UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 2010
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-5828
CARPENTER TECHNOLOGY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 23-0458500 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
P.O. Box 14662 Reading, Pennsylvania |
19610 | |
(Address of principal executive offices) | (Zip Code) |
610-208-2000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5 Par Value | New York Stock Exchange | |
Title of each class | Name of each exchange on which registered |
Securities registered pursuant to 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants 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. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the registrants voting common stock held by non-affiliates at December 31, 2009 was $1,178,058,288, based on the closing price per share of the registrants common stock on that date of $26.95 as reported on the New York Stock Exchange.
As of August 13, 2010, 43,965,853 shares of the registrants common stock were outstanding
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of the Companys fiscal year 2010 definitive Proxy Statement are incorporated by reference into Part III of this Report.
Page
Number |
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PART I | ||||||
Item 1 | 2 - 6 | |||||
Item 1A | 7 - 12 | |||||
Item 1B | 12 | |||||
Item 2 | 13 | |||||
Item 3 | 13 | |||||
PART II | ||||||
Item 5 |
Market for Registrants Common Equity and Related Stockholder Matters |
14 -15 | ||||
Item 6 | 16 | |||||
Item 7 |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
17 - 39 | ||||
Forward-Looking Statements | 39 | |||||
Item 7A | 39 - 40 | |||||
Item 8 | 41 - 87 | |||||
Item 9 |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
88 | ||||
Item 9A | 88 | |||||
Item 9B | 88 | |||||
PART III | ||||||
Item 10 | 89 - 90 | |||||
Item 11 | 90 | |||||
Item 12 |
Security Ownership of Certain Beneficial Owners and Management |
91 | ||||
Item 13 |
Certain Relationships, Related Transactions and Director Independence |
91 | ||||
Item 14 | 91 | |||||
PART IV | Item 15 | 92 - 95 | ||||
SIGNATURES | 96 - 97 | |||||
SCHEDULE II | 98 |
PART I
Item 1. | Business |
(a) | General Development of Business: |
Carpenter Technology Corporation is engaged in the manufacturing, fabrication and distribution of specialty metals. As used throughout this report, unless the context requires otherwise, the terms Carpenter, the Company, Registrant, Issuer, we and our refer to Carpenter Technology Corporation.
(b) | Financial Information About Segments: |
We are organized in two reportable business segments: Advanced Metals Operations and Premium Alloys Operations. See Note 20 to our consolidated financial statements included in Item 8 Financial Statements and Supplementary Data for additional segment reporting information.
(c) | Narrative Description of Business: |
(1) | General: |
We develop, manufacture and distribute cast/wrought and powder metal stainless steels and special alloys including high temperature alloys, controlled expansion alloys, ultra high strength alloys, implantable alloys, tool and die steels and other specialty metals, as well as cast/wrought titanium alloys. We provide material solutions to the ever-changing needs of the aerospace, industrial, energy, medical, consumer products and automotive industries.
Our Advanced Metals Operations (AMO) segment includes the manufacturing and distribution of high temperature and high strength metal alloys, stainless steels, and titanium in the form of small bars and rods, wire, narrow strip and powder. Products in this segment typically go through more finishing operations, such as rolling, turning, grinding, drawing, and atomization, than products in our PAO segment (as described below). Also, sales in the AMO segment are spread across many end-use markets, including the aerospace, industrial, consumer, automotive, and medical industries. AMO products are sold under the Carpenter, Dynamet, Talley, Carpenter Powder Products and Aceros Fortuna brand names.
Our Premium Alloys Operations (PAO) segment includes the manufacturing and distribution of high temperature and high strength metal alloys and stainless steels in the form of ingots, billets, large bars and hollows. Also, the PAO segment includes conversion processing of metal for other specialty metals companies. A significant portion of PAO sales are to customers in the aerospace and energy industries. Much of PAO sales are to forging companies that further shape, mill, and finish the metals into more specific dimensions. All such sales are made under the Carpenter brand name.
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(2) | Classes of Products: |
Our major classes of products are:
Special alloys
Our special alloys are used in critical components such as rings, discs and fasteners and include heat resistant alloys that range from slight modifications of stainless steels to complex nickel and cobalt base alloys as well as alloys for electronic, magnetic and electrical applications with controlled thermal expansion characteristics, or high electrical resistivity or special magnetic characteristics.
Stainless steels
Our stainless products include a broad range of corrosion resistant alloys including conventional stainless steels and many proprietary grades for special applications.
Titanium products
Our titanium products include corrosion resistant, highly specialized metal with a combination of high strength and low density. Most common uses are in aircraft fasteners, medical devices, sporting equipment and chemical and petroleum processing.
(3) | Raw Materials: |
Our business depends on continued delivery of critical raw materials for our day-to-day operations. These raw materials include nickel, cobalt, chromium, manganese, molybdenum, titanium, iron and scrap containing iron and nickel. Some of the sources of these raw materials, many of which are international, could be subject to potential interruptions of supply as a result of political events, labor unrest or other reasons. These potential interruptions could cause material shortages and affect availability and price. We have arrangements with certain vendors to provide consigned materials at our manufacturing facilities available for our consumption as necessary.
We have long-term relationships with major suppliers who provide availability of material at competitive prices. Purchase prices of certain raw materials have historically been volatile, and have been especially volatile over the past few years. We use pricing surcharges, indexing mechanisms, base price adjustments and raw material forward contracts to reduce the impact of increased costs for the most significant of these materials. There can be delays between the time of the increase in the price of raw materials and the realization of the benefits of such mechanisms or actions that could have a short-term impact on our results and could affect the comparability of our results from period to period.
(4) | Patents and Licenses: |
We own a number of United States and international patents and have granted licenses under some of them. In addition, certain products that we produce are covered by patents held or owned by other companies from whom licenses have been obtained. The duration of a patent issued in the United States is between 14 and 20 years from the date of filing a patent application or issuance of the patents. The duration of patents issued outside of the United States vary from country to country. Generally, patent licenses are structured to match the duration of the underlying patent. Although these patents and licenses are believed to be of value, we do not consider our business to be materially dependent upon any single such item or related group of such items.
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(5) | Seasonality of Business: |
Our sales are normally influenced by seasonal factors. Historically, our sales in the first two fiscal quarters (the respective three months ending September 30 and December 31) are typically the lowest principally because of annual plant vacation and maintenance shutdowns by us as well as by many of our customers. However, the timing of major changes in the general economy or the markets for certain products, as we experienced in the last two fiscal years, can alter this historical pattern.
The chart below summarizes the percent of net sales by quarter for the past three fiscal years:
Quarter Ended
2010 | 2009 | 2008 | |||||||
September 30, |
19 | % | 30 | % | 23 | % | |||
December 31, |
22 | 27 | 23 | ||||||
March 31, |
28 | 24 | 26 | ||||||
June 30, |
31 | 19 | 28 | ||||||
100 | % | 100 | % | 100 | % | ||||
(6) | Customers: |
On a consolidated basis, we are not dependent upon a single customer, or a very few customers, such that the loss of any one or more particular customers would have a materially adverse effect on our consolidated statement of operations. One customer, Precision Castparts Corporation, accounted for 10 percent of our net sales during fiscal year 2010. There were no significant individual customer sales that accounted for more than 10 percent of our net sales during fiscal years 2009 and 2008. See Note 20 to our consolidated financial statements included in Item 8 Financial Statements and Supplementary Data for additional information.
(7) | Backlog: |
As of June 30, 2010, we had a backlog of orders, believed to be firm, of approximately $351 million, substantially all of which is expected to be shipped within fiscal year 2011. Our backlog as of June 30, 2009 was approximately $230 million.
(8) | Competition: |
Our business is highly competitive. We supply materials to a wide variety of end-use market sectors and compete with various companies depending on end-use market, product or geography. We are leaders in specialty materials for critical applications with over 120 years of metallurgical and manufacturing expertise. A significant portion of the products we produce are highly engineered materials for demanding applications. There are several large domestic companies producing one or more similar products that we consider our major competitors for these demanding applications, particularly in our aerospace and energy end-use markets. Our experience, technical capabilities, product offerings and research and development efforts that we have in our niche markets represent barriers to existing and potential competitors.
There are several dozen smaller producing companies and converting companies that are also competitors as well as several hundred independent distributors of products similar to those distributed by us. Additionally, numerous foreign companies produce various specialty metal products similar to those produced by us. Furthermore, a number of different products may, in certain instances, be substituted for our finished products.
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Imports of foreign specialty steels, particularly stainless steels, have long been a concern to the domestic steel industry because of the potential for unfair pricing by certain foreign producers. Certain foreign governments through direct and indirect subsidies have often supported such pricing practices. Because of the unfair trade practices and the resulting injury, we have joined with other domestic producers of specialty metals in the filing of trade actions against foreign producers as well as lobbying various government agencies for the creation of laws and regulations to eliminate the competitive benefits realized by the unfair trade practices. These proposals are aimed at tax and regulatory reform needed to provide incentives to domestic producers and disincentives for foreign producers to import products into the United States unfairly. We will continue to monitor developments related to what we consider unfairly traded imports from foreign competitors and develop appropriate actions in response.
Under the provisions of the Continued Dumping and Subsidy Offset Act of 2000 (the Act), which was signed into law on October 28, 2000, we have received distributions from the United States Customs Service (Customs). Under the Act, Customs establishes special accounts for funds to be distributed annually to eligible domestic producers. The special accounts are sourced with duties collected by Customs on pre-existing anti-dumping or countervailing duty orders. We have received distributions under the Act totaling $5.7 million, $6.1 million and $8.4 million in fiscal years 2010, 2009 and 2008, respectively. We currently believe that we will not receive any additional significant distributions as the Act has expired.
(9) | Research, Product and Process Development: |
Our expenditures for company-sponsored research and development were $17.8 million, $15.4 million and $14.4 million in fiscal years 2010, 2009 and 2008, respectively. We believe that our ability to be an innovator in special material development and manufacturing processes is an important factor in the success of the Company. Our strong commitment to setting new industry standards is evidenced by our Specialty Alloys Research and Development Center, where teams work in areas such as physical metallurgy, analytical chemistry, applied physics and process and systems development. Our worldwide staff of expert metallurgists, research and development scientists, engineers and service professionals works closely with our customers to identify and provide innovative solutions to specific product requirements.
(10) | Environmental Regulations: |
We are subject to various stringent federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Management evaluates the liability for future environmental remediation costs on a quarterly basis. We accrue amounts for environmental remediation costs representing managements best estimate of the probable and reasonably estimable costs relating to environmental remediation. For further information on environmental remediation, see the Contingencies section included in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and the notes to our consolidated financial statements included in Item 8, Financial Statements and Supplementary Data.
Our costs of maintaining and operating environmental control equipment were $10.7 million, $12.6 million and $12.6 million for fiscal years 2010, 2009 and 2008, respectively. The capital expenditures for environmental control equipment were $0.1 million, $0.4 million and $0.2 million for fiscal years 2010, 2009 and 2008, respectively. We anticipate spending approximately $1.7 million on major domestic environmental capital projects over the next five fiscal years. This includes approximately $0.8 million in fiscal year 2011 and fiscal year 2012. Due to the possibility of future regulatory developments, the amount of future capital expenditures may vary from these estimates.
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(11) | Employees: |
As of June 30, 2010, our total workforce consisted of approximately 3,000 employees, which included approximately 100 production employees in Washington, Pennsylvania who are covered under a collective bargaining agreement which expires on August 31, 2013.
(d) | Financial information about foreign and domestic operations and export sales: |
Sales outside of the United States, including export sales, were $377.8 million, $477.0 million and $655.8 million in fiscal years 2010, 2009 and 2008, respectively. Long lived assets held outside of the United States were $6.0 million and $7.2 million as of June 30, 2010 and 2009.
For further information on domestic and international sales, see Note 20 to our consolidated financial statements included in Item 8 Financial Statements and Supplementary Data.
(e) | Available Information: |
Our Board of Directors has adopted a Code of Ethics for the Chief Executive Officer and Senior Financial Officers of Carpenter Technology Corporation, which is also applicable to our other executive officers. There were no waivers of the Code of Ethics in fiscal year 2010. The Code of Ethics and any information regarding any waivers of the Code of Ethics are disclosed on Carpenters website at www.cartech.com . Our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission (SEC). Our website and the content contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
The public may read and copy any materials the Company files with the SEC at the SECs Public Reference Room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and other information regarding issuers that file electronically. Such information can be accessed through the Internet at www.sec.gov.
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Item 1A. | Risk Factors |
There are inherent risks and uncertainties associated with all businesses that could adversely affect operating performances or financial conditions. The following discussion outlines the risks and uncertainties that management believes are the most material to our business. However, these are not the only risks or uncertainties that could affect our business. Certain risks are associated specifically with our business, industry or customer base, while others are broader.
The demand for certain products we produce may be cyclical.
Demand in our end-use markets, including companies in the aerospace, industrial supply, consumer, automotive, medical and energy markets, can be cyclical in nature and sensitive to general economic conditions, competitive influences and fluctuations in inventory levels throughout the supply chain. As a result, our results of operations, financial condition, cash flows and availability of credit could fluctuate significantly from period to period.
The worldwide economic downturn has had a significant impact on global manufacturing activity, which in turn has affected demand throughout our customer base. If these global economic conditions do not improve or worsen, our results of operations and financial condition could be materially adversely affected.
A significant portion of our sales represents products sold to customers in the commercial aerospace and energy markets. The cyclicality of those markets can adversely affect our current business and our expansion objectives.
The commercial aerospace market is historically cyclical due to both external and internal market factors. These factors include general economic conditions, airline profitability, consumer demand for air travel, varying fuel and labor costs, price competition, and international and domestic political conditions such as military conflict and the threat of terrorism. The length and degree of cyclical fluctuation can be influenced by any one or combination of these factors and therefore are difficult to predict with certainty. A downturn in the commercial aerospace industry would adversely affect the demand for our products and/or the prices at which we are able to sell our products, and our results of operations, business and financial condition could be materially adversely affected.
The energy market has also been historically cyclical, principally as a result of volatile oil prices that impact demand for our products. Our future success requires us to, among other things, expand in key international energy markets by successfully adding to our customer base, distribution channels and product portfolio. The volatility of oil prices and other factors that contribute to the cyclicality of the energy market will impact our ability to expand successfully in this area. If we are not able to be successful in this regard, our results of operations, business and financial condition could be adversely affected.
Periods of reduced demand and excess supply as well as the availability of substitute lower cost materials can adversely affect our ability to price and sell our products at the profitability levels we require to be successful.
Additional worldwide capacity and reduced demand for our products could significantly impact future worldwide pricing which would adversely impact our results of operations and financial condition. In addition, continued availability of lower cost, substitute materials may also cause significant fluctuations in future results as our customers opt for a lower cost alternative.
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We change prices on certain of our products from time-to-time. In addition to the above general competitive impact along with other market conditions and various economic factors, beyond our control can adversely affect the timing of our pricing actions. The effects of any pricing actions may be delayed due to long manufacturing lead times or the terms of existing contracts. There is no guarantee that pricing actions implemented will be able to maintain the Companys profit margin levels.
We rely on third parties to supply certain raw materials that are critical to the manufacture of our products and we may not be able to access alternative sources of these raw materials if the suppliers are unwilling or unable to meet our demand.
Certain critical raw material costs, such as nickel, cobalt, chromium, manganese, molybdenum, titanium, iron, and scrap containing iron and nickel, have been volatile due to factors beyond our control. We are able to mitigate most of the adverse impact of rising raw material costs through raw material surcharges, indices to customers and raw material forward contracts, but changes in business conditions could adversely affect our ability to recover rapid increases in raw material costs and may adversely affect our results of operations.
In addition, the availability of these critical raw materials are subject to factors that are not in our control. In some cases, these critical raw materials are purchased from suppliers operating in countries that may be subject to unstable political and economic conditions. At any given time, we may be unable to obtain an adequate supply of these critical raw materials on a timely basis, at prices and other terms acceptable to us, or at all.
If suppliers increase the price of critical raw materials or are unwilling or unable to meet our demand, we may not have alternative sources of supply. In addition, to the extent that we have quoted prices to customers and accepted customer orders for products prior to purchasing necessary raw materials, or have existing contracts, we may be unable to raise the price of products to cover all or part of the increased cost of the raw materials to our customers.
The manufacture of some of our products is a complex process and requires long lead times. As a result, we may experience delays or shortages in the supply of raw materials. If unable to obtain adequate and timely deliveries of required raw materials, we may be unable to timely manufacture sufficient quantities of products. This could cause us to lose sales, incur additional costs, delay new product introductions or suffer harm to our reputation.
We provide benefits to active and retired employees throughout most of our Company, most of which are not covered by insurance, and thus our financial condition can be adversely affected if our investment returns are insufficient to meet these obligations.
We have obligations to provide substantial benefits to active and current employees, and most of these costs are paid by the Company and are not covered by insurance. In addition, certain employees are covered by defined benefit pension plans, with the majority of our plans covering employees in the United States. Many domestic and international competitors do not provide defined benefit plans and/or retiree health care plans, and other international competitors operate in jurisdictions with government sponsored health care plans that may offer them a cost advantage. We currently expect to make approximately $4 million and $19 million in required contributions to the plan during fiscal year 2011 and 2012, respectively. A decline in the value of plan investments in the future, an increase in costs or liabilities or unfavorable changes in laws or regulations that govern pension plan funding could materially change the timing and amount of required pension funding. A requirement to fund pension contributions in the future could have a material adverse effect on our results of operations and financial condition.
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The extensive environmental, health and safety regulatory regimes applicable to our manufacturing operations create the potential exposure to significant liabilities.
The nature of our manufacturing business subjects our operations to numerous varied federal, state, local and international laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Among other things, we have used, and currently use and manufacture, substantial quantities of substances that are considered hazardous, extremely hazardous or toxic under worker safety and health laws and regulations. Although we implement controls and procedures designed to reduce continuing risk of adverse impacts and health and safety issues, we could incur substantial cleanup costs, fines and civil or criminal sanctions, third party property damage or personal injury claims as a result of violations, non-compliance or liabilities under these regulatory regimes required at our facilities.
We have environmental remediation liabilities at some of our owned operating facilities and have been designated as a potentially responsible party (PRP) with respect to certain third-party Superfund or similar waste disposal sites and other third party owned sites. Additionally, we have been notified that we may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against us. From time-to-time, we are a party to lawsuits and other proceedings involving alleged violations of, or liabilities arising from, environmental laws.
When our liability is probable and we can reasonably estimate our costs, we record environmental liabilities in our financial statements. In many cases, we are not able to determine whether we are liable, or if liability is probable, to reasonably estimate the loss or range of loss. Estimates of our liability remain subject to additional uncertainties, including the nature and extent of site contamination, available remediation alternatives, the extent of corrective actions that may be required, and the number and financial condition of other PRPs, as well as the extent of their responsibility for the remediation. We adjust our accruals to reflect new information as appropriate. Future adjustments could have a material adverse effect on our results of operations in a given period, but we cannot reliably predict the amounts of such future adjustments. Future developments, administrative actions or liabilities relating to environmental matters could have a material adverse effect on our financial condition or results of operations.
Our manufacturing processes, and the manufacturing processes of many of our suppliers and customers, are energy intensive and generate carbon dioxide and other Greenhouse Gases, and pending legislation or regulation of Greenhouse Gases, if enacted or adopted in an onerous form, could have a material adverse impact on our results of operations, financial condition and cash flows.
Political and scientific debates related to the impacts of emissions of greenhouse gases on the global climate are prevalent. Regulation or some form of legislation aimed at reducing the Greenhouse Gas emissions is currently being considered in the United States as well as globally. As a specialty alloy manufacturer, we will be affected, both directly and indirectly, if proposed climate change legislation, such as use of a cap and trade, is enacted which could have a material adverse impact on our results of operations, financial condition and cash flows.
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Product liability and product quality claims could adversely affect our operating results.
We produce ultra high-strength, high temperature and corrosion-resistant alloys designed for our customers demanding applications particularly in our aerospace and energy-end use markets. Failure of the materials that are included in our customers applications could give rise to substantial product liability claims. There can be no assurance that our insurance coverage will be adequate or continue to be available on terms acceptable to us. We have a complex manufacturing process necessary to meet our customers stringent product specifications. We are also required to adhere to various third party quality certifications and perform sufficient internal quality reviews to ensure compliance with established standards. If we fail to meet the customer specifications for their products, we may be subject to product quality costs and claims. These costs are generally not insured. The impacts of product liability and quality claims could have a material adverse impact on the results of our operations, financial condition and cash flows.
Our business subjects us to risks of litigation claims, as a routine matter, and this risk increases the potential for a loss that might not be covered by insurance.
These claims relate to the conduct of our currently and formerly owned businesses, including claims pertaining to product liability, commercial disputes, employment actions, employee benefits, compliance with domestic and federal laws, personal injury and tax issues. Due to the uncertainties of litigation, we can give no assurance that we will prevail on claims made against us in the lawsuits that we currently face or that additional claims will not be made against us in the future. The outcome of litigation cannot be predicted with certainty, and some of these lawsuits, claims or proceedings may be determined adversely to us. The resolution in any reporting period of one or more of these matters could have a material adverse effect on our results of operations for that period. We can give no assurance that any other matters brought in the future will not have a material effect on our financial condition, liquidity or results of operations.
A small number of our workforce is covered by a collective bargaining agreement and we may be subject to attempts to organize our other employees by a union which may cause work interruptions or stoppages.
Approximately 100 production employees at our Dynamet business unit located in Washington, PA are covered by a collective bargaining agreement. The agreement expires in August 2013. There can be no assurance that we will succeed in concluding collective bargaining agreements with the unions to replace those that expire. From time to time, the employees at our primary manufacturing facility in Reading, Pennsylvania, participate in election campaigns or union organizing attempts. There is no guarantee that future organization attempts will not result in union representation.
Our manufacturing processes are complex and depend upon critical, high cost equipment for which there may be only limited or no production alternatives.
It is possible that we could experience prolonged periods of reduced production due to unplanned equipment failures, and we could incur significant repair or replacement costs in the event of those failures. It is also possible that operations could be disrupted due to other unforeseen circumstances such as power outages, explosions, fires, floods, accidents and severe weather conditions. We must make regular, substantial capital investments and changes to our manufacturing processes to lower production costs, improve productivity, manufacture new or improved products and remain competitive. We may not be in a position to take advantage of business opportunities or respond to competitive pressures if we fail to update, replace or make additions to our equipment or our manufacturing processes in a timely manner. The cost to repair or replace much of our equipment or facilities would be significant. We cannot be certain that we will have sufficient internally generated cash or acceptable external financing to make necessary capital expenditures in the future.
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A significant portion of our manufacturing and production facilities are located in Reading, Pennsylvania, which increases our exposure to significant disruption to our business as a result of unforeseeable developments in a single geographic area.
It is possible that we could experience prolonged periods of reduced production due to unforeseen catastrophic events occurring in or around our manufacturing facilities in Reading, Pennsylvania. As a result, we may be unable to shift manufacturing capabilities to alternate locations, accept materials from suppliers, meet customer shipment needs or address other severe consequences that may be encountered. Our financial condition and results of our operations could be materially adversely affected.
We rely on third parties to supply energy consumed at each of our energy-intensive production facilities.
The prices for and availability of electricity, natural gas, oil and other energy resources are subject to volatile market conditions. These market conditions often are affected by political and economic factors beyond our control. Disruptions or lack of availability in the supply of energy resources could temporarily impair the ability to operate our production facilities. Further, increases in energy costs, or changes in costs relative to energy costs paid by competitors, has affected and may continue to adversely affect our profitability. To the extent that these uncertainties cause suppliers and customers to be more cost sensitive, increased energy prices may have an adverse effect on our results of operations and financial condition.
We consider acquisition, joint ventures and other business combination opportunities, as well as possible business unit dispositions, as part of our overall business strategy, which matters involve uncertainties and potential risks that we cannot predict or anticipate fully.
From time-to-time, management holds discussions with management of other companies to explore such opportunities. As a result, the relative makeup of the businesses comprising our Company is subject to change. Acquisitions, joint ventures and other business combinations involve various inherent risks, such as difficulties in integrating the operations, technologies, products and personnel of the acquired companies, diversion of managements attention from existing operations, difficulties in entering markets in which we have limited or no direct prior experience, dependence on unfamiliar supply chains, insufficient revenues to offset increased expenses associated with acquisitions, loss of key employees of the acquired companies, inaccurate assessment of undisclosed liabilities, difficulties in realizing projected efficiencies, synergies and cost savings, and increases in our debt or limitation on our ability to access additional capital when needed.
Our business may be impacted by external factors that we may not be able to control.
War, civil conflict, terrorism, natural disasters and public health issues including domestic or international pandemic have caused and could cause damage or disruption to domestic or international commerce by creating economic or political uncertainties. These events could result in a decrease in demand for our products, make it difficult or impossible to deliver orders to customers or receive materials from suppliers, affect the availability or pricing of energy sources or result in other severe consequences that may or may not be predictable. As a result, our business, financial condition and results of operations could be materially adversely affected.
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We believe that international sales, which are associated with various risks, will continue to account for a significant percentage of our future revenues.
Risks associated with international sales include without limitation: political and economic instability, including weak conditions in the worlds economies; accounts receivable collection; export controls; changes in legal and regulatory requirements; policy changes affecting the markets for our products; changes in tax laws and tariffs; and exchange rate fluctuations (which may affect sales to international customers and the value of profits earned on international sales when converted into dollars). In addition, we will need to invest in building our capabilities and infrastructure to meet our international growth goals. Any of these factors could materially adversely affect our results for the period in which they occur.
We value most of our inventory using the LIFO method, which could be repealed resulting in adverse affects on our cash flows and financial condition.
The cost of our inventories is primarily determined using the Last-In First-Out (LIFO) method. Under the LIFO inventory valuation method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials and other costs may have been incurred at significantly different values due to the length of time of our production cycle. Generally in a period of rising prices, LIFO recognizes higher costs of goods sold, which both reduces current income and assigns a lower value to the year-end inventory. Recent proposals have been initiated aimed at repealing the election to use the LIFO method for income tax purposes. According to these proposals, generally taxpayers that currently use the LIFO method would be required to revalue their LIFO inventory to its first-in, first-out (FIFO) value. As of June 30, 2010, if the FIFO method of inventory had been used instead of the LIFO method, our inventories would have been about $332 million higher. This increase in inventory would result in a one time increase in taxable income which would be taken into account ratably over the first taxable year and the following several taxable years. The repeal of LIFO could result in a substantial tax liability which could adversely impact our cash flows and financial condition.
We depend on the retention of key personnel.
Much of our future success depends on the continued service and availability of skilled personnel, including members of our executive management team, management, metallurgists and production positions. The loss of key personnel could adversely affect our ability to perform until suitable replacements are found.
We depend on our IT infrastructure to support the current and future information requirements of our operations.
Management relies on IT infrastructure, including hardware, network, software, people and processes, to provide useful information to support assessments and conclusions about operating performance. Our inability to produce relevant and/or reliable measures of operating performance in an efficient, cost-effective and well-controlled fashion may have significant negative impacts on our future operations.
Item 1B. | Unresolved Staff Comments |
None.
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Item 2. | Properties |
The locations of our primary manufacturing plants are: Reading, Pennsylvania; Hartsville, South Carolina; Washington, Pennsylvania; Orangeburg, South Carolina; Bridgeville, Pennsylvania; Orwigsburg, Pennsylvania; Clearwater, Florida; Elyria, Ohio; Woonsocket, Rhode Island; and Torshalla, Sweden. The Reading, Hartsville, Washington, Orangeburg, Bridgeville, Orwigsburg, Elyria, Woonsocket and Torshalla plants are owned. The Clearwater plant is owned, but the land is leased. Two administrative buildings in Torshalla are leased.
Our corporate offices, located in Wyomissing, Pennsylvania, are leased.
We also operate regional customer service and distribution centers, most of which are leased, at various locations in several states and foreign countries.
Our plants, customer service centers, and distribution centers were acquired or leased at various times over several years. There is an active maintenance program to ensure a safe operating environment and to keep facilities in good condition. In addition, we have had an active capital spending program to replace equipment as needed to keep it technologically competitive on a world-wide basis. We believe our facilities are in good condition and suitable for our business needs.
Item 3. | Legal Proceedings |
We are, from time to time, a party to litigation arising in the normal course of business. We do not believe that any of these actions, individually or in the aggregate, will have a material adverse effect on our financial position, liquidity, or results of operations.
13
PART II
Item 5. | Market for the Registrants Common Equity and Related Stockholder Matters |
Our common stock is listed on the New York Stock Exchange (NYSE) and traded under the symbol CRS. The following table sets forth, for the periods indicated, the high and low closing prices for our common stock as reported by the NYSE.
Fiscal Year 2010 | Fiscal Year 2009 | |||||||||||
Quarter Ended: |
High | Low | High | Low | ||||||||
September 30, |
$ | 25.66 | $ | 16.87 | $ | 42.65 | $ | 24.79 | ||||
December 31, |
$ | 27.90 | $ | 20.83 | $ | 25.17 | $ | 11.93 | ||||
March 31, |
$ | 36.60 | $ | 26.54 | $ | 23.89 | $ | 12.15 | ||||
June 30, |
$ | 42.52 | $ | 32.83 | $ | 24.74 | $ | 14.42 | ||||
Annual |
$ | 42.52 | $ | 16.87 | $ | 42.65 | $ | 11.93 | ||||
The range of our common stock price on the NYSE from July 1, 2010 to August 13, 2010 was $31.67 to $38.11. The closing price of the common stock was $32.53 on August 13, 2010.
We have paid quarterly cash dividends on our common stock for over 100 consecutive years. We paid a quarterly dividend of $0.18 per common share during each quarter of fiscal years 2010 and 2009.
As of August 13, 2010, there were 3,090 common stockholders of record.
Cumulative Total Stockholder Return
The graph below compares the cumulative total stockholder return on our common stock to the cumulative total return of the S&P MidCap Index and our Peer Group for each of the last five fiscal years ended June 30, 2010. The cumulative total return assumes an investment of $100 on June 30, 2005 and the reinvestment of any dividends during the period. The S&P MidCap 400 Index is the most widely used index for mid-sized companies. The companies in our Peer Group are: AK Steel Holding Corp., Allegheny Technologies, Inc., Daido Steel Company Limited, Gloria Material Technology Corp., Haynes International Inc., Kennametal Inc., Ladish Company Inc., Parker-Hannifin Corp., Precision Industries Castparts Corp., Reliance Steel and Aluminum Company, RTI International Metals Inc., Sandvik AB, Schmolz + Bichenbach AG, Steel Dynamics Inc., The Timken Company, Titanium Metals Corp., Universal Stainless & Alloy Products, Voestalpine AG. The total stockholder return for the Peer Group is weighted according to the respective issuers stock market capitalization at the beginning of each period.
