, net of amts capitalized $ 15,441 $ 17,592 $ 22,195 Income tax payments, net of refunds $ 17,692 $ 18,066 $ 2,538 - ------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. CONSOLIDATED BALANCE SHEET CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES June 30, 1995 and 1994 - ------------------------------------------------------------------------- (in thousands, except share data) 1995 1994 - ------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 20,120 $ 5,404 Accounts receivable, net of allowance for doubtful accounts ($1,034 and $619) 118,848 95,412 Inventories 91,383 65,262 Deferred income taxes 1,827 463 Other current assets 8,251 4,629 - ------------------------------------------------------------------------- Total current assets 240,429 171,170 - ------------------------------------------------------------------------- Property, plant and equipment, net 403,580 391,840 - ------------------------------------------------------------------------- Prepaid pension cost 81,182 73,185 - ------------------------------------------------------------------------- Investment in joint venture 49,085 48,576 - ------------------------------------------------------------------------- Goodwill, net 15,701 7,837 - ------------------------------------------------------------------------- Other assets 41,798 37,303 - ------------------------------------------------------------------------- Total assets $831,775 $729,911 ========================================================================= LIABILITIES Current liabilities: Short-term debt $ 20,145 $ - Accounts payable 51,162 35,478 Accrued compensation 21,457 18,654 Accrued income taxes 5,442 616 Other accrued liabilities 28,684 28,153 Current portion of long-term debt 7,286 15,618 - ------------------------------------------------------------------------- Total current liabilities 134,176 98,519 - ------------------------------------------------------------------------- Long-term debt, net of current portion 194,762 158,070 - ------------------------------------------------------------------------- Accrued postretirement benefits 140,855 139,365 - ------------------------------------------------------------------------- Deferred income taxes 78,415 74,739 - ------------------------------------------------------------------------- Other liabilities and deferred income 19,622 20,074 - ------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Preferred stock, $5 par value - authorized 2,000,000 shares 28,825 29,029 Common stock, $5 par value - authorized 50,000,000 shares 96,690 48,061 Capital in excess of par value 6,801 50,882 Reinvested earnings 231,114 204,667 Common stock in treasury, at cost (67,002) (66,150) Deferred compensation (25,461) (26,386) Foreign currency translation adjustments (7,022) (959) - ------------------------------------------------------------------------- Total shareholders' equity 263,945 239,144 - ------------------------------------------------------------------------- Total liabilities and shareholders' equity $831,775 $729,911 ========================================================================= 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, 1995, 1994 and 1993
- -------------------------------------------------------------------------------------------------------------- Foreign Total Capital in Deferred Currency Share- (in thousands, Preferred Common Excess of Reinvested Treasury Compen- Translation holders except and per share data) Stock Stock Par Value Earnings Stock sation Adjustments Equity - -------------------------------------------------------------------------------------------------------------- Balances at June 30, 1992 $ 29,150 $ 47,361 $ 44,573 $258,251 $(54,517) $(28,551) $ - $296,267 Distributions to ESOP (22) (22) - -------------------------------------------------------------------------------------------------------------- Stock options exercised, net of 6,068 shares exchanged 108 847 955 - -------------------------------------------------------------------------------------------------------------- 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 Distributions to ESOP (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 Distributions to ESOP (204) 1 9 (194) - -------------------------------------------------------------------------------------------------------------- Stock options exercised, net of 133 shares exchanged 176 1,569 1,745 - -------------------------------------------------------------------------------------------------------------- Restricted shares issued, net 107 1,238 (28) (1,317) - - -------------------------------------------------------------------------------------------------------------- Shares purchased (3,002) (3,002) - -------------------------------------------------------------------------------------------------------------- Shares issued to acquire business 1,022 2,178 3,200 - -------------------------------------------------------------------------------------------------------------- Net income 47,492 47,492 - -------------------------------------------------------------------------------------------------------------- Cash dividends: Preferred, $5,362.50 per share, net of income taxes (1,599) (1,599) - -------------------------------------------------------------------------------------------------------------- Common, $2.40 per share (19,446) (19,446) - -------------------------------------------------------------------------------------------------------------- Reduction of ESOP note 1,071 1,071 - -------------------------------------------------------------------------------------------------------------- Accrued compensation - -------------------------------------------------------------------------------------------------------------- Translation adjustments - -------------------------------------------------------------------------------------------------------------- Other 426 - -------------------------------------------------------------------------------------------------------------- Effects of 2-for-1 stock split(1) 48,345 (48,345) - -------------------------------------------------------------------------------------------------------------- Balances at June 30, 1995 $ 28,825 $ 96,690 $ 6,801 $231,114 $(67,002) $(25,461) $ (7,022) $263,945 ============================================================================================================== See accompanying notes to consolidated financial statements. (1)See Note 17 to the financial statements.
CONSOLIDATED STATEMENT CHANGES IN SHAREHOLDERS' EQUITY CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES for the years ended June 30, 1995, 1994 and 1993
- --------------------------------------------------------------------------------- Share Data ------------------------------------------------ Common Shares -------------------------------------- Preferred Shares Net Issued Issued Treasury Outstanding - --------------------------------------------------------------------------------- Balances at June 30, 1992 461.5 9,472,203 (1,268,784) 8,203,419 Distributions to ESOP (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 Distribution to ESOP (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 Distributions to ESOP (3.2) 179 179 - --------------------------------------------------------------------------------- Stock options exercised, net of 133 shares exchanged 35,272 35,272 - --------------------------------------------------------------------------------- Restricted shares issued, net 21,350 (500) 20,850 - --------------------------------------------------------------------------------- Shares purchased (53,124) (53,124) - --------------------------------------------------------------------------------- Shares issued to acquire business 53,124 53,124 - --------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------- Effects of 2-for-1 stock split(1) 9,668,982 (1,523,104) 8,145,878 - --------------------------------------------------------------------------------- Balances at June 30, 1995 456.7 19,337,964 (3,046,208) 16,291,756 - --------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements. (1)See Note 17 to the 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 a 20%-50% interest in other entities, and for investments in corporate joint ventures. Under the equity method, the original investment is recorded at cost and adjusted by the Company's share of undistributed earnings or losses of the entity. All other investments are carried at cost. Business Segments - The Company is primarily engaged in one business segment - the manufacture, fabrication and distribution of specialty metals. The ceramics operations are not significant for separate presentation as a business segment. 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. The Company also uses the First-In, First-Out (FIFO) and average cost methods. Depreciation - Depreciation for financial reporting purposes is computed by the straight-line method. This method allocates depreciation equally over the estimated useful lives of the assets. Depreciation for income tax purposes is computed using accelerated methods. Goodwill - Goodwill, representing the excess of the purchase price over the estimated fair value of the net assets of companies acquired to date, is being amortized on a straight-line basis over periods not to exceed 20 years, the estimated life of the goodwill. 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 asset utilization, business climate and future cash flows expected to result from the use of the net assets. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 and that do not contribute to current or future revenues are expensed. Liabilities are recognized for remedial activities, including remediation investigation and feasibility study costs, when the cleanup is probable and the cost can be reasonably estimated. Recoveries of expenditures are recognized as a receivable 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 fixed-price sales arrangements, 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. 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. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 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 $5.43 per share), representing the cumulative effect of the change in accounting. 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 $12.4 million ($.77 per share) principally for the cumulative effect of restating deferred taxes as of July 1, 1992 to current tax rates. 