14
6/05 | 6/06 | 6/07 | 6/08 | 6/09 | 6/10 | |||||||
Carpenter Technology Corporation |
100.00 | 224.74 | 255.81 | 173.19 | 85.37 | 138.47 | ||||||
S&P Midcap 400 |
100.00 | 112.98 | 133.89 | 124.07 | 89.30 | 111.56 | ||||||
Peer Group |
100.00 | 181.13 | 287.03 | 257.14 | 136.90 | 180.07 |
15
Item 6. | Selected Financial Data |
Five-Year Financial Summary
In millions, except per share data
(Fiscal years ended June 30,)
2010 | 2009 (a) | 2008 (b) | 2007 | 2006 | |||||||||||
Summary of Operations: |
|||||||||||||||
Net sales |
$ | 1,198.6 | $ | 1,362.3 | $ | 1,953.5 | $ | 1,839.0 | $ | 1,465.2 | |||||
Operating income |
11.7 | 64.0 | 293.6 | 304.4 | 293.4 | ||||||||||
Income from continuing operations |
2.1 | 47.9 | 200.5 | 215.2 | 200.3 | ||||||||||
Income from discontinued operations, net |
| | 77.2 | 12.0 | 11.5 | ||||||||||
Net income |
$ | 2.1 | $ | 47.9 | $ | 277.7 | $ | 227.2 | $ | 211.8 | |||||
Financial Position at Year-End: |
|||||||||||||||
Cash and cash equivalents |
$ | 265.4 | $ | 340.1 | $ | 403.3 | $ | 300.8 | $ | 352.8 | |||||
Marketable securities, current |
$ | 105.2 | $ | 15.0 | $ | 5.3 | $ | 372.7 | $ | 141.8 | |||||
Total assets |
$ | 1,583.2 | $ | 1,497.4 | $ | 1,712.2 | $ | 2,025.7 | $ | 1,887.9 | |||||
Long-term obligations, net of current portion (including convertible preferred stock) |
$ | 259.6 | $ | 258.6 | $ | 276.7 | $ | 299.5 | $ | 351.1 | |||||
Per Common Share: |
|||||||||||||||
Net earnings: |
|||||||||||||||
Basic |
|||||||||||||||
Continuing operations |
$ | 0.04 | $ | 1.08 | $ | 4.11 | $ | 4.16 | $ | 3.94 | |||||
Discontinued operations |
$ | | $ | | $ | 1.59 | $ | 0.24 | $ | 0.23 | |||||
$ | 0.04 | $ | 1.08 | $ | 5.70 | $ | 4.40 | $ | 4.17 | ||||||
Diluted |
|||||||||||||||
Continuing operations |
$ | 0.04 | $ | 1.08 | $ | 4.11 | $ | 4.09 | $ | 3.82 | |||||
Discontinued operations |
$ | | $ | | $ | 1.58 | $ | 0.23 | $ | 0.22 | |||||
$ | 0.04 | $ | 1.08 | $ | 5.69 | $ | 4.32 | $ | 4.04 | ||||||
Cash dividend-common |
$ | 0.72 | $ | 0.72 | $ | 0.63 | $ | 0.4875 | $ | 0.30 | |||||
Weighted Average Common Shares Outstanding: |
|||||||||||||||
Basic |
43.9 | 43.9 | 48.5 | 51.5 | 50.5 | ||||||||||
Diluted |
44.4 | 44.2 | 48.7 | 52.5 | 52.2 | ||||||||||
(a) | Fiscal year 2009 included $9.4 million of restructuring charges related to the shutdown and closure of our U.K. metal strip manufacturing operations. See Restructuring Charges footnote in the Notes to the Consolidated Financial Statements included in Item 8 Financial Statements and Supplementary Data of this report. |
(b) | Fiscal year 2008 included a $109.6 million pre-tax gain on the sale of our ceramics and metals shapes businesses. The results of operations of the divested business units prior to the divestitures are presented as discontinued operations. See Divestitures and Acquisition footnote in the Notes to the Consolidated Financial Statements included in Item 8 Financial Statements and Supplementary Data of this report. |
16
See Item 7.Managements 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. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Background and General
Our discussions below in this Item 7 should be read in conjunction with our consolidated financial statements, including the notes thereto, included in this annual report on Form 10-K.
We are engaged in the manufacturing, fabrication, and distribution of specialty metals. We primarily process basic raw materials such as nickel, cobalt, titanium, manganese, chromium, molybdenum, 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 and narrow strip in many sizes and finishes. We also produce certain metal powders. Our sales are distributed directly from our production plants and distribution network as well as through independent distributors. Unlike many other specialty steel producers, we operate our own worldwide network of service/distribution centers. These service centers, located in the United States, Canada, Mexico, Europe and Asia allow us to work more closely with customers and to offer various just-in-time stocking programs.
As part of our overall business strategy, we have
sought out and considered opportunities related to strategic acquisitions and joint collaborations aimed at broadening our offering to the marketplace. We have participated with other companies to explore potential terms and structure of such
Business Trends
Selected financial results for the past three fiscal years are summarized below:
Fiscal Year | |||||||||
($ in millions, except per share data) | 2010 | 2009 | 2008 | ||||||
Net sales |
$ | 1,198.6 | $ | 1,362.3 | $ | 1,953.5 | |||
Net sales excluding surcharges (1) |
$ | 921.7 | $ | 1,055.2 | $ | 1,369.0 | |||
Operating income excluding pension EID expense and restructuring costs (1) |
$ | 49.6 | $ | 73.5 | $ | 315.3 | |||
Income from continuing operations |
$ | 2.1 | $ | 47.9 | $ | 200.5 | |||
Net income |
$ | 2.1 | $ | 47.9 | $ | 277.7 | |||
Diluted earnings per share from continuing operations |
$ | 0.04 | $ | 1.08 | $ | 4.12 | |||
Diluted earnings per share |
$ | 0.04 | $ | 1.08 | $ | 5.70 | |||
Purchases of property, equipment and software |
$ | 44.2 | $ | 116.3 | $ | 118.9 | |||
Free cash flow (1) |
$ | 40.1 | $ | 11.2 | $ | 213.4 | |||
Pounds sold (in thousands) (2) |
170,820 | 167,040 | 223,460 |
(1) |
See the section Non-GAAP Financial Measures below for further discussion of these financial measures. |
(2) |
Includes specialty and titanium alloys, stainless steel and powder materials |
17
Our sales are across a diversified list of end-use markets. The table below summarizes our estimated sales by market over the past three fiscal years.
Fiscal Year | ||||||||||||||||||
($ in millions) | 2010 | 2009 | 2008 | |||||||||||||||
Aerospace |
$ | 519.7 | 43 | % | $ | 582.9 | 43 | % | $ | 744.4 | 38 | % | ||||||
Industrial |
275.0 | 23 | 310.4 | 23 | 465.4 | 23 | ||||||||||||
Energy |
79.8 | 7 | 152.0 | 11 | 229.5 | 12 | ||||||||||||
Medical |
104.4 | 9 | 113.5 | 8 | 132.1 | 7 | ||||||||||||
Consumer |
119.1 | 10 | 104.3 | 8 | 169.0 | 9 | ||||||||||||
Automotive |
100.6 | 8 | 99.2 | 7 | 213.1 | 11 | ||||||||||||
Total net sales |
$ | 1,198.6 | 100 | % | $ | 1,362.3 | 100 | % | $ | 1,953.5 | 100 | % | ||||||
The table below shows our net sales by major product class for the past three fiscal years:
Fiscal Year | ||||||||||||||||||
($ in millions) | 2010 | 2009 | 2008 | |||||||||||||||
Special alloys |
$ | 637.8 | 54 | % | $ | 694.6 | 51 | % | $ | 1,019.8 | 53 | % | ||||||
Stainless steels |
398.3 | 33 | 460.1 | 34 | 668.1 | 34 | ||||||||||||
Titanium products |
112.4 | 9 | 141.4 | 10 | 180.6 | 9 | ||||||||||||
Other materials |
50.1 | 4 | 66.2 | 5 | 85.0 | 4 | ||||||||||||
Total net sales |
$ | 1,198.6 | 100 | % | $ | 1,362.3 | 100 | % | $ | 1,953.5 | 100 | % | ||||||
Impact of Raw Material Prices and Product Mix
We value most of our inventory utilizing the last-in, first-out (LIFO) inventory costing methodology. Under the LIFO inventory costing method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials may have been acquired at potentially significantly different values due to the length of time from the acquisition of the raw materials to the sale of the processed finished goods to the customers. In a period of rising raw material costs, the LIFO inventory valuation normally results in higher costs of sales. Conversely, in a period of decreasing raw material costs, the LIFO inventory valuation normally results in lower costs of sales.
The volatility of the costs of raw materials has impacted our operations over the past several years. We, and others in our industry, generally have been able to pass cost increases on major raw materials through to our customers using surcharges that are structured to recover increases in raw material costs. Generally, the formula used to calculate a surcharge is based on published prices of the respective raw materials for the previous month, which correlates to the prices we pay for our raw material purchases. However, a portion of our surcharges may be calculated based on the raw material prices at the time of order, which creates a lag between surcharge revenue and corresponding raw material costs recognized in costs of sales. The surcharge mechanism protects our net income on such sales. However, surcharges have had a dilutive effect on our gross margin and operating margin percentages as described later in this report.
A portion of our business consists of sales to customers under firm price sales arrangements. Firm price sales arrangements involve a risk of profit margin fluctuations, particularly when raw material prices are volatile. In order to reduce the risk of fluctuating profit margins on these sales, we enter into commodity forward contracts to purchase certain critical raw materials necessary to produce the related products sold. Firm price sales arrangements generally include certain annual purchasing commitments and consumption schedules agreed to by the customers at selling prices based on raw material prices at the time the arrangements are
18
established. If a customer fails to meet the volume commitments (or the consumption schedule deviates from the agreed-upon terms of the firm price sales arrangements), the Company may need to absorb the gains or losses associated with the commodity forward contracts on a temporary basis. Gains or losses associated with commodity forward contracts are reclassified to earnings/loss when earnings are impacted by the hedged transaction. Because we value most of our inventory under the LIFO costing methodology, the gains and/or losses associated with commodity forward contracts may not impact the same period that the firm price sales arrangements revenue is recognized, and comparisons of gross profit from period to period may be impacted.
We produce hundreds of grades of materials, with a wide range of pricing and profit levels depending on the grade. In addition, our product mix within a period is subject to the fluctuating order patterns of our customers as well as decisions we may make to participate in certain lower margin business in order to utilize available capacity. While we expect to see positive contribution from a more favorable product mix in our margin performance over time, the impact by period may fluctuate, and period-to-period comparisons may vary.
Net Pension Expense (Income )
Net pension expense (income), as we define it below, includes the net periodic benefit costs related to both our pension and other postretirement plans. Net pension expense is recorded in accounts that are included in both the cost of sales and selling, general and administrative expenses lines of our statements of income. The following is a summary of the classification of net pension expense included in our statements of income during fiscal years 2010, 2009 and 2008:
Fiscal Year | ||||||||||
($ in millions) | 2010 | 2009 | 2008 | |||||||
Cost of sales |
$ | 44.6 | $ | 12.0 | $ | (3.7 | ) | |||
Selling, general and administrative expenses |
16.7 | 8.6 | 3.6 | |||||||
Pension settlement charges included in restructuring charges |
| 4.4 | | |||||||
Net pension expense (income) |
$ | 61.3 | $ | 25.0 | $ | (0.1 | ) | |||
Net pension expense (income) is determined annually based on beginning of year balances, and is recorded ratably throughout the fiscal year, unless a significant re-measurement event occurs. The following is a summary of the components of net pension expense during fiscal year 2010, 2009 and 2008:
Fiscal Year | ||||||||||
($ in millions) | 2010 | 2009 | 2008 | |||||||
Service cost |
$ | 23.3 | $ | 20.2 | $ | 21.6 | ||||
Pension earnings, interest and deferrals |
38.0 | 0.4 | (21.7 | ) | ||||||
Pension settlement charges included in restructuring charges |
| 4.4 | | |||||||
Net pension expense (income) |
$ | 61.3 | $ | 25.0 | $ | (0.1 | ) | |||
The service cost component of net pension expense represents the estimated cost of future pension liabilities earned associated with active employees. The pension earnings, interest and deferrals expense is comprised of the expected return on plan assets, interest costs on the projected benefit obligations of the plans, and amortization of actuarial gains and losses and prior service costs. Pension earnings, interest and deferrals expenses is impacted by the financial markets and increased significantly during fiscal year 2010 and 2009 principally due to the decline in market value of the securities held by the plans as of June 30, 2009 and 2008.
19
Operating Performance Overview
Market conditions were challenging at the start of fiscal year 2010. As we ended the fiscal year, we are encouraged with the strength and momentum of the business. Our forward order book is robust. Our utilization rates are increasing and we are adding production workers. It is critical that we remain well positioned to meet growing customer demand as it unfolds.
Fiscal year 2010 highlights include the following:
|
We increased our share in key markets by enhancing our relationships with key customers and diversifying our customer base. |
|
We invested further in research and development, which will lead to a more robust new product pipeline and make an important contribution to overall growth. |
|
We have increased our external collaboration efforts to position us at the forefront of new technology and innovation which will help us grow the strategic parts of our business. |
|
We strengthened our financial position, which should enable us to pursue growth opportunities. |
We had a solid year of cash flow performance and remain financially strong. We are excited about our long-term growth opportunities, particularly in aerospace and energy and we remain focused on ultimately exceeding our prior peak level of financial performance.
Results of Operations Fiscal Year 2010 Compared to Fiscal Year 2009
For fiscal year 2010, we reported net income of $2.1 million, or $0.04 per diluted share, compared with income of $47.9 million, or $1.08 per diluted share, a year earlier. Our fiscal year 2010 results reflect a trend of improving revenues and profit throughout the fiscal year. For fiscal year 2010 lower revenues and the impacts of an unfavorable shift in product mix have been offset by cost improvement initiatives. In addition, as discussed above, our net income results reflect the $36.3 million increase in our net pension expense in fiscal year 2010.
Net Sales
Net sales for fiscal year 2010 were $1,198.6 million, which was a 12 percent decrease from fiscal year 2009. Excluding surcharge revenues, sales were 13 percent lower than a year earlier on 3 percent higher volume.
Geographically, sales outside the United States decreased 21 percent from a year ago to $377.8 million. International sales remained fairly consistent as a percentage of our total net sales, representing 32 percent and 35 percent for fiscal year 2010 and fiscal year 2009, respectively.
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Sales by End-Use Markets
We sell to customers across diversified end-use markets. During fiscal year 2010, we changed the manner in which sales are classified by end-use market so that we could better evaluate our sales results from period to period. In order to make the discussion of net sales by end-use market meaningful, we have reclassified the fiscal year 2009 sales by end-use market balances to conform to the fiscal year 2010 presentation. The following table includes comparative information for our estimated net sales by principal end-use markets:
Fiscal Year |
$ Increase |
% Increase |
|||||||||||
($ in millions) | 2010 | 2009 | (Decrease) | (Decrease) | |||||||||
Aerospace |
$ | 519.7 | $ | 582.9 | $ | (63.2 | ) | (11 | )% | ||||
Industrial |
275.0 | 310.4 | (35.4 | ) | (11 | ) | |||||||
Energy |
79.8 | 152.0 | (72.2 | ) | (48 | ) | |||||||
Medical |
104.4 | 113.5 | (9.1 | ) | (8 | ) | |||||||
Consumer |
119.1 | 104.3 | 14.8 | 14 | |||||||||
Automotive |
100.6 | 99.2 | 1.4 | 1 | |||||||||
Total net sales |
$ | 1,198.6 | $ | 1,362.3 | $ | (163.7 | ) | (12 | )% | ||||
The following table includes comparative information for our estimated net sales by the same principal end-use markets, but excluding surcharge revenues:
Fiscal Year |
$ Increase |
% Increase |
|||||||||||
($ in millions) | 2010 | 2009 | (Decrease) | (Decrease) | |||||||||
Aerospace |
$ | 395.1 | $ | 450.0 | $ | (54.9 | ) | (12 | )% | ||||
Industrial |
207.9 | 228.4 | (20.5 | ) | (9 | ) | |||||||
Energy |
63.9 | 126.7 | (62.8 | ) | (50 | ) | |||||||
Medical |
86.9 | 94.7 | (7.8 | ) | (8 | ) | |||||||
Consumer |
89.1 | 79.1 | 10.0 | 13 | |||||||||
Automotive |
78.8 | 76.3 | 2.5 | 3 | |||||||||
Total net sales excluding surcharge revenues |
$ | 921.7 | $ | 1,055.2 | $ | (133.5 | ) | (13 | )% | ||||
Sales to the aerospace market decreased 11 percent from fiscal year 2009 to $519.7 million. Excluding surcharge revenue, such sales decreased 12 percent on 8 percent lower shipment volume. The sales decline reflects lower airplane build levels, reductions of inventory in the supply chain and a less favorable mix of products.
Industrial market sales decreased 11 percent from fiscal year 2009 to $275.0 million. Adjusted for surcharge revenue, such sales decreased approximately 9 percent while volumes increased 6 percent. The results reflect the higher demand for lower value products sold primarily through distributors. Industrial markets continue to show signs of steady improvement. With many of our larger customers in this segment, our first and second quarter backlogs of fiscal year 2011 are already full.
Sales to the energy market of $79.8 million reflected a 48 percent decrease from the fiscal year 2009. Excluding surcharge revenue, such sales decreased 50 percent on 48 percent lower shipment volume. The sales results reflect the impacts of excess inventories in the supply chain, as a result of significantly lower oil and gas drilling along with sluggish demand for high-capacity industrial gas turbines. We are continuing to focus on diversifying our customer base, market segments served and product offerings in the broader energy market. We think that the energy market has the potential to be our fastest growing market.
21
Sales to the medical market decreased 8 percent to $104.4 million from a year ago. Adjusted for surcharge revenue, such sales decreased 8 percent, while volumes increased 7 percent. The shipment volume increase reflects the impact of an increase in demand for stainless steel materials used in medical implants and gains in market share with key customers, while the revenue decline is attributable to lower raw material costs for titanium and a less favorable mix of products.
Sales to the consumer market increased 14 percent to $119.1 million from a year ago. Adjusted for surcharge revenue, such sales increased 13 percent with shipment volume higher by 24 percent. The results reflect increased demand in all segments along with an unfavorable shift in product mix.
Automotive market sales increased 1 percent from the fiscal year 2009 to $100.6 million. Excluding surcharge revenue, such sales
increased 3 percent on 40 percent higher shipment volume. The results reflect higher volumes associated with a steady upswing in demand from the same period last year coupled with an unfavorable shift in product mix. Our objective is to increase our
Sales by Product Class
The following table includes comparative information for our net sales by major product class:
Fiscal Year | $ | % | |||||||||||
($ in millions) | 2010 | 2009 | Decrease | Decrease | |||||||||
Special alloys |
$ | 637.8 | $ | 694.6 | $ | (56.8 | ) | (8 | )% | ||||
Stainless steels |
398.3 | 460.1 | (61.8 | ) | (13 | ) | |||||||
Titanium products |
112.4 | 141.4 | (29.0 | ) | (21 | ) | |||||||
Other materials |
50.1 | 66.2 | (16.1 | ) | (24 | ) | |||||||
Total net sales |
$ | 1,198.6 | $ | 1,362.3 | (163.7 | ) | (12 | )% | |||||
The following table includes comparative information for our net sales by the same major product class, but excluding surcharge revenues:
Fiscal Year | $ | % | |||||||||||
($ in millions) | 2010 | 2009 | Decrease | Decrease | |||||||||
Special alloys |
$ | 449.6 | $ | 499.2 | $ | (49.6 | ) | (10 | )% | ||||
Stainless steels |
311.7 | 349.8 | (38.1 | ) | (11 | ) | |||||||
Titanium products |
112.4 | 141.4 | (29.0 | ) | (21 | ) | |||||||
Other materials |
48.0 | 64.8 | (16.8 | ) | (26 | ) | |||||||
Total net sales excluding surcharge revenues |
$ | 921.7 | $ | 1,055.2 | $ | (133.5 | ) | (13 | )% | ||||
Sales of special alloys products decreased 8 percent in fiscal year 2010 as compared with a year ago to $637.8 million. Excluding surcharge revenue, sales decreased 10 percent on a 5 percent increase in shipment volume. The sales results principally reflect the decline in demand from the higher value aerospace and energy market products.
Sales of stainless steels decreased 13 percent as compared with a year ago. Excluding surcharge revenues, such sales decreased by 11 percent on a 1 percent higher shipment volume. The results reflect a moderate increase in demand that was more than offset by an unfavorable shift in product mix in materials used in the automotive, industrial and consumer markets.
22
Sales of titanium products decreased 21 percent as compared with a year ago on 8 percent lower shipment volume. The results reflect the impact of significantly lower titanium prices and decreased demand for titanium products used in the aerospace end-use market.
Gross Profit
Gross profit in fiscal year 2010 decreased to $144.8 million, or 12.1 percent of net sales (15.7 percent of net sales excluding surcharges), from $207.2 million, or 15.2 percent of net sales (19.6 percent of net sales excluding surcharges), a year ago. The results primarily reflect the favorable impacts of higher volumes and cost savings initiatives in fiscal year 2010 offset by an unfavorable shift in product mix and the higher net pension expense included in costs of sales during fiscal year 2010.
Our surcharge mechanism is structured to recover increases in raw material costs, although generally with a lag effect. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharges on gross margin for fiscal years 2010 and 2009. See the section Non-GAAP Financial Measures below for further discussion of these financial metrics.
Fiscal Year | ||||||||
($ in millions) | 2010 | 2009 | ||||||
Net sales |
$ | 1,198.6 | $ | 1,362.3 | ||||
Less: surcharge revenue |
276.9 | 307.1 | ||||||
Net sales excluding surcharges |
$ | 921.7 | $ | 1,055.2 | ||||
Gross profit |
$ | 144.8 | $ | 207.2 | ||||
Gross margin |
12.1 | % | 15.2 | % | ||||
Gross margin excluding dilutive effect of surcharges |
15.7 | % | 19.6 | % | ||||
In addition to the impact of the surcharge mechanism, fluctuations in raw material prices (combined with fluctuations in inventory levels) have impacted our gross profit from year to year. We estimate that the effect of such combined fluctuations had no impact on gross margin in fiscal year 2010 and negatively impacted gross margin by 90 basis points in fiscal year 2009. We estimate that the lag effect of the surcharge mechanism negatively impacted gross margin by approximately 150 basis points during fiscal year 2010, compared to a positive impact on gross margin of approximately 100 basis points during fiscal year 2009.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal year 2010 were $133.1 million, or 11.1 percent of net sales (14.4 percent of net sales excluding surcharges), compared to $133.8 million, or 9.8 percent of net sales (12.7 percent of net sales excluding surcharges), in fiscal year 2009. Excluding the impact of changes in net pension expense discussed above, expenses decreased by 7 percent over fiscal year 2009.
Restructuring Charges
During fiscal year 2009, we recorded $9.4 million of restructuring charges associated with the closure of our metal strip manufacturing facility in the United Kingdom (U.K.). The charges recorded consisted principally of pension settlement charges from the elimination of a U.K. defined benefit pension plan, certain asset write-downs, payments of employee severance costs and other exit costs.
23
Operating Income
Our operating income in fiscal year 2010 decreased to $11.7 million as compared with $64.0 million in fiscal year 2009. The lower operating income principally reflects lower gross profit levels. The results for fiscal year 2009 included approximately $9.4 million of restructuring charges associated with the closure of a UK facility.
Operating income has been significantly impacted by our pension earnings, interest and deferrals (pension EID) portion of our net pension expense, which may be volatile based on conditions in the financial markets. The following presents our operating income and operating margin, in each case excluding the impact of surcharges on net sales and excluding the impacts of pension EID expense and restructuring costs from operating income. We present and discuss these financial measures because management believes removing the impact of volatile and restructuring charges provides a more consistent and meaningful basis for comparing results of operations from period to period. See the section Non-GAAP Financial Measures below for further discussion of these financial measures.
($ in millions) | Fiscal Year | |||||||
2010 | 2009 | |||||||
Net sales |
$ | 1,198.6 | $ | 1,362.3 | ||||
Less: surcharge revenue |
276.9 | 307.1 | ||||||
Net sales excluding surcharges |
$ | 921.7 | $ | 1,055.2 | ||||
Operating income |
$ | 11.7 | $ | 64.0 | ||||
Add back: Pension EID expense |
37.9 | 0.1 | ||||||
Add back: Restructuring costs |
| 9.4 | ||||||
Operating income excluding pension EID expense and restructuring costs |
$ | 49.6 | $ | 73.5 | ||||
Operating margin excluding surcharges, pension EID expense and restructuring costs |
5.4 | % | 7.0 | % | ||||
Interest Expense
Fiscal year 2010 interest expense of $17.8 million increased 11 percent from $16.1 million in fiscal year 2009. Interest on substantially all of our debt was at a fixed rate. The increase in interest expense is attributable to the $3.0 million decrease in the amount of interest capitalized associated with ongoing construction projects during fiscal year 2010 as compared with fiscal year 2009 which was offset by the reductions in outstanding debt related to current year repayments.
Other Income, Net
Other income for fiscal year 2010 was $10.8 million as compared with $15.1 million a year ago. The decrease principally reflected lower returns on invested cash balances and less foreign exchange gains in fiscal year 2010 as compared with fiscal year 2009.
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Income Taxes
Our effective tax rate (income tax expense as a percent of income before taxes) for fiscal year 2010 was 55.3 percent as compared to 24.0 percent in fiscal year 2009. The fiscal year 2010 tax rate was higher than the statutory rate of 35 percent, primarily due to the following items. We recorded an income tax expense charge in the amount of $5.9 million to reduce the value of the Companys deferred tax asset previously established for anticipated retiree health care liabilities. Offsetting this amount, there was a reduction in income tax expense in the amount of $3.2 million due to the reversal of certain unrecognized tax benefits due to the lapse of certain statutes of limitations. Our lower taxable income level also resulted in our permanent book to tax differences having a more significant impact on the effective tax rate.
The fiscal year 2009 tax rate was lower than the statutory rate of 35 percent, primarily due to the following items. We recorded a reduction in income tax expense in the amount of $3.5 million or 5.6 percent of pre-tax income related to research and development tax credits. In addition, there was a reduction in income tax expense in the amount of $3.3 million or 5.2 percent which was primarily due to the reversal of certain unrecognized tax benefits due to the lapse of certain statutes of limitations. These items were partially offset by an increase in tax expense in the amount of $4.6 million or 7.4 percent related to additional valuation allowance on deferred tax assets for state net operating losses. Our lower taxable income level generated a more significant impact on the effective tax rate for these items.
See Note 18 to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data for a full reconciliation of the statutory federal tax rate to the effective tax rates.
Business Segment Results
Summary information about our operating results on a segment basis is set forth below. For more detailed segment information, see Note 20 to the consolidated financial statements included in Item 8. - Financial Statements and Supplementary Data.
Advanced Metals Operations Segment
Net sales in fiscal year 2010 for the AMO segment were $853.0 million, as compared with $957.4 million in fiscal year 2009. Excluding surcharge revenues, sales decreased 10 percent from a year ago. The fiscal year 2010 net sales reflected an increase in pounds shipped of 8 percent as compared to fiscal year 2009. The results reflects higher demand in the automotive, industrial and consumer markets more than offset by an unfavorable shift in product mix.
Operating income for the AMO segment in fiscal year 2010 was $11.8 million, or 1.4 percent of net sales (1.7 percent of net sales excluding surcharge revenues), compared to $34.1 million, or 3.6 percent of net sales (4.5 percent of net sales excluding surcharge revenues), a year ago. The decrease in operating income reflects an unfavorable shift in product mix during fiscal year 2010, as compared to fiscal year 2009. In addition, fiscal year 2009 operating income included the positive impacts of the lag effect of the surcharge mechanism as compared with a negative impact of the lag effect in fiscal year 2010.
Premium Alloys Operations Segment
Net sales for fiscal year 2010 for the PAO segment decreased 16 percent to $348.3 million as compared with $413.2 million for fiscal year 2009. Excluding surcharge revenues, net sales decreased 20 percent on 16 percent lower shipment volumes. Both the sales and shipment volume decreases were due to lower demand, particularly in our energy end use market.
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Operating income for the PAO segment for fiscal year 2010 was $71.2 million, or 20.4 percent of net sales (28.6 percent of net sales excluding surcharge revenues), as compared with $76.9 million, or 18.6 percent of net sales (24.7 percent of net sales excluding surcharge revenues) for fiscal year 2009. The decrease in operating income principally reflects the lower shipment volume in the current year as well as an unfavorable shift in product mix. In addition, fiscal year 2009 operating income included negative impacts related to the timing of raw material hedges as compared with no significant impacts from the timing of raw material hedges in fiscal year 2010.
Results of Operations Fiscal Year 2009 Compared to Fiscal Year 2008
For fiscal year 2009, we reported income from continuing operations of $47.9 million, or $1.08 per diluted share, compared with income from continuing operations of $200.5 million, or $4.12 per diluted share, a year earlier. Continued weak global manufacturing activity affected demand throughout our customer base, and especially in our higher margin markets of energy and aerospace.
Net Sales
Net sales for fiscal year 2009 were $1,362.3 million, which was a 30 percent decrease from fiscal year 2008. Excluding surcharge revenues, sales were 23 percent lower than a year earlier.
Geographically, sales outside the United States decreased 27 percent in fiscal year 2009 to $477.0 million. International sales remained fairly consistent as a percentage of our total net sales, representing 35 percent and 34 percent for fiscal year 2009 and fiscal year 2008, respectively.
Sales by End-Use Markets
We sell to customers across diversified end-use markets. The following table includes comparative information for our estimated net sales by principal end-use markets:
Fiscal Year | $ | % | |||||||||||
($ in millions) | 2009 | 2008 | Decrease | Decrease | |||||||||
Aerospace |
$ | 582.9 | $ | 744.4 | $ | (161.5 | ) | (22 | )% | ||||
Industrial |
310.4 | 465.4 | (155.0 | ) | (33 | ) | |||||||
Energy |
152.0 | 229.5 | (77.5 | ) | (34 | ) | |||||||
Medical |
113.5 | 132.1 | (18.6 | ) | (14 | ) | |||||||
Consumer |
104.3 | 169.0 | (64.7 | ) | (38 | ) | |||||||
Automotive |
99.2 | 213.1 | (113.9 | ) | (53 | ) | |||||||
Total net sales |
$ | 1,362.3 | $ | 1,953.5 | $ | (591.2 | ) | (30 | )% | ||||
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The following table includes comparative information for our estimated net sales by the same principal end-use markets, but excluding surcharge revenues:
Fiscal Year | $ | % | |||||||||||
($ in millions) | 2009 | 2008 | Decrease | Decrease | |||||||||
Aerospace |
$ | 450.0 | $ | 520.5 | $ | (70.5 | ) | (14 | )% | ||||
Industrial |
228.4 | 306.1 | (77.7 | ) | (25 | ) | |||||||
Energy |
126.7 | 171.4 | (44.7 | ) | (26 | ) | |||||||
Medical |
94.7 | 109.7 | (15.0 | ) | (14 | ) | |||||||
Consumer |
79.1 | 113.1 | (34.0 | ) | (30 | ) | |||||||
Automotive |
76.3 | 146.9 | (70.6 | ) | (48 | ) | |||||||
Total net sales excluding surcharge revenues |
$ | 1,055.2 | $ | 1,367.7 | $ | (312.5 | ) | (23 | )% | ||||
Sales to the aerospace market decreased 22 percent from fiscal year 2008 to $582.9 million. Excluding surcharge revenue, such sales decreased 14 percent on 13 percent lower shipment volume. The sales decline reflects the continued impact of a reduction in airplane build schedules and lower overall passenger miles. Excess inventory in jet engines and fasteners also contributed to the lower volumes in fiscal year 2009.
Industrial market sales decreased 33 percent from fiscal year 2008 to $310.4 million. Adjusted for surcharge revenue, such sales decreased approximately 25 percent as a result of a 26 percent decrease in shipment volume. The results reflect competitive pricing pressures in more commodity-oriented applications and reduced overall demand for materials used in valves, fittings, fasteners, and general industrial applications as customers are purchasing limited quantities on an as-needed basis.
Sales to the energy market of $152.0 million reflected a 34 percent decrease from the fiscal year 2008. Excluding surcharge revenue, such sales decreased 26 percent from a year ago on lower shipment volume of 34 percent. The decline in energy sales and shipment volumes principally reflected lower oil and gas exploration activity in the face of weak demand for oil. Declining market demand and high customer inventory have also reduced shipments and sales levels to the power generation sector.
Sales to the medical market decreased 14 percent to $113.5 million from a year ago. Adjusted for surcharge revenue, such sales decreased 14 percent, while volumes increased 10 percent. The strong shipment volume reflects higher demand in orthopedic implant and medical instrument applications, while the revenue decline reflects the impact of lower titanium costs and a leaner mix of products. Demand is driven primarily by steady increases in the number of implant procedures in the U.S., Japan and the EU.
Sales to the consumer market decreased 38 percent to $104.3 million from a year ago. Adjusted for surcharge revenue, such sales decreased 30 percent with shipment volume lower by 21 percent. The decline reflects lower sales across all sectors, led by housing and electronics as customers and distributors attempt to conserve cash in light of credit availability concerns.
Automotive market sales decreased 53 percent from the fiscal year 2008 to $99.2 million. Excluding surcharge revenue, such sales decreased 48 percent on 44 percent lower shipment volume. Sharply lower consumer spending and tighter credit continued to suppress auto sales, resulting in the further deterioration in production rates. Lower inventory levels in the supply chain reflect customers with demand focused on spot purchases of material with short lead times.
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Sales by Product Class
The following table includes comparative information for our net sales by major product class:
Fiscal Year | $ | % | |||||||||||
($ in millions) | 2009 | 2008 | Decrease | Decrease | |||||||||
Special alloys |
$ | 694.6 | $ | 1,019.8 | $ | (325.2 | ) | (32 | )% | ||||
Stainless steels |
460.1 | 668.1 | (208.0 | ) | (31 | ) | |||||||
Titanium products |
141.4 | 180.6 | (39.2 | ) | (22 | ) | |||||||
Other materials |
66.2 | 85.0 | (18.8 | ) | (22 | ) | |||||||
Total net sales |
$ | 1,362.3 | $ | 1,953.5 | $ | (591.2 | ) | (30 | )% | ||||
The following table includes comparative information for our net sales by the same major product class, but excluding surcharge revenues:
Fiscal Year | $ | % | |||||||||||
($ in millions) | 2009 | 2008 | Decrease | Decrease | |||||||||
Special alloys |
$ | 499.2 | $ | 647.1 | $ | (147.9 | ) | (23 | )% | ||||
Stainless steels |
349.8 | 458.4 | (108.6 | ) | (24 | ) | |||||||
Titanium products |
141.4 | 180.6 | (39.2 | ) | (22 | ) | |||||||
Other materials |
64.8 | 81.6 | (16.8 | ) | (21 | ) | |||||||
Total net sales excluding surcharge revenues |
$ | 1,055.2 | $ | 1,367.7 | $ | (312.5 | ) | (23 | )% | ||||
Sales of special alloys products decreased 32 percent in fiscal year 2009 as compared with a year ago to $694.6 million. The sales decrease principally reflects the decline in demand from the aerospace and energy markets.
Sales of stainless steels decreased 31 percent as compared with a year ago. Excluding surcharge revenues, such sales decreased by 24 percent on 28 percent lower shipment volume. The decrease resulted primarily from reduced shipments of materials used in the automotive, industrial and consumer markets.
Sales of titanium products decreased 22 percent as compared with a year ago on 10 percent lower shipment volume. The results reflect the impact of significantly lower titanium prices and decreased demand for titanium products used in the aerospace end-use market, which was partially offset by an increase in demand in the medical end-use market.
Gross Profit
Gross profit in fiscal year 2009 decreased to $207.2 million, or 15.2 percent of net sales (19.6 percent of net sales excluding surcharges), from $457.2 million, or 23.4 percent of net sales (33.4 percent of net sales excluding surcharges), a year ago. The results primarily reflected the reduced demand levels and related manufacturing inefficiencies associated with the lower volume.
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Our surcharge mechanism is structured to recover increases in raw material costs, although generally with a lag effect. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharges on gross margin for fiscal years 2009 and 2008. See the section Non-GAAP Financial Measures below for further discussion of these financial metrics.
Fiscal Year | ||||||||
($ in millions) | 2009 | 2008 | ||||||
Net sales |
$ | 1,362.3 | $ | 1,953.5 | ||||
Less: surcharge revenue |
307.1 | 585.8 | ||||||
Net sales excluding surcharges |
$ | 1,055.2 | $ | 1,367.7 | ||||
Gross profit |
$ | 207.2 | $ | 457.2 | ||||
Gross margin |
15.2 | % | 23.4 | % | ||||
Gross margin excluding dilutive effect of surcharges |
19.6 | % | 33.4 | % | ||||
In addition to the impact of the surcharge mechanism, fluctuations in raw material prices (combined with fluctuations in inventory levels) have impacted our gross profit from year to year. We estimate that the effect of such combined fluctuations negatively impacted gross margin by 90 basis points in fiscal year 2009 and negatively impacted gross margin by 40 basis points in fiscal year 2008. We estimate that the lag effect of the surcharge mechanism positively impacted gross margin by approximately 100 basis points during fiscal year 2009, compared to a positive impact on gross margin of approximately 40 basis points during fiscal year 2008.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal year 2009 were $133.8 million, or 9.8 percent of net sales (12.7 of net sales excluding surcharges), compared to $163.6 million, or 8.4 percent of net sales (12.0 percent of net sales excluding surcharges), in fiscal year 2008. Excluding the impact of changes in net pension expense discussed above, expenses improved by 22 percent over fiscal year 2008. The reduction reflects the $21.0 million charge for a legal matter that was recorded in the fourth quarter of fiscal year 2008 in addition to reductions in variable compensation and actions taken to reduce headcount and spending across the business.
Restructuring Charges
During fiscal year 2009, we recorded $9.4 million of restructuring charges associated with the closure of our metal strip manufacturing facility in the U.K. The closure is expected to reduce our fixed costs and to utilize existing production capacity more efficiently. The charges recorded consisted principally of pension settlement charges from the elimination of a U.K. defined benefit pension plan, certain asset write-downs, payments of employee severance costs and other exit costs.
Interest Expense
Fiscal year 2009 interest expense of $16.1 million decreased 22 percent from $20.5 million in fiscal 2008. Interest on substantially all of our debt was at a fixed rate. The decrease in interest expense is attributable to the reductions in outstanding debt related to current year repayments, as well as a $1.7 million increase in the amount of interest capitalized associated with ongoing construction projects during fiscal year 2009 as compared with fiscal year 2008.
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Other Income, Net
Other income for fiscal year 2009 was $15.1 million as compared with $24.2 million a year ago. The decrease principally reflected lower returns on invested cash balances which were partially offset by the favorable impacts of foreign exchange in fiscal year 2009 as compared with fiscal year 2008.
Income Taxes
Our effective tax rate (income tax expense as a percent of income before taxes) for fiscal year 2009 was 24.0 percent as compared to 32.6 percent in fiscal year 2008. The fiscal year 2009 tax rate was lower than the statutory rate of 35 percent, primarily due to the following items. We recorded a reduction in income tax expense in the amount of $3.5 million or 5.6 percent of pre-tax income related to research and development tax credits. In addition, there was a reduction in income tax expense in the amount of $3.3 million or 5.2 percent which was primarily due to the reversal of certain unrecognized tax benefits due to the lapse of certain statutes of limitations. These items were partially offset by an increase in tax expense in the amount of $4.6 million or 7.4 percent related to additional valuation allowance on deferred tax assets for state net operating losses. Our lower taxable income level generated a more significant impact on the effective tax rate for these items.
The fiscal year 2008 tax rate was also lower than the statutory rate of 35 percent, primarily due to the following items. We recorded a reduction in income tax expense of $2.3 million, or 0.8 percent of pretax income, reflecting the reversal of valuation allowances that had been recorded against state net operating loss carryforwards in prior years. Valuation allowances are reviewed each year and an assessment is made as to the likelihood of recovery of those deferred taxes. Based on the then-current year and forecasted taxable income in certain jurisdictions, we determined that it was appropriate to reverse a portion of this valuation allowance in fiscal year 2008. We recognized a benefit of $5.7 million, or 1.9 percent of pretax income, in connection with the domestic manufacturing deduction, which was part of the American Jobs Creation Act of 2004 allowing a special deduction for qualified manufacturing activities. The Act also provided for a two-year phase-out of the existing extraterritorial income exclusion deduction. As a result, we recognized an increase in income tax expense year over year, reflecting the phase-out of the deduction in 2007, and the repeal in 2008.
See Note 18 to the consolidated financial statements in Item 8. Financial Statements and Supplementary Data for a full reconciliation of the statutory federal tax rate to the effective tax rates.
Business Segment Results
Summary information about our operating results on a segment basis is set forth below. For more detailed segment information, see Note 20 to the consolidated financial statements included in Item 8. - Financial Statements and Supplementary Data.
Advanced Metals Operations Segment
Net sales in fiscal year 2009 for the AMO segment were $957.4 million, as compared with $1,390.7 million in fiscal year 2008. Excluding surcharge revenues, sales decreased 24 percent from a year ago. The fiscal year 2009 net sales reflected a reduction in pounds shipped of 26 percent as compared to fiscal year 2008. Both the sales and shipment volume decreases primarily reflect lower demand in the automotive, industrial and consumer markets.
Operating income for the AMO segment in fiscal year 2009 was $34.1 million, or 3.6 percent of net sales (4.5 percent of net sales excluding surcharge revenues), compared to $188.7 million, or 13.6 percent of net sales (19.0 percent of net sales excluding surcharge revenues), a year ago. The decrease in operating income reflects lower shipment volume coupled with the negative fixed cost impacts related to both the lower shipment volume levels and our inventory reduction efforts.
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Premium Alloys Operations Segment
Net sales for fiscal year 2009 for the PAO segment decreased 28 percent to $413.2 million as compared with $575.7 million for fiscal year 2008. Excluding surcharge revenues, net sales decreased 20 percent on 24 percent lower shipment volumes. Both the sales and shipment volume decreases were due to lower demand, particularly in our energy end use market.
Operating income for the PAO segment for fiscal year 2009 was $76.9 million, or 18.6 percent of net sales (24.7 percent of net sales excluding surcharge revenues), as compared with $144.7 million, or 25.1 percent of net sales (37.2 percent of net sales excluding surcharge revenues) for fiscal year 2008. The decrease in operating income principally reflects lower shipment volume
Liquidity and Capital Resources
We have the ability to generate cash to meet our needs through cash flow from operations, management of working capital and the availability of outside sources of financing to supplement internally generated funds. We believe that our cash and cash equivalents and short-term marketable securities of approximately $371 million as of June 30, 2010, together with cash generated from operations and available borrowing capacity of approximately $196 million under our credit facilities, will be sufficient to fund our operating activities, planned capital expenditures, and other obligations for the foreseeable future.
In November 2009, we entered into a new revolving credit facility that expires November 2012 and contains a revolving credit commitment amount of $200 million. As of June 30, 2010, we had $3.8 million of issued letters of credit under the revolving credit facility. The balance of the revolving credit facility ($196.2 million) remains available to us. The revolving credit facility contains financial covenants, including maintenance of an interest coverage ratio and a debt-to-capital ratio.
As of June 30, 2010, we were in compliance with all the covenants of the credit facility. The following table shows our actual ratio performance with respect to the financial covenants, as of June 30, 2010:
Covenant Requirement |
Actual
Ratio |
||||
Consolidated interest coverage |
3.0 to 1.0 (minimum) | 7.8 to 1.0 | |||
Consolidated debt to capital |
55% (maximum) | 31 | % |
During the fiscal year 2010, our free cash flow, which we define under Non-GAAP Financial Measures below, was $40.1 million as compared to $11.2 million for the same period a year ago. The free cash flow in the fiscal year 2010 as compared with the prior year principally reflects the lower capital expenditures in the current period partially offset by the lower fiscal year 2010 net income levels. We continue to actively manage working capital levels through robust processes that balance our cash objectives.
Capital expenditures for plant, equipment and software were $44.2 million for fiscal year 2010 as compared with $116.3 million for the prior year. A significant portion of the prior year periods capital expenditures related to the expansion of our premium melt facilities.
Dividends for the fiscal year 2010 were $31.9 million, as compared with $31.5 million in the prior year, and were paid at the same quarterly rate of $0.18 per share of common stock in both periods.
During fiscal year 2009, we used $46.1 million to purchase 1,218,900 shares of our common stock pursuant to the terms of share repurchase programs authorized by our Board of Directors.
31
For fiscal years 2010, 2009 and 2008, interest cost totaled $18.8 million, $20.1 million, and $22.8 million, respectively, of which $1.0 million, $4.0 million, and $2.3 million, respectively, were capitalized as part of the cost of plant, equipment and software.
Non-GAAP Financial Measures
The following provides additional information regarding certain non-GAAP financial measures. Our definitions and calculations of these items may not necessarily be the same as those used by other companies.
Net Sales and Gross Margin Excluding Surcharges
This report includes discussions of net sales and gross margin as adjusted to exclude the impact of raw material surcharges, which represent financial measures that have not been determined in accordance with U.S. GAAP. We present and discuss these financial measures because management believes removing the impact of raw material surcharges from net sales and gross margin provides a more consistent basis for comparing results of operations from period to period for the reasons discussed earlier in this report. See our earlier discussion of gross profit for a reconciliation of net sales and gross margin excluding surcharges to net sales as determined in accordance with U.S. GAAP.
Operating Income and Operating Margin Excluding Surcharges, Pension EID Expense and Restructuring Costs
This report includes discussions of operating income and operating margin as adjusted to exclude the impact of raw material surcharges, pension EID expense and restructuring costs, which represent financial measures that have not been determined in accordance with U.S. GAAP. We present and discuss these financial measures because management believes removing the impact of raw material surcharges from net sales provides a more consistent and meaningful basis for comparing results of operations from period to period for the reasons discussed earlier in this report. In addition, management believes that excluding pension earnings, interest and deferrals expense and non-recurring restructuring costs from operating income and operating margin is helpful in analyzing our operating performance particularly as pension EID expense may be volatile due to changes in the financial markets. See our earlier discussion of operating income for a reconciliation of operating income and operating margin excluding pension EID expense and non-recurring restructuring costs to operating income and operating margin determined in accordance with U.S. GAAP.
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Free Cash Flow
The following provides a reconciliation of free cash flow, as used in this annual report, to its most directly comparable U.S. GAAP financial measures.
Fiscal Year | ||||||||||||
($ in millions) | 2010 | 2009 | 2008 | |||||||||
Net cash provided from operating activities |
$ | 115.2 | $ | 145.5 | $ | 218.5 | ||||||
Payment of income tax liability associated with gain on sales of businesses |
| | 41.3 | |||||||||
Purchases of property, equipment and software |
(44.2 | ) | (116.3 | ) | (118.9 | ) | ||||||
Dividends paid |
(31.9 | ) | (31.5 | ) | (30.6 | ) | ||||||
Proceeds from disposals of plant and equipment |
1.0 | 0.1 | 1.5 | |||||||||
Free cash flow excluding impact of sales and acquisition of businesses |
40.1 | (2.2 | ) | 111.8 | ||||||||
Payment of income tax liability associated with gain on sales of businesses |
| | (41.3 | ) | ||||||||
Net proceeds from sales of businesses |
| 13.4 | 149.5 | |||||||||
Acquisition of business |
| | (6.6 | ) | ||||||||
Free cash flow |
$ | 40.1 | $ | 11.2 | $ | 213.4 | ||||||
Management believes that the presentation of free cash flow provides useful information to investors regarding our financial condition because it is a measure of cash generated which management evaluates for alternative uses. It is managements current intention to use excess cash to fund investments in capital equipment, acquisition opportunities and consistent dividend payments. Free cash flow is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, cash flows calculated in accordance with U.S. GAAP.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an on-going basis, we evaluate our estimates, including those related to bad debts, customer claims, inventories, goodwill, intangible assets, income taxes, pensions and other postretirement benefits, contingencies and litigation, environmental liabilities, and derivative instruments and hedging activities.
We believe the following are the critical accounting policies and areas affected by significant judgments and estimates impacting the preparation of our consolidated financial statements.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the failure of our customers to make required payments. We perform ongoing credit evaluations of our customers and monitor their payment patterns. Should the financial condition of our customers deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
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Inventories
Inventories are stated at the lower of cost or market. The cost of inventories is primarily determined using the LIFO method. Costs include direct materials, direct labor and applicable manufacturing overhead, and other direct costs. Under the LIFO inventory valuation method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials and other costs may have been incurred at significantly different values due to the length of time of our production cycle. The prices for many of the raw materials we use have been volatile. Since we value most of our inventory utilizing the LIFO inventory costing methodology, rapid changes in raw material costs have an impact on our operating results. In a period of rising prices, cost of sales expense recognized under LIFO is generally higher than the cash costs incurred to acquire the inventory sold. Conversely, in a period of declining raw material prices, cost of sales recognized under LIFO is generally lower than cash costs incurred to acquire the inventory sold.
Since the LIFO inventory valuation methodology is designed for annual determination, interim estimates of the annual LIFO valuation are required. We recognize the effects of the LIFO inventory valuation method on an interim basis by estimating the expected annual LIFO cost based on cost changes to date. These projections of annual LIFO inventory valuation reserve changes are updated quarterly and are evaluated based upon material, labor and overhead costs.
Pension and Other Postretirement Benefits
The amount of the pension expense, which is determined annually, is based upon the value of the assets in the pension trust at the beginning of the fiscal year as well as actuarial assumptions, such as the discount rate and the expected long-term rate of return on plan assets. The assumed long-term rate of return on pension plan assets is reviewed at each year end based on the plans investment policies, an analysis of the historical returns of the capital markets, and current interest rates. The plans current allocation policy is to have approximately 60 percent U.S. and international equities and 40 percent fixed income. The discount rate for the U.S. plan is determined by reference to Citigroup Pension Discount Curve with maturities that approximate the anticipated cash outflows from the plan. The fluctuations in stock and bond markets could cause actual investment results to be significantly different from those assumed, and therefore, significantly impact the valuation of the assets in our pension trust. Changes in actuarial assumptions could significantly impact the accounting for the pension assets and liabilities. If the assumed long-term rate of return on plan assets was changed by 0.25 percent, the net pension expense would change by approximately $1.7 million. If the discount rate was changed by 0.25 percent, the net pension expense would change by approximately $2.0 million.
Long-Lived Assets
Long-lived assets are reviewed for impairment and written down to fair value whenever events or changes in circumstances indicate that the carrying value may not be recoverable through estimated future undiscounted cash flows. The amount of the impairment loss is the excess of the carrying amount of the impaired assets over the fair value of the assets based upon estimated future discounted cash flows. We evaluate long-lived assets for impairment by individual business unit. Changes in estimated cash flows could have a significant impact on whether or not an asset is impaired and the amount of the impairment.
Goodwill
Goodwill is not amortized, but instead is tested for impairment, at least annually. Potential impairment is identified by comparing the fair value of a reporting unit to its carrying value, including goodwill. The fair value is estimated based principally upon discounted cash flow analysis and using market multiples for comparable companies as well as recently completed transactions. If the carrying value of the reporting unit exceeds its fair value, any impairment loss is measured by comparing the carrying value of the reporting units goodwill to its implied fair value. We tested our goodwill for impairment as of June 30, 2010 and determined that goodwill had not been impaired. If global economic conditions worsen or are prolonged, changes in anticipated discounted cash flows and comparable market multiples could have significant impact on whether or not goodwill is impaired and the amount of impairment.
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Environmental Expenditures
Environmental expenditures that pertain to current operations or to future revenues are expensed or capitalized consistent with Carpenters capitalization policy for property, plant and equipment. 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 when the remediation is probable and the cost can be reasonably estimated. Recoveries of expenditures for environmental remediation are recognized as assets only when recovery is deemed probable. Estimated liabilities are not discounted to present value, but estimated assets are measured on a discounted basis.
Income Taxes
Deferred income taxes result from temporary differences in the recognition of income and expense for financial and income tax reporting purposes, or differences between the fair value of assets acquired in business combinations accounted for as purchases for financial reporting purposes and their corresponding tax bases. Deferred income taxes represent future tax benefits (assets) or costs (liabilities) to be recognized when those temporary differences reverse. We evaluate on a quarterly basis whether, based on all available evidence, we believe that our deferred income tax assets will be realizable. Valuation allowances are established when it is estimated that it is probable (more likely than not) that the tax benefit of the deferred tax assets will not be realized. The evaluation includes the consideration of all available evidence, both positive and negative, regarding historical operating results including recent years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may be employed to prevent an operating loss or tax credit carryforward from expiring unused. Future realization of deferred income tax assets ultimately depends upon the existence of sufficient taxable income within the carryback, carryforward period available under tax law.
Management determines whether a tax position should be recognized in the financial statements by evaluating whether it is more-likely-than-not that the tax position will be sustained upon examination by the tax authorities based upon the technical merits of the position. For those tax positions which should be recognized, the measurement of a tax position is determined as being the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Interest and penalties on estimated liabilities for uncertain tax positions are recorded as components of the provision for income taxes.
Derivative Financial Instruments
Our current risk management strategies include the use of derivative instruments to reduce certain risks. The critical strategies include: (1) the use of commodity forward contracts to fix the price of a portion of anticipated future purchases of certain raw materials and energy to offset the effects of changes in the costs of those commodities; and (2) the use of foreign currency forward contracts to hedge a portion of anticipated future sales denominated in foreign currencies, principally the Euro and Pound Sterling, in order to offset the effect of changes in exchange rates. The commodity forwards and foreign currency forwards have been designated as cash flow hedges and unrealized net gains and losses are recorded in the accumulated other comprehensive income (loss) component of stockholders equity. The unrealized gains or losses are reclassified to the income statement when the hedged transaction affects earnings or if the anticipated transactions were no longer expected to occur. We have used interest rate swaps to maintain a certain level of floating rate debt relative to fixed rate debt. Interest rate swaps have been designated as fair value hedges. Accordingly, the mark-to-market values of both the interest rate swap and the underlying debt obligations were recorded as equal and offsetting gains and losses in the interest expense component of the consolidated statement of income. We evaluate all derivative instruments each quarter to determine that they are highly effective. Any ineffectiveness is recorded in our consolidated statement of income. We also use foreign currency forward contracts to protect certain short-term asset positions denominated in foreign currency against the effect of changes in exchange rates. These positions do not qualify for hedge accounting and accordingly are marked-to-market at each reporting date through charges to other income and expense.
35
New Accounting Pronouncements
For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 21, Summary of Significant Accounting Policies, to Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data.
Off Balance Sheet Arrangements
We had no off balance sheet arrangements during the periods presented.
Contractual Obligations
At June 30, 2010, we had the following contractual obligations and other commercial commitments and contingencies:
Fiscal Year | There- | ||||||||||||||||||||
Total | 2011 | 2012 | 2013 | 2014 | 2015 | after | |||||||||||||||
($ in millions) | |||||||||||||||||||||
Long-term debt (1) |
$ | 256.0 | $ | | $ | 100.0 | $ | 101.0 | $ | | $ | | $ | 55.0 | |||||||
Estimated interest payments (2) |
58.1 | 18.2 | 11.5 | 9.7 | 3.9 | 3.9 | 10.9 | ||||||||||||||
Operating leases |
18.2 | 6.5 | 5.0 | 2.9 | 1.9 | 1.4 | 0.5 | ||||||||||||||
Pension plan contributions (3) |
23.3 | 3.9 | 19.4 | N/A | N/A | N/A | N/A | ||||||||||||||
Accrued post-retirement benefits (4) |
150.2 | 13.1 | 13.7 | 14.2 | 14.7 | 15.1 | 79.4 | ||||||||||||||
Purchase obligations (5) |
175.8 | 130.8 | 21.0 | 16.3 | 7.7 | | | ||||||||||||||
Pension benefits (6) |
29.8 | 3.2 | 3.1 | 3.1 | 3.0 | 3.0 | 14.4 | ||||||||||||||
Total |
$ | 711.4 | $ | 175.7 | $ | 173.7 | $ | 147.2 | $ | 31.2 | $ | 23.4 | $ | 160.2 | |||||||
(1) |
Refer to Note 9 of Notes to Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data. In addition, we had $3.8 million of outstanding letters of credit as of June 30, 2010. |
( 2 ) |
Estimated interest payments for long-term debt were calculated based on the applicable rates and payment dates. |
( 3 ) |
Pension plan contributions represent required minimum contributions for the plan year beginning January 1, 2010 and quarterly installment contributions for plan year beginning January 1, 2011. These amounts were calculated based on actuarial valuations as prescribed by pension funding regulations in the United States. Required pension contributions in future periods are dependent on actuarial valuations to be prepared in future periods. |
( 4 ) |
Postretirement benefits for certain plans are paid from corporate assets. There is no guarantee that future payments will be paid from corporate assets rather than plan assets. |
( 5 ) |
We have entered into purchase commitments primarily for various key raw materials and equipment purchases at market related prices, all made in the normal course of business. The commitments include both fixed and variable price provisions. We used June 30, 2010 raw material prices for commitments with variable pricing. |
( 6 ) |
Pension benefits for certain plans are paid from corporate assets. There is no guarantee that future payments will be paid from corporate assets rather than plan assets. |
36
As of June 30, 2010, the noncurrent portion of our income tax liabilities, including accrued interest and penalties related to unrecognized tax benefits was approximately $2.3 million. The settlement period for these income tax liabilities cannot be determined and were therefore excluded from the table above.
Market Sensitive Instruments and Risk Management
See Item 7A. Quantitative and Qualitative Disclosures About Market Risk for discussion of market sensitive instruments and associated market risk for Carpenter.
Contingencies
Environmental
We are subject to various federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Although compliance with these laws and regulations may affect the costs of our operations, compliance costs to date have not been material. We have environmental remediation liabilities at some of our owned operating facilities and have been designated as a potentially responsible party (PRP) with respect to certain third-party Superfund waste disposal sites and other third party owned sites. Additionally, we have been notified that we may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against us. Neither the exact amount of remediation costs nor the final method of their allocation among all designated PRPs at these Superfund sites has been determined. The liability for future environmental remediation costs is evaluated on a quarterly basis. We accrue amounts for environmental remediation costs that represent our best estimate of the probable and reasonably estimable costs related to environmental remediation. During fiscal year 2010, we decreased the liabilities recorded for environmental remediation costs by approximately $2.0 million for two environmental remediation sites. During fiscal year 2009, we increased the liabilities recorded for environmental remediation costs by approximately $2.0 million for one environmental remediation site. During fiscal year 2008, no additional accruals were recorded. The liabilities recorded for environmental remediation costs at Superfund sites, at other third party-owned sites and at company-owned current or former operating facilities remaining at June 30, 2010 and 2009, were $4.9 million and $6.9 million, respectively.
Estimates of the amount and timing of future costs of environmental remediation requirements are inherently imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of currently unknown remediation sites and the allocation of costs among the PRPs. Based upon information currently available, such future costs are not expected to have a material effect on our financial position, results of operations or cash flows over the long-term. However, such costs could be material to our financial position, results of operations or cash flows in a particular future quarter or year.
Boarhead Farms
In June 2002, we were named as a defendant in a lawsuit filed by a group of plaintiffs in the District Court for the Eastern District of Pennsylvania titled Boarhead Farm Agreement Group v. Advanced Environmental Technology Corporation et. al. (since amended to include the individual members). The suit alleges that we and the other named defendants contributed to damages caused at Boarhead Farms, a Superfund site located in Bridgeton, Pennsylvania. The Boarhead Farms site was the home of a now defunct chemical and waste hauling company that we engaged to dispose of certain wastes during the 1970s. The plaintiff group was individually named as PRPs for the Boarhead site in the EPAs Record of Decision in November 1998. Their suit, in June of 2002, against various defendants, including Carpenter, sought contributions for a portion of costs incurred for various site cleanup activities as well as contributions to future cleanup efforts. The suit went to trial in June 2008. Prior to trial, all of the named co-defendants, except for Carpenter, reached an out of court settlement with the plaintiffs. We denied the claims made by the plaintiff group. On August 18, 2008, the Court awarded the plaintiffs judgment against us for 80 percent of the plaintiffs past costs of remediating the site,
37
including prejudgment interest from June 18, 2002 to January 1, 2008, and held us liable for 80 percent of future costs of the cleanup activities at the site. We appealed the Courts decision and oral arguments took place before the United States Court of Appeals for the Third Circuit on December 17, 2009. On April 12, 2010, the Court of Appeals for the Third Circuit vacated the previous judgment by the District Court and remanded the case for further proceedings. We intend to continue to defend against the claims in this case, but are unable to predict the outcome of the proceedings at this time. As of June 30, 2010 and June 30, 2009, we recorded a liability related to this case of $21.8 and $21.5 million, respectively.
Duty Drawback
Historically, we have participated in a program offered by U.S. Customs and Border Protection (U.S. Customs) known as duty drawback. Under the program, we claimed a refund of import duties on items manufactured and exported to customers in foreign countries. Certain vendors prepared certificates authorizing us to claim duty drawback refunds against imported goods purportedly shipped by the vendor to us. Because of the complexity of the program, we engaged a licensed U.S. customs broker specializing in duty drawback claims. The customs broker was responsible for performing the administration of the process which included maintaining and collecting various forms of supporting evidence for each claim including collecting appropriate certificates from vendors, as well as preparing and submitting the refund claims.
In fiscal year 2008, we received notice from U.S. Customs that we were under investigation related to claims previously filed by the customs broker on our behalf. The investigation alleged certain discrepancies and a lack of supporting documentation for the claims that had been filed by the broker. We initiated an internal review of the claims filed with U.S. Customs to determine the extent of claims that may have inadequate supporting documentation. We also engaged a new licensed U.S. customs broker. We have cooperated fully with U.S. Customs investigation of this matter. As of the date of this filing, our internal review remains ongoing due to the extensive amount of documentation that must be compiled and reviewed.
During the period our customs broker was filing claims on our behalf, July 2003 through December 2006, we applied for and received refund claims totaling $6.9 million. While the ultimate outcome of the U.S. Customs investigation and our internal review is not yet known, based on current facts we believe that the reserve recorded of $2.5 million as of June 30, 2010 is a reasonable estimate of the probable loss that will result from the investigation. We do not expect that any additional material liabilities will be incurred related to this matter.
Export Regulations Violations
In the third quarter of fiscal year 2008, we became aware of potential violations of federal export regulations at a business unit that was divested. Upon investigation, we discovered that approximately 40 foreign nationals employed over time at the business units facility may have been exposed to protected technical data related to the production of various products for military applications. An export license from the Department of State and the Department of Commerce is required prior to the exporting of technical data for military applications. We have applied for and received similar applications for other business units, but did not have such a license for the divested business unit. Violations of federal export regulations can be subject to civil penalties depending upon the severity of the violation. We filed voluntary disclosures with the Department of State and the Department of Commerce before the divestiture of the business unit on March 31, 2008. The Department of State responded to the voluntary disclosure without assessing civil penalties. The Department of Commerce has not yet responded to the voluntary disclosure. It is not possible to determine the amount, if any, of civil penalties that may be assessed by the Department of Commerce. As a result, we have not recorded any liability for potential penalties as of June 30, 2010.
38
Other
We are defending various routine claims and legal actions that are incidental to our business, and we are subject to contingencies that are common to our operations, including those pertaining to product claims, commercial disputes, employment actions, employee benefits, compliance with domestic and foreign laws, personal injury claims and tax issues. We provide for costs relating to these matters when a loss is probable and the amount of the loss is reasonably estimable. The effect of the outcome of these matters on our 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, we believe that the total liability from these matters will not have a material effect on our financial position, results of operations or cash flows over the long-term. However, there can be no assurance that an increase in the scope of pending matters or that any future lawsuits, claims, proceedings or investigations will not be material to our financial position, results of operations or cash flows in a particular future quarter or year.