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, 1995 and 1994, the cash surrender values, $54.4 million and $27.4 million, and the insurance policy loans, $53.9 million and $27.2 million, respectively, 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. Reclassifications - Certain reclassifications of prior years' amounts have been made to conform with the current year's presentation. 2. ACQUISITIONS OF BUSINESSES During fiscal 1995 and 1994, the Company acquired the entities described below, which were accounted for by the purchase method of accounting: On July 22, 1994, the Company acquired all of the outstanding shares of Certech, Inc., and an affiliated company, for $16.7 million, including acquisition costs, comprised of $13.5 million in cash and 106,248 shares of treasury common stock. Certech manufactures a broad line of complex injection molded ceramics parts. The excess of 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. 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 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. Fiscal 1995 also includes other acquisitions which are immaterial. The purchase prices have been allocated to the assets purchased and the liabilities assumed based upon the fair values on the dates of acquisition, as follows: ---------------------------------------------------------- (in thousands) 1995 1994 ---------------------------------------------------------- Working capital, other than cash $ 1,894 $ 6,552 Property, plant and equipment 10,200 6,634 Other assets 1,740 2,661 Goodwill 8,154 8,213 Other liabilities (5,756) (1,737) ---------------------------------------------------------- Purchase price, net of cash received $16,232 $22,323 =========================================================== 2. ACQUISITIONS OF BUSINESSES (continued) The operating results of these acquired businesses have been included in the consolidated statement of income from the dates of acquisition. On the basis of a pro forma consolidation of the results of operations as if the acquisitions had taken place at the beginning of fiscal 1994, consolidated net sales would have been $759.0 million for fiscal 1995, and $654.0 million for fiscal 1994. Consolidated pro forma income and earnings per share, before the extraordinary charge, would not have been materially different from the reported amounts for fiscal 1995 and 1994. 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 1994. 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 corporate joint venture in Taiwan with Walsin Lihwa Corporation. During fiscal 1994, the joint venture constructed a facility and installed equipment to manufacture and distribute specialty steel. In January 1995, the joint venture became operational, producing and shipping steel products to customers. 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 before July 1, 1996. Additionally, the Company may require Walsin Lihwa to purchase its 19 percent ownership for the original purchase cost at any time before 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 pre-operating period of $2.1 million and $3.6 million in fiscal 1995 and 1994, respectively, and for acquisition costs. As these costs are amortized, the investment account is reduced. 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. 3. INVESTMENT IN JOINT VENTURE (continued) Condensed financial information of the joint venture is summarized below: ----------------------------------------------------------- (in thousands) 1995 1994 ----------------------------------------------------------- Condensed Balance Sheet Information: Current assets $ 93,452 $ 17,334 Non-current assets $331,171 $277,878 Current liabilities $136,536 $ 62,331 Non-current liabilities $ 62,545 $ - Shareholders' equity $225,542 $232,881 Condensed Income Statement Information: Net sales $ 60,455 $ - Net loss $ 15,789 $ 4,789 Company equity in net loss $ 3,000 $ 910 =========================================================== 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 of stainless steel 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. In addition, the joint venture and the Company entered into distribution agreements establishing the joint venture as the exclusive distributor of the Company's stainless steel 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) 1995 1994 ----------------------------------------------------------- Finished $ 92,930 $ 76,187 Work in process 110,468 85,247 Raw materials and supplies 41,602 29,558 ----------------------------------------------------------- Total at current cost 245,000 190,992 ----------------------------------------------------------- Less excess of current cost over LIFO values 153,617 125,730 ----------------------------------------------------------- $ 91,383 $ 65,262 ============================================================ 4. INVENTORIES (continued) Current cost of LIFO-valued inventories was $219.7 million at June 30, 1995 and $165.8 million at June 30, 1994. Reductions in LIFO-valued inventories resulted in an increase in income before the extraordinary charge and the cumulative effect of changes in accounting principles of approximately $12.1 million or $.75 per share and $13.4 million or $.84 per share in the years ended June 30, 1994 and 1993, respectively. There were no LIFO accounting effects in the year ended June 30, 1995. 5. PROPERTY, PLANT AND EQUIPMENT June 30 ------------------------------------------------------------ (in thousands) 1995 1994 ------------------------------------------------------------ Land $ 7,222 $ 8,304 Buildings and building equipment 151,151 143,714 Machinery and equipment 594,579 554,449 Construction in progress 10,803 17,253 ------------------------------------------------------------ Total at cost 763,755 723,720 ------------------------------------------------------------ Less accumulated depreciation and amortization 360,175 331,880 ------------------------------------------------------------ $403,580 $391,840 ============================================================ The estimated useful lives are principally 45 years for buildings and 20 years for machinery and equipment. The ranges are as follows: Classification Expected Useful Lives ------------------------------------------------------------ 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 and equipment 4 to 10 years ------------------------------------------------------------ For the years ended June 30, 1995, 1994 and 1993, depreciation expense was $31.2 million, $29.0 million and $26.9 million, respectively. 6. OTHER ACCRUED LIABILITIES June 30 ----------------------------------------------------------- (in thousands) 1995 1994 ----------------------------------------------------------- Medical expenses $ 10,645 $ 11,455 Interest 4,872 3,417 Environmental costs 1,593 2,603 Other 11,574 10,678 ----------------------------------------------------------- $ 28,684 $ 28,153 =========================================================== 7. DEBT ARRANGEMENTS During fiscal 1995, the Company issued $80.0 million of medium-term debt securities with a 7.38% average interest rate under a Form S-3 registration statement ("Shelf Registration") on file with the Securities and Exchange Commission. The proceeds were used to retire borrowings under credit arrangements. At June 30, 1995, the Company had an additional $20.0 million of medium-term debt securities available for issuance under the Shelf Registration. 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. There were no borrowings outstanding at June 30, 1995 under this arrangement. Short-term debt at June 30, 1995 consisted primarily of commercial paper. For the years ended June 30, 1995, 1994 and 1993, interest cost totaled $17.8 million, $19.6 million and $21.8 million, of which $3.3 million, $4.1 million and $1.2 million, respectively, was capitalized. The weighted average interest rates for short-term borrowings during fiscal 1995 and 1994 were 6.1% and 4.0%, respectively. 7. DEBT ARRANGEMENTS (continued) Long-term debt outstanding at June 30, 1995 and 1994, consisted of the following: ----------------------------------------------------------- (in thousands) 1995 1994 ----------------------------------------------------------- 9% Sinking fund debentures due 2022; sinking fund requirements are $5.0 million annually from 2003 to 2021 $ 99,542 $ 99,525 Medium-term notes at 6.78% to 7.80% due from 1998 to 2005 80,000 - 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 7,143 10,714 9.89% Senior notes, series A - 9,000 10.45% Senior notes, series B, due in annual installments of $3.0 million through 1999 12,000 15,000 Capitalized lease obligations at 7.6% to 10.1% due in installments through 2006 2,351 110 Other 1,012 - ----------------------------------------------------------- Total 202,048 173,688 ----------------------------------------------------------- Less amounts due within one year 7,286 15,618 ----------------------------------------------------------- $194,762 $158,070 =========================================================== Aggregate maturities of long-term debt for the four years subsequent to June 30, 1996 are $7.0 million in fiscal 1997, $3.2 million in 1998, $13.1 million in 1999, and $15.1 million in 2000. 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 after taxes of $2.0 million including unamortized discount and issue costs, or $.13 per share. Although the funding for the retirement originally came from the Company's credit facilities, it was replaced with the medium-term debt securities described above. Consequently, such debt of $39.3 million at June 30, 1994 was classified as long-term debt on the consolidated balance sheet. 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, 1995 were approximately $90.3 million. 8. FINANCIAL INSTRUMENTS The Company's financial instrument portfolio is comprised of cash and cash equivalents, nickel futures contracts and commodity price swaps, company-owned life insurance, and short- and long-term debt instruments. The carrying amounts for cash, cash equivalents, and short-term debt approximate their respective fair values due to the short maturities of these instruments. The carrying amount for company-owned life insurance is based on cash surrender values determined by the insurance carriers. The fair value of long-term debt as of June 30, 1995 and 1994, determined by using current interest rates and market values of similar issues, was approximately $208.7 million and $179.0 million, respectively. The fair value of nickel futures contracts and commodity price swaps is based on quoted market prices for these instruments. At June 30, 1995 and 1994, the Company had entered into contracts hedging future commodity purchases of approximately $9.1 million and $19.7 million, respectively. The fair market value of these contracts was $12.2 million and $21.3 million, respectively. 