This Annual Report on Form 10-K contains various Forward-looking Statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which represent our expectations or beliefs concerning various future events, include statements concerning future revenues, earnings and liquidity associated with continued growth in various market segments and cost reductions expected from various initiatives. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected, anticipated or implied. The most significant of these uncertainties are described in this Form 10-K, and they include but are not limited to: (1) the cyclical nature of our business and certain end-use markets, including aerospace, industrial, automotive, consumer, medical and energy, or other influences on our business such as new competitors, the consolidation of customers and suppliers or the transfer of manufacturing capacity from the United States to foreign countries; (2) our ability to achieve cost savings, productivity improvements or process changes; (3) the volatility of, and our ability to recoup increases in the costs of energy and raw materials or other factors; (4) domestic and foreign excess manufacturing capacity for certain metals; (5) fluctuations in currency exchange rates; (6) the degree of success of government trade actions; (7) the valuation of the assets and liabilities in our pension trusts; (8) possible labor disputes or work stoppages; and (9) the potential that our customers may substitute alternate materials or adopt different manufacturing practices that replace or limit the suitability of our products. Any of these factors could have an adverse and/or fluctuating effect on our results of operations. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We undertake no obligation to update or revise any forward-looking statements.
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
We use derivative financial instruments to reduce certain types of financial risk. Firm price sales arrangements involve a risk of profit margin fluctuations particularly as raw material prices have been volatile. As discussed in Item 7, in order to reduce the risk of fluctuating profit margins on these sales, we enter into commodity forward contracts to purchase certain critical raw materials necessary to produce the products sold under the firm price sales arrangements. If a customer fails to perform its obligations under the firm price sales arrangements, we may realize losses as a result of the related commodity forward contracts. These customers have historically performed under these arrangements and we believe that they will honor such obligations in the future, notwithstanding the exceptional nature of the current economic conditions.
39
We are actively involved in managing risks associated with energy resources. Risk containment strategies include interaction with primary and secondary energy suppliers as well as obtaining adequate insurance coverage to compensate us for potential business interruption related to lack of availability of energy resources. In addition, we have used forwards and options to fix the price of a portion of our anticipated future purchases of certain energy requirements to protect against the impact of significant increases in energy costs. We also use surcharge mechanisms to offset a portion of these charges where appropriate.
Fluctuations in foreign currency exchange rates could subject us to risk of losses on anticipated future cash flows from our international operations or customers. Foreign currency forward contracts are used to hedge certain foreign exchange risk.
We have used interest rate swaps to achieve a level of floating rate debt relative to fixed rate debt where appropriate.
All hedging strategies are reviewed and approved by senior financial management before being implemented. Senior financial management has established policies regarding the use of derivative instruments that prohibit the use of speculative or leveraged derivatives. Market valuations are performed at least quarterly to monitor the effectiveness of our risk management programs.
Our pension plan assets are invested in different asset classes including large-, mid- and small-cap growth and value funds, index and international equity funds, short-term and medium-term duration fixed-income funds and high yield funds. The plans current allocation policy is to have approximately 60 percent U.S. and international equities and 40 percent fixed income securities.
The status of our financial instruments as of June 30, 2010 is provided in Note 17 to the consolidated financial statements included in Item 8., Financial Statements and Supplementary Data. Assuming on June 30, 2010, (a) an instantaneous 10 percent decrease in the price of raw materials and energy for which we have commodity forward contracts, our results of operations would not have been materially affected and, (b) a 10 percent strengthening of the U.S. dollar versus foreign currencies for which foreign exchange forward contracts existed, our results of operations would not have been materially affected.
40
Item 8. | Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements and Supplementary Data
Page | ||
Consolidated Financial Statements: |
||
42 | ||
Managements Report on Internal Control Over Financial Reporting |
42 | |
43 | ||
Consolidated Statements of Income for the
|
44 | |
Consolidated Statements of Cash Flows for the
|
45 | |
46 | ||
47 - 48 | ||
48 | ||
49 - 85 | ||
Supplementary Data: |
||
86 - 87 | ||
98 |
41
Managements Responsibilities for Financial Reporting
Management prepared the financial statements included in this Annual Report on Form 10-K and is responsible for their integrity and objectivity. The statements were prepared in conformity with accounting principles generally accepted in the United States of America and, as such, include amounts based on managements best judgments and estimates. Financial information elsewhere in this Annual Report is consistent with that in the financial statements.
Carpenter maintains a system of internal controls, supported by a code of conduct, designed to provide reasonable assurance that assets are safeguarded and transactions are properly executed and recorded for the preparation of financial information. We believe Carpenters system of internal controls provides this appropriate balance. The system of internal controls and compliance is continually monitored by Carpenters internal audit staff.
The Audit/Finance Committee of the Board of Directors, composed of independent directors, meets regularly with management, Carpenters internal auditors and our independent registered public accounting firm to consider audit results and to discuss significant internal control, auditing and financial reporting matters. Both the independent registered public accounting firm and internal auditors have unrestricted access to the Audit/Finance Committee.
Managements Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of Carpenters internal control over financial reporting as of June 30, 2010. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control Integrated Framework . Based on its assessment, management concluded that, as of June 30, 2010, Carpenters internal control over financial reporting is effective based on those criteria.
The effectiveness of Carpenters internal control over financial reporting as of June 30, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing herein.
/s/ William A. Wulfsohn |
William A. Wulfsohn |
President and Chief Executive Officer |
/s/ K. Douglas Ralph |
K. Douglas Ralph |
Senior Vice President Finance and Chief Financial Officer |
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Carpenter Technology Corporation
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Carpenter Technology Corporation and its subsidiaries at June 30, 2010 and June 30, 2009, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2010 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(1) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2010, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Managements Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Companys internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 18 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2008.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP |
PricewaterhouseCoopers LLP |
Philadelphia, Pennsylvania |
August 17, 2010 |
43
Consolidated Statements of Income
Carpenter Technology Corporation
For the Years Ended June 30, 2010, 2009 and 2008
($ in millions, except per share data) |
2010 | 2009 | 2008 | |||||||||
NET SALES |
$ | 1,198.6 | $ | 1,362.3 | $ | 1,953.5 | ||||||
Cost of sales |
1,053.8 | 1,155.1 | 1,496.3 | |||||||||
Gross profit |
144.8 | 207.2 | 457.2 | |||||||||
Selling, general and administrative expenses |
133.1 | 133.8 | 163.6 | |||||||||
Restructuring charges |
| 9.4 | | |||||||||
Operating income |
11.7 | 64.0 | 293.6 | |||||||||
Interest expense |
(17.8 | ) | (16.1 | ) | (20.5 | ) | ||||||
Other income, net |
10.8 | 15.1 | 24.2 | |||||||||
Income before income taxes |
4.7 | 63.0 | 297.3 | |||||||||
Income tax expense |
2.6 | 15.1 | 96.8 | |||||||||
Income from continuing operations |
2.1 | 47.9 | 200.5 | |||||||||
Income from discontinued operations |
| | 77.2 | |||||||||
NET INCOME |
$ | 2.1 | $ | 47.9 | $ | 277.7 | ||||||
EARNINGS PER COMMON SHARE: |
||||||||||||
Basic: |
||||||||||||
Income from continuing operations |
$ | 0.04 | $ | 1.08 | $ | 4.14 | ||||||
Income from discontinued operations |
| | 1.59 | |||||||||
Net income |
$ | 0.04 | $ | 1.08 | $ | 5.73 | ||||||
Diluted: |
||||||||||||
Income from continuing operations |
$ | 0.04 | $ | 1.08 | $ | 4.12 | ||||||
Income from discontinued operations |
| | 1.58 | |||||||||
Net income |
$ | 0.04 | $ | 1.08 | $ | 5.70 | ||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
||||||||||||
Basic |
43.9 | 43.9 | 48.5 | |||||||||
Diluted |
44.4 | 44.2 | 48.7 | |||||||||
See accompanying notes to consolidated financial statements.
44
Consolidated Statements of Cash Flows
Carpenter Technology Corporation
For the Years Ended June 30, 2010, 2009 and 2008
($ in millions) |
2010 | 2009 | 2008 | |||||||||
OPERATING ACTIVITIES |
||||||||||||
Net income |
$ | 2.1 | $ | 47.9 | $ | 277.7 | ||||||
Adjustments to reconcile net income to net cash provided from operating activities: |
||||||||||||
Depreciation and amortization |
59.1 | 52.7 | 49.2 | |||||||||
Deferred income taxes |
(1.8 | ) | 16.4 | (4.0 | ) | |||||||
Net pension expense (income) |
61.3 | 20.6 | (0.1 | ) | ||||||||
Net loss (gain) on disposal of property and equipment |
2.0 | 1.7 | (0.9 | ) | ||||||||
Gain on sales of businesses |
| | (109.6 | ) | ||||||||
Changes in working capital and other: |
||||||||||||
Accounts receivable |
(62.5 | ) | 144.0 | 6.3 | ||||||||
Inventories |
(19.1 | ) | 13.4 | 17.4 | ||||||||
Other current assets |
24.2 | (26.7 | ) | (8.3 | ) | |||||||
Accounts payable |
60.8 | (85.7 | ) | (56.1 | ) | |||||||
Accrued current liabilities |
13.4 | (33.5 | ) | 28.5 | ||||||||
Other, net |
(24.3 | ) | (5.3 | ) | 18.4 | |||||||
Net cash provided from operating activities |
115.2 | 145.5 | 218.5 | |||||||||
INVESTING ACTIVITIES |
||||||||||||
Purchases of property, equipment and software |
(44.2 | ) | (116.3 | ) | (118.9 | ) | ||||||
Proceeds from disposals of property and equipment |
1.0 | 0.1 | 1.5 | |||||||||
Net proceeds from sales of businesses |
| 13.4 | 149.5 | |||||||||
Acquisition of business |
| | (6.6 | ) | ||||||||
Purchases of marketable securities |
(145.0 | ) | (49.5 | ) | (366.2 | ) | ||||||
Proceeds from sales and maturities of marketable securities |
55.3 | 44.8 | 722.2 | |||||||||
Net cash (used for) provided from investing activities |
(132.9 | ) | (107.5 | ) | 381.5 | |||||||
FINANCING ACTIVITIES |
||||||||||||
Payments on long-term debt |
(20.0 | ) | (23.0 | ) | (33.2 | ) | ||||||
Dividends paid |
(31.9 | ) | (31.5 | ) | (30.6 | ) | ||||||
Payments of debt issue costs |
(2.0 | ) | | | ||||||||
Purchases of treasury stock |
| (46.1 | ) | (425.2 | ) | |||||||
Tax benefits on share-based compensation |
0.2 | | 1.0 | |||||||||
Proceeds from common stock options exercised |
0.2 | 0.1 | 0.7 | |||||||||
Net cash used for financing activities |
(53.5 | ) | (100.5 | ) | (487.3 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents |
(3.5 | ) | (0.7 | ) | (10.2 | ) | ||||||
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
(74.7 | ) | (63.2 | ) | 102.5 | |||||||
Cash and cash equivalents at beginning of year |
340.1 | 403.3 | 300.8 | |||||||||
Cash and cash equivalents at end of year |
$ | 265.4 | $ | 340.1 | $ | 403.3 | ||||||
See accompanying notes to consolidated financial statements.
45
Carpenter Technology Corporation
June 30, 2010 and 2009
($ in millions, except share data) |
2010 | 2009 | ||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 265.4 | $ | 340.1 | ||||
Marketable securities |
105.2 | 15.0 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $2.7 and $2.8 at June 30, 2010 and 2009, respectively |
188.5 | 130.8 | ||||||
Inventories |
203.6 | 185.4 | ||||||
Deferred income taxes |
21.5 | 23.8 | ||||||
Other current assets |
36.0 | 54.6 | ||||||
Total current assets |
820.2 | 749.7 | ||||||
Property, plant and equipment, net |
617.5 | 634.1 | ||||||
Goodwill |
35.2 | 35.2 | ||||||
Other intangibles, net |
17.6 | 18.7 | ||||||
Deferred income taxes |
16.2 | | ||||||
Other assets |
76.5 | 59.7 | ||||||
Total assets |
$ | 1,583.2 | $ | 1,497.4 | ||||
LIABILITIES |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 130.5 | $ | 70.2 | ||||
Accrued liabilities |
87.6 | 108.3 | ||||||
Current portion of long-term debt |
| 20.0 | ||||||
Total current liabilities |
218.1 | 198.5 | ||||||
Long-term debt, net of current portion |
259.6 | 258.6 | ||||||
Accrued pension liabilities |
322.6 | 240.4 | ||||||
Accrued postretirement benefits |
146.7 | 127.7 | ||||||
Deferred income taxes |
| 1.6 | ||||||
Other liabilities |
62.8 | 53.6 | ||||||
Total liabilities |
1,009.8 | 880.4 | ||||||
Contingencies and commitments (see Note 12) |
||||||||
STOCKHOLDERS EQUITY |
||||||||
Common stock authorized 100,000,000 shares; issued 54,644,401 shares at June 30, 2010 and 54,614,842 shares at June 30, 2009; outstanding 43,967,084 shares at June 30, 2010 and 44,029,025 shares at June 30, 2009 |
273.2 | 273.1 | ||||||
Capital in excess of par value |
223.3 | 208.9 | ||||||
Reinvested earnings |
983.2 | 1,013.0 | ||||||
Common stock in treasury (10,677,317 shares and 10,585,817 shares at June 30, 2010 and 2009, respectively), at cost |
(535.2 | ) | (531.5 | ) | ||||
Accumulated other comprehensive loss |
(371.1 | ) | (346.5 | ) | ||||
Total stockholders equity |
573.4 | 617.0 | ||||||
Total liabilities and stockholders equity |
$ | 1,583.2 | $ | 1,497.4 | ||||
See accompanying notes to consolidated financial statements.
46
Consolidated Statement of Changes in Stockholders Equity
Carpenter Technology Corporation
For the Years Ended June 30, 2010, 2009 and 2008
Common Stock | Accumulated | ||||||||||||||||||||||
Par | Capital in | Common | Other | Total Stock- | |||||||||||||||||||
($ in millions, except | Value | Excess of | Reinvested | Stock in | Comprehensive | Holders | |||||||||||||||||
per share data) |
Of $5 | Par Value | Earnings | Treasury | Loss | Equity | |||||||||||||||||
Balances at June 30, 2007 |
272.8 | 191.6 | 751.3 | (65.7 | ) | (82.3 | ) | 1,067.7 | |||||||||||||||
Net income |
277.7 | 277.7 | |||||||||||||||||||||
Pension and post-retirement benefits, net of tax |
(57.7 | ) | (57.7 | ) | |||||||||||||||||||
Net losses on derivative instruments, net of tax |
(13.8 | ) | (13.8 | ) | |||||||||||||||||||
Foreign currency translation |
9.9 | 9.9 | |||||||||||||||||||||
Purchase of treasury stock |
(425.2 | ) | (425.2 | ) | |||||||||||||||||||
Cash Dividends: |
|||||||||||||||||||||||
Common @ $0.63 per share |
(30.6 | ) | (30.6 | ) | |||||||||||||||||||
Share-based compensation |
5.0 | 8.2 | 13.2 | ||||||||||||||||||||
Stock options exercised |
0.2 | 0.5 | 0.7 | ||||||||||||||||||||
Tax benefit on share-based compensation |
1.0 | 1.0 | |||||||||||||||||||||
Adjustment to initially apply FIN 48 |
(1.8 | ) | (1.8 | ) | |||||||||||||||||||
Other |
(0.6 | ) | (1.3 | ) | (1.9 | ) | |||||||||||||||||
Balances at June 30, 2008 |
273.0 | 197.5 | 996.6 | (484.0 | ) | (143.9 | ) | 839.2 | |||||||||||||||
Net income |
47.9 | 47.9 | |||||||||||||||||||||
Pension and post-retirement benefits, net of tax |
(176.4 | ) | (176.4 | ) | |||||||||||||||||||
Net losses on derivative instruments, net of tax |
(5.9 | ) | (5.9 | ) | |||||||||||||||||||
Foreign currency translation |
(20.3 | ) | (20.3 | ) | |||||||||||||||||||
Purchase of treasury stock |
(46.1 | ) | (46.1 | ) | |||||||||||||||||||
Cash Dividends: |
|||||||||||||||||||||||
Common @ $0.72 per share |
(31.5 | ) | (31.5 | ) | |||||||||||||||||||
Share-based compensation plans |
10.4 | (1.4 | ) | 9.0 | |||||||||||||||||||
Uncertain tax positions adjustments |
3.5 | 3.5 | |||||||||||||||||||||
Stock options exercised |
0.1 | 0.1 | |||||||||||||||||||||
Tax shortfall on share-based compensation |
(2.5 | ) | (2.5 | ) | |||||||||||||||||||
Balances at June 30, 2009 |
273.1 | 208.9 | 1,013.0 | (531.5 | ) | (346.5 | ) | 617.0 | |||||||||||||||
Net income |
2.1 | 2.1 | |||||||||||||||||||||
Pension and post-retirement benefits, net of tax |
(29.7 | ) | (29.7 | ) | |||||||||||||||||||
Net gain on derivative instruments, net of tax |
14.9 | 14.9 | |||||||||||||||||||||
Unrealized loss on marketable securities, net of tax |
(0.5 | ) | (0.5 | ) | |||||||||||||||||||
Foreign currency translation |
(9.3 | ) | (9.3 | ) | |||||||||||||||||||
Cash Dividends: |
|||||||||||||||||||||||
Common @ $0.72 per share |
(31.9 | ) | (31.9 | ) | |||||||||||||||||||
Share-based compensation plans |
10.2 | (3.7 | ) | 6.5 | |||||||||||||||||||
Uncertain tax positions adjustments |
5.0 | 5.0 | |||||||||||||||||||||
Stock options exercised |
0.1 | 0.1 | 0.2 | ||||||||||||||||||||
Tax shortfall on share-based compensation |
(0.9 | ) | (0.9 | ) | |||||||||||||||||||
Balances at June 30, 2010 |
$ | 273.2 | $ | 223.3 | $ | 983.2 | $ | (535.2 | ) | $ | (371.1 | ) | $ | 573.4 | |||||||||
See accompanying notes to consolidated financial statements.
47
Consolidated Statement of Changes in Stockholders Equity (continued)
Carpenter Technology Corporation
For the Years Ended June 30, 2010, 2009 and 2008
Common Shares | ||||||||
Issued | Treasury |
Net
Outstanding |
||||||
Balances at June 30, 2007 |
54,552,244 | (2,308,702 | ) | 52,243,542 | ||||
Stock options exercised |
55,550 | | 55,550 | |||||
Share-based compensation plans |
348 | 131,741 | 132,089 | |||||
Purchases of treasury stock |
| (7,135,411 | ) | (7,135,411 | ) | |||
Balances at June 30, 2008 |
54,608,142 | (9,312,372 | ) | 45,295,770 | ||||
Stock options exercised |
6,700 | | 6,700 | |||||
Share-based compensation plans |
| (54,545 | ) | (54,545 | ) | |||
Purchases of treasury stock |
| (1,218,900 | ) | (1,218,900 | ) | |||
Balances at June 30, 2009 |
54,614,842 | (10,585,817 | ) | 44,029,025 | ||||
Stock options exercised |
29,559 | | 29,559 | |||||
Share-based compensation plans |
| (91,500 | ) | (91,500 | ) | |||
Balances at June 30, 2010 |
54,644,401 | (10,677,317 | ) | 43,967,084 | ||||
Consolidated Statements of Comprehensive (Loss) Income
Carpenter Technology Corporation
For the years ended June 30, 2010, 2009 and 2008
($ in millions) |
2010 | 2009 | 2008 | |||||||||
Net income |
$ | 2.1 | $ | 47.9 | $ | 277.7 | ||||||
Pension and post-retirement benefits, net of tax of $23.5, $110.3, and $36.7, respectively |
(29.7 | ) | (176.4 | ) | (57.7 | ) | ||||||
Net gain (loss) on derivative instruments, net of tax of ($9.2), $3.7, and $8.8, respectively |
14.9 | (5.9 | ) | (13.8 | ) | |||||||
Unrealized loss on marketable securities, net of tax of $0.3, $, $ respectively |
(0.5 | ) | | | ||||||||
Foreign currency translation |
(9.3 | ) | (20.3 | ) | 9.9 | |||||||
Comprehensive (loss) income |
$ | (22.5 | ) | $ | (154.7 | ) | $ | 216.1 | ||||
See accompanying notes to consolidated financial statements.
48
Notes to Consolidated Financial Statements
1. | Summary of Significant Accounting Policies |
Basis of Consolidation
The consolidated financial statements include the accounts of Carpenter and all majority-owned subsidiaries. All significant intercompany accounts and transactions are eliminated. Investments in companies in which Carpenter exercises significant influence, but which it does not control (generally a 20 to 50 percent ownership interest), are accounted for on the equity method of accounting and Carpenters share of their income or loss is included in other income, net in the Consolidated Statements of Income.
Stock Split
On October 16, 2007, the Company announced that its Board of Directors approved a two-for-one split of the Companys common stock to be effected in the form of a stock dividend. The stock split was distributed on November 15, 2007 to stockholders of record at the close of business on November 6, 2007. All share and per share information has been retroactively adjusted and restated to reflect the impact of the split.
Discontinued Operations
During fiscal year 2008, the Company completed the sale of the ceramics and metal shapes businesses. The results of operations for the disposed businesses and the gain on sale have been classified as discontinued operations in the consolidated statements of income for all periods presented. Cash flows related to our disposed operations have not been separately disclosed.
Revenue Recognition
Revenue, net of related discounts and allowances, is recognized when product is shipped and title and risk of loss has transferred to the customer.
Freight and Handling Fees and Costs
Freight and handling costs billed separately to customers are included as part of sales, and freight and handling costs expensed are included as part of cost of sales on the consolidated statements of income.
Research and Development
Research and development expenditures, which amounted to $17.8 million, $15.4 million and $14.4 million in fiscal year 2010, 2009 and 2008, respectively, are expensed as incurred and are generally reported in cost of sales in the consolidated statement of income. Substantially all development costs are related to developing new products or designing significant improvements to existing products.
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.
49
Notes to Consolidated Financial Statements (continued)
Marketable Securities
Purchases and sales of marketable securities are recorded on a trade-date basis. Carpenter has determined that all of its marketable securities are to be classified as available-for-sale. These securities are carried at market value, with the unrealized gains and losses reported as a component of accumulated other comprehensive loss. Interest and dividends on securities classified as available-for-sale are included in other income, net.
Accounts Receivable
Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of outstanding amounts. Trade credit is extended based upon periodic evaluation of each customers ability to perform its obligations. The Company determines accounts receivable allowances based on an aging of accounts and a review of specific accounts identified as collection risks. The Company does not require collateral to secure accounts receivable.
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. Carpenter also uses the First-In, First-Out (FIFO) and average cost methods. As of June 30, 2010 and 2009, $60.8 million and $56.0 million of inventory, respectively, was accounted for using a method other than the LIFO method.
Fixed Assets and Depreciation
Fixed assets are stated at historical cost less accumulated depreciation. Depreciation for financial reporting purposes is computed by the straight-line method over the estimated useful lives of the assets. Depreciation for income tax purposes is computed using accelerated methods. Upon disposal, assets and related depreciation are removed from the accounts and the differences between the net amounts and proceeds from disposal are included in cost of goods sold in the consolidated statement of income.
Computer Software and Amortization
Computer software is included in other assets on the consolidated balance sheet, and is amortized for financial reporting purposes on a straight-line basis over the respective estimated useful lives, ranging principally from 3 to 7 years. Amortization expense charged to operations related to capitalized software amounted to $4.4 million, $2.1 million and $1.3 million for the years ended June 30, 2010, 2009 and 2008, respectively.
Goodwill
Goodwill, representing the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses, is stated at cost. Goodwill is not amortized but instead is annually tested for impairment, or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. Potential impairment is identified by comparing the fair value of a reporting unit to its carrying value, including goodwill. The fair value is estimated using discounted cash flow and the use of market multiples valuation techniques. These valuation techniques require the use of estimates and assumptions related to projected operating results, capital expenditures and working capital levels as well as the cost of capital. If the carrying value of the reporting unit exceeds its fair value, any impairment loss is measured by comparing the carrying value of the reporting units goodwill to its implied fair value.
50
Notes to Consolidated Financial Statements (continued)
Intangible assets
The costs of intangible assets, consisting principally of trademarks, trade names and customer relationships are amortized on a straight-line basis over the estimated useful lives ranging from 15 to 30 years.
Impairment of Long-Lived Assets
Long-lived assets, including property, plant and equipment and intangible assets subject to amortization are reviewed for impairment and written down to fair value whenever events or changes in circumstances indicate that the carrying value may not be recoverable through future undiscounted cash flows. The amount of the impairment loss is the excess of the carrying amount of the impaired assets over the fair value of the assets based upon discounted future cash flows.
Environmental Expenditures
Environmental expenditures that pertain to current operations or to future revenues are expensed or capitalized consistent with Carpenters capitalization policy for property, plant and equipment. 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 when the remediation is probable and the cost can be reasonably estimated. Recoveries of expenditures for environmental remediation are recognized as assets only when recovery is deemed probable. Estimated liabilities are not discounted to present value, but estimated assets are measured on a discounted basis.
Derivative Financial Instruments
All derivative financial instruments are recorded on the balance sheet at their fair value and changes in fair value are recorded each period in current earnings or comprehensive income. Carpenter enters into derivative financial instruments to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. The Company has utilized interest rate swaps to convert floating rate debt to fixed rate, or to convert fixed rate debt to floating rate.
Foreign Currency Translation
Assets and liabilities of most international operations are translated into U.S. dollars at exchange rates in effect at year-end, and their income statements are translated at the average monthly exchange rates prevailing during the year. The resulting translation gains and losses are recorded each period as a component of accumulated other comprehensive income until the international entity is sold or liquidated. Gains and losses from transactions denominated in foreign currencies are reported in other income, net in the consolidated statement of income.
Income Taxes
Deferred income taxes are recognized by applying enacted statutory tax rates, applicable to future years, to temporary differences between the tax bases and financial statement carrying values of Carpenters assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets to amounts that are more likely than not to be realized.
51
Notes to Consolidated Financial Statements (continued)
Significant judgments, estimates and assumptions are required in determining tax return reporting positions and in calculating provisions for income tax, which are based on interpretations of tax regulations and accounting pronouncements. Liabilities are established for uncertain tax positions when it is more likely than not that such positions, if challenged would not be sustained upon review by taxing authorities. These liabilities are re-evaluated as tax regulations and facts and circumstances change, such as the closing of a tax audit or the expiration of the statute of limitations for a specific exposure.
Earnings per Share
Beginning in fiscal year 2010 the Company adopted the FASBs guidance on the determination of participating securities as it relates to nonvested restricted shares and units that are considered participating securities because the awards have the right to receive non-forfeitable dividends. Accordingly, the Company calculates basic earnings per share using the two class method and retrospectively adjusted earnings per share data to conform to the current presentation. Under the two class method, earnings are allocated to common stock and participating securities according to their participation rights in dividends and undistributed earnings. The earnings available to each class of stock is divided by the weighted average number of shares for the period in each class. Because the participating securities have no obligation to share in net losses, losses are not allocated to the participating securities in this calculation.
Litigation
Periodically, Carpenter and its subsidiaries are parties to lawsuits arising out of the normal course of business. Carpenter records liabilities when a loss is probable and can be reasonably estimated. These estimates are based on an analysis made by internal and external legal counsel considering information known at the time.
Share-Based Compensation
The Company has two share-based employee compensation plans, which are more fully described in detail in Note 16. The Company recognizes compensation cost based on the fair value of the awards on the date of grant. The compensation cost is recognized over the requisite service period of the award, which is generally the shorter of the vesting period that the holder is required to provide service, or the period from the grant date to the date on which the employee is eligible to retire. Upon retirement, as defined in the Companys share-based compensation plans, outstanding awards are subject to certain accelerated vesting terms.
Concentration of Credit Risk
Financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash and cash equivalents, investments in marketable securities and trade receivables. Investment and cash management policies have been implemented that limit deposit concentrations and limit investments to investment grade securities. The risk with respect to trade receivables is mitigated by monitoring payment terms and periodic credit evaluations we perform on our customers, the short duration of our payment terms and by the diversification of our customer base. One customer accounted for 10% of total net sales in fiscal year 2010. No single customer accounted for more than 10% or more of total sales in fiscal years 2009 and 2008.
52
Notes to Consolidated Financial Statements (continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2. | Restructuring Charges |
During the year ended June 30, 2009, the Company recorded $9.4 million of charges associated with the closure of our metal strip manufacturing facility in the United Kingdom (UK), which we announced in March 2009. The UK facility employed approximately 35 workers and manufactured soft magnetic nickel-iron and cobalt-iron alloys in strip and bar form. The facilitys customers will be serviced by existing operations and through arrangements with other suppliers. The UK manufacturing operations were historically included in our Advanced Metals Operation segment, and the restructuring charges have not been included in the segment operating results.
3. | Divestitures and Acquisition |
Divestitures
On March 31, 2008, the Company completed the sale of our ceramics businesses to Morgan Crucible Company plc, a U.K. based advanced materials company. The ceramics operations consisted of our Certech and Carpenter Advanced Ceramics business units that have historically been included in our Engineered Products Operations business segment. The net proceeds from the sale were $142.6 million, which included $144.5 million of sales price net of $1.9 million of deal costs. The selling price was subject to a working capital adjustment, which the Company calculated to be $2.9 million. In June 2008, the Company received an initial payment of the working capital adjustment of $2.0 million, the remaining balance of the estimated working capital adjustment totaling $0.9 million was collected in the first quarter of fiscal year 2009. The Company does not have any significant continuing involvement in the operations after the divestiture.
On June 30, 2008, the Company completed the sale of our metal shapes business, Rathbone Precision Metals (Rathbone), to Calvi Holdings, S.r.l. Rathbone is engaged in the business of designing, manufacturing and selling precision formed shape components in a variety of alloys. The operations of Rathbone were historically included on our Engineered Products Operations business segment. The net sales price was $17.4 million, of which $5.0 million was received at closing with the remaining $12.5 million in the form of a note receivable which was paid in full in July 2008. The net proceeds also reflect $0.1 million of deal related costs. In conjunction with the sale, Carpenter entered into a long-term supply agreement to provide the buyer with certain raw materials over a five-year period.
53
Notes to Consolidated Financial Statements (continued)
The following table summarizes the components of discontinued operations:
Year Ended June 30, | |||||||||
($ in millions) | 2010 | 2009 | 2008 | ||||||
Net sales |
$ | | $ | | $ | 88.9 | |||
Income before income taxes |
$ | | $ | | $ | 13.2 | |||
Less: income tax expense |
| | 4.3 | ||||||
Income from operations of discontinued businesses, net of tax |
| | 8.9 | ||||||
Gain on sale of discontinued operations |
| | 109.6 | ||||||
Less: income tax expense on gain |
| | 41.3 | ||||||
Income from discontinued operations, net of tax |
$ | | $ | | $ | 77.2 | |||
The Company has not allocated general corporate overhead charges to the discontinued operations and has elected not to allocate general corporate interest expense.
Acquisition
On March 27, 2008, the Company acquired substantially all the assets of Ultrafine Powder Technology, a manufacturer of fine gas atomized powders used by the metal injection molding industry and other specialty markets located in Woonsocket, RI. The purchase price was $6.6 million and was paid in cash at closing. The consideration paid was allocated to $1.8 million of current assets, principally accounts receivable and inventory, $3.2 million of property, plant and equipment, $1.7 million of intangible assets, $0.6 million of goodwill and $0.7 million to accounts payable and accrued expenses.
54
Notes to Consolidated Financial Statements (continued)
4. | Earnings per Common Share |
The calculations of basic and diluted earnings from continuing operations per common share for the years ended June 30, 2010, 2009 and 2008 were as follows:
($ in millions, except per share data) | Year Ended June 30, | |||||||||||
2010 | 2009 | 2008 | ||||||||||
Net income from continuing operations |
$ | 2.1 | $ | 47.9 | $ | 200.5 | ||||||
Less: earnings and dividends allocated to participating securities |
(0.2 | ) | (0.1 | ) | (1.2 | ) | ||||||
Earnings available for common shareholders |
$ | 1.9 | $ | 47.8 | $ | 199.3 | ||||||
Weighted average number of common shares outstanding for basic earnings per common share |
43.9 | 43.9 | 48.5 | |||||||||
Effect of shares issuable under share based compensation plans |
0.5 | 0.3 | 0.2 | |||||||||
Weighted average number of common shares outstanding for diluted earnings per common share |
44.4 | 44.2 | 48.7 | |||||||||
Basic earnings per common share from continuing operations |
$ | 0.04 | $ | 1.08 | $ | 4.11 | ||||||
Diluted earnings per common share from continuing operations |
$ | 0.04 | $ | 1.08 | $ | 4.11 | ||||||
The following awards issued under share-based compensation plans were excluded from the calculations of diluted earnings per share above because their effects were anti-dilutive:
(in millions) | Year Ended June 30, | |||||
2010 | 2009 | 2008 | ||||
Stock options |
0.4 | 0.4 | 0.2 | |||
Restricted stock awards |
| 0.1 | | |||
55
Notes to Consolidated Financial Statements (continued)
5. | Marketable Securities |
The fair value of the Companys marketable securities was based on quoted market prices or estimates of fair value as of June 30, 2010 and 2009. The following is a summary of marketable securities, all of which were classified as available-for-sale as of June 30, 2010 and 2009:
June 30, 2010 ($ in millions) |
Cost |
Unrealized
Losses |
Estimated
Fair Value |
|||||||
Current |
||||||||||
Government agency bonds |
$ | 78.9 | $ | | $ | 78.9 | ||||
Corporate bonds |
15.4 | | 15.4 | |||||||
Commercial paper |
0.9 | | 0.9 | |||||||
Certificate of deposit |
10.0 | | 10.0 | |||||||
$ | 105.2 | $ | | $ | 105.2 | |||||
Non-current |
||||||||||
Municipal auction rate securities |
$ | 6.2 | $ | (0.9 | ) | $ | 5.3 | |||
June 30, 2009 ($ in millions) |
Cost |
Unrealized
Losses |
Estimated
Fair Value |
|||||||
Current |
||||||||||
Certificate of deposit |
$ | 15.0 | $ | | $ | 15.0 | ||||
Non-current |
||||||||||
Municipal auction rate securities |
$ | 6.3 | $ | | $ | 6.3 | ||||
For the fiscal years ended June 30, 2010, 2009 and 2008, proceeds from sales and maturities of marketable securities were $55.3 million, $44.8 million and $722.2 million, respectively.
Municipal Auction Rate Securities
As of June 30, 2010 and June 30, 2009, the Companys marketable securities included municipal auction rate securities with a par value of $6.2 million and $6.3 million, respectively. The municipal auction rate securities are callable at par at the option of the issuer. As of June 30, 2010, the Company recorded $0.9 million of unrealized losses to reflect the estimated market value of these securities. The Company does not intend to sell the securities and believes that it is more likely than not that the Company will not be required to sell the securities before recovering their costs. The valuation of auction rate securities is subject to uncertainties that are difficult to predict. Factors that impact the valuation of these securities include changes in credit ratings of the securities as well as the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates, counterparty risk and the ongoing strength and quality of market credit and liquidity. The municipal auction rate securities owned by the Company are of high credit quality and maintain credit enhancements. The Company does not believe that any of the underlying issuers of our municipal auction rate securities are currently at risk of default. The securities have been classified according to their stated maturity dates, which range from 2019 to 2030. Accordingly, the municipal auction rate securities are included in other assets in the accompanying consolidated balance sheets.
56
Notes to Consolidated Financial Statements (continued)
6. | Inventories |
($ in millions) | June 30, | |||||
2010 | 2009 | |||||
Raw materials and supplies |
$ | 30.7 | $ | 29.5 | ||
Work in process |
109.1 | 90.8 | ||||
Finished and purchased products |
63.8 | 65.1 | ||||
$ | 203.6 | $ | 185.4 | |||
If the first-in, first-out method of inventory had been used instead of the LIFO method, inventories would have been $331.8 and $305.8 million higher as of June 30, 2010 and 2009, respectively. Current cost of LIFO-valued inventories was $474.4 million at June 30, 2010 and $435.1 million at June 30, 2009. The reductions in LIFO-valued inventories decreased cost of sales by $7.0 million during fiscal year 2010, $8.0 million during fiscal year 2009 and $23.4 million during fiscal year 2008.
7. | Property, Plant and Equipment |
($ in millions) | June 30, | |||||
2010 | 2009 | |||||
Land |
$ | 8.1 | $ | 8.1 | ||
Buildings and building equipment |
263.4 | 259.5 | ||||
Machinery and equipment |
1,176.1 | 1,209.4 | ||||
Construction in progress |
18.6 | 32.4 | ||||
Total at cost |
1,466.2 | 1,509.4 | ||||
Less: accumulated depreciation and amortization |
848.7 | 875.3 | ||||
$ | 617.5 | $ | 634.1 | |||
The estimated useful lives of depreciable assets are as follows:
Asset Category |
Useful Life
(in Years) |
|
Buildings and building equipment |
10 45 | |
Machinery and equipment |
3 30 |
Depreciation and amortization for the years ended June 30, 2010, 2009 and 2008 was $53.6 million, $49.5 million and $46.8 million, respectively.
57
Notes to Consolidated Financial Statements (continued)
8. | Goodwill and Other Intangible Assets, Net |
Goodwill
Carpenter conducted its annual impairment review as of June 30, 2010 and 2009 and determined that there was no goodwill impairment. At June 30, 2010 and 2009 the goodwill recorded was associated with the Advanced Metals Operations segment. There were no changes in the carrying amount of goodwill as of June 30, 2010 and 2009.
2010 | 2009 | |||||||
Goodwill |
$ | 69.9 | $ | 69.9 | ||||
Accumulated impairment losses |
(34.7 | ) | (34.7 | ) | ||||
$ | 35.2 | $ | 35.2 | |||||
Other Intangible Assets, Net
June 30, | ||||||||||||||||||||
2010 | 2009 | |||||||||||||||||||
(in millions) |
Gross
Carrying Amount |
Accumulated
Amortization |
Net
Carrying Amount |
Gross
Carrying Amount |
Accumulated
Amortization |
Net
Carrying Amount |
||||||||||||||
Trademarks and trade names |
$ | 30.6 | $ | (13.7 | ) | $ | 16.9 | $ | 30.6 | $ | (12.7 | ) | $ | 17.9 | ||||||
Other |
0.9 | (0.2 | ) | 0.7 | 0.9 | (0.1 | ) | 0.8 | ||||||||||||
Total |
$ | 31.5 | $ | (13.9 | ) | $ | 17.6 | $ | 31.5 | $ | (12.8 | ) | $ | 18.7 | ||||||
Carpenter recorded $1.1 million of amortization expense during fiscal year 2010, $1.1 million during fiscal year 2009, and $1.0 million during fiscal year 2008. The estimated annual amortization expense for each of the succeeding five fiscal years is $1.1 million.
9. | Debt |
On November 24, 2009, the Company entered into a new revolving credit facility (Credit Agreement). The Credit Agreement replaced the Companys previous Five-Year Revolving Credit Agreement, dated as of August 31, 2005, which had been set to expire in August 2010. During the fiscal year ended June 30, 2010, the Company capitalized $2.0 million of debt issue costs paid in connection with the Credit Agreement.
The Credit Agreement extends to November 24, 2012, permits the Company to borrow funds for working capital and other general corporate purposes; contains a revolving credit commitment amount of $200 million subject to the Companys right, from time to time, to request an increase of the commitment to $300 million in the aggregate; and provides for the issuance of Letters of Credit within such amount. Borrowings under the Credit Agreement bear interest, at the election of the Company, at either the base rate or the Eurocurrency rate in effect at such time plus, in each case, the applicable margin based on the Companys debt rating. The Company has the right to voluntarily prepay and reborrow loans and to terminate or reduce the commitments under the facility. As of June 30, 2010, the Company had $3.8 million of issued letters of credit under the Credit Agreement, with the balance of $196.2 million available for future borrowings.
58
Notes to Consolidated Financial Statements (continued)
The Company is subject to certain financial and restrictive covenants under the Credit Agreement, which, among other things, require the maintenance of a minimum interest coverage ratio (which begins at 3.0 to 1.0 for the period through September 30, 2010, and ultimately increases to 3.5 to 1.0 thereafter). The interest coverage ratio is defined in the Credit Agreement as, for any period, the ratio of consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) to consolidated interest expense for such period. The Credit Agreement also requires the Company to maintain a debt to capital ratio of less than 55%. The debt to capital ratio is defined in the Credit Agreement as the ratio of consolidated indebtedness, as defined, to consolidated capitalization, as defined. As of June 30, 2010, the Company was in compliance with all of the covenants of the Credit Agreement.
In connection with the Company entering into the Credit Agreement discussed above, the Company simultaneously terminated its separate $50 million accounts receivable purchase facility, dated as of December 20, 2001.
Long-term debt outstanding as of June 30, 2010 and 2009 consisted of the following:
($ in millions) | June 30, | |||||
2010 | 2009 | |||||
Senior unsecured notes, 6.625% due May 2013
|
$ | 102.8 | $ | 101.6 | ||
Medium-term notes, Series B at 6.74% to 7.10% due from April 2013
|
56.0 | 76.0 | ||||
Medium-term notes, Series C at 7.625% due August 2011
|
100.8 | 101.0 | ||||
Total |
259.6 | 278.6 | ||||
Less amounts due within one year |
| 20.0 | ||||
Long-term debt, net of current portion |
$ | 259.6 | $ | 258.6 | ||
The carrying value of the notes as of June 30, 2010 and 2009 includes fair value adjustments for interest rate swap contracts of $0.7 million and $1.0 million, respectively, for deferred gains on settled interest rate swaps. The deferred gains on settled interest rate swap contracts are being recognized as reductions to interest expense over the remaining term of the notes, which ranges from one to three years.
Aggregate maturities of long-term debt for the four years subsequent to June 30, 2011, are $100.0 million in fiscal year 2012, $101.0 million in fiscal year 2013 and $0 in fiscal year 2014 and 2015.
For the years ended June 30, 2010, 2009 and 2008, interest costs totaled $18.8 million, $20.1 million and $22.8 million, respectively, of which $1.0 million, $4.0 million and $2.3 million, respectively, were capitalized as part of the cost of property, plant, equipment and software.
59
Notes to Consolidated Financial Statements (continued)
10. | Accrued Liabilities |
($ in millions) | June 30, | |||||
2010 | 2009 | |||||
Compensation |
$ | 38.6 | $ | 19.5 | ||
Employee benefits |
25.9 | 28.3 | ||||
Interest |
4.5 | 4.4 | ||||
Deferred revenue |
2.9 | 4.1 | ||||
Derivative financial instruments |
1.9 | 22.1 | ||||
Taxes, other than income |
1.9 | 1.6 | ||||
Environmental costs |
1.3 | 1.0 | ||||
Legal |
0.3 | 14.1 | ||||
Professional services |
0.1 | 0.3 | ||||
Other |
10.2 | 12.9 | ||||
$ | 87.6 | $ | 108.3 | |||
11. | Pension and Other Postretirement Benefits |
Carpenter provides several noncontributory defined benefit pension plans to certain employees. The plans provide defined benefits based on years of service and final average salary.
Carpenter also provides other postretirement benefit plans to certain of its employees. The postretirement benefit plans consist of health care and life insurance plans. Benefit payments are paid from corporate assets. Plan assets are maintained in a Voluntary Employee Benefit Association Trust (VEBA) and are principally invested in equity securities.
60
Notes to Consolidated Financial Statements (continued)
The following provides a reconciliation of benefit obligations, plan assets, and funded status of the plans:
($ in millions) | Pension Plans |
Other
Postretirement Plans |
||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Change in projected benefit obligation: |
||||||||||||||||
Projected benefit obligation at beginning of year |
$ | 829.9 | $ | 777.0 | $ | 199.8 | $ | 185.4 | ||||||||
Service cost |
21.0 | 18.0 | 2.3 | 2.2 | ||||||||||||
Interest cost |
50.2 | 50.4 | 12.1 | 12.1 | ||||||||||||
Benefits paid |
(58.6 | ) | (59.7 | ) | (11.1 | ) | (11.9 | ) | ||||||||
Actuarial loss (gain) |
115.1 | 54.3 | 21.0 | 12.6 | ||||||||||||
Plan settlements |
| (8.3 | ) | | | |||||||||||
Plan amendments |
(0.4 | ) | | (0.3 | ) | | ||||||||||
Other |
| (1.8 | ) | 0.8 | (0.6 | ) | ||||||||||
Projected benefit obligation at end of year |
$ | 957.2 | $ | 829.9 | $ | 224.6 | $ | 199.8 | ||||||||
Change in plan assets: |
||||||||||||||||
Fair value of plan assets at beginning of year |
$ | 586.6 | $ | 789.4 | $ | 57.0 | $ | 78.3 | ||||||||
Actual return on plan assets |
100.0 | (142.8 | ) | 6.4 | (21.0 | ) | ||||||||||
Benefits paid from plan assets |
(58.6 | ) | (59.7 | ) | (11.1 | ) | (11.9 | ) | ||||||||
Contributions |
3.5 | 8.0 | 10.9 | 11.6 | ||||||||||||
Plan settlements |
| (8.3 | ) | | | |||||||||||
Fair value of plan assets at end of year |
$ | 631.5 | $ | 586.6 | $ | 63.2 | $ | 57.0 | ||||||||
Funded status of the plans |
$ | (325.7 | ) | $ | (243.3 | ) | $ | (161.4 | ) | $ | (142.8 | ) | ||||
Amounts recognized in the Consolidated Balance Sheets : |
||||||||||||||||
Other assets - noncurrent |
$ | 0.2 | $ | 0.1 | $ | | $ | | ||||||||
Accrued liabilities - current |
(3.3 | ) | (3.0 | ) | (14.7 | ) | (15.1 | ) | ||||||||
Accrued pension liabilities - noncurrent |
(322.6 | ) | (240.4 | ) | | | ||||||||||
Accrued postretirement benefits |
| | (146.7 | ) | (127.7 | ) | ||||||||||
$ | (325.7 | ) | $ | (243.3 | ) | $ | (161.4 | ) | $ | (142.8 | ) | |||||
61
Notes to Consolidated Financial Statements (continued)
($ in millions) | Pension Plans | Postretirement Plans | ||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||
Amounts recognized in accumulated other comprehensive loss: |
||||||||||||||
Net actuarial loss |
$ | 486.5 | $ | 453.4 | $ | 95.1 | $ | 81.0 | ||||||
Prior service cost (credit) |
5.0 | 6.5 | (20.0 | ) | (27.6 | ) | ||||||||
Total |
$ | 491.5 | $ | 459.9 | $ | 75.1 | $ | 53.4 | ||||||
Additional information : |
||||||||||||||
Accumulated benefit obligation for all pension plans |
$ | 875.8 | $ | 754.5 | N/A | N/A | ||||||||
The following is additional information related to plans with projected benefit obligations in excess of plan assets as of June 30, 2010 and 2009:
Pension Plans |
Other Postretirement
Plans |
|||||||||||
($ in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||
Projected benefit obligation |
$ | 957.2 | $ | 829.8 | $ | 224.6 | $ | 199.8 | ||||
Fair value of plan assets |
$ | 631.5 | $ | 586.4 | $ | 63.2 | $ | 57.0 |
The following additional information is for plans with accumulated benefit obligations in excess of plan assets as of June 30, 2010 and 2009:
Pension Plans |
Other Postretirement
Plans |
|||||||||||
($ in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||
Accumulated benefit obligation |
$ | 875.8 | $ | 754.4 | $ | 224.5 | $ | 199.8 | ||||
Fair value of plan assets |
$ | 631.5 | $ | 586.4 | $ | 63.2 | $ | 57.0 |
The components of the net periodic benefit cost related to the Companys pension and other postretirement benefits for the years ended June 30, 2010, 2009 and 2008 are as follows:
Pension Plans | Other Postretirement Plans | |||||||||||||||||||||||
($ in millions) | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | ||||||||||||||||||
Service cost |
$ | 21.0 | $ | 18.0 | $ | 19.0 | $ | 2.3 | $ | 2.2 | $ | 2.6 | ||||||||||||
Interest cost |
50.2 | 50.4 | 49.1 | 12.1 | 12.1 | 11.6 | ||||||||||||||||||
Expected return on plan assets |
(45.0 | ) | (60.9 | ) | (73.8 | ) | (4.6 | ) | (6.2 | ) | (7.4 | ) | ||||||||||||
Amortization of net loss |
27.0 | 9.7 | 3.5 | 5.0 | 2.1 | 1.9 | ||||||||||||||||||
Amortization of prior service cost (benefit) |
1.1 | 1.1 | 1.1 | (7.8 | ) | (7.9 | ) | (7.9 | ) | |||||||||||||||
Curtailment |
| | 0.2 | | | | ||||||||||||||||||
Plan settlement expense |
| 4.4 | | | | | ||||||||||||||||||
Net pension expense (income) |
$ | 54.3 | $ | 22.7 | $ | (0.9 | ) | $ | 7.0 | $ | 2.3 | $ | 0.8 | |||||||||||
62
Notes to Consolidated Financial Statements (continued)
As discussed in Note 2, the Company closed the metal strip manufacturing facility in the U.K. In conjunction with the closure, the Company settled the defined benefit pension plan covering employees at the U.K. facility.
As discussed in Note 3, the Company completed the sale of certain business units during fiscal year 2008. As a result of the Companys decision to divest these business units, the Company recognized a curtailment loss of $0.2 million in fiscal year 2008. The curtailment loss recorded is due to the significant reduction in the expected aggregate years of future service as a result of the divestitures.
The service cost component of Carpenters net pension (income) expense, which represents the estimated cost of future pension liabilities earned associated with active employees, is included in the operating income of the business segments. The residual net pension expense, which is comprised of the expected return on plan assets, interest costs on the projected benefit obligations of the plans, and amortization of actuarial gains and losses and prior service costs, is included under the heading Pension earnings, interest & deferrals in the segment data presented in Note 20.
Principal actuarial assumptions at June 30:
Pension Plans | Other Postretirement Plans | |||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||
Weighted-average assumptions used to determine benefit obligations at fiscal year end |
||||||||||||||||||
Discount rate |
5.00 | % | 6.25 | % | 6.75 | % | 5.00 | % | 6.25 | % | 6.75 | % | ||||||
Rate of compensation increase |
3.66 | % | 3.65 | % | 3.65 | % | N/A | N/A | N/A | |||||||||
Pension Plans | Other Postretirement Plans | |||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||
Weighted-average assumptions used to determine net periodic benefit cost for the fiscal year |
||||||||||||||||||
Discount rate |
6.25 | % | 6.75 | % | 6.25 | % | 6.25 | % | 6.75 | % | 6.25 | % | ||||||
Expected long-term rate of return on plan assets |
8.00 | % | 8.00 | % | 8.50 | % | 8.00 | % | 8.00 | % | 8.50 | % | ||||||
Long-term rate of compensation increase |
3.65 | % | 3.65 | % | 3.64 | % | N/A | N/A | N/A |
63
Notes to Consolidated Financial Statements (continued)
The following table shows the expected health care rate increase and the future rate and time at which it is expected to remain constant.
June 30, | ||||||
2010 | 2009 | |||||
Assumed health care cost trend rate |
9 | % | 10 | % | ||
Rate to which the cost trend rate is assumed to decline and remain (the ultimate trend rate) |
5 | % | 5 | % | ||
Year that the rate reaches the ultimate trend rate |
2018 | 2015 |
Assumed health care cost trend rates have an effect on the amounts reported for other postretirement benefits. A one percentage point increase in the assumed health care cost trend rate would increase service and interest cost by $0.5 million and increase the postretirement benefit obligation by $8.8 million. A one percentage point decrease in the assumed health care cost trend rate would decrease service and interest cost by $0.4 million and decrease the postretirement benefit obligation by $7.7 million.
Net pension expense in the year ended June 30, 2011 is estimated to be $60.6 million, comprised of $53.8 million of net periodic benefit costs for pension plans and $6.8 million of net periodic benefit costs for other post-retirement benefit plans. The discount rate and expected long-term rate of return on plan assets used to calculate the net pension expense for the year ended June 30, 2011 were 5.00 percent and 7.50 percent, respectively.
Amounts in other comprehensive loss that are expected to be recognized as components of net periodic benefit cost in the year ended June 30, 2011 are:
($ in millions) |
Pension
Plans |
Other
Postretirement Plans |
Total | ||||||||
Amortization of prior service cost (credit) |
$ | 1.0 | $ | (7.9 | ) | $ | (6.9 | ) | |||
Amortization of net actuarial loss |
29.1 | 6.1 | 35.2 | ||||||||
Amortization of accumulated other comprehensive loss |
$ | 30.1 | $ | (1.8 | ) | $ | 28.3 | ||||
Carpenters U.S. pension plans weighted-average asset allocations at June 30, 2010 and 2009, by asset category are as follows:
2010 | 2009 | |||||
Equity securities |
49.1 | % | 58.4 | % | ||
Fixed income securities |
33.0 | 37.9 | ||||
Cash and cash equivalents |
17.9 | 3.7 | ||||
Total |
100.0 | % | 100.0 | % | ||
Carpenters policy for developing a pension plan investment strategy includes the periodic development of an asset and liability study by an independent investment consultant. Management considers this study in establishing an asset allocation that is presented to and approved by the Companys Plan Committee.
64
Notes to Consolidated Financial Statements (continued)
Management determines an asset allocation that will provide the highest level of return for an acceptable level of risk. Accordingly, Carpenter invests in different asset classes including large-, mid- and small-cap growth and value funds, index and international equity funds, short-term and medium-term duration fixed-income funds and high yield funds. The plans current allocation policy is to have approximately 60 percent U.S. and international equities and 40 percent fixed income securities. The Company may vary the actual asset mix based on the ratio of the plan assets and liabilities. Management reviews the asset allocation on a quarterly basis and makes revisions as deemed necessary. The assets related to Carpenters other postretirement benefit plans were invested 100 percent in equity securities as of June 30, 2010 and 2009.
The fair values of the Companys pension plan assets as of June 30, 2010, by asset category and by the levels of inputs used to determine fair value were as follows:
Fair Value | Total | ||||||||
Level 1 | Level 2 | ||||||||
Short-term investments |
$ | | $ | 121.5 | $ | 121.5 | |||
Domestic and international equities |
253.8 | 0.9 | 254.7 | ||||||
Commingled funds |
| 112.7 | 112.7 | ||||||
Government agency bonds |
65.0 | | 65.0 | ||||||
Corporate bonds |
| 63.0 | 63.0 | ||||||
Mortgage backed securities |
| 13.5 | 13.5 | ||||||
Asset backed securities and other |
| 1.1 | 1.1 | ||||||
$ | 318.8 | $ | 312.7 | $ | 631.5 | ||||
The fair values of the Companys other postretirement benefit plans as of June 30, 2010, by asset category and by the level of inputs used to determine fair value, were as follows:
Fair Value | Total | ||||||||
Level 1 | Level 2 | ||||||||
Short-term investments |
$ | | $ | 4.3 | $ | 4.3 | |||
Domestic and international equities |
23.6 | 0.4 | 24.0 | ||||||
Commingled fund |
| 34.9 | 34.9 | ||||||
$ | 23.6 | $ | 39.6 | $ | 63.2 | ||||
A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Investments in domestic and international equities are generally valued at the closing price reported on the active market on which they are traded. Commingled funds are valued based on the net asset value (NAV) established for the fund at each valuation date. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of shares outstanding. Corporate and government agency bonds and other fixed income securities are valued using closing bid prices on an active market when possible, otherwise using evaluated bid prices.
65
Notes to Consolidated Financial Statements (continued)
Management establishes the expected long-term rate of return assumption by reviewing historical trends and analyzing the current and projected market conditions in relation to the plans asset allocation and risk management objectives. In determining the expected long-term rate of return, Carpenter considered historical returns for individual asset classes and the impact of active portfolio management.
Cash Flows Employer Contributions
The Company was not required to make contributions to the plans during fiscal years 2010, 2009 or 2008. The Company currently expects to make approximately $3.9 million in required contributions to the Companys pension plan during fiscal year 2011.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid. Pension Benefits are currently paid from plan assets and Other Benefits are currently paid from corporate assets:
($ in millions) |
Pension
Benefits |
Other
Benefits |
||||
2011 |
$ | 58.9 | $ | 13.1 | ||
2012 |
$ | 61.2 | $ | 13.7 | ||
2013 |
$ | 62.5 | $ | 14.2 | ||
2014 |
$ | 64.0 | $ | 14.7 | ||
2015 |
$ | 65.6 | $ | 15.1 | ||
2016-2020 |
$ | 349.4 | $ | 79.4 |
Other Benefit Plans
Carpenter also maintains defined contribution retirement and savings plans for substantially all domestic employees. Company contributions were $4.0 million in fiscal year 2010, $4.9 million in fiscal year 2009 and $5.6 million in fiscal year 2008.
12. | Contingencies and Commitments |
Environmental
Carpenter is subject to various federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Although compliance with these laws and regulations may affect the costs of Carpenters operations, compliance costs to date have not been material. Carpenter has environmental remediation liabilities at some of its owned operating facilities and has been designated as a potentially responsible party (PRP) with respect to certain third-party Superfund waste disposal sites and other third party owned sites. Additionally, Carpenter has been notified that it may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against Carpenter. Neither the exact amount of remediation costs nor the final method of their allocation among all designated PRPs at these Superfund sites has been determined. The liability for future environmental remediation costs is evaluated by management on a quarterly basis. Carpenter accrues amounts for environmental remediation costs that represent managements best estimate of the probable and reasonably estimable costs related to environmental remediation. During fiscal year 2010, Carpenter decreased the liabilities recorded for environmental remediation costs by $2.0 million related to two
66
Notes to Consolidated Financial Statements (continued)
environmental remediation sites. During fiscal year 2009, Carpenter increased the liabilities recorded for environmental remediation costs by approximately $2.0 million for one environmental remediation site. During fiscal year 2008, no additional accruals were recorded. The liabilities recorded for environmental remediation costs at Superfund sites, at other third party-owned sites and at Carpenter-owned current or former operating facilities remaining at June 30, 2010 and 2009, were $4.9 million and $6.9 million, respectively.
Estimates of the amount and timing of future costs of environmental remediation requirements are inherently imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of currently unknown remediation sites and the allocation of costs among the PRPs. Based upon information currently available, such future costs are not expected to have a material effect on Carpenters financial position, results of operations or cash flows over the long-term. However, such costs could be material to Carpenters financial position, results of operations or cash flows in a particular future quarter or year.
Boarhead Farms
In June 2002, the Company was named as a defendant in a lawsuit filed by a group of plaintiffs in the District Court for the Eastern District of Pennsylvania titled Boarhead Farm Agreement Group v. Advanced Environmental Technology Corporation et al. (since amended to include the individual members). The suit alleges that the Company and the other named defendants contributed to damages caused at Boarhead Farms, a Superfund site located in Bridgeton, Pennsylvania. The Boarhead Farms site was the home of a now defunct chemical and waste hauling company that the Company engaged to dispose of certain wastes during the 1970s. The plaintiff group was individually named as PRPs for the Boarhead site in the EPAs Record of Decision in November 1998. Their suit, in June of 2002, against various defendants, including Carpenter, sought contributions for a portion of costs incurred for various site cleanup activities as well as contributions to future cleanup efforts. The suit went to trial in June 2008. Prior to trial, all of the named co-defendants, except for Carpenter, reached an out of court settlement with the plaintiffs. Carpenter denied the claims made by the plaintiff group. On August 18, 2008, the Court awarded the plaintiffs judgment against the Company for 80 percent of the plaintiffs past costs of remediating the site, including prejudgment interest from June 18, 2002 to January 1, 2008, and held the Company liable for 80 percent of future costs of the cleanup activities at the site. The Company appealed the Courts decision and oral arguments took place before the United States Court of Appeals for the Third Circuit on December 17, 2009. On April 12, 2010, the Court of Appeals for the Third Circuit vacated the previous judgment by the District Court and remanded the case for further proceedings. The Company intends to continue to defend against the claims in this case, but is unable to predict the outcome of the proceedings at this time. As of June 30, 2010 and June 30, 2009, the Company has recorded a liability related to this case of $21.8 and $21.5 million, respectively.
Duty Drawback
Historically, the Company has participated in a program offered by U.S. Customs and Border Protection (U.S. Customs) known as duty drawback. Under the program, the Company claimed a refund of import duties on items manufactured and exported to customers in foreign countries. Certain vendors of the Company prepared certificates authorizing the Company to claim duty drawback refunds against imported goods purportedly shipped by the vendor to the Company. Because of the complexity of the program, the Company engaged a licensed U.S. customs broker specializing in duty drawback claims. The customs broker was responsible for performing the administration of the process which included maintaining and collecting various forms of supporting evidence for each claim including collecting appropriate certificates from vendors, as well as preparing and submitting the refund claims.
67
Notes to Consolidated Financial Statements (continued)
In fiscal year 2008, the Company received notice from U.S. Customs that the Company was under investigation related to claims previously filed by the customs broker on the Companys behalf. The investigation alleged certain discrepancies and a lack of supporting documentation for the claims that had been filed by the broker. The Company initiated an internal review of the claims filed with U.S. Customs to determine the extent of claims that may have inadequate supporting documentation. The Company has also engaged a new licensed U.S. customs broker. The Company intends to cooperate fully with U.S. Customs investigation of this matter. As of the date of this filing, the Companys internal review remains ongoing due to the extensive amount of documentation which must be compiled and reviewed.
During the period the Companys customs broker was filing claims on the Companys behalf, July 2003 through December 2006, the Company applied for and received refund claims totaling $6.9 million. While the ultimate outcome of the U.S. Customs investigation and the Companys internal review is not yet known, based on current facts we believe that the reserve recorded of $2.5 million as of June 30, 2010 is a reasonable estimate of the probable loss that will result from the investigation. The Company does not expect that any additional material liabilities will be incurred related to this matter.
Export Regulations Violations
In the third quarter of fiscal year 2008, the Company became aware of potential violations of federal export regulations at a business unit that was recently divested. Upon investigation, the Company discovered that approximately 40 foreign nationals employed over time at the business units facility may have been exposed to protected technical data related to the production of various products for military applications. An export license from the Department of State and the Department of Commerce is required prior to the exporting of technical data for military applications. The Company has applied for and received similar applications for other business units, but did not have such a license for the divested business unit. Violations of Federal export regulations can be subject to civil penalties depending upon the severity of the violation. The Company filed voluntary disclosures with the Department of State and the Department of Commerce before the divestiture of the business unit on March 31, 2008. The Department of State responded to the voluntary disclosure without assessing civil penalties. The Department of Commerce has not yet responded to the voluntary disclosure. It is not possible to determine the amount, if any, of civil penalties that may be assessed by the Department of Commerce. As a result the Company has not recorded any liability for potential penalties as of June 30, 2010.
Other
The Company is defending various routine claims and legal actions that are incidental to its business, and the Company is subject to contingencies that are common to its operations, including those pertaining to product claims, commercial disputes, employment actions, employee benefits, compliance with domestic and foreign laws, personal injury claims and tax issues. The Company provides for costs relating to these matters when a loss is probable and the amount of the loss is reasonably estimable. The effect of the outcome of these matters on the Companys future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount and timing (both as to recording future charges to operations and cash expenditures) of the resolution of such matters. While it is not feasible to determine the outcome of these matters, management believes that the total liability from these matters will not have a material effect on the Companys financial position, results of operations or cash flows over the long-term. However, there can be no assurance that an increase in the scope of pending matters or that any future lawsuits, claims, proceedings or investigations will not be material to the Companys financial position, results of operations or cash flows in a particular future quarter or year.