9. 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 $45. After distribu- tion, 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 9. COMMON STOCK PURCHASE RIGHTS (continued) 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 $.025 per Right at any time before they become exercisable and expire June 26, 1996. 10. 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 1,000,000 shares plus any shares cancelled 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 1995 and 1994, $.3 million and $.2 million, respectively, were charged to expense for vested restricted shares. As of June 30, 1995 and 1994, 10,186 and 21,164 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. Under the 1982 plan, options granted since August 9, 1990 expire ten years after grant, while options granted prior to that date have expired. Options granted under the 1977 plan expire ten years after grant. At June 30, 1995 and 1994, 284,720 shares were reserved for options which may be granted under the 1977 plan. 10. COMMON STOCK OPTIONS (continued) 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, 1995 and 1994, 89,000 and 102,000 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 of Option Price Shares per Share ----------------------------------------------------------- Balance June 30, 1992 (550,400 shares exercisable) 757,680 $19.00-$26.00 Granted 131,380 $22.38-$27.06 Exercised (55,420) $19.00-$25.50 Cancelled (47,570) $22.50-$25.50 ----------------------------------------------------------- Balance June 30, 1993 (654,690 shares exercisable) 786,070 $19.00-$27.06 Granted 136,760 $26.88-$30.19 Exercised (195,318) $19.00-$25.75 Cancelled (3,160) $24.12-$27.06 ----------------------------------------------------------- Balance June 30, 1994 (587,592 shares exercisable) 724,352 $19.00-$30.19 Granted 144,000 $28.32-$32.56 Exercised (70,810) $22.38-$30.19 Cancelled (3,390) $24.12-$30.19 ----------------------------------------------------------- Balance June 30, 1995 (650,152 shares exercisable) 794,152 $19.00-$32.56 =========================================================== Of the options outstanding at June 30, 1995, 363,220 relate to the 1993 plan, 238,152 relate to the 1982 plan, 120,980 relate to the 1977 plan and 71,800 relate to the plan for non-employee Directors. No adjustments to income are made with respect to options granted or exercised under the plans. 11. PENSION PLANS The Company has several noncontributory defined benefit pension plans, which cover most of its employees. The bene- fits 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. 11. PENSION PLANS (continued) 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. During fiscal 1995, the Company established a company-owned life insurance program covering certain key employees and outside Directors. The purpose of the program is to provide for the Company's obligation under the above-mentioned supplemental retirement plans. As of June 30, 1995, the cash surrender value of $2.0 million was included in other assets on the consolidated balance sheet. Net pension credits included the following components: ---------------------------------------------------------------- (in thousands) 1995 1994 1993 ---------------------------------------------------------------- Service cost of benefits earned $ 9,852 $ 9,891 $ 8,950 Interest cost on projected benefit obligation 27,255 25,576 24,765 Return on plan assets: Actual (83,917) (8,351) (47,148) Deferred gain (loss) 42,733 (34,297) 6,771 Net amortization and deferral (2,727) (3,304) (4,435) ---------------------------------------------------------------- Net pension credits $ (6,804) $(10,485) $(11,097) ================================================================ Principal actuarial assumptions: Discount rate 8.0% 7.5% 8.0% Long-term rate of compensation increase 4.5% 4.5% 4.5% Long-term rate of return on plan assets 9.0% 9.0% 9.0% ================================================================ The .5% discount rate changes increased the pension credit by $.7 million in fiscal 1995 and decreased the pension credit by $1.8 million in fiscal 1994. 11. PENSION PLANS (continued) The funded status of these plans at June 30, 1995 and 1994 is summarized as follows: Overfunded Plans Underfunded Plans ----------------------------------------------------------------------- (in thousands) 1995 1994 1995 1994 Plan assets at fair value $527,009 $467,144 $ 1,378 $ 2,395 ----------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested 271,332 260,008 7,214 6,523 Non-vested 55,694 33,747 332 1,215 ----------------------------------------------------------------------- Accumulated benefit obligation 327,026 293,755 7,546 7,738 Effect of future com- pensation increases 58,225 47,891 3,393 3,560 Projected benefit obligation 385,251 341,646 10,939 11,298 ----------------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation $141,758 $125,498 $ (9,561) $ (8,903) ----------------------------------------------------------------------- Unrecognized net (gain) loss - experience different from assumptions (47,565) (36,793) 3,008 2,113 Unrecognized transition (asset) obligation (17,387) (20,283) 463 347 Unrecognized prior service cost 4,376 4,763 717 702 ----------------------------------------------------------------------- Prepaid (accrued) pension cost $ 81,182 $ 73,185 $ (5,373) $ (5,741) ======================================================================= Principal actuarial assumptions: Discount rate 7.5% 8.0% 7.1% 9.0% Long-term rate of compensation increase 4.5% 4.5% 6.0% 7.5% ======================================================================= 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 defined contribution pension and savings plans for substantially all domestic employees. The Company contributions were $4.5 million in fiscal 1995, $3.7 million in fiscal 1994, and $3.6 million in fiscal 1993. 12. POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS In addition to pension plan benefits, the Company provides health care and life insurance benefits for certain retired employees and covered dependents. Eligible employees receive these benefits upon normal retirement. Expense of postretirement medical and life insurance benefits included the following components: --------------------------------------------------------------------- (in thousands) 1995 1994 1993 --------------------------------------------------------------------- Service cost of benefits earned $ 2,287 $ 2,803 $ 2,511 Interest cost on accumulated postretirement benefit obligation 10,317 10,622 11,457 Return on plan assets: Actual (6,023) 370 53 Deferred gain (loss) 4,675 (1,341) (552) Net amortization and deferral (1,031) - - --------------------------------------------------------------------- Postretirement medical and life insurance benefits expense $ 10,225 $ 12,454 $ 13,469 ===================================================================== Principal actuarial assumptions: Discount rate 8.0% 7.5% 8.0% Return on plan assets 9.0% 9.0% 9.0% Trend rate - beginning* 11.0% 12.0% 14.0% Trend rate - ultimate 6.0% 6.0% 6.0% *Declines 1% per year to the ultimate rate. ===================================================================== The .5% discount rate changes decreased expense $.8 million in fiscal 1995 and increased expense $.6 million in fiscal 1994. 12. POSTRETIREMENT MEDICAL AND LIFE INSURANCE BENEFITS (continued) The funded status of the postretirement medical and life insurance benefit plans at June 30, 1995 and 1994, is summarized as follows: ----------------------------------------------------------------- (in thousands) 1995 1994 ----------------------------------------------------------------- Accumulated postretirement benefit obligation (APBO): Retirees $ 83,879 $ 84,913 Fully eligible active plan participants 20,702 18,337 Other active plan participants 28,555 28,669 ----------------------------------------------------------------- Total APBO 133,136 131,919 Plan assets at fair value 24,586 14,275 ----------------------------------------------------------------- APBO in excess of plan assets 108,550 117,644 Unrecognized net gain 38,477 30,047 Unrecognized prior service cost (1,441) (1,552) ----------------------------------------------------------------- Accrued postretirement benefits $145,586 $146,139 ================================================================= Principal actuarial assumptions: Discount rate 7.5% 8.0% Trend rate - beginning* 10.0% 11.0% 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, 1995 would increase by $16.8 million and the postretirement benefit expense for fiscal 1995 would have increased by $1.6 million. Plan assets are held in a Voluntary Employee Benefit Trust (VEBA) and are invested in trust-owned life insurance. 13. 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. 13. EMPLOYEE STOCK OWNERSHIP PLAN (continued) 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 $1.1 million in fiscal 1995, $.9 million in fiscal 1994, and $.6 million in fiscal 1993 to the ESOP. Compensation expense related to the plan was $2.0 million in fiscal 1995, $2.1 million in fiscal 1994, and $2.0 million in fiscal 1993. As of June 30, 1995, the ESOP held 456.7 shares of the convertible preferred stock, consisting of 90.0 allocated shares and 366.7 unallocated shares. Each preferred share is convertible into 2,000 shares 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 2,600 votes per share. The stock is redeemable at the Company's option at any time after September 5, 1996 at an initial price of $67,600.00 per share, declining to $65,000.00 per share by 2001. 14. SUPPLEMENTAL DATA ----------------------------------------------------------------- (in thousands) 1995 1994 1993 ----------------------------------------------------------------- Research and development $ 12,302 $ 13,597 $ 12,900 Repairs and maintenance $ 49,305 $ 42,862 $ 38,380 ----------------------------------------------------------------- 15. INCOME TAXES Provisions for income taxes consisted of the following: ----------------------------------------------------------------- (in thousands) 1995 1994 1993 ----------------------------------------------------------------- Current: Federal $ 20,117 $ 18,040 $ 4,345 State 2,488 798 968 Foreign 1,160 1,544 - Deferred: Federal 4,332 4,937 9,867 State (1,437) (128) 1,085 Foreign 419 (752) - ----------------------------------------------------------------- $ 27,079 $ 24,439 $ 16,265 ================================================================= 15. INCOME TAXES (continued) The following is a reconciliation of the statutory federal income tax rate to the actual effective income tax rate: ----------------------------------------------------------------- (% of pre-tax income) 1995 1994 1993 ----------------------------------------------------------------- Federal tax rate 35.0% 35.0% 34.0% Increase in taxes resulting from: State income taxes, net of federal tax benefit 4.1 1.7 4.4 Federal and state tax rate changes (2.0) 1.4 - Other, net (0.8) 0.9 (0.4) ----------------------------------------------------------------- Effective tax rate 36.3% 39.0% 38.0% ================================================================= 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, 1995 and 1994: ----------------------------------------------------------------- (in thousands) 1995 1994 ----------------------------------------------------------------- Deferred tax liabilities: Depreciation and amortization $110,921 $111,356 Prepaid pensions 26,578 24,167 Other 15,755 12,731 ----------------------------------------------------------------- Total deferred tax liabilities 153,254 148,254 ----------------------------------------------------------------- Deferred tax assets: Postretirement provisions 56,000 57,230 Other reserve provisions 21,168 17,217 Valuation allowance (502) (469) ----------------------------------------------------------------- Total deferred tax assets 76,666 73,978 ----------------------------------------------------------------- Net deferred tax liability $ 76,588 $ 74,276 ================================================================= 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, 1995 and 1994, $1.0 million and $1.2 million, respectively, were charged to operations for environmental remediation costs (no expense was recognized in fiscal 1993). The liability recorded for environmental cleanup costs, including remedi- ation investigation and feasibility study costs, remaining at June 30, 1995 and 1994, was $5.9 million and $4.9 million, while the amount of recoveries recorded as a receivable was $1.2 million and $.8 million, respectively. Estimates of the amount and timing of future costs of environmental remediation requirements are necessarily imprecise because of the continuing evolution of environ- mental 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 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 and timing (both as to recording future charges to operations and cash expenditures) of the resolution of such matters. While it is not feasible to determine the outcome of these matters, in the opinion of management, any total ultimate liability will not have a material effect on the Company's financial position or results of operations and cash flows. 17. SUBSEQUENT EVENT On August 10, 1995, the Board of Directors of the Company declared a two-for-one common stock split which will be distributed to shareholders of record on September 1, 1995. The par value of common shares remained at $5 per share. The Board also declared a ten percent increase in the common stock dividend, effective with the quarterly dividend to shareholders of record on August 22, 1995. The effect of the stock split has been retroactively reflected as of June 30, 1995, in the consolidated balance sheet and statement of changes in shareholders' equity, but activity for fiscal 1995 and prior periods was not restated in those statements. All references to the number of common shares and per share amounts elsewhere in the consolidated financial statements and related footnotes have been restated to reflect the effect of the split for all periods presented. 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 and maintenance 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 - First Second Third Fourth Fiscal except per share amounts) Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------------- Results of Operations Fiscal 1995 Net sales $156,084 $172,400 $211,636 $217,412 $757,532 Gross profits $ 34,516 $ 44,483 $ 57,535 $ 56,829 $193,363 Net income $ 4,932 $ 9,827 $ 15,363 $ 17,370(1)$ 47,492 - ------------------------------------------------------------------------------- Fiscal 1994 Net sales $129,429 $147,127 $174,347 $177,892 $628,795 Gross profits $ 31,924 $ 38,863 $ 50,440 $ 50,095 $171,322 Income before extraordinary charge(2) $ 2,772 $ 7,360 $ 12,825 $ 15,332 $ 38,289 Net income $ 2,772(1)$ 7,360 $ 10,786(3)$ 15,332(1)$ 36,250 - ------------------------------------------------------------------------------- Per Common Share Fiscal 1995 Primary earnings $ .28 $ .58 $ .91 $ 1.04 $ 2.81 Fully-diluted earnings $ .27 $ .56 $ .89 $ .98 $ 2.70 - ------------------------------------------------------------------------------- Fiscal 1994 Primary earnings: Income before extraordinary charge(2)$ .15 $ .43 $ .77 $ .93 $ 2.28 Net income $ .15 $ .43 $ .64(3)$ .93 $ 2.15 Fully-diluted earnings: Income before extraordinary charge $ .15 $ .42 $ .74 $ .89 $ 2.20 Net income $ .15 $ .42 $ .62(3)$ .89 $ 2.08 - ------------------------------------------------------------------------------- (1) Changes in Pennsylvania income tax laws resulted in increases to income of $1.5 million or $.09 per share and $.7 million or $.04 per share during the fourth quarters of fiscal 1995 and 1994, respectively, for the restatement of deferred tax liabilities. Deferred taxes were also restated during the first quarter of fiscal 1994 for an increase in the Federal tax rate resulting in a decrease in net income of $1.5 million or $.09 per share. (2) Reductions in LIFO-valued inventories resulted in increases in income before an extraordinary charge of $2.1 million or $.13 per share, $1.5 million or $.09 per share, $5.5 million or $.34 per share and $3.0 million or $.19 per share for the first, second, third and fourth quarters of fiscal 1994, respectively. (3) Includes extraordinary charge for retirement of 12-7/8% deben- tures at a premium ($2.0 million after taxes, or $.13 and $.12 for primary and fully-diluted earnings per share, respectively). All share and per share data have been restated for the effect of a two-for-one common stock split declared on August 10, 1995. See Note 17 to the consolidated financial statements. 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 1995 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 1995 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 1995 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 1995 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 schedule should be read in conjunction with the consolidated financial statements (see Item 8. Financial Statements): Report of Independent Accountants on Schedule VIII Schedule VIII - Valuation and Qualifying Accounts 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 BOARD OF DIRECTORS AND 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 1995 Annual Report on Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14(a) of this Form 10-K. In our opinion, the financial statement schedule 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 L.L.P. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania July 27, 1995, except for Note 17, as to which the date is August 10, 1995 (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 no reports on Form 8-K for the period covered by this filing. 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, 1995 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, 1995 - --------------------- Chief Executive Officer Robert W. Cardy and Director (Principal Executive Officer) s/G. Walton Cottrell Sr. Vice President - September 27, 1995 - --------------------- Finance & Chief G. Walton Cottrell Financial Officer s/Edward B. Bruno Controller (Principal September 27, 1995 - --------------------- Accounting (Officer) Edward B. Bruno * Director September 27, 1995 - --------------------- Marcus C. Bennett * Director September 27, 1995 - --------------------- Dennis M. Draeger * Director September 27, 1995 - --------------------- C. McCollister Evarts, M.D. * Director September 27, 1995 - --------------------- Carl R. Garr * Director September 27, 1995 - --------------------- William J. Hudson, Jr. * Director September 27, 1995 - --------------------- Arthur E. Humphrey * Director September 27, 1995 - --------------------- Edward W. Kay * Director September 27, 1995 - --------------------- Frederick C. Langenberg * Director September 27, 1995 - --------------------- Marlin Miller, Jr. * Director September 27, 1995 - --------------------- Paul R. Roedel * Director September 27, 1995 - --------------------- Kathryn C. Turner * Director September 27, 1995 - --------------------- Kenneth L. Wolfe 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, Marlin Miller, Jr., Paul R. Roedel, Kathryn C. Turner, Kenneth L. Wolfe, 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 VIII. VALUATION AND QUALIFYING ACCOUNTS (in thousands) Column A Column B Column C Column D Column E - -------- -------- -------- -------- -------- Additions Balance -------------------- 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, 1995: Allowance for doubtful accounts receivable $ 619 $ 578 $ 338 $ (501) $1,034 ====== ====== ====== ====== ====== 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 ====== ====== ====== ====== ====== (1) Includes beginning balances of acquired businesses and recoveries of accounts previously written off, net of collection expenses. (2) Doubtful accounts written off. EX-99 2 EXHIBIT INDEX EXHIBIT INDEX ------------- Exhibit No. Title Page - ----------- ----- ---- 3. Articles of Incorporation and By-Laws A. Restated Certificate of Incorporation is incorporated herein by reference to Exhibit 3A of the Company's 1987 Annual Report on Form 10-K. B. By-Laws, amended as of October 24, 1994. 