68
Notes to Consolidated Financial Statements (continued)
The Company has entered into purchase agreements primarily for various key raw materials and equipment at market related prices, all made in the normal course of business. The commitments include both fixed and variable price provisions. We used June 30, 2010 raw material prices for commitments with variable pricing. The purchase commitments covered by these agreements aggregate to approximately $175.8 million as of June 30, 2010. Of this amount, $130.8 million relates to fiscal year 2011, $21.0 million to fiscal year 2012, $16.3 million to fiscal year 2013, and $7.7 million to fiscal year 2014.
13. | Operating Leases |
The Company leases certain facilities and equipment under operating leases. Total rent expense was $6.8 million, $6.4 million and $6.6 million for the fiscal years ended June 30, 2010, 2009 and 2008, respectively.
Future minimum payments for non-cancellable operating leases in effect at June 30, 2010 are: $6.5 million in fiscal year 2011, $5.0 million in fiscal year 2012, $2.9 million in fiscal year 2013, $1.9 million in fiscal year 2014, $1.4 million in fiscal year 2015 and $0.5 million thereafter.
14. | Fair Value Measurements |
The fair value hierarchy has three levels based on the inputs used to determine fair value. Level 1 refers to quoted prices in active markets for identical assets or liabilities. Level 2 refers to observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3, which the Company does not currently use, refers to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
69
Notes to Consolidated Financial Statements (continued)
The following tables present the Companys assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy.
June 30, 2010 |
Fair Value
Measurements Using Input Type |
||||||||
(in millions) | Level 1 | Level 2 | Total | ||||||
Assets: |
|||||||||
Marketable securities |
|||||||||
Government agency bonds |
$ | 78.9 | $ | | $ | 78.9 | |||
Certificates of deposit |
10.0 | | 10.0 | ||||||
Corporate bonds |
15.4 | | 15.4 | ||||||
Commercial Paper |
0.9 | | 0.9 | ||||||
Municipal auction rate securities |
| 5.3 | 5.3 | ||||||
Derivative financial instruments |
| 9.2 | 9.2 | ||||||
Total assets |
$ | 105.2 | $ | 14.5 | $ | 119.7 | |||
Liabilities: |
|||||||||
Derivative financial instruments |
$ | | $ | 6.7 | $ | 6.7 | |||
June 30, 2009 |
Fair Value
Measurements Using Input Type |
Total | |||||||
(in millions) | Level 1 | Level 2 | |||||||
Assets: |
|||||||||
Marketable securities |
|||||||||
Certificate of deposit |
$ | 15.0 | $ | | $ | 15.0 | |||
Municipal auction rate securities |
| 6.3 | 6.3 | ||||||
Derivative financial instruments |
| 2.6 | 2.6 | ||||||
Total assets |
$ | 15.0 | $ | 8.9 | $ | 23.9 | |||
Liabilities: |
|||||||||
Derivative financial instruments |
$ | | $ | 32.5 | $ | 32.5 | |||
The Companys derivative financial instruments consist of commodity forward contracts, foreign exchange forward contracts and interest rate swaps. These instruments are measured at fair value using the market method valuation technique. The inputs to this technique utilize information related to foreign exchange rates, commodity prices and interest rates published by third-party leading financial news and data providers. This is observable data; however, the valuation of these instruments is not based on actual transactions for the same instruments so they are classified as Level 2. The Companys use of derivatives and hedging policies are more fully discussed in Note 17.
The Company has currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with accounting principles generally accepted in the United States.
70
Notes to Consolidated Financial Statements (continued)
The carrying amounts of other financial instruments not listed in the table below approximate fair value due to the short-term nature of these items.
The carrying amounts and estimated fair values of Carpenters financial instruments not recorded at fair value in the financial statements were as follows:
(in millions) | June 30, 2010 | June 30, 2009 | ||||||||||
Carrying
Value |
Fair
Value |
Carrying
Value |
Fair
Value |
|||||||||
Company-owned life insurance |
$ | 9.3 | $ | 9.3 | $ | 8.1 | $ | 8.1 | ||||
Long-term debt |
$ | 259.6 | $ | 267.9 | $ | 278.6 | $ | 272.5 |
The carrying amount for company-owned life insurance reflects cash surrender values based upon the market values of underlying securities, net of any outstanding policy loans. The carrying value associated with the cash surrender value of these policies is recorded in other assets in the accompanying consolidated balance sheets.
The fair values of long-term debt as of June 30, 2010 and June 30, 2009 were determined by using current interest rates for debt with terms and maturities similar to the Companys existing debt arrangements.
15. | Share Repurchase Program |
In December 2007, the Companys Board of Directors authorized a share repurchase program as a result of the completion of the purchases of the previously authorized share repurchase program. Under the terms of the share repurchase programs, the Company purchased 1,218,900 shares and 7,135,411 shares of its common stock on the open market for $46.1 million and $425.2 million during the years ended June 30, 2009 and 2008, respectively.
16. | Share-Based Compensation |
Carpenter has two share-based compensation plans: the 1993 Plan covering officers and key employees and the Directors Plan covering non-employee directors. Awards granted under the share-based compensation plans are generally paid from shares held in treasury and any additional required share payments are made with newly issued shares. The total compensation cost that has been charged against income related to these share-based compensation plans was $7.4 million, $10.3 million, and $13.3 million for the years ended June 30, 2010, 2009 and 2008, respectively.
1993 Plan
The 1993 plan provides that the Board of Directors may grant stock options, restricted stock, and restricted stock units, and determine the terms and conditions of each grant. The 1993 plan provides the Chief Executive Officer with limited authority to grant awards. As of June 30, 2010, 3,554,185 shares were available for awards which may be granted under this plan.
Directors Plan
The Directors plan provides for the granting of stock options, performance units and stock units to non-employee Directors. As of June 30, 2010, 921,972 shares were reserved for awards which may be granted under this plan.
71
Notes to Consolidated Financial Statements (continued)
Stock Options (all plans):
Stock options granted under the plans above are granted with an exercise price equal to at least the fair market value of the Companys common stock on the date of grant. The options are exercisable after one to three years of service and expire no longer than ten years from the grant date.
The fair value of stock options awarded in fiscal year 2010, 2009 and 2008 were estimated on the date of each grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
Year Ended June 30, | |||||||||
2010 | 2009 | 2008 | |||||||
Expected volatility |
54 | % | 45 | % | 46 | % | |||
Dividend yield |
2 | % | 2 | % | 2 | % | |||
Risk-free interest rate |
2.6 | % | 2.9 | % | 3.5 | % | |||
Expected term (in years) |
5.0 | 5.0 | 5.0 |
The assumptions are based on multiple factors, including historical exercise patterns of employees in relatively homogeneous groups with respect to exercise and post-vesting employment termination behaviors, expected future exercising patterns for these same homogeneous groups and the implied volatility of our stock price based on historical performance for the same expected term of the options granted. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of each grant.
Number of
Awards |
Weighted
Average Exercise Price |
Weighted
Average Remaining Contractual Term |
Aggregate
Intrinsic Value (In Millions) |
||||||||
Outstanding at June 30, 2007 |
252,780 | $ | 24.50 | ||||||||
Granted |
232,876 | 46.43 | |||||||||
Exercised |
(55,550 | ) | 12.81 | ||||||||
Outstanding at June 30, 2008 |
430,106 | 37.88 | |||||||||
Granted |
145,315 | 28.57 | |||||||||
Exercised |
(6,700 | ) | 14.39 | ||||||||
Cancelled |
(27,458 | ) | 43.49 | ||||||||
Outstanding at June 30, 2009 |
541,263 | 35.36 | |||||||||
Granted |
592,746 | 18.50 | |||||||||
Exercised |
(29,559 | ) | 10.00 | ||||||||
Cancelled |
(283,795 | ) | 28.31 | ||||||||
Outstanding at June 30, 2010 |
820,655 | $ | 26.53 | 7.9 Years | $ | 8.7 | |||||
Exercisable at June 30, 2010 |
343,657 | $ | 33.34 | 6.4 Years | $ | 2.8 | |||||
72
Notes to Consolidated Financial Statements (continued)
Outstanding and Exercisable Options:
Exercise Price
Range |
Number
Outstanding at June 30, 2010 |
Weighted
Average Remaining Contractual Term (in Years) |
Weighted
Average Exercise Price |
Number
Exercisable at June 30, 2010 |
Weighted
Average Exercise Price |
|||||||
$5 - $10 |
38,000 | 3.0 | $ | 8.25 | 38,000 | $ | 8.25 | |||||
$10 - $20 | 352,113 | 8.0 | 16.65 | 54,623 | 13.18 | |||||||
$21 - $65 | 430,542 | 8.3 | 36.22 | 251,034 | 41.53 | |||||||
820,655 | $ | 26.53 | 343,657 | $ | 33.34 | |||||||
The weighted average grant date fair value of options awarded during fiscal year 2010, 2009 and 2008 was $7.77, $10.34 and $18.42, respectively. Share based compensation charged against income related to stock options for the years ended June 30, 2010, 2009 and 2008 was $2.2 million, $3.3 million and $2.0 million, respectively. As of June 30, 2010, $1.6 million of compensation cost related to non vested stock options remains to be recognized over a weighted average remaining life of 1.1 years.
Of the options outstanding at June 30, 2010, 610,549 relate to the 1993 plan and 210,106 relate to the Directors Plan.
Nonvested Stock Awards (all plans):
Nonvested stock awards are granted to employees with performance and/or service conditions. Nonvested awards receive non-forfeitable cash dividends during the restriction period. The fair value of the nonvested stock awards is determined based on the Companys stock price at the grant date.
Performance-based restricted share awards are earned only if Carpenter achieves certain performance goals during a specified performance period according to the terms determined by the Board at the date of the grant. These shares vest from one to two years from the date of the attainment of the specified performance goals. Compensation cost is determined and charged to expense beginning in the performance period through the vesting period. The performance goals for fiscal year 2009 were not attained for the performance shares and therefore no performance shares were earned during fiscal year 2009.
Time-based restricted share awards vest three years from the date of grant. Compensation cost related to time based share awards is recognized over the vesting period of the award.
Amounts charged to compensation expense for nonvested stock awards was $3.4 million, $5.9 million and $10.8 million for the years end June 30, 2010, 2009 and 2008, respectively. As of June 30, 2010, $4.0 million of compensation cost related to nonvested restricted stock awards remains to be recognized over a weighted average remaining life of 1.7 years.
73
Notes to Consolidated Financial Statements (continued)
Number of
Awards |
Weighted-
Average Grant Date Fair Value |
|||||
Nonvested Balance at June 30, 2007 |
353,974 | $ | 46.33 | |||
Time-based granted |
97,938 | $ | 54.70 | |||
Performance-based earned |
133,325 | $ | 67.57 | |||
Vested |
(68,558 | ) | $ | 56.67 | ||
Forfeited |
(75,480 | ) | $ | 40.54 | ||
Nonvested Balance at June 30, 2008 |
441,199 | $ | 53.19 | |||
Time-based granted |
34,788 | $ | 36.45 | |||
Vested |
(178,745 | ) | $ | 50.01 | ||
Forfeited |
(38,678 | ) | $ | 61.72 | ||
Nonvested Balance at June 30, 2009 |
258,564 | $ | 50.90 | |||
Time-based granted |
219,448 | $ | 19.66 | |||
Performance-based earned |
110,904 | $ | 18.59 | |||
Vested |
(125,222 | ) | $ | 50.04 | ||
Forfeited |
(118,667 | ) | $ | 32.78 | ||
Nonvested Balance at June 30, 2010 |
345,027 | $ | 26.63 | |||
Total Stockholder Return Awards
The Company granted Total Stockholder Return (TSR) awards in fiscal year 2010 and 2009. The TSR awards are granted at a target number of shares, and vest based on the Companys total stockholder return compared to the total stockholder returns of a group of peer companies at the end of a three-year period. The actual number of shares awarded may range from a minimum of 50 percent of the target shares to a maximum of two times target. Participants do not have any rights to dividends (or equivalents) during the performance period. The fair value of the TSR awards was estimated using Monte Carlo valuation models. Compensation cost recognized in both fiscal years 2010 and 2009 related to TSR awards was $0.6 million.
Director Stock Units
According to the provisions of the Directors plan, on the date of each annual stockholders meeting or on such other regularly scheduled date as the Board of Directors may determine from time to time in light of the Companys prevailing practices for the grant of equity awards to employees, each Director shall be granted, in place of cash compensation, a number of stock units determined by dividing 50 percent of the Directors annual retainer by the fair market value of the Companys common stock on that date. Each Director may elect to increase the percentage up to 100 percent of the annual retainer to be paid in stock units in lieu of cash. Stock units granted at each annual meeting will be forfeited if the Director terminates service as a Director for any reason other then retirement, disability or death before the next annual stockholders meeting. Additional units are credited to each Director on a quarterly basis to reflect dividend equivalents on the Companys common stock.
74
Notes to Consolidated Financial Statements (continued)
Following a Directors retirement, the Director will be paid the number of the Companys common stock shares equal to the number of stock units credited to the Directors account.
Number of
Units |
Weighted-
Average Grant Date Fair Value |
||||
Outstanding at June 30, 2007 |
67,463 | $ | 22.71 | ||
Granted |
7,099 | $ | 62.86 | ||
Dividend equivalents |
800 | $ | | ||
Outstanding at June 30, 2008 |
75,362 | $ | 27.06 | ||
Granted |
21,444 | $ | 22.24 | ||
Dividend equivalents |
3,257 | $ | | ||
Outstanding at June 30, 2009 |
100,063 | $ | 25.95 | ||
Granted |
59,332 | $ | 18.12 | ||
Dividend equivalents |
3,469 | $ | | ||
Outstanding at June 30, 2010 |
162,864 | $ | 22.66 | ||
Compensation cost is determined using the grant-date fair value and charged to expense over the vesting period of one year and amounted to $1.2 million, $0.5 million and $0.5 million for the years ended June 30, 2010, 2009 and 2008, respectively. As of June 30, 2010, $0.1 million of compensation cost related to director stock units remains to be recognized over a weighted average remaining life of 0.3 years.
17. | Derivatives and Hedging Activities |
The Company uses commodity forwards, interest rate swaps and foreign currency forwards to manage risks generally associated with commodity price, interest rate and foreign currency rate fluctuations. The following explains the various types of derivatives and includes a recap about the impact the derivative instruments have had on the Companys financial position, results of operations, and cash flows.
Cash Flow Hedging Commodity forward contracts: The Company enters into commodity forward contracts to fix the price of a portion of anticipated future purchases of certain critical raw materials and energy to manage the risk of cash flow variability associated with volatile commodity prices. The commodity forward contracts have been designated as cash flow hedges. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in other comprehensive income to the extent effective, and reclassified to costs of sales in the period during which the hedged transaction affects earnings or it becomes probable that the forecasted transaction will not occur.
Cash Flow Hedging Foreign currency forward contracts: The Company uses foreign currency forward contracts to hedge a portion of anticipated future sales denominated in foreign currencies, principally the Euro and Pound Sterling, in order to offset the effect of changes in exchange rates. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in other comprehensive income to the extent effective, and reclassified to net sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.
75
Notes to Consolidated Financial Statements (continued)
The Company also uses foreign currency forward contracts to protect certain short-term asset positions denominated in foreign currency against the effect of changes in exchange rates. These positions do not qualify for hedge accounting and accordingly are marked-to-market at each reporting date through charges to other income and expense. As of June 30, 2010, the fair value of the outstanding foreign currency forwards not designated as hedging instruments and the charges to income for changes in fair value for these contracts was not material.
Fair Value Hedging - Interest rate swaps : The Company has used interest rate swaps to achieve a level of floating rate debt relative to fixed rate debt where appropriate. The Company has designated fixed to floating interest rate swaps as fair value hedges. Accordingly, the changes in the fair value of these instruments are immediately recorded in earnings. The mark-to-market values of both the fair value hedging instruments and the underlying debt obligations are recorded as equal and offsetting gains and losses in interest expense in the consolidated statements of income. As of June 30, 2010 and 2009, the total notional amounts of floating interest rate contracts were $65.0 million and $45.0 million, respectively. For the years ended June 30, 2010 and 2009, net gains of $2.4 million and $1.5 million were recorded as a reduction to interest expense. These amounts include the impact of previously terminated swaps which are being amortized over the remaining term of the underlying debt.
The fair value and location of outstanding derivative contracts recorded in the accompanying consolidated balance sheets were as follows as of June 30, 2010 and 2009:
June 30, 2010 ($ in millions) |
Interest
Rate Swaps |
Foreign
Currency Contracts |
Commodity
Contracts |
Total
Derivatives |
||||||||
Asset Derivatives: |
||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||
Other current assets |
$ | 0.5 | $ | 1.8 | $ | 3.4 | $ | 5.7 | ||||
Other assets |
3.2 | | 0.3 | 3.5 | ||||||||
Total asset derivatives |
$ | 3.7 | $ | 1.8 | $ | 3.7 | $ | 9.2 | ||||
Liability Derivatives: |
||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||
Accrued liabilities |
$ | | $ | | $ | 1.9 | $ | 1.9 | ||||
Other liabilities |
| | 4.8 | 4.8 | ||||||||
Total liability derivatives |
$ | | $ | | $ | 6.7 | $ | 6.7 | ||||
76
Notes to Consolidated Financial Statements (continued)
June 30, 2009 ($ in millions) |
Interest
Rate Swaps |
Foreign
Currency Contracts |
Commodity
Contracts |
Total
Derivatives |
||||||||
Asset Derivatives: |
||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||
Other current assets |
$ | | $ | 0.2 | $ | | $ | 0.2 | ||||
Other assets |
2.4 | | | 2.4 | ||||||||
Total asset derivatives |
$ | 2.4 | $ | 0.2 | $ | | $ | 2.6 | ||||
Liability Derivatives: |
||||||||||||
Derivatives designated as hedging instruments: |
||||||||||||
Accrued liabilities |
$ | | $ | | $ | 22.1 | $ | 22.1 | ||||
Other liabilities |
| | 10.4 | 10.4 | ||||||||
Total liability derivatives |
$ | | $ | | $ | 32.5 | $ | 32.5 | ||||
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (OCI) and reclassified into earnings in the same period or periods during which the hedged transactions affects earnings or it becomes probable that the forecasted transaction will not occur. The following is a summary of the gains (losses) related to cash flow hedges recognized during the years ended June 30, 2010 and 2009:
Amount of Gain (Loss)
Recognized in OCI on Derivatives (Effective Portion) |
|||||||
($ in millions) | Years Ended June 30, | ||||||
Derivatives in Cash Flow Hedging Relationship: |
2010 | 2009 | |||||
Commodity contracts |
$ | 23.3 | $ | (12.2 | ) | ||
Foreign exchange contracts |
0.7 | 2.5 | |||||
Total |
$ | 24.0 | $ | (9.7 | ) | ||
($ in millions) |
Location of Gain (Loss) |
Amount of (Loss) Gain
Reclassified from Accumulated OCI into |
||||||||
Reclassified from Accumulated | Income (Effective Portion) | |||||||||
OCI into Income (Effective | Years Ended June 30, | |||||||||
Derivatives in Cash Flow Hedging Relationship: |
Portion) | 2010 | 2009 | |||||||
Commodity contracts |
Cost of sales | $ | (3.2 | ) | $ | (71.2 | ) | |||
Foreign exchange contracts |
Net sales | 1.3 | 1.9 | |||||||
Total |
$ | (1.9 | ) | $ | (69.3 | ) | ||||
77
Notes to Consolidated Financial Statements (continued)
The Company estimates that $0.4 million of net derivative gains included in OCI as of June 30, 2010 will be reclassified into earnings within the next 12 months. No significant cash flow hedges were discontinued during the year ended June 30, 2010. Ineffectiveness was not material during the year ended June 30, 2010.
The changes in other accumulated comprehensive income associated with derivative hedging activities during the years ended June 30, 2010, 2009 and 2008 were as follows:
2010 | 2009 | 2008 | ||||||||||
Balance at July 1 |
$ | (17.3 | ) | $ | (11.4 | ) | $ | 2.4 | ||||
Current period changes in fair value, net of tax |
11.6 | (41.8 | ) | (15.2 | ) | |||||||
Reclassification to earnings, net of tax |
3.3 | 35.9 | 1.4 | |||||||||
Balance at June 30 |
$ | (2.4 | ) | $ | (17.3 | ) | $ | (11.4 | ) | |||
According to the provisions of the Companys derivative arrangements, in the event that the fair value of outstanding derivative positions with certain counterparties exceeds certain thresholds, the Company may be required to issue cash collateral to the counterparties. The Companys contracts with these counterparties allow for netting of derivative instrument positions executed under each contract. As of June 30, 2010 the Company had no cash collateral held by counterparties.
The Company is exposed to credit loss in the event of nonperformance by counterparties on its derivative instruments as well as credit or performance risk with respect to its customer commitments to perform. Although nonperformance is possible, the Company does not anticipate nonperformance by any of the parties. In addition various master netting arrangements are in place with counterparties to facilitate settlement of gains and losses on these contracts.
18. | Income Taxes |
Income from continuing operations before income taxes for the Companys domestic and international operations was as follows:
Years Ended June 30, | ||||||||||
($ in millions) | 2010 | 2009 | 2008 | |||||||
Domestic |
$ | (7.4 | ) | $ | 50.0 | $ | 262.1 | |||
International |
12.1 | 13.0 | 35.2 | |||||||
Income before income taxes |
$ | 4.7 | $ | 63.0 | $ | 297.3 | ||||
78
Notes to Consolidated Financial Statements (continued)
The provision (benefit) for income taxes from continuing operations consisted of the following:
Years Ended June 30, | ||||||||||||
($ in millions) | 2010 | 2009 | 2008 | |||||||||
Current: |
||||||||||||
Federal |
$ | | $ | (8.5 | ) | $ | 83.4 | |||||
State |
0.7 | 0.3 | 7.9 | |||||||||
Foreign |
2.8 | 6.9 | 9.9 | |||||||||
Deferred: |
||||||||||||
Federal |
2.2 | 16.5 | (1.9 | ) | ||||||||
State |
(4.1 | ) | 1.8 | (3.1 | ) | |||||||
Foreign |
1.0 | (1.9 | ) | 0.6 | ||||||||
$ | 2.6 | $ | 15.1 | $ | 96.8 | |||||||
The following is a reconciliation of income taxes computed at the U.S. Federal income tax rate to the Companys effective income tax rate:
Years Ended June 30, | |||||||||
(% of pre-tax income ) |
2010 | 2009 | 2008 | ||||||
Statutory federal income tax rate |
35.0 | % | 35.0 | % | 35.0 | % | |||
Healthcare reform |
126.9 | | | ||||||
Adjustment of prior years income taxes |
57.8 | | | ||||||
Research and development tax credit |
(6.0 | ) | (5.6 | ) | (0.3 | ) | |||
Change in tax position on previously filed tax return |
| (3.4 | ) | | |||||
Changes in uncertain tax positions, net |
(104.8 | ) | (5.2 | ) | | ||||
State income taxes, net of federal tax benefit |
(13.5 | ) | (1.1 | ) | 2.0 | ||||
State valuation allowances |
7.9 | 7.4 | (0.8 | ) | |||||
Domestic manufacturing deduction |
(13.7 | ) | (0.5 | ) | (1.9 | ) | |||
Nontaxable income |
(27.3 | ) | (2.1 | ) | (1.5 | ) | |||
Other, net |
(7.0 | ) | (0.5 | ) | 0.1 | ||||
Effective income tax rate |
55.3 | % | 24.0 | % | 32.6 | % | |||
79
Notes to Consolidated Financial Statements (continued)
Deferred taxes 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, 2010 and 2009:
June 30, | ||||||||
($ in millions) | 2010 | 2009 | ||||||
Deferred tax assets: |
||||||||
Postretirement provisions |
$ | 61.6 | $ | 60.8 | ||||
Net operating loss carryforwards |
20.2 | 18.1 | ||||||
Other reserve provisions |
17.5 | 30.2 | ||||||
Pensions |
125.6 | 96.9 | ||||||
Environmental |
12.5 | 13.5 | ||||||
Tax credit carryforwards |
0.3 | 0.3 | ||||||
Valuation allowances |
(17.9 | ) | (17.8 | ) | ||||
Total deferred tax assets |
219.8 | 202.0 | ||||||
Deferred tax liabilities: |
||||||||
Depreciation |
(170.9 | ) | (172.0 | ) | ||||
Intangible assets |
(7.8 | ) | (4.6 | ) | ||||
Inventories |
(3.4 | ) | (3.2 | ) | ||||
Total deferred tax liabilities |
(182.1 | ) | (179.8 | ) | ||||
Net deferred tax asset |
$ | 37.7 | $ | 22.2 | ||||
As of June 30, 2010, the Company had state net operating losses of $329.4 million available to be carried forward to future years. The state net operating losses begin to expire in 2011.
A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. The Company has recorded a valuation allowance against certain state net operating loss carryforwards. As of June 30, 2010 and 2009, the valuation allowance was $17.9 million and $17.8 million, respectively. During the years ended June 30, 2010 and 2009, the Company increased its valuation allowance in the amount of $0.1 million and $5.9 million, respectively. During the year ended June 30, 2008, state tax benefits were recognized through reductions of the valuation allowance in the amount of $2.3 million.
At June 30, 2010, the Company had undistributed earnings of international subsidiaries, amounting to $101.9 million on which deferred income taxes have not been provided because earnings are expected to be reinvested indefinitely outside of the U.S. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. income taxes including any adjustments for foreign tax credit, state income taxes, and withholding taxes payable to the various foreign countries.
Carpenter is routinely under audit by federal, state or local authorities in the areas of income taxes and the remittance of sales and use taxes. These audits include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal, state and local tax laws. The Company has settled all IRS examinations through June 30, 2006.
80
Notes to Consolidated Financial Statements (continued)
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits for uncertain tax positions follows:
Years Ended June 30, | ||||||||||||
($ in millions) | 2010 | 2009 | 2008 | |||||||||
Balance, beginning |
$ | 14.3 | $ | 19.8 | $ | 19.4 | ||||||
Additions based on tax positions of prior years |
| 1.5 | 0.6 | |||||||||
Additions based on tax positions of current years |
| 1.7 | 0.7 | |||||||||
Reductions as a result of a lapse of statute of limitations |
(8.2 | ) | (8.7 | ) | | |||||||
Reductions based on tax positions of prior year |
(1.9 | ) | | (0.6 | ) | |||||||
Settlements |
(0.6 | ) | | (0.3 | ) | |||||||
Balance, ending |
$ | 3.6 | $ | 14.3 | $ | 19.8 | ||||||
It is the Companys policy to classify interest and penalties recognized on uncertain tax positions as a component of income tax expense. The Companys income tax expense included a benefit of $1.7 million, a benefit of $1.4 million, and expense of $1.7 million in the years ended June 30, 2010, 2009 and 2008, respectively, related to interest and penalties. As of June 30, 2010 and 2009, the amount of interest and penalties accrued was $0.6 million and $2.3 million, respectively.
Including tax positions for which the Company determined that the tax position would not meet the more-likely-than-not recognition threshold upon examination by the taxing authorities based upon the technical merits of the position, the total estimated unrecognized tax benefit that, if recognized at June 30, 2010, would affect the Companys effective tax rate was approximately $2.8 million. The total estimated unrecognized tax benefit that, if recognized at June 30, 2010, would be recorded in stockholders equity was approximately $1.4 million. It is reasonably possible that the amount of the unrecognized tax benefits will decrease by approximately $1.5 - $2.5 million within the next 12 months of the reporting date of the Companys consolidated financial statements as a result of the expiration of the statutes of limitations in certain jurisdictions.
The Company, and/or one of its subsidiaries, files income tax returns in the U.S. Federal jurisdiction and in various states and foreign jurisdictions. A summary of tax years that remain subject to examination, by major tax jurisdiction, is as follows:
Jurisdiction |
Earliest Year
Open to Examination |
|
U.S. Federal |
2007 | |
States: |
||
Pennsylvania |
2007 | |
California |
2008 | |
Illinois |
2007 | |
Foreign: |
||
Belgium |
2005 | |
Mexico |
2004 |
81
Notes to Consolidated Financial Statements (continued)
19. | Other Income, Net |
Other income (expense), net consists of the following:
Years Ended June 30, | |||||||||||
($ in millions) | 2010 | 2009 | 2008 | ||||||||
Continued Dumping and Subsidy Offset Act receipts |
$ | 5.7 | $ | 6.1 | $ | 8.4 | |||||
Foreign exchange gain (loss) |
0.6 | 7.7 | (2.5 | ) | |||||||
Interest income |
1.6 | 4.7 | 16.5 | ||||||||
Other |
2.9 | (3.4 | ) | 1.8 | |||||||
$ | 10.8 | $ | 15.1 | $ | 24.2 | ||||||
20. | Segment Information, Geographic and Product Data |
Following the divestitures of the ceramics and metal shapes businesses during fiscal year 2008, which historically comprised the Companys Engineered Products Operations segment, the Company has two reportable business segments: Advanced Metals Operations and Premium Alloys Operations.
The Advanced Metals Operations (AMO) segment includes the manufacturing and distribution of high temperature and high strength metal alloys, stainless steels, and titanium in the form of small bars and rods, wire, narrow strip and powder. Products in this segment typically go through more finishing operations, such as rolling, turning, grinding, drawing, and atomization, than products in our PAO segment. Also, sales in the AMO segment are spread across many end-use markets, including the aerospace, industrial, consumer, automotive, and medical industries. AMO products are sold under the Carpenter, Dynamet, Talley, Carpenter Powder Products and Aceros Fortuna brand names.
The Premium Alloys Operations (PAO) segment includes the manufacturing and distribution of high temperature and high strength metal alloys and stainless steels in the form of ingots, billets, large bars and hollows. Also, the PAO segment includes conversion processing of metal for other specialty metals companies. A significant portion of PAO sales are to customers in the aerospace and energy industries. Much of PAO sales are to forging companies that further shape, mill, and finish the metals into more specific dimensions. All such sales are made under the Carpenter brand name.
The Companys consolidated total assets are managed as corporate-level assets and, therefore, are not allocated to the business segments. Only a portion of the expenses related to these assets, principally depreciation and amortization, is allocated to the individual business segments for inclusion in their respective measures of operating income.
The service cost component of the Companys net pension expense, which represents the estimated cost of future pension liabilities earned associated with active employees, is included in the operating income of the business segments. The residual net pension expense, which is comprised of the expected return on plan assets, interest costs on the projected benefit obligations of the plans, and amortization of actuarial gains and losses and prior service costs, is included under the heading Pension earnings, interest & deferrals.
On a consolidated basis, one customer, Precision Castparts Corporation, accounted for 10% ($116.1 million) of the Companys sales for the year ended June 30, 2010. There were no significant individual customer sales that accounted for more than 10 percent of the total sales during fiscal years 2009 and 2008.
82
Notes to Consolidated Financial Statements (continued)
The accounting policies of both reportable segments are the same as those described in the Summary of Significant Accounting Policies.