4. Instruments Defining Rights of Security Holders, Including Indentures A. Restated Certificate of Incorporation and By-Laws set forth in Exhibit Nos. 3A and 3B, above. B. Indenture relating to the Company's 12-7/8% notes due 2014 is incorpor- ated herein by reference to Exhibit No. 4C to the Company's 1984 Annual Report on Form 10-K. C. Rights Agreement relating to Rights distributed to holders of the Company's Stock, amended as of May 11, 1989, is incorporated herein by reference to Exhibit 4C to the Company's 1989 Annual Report on Form 10-K. D. Agreement to furnish to the Securities and Exchange Commission upon request a copy of the Note Agreement relating to the Company's 9.40% Notes Due October 30, 1996 is incorporated herein by reference to Exhibit 4E of the Company's 1987 Annual Report on Form 10-K. E. Agreement to furnish to the Securities and Exchange Commission upon request a copy of the Note Agreement relating to the Company's 9.89% Notes and 10.45% Notes due August 23, 1994 and May 15, 1999, respectively, is incorporated herein by reference to Exhibit 4F of the Company's 1988 Annual Report on Form 10-K. F. Agreement to furnish to the Securities and Exchange Commission upon request a copy of the $150,000,000 Credit Agreement dated as of July 26, 1991 is incorporated herein by reference to Exhibit No. 4F to the Company's 1991 Annual Report on Form 10-K. G. Certificate of Designation, Preferences and Rights of the Series A Convertible Preferred Stock is incorporated herein by reference to Exhibit No. 3.1 to the Company's Form 8-K Current Report dated September 6, 1991. H. Indenture related to the Company's $100,000,000 of 9.0% Sinking Fund Debentures due 2022 is incorporated herein by reference to Exhibit No. 4A to the Company's Form 10-Q Quarterly Report for the quarter ended March 31, 1992. I. The Company's Registration Statement No. 33-51613, as filed on Form S-3 on January 6, 1994, with respect to its Medium Term Note Program for issuance of unsecured debt up to $100,000,000 and the Prospectus and Prospectus Supplement, both dated and filed June 14, 1994, with respect thereto are incorporated by reference. J. Indenture dated January 12, 1994, between the Company and Morgan Guaranty Trust Company of New York, as Trustee, related to the Company's $100,000,000 of unsecured medium term notes registered under Registration No. 33-51613 is incorporated by reference to the Company's Report on Form 10-Q for the quarterly period ended December 31, 1993. K. The Company's Registration Statement No. 33-54045 as filed on Form S-8 on June 8, 1994, with respect to its Stock-Based Incentive Compensation Plan is incorporated by reference. L. Pricing Supplements Nos. 1 and 2, dated August 8, 1994, as filed on August 9, 1994, to Registration No. 33-51613 with respect to issuance of $15,000,000 of debt under the Company's $100,000,000 Medium Term Note Program is incorporated by reference. M. Pricing Supplements Nos. 3 and 4, dated September 12, 1994, as filed on September 13, 1994 to Registration No. 33-51613 with respect to issuance of $15,000,000 of debt under the Company's $100,000,000 Medium Term Note Program is incorporated by reference. N. Pricing Supplement No. 5 dated September 21, 1994 as filed on September 22, 1994 to Registration No. 33-51613 with respect to the issuance of $10,000,000 of debt under the Company's $100,000,000 Medium Term Note Program is incorporated by reference. O. Pricing Supplement No. 6 dated October 5, 1994 as filed on October 6, 1994 to Registration No. 33-51613 with respect to issuance of $10,000,000 of debt under the Company's $100,000,000 Medium Term Note Program is incorporated by reference. P. Pricing Supplements Nos. 7 and 8 dated June 15, 1995 as filed on June 19, 1995 to Registration No. 33-51613 with respect to issuance of $30,000,000 of debt under the Company's $100,000,000 Medium Term Note Program is incorporated by reference. 10. Material Contracts A. Supplemental Retirement Plan for Executive Officers, amended as of September 8, 1988, is incorporated herein by reference to Exhibit No. 10A to the Company's 1990 Annual Report on 10-K. B. Management and Officers Capital Appreciation Plan, an Incentive Stock Option Plan, amended as of August 9, 1990, is incorporated herein by reference to Exhibit No. 10B to the Company's 1990 Annual Report on Form 10-K. C. Incentive Stock Option Plan for Officers and Key Employees, amended as of August 9, 1990, is incorporated herein by reference to Exhibit No. 10C to the Company's 1990 Annual Report on Form 10-K. D. Directors Retirement Plan is incorporated herein by reference to Exhibit No. 10E to the Company's 1983 Annual Report on Form 10-K. E. Deferred Compensation Plan for Nonmanagement Directors of Carpenter Technology Corporation, amended as of December 13, 1984, is incorpor- ated by reference to Exhibit No. 10F to the Company's 1985 Annual Report on Form 10-K. F. Deferred Compensation Plan for Corporate and Division Officers of Carpenter Technology Corporation, amended as of December 13, 1984, is incorporated by reference to Exhibit No. 10G to the Company's 1985 Annual Report on Form 10-K. G. Executive Annual Compensation Plan is incorporated herein by reference to Exhibit No. 10G to the Company's 1990 Annual Report on Form 10-K. H. Non-Qualified Stock Option Plan For Non-Employee Directors is incorporated herein by reference to Exhibit No. 10H to the Company's 1990 Annual Report on Form 10-K. I. Officers' Supplemental Retirement Plan of Carpenter Technology Corporation is incorporated herein by reference to Exhibit 10I to the Company's 1990 Annual Report on Form 10-K. J. Trust Agreement between the Company and the Chase Manhattan Bank, N.A. dated September 11, 1990 relating, in part, to the Supplemental Retirement Plan for Executive Officers, Deferred Compensation Plan for Corporate and Division Officers of Carpenter Technology Corporation and the Officers' Supplemental Retirement Plan of Carpenter Technology Corporation, set forth in Exhibits Nos. 10A, 10F and 10I, above is incorporated herein by reference to Exhibit No. 10J to the Company's 1990 Annual Report on Form 10-K. K. Carpenter Technology Corporation Employee Stock Ownership Plan, effective as of September 6, 1991, is incorporated herein by reference to Exhibit No. 10.1 to the Company's Form 8-K Current Report dated September 6, 1991. L. Carpenter Technology Corporation Employee Stock Ownership Plan Trust Agreement dated September 6, 1991, between the Company and State Street Bank and Trust Company, not in its individual capacity, but solely in its capacity as the Trustee, is incorporated herein by reference to Exhibit No. 10.2 to the Company's Form 8-K Current Report dated September 6, 1991. M. Stock Purchase Agreement dated September 6, 1991, between the Company and State Street Bank and Trust Company, not in its indivi- dual capacity, but solely in its capacity as the Trustee, is incorporated herein by reference to Exhibit No. 10.3 to the Company's Form 8-K Current Report dated September 6, 1991. N. Stock Subscription and Investment Agreement and related letter agreement, both dated April 8, 1993, between Walsin Lihwa Corporation and the Company are incorporated by reference to Exhibit 1 of the Company's Current Report on Form 8-K, dated April 7, 1993. O. Indemnification Agreements, adopted April 28, 1993, in the form attached between the Company and each of the directors and the following executive officers; Robert W. Cardy, Donald C. Bristol, G. Walton Cottrell, Nicholas F. Fiore, Robert W. Lodge and John R. Welty. P. Stock-Based Incentive Compensation Plan for Officers and Key Employees, adopted June 22, 1993, is incorporated herein by reference to Appendix A to the 1993 Proxy Statement. Q. Stock Purchase Agreement dated July 28, 1993, between Carpenter Technology Corporation, Carpenter Investments, Inc. and the share- holders of Aceros Fortuna, S.A. de C.V. and Movilidad Moderna, S.A. de C.V. with respect to the purchase of all the capital stock of Aceros Fortuna and Movilidad Moderna is incorporated by reference to Exhibit 1 to the Company's Form 8-K Current Report dated July 28, 1993. R. Distribution Agreement dated January 12, 1994 among the Company, CS First Boston Corporation and J. P. Morgan Securities Inc. is incorporated by reference to Exhibit 1 to the Company's Registration Statement No. 33-51613. S. Special Severance Agreements dated E-7 April 3, 1995 were entered into with Robert W. Cardy, Donald C. Bristol, G. Walton Cottrell, Nicholas F. Fiore, Robert W. Lodge, and John R. Welty in the form attached hereto as Exhibit 10S. 11. Statement re Computation of Per Share E-20 Earnings 23. Consent of Experts and Counsel E-22 Consent of Independent 24. Power of Attorney E-23 Powers of Attorney in favor of G. Walton Cottrell or John R. Welty. 27. Financial Data Schedule E-35 99. Additional Exhibits 1995 Proxy Statement, submitted to the SEC via Edgar on September 26, 1995 EX-10 3 SEVERANCE AGREEMENT April 3, 1995 Mr. ______________ __________________ __________________ RE: Special Severance Agreement Dear _______, Carpenter Technology Corporation (the "Company") considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel. In this connection, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including yourself, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company, although no such change is now contemplated. In order to induce you to remain in the employ of the Company and in consideration of your agreement set forth in Subsection 2(ii) hereof, the Company agrees that you shall receive the severance benefits set forth in this letter agreement ("Agreement") in the event your employment with the Company is terminated subsequent to a "change in control of the Company" (as defined in Section 2 hereof) under the circumstances described below. 