Segment Data | Year Ended June 30, | |||||||||||
($ in millions) | 2010 | 2009 | 2008 | |||||||||
Net Sales: |
||||||||||||
Advanced Metals Operations |
$ | 853.0 | $ | 957.4 | $ | 1,390.7 | ||||||
Premium Alloys Operations |
348.3 | 413.2 | 575.7 | |||||||||
Intersegment |
(2.7 | ) | (8.3 | ) | (12.9 | ) | ||||||
Consolidated net sales |
$ | 1,198.6 | $ | 1,362.3 | $ | 1,953.5 | ||||||
Operating Income: |
||||||||||||
Advanced Metals Operations |
$ | 11.8 | $ | 34.1 | $ | 188.7 | ||||||
Premium Alloys Operations |
71.2 | 76.9 | 144.7 | |||||||||
Corporate costs |
(33.5 | ) | (37.5 | ) | (61.8 | ) | ||||||
Pension earnings, interest & deferrals |
(37.9 | ) | (0.1 | ) | 21.7 | |||||||
Restructuring costs |
| (9.4 | ) | | ||||||||
Intersegment |
0.1 | | 0.3 | |||||||||
Consolidated operating income |
$ | 11.7 | $ | 64.0 | $ | 293.6 | ||||||
Geographic Data | Year Ended June 30, | |||||||||||
($ in millions) | 2010 | 2009 | 2008 | |||||||||
Net Sales: (a) |
||||||||||||
United States |
$ | 820.8 | $ | 885.3 | $ | 1,297.7 | ||||||
Europe |
194.6 | 261.5 | 372.2 | |||||||||
Asia Pacific |
82.9 | 86.4 | 114.9 | |||||||||
Mexico |
57.9 | 72.0 | 79.8 | |||||||||
Canada |
31.6 | 34.2 | 52.7 | |||||||||
Other |
10.8 | 22.9 | 36.2 | |||||||||
Consolidated net sales |
$ | 1,198.6 | $ | 1,362.3 | $ | 1,953.5 | ||||||
(a) |
Net sales were attributed to countries based on the location of the customer. |
Long-lived assets: | June 30, | |||||
($ in millions) | 2010 | 2009 | ||||
United States |
$ | 611.5 | $ | 626.9 | ||
Europe |
4.4 | 5.2 | ||||
Mexico |
1.3 | 1.5 | ||||
Asia Pacific |
0.3 | 0.5 | ||||
Consolidated long-lived assets |
$ | 617.5 | $ | 634.1 | ||
83
Notes to Consolidated Financial Statements (continued)
Product Data | Year Ended June 30, | ||||||||
($ in millions) | 2010 | 2009 | 2008 | ||||||
Special alloys |
$ | 637.8 | $ | 694.6 | $ | 1,019.8 | |||
Stainless steels |
398.3 | 460.1 | 668.1 | ||||||
Titanium products |
112.4 | 141.4 | 180.6 | ||||||
Other materials |
50.1 | 66.2 | 85.0 | ||||||
Total net sales |
$ | 1,198.6 | $ | 1,362.3 | $ | 1,953.5 | |||
21. | Recent Accounting Pronouncements |
Accounting Standards Codification
The Accounting Standards Codification (ASC) has become the sole source of authoritative U.S. generally accepted accounting principles (U.S. GAAP). The ASC only affects the way companies reference U.S. GAAP and was not intended to change existing U.S. GAAP.
Fair Value Measurements
During the quarter ended September 30, 2009, the Company adopted new accounting guidance included in ASC 820, Fair Value Measurements and Disclosures, which delayed the effective date for disclosing all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value on a recurring basis (at least annually). The adoption of this guidance did not have a material impact on the Companys financial condition or results of operations. See fair value disclosures included in Note 14.
In January 2010, the FASB issued guidance on improving disclosures about fair value measurements. This guidance requires new disclosures about transfers in and out of Level 1 and 2 measurements. In addition, this guidance clarifies existing fair value disclosures about the level of disaggregation and the input and valuation techniques used to measure fair value. The guidance only relates to disclosure and does not impact the Companys consolidated financial statements. During the quarter ended March 31, 2010, the Company adopted this guidance in and there was no significant impact to the Companys disclosures upon adoption.
In December 2008, the FASB issued accounting guidance that is included in ASC 715, Compensation-Retirement Benefits. This guidance includes objectives for disclosing information about an employers plan assets of a defined benefit pension or other postretirement plan and is effective for fiscal years ending after December 15, 2009. The adoption of this guidance did not have a material impact on the Companys financial condition or results of operations. See disclosures related to pension and other postretirement plans in Note 11.
Participating Securities & the Two-class Method of Computing Earnings Per Share
During the quarter ended September 30, 2009, the Company adopted new accounting guidance included in ASC 260, Earnings Per Share. According to the guidance, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents are participating securities and should be included in the computation of earnings per share using the two-class method. The guidance requires that all prior period earnings per share data be adjusted retrospectively. The adoption of this guidance did not have a material impact on the Companys financial condition or results of operations. See earnings per common share disclosures in Note 4.
84
Notes to Consolidated Financial Statements (continued)
22. | Supplemental Data |
The following are additional required disclosures and other material items:
Year Ended June 30, | ||||||||||||
($ in millions) | 2010 | 2009 | 2008 | |||||||||
Cost Data: |
||||||||||||
Repairs and maintenance costs |
$ | 60.4 | $ | 65.3 | $ | 68.2 | ||||||
Cash Flow Data: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest payments |
$ | 19.8 | $ | 21.1 | $ | 23.5 | ||||||
Income tax payments, net |
$ | 13.7 | $ | 33.3 | $ | 148.8 | ||||||
June 30, | ||||||||||||
($ in millions) | 2010 | 2009 | 2008 | |||||||||
Accumulated Other Comprehensive Loss: |
||||||||||||
Foreign currency translation adjustment |
$ | (23.7 | ) | $ | (14.4 | ) | $ | 5.9 | ||||
Pension and post-retirement benefits, net of tax |
(344.5 | ) | (314.8 | ) | (138.4 | ) | ||||||
Net unrealized losses on derivatives, net of tax |
(2.4 | ) | (17.3 | ) | (11.4 | ) | ||||||
Unrealized losses on marketable securities, net of tax |
(0.5 | ) | | | ||||||||
$ | (371.1 | ) | $ | (346.5 | ) | $ | (143.9 | ) | ||||
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SUPPLEMENTARY DATA
Quarterly Financial Data (Unaudited)
Quarterly sales and earnings results are normally influenced by seasonal factors. Historically, the first two fiscal quarters (three months ending September 30 and December 31) are typically the lowest principally because of annual plant vacation and maintenance shutdowns by Carpenter and by many of its customers. However, the timing of major changes in the general economy or the markets for certain products as we experienced during the last two fiscal years can alter this pattern.
(dollars and shares in millions, except per share amounts) |
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
||||||||||
Results of Operations |
||||||||||||||
Fiscal Year 2010 |
||||||||||||||
Net sales |
$ | 233.7 | $ | 263.8 | $ | 336.9 | $ | 364.2 | ||||||
Gross profit |
$ | 19.2 | $ | 35.6 | $ | 46.3 | $ | 43.7 | ||||||
Operating (loss) income |
$ | (13.3 | ) | $ | 2.0 | $ | 12.8 | $ | 10.2 | |||||
Net (loss) income |
$ | (9.3 | ) | $ | 3.5 | $ | 2.1 | $ | 5.9 | |||||
Fiscal Year 2009 |
||||||||||||||
Net sales |
$ | 413.7 | $ | 361.7 | $ | 330.0 | $ | 256.9 | ||||||
Gross profit |
$ | 73.7 | $ | 75.9 | $ | 49.2 | $ | 8.4 | ||||||
Operating income (loss) |
$ | 40.3 | $ | 39.7 | $ | 16.1 | $ | (32.1 | ) | |||||
Net income (loss) |
$ | 25.8 | $ | 29.8 | $ | 13.1 | $ | (20.8 | ) | |||||
86
Earnings per common share |
||||||||||||||
Fiscal Year 2010 |
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
||||||||||
Basic earnings |
||||||||||||||
Net income (loss) |
$ | (0.21 | ) | $ | 0.08 | $ | 0.05 | $ | 0.13 | |||||
Diluted earnings |
||||||||||||||
Net income (loss) |
$ | (0.21 | ) | $ | 0.08 | $ | 0.05 | $ | 0.13 | |||||
Fiscal Year 2009 |
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
||||||||||
Basic earnings |
||||||||||||||
Net income (loss) |
$ | 0.58 | $ | 0.68 | $ | 0.30 | $ | (0.48 | ) | |||||
Diluted earnings |
||||||||||||||
Net income (loss) |
$ | 0.58 | $ | 0.68 | $ | 0.30 | $ | (0.48 | ) | |||||
First
Quarter |
Second
Quarter |
Third
Quarter |
Fourth
Quarter |
|||||||||||
Weighted average common shares outstanding (in millions) |
||||||||||||||
Fiscal Year 2010 |
||||||||||||||
Basic |
43.9 | 44.0 | 44.0 | 44.0 | ||||||||||
Diluted |
43.9 | 44.2 | 44.4 | 44.5 | ||||||||||
Fiscal Year 2009 |
||||||||||||||
Basic |
44.3 | 43.7 | 43.8 | 43.8 | ||||||||||
Diluted |
44.5 | 44.0 | 44.0 | 43.8 | ||||||||||
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Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable
Item 9A. | Controls and Procedures |
(a) | Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures |
The Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Companys disclosure controls and procedures as defined in Rules 13a15(e) and 15d15(e) of the Securities Exchange Act of 1934, as amended, (the Exchange Act) as of June 30, 2010. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures as of June 30, 2010 were effective in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods required under the Securities and Exchange Commissions rules and forms, including a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) | Managements Report on Internal Control over Financial Reporting |
Managements Report on the Companys internal control over financial reporting is included in Item 8 of this Annual Report on Form 10-K under the caption Managements Report on Internal Control Over Financial Reporting and is incorporated herein by reference. The Companys independent registered public accounting firm has issued a report on managements assessment of the Companys internal control over financial reporting and is set forth in Item 8 of this Annual Report on Form 10-K under the caption Report of Independent Registered Public Accounting Firm and is incorporated herein by reference.
(c) | Changes in Internal Controls over Financial Reporting |
There have been no changes in the Companys internal control over financial reporting that occurred during the quarter ended June 30, 2010 that have materially affected, or are likely to materially affect, our internal control over financial reporting.
Item 9B. | Other Information |
Not applicable
88
PART III
Item 10. | Directors and Executive Officers and Corporate Governance |
Listed below are the names of our corporate executive officers, including those required to be listed as executive officers for Securities and Exchange Commission purposes, each of whom assumes office after the annual organization meeting of the Board of Directors which immediately follows the Annual Meeting of Stockholders.
William A Wulfsohn was appointed President and Chief Executive Officer effective July 1, 2010. Mr. Wulfsohn has served as a Director for the Company since April 2009. Mr. Wulfsohn most recently served as Senior Vice President, Industrial Coatings at PPG Industries, a Fortune 200 company with more than $12 billion in annual revenues. Prior to joining PPG Industries, Mr. Wulfsohn served as Vice President and General Manager for Honeywell International. Previously, Mr. Wulfsohn worked for Morton International/Rohm & Haas, beginning as a director of marketing and culminating as Vice President and Business Director.
K. Douglas Ralph was appointed Senior Vice President and Chief Financial Officer effective July 9, 2007. Mr. Ralph most recently served as Executive Vice President and Chief Financial Officer at Foamex International, Inc. from February 2003 to April 2006. Foamex International, Inc. is a leading manufacturer of flexible polyurethane foam for bedding, furniture, automotive, carpet cushion, and other consumer and industrial applications in North America. At Foamex International, Inc., Mr. Ralph had responsibility for total financial operations, including accounting, treasury, investor relations and information technology of the $1.3 billion global company. Prior to joining Foamex International, Inc., Mr. Ralph spent 21 years as a financial executive for the Procter & Gamble Company.
Michael L. Shor was appointed Executive Vice President Advanced Metals Operations & Premium Alloys Operations, effective October 21, 2008. In this position, Shor is responsible for leading Carpenters business and operations both domestic and abroad. Prior to this position, Shor served as Sr. Vice President - Premium Alloys Operations where he was responsible for revenue growth and operational effectiveness for Carpenters Reading based manufacturing operations. Prior to that, Shor served as Sr. Vice President - Engineered Products from 2004 to 2007. Previously, Shor served as Senior. Vice President, Specialty Alloys Operations of Carpenter from 2000 to 2004. In this position, he had overall responsibility for the restructuring of Carpenters largest division while leading it to long-term sustainable revenue and profit growth.
Name |
Age |
Positions |
Assumed Present Position |
|||
William A. Wulfsohn | 48 |
President and Chief Executive Officer Director |
July 2010 | |||
K. Douglas Ralph | 49 | Senior Vice President Finance and Chief Financial Officer | July 2007 | |||
Michael L. Shor | 51 |
Executive Vice President Advanced Metals Operations & Premium Alloys Operations |
October 2008 |
The information required as to directors and the committees of the Board of Directors is incorporated herein by reference to the Companys fiscal year 2010 definitive Proxy Statement under the captions Election of Directors and Corporate Governance.
89
The information concerning compliance with Section 16(a) of the Securities and Exchange Act of 1934, as amended, is incorporate herein by reference to the Companys fiscal year 2010 definitive Proxy Statement under the caption Corporate Governance.
The information concerning Carpenters Code of Ethics and certain additional information relating to the Companys Corporate Governance is incorporated herein by reference to the Companys fiscal year 2010 definitive Proxy Statement under the caption Corporate Governance.
The information concerning the Audit Committee and its financial experts is incorporated herein by reference to the Companys fiscal year 2010 definitive Proxy Statement under the caption Audit/Finance Committee Report.
The information concerning material changes to the procedures by which shareholders may recommend nominees to the Board of Directors is incorporated herein by reference to the Companys fiscal year 2010 definitive Proxy Statement under the caption General Information.
On November 2, 2009, we filed with the New York Stock Exchange (NYSE) the Annual CEO Certification regarding our compliance with the NYSEs Corporate Governance listing standards as required by Section 303 A-12(a) of the NYSE Listed Company Manual. In addition, we have filed as exhibits to our annual report on Form 10-K for the fiscal year ended June 30, 2010, the applicable certifications of our Chief Executive Officer and our Chief Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002, regarding the quality of Carpenters public disclosures.
Item 11. | Executive Compensation |
Certain information required by this item is incorporated herein by reference to the Companys fiscal year 2010 definitive Proxy Statement under the captions Compensation Discussion and Analysis and Executive Compensation.
90
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this item is incorporated herein by reference to the Companys fiscal year 2010 definitive Proxy
Equity Compensation Plan Information
The following table shows the securities authorized for issuance under equity compensation plans as of June 30, 2010:
Equity Compensation Plan Information | ||||||||
Plan category |
Number of securities
to be issued upon exercise of outstanding options, warrants and rights (a) |
Weighted-
average exercise price of outstanding options, warrants and rights (b) |
Number of securities
remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
|||||
Equity compensation plans approved by security holders |
820,655 | $ | 26.53 | 4,476,157 | (1) | |||
Equity compensation plans not approved by security holders |
| | | |||||
Total |
820,655 | $ | 26.53 | 4,476,157 | (1) | |||
(1) |
Includes 3,554,185 shares available for issuance under the Stock-Based Incentive Compensation Plan for Officers and Key Employees (which provides for the issuance of stock options, restricted stock, and restricted stock units) and 921,972 shares available under the Stock-Based Compensation Plan for Non-Employee Directors (which provides for issuance of stock options, stock units and performance units.) |
Item 13. | Certain Relationships, Related Transactions and Director Independence |
The information required by this item is incorporated herein by reference to the Companys fiscal year 2010 definitive Proxy Statement under the captions Corporate Governance and Executive Compensation.
Item 14. | Principal Accounting Fees and Services |
The information required by this item is incorporated herein by reference to the Companys fiscal year 2010 definitive Proxy Statement under the caption Approval of Appointment of Independent Registered Public Accounting Firm.
91
PART IV
Item 15. | Exhibits, Financial Statement Schedules |
(a) | Financial Statement Schedule: |
(1) | The following consolidated financial statement schedule should be read in conjunction with the consolidated financial statements (see Item 8. Financial Statements and Supplementary Data:): |
Schedule II 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.
(b) | Exhibits |
Exhibits required to be filed by Item 601 of Regulation S-K are listed below. Documents not designated as being incorporated herein by reference are filed herewith. The exhibit numbers correspond to the paragraph numbers designated in Item 601 of Regulation S-K.
Exhibit
|
Description |
|
3(A) |
Restated Certificate of Incorporation, dated October 26, 1998, is incorporated herein by reference to Exhibit 3(A) of Carpenters 2005 Annual Report on Form 10-K filed on September 9, 2005. | |
3(B) |
By-Laws, amended as of October 11, 2009, are attached as an Exhibit to this Annual Report on Form 10-K. | |
4(A) |
Restated Certificate of Incorporation and By-Laws set forth in Exhibit Nos. 3A and 3B, above. | |
4(B) |
Carpenters Registration Statement No. 333-44757, as filed on Form S-3 on January 22, 1998, and amended on February 13, 1998, with respect to issuance of Common Stock and unsecured debt is incorporated herein by reference. | |
4(C) |
Prospectus, dated February 13, 1998, and Prospectus Supplement, dated March 31, 1998, File No. 333-44757, with respect to issuance of $198,000,000 of Medium Term Notes are incorporated by reference. | |
4(D) |
Indenture dated as of January 12, 1994, between Carpenter and U.S. Bank Trust National Association, formerly known as First Trust of New York, National Association, as successor Trustee to Morgan Guaranty Trust Company of New York, related to Carpenters (i) $100,000,000 of unsecured medium term notes registered on Registration Statement No. 33-51613 and (ii) $198,000,000 of unsecured medium term notes registered on Registration Statement No. 333-44757 is incorporated by reference to Exhibit 4(C) to Carpenters Registration Statement No. 33-51613, as filed on Form S-3 on January 6, 1994. | |
4(E) |
Forms of Fixed Rate and Floating Rate Medium-Term Note, Series B are incorporated by reference to Exhibit 4(F) of Carpenters 2004 Annual Report on Form 10-K filed September 3, 2004. | |
4(F) |
Pricing Supplements No. 1 through 25 dated and filed from April 2, 1998 to June 12, 1998, supplements to Prospectus dated February 13, 1998 and Prospectus Supplement dated March 31, 1998, File No. 333-44757, with respect to issuance of $198,000,000 of Medium Term Notes are incorporated herein by reference. |
92
93
Exhibit
|
Description |
|
10(H) |
Trust Agreement between Carpenter and the Chase Manhattan Bank, N.A., dated September 11, 1990 as restated on May 1, 1997 and amended October 28, 2002 and January 23, 2003, relating in part to the Supplemental Retirement Plan for Executive Officers, Deferred Compensation Plan for Corporate and Division Officers and the Officers Supplemental Retirement Plan of Carpenter Technology Corporation is incorporated by reference to Exhibit 10(J) of Carpenters 2002 Annual Report on Form 10-K filed September 23, 2002 and the amendments thereof are incorporated herein by reference to Exhibit 10 (I) of Carpenters 2005 Annual Report on Form 10-K filed September 9, 2005. | |
10(I) |
Form of Indemnification Agreement, entered into between Carpenter and each of the directors and the following executive officers: K. Douglas Ralph and Michael L. Shor, is incorporated herein by reference to Exhibit 10 (J) of Carpenters 2005 Annual Report on Form 10-K filed September 9, 2005. | |
10(J) |
Stock-Based Incentive Compensation Plan for Officers and Key Employees, as amended effective June 30, 2009 is incorporated herein by reference to Exhibit 10(J) of Carpenters 2009 Annual Report on Form 10-K filed August 20, 2009. | |
10(K) |
Carpenter Technology Corporation Change of Control Severance Plan, adopted April 26, 2001 and amended as of August 20, 2007, is incorporated herein by reference to Exhibit 10(K) of Carpenters 2007 Annual Report on Form 10-K filed August 29, 2007. | |
10(L) |
Earnings Adjustment Plan of Carpenter Technology Corporation, restated as of August 20, 2007, is incorporated herein by reference to Exhibit 10(M) of Carpenters 2007 Annual Report on Form 10-K filed August 29, 2007. | |
10(M) |
Benefit Equalization Plan of Carpenter Technology Corporation, restated as of August 20, 2007, is incorporated herein by reference to Exhibit 10(N) of Carpenters 2007 Annual Report on Form 10-K filed August 29, 2007. | |
10(N) |
Employment Letter Agreement of K. Douglas Ralph, dated July 6, 2007, is incorporated herein by reference to Exhibit 99.2 of Carpenters Current Report on Form 8-K filed July 11, 2007. | |
10(O) |
Trust Agreement between Carpenter and the Chase Manhattan Bank, N.A., dated December 7, 1990 as restated on May 1, 1997 and amended October 28, 2002 and January 23, 2003, relating in part to the Directors Retirement Plan and the Deferred Compensation Plan for Non-Management Directors, is incorporated by reference to Exhibit 10(P) of Carpenters 2002 Annual Report on Form 10-K filed September 23, 2002 and the amendments thereof are incorporated herein by reference to Exhibit 10 (O) of Carpenters 2005 Annual Report on Form 10-K filed September 9, 2005. | |
10(P) |
Revolving Credit Agreement dated as of November 30, 2009 among Carpenter and certain of its subsidiaries as Borrowers and with JPMorgan Chase Bank NA, The Bank of Tokyo-Mitsubishi UFJ Trust Company, PNC Bank National Association and Keybank, National Association as Lenders is incorporated herein by reference to Carpenters Current Report on Form 8-K filed November 25, 2009. |
94
Exhibit
|
Description |
|
10(Q) |
Release and Termination of Employment Agreement executed November 6, 2009, between the Company and T. Kathleen Hanley is incorporated herein by reference to Carpenters Current Report on Form 8-K filed on November 12, 2009. | |
10(R) |
Supplemental Separation Pay Agreement executed July 20, 2010 between the Company and Anne L Stevens is incorporated herein by reference to Carpenters Current Report on Form 8-K filed on July 22, 2010. | |
10(S) |
Employment Letter Agreement of William A. Wulfsohn, dated June 3, 2010, incorporated herein by reference to Carpenters Current Report on Form 8-K filed on June 7, 2010. | |
10(T) |
Severance Pay Plan for Executives of Carpenter Technology Corporation, as adopted July 1, 2010, incorporated herein by reference to Carpenters Current Report on Form 8-K filed on July 2, 2010. | |
10(U) |
Form of Restricted Stock Unit Award Agreement (pursuant to Carpenters Stock-Based Incentive Plan for Officers and Key Employees) is incorporated herein by reference to Exhibit 10(A) of Carpenters 10-Q for the quarter ended December 31, 2009 filed February 3, 2010. | |
10(V) |
Form of Stock Option Award Agreement (pursuant to Carpenters Stock-Based Incentive Compensation Plan for Officers and Key Employees) is incorporated herein by reference to Exhibit 10(B) of Carpenters 10-Q for the quarter ended December 31, 2009 filed February 3, 2010. | |
12 |
Computations of Ratios of Earnings to Fixed Charges (unaudited) (filed herewith) | |
21 |
Subsidiaries of the Registrant (filed herewith) | |
23 |
Consent of PricewaterhouseCoopers LLP (filed herewith) | |
24 |
Powers of Attorney in favor of William A. Wulfsohn or K. Douglas Ralph (filed herewith) | |
31(A) |
Certification of Chief Executive Officer required by Securities and Exchange Commission Rule 13a-14(a)/15d-14(a) (filed herewith). | |
31(B) |
Certification of Chief Financial Officer required by Securities and Exchange Commission Rule 13a-14(a)/15d-14(a) (filed herewith). | |
32 |
Certification pursuant to 18 U.S.C Section 1350 (filed herewith) | |
99 |
Agreement to Furnish Debt Instruments (filed herewith) |
95
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/ K. Douglas Ralph |
|
K. Douglas Ralph | ||
Senior Vice President Finance and | ||
Chief Financial Officer |
Date: August 20, 2010
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.
96
* |
Director | August 20, 2010 | ||
Jeffrey Wadsworth | ||||
* |
Director | August 20, 2010 | ||
Stephen M. Ward, Jr. | ||||
* |
Director | August 20, 2010 | ||
Dr. Phillip M. Anderson |
Original Powers of Attorney authorizing William A. Wulfsohn or K. Douglas Ralph to sign this Report on behalf of: Carl G. Anderson, Jr., Robert R. McMaster, Martin Inglis, Gregory A. Pratt, Peter N. Stephans, Kathryn C. Turner, Jeffrey Wadsworth, Stephen M. Ward, Jr. and Dr. Phillip M. Anderson are being filed with the Securities and Exchange Commission.
*By |
/s/ K. Douglas Ralph |
|
K. Douglas Ralph | ||
Attorney-in-fact |
97
CARPENTER TECHNOLOGY CORPORATION AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
($ in millions)
Column A | Column B |
Column C
Additions |
Column D | Column E | |||||||||||||
Description |
Balance
at
Beginning of Period |
Charged
to Costs & Expenses |
Charged
to Other Accounts |
Deductions |
Balance at
End of Period |
||||||||||||
Year ended June 30, 2010 |
|||||||||||||||||
Allowance for doubtful accounts receivable |
$ | 2.8 | $ | (0.1 | ) | $ | | $ | | $ | 2.7 | ||||||
Deferred tax valuation allowance |
$ | 17.9 | $ | (0.4 | ) | $ | | $ | 0.1 | $ | 17.6 | ||||||
Inventory reserves |
$ | 16.0 | $ | (0.9 | ) | $ | | $ | 0.1 | $ | 15.2 | ||||||
Year ended June 30, 2009 |
|||||||||||||||||
Allowance for doubtful accounts receivable |
$ | 2.7 | $ | 1.2 | $ | | $ | (1.1 | ) | $ | 2.8 | ||||||
Deferred tax valuation allowance |
$ | 12.0 | $ | 5.9 | $ | | $ | | $ | 17.9 | |||||||
Inventory reserves |
$ | 7.8 | $ | 11.1 | $ | | $ | (2.9 | ) | $ | 16.0 | ||||||
Year ended June 30, 2008 |
|||||||||||||||||
Allowance for doubtful accounts receivable |
$ | 4.0 | $ | 1.1 | $ | | $ | (2.4 | ) | $ | 2.7 | ||||||
Deferred tax valuation allowance |
$ | 14.1 | $ | | $ | | $ | (2.1 | ) | $ | 12.0 | ||||||
Inventory reserves |
$ | 8.3 | $ | | $ | | $ | (0.5 | ) | $ | 7.8 | ||||||
98
Exhibit 3(B)
By-Laws
of
CARPENTER TECHNOLOGY CORPORATION
As Last Amended Effective October 11, 2009.
1. | MEETINGS OF STOCKHOLDERS . |
1.1 Annual Meeting . The annual meeting of stockholders shall be held during the month of October in each year, and shall be held at a place and time determined by the Board of Directors (the Board).
At an annual meeting of stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, or (b) otherwise brought before the meeting by or at the direction of the Board or by a stockholder in accordance with the following provisions. In addition to any other applicable requirements, for business to be brought before an annual meeting by a stockholder, the stockholder must have given notice thereof in writing to the Secretary of the Corporation, which must be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of the stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the stockholder must be so received not later than the close of business on the 10th day following the day on which notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made, whichever first occurs. A stockholders notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the Corporation which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business.
Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 1.1.
The chairperson of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 1.1 and, if the chairperson should so determine, any such business not properly brought before the meeting shall not be transacted.
1.2 Special Meetings . Except as otherwise required by law and subject to the rights of the holders of any class or series of stock having preference over the Common Stock as to dividends or upon liquidation, special meetings of the stockholders may be called only by the Board pursuant to a resolution approved by a majority of the entire Board. At a special meeting of the stockholders, only such business shall be conducted as shall be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board.
1.3 Place of Meetings . Meetings of the stockholders may be held in or outside Delaware at the place specified in the notice by the person or persons calling the meeting.
1.4 Notice of Meetings . Written notice of each meeting of stockholders shall be mailed to each stockholder entitled to vote at the meeting, not less than 20 nor more than 40 days before the meeting, and shall state the time and place of the meeting and the purposes for which it is called.
1.5 Quorum . The presence in person or by proxy of the holders of a majority of the shares entitled to vote shall constitute a quorum for the transaction of any business, except as otherwise provided by law. In the absence of a quorum any officer entitled to preside at or act as secretary of such meeting shall have the power to adjourn the meeting from time to time until a quorum is present, without further notice other than announcement at the meeting of the adjourned time and place (provided that if a meeting is adjourned for more than 30 days, or if a new record date is set, a new notice must be given). At any adjourned meeting at which a quorum is present, any action may be taken which might have been taken at the meeting as originally called.
1.6 Voting; Proxies . Stockholders may attend meetings and vote either in person or by proxy. Without limiting the manner in which a stockholder may authorize another person or persons to act for the stockholder as proxy, either of the following shall constitute a valid means by which a stockholder may grant such authority:
(i) A stockholder may execute a writing authorizing another person or persons to act for the stockholder as proxy. Execution may be accomplished by the stockholder or an authorized officer, director, employee or agent signing such writing or causing their signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature.
(ii) A stockholder may authorize another person or persons to act for the stockholder as proxy by transmitting or authorizing the transmission of a telegram or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such telegram or other means of electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram or other electronic transmission was authorized by the stockholder.
Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission authorizing another person or persons to act as proxy for a stockholder may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Corporate action to be taken by stockholder vote, other than the election of directors, shall be authorized by a majority of the votes cast at a meeting of stockholders at which a quorum is present, except as otherwise provided by law, by the Certificate of Incorporation, as amended from time to time, or by these By-Laws. Directors shall be elected in the manner provided in Section 2.1 of these By-Laws.
1.7 Inspectors of Election . In advance of every meeting of the stockholders, the Board by resolution or the Chairperson or President shall appoint one or more persons to act as inspectors of election at the meeting. One or more other persons may be designated as alternate inspectors to replace any inspector who is unable or unwilling to act at such meeting. If no inspector or alternate inspector has been appointed or is present, ready and willing to act at any meeting, the chairperson of the meeting shall appoint one or more persons to act as inspectors at the meeting. Each inspector, before discharging the duties of office, shall faithfully take and sign an oath to execute the duties of inspector with strict impartiality and according to the best of the inspectors ability. The inspectors shall have the duties prescribed by law. Any person, including persons who serve the Corporation in other capacities, including without limitation, as officers, employees, agents or representatives of the Corporation, may act as an
inspector, except that no candidate for the office of director shall act as an inspector of any election for directors.
1.8 Opening and Closing of the Polls . At every meeting of the stockholders, the chairperson of the meeting shall fix and announce at the meeting the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at the meeting.
2. | BOARD OF DIRECTORS . |
2.1 Number, Election and Term of Directors . The business of the Corporation shall be managed under the direction of the Board, which shall consist of not less than six nor more than seventeen directors, the exact number of directors to be determined from time to time by resolution adopted by affirmative vote of a majority of the entire Board. A majority of the Board must be persons who are neither current nor former officers or employees of the Corporation or its subsidiaries. The Board of Directors shall be divided into three classes. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board. The term of office of the first class will expire at the first annual meeting of the stockholders after the initial classification of the Board, that of the second class will expire at the second meeting after the initial classification of the Board, and that of the third class will expire at the third annual meeting after the initial classification of the Board. At each annual meeting of the stockholders after such initial classification of the Board, directors shall be chosen for a term of three years to succeed those whose terms expire, and shall hold office until the third following annual meeting of stockholders and until the election of their respective successors, subject to the provisions of Section 2.6 hereof. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case may a decrease in the number of directors shorten the term of any incumbent director. Directors shall be elected at each annual meeting of stockholders by a plurality of the votes cast by written ballot. As used in these By-Laws, entire Board means the total number of directors which the Corporation would have if there were no vacancies.