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect through December 31, 1998; provided, however, that commencing on January 1, 1999 and each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless, not later than the October 31 preceding each such January 1, the Company shall have given notice that it does not wish to extend this Agreement; provided, further, if a change in control of the Company shall have occurred during the original or extended term of this Agreement, this Agreement shall continue in effect for the later of (i) the original or extended term or (ii) a period of twenty-four (24) months beyond the month in which such change in control occurred. Notwithstanding the foregoing, in no event shall the term of this Agreement extend beyond the date that you attain sixty-five years of age. 2. Change in Control. (i) No benefits shall be payable hereunder unless there shall have been a change in control of the Company, as set forth below. For purposes of this Agreement, a "change in control of the Company" shall be deemed to have occurred if (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; or (B) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clauses (A), (C) or (D) of this Subsection) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or (C) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 75% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (D) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company's assets. (ii) For purposes of this Agreement, a "potential change in control of the Company" shall be deemed to have occurred if (A) the Company enters into an agreement, the consummation of which would result in the occurrence of a change in control of the Company, (B) any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a change in control of the Company; (C) any person, other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, who is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding securities, increases his beneficial ownership of such securities by 5% or more of the combined voting power of the Company's then outstanding securities on the date hereof; or (D) the Board adopts a resolution to the effect that, for purposes of this Agreement, a potential change in control of the Company has occurred. You agree that, subject to the terms and conditions of this Agreement, in the event of a potential change in control of the Company, you will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the occurrence of such potential change in control of the Company, (ii) the termination by you of your employment by reason of Disability or Retirement as defined in Subsection 3(i), or (iii) the occurrence of a change in control of the Company. 3. Termination Following Change in Control. If any of the events described in Subsection 2(i) hereof constituting a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Subsection 4(iii) hereof upon the subsequent termination of your employment during the term of this Agreement unless such termination is (A) because of your death, Disability or Retirement, (B) by the Company for Cause, or (C) by you other than for Good Reason. (i) Disability; Retirement. If, as a result of your incapacity due to physical or mental illness, you shall have been absent from the full-time performance of your duties with the Company for twenty-four (24) consecutive months (or twelve (12) consecutive months if you have been employed by the Company for less than five (5) years as of the date your absence from full-time performance of duties under this Subsection begins), and within thirty (30) days after written notice of termination is given you shall not have returned to the full-time performance of your duties, your employment may be terminated for "Disability". Termination by the Company or you of your employment based on "Retirement" shall mean termination with your consent in accordance with the Company's Pension Plan (as hereafter defined) including early retirement, generally applicable to its salaried employees, provided, however, that termination based on "Retirement" shall not include retirement in conjunction with termination by you for Good Reason. (ii) Cause. Termination by the Company of your employment for "Cause" shall mean termination upon (A) the willful and continued failure by you to substantially perform your duties with the Company (other than any such failure resulting from your incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination, by you for Good Reason as defined in Subsections 3(iv) and 3(iii), respectively) after a written demand for substantial performance is delivered to you by the Board, which demand specifically identifies the manner in which the Board believes that you have not substantially performed your duties, or (B) the willful engaging by you in conduct which is demonstrably and materially injurious to the Company, monetarily or otherwise. For purposes of this Subsection, no act, or failure to act, on your part shall be deemed "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of conduct set forth above in clauses (A) or (B) of the first sentence of this Subsection and specifying the particulars thereof in detail. (iii) Good Reason. You shall be entitled to terminate your employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without your express written consent, the occurrence after a change in control of the Company of any of the following circumstances unless, in the case of paragraphs (A), (E), (F), (G) or (H), such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination, as defined in Subsections 3(v) and 3(iv), respectively, given in respect thereof: (A) the assignment to you of any duties inconsistent with your present status as Vice President, General Counsel and Secretary of the Company (or such other title or titles as you may be holding immediately prior to the change in control of the Company) or a substantial adverse alteration in the nature or status of your responsibilities from those in effect immediately prior to the change in control of the Company; (B) a reduction by the Company in your annual base salary as in effect on the date of the change in control of the Company; (C) the relocation of the Company's principal executive offices to a location outside of Berks County, Pennsylvania (or, if different, the metropolitan area in which such offices are located immediately prior to the change in control of the Company) or the Company's requiring you to be based anywhere other than the Company's principal executive offices except for required travel on the Company's business to an extent substantially consistent with your present business travel obligations; (D) the failure by the Company, without your consent, to pay to you any portion of your current compensation, or to pay to you any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (E) the failure by the Company to continue in effect any compensation plan in which you participate immediately prior to the change in control of the Company which is material to your total compensation, including but not limited to the Company's stock option plans, Annual Executive Compensation Plan, Profit Sharing Plan for Employees of Carpenter Technology Corporation and the Flexible Savings Plan of Carpenter Technology Corporation or any substitute plans adopted prior to the change in control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue your participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of your participation relative to other participants, as existed at the time of the change in control; (F) the failure by the Company to continue to provide you with benefits substantially similar to those enjoyed by you under the Company's General Retirement Plan for Employees of Carpenter Technology Corporation, Earnings Adjustment Plan of Carpenter Technology Corporation, Benefit Equalization Plan of Carpenter Technology Corporation, Supplemental Retirement Plan for Executives of Carpenter Technology Corporation and Officers' Supplemental Retirement Plan of Carpenter Technology Corporation (the "Pension Plan" or "Pension Plans") or under any of the Company's other deferred compensation plans, life insurance, medical, health and accident, or disability plans in which you were participating at the time of the change in control of the Company, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit enjoyed by you at the time of the change in control of the Company, or the failure by the Company to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy for officers in effect at the time of the change in control of the Company; (G) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 5 hereof; or (H) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (iv) below (and, if applicable, the requirements of Subsection (ii) above); for purposes of this Agreement, no such purported termination shall be effective. Your right to terminate your employment pursuant to this Subsection shall not be affected by your incapacity due to physical or mental illness. Your continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder, subject to the applicable notice requirements of Subsection (iv) below. (iv) Notice of Termination. Any purported termination of your employment by the Company or by you shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 6 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment under the provision so indicated. A Notice of Termination given by you indicating termination for Good Reason pursuant to Subsection (iii) above must be communicated within six (6) months from the date on which the facts and circumstances believed by you to constitute such Good Reason first became known to you or reasonably ascertainable by you. (v) Date of Termination, Etc. "Date of Termination" shall mean (A) if your employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that you shall not have returned to the full-time performance of your duties during such thirty (30) day period), and (B) if your employment is terminated pursuant to Subsection (ii) or (iii) above or for any other reason (other than Disability), the date specified in the Notice of Termination (which, in the case of a termination pursuant to Subsection (ii) above shall not be less than thirty (30) days, and in the case of a termination pursuant to Subsection (iii) above shall not be less than fifteen (15) nor more than sixty (60) days, respectively, from the date such Notice of Termination is given); provided that if within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this proviso), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided further that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Company will continue to pay you your full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, base salary) and continue you as a participant in all compensation, benefit and insurance plans in which you were participating whether or not specifically referenced in this Agreement when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Subsection. Amounts paid under this Subsection are in addition to all other amounts due under this Agreement and shall not be offset against or reduce any other amounts due under this Agreement. 