2.2 Quorum and Manner of Acting . A majority of the directors in office (but not less than one-third of the entire Board) shall constitute a quorum for the transaction of business at any meeting, except as provided in Section 2.7 of these By-Laws. Action of the Board shall be authorized by the vote of a majority of the directors present at the time of the vote, if a quorum is present, unless otherwise provided by law or these By-Laws. In the absence of a quorum, a majority of the directors present may adjourn any meeting from time to time until a quorum is present, on notice given as provided in Section 2.5 hereof.
2.3 Annual and Regular Meetings . Annual meetings of the Board, for the election of officers and consideration of other matters, shall be held either (a) without notice immediately after the annual meeting of stockholders and at the same place, or (b) as soon as practicable after the annual meeting of stockholders on notice as provided in Section 2.5 of these By-Laws. Regular meetings of the Board may be held at such times and places as the Board determines.
2.4 Special Meetings . Special meetings of the Board may be called by the Chairperson of the Board or the Chief Executive Officer of the Corporation or by three directors, one from each class of directors then in office.
2.5 Notice of Meetings; Waiver of Notice . Notice of the time and place of each regular and special meeting of the Board, and of each annual meeting not held immediately after the annual meeting of stockholders and at the same place, shall be given to each director by mailing it to the Director at the
Directors residence or usual place of business at least five days before the meeting, or by delivering or telephoning or telegraphing it to the Director at least one day before the meeting. Notice of a special meeting shall also state the general purpose or purposes for which the meeting is called. Notice need not be given to any director who submits a signed waiver of notice before or after the meeting, or who attends the meeting without protesting the lack of notice to him or herself, either before the meeting or when it begins. Notice of any adjourned meeting need not be given, other than by announcement at the meeting at which the adjournment is taken.
2.6 Resignation and Retirement of Directors . Any director may resign at any time by giving written notice to the Chief Executive Officer or Secretary of the Corporation, to take effect at the time specified therein. The acceptance of such resignation, unless required by the terms thereof, shall not be necessary to make it effective. Unless otherwise provided by resolution of the Board, any director who is also an officer of the Corporation shall retire from the Board upon the earlier of (a) attaining age 65 or (b) retirement as an officer of the Corporation. Unless otherwise provided by resolution of the Board, any Director who is not an Officer of the Corporation shall retire from the Board at the next Annual Meeting of Stockholders after the Director attains the age of 70.
2.7 Vacancies . Any vacancy in the Board, including one created by an increase in the number of directors, may be filled for the unexpired term by a majority vote of the remaining directors, though not a quorum.
2.8 Action by Directors Without a Meeting . Any action by the Board or any committee of the Board may be taken without a meeting, if a written consent to the action is signed by all of the members of the Board or committee.
2.9 Compensation . Directors shall receive such compensation as the Board determines, together with reimbursement of their reasonable expenses in connection with the performance of their duties. A director may also be paid for serving the Corporation, its affiliates or subsidiaries in other capacities.
2.10 Nominations of Director Candidates . Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors at meetings of stockholders. Nominations of persons for election to the Board of the Corporation may be made at a meeting of stockholders by (a) the Board, (b) any committee whose responsibilities include director nominations or person appointed by the Board, or (c) any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.10. Such nominations, other than those made by or at the direction of the Board, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholders notice shall be delivered to or mailed and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of the stockholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the 10th day following the date on which notice of the date of the annual meeting was mailed or public disclosure of the date of the annual meeting was made, whichever first occurs. Such stockholders notice to the Secretary shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the person, and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Schedule 14A under the Securities Exchange Act of 1934, as amended; and (b) as to the stockholder giving the notice (i) the name and record address of the stockholder and (ii) the class and number of shares of capital stock of the Corporation which are
beneficially owned by the stockholder. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation.
The chairperson of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure and, if the chairperson should so determine, the chairperson shall so declare to the meeting and the defective nomination shall be disregarded.
2.11 Chairperson of the Board . The Chairperson of the Board, if one is elected, shall preside at all meetings of the Board and of the stockholders. The Chairperson shall perform all duties incident to the office of Chairperson of the Board and shall have such other powers and duties as the Board assigns to that individual. In the absence of the Chairperson, the Board shall designate a member of the Board as temporary Chairperson.
3. | COMMITTEES . |
3.1 Standing Committees . The Board shall by resolution designate an Audit/Finance Committee, a Corporate Governance Committee, and a Human Resources Committee, each consisting of two or more members of the Board. Unless otherwise provided by Board resolution, any current or former officer or employee of the Corporation or its subsidiaries shall not serve on any Standing Committee. The members of each such Committee shall serve at the pleasure of the Board, and the Board shall designate from the membership a Committee chairperson and shall fill any membership vacancies. The Corporate Governance Committee shall determine, from time to time, after consultation with each Committee, the scope of each standing Committees responsibilities, which shall be set forth in a written statement to be submitted to the Board for approval. Each such Committee shall perform such other functions and exercise such other powers as may be delegated to it from time to time by the Board.
3.2 Executive Committee . The Board may by resolution designate an Executive Committee of four or more members of the Board, which Committee shall have all the authority of the Board except as otherwise provided in the resolution or by law. The members of such Committee shall serve at the pleasure of the Board, and the Board shall designate from among the membership a Committee chairperson and shall fill any membership vacancies.
3.3 Other Committees . The Board may by resolution provide for such other standing or special committees, composed of two or more members of the Board, and discontinue the same at its pleasure. Each such committee shall have such powers and perform such duties, not inconsistent with law, as may be assigned to it by the Board.
3.4 Meetings of Committees . Each committee of the Board shall fix its own rules of procedure consistent with the provisions of the Board governing such committee, and shall meet as provided by such rules or by resolution of the Board, and it shall also meet at the call of its chairperson or any two members of such committee. Unless otherwise provided by such rules or by such resolution, the provisions of Article 2 of these By-Laws relating to the place of holding and notice required of meetings of the Board shall govern committees of the Board. A majority of each committee shall constitute a quorum thereof; provided, however, that in the absence of any member of such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint a member of the Board otherwise qualified for membership of such committee to act in the place of such absent member. The vote of a majority of such quorum at a duly constituted meeting shall be sufficient to authorize any action within the scope of responsibilities of each committee, unless otherwise provided by the rules of such committee
or by resolution of the Board. Each committee shall keep minutes of its meetings and all action taken by such committee shall be reported to the Board at its next meeting.
4. | OFFICERS . |
4.1 Executive and Other Officers . The officers of the Corporation shall be a Chief Executive Officer, a President, one or more Vice Presidents, a Treasurer; a Secretary and a Controller (any of whom may be designated as executive officers). The offices of Chief Executive Officer and President may, but need not, be held by the same person, and the offices of Treasurer, Controller or Secretary, may, but need not, be filled by the same person, who may also be a Vice President. The Officers specifically listed above, or otherwise designated as executive officers, shall be elected annually by the Board, and each such officer shall hold office until the next annual meeting of the Board and until the election of his successor, or until his earlier resignation or removal.
The Board may elect other officers including Vice Presidents (not otherwise designated by the Board as executive officers), Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers, each of whom shall hold office for such period and have such powers and duties as the Board determines.
4.2 Vacancies . A vacancy in any office may be filled for the unexpired term in the manner prescribed in Section 4.1 of these By-Laws for election or appointment to the office.
4.3 [ Reserved. ]
4.4 The President . The President shall perform all duties incident to the office of President and such other duties as the Board assigns to that individual.
4.5 Chief Executive Officer . The Chief Executive Officer shall, subject to the control of the Board, have the general management and control of the business and affairs of the Corporation and, in general, shall have all powers and perform all duties incident to the office of Chief Executive Officer.
4.6 Vice Presidents . Each Vice President shall have such designation as the Board may determine and such powers and duties as the Board or the Chief Executive Officer, subject to the control of the Board, assigns to that individual. One of the Vice Presidents, who is an executive officer, may be designated by the Board to act, in the absence of the Chief Executive Officer, in the Chief Executive Officers place.
4.7 The Treasurer . The Treasurer shall, subject to the direction of the Chief Executive Officer, have charge of all funds, securities, notes, receipts and disbursements of the Corporation. The Treasurer shall be responsible for the deposit of Corporation funds in or withdrawal from such banks or other depositories as shall be selected by the Chief Executive Officer with the approval of the Board, and shall provide all necessary cash and other records to the Controller. The Treasurer shall perform such other duties as treasurers of corporations usually have or as the Chief Executive Officer or the Vice President to whom the Treasurer reports assigns to that individual.
4.8 The Secretary . The Secretary shall be the secretary of, and keep the minutes of, all meetings of the Board and of the stockholders, shall be responsible for giving notice of all meetings of the Board and of the stockholders and shall keep the seal and shall apply it to any instrument requiring it. The Secretary shall be custodian of the corporate records (except accounting records), contracts and documents, and shall have such other powers and duties as the Chief Executive Officer or the Vice President to whom the
Secretary reports assigns to that individual. In the absence of the Secretary from meetings, the minutes shall be kept by the person appointed for that purpose by the presiding officer.
4.9 The Controller . The Controller shall be the officer in charge of accounts of the Corporation and shall be responsible for the maintenance of adequate accounting and internal control procedures, and adequate records of the Corporation, for the preparation of financial statements and reports on the operation of the business. The Controller shall be responsible for the administration of the office and shall have such other powers and duties as the Board, the Chief Executive Officer or the Vice President to whom the Controller reports assigns to that individual.
4.10 Subsidiary, Business Unit or Division Officers . For administrative and management purposes, the Chief Executive Officer, may appoint such subsidiary, business unit or division officers (Business Officers) with such titles, as deemed necessary or advisable for the transaction of the business of the Corporation. Any Business Officer may be removed from office as a Business Officer, either with or without cause, at any time, by the Chief Executive Officer or by any other executive officer of the Corporation or officer of a subsidiary, business unit or division to whom such Business Officer may at the time be responsible. A Business Officer shall not be an officer of the Corporation by virtue of his or her position as such Business Officer. Business Officers shall perform such duties as shall be assigned to them from time to time by the Chief Executive Officer but no Business Officer shall execute any deed, lease or other conveyance or transfer of real property of the Corporation, any note or other evidence of indebtedness or any mortgage or other security for indebtedness.
5. | SHARES . |
5.1 Certificates . The shares of the Corporation shall be represented by certificates in the form approved by the Board, unless the Board by resolution provides that some or all classes or series of stock shall be uncertificated shares (provided that no such resolution shall apply to shares theretofore represented by a certificate unless and until such certificate is surrendered to the Corporation). Notwithstanding the adoption of such resolution by the Board, every holder of shares represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate representing such shares registered in his or her name on the Corporations books. Each certificate shall be signed by the President or a Vice President and by the Secretary or the Treasurer. Any or all the signatures on the certificate may be a facsimile.
5.2 Transfers . Shares shall be transferable only on the Corporations books, (and, in the case of shares represented by certificates,) upon surrender of the certificate for the shares, properly endorsed. The Board may require satisfactory surety before issuing a new certificate to replace a certificate claimed to have been lost or destroyed.
5.3 Transfer Agents and Registrars . The Corporation shall have one or more transfer agents and one or more registrars of its shares, whose respective duties shall be defined by the Board. Unless the Board specifically directs otherwise with respect to a particular certificate, no certificates for shares shall be valid unless countersigned by a transfer agent and unless registered by a registrar.
6. | MISCELLANEOUS . |
6.1 Seal . The Board shall adopt a corporate seal, which shall be in the form of a circle and shall bear the Corporations name and the year and state in which it was incorporated.
6.2 Fiscal Year . The Board may determine the Corporations fiscal year. Until changed by the Board, the Corporations fiscal year shall end on June 30.
6.3 Voting of Shares in Other Corporations . Shares in other corporations which are held by the Corporation may be represented and voted by the President or a Vice President of this Corporation or by proxy or proxies appointed by one of them. The Board may, however, appoint some other person to vote the shares.
6.4 Indemnification of Officers, Directors, Employees and Agents . The Corporation shall, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law as amended from time to time, indemnify all persons whom it may indemnify under that Section. For these purposes an employee or agent shall be deemed to have acted in good faith only if his or her action were within the scope of employment as defined by an agreement with the Corporation or in accordance with the rules of the Corporation or an authorized officer thereof.
6.5 Amendments . These By-Laws may be amended, repealed or adopted by the affirmative vote of a majority of the entire Board or of the holders of two-thirds of the issued and outstanding stock of the Corporation entitled to vote.
Exhibit 10(A)
SUPPLEMENTAL RETIREMENT PLAN
FOR EXECUTIVES OF
CARPENTER TECHNOLOGY CORPORATION
Effective December 13, 1979
Restated August 20, 2007
Amended June 29, 2010
1. | Purpose |
The purpose of this Plan is to attract, retain and motivate designated employees of Carpenter Technology Corporation (the Company or Corporation) who are Participants in the Plan by providing supplemental pension and death benefits to enhance their economic security during their active careers with the Corporation and in Retirement.
2. | Definitions |
(A) | Annual Base Formula Retirement Benefit shall mean the annual benefit computed to measure total annual retirement income, as provided in Section 6. |
(B) | Annual Supplemental Retirement Benefit shall mean the annual benefit to be paid from the Plan, as provided in Section 7 hereof. |
(C) | Average Annual Earnings shall, after the adjustment of earnings as indicated below, mean average monthly earnings as both of these terms are used in the General Retirement Plan multiplied by 12 (in the event the Participant or Former Participant has insufficient service to calculate such average monthly earnings, such Participants average monthly compensation shall be determined by the Board in its discretion). Such average monthly earnings shall be recalculated with the following adjustments to the definition of earnings under the General Retirement Plan. |
(1) | Annual compensation under the General Retirement Plan will not be limited by the application of section 401(a)(17) of the Code and the regulations thereunder, as amended. |
(2) | Compensation deferred under the Deferred Compensation Plan for Officers and Key Employees of Carpenter Technology Corporation or any similar non-qualified plan or arrangement will count as earnings. |
(3) | The amount of any bonus payments for fiscal year 2002 under the Corporations Executive Bonus Compensation Plan (then titled the Executive Annual Compensation Plan or EACP) that were voluntarily waived will count as earnings. |
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(4) | The Fair Market Value as of the last day of fiscal year 2004 of any restricted shares of the Corporations Common Stock received in lieu of cash compensation under the Corporations Executive Bonus Compensation Plan (then titled the EACP) for fiscal year 2004 will count as earnings. |
(D) | Board shall mean the Board of Directors of Carpenter Technology Corporation. |
(E) | Change in Control shall mean and include each of the following: |
(1) | The acquisition by any person, entity, or group of persons (within the meaning of section 13(d)(3) or 14(d)(2) of the Exchange Act) (each, a Person) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of either (i) the then outstanding shares of common stock of the Company (the Outstanding Company Common Stock) or (ii) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the Outstanding Company Voting Securities); provided , however , that, the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company, (ii) any acquisition by a person that is considered immediately prior to such acquisition or acquisitions to effectively control the Company within the meaning of Section 409A of the Code, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any affiliated company or (iv) any acquisition by any corporation pursuant to a transaction that complies with Sections 2(E)(3)(i), 2(E)(3)(ii), and 2(E)(3)(iii); |
(2) | the date a majority of the individuals who constitute the Board of Directors (the Incumbent Board) cease for any reason, during any 12-month period, to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director during such 12-month period whose election, or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors; |
(3) |
consummation of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company or the |
2
acquisition of the assets or stock of another entity (a Business Combination), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the surviving entity resulting from such Business Combination (including, without limitation, a surviving entity that, as a result of such transaction, owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any surviving entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such surviving entity resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the surviving entity resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such surviving entity, except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the surviving entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or |
(4) | approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. |
(F) | Code means the Internal Revenue Code of 1986, as amended. |
(G) | Disability shall mean that a qualified physician designated by the Corporation has reviewed and approved the determination that prior to Separation from Service the employee: |
(1) | is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or |
(2) |
is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a |
3
continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Corporation. |
(H) | Early Retirement Benefit shall mean the annual benefit payable to a Participant under Section 7(B) hereof. |
(I) | Former Participant shall mean any person who was previously a Participant and was either (i) a Participant for at least three years or (ii) an employee of the Company for at least ten years. |
(J) | General Retirement Plan shall mean the Corporations General Retirement Plan for Employees of Carpenter Technology Corporation as in effect on the last date of a Participants employment with the Corporation as a participant under the General Retirement Plan. |
(K) | Participant shall mean any person included in the Plan, as provided in Section 3 and shall also mean a Former Participant except as otherwise provided in Section 6. |
(L) | Plan shall mean this Supplemental Retirement Plan for Executives of Carpenter Technology Corporation. |
(M) | Retirement shall mean the Participants Separation from Service on account of retirement, as that term is defined in the General Retirement Plan. |
(N) | Separation from Service shall mean a Participants termination of employment with the Company which entitles the Participant to benefits under the Plan, and which constitutes a Separation from Service within the meaning of Code Section 409A. |
(O) | Surviving Spouse shall have the meaning ascribed to such term in Sections 3.13(f) or 4.5(a)(1), as applicable, of the General Retirement Plan. |
3. | Participants |
Participants in the Plan will consist of such employees of the Corporation as the Board in its sole discretion may from time to time designate. An employee previously designated a Participant shall cease to be eligible to participate upon the occurrence of the following:
(A) | Such Participants Separation from Service with the Corporation for any reason other than Retirement under conditions where benefits are payable under Section 7 (except that a Former Participant shall be eligible to receive any previously accrued benefit under this Plan); |
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(B) | The Boards determination, in its sole discretion, that such Participant is no longer eligible to participate in the Plan (except that a Former Participant shall be eligible to receive any previously accrued benefit under this Plan); |
(C) | Such Participant commences performing services for the Corporation solely as an independent contractor or consultant (except that such Participant shall continue to receive any previously accrued benefit under this Plan); or |
(D) | The Boards determination that such Participant breached the non-competition covenant contained in the Supplemental Retirement Agreement described in Section 4(C) hereof (in which case no further payments will be made under the Plan). |
4. | Supplemental Retirement Agreement |
Each Participant, as a condition precedent to becoming a Participant, will enter into an agreement with the Corporation, in a form supplied by and satisfactory to the Corporation, which will, inter alia,
(A) | set forth any additional terms and conditions to benefits or participation not otherwise provided herein, |
(B) | permit the Corporation, in its sole discretion, to insure the Participants life under an individual life insurance policy in which the Corporation is the owner and beneficiary at no cost to the Participant, and |
(C) | contain a non-competition covenant. |
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5. | Payment of Benefits |
Each Participant who shall have a Separation from Service under the conditions set forth in Section 7 will receive a monthly Annual Supplemental Retirement Benefit paid from the general assets of the Corporation for a period of fifteen years commencing as provided herein. Notwithstanding the foregoing, upon a Change in Control, each Participant shall receive a lump sum payment of their benefits hereunder, as described in Section 5(C) below.
(A) | Disability . Upon a Participants Disability, a Participant shall commence payment on or about the first of the month following Retirement subject to any age reduction applicable under Section 7(B). |
(B) | Death . In the event of the death of a Participant prior to the commencement of the Annual Supplemental Retirement Benefit under Section 7 or prior to the completion of payments commenced under Sections 5(A) or 5(D) hereof, a Participants Annual Supplemental Retirement Benefit shall be payable in the following order: |
(1) | To the last beneficiary effectively designated by such Participant in monthly installments for the remainder of the payment period provided in Section 5(A) or 5(D), as applicable, then |
(2) | To the Surviving Spouse of the Participant, if different, in monthly installments for the remainder of the payment period provided in Section 5(A) or 5(D), as applicable, and finally |
(3) | To the estate of the Participant or the estate of a payee provided in Sections 5(B)(i) or 5(B)(ii) above, as the Plan Committee determines, in its sole discretion, in a lump sum. Any lump sum payment hereunder shall be calculated as the present value of the remaining payments, determined in accordance with the applicable interest rate and the applicable mortality table set forth in Section 3.12(a) of the General Retirement Plan. |
(C) |
Change in Control . Within 30 days following the occurrence of a Change in Control event, all Participants as of the date of this restatement (August 20, 2007) shall receive the actuarial present value of the benefits that would be payable under Section 7(A) hereof, calculated as if each such Participant had a Separation from Service as of the date of such Change in Control event, in a lump sum calculated as in Section 5(B)(3) above. Notwithstanding the foregoing, any such Participants not eligible for a Normal Retirement under Section 7(A) of this Plan as of the date of such Change in Control will receive a lump sum that is adjusted for Early Retirement as indicated in Section 7(B) of this Plan. In addition, unless otherwise determined by the Board of Directors, if a Participant is liable for the |
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payment of any excise tax (the Basic Excise Tax) pursuant to Section 4999 of the Code, or any successor or like provision, as a result of any payment under this Section 5(C), the Company shall pay the Participant an amount (the Special Reimbursement) which, after payment to the Participant (or on the Participants behalf) of any federal, state and local taxes, including, without limitation, any further excise tax under said Section 4999, with respect to or resulting from the Special Reimbursement, equals the net amount of the Basic Excise Tax. The Special Reimbursement shall be paid as soon as practicable after it is determined by the Company or the Participant and reviewed for accuracy by the Companys certified public accountants, but in no event later than the close of the calendar year next following the calendar year in which the taxes due under this Section 5(C) are remitted to the taxing authority. |
(D) | Other Retirement . |
(1) | If the Participant has a Separation from Service with eligibility under Section 7(A), the initial installment shall be paid on or about the first of the month immediately following Retirement. |
(2) | If the Participant has a Separation from Service with eligibility under Section 7(B or C), the initial installment shall be paid on or about: |
(a) | the first of the month following Retirement for Participants who are (i) at least age 55 with 10 but less then 30 years of service, or (ii) at least age 60 with a vested benefit but less then 10 years of service, or |
(b) | for all other Participants, the first of the month following (i) attainment of age 55 for those with 10 but less then 30 years of service, or attainment of age 60 for those with a vested benefit but less then 10 years of service. |
(3) | Notwithstanding anything to the contrary in this Section 5(D), if a Participant is a Specified Employee, as that term is defined in section 409A of the Code and the applicable regulations thereunder, payment of such Participants benefits shall commence no earlier than the first day of the 7th month following such Participants Retirement. In such event, such Participants first installment payment shall be increased by an amount equal to |
(a) | that number of monthly payments that would have otherwise been made to such Participant during the period between such Participants Retirement and the first installment payment provided by this Section 5(D) under the form of annuity in which such Participants benefits are payable, plus |
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(b) | a reasonable rate of interest on each of the monthly payments that would have otherwise been made to such Participant during the period between such Participants Retirement and the first installment payment provided by this Section 5(D). |
(E) | No benefit payable under this Plan shall be subject in any way to alienation, sale, transfer, assignment, pledge, attachment, garnishment, execution, or encumbrance of any kind, and any attempt to accomplish the same shall be void and of no effect. |
6. | Annual Base Formula Retirement Benefit |
The Annual Base Formula Retirement Benefit shall be calculated on either (i) the date of the applicable Participants Retirement, (ii) in the case of a Former Participant, upon such Former Participants termination of participation or (iii) the date of a Change in Control, and will be equal to:
(A) | the Participants or Former Participants Average Annual Earnings, |
(B) | multiplied by a percentage which is: |
(1) | five percent for each year of service, or fraction thereof, with the Corporation up to a maximum of ten years, that an individual has been designated a Participant in this Plan, plus |
(2) | for each additional year in excess of the service credited in (1) above that the Participant accrues a benefit under paragraph 3.3 of the General Retirement Plan, 1.3 percent for each additional year of service during the first 20 years of Continuous Service (as defined in the General Retirement Plan) and 1.4 percent for each other additional year of service, or fraction thereof |
provided, however, that the aggregate of the percentages of this Subparagraph 6(B) shall not exceed the sum of 60% plus one-quarter percent per year for each year, or fraction thereof, of Continuous Service exceeding 30 years,
(C) | reduced by the sum of the following (such reduction to commence and be fixed as of the respective calculation dates hereinafter stated): |
(1) |
the Participants accrued pension benefits calculated to be payable from any other defined benefit pension plans provided by the Corporation or its subsidiaries (including but not limited to the General Retirement Plan, the Benefit Equalization Plan, the Earnings Adjustment Plan, the Officers Supplemental Retirement Plan, or any replacement or successor pension plans) as of the respective date or dates of earliest entitlement (including |
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the application of any early retirement factor) or, if later, the date of retirement under such pension plans, before any actuarial reduction for option election or conversion in Appendix I of the General Retirement Plan to a life annuity; provided, however, that any such reduction shall not include the portion of any other pension benefit resulting from the Participants express contribution or any Increased Benefit calculated under paragraph 3.6 of the General Retirement Plan, nor any benefits attributable to a defined contribution entitlement, and |
(2) | the amount of the Primary Social Security Retirement Benefit calculated to be payable as of the date of earliest entitlement or, if later, the date of Retirement hereunder. |
7. | Annual Supplemental Retirement Benefits |
(A) | Normal Retirement |
(1) | A Participant shall receive upon Retirement a Normal Supplemental Retirement Benefit (as defined below) if the Participant has attained (a) age 62 or older with five or more years of service with the Corporation or its subsidiaries, or (b) thirty years of service with the Corporation or its subsidiaries. |
(2) | Normal Supplemental Retirement Benefit shall mean the Annual Base Formula Retirement Benefit, as set forth in Section 6. |
(B) | Early Retirement |
(1) | In the event of Retirement before attainment of eligibility for Normal Retirement or grant of a Mutual Consent Retirement, a Participant shall commence receiving his or her Early Retirement Benefit (as defined below) as indicated in Section 5(D) of this Plan. |
(2) | Early Retirement Benefit shall mean the Annual Base Formula Retirement Benefit, as set forth in Section 6(A) and 6(B), reduced to its equivalent actuarial value from age 62 to the date of initial payment to the Participant based on the early retirement factors in paragraph 3.3(c)(2) of the General Retirement Plan, and subsequently adjusted for any further reduction required under Section 6(C). |
(C) | Mutual Consent Retirement |
(1) |
A Participant shall receive an actuarially adjusted monthly Plan benefit as of the commencement date indicated in Section 5(D) based upon the value |
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of the Plan benefit that would have been paid at Retirement hereunder with ten or more years service with the Corporation or its subsidiaries, a Mutual Consent Retirement, if: (a) the Participant is entitled to retire with monthly payments under the General Retirement Plan in the month following a Separation from Service, and (b) both the Participant and the Corporation agree that retirement under this Plan would be mutually beneficial. |
(2) | The amount of such benefit will be the Annual Base Formula Retirement Benefit, as set forth in Section 6. |
(D) | Notwithstanding anything to the contrary contained in this Plan, no Participant, Surviving Spouse or other beneficiary may become entitled to benefits under this Plan without the Participant or Former Participant first completing five consecutive years of service with the Corporation or its subsidiaries, unless otherwise provided in writing and expressly authorized by Board approval. |
8. | General Provision |
(A) | The exclusive power to interpret this Plan and the responsibility for carrying out its provisions are vested in the Human Resources Committee, including any successor committee, of the Board, in the same manner and scope as the Pension Boards authority under paragraph 7.1 of the General Retirement Plan. Management of this Plans administration including the determination of initial claim applications is delegated to the Corporations vice-president responsible for benefit administration. Whenever such vice-president submits a claim application under this Plan, determination of eligibility will be made by the Corporations Chief Executive Officer. |
(B) | Except for substituting the adjudicators designated in Section 8(A) above, the claim procedures established under the General Retirement Plan shall be utilized herein. |
(C) | The benefits provided by this Plan will be paid from the general assets of the Corporation or otherwise as the Board may from time to time determine. |
(D) | The Board or, when so designated by the Board, the Human Resources Committee or such Committees designee reserves the right at any time to modify or amend in whole or in part any or all of the provisions of the Plan, subject to the provisions of the Supplemental Retirement Agreement between the Corporation and each Participant. |
(E) | The masculine pronoun shall mean the feminine pronoun wherever appropriate. |
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Exhibit 10(C)
CARPENTER TECHNOLOGY CORPORATION
DEFERRED COMPENSATION PLAN
FOR NON-MANAGEMENT DIRECTORS
As amended and restated, effective January 1, 2005
and amended, effective June 29, 2010
This is the Carpenter Technology Corporation Deferred Compensation Plan for Non-Management Directors, effective January 1, 2005, established by Carpenter Technology Corporation and its subsidiaries expressly included herein to provide its non-employee directors with an additional method of planning for their retirement. The Plan is intended to be an unfunded plan maintained for the purpose of providing deferred compensation to the non-employee directors of Carpenter Technology Corporation.
The Plan was amended and restated, effective January 1, 2005, to meet the requirements of Section 409A of the Internal Revenue Code of 1986, as amended, to achieve deferral of taxation until deferred amounts are distributed in accordance with the terms of the Plan.
The Plan has been amended, effective June 29, 2010, to define the Plan Year as October 1 to September 30, to align the deferral rights provided herein with the annual service term for a Director, which commences at Carpenter Technology Corporations Annual Meeting in October.
ARTICLE IDEFINITIONS
The following words and phrases as used herein have the following meanings unless the context plainly requires a different meaning:
1.1 Account means the total amount credited to the bookkeeping accounts in which a Participants Deferral Credits are maintained, including earnings thereon. The Accounts will consist of Tranches for each type of Deferral made under Article IV, as the Plan Administrator deems necessary.
1.2 Beneficiary means the person that the Participant designates to receive any unpaid portion of the Participants Account should the Participants death occur before the Participant receives the entire balance to the credit of such Participants Account. If the Participant does not designate a beneficiary, his Beneficiary shall be his spouse if he is married at the time of his death, or his estate if he is unmarried at the time of his death.
1.3 Board of Directors means the board of directors of Carpenter Technology Corporation.
1.4 Change in Control means and includes each of the following:
1.4.1 The acquisition by any individual, entity, or group (within the meaning of section 13(d)(3) or 14(d)(2) of the Exchange Act) (each, a Person) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of either (i) the then-outstanding shares of common stock of the Company (the Outstanding Company Common Stock) or (ii) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the Outstanding Company Voting Securities); provided, however, that, the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any affiliated company or (iv) any acquisition by any corporation pursuant to a transaction that complies with Sections 1.4.3 (i), 1.4.3 (ii) and 1.4.3(iii);
1.4.2 individuals who, as of the date hereof, constitute the Board of Directors (the Incumbent Board) cease for any reason to constitute at least a majority of the Board of Directors during any 12 month period; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a
1
member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors;
1.4.3 consummation of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of the assets or stock of another entity (a Business Combination), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board of Directors providing for such Business Combination; or
1.4.4 approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.
1.5 Code means the Internal Revenue Code of 1986, as amended.
1.6 Company means the Carpenter Technology Corporation or any successor by merger, purchase or otherwise.
1.7 Compensation means all cash amounts that a Director receives in payment for serving on the Board of Directors. Notwithstanding the preceding sentence, Compensation shall not include amounts either granted or elected as stock units under the Carpenter Technology Corporation Stock-Based Compensation Plan for Non-Employee Directors, or identified by the Company as expense allowances or reimbursements.
1.8 Credits means the amount credited to a Participants Account or Tranche, as appropriate, as a result of a Participants Deferrals plus earnings credited under Section 4.4.
1.9 Deferral means an amount deferred under the Plan pursuant to a Participants election under Article IV and credited to a Participants Account. No money or other assets will actually be contributed to such Accounts.
1.10 Director means an individual who serves on the Board of Directors.
1.11 Disability means a qualified physician designated by the Company has reviewed and approved the determination that a Participant:
1.11.1 is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or
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1.11.2 is, by reasons of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering Directors or employees of the Company or any subsidiary.
1.12 Effective Date means January 1, 2005.
1.13 Event means any one or combination of the following elected by the Participant in writing prior to the year of deferral to govern distribution of a Tranche: Change in Control, Disability, Termination or specific date or dates (such as attainment of a specified age). When a Participant elects a combination of events, the Participant must specify whether the event that is