4. Compensation Upon Termination or During Disability. Following a change in control of the Company, as defined by Subsection 2(i), upon termination of your employment or during a period of Disability you shall be entitled to the following benefits: (i) During any period that you fail to perform your full-time duties with the Company as a result of incapacity due to physical or mental illness, you shall continue to receive the benefits payable to you under the Company's Salary Continuation Program, together with all other compensation payable to you during such period, until this Agreement is terminated pursuant to Section 3(i) hereof. Thereafter, or in the event your employment shall be terminated by the Company or by you for Retirement, or by reason of your death, your benefits shall be determined under the Company's retirement, insurance and other compensation plans and programs then in effect in accordance with the terms of such programs. (ii) If your employment shall be terminated by the Company for Cause or by you other than for Good Reason, Disability, death or Retirement, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation plan of the Company at the time such payments are due, and the Company shall have no further obligations to you under this Agreement. (iii) If your employment by the Company shall be terminated (a) by the Company other than for Cause, Retirement or Disability or (b) by you for Good Reason, then you shall be entitled to the benefits provided below: (A) the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which you are entitled under any compensation plan of the Company, at the time such payments are due, except as otherwise provided below; (B) in lieu of any further (i) salary payments to you for periods subsequent to the Date of Termination or (ii) payments to you under the Company's Salary Continuation Program, the Company shall pay as severance pay to you a lump sum severance payment equal to two (2) times the sum of (x) your annual base salary in effect immediately prior to the occurrence of the circumstance giving rise to the Notice of Termination given in respect thereof, and (y) the highest annual amount earned by you as Profit-Sharing and bonus compensation for the three prior Company fiscal years preceding the fiscal year in which the Date of Termination occurs; (C) in lieu of shares of common stock of the Company ("Company Shares") issuable upon exercise of outstanding options ("Options") or any related stock appreciation rights ("Rights"), if any, granted to you under the Long-Term Incentive Program (which Options and Rights shall be canceled upon the making of the payment referred to below), you shall receive an amount in cash equal to the product of (i) the excess of the higher of the closing price of the Company's Shares as reported on the New York Stock Exchange- Composite Tape on or nearest the Date of Termination (or, if not listed on such exchange, on the nationally recognized exchange or Quotation System on which trading volume in Company Shares is highest) or the highest per share price for Company Shares actually paid in connection with any change in control of the Company, over the per share exercise price of each Option or Right held by you (whether or not then fully exercisable), times (ii) the number of Company Shares covered by each such Option or Right; and (D) an amount in cash equal to the sum of (i) the present value of your accrued benefit (determined by using the ongoing actuarial assumptions in effect immediately prior to your Date of Termination under the Company's defined benefit plan in which you are a participant) under any Pension Plans or other defined benefit plan sponsored by the Company and (ii) your account balance under any defined contribution plan sponsored by the Company, in either case to the extent that such accrued benefit or account balance, as the case may be, shall not be fully vested at the time of your Date of Termination. (E) In addition to the retirement benefits to which you are entitled under the Pension Plan or any successor plans thereto, the Company shall pay to you a lump sum amount, in cash, equal to the actuarial equivalent of the excess of (x) the retirement pension (determined as a straight life annuity commencing at Normal Retirement Age or, if later, two years after the Date of Termination) which you would have accrued under the terms of the Pension Plan (without regard to any amendment to the Pension Plan made subsequent to a change in control and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if you were fully vested thereunder and had accumulated (after the Date of Termination) twenty-four (24) additional months of service credit thereunder at your highest annual rate of compensation during the twelve (12) months immediately preceding the Date of Termination, over (y) the retirement pension (determined as a straight life annuity commencing at Normal Retirement Age which you had then accrued pursuant to the provisions of the Pension Plan). For the purposes of this Section 4 (iii) (E), the actuarial value of the retirement benefits shall be calculated as the present value of a single life annuity using the UP 1984 mortality table adjusted one year forward. The interest rate used in the calculation shall be 120% of the rate used by the PBGC for purposes of determining the present value of lump sum distributions on plan terminations. (F) The payments provided for in paragraphs (B), (C), (D) and (E), above, shall be made not later than the fifth day following the Date of Termination, provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to you on such day an estimate, as determined in good faith by the Company, of the minimum amount of such payments and shall pay the remainder of such payments (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later then the thirtieth day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to you, payable on the fifth day after demand by the Company (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code). (G) The Company also shall pay to you all legal fees and expenses incurred by you as a result of such termination (including all such legal fees and legal expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Code to any payment or benefit provided hereunder). Such payments shall be made at the later of the times specified in paragraph (F) above, or within five (5) days after your request for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. (iv) Notwithstanding any other provisions of this Agreement, in the event that any payment or benefit received or to be received by you in connection with a change in control or the termination of your employment (whether payable pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, its successors, any person whose actions result in a change in control or any person affiliated with (or which, as a result of the completion of the transactions causing a change in control, will become affiliated) the Company or such person within the meaning of Section 1504 of the Code) (all such payments and benefits being hereinafter called the "Severance Payments") would not be deductible (in whole or part), by the Company, an affiliate or person making such payment or providing such benefit as a result of Section 280G of the Code, then, to the extent necessary to make such portion of the Severance Payments deductible (and after taking into account any reduction in the Severance Payments provided by reason of Section 280G of the Code in such other plan, arrangement or agreement), (A) the cash Severance Payments shall first be reduced (if necessary, to zero), and (B) all other non-cash Severance Payments shall next be reduced. For purposes of this limitation (i) no portion of the Severance Payments the receipt or enjoyment of which you shall have effectively waived in writing prior to the Date of Termination shall be taken into account, (ii) no portion of the Severance Payments shall be taken into account which in the opinion of tax counsel selected by the Company's independent auditors and reasonably acceptable to you does not constitute a "parachute payment" within the meaning of Section 280G(b)(2) of the Code, including by reason of Section 280G(b)(4)(A) of the Code, (iii) the Severance Payments shall be reduced only to the extent necessary so that the Severance Payments (other than those referred to in clauses (i) or (ii)) in their entirety constitute reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4)(B) of the Code or are otherwise not subject to disallowance as deductions, in the opinion of the tax counsel referred to in clause (ii); and (iv) the value of any non-cash benefit or any deferred payment or benefit included in the Severance Payments shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. (v) If your employment shall be terminated (A) by the Company other than for Cause, Retirement or Disability or (B) by you for Good Reason, then for a twenty-four (24) month period after such termination, the Company shall arrange to provide you at the Company's expense with life, disability, accident and health insurance benefits substantially similar to those which you are receiving immediately prior to the Notice of Termination. Benefits otherwise receivable by you pursuant to this Subsection 4(v) shall be reduced to the extent comparable benefits are actually received by you during the twenty-four (24) month period following your termination, and any such benefits actually received by you shall be reported to the Company. (vi) You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by you to the Company, or otherwise except as specifically provided in this Section 4. (vii) In addition to all other amounts payable to you under this Section 4, you shall be entitled to receive all benefits payable to you, at the respective time or times such payments are due, under the Pension Plans, the Flexible Savings Plan of Carpenter Technology Corporation and any other plan or agreement relating to retirement benefits. 5. Successors; Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled to hereunder if you terminate your employment for Good Reason following a change in control of the Company, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with terms of this Agreement to your devisee, legatee or other designee or, if there is no such designee, to your estate. 6. Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage pre-paid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notice to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 7. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar of dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Delaware. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. The obligations of the Company under Section 4 shall survive the expiration of the term of this Agreement. 8. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 9. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 10. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled, at the Company's expense, exclusively by arbitration in Berks County, Pennsylvania, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that you shall be entitled to seek specific performance of your right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely, By: _______________________________ President, Chairman and CEO Agreed to this ____ day of ____________________ ______________________________ EX-11 4 EARNINGS PER SHARE EXHIBITS Exhibit 11 CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES PRIMARY EARNINGS PER COMMON SHARE COMPUTATIONS For the Years Ended June 30, 1995, 1994 and 1993 1995 1994 1993 -------- -------- -------- (in thousands, except per share data) Net Income (Loss) for Primary - ----------------------------- Earnings Per Common Share ------------------------- Income before extraordinary charge and cumulative effect of changes in accounting principles $ 47,492 $ 38,289 $ 26,534 Dividends accrued on convertible preferred stock, net of tax benefits (1,599) (1,606) (1,628) -------- -------- -------- Income for primary earnings per common share before extraordinary charge and cumulative effect of changes in accounting principles $ 45,893 $ 36,683 $ 24,906 Extraordinary charge, net of income taxes - (2,039) - Cumulative effect of changes in accounting principles, net of income taxes - - (74,676) -------- -------- -------- Net income (loss) for primary earnings per common share $ 45,893 $ 34,644 $(49,770) ======== ======== ======== Weighted Average Common Shares - ------------------------------ Weighted average number of common shares outstanding 16,240 16,052 16,016 Effect of shares issuable under the stock option plans 87 78 2 -------- -------- -------- Weighted average common shares 16,327 16,130 16,018 ======== ======== ======== Primary Earnings (Loss) Per Common Share - ---------------------------------------- Primary earnings per common share before extraordinary charge & cumulative effect of changes in accounting principle $ 2.81 $ 2.28 $ 1.55 Extraordinary charge - (.13) - Cumulative effect of changes in accounting principles - - (4.66) -------- -------- -------- Primary earnings (loss) per common share $ 2.81 $ 2.15 $ (3.11) ======== ======== ======== All share and per share data have been restated for the effect of a two-for-one common stock split declared on August 10, 1995. See Note 17 to the consoli- dated financial statements included in Item 8 "Financial Statements and Supplementary Data." E-20 Exhibit 11 CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES FULLY DILUTED EARNINGS PER COMMON SHARE COMPUTATIONS For the Years Ended June 30, 1995, 1994 and 1993 1995 1994 1993 -------- -------- -------- (in thousands, except per share data) Net Income (Loss) for Fully Diluted - ----------------------------------- Earnings Per Common Share ------------------------- Income before extraordinary charge and cumulative effect of changes in accounting principles $ 47,492 $ 38,289 $ 26,534 Shortfall between common and preferred dividend (705) (699) (785) -------- -------- -------- Income for fully diluted earnings per common share before extraordinary charge and cumulative effect of changes in accounting principles 46,787 37,590 25,749 Extraordinary charge, net of income taxes - (2,039) - Cumulative effect of changes in accounting principles, net of income taxes - - (74,676) -------- -------- -------- Net income (loss) for fully diluted earnings per common share $ 46,787 $ 35,551 $ 48,927 ======== ======== ======== Weighted Average Common Shares - ------------------------------ Weighted average number of common shares outstanding 16,240 16,052 16,016 Conversion of preferred shares 917 922 922 Effect of shares issuable under the stock option plans 152 112 62 Weighted average common shares 17,309 17,086 17,000 ======== ========= ======== Fully Diluted Earnings (Loss) - ----------------------------- Per Common Share ---------------- Fully diluted earnings per common share before extraordinary charge and cumulative effects of changes in accounting principles $ 2.70 $ 2.20 $ 1.51 Extraordinary charge - (.12) - Cumulative effect of changes in accounting principles - - (4.39) -------- ------- -------- Fully diluted earnings (loss) per common share $ 2.70 $ 2.08 $ (2.88) ======== ======== ======== All share and per share data have been restated for the effect of a two-for-one common stock split declared on August 10, 1995. See Note 17 to the consoli- dated financial statements included in Item 8 "Financial Statements and Supplementary Data." E-21 EX-23 5 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Carpenter Technology Corporation and subsidiaries on Form S-8 and S-3 (File No. 2-83780, 2-81019, 2-60649, 33-42536, 33-51613 and 33-54045) of our reports dated July 27, 1995, except for Note 17, as to which the date is August 10, 1995, on our audits of the consolidated financial statements and financial statement schedule of Carpenter Technology Corporation and subsidiaries as of June 30, 1995 and 1994, for the years ended June 30, 1995, 1994 and 1993, which reports are included in this Annual Report on Form 10-K. s/Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania September 25, 1995 E-22 EX-24 6 POWERS OF ATTORNEY CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section l3 or l5(d) of the Securities Exchange Act of l934 on Form l0-K, for the year ended June 30, l995, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 14th day of September, l995. /S/Marcus C. Bennett ------------------ Marcus C. Bennett Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section l3 or l5(d) of the Securities Exchange Act of l934 on Form l0-K, for the year ended June 30, l995, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 14th day of September, l995. /S/Dennis M. Draeger ----------------- Dennis M. Draeger Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section l3 or l5(d) of the Securities Exchange Act of l934 on Form l0-K, for the year ended June 30, l995, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 14th day of September, l995. /S/C. McCollister Evarts, MD -------------------------- C. McCollister Evarts, MD Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section l3 or l5(d) of the Securities Exchange Act of l934 on Form l0-K, for the year ended June 30, l995, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 14th day of September, l995. /S/Carl R. Garr ------------- Carl R. Garr Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section l3 or l5(d) of the Securities Exchange Act of l934 on Form l0-K, for the year ended June 30, l995, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 14th day of September, l995. /S/William J. Hudson, Jr. ----------------------- William J. Hudson, Jr. Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section l3 or l5(d) of the Securities Exchange Act of l934 on Form l0-K, for the year ended June 30, l995, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 14th day of September, l995. /S/Arthur E. Humphrey ------------------- Arthur E. Humphrey Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section l3 or l5(d) of the Securities Exchange Act of l934 on Form l0-K, for the year ended June 30, l995, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 14th day of September, l995. /S/Edward W. Kay -------------- Edward W. Kay Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section l3 or l5(d) of the Securities Exchange Act of l934 on Form l0-K, for the year ended June 30, l995, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 14th day of September, l995. /S/Frederick C. Langenberg ------------------------ Frederick C. Langenberg Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section l3 or l5(d) of the Securities Exchange Act of l934 on Form l0-K, for the year ended June 30, l995, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 14th day of September, l995. /S/Marlin Miller, Jr. ------------------- Marlin Miller, Jr. Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section l3 or l5(d) of the Securities Exchange Act of l934 on Form l0-K, for the year ended June 30, l995, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 14th day of September, l995. /S/Paul R. Roedel --------------- Paul R. Roedel Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section l3 or l5(d) of the Securities Exchange Act of l934 on Form l0-K, for the year ended June 30, l995, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 15th day of September, l995. /s/Kathryn C. Turner ------------------ Kathryn C. Turner Director CARPENTER TECHNOLOGY CORPORATION -------------------------------- POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS that the undersigned in his capacity as a Director of Carpenter Technology Corporation does hereby appoint G. Walton Cottrell and John R. Welty or either of them his true and lawful attorneys to execute in his name, place and stead, in his capacity as Director of said Company, the Annual Report pursuant to Section l3 or l5(d) of the Securities Exchange Act of l934 on Form l0-K, for the year ended June 30, l995, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file the same with the Securities and Exchange Commission. Said attorneys shall individually have full power and authority to do and perform in the name and on behalf of the undersigned, in any and all capacities, every act whatsoever requisite or desirable to be done in the premises, as fully and to all intents and purposes as the undersigned might or could do in person, the undersigned hereby ratifying and approving the acts of said attorneys. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 14th day of September, l995. /s/Kenneth L. Wolfe ----------------- Kenneth L. Wolfe Director EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 YEAR JUN-30-1995 JUN-30-1995 $20,120 $0 $118,848 $0 $91,383 $240,429 $763,755 $360,175 $831,775 $134,176 $194,762 $96,690 $0 $28,825 $138,430 $831,775 $757,532 $757,532 $564,169 $564,169 $2,285 $0 $14,542 $74,571 $27,079 $47,492 $0 $0 $0 $47,492 $2.81 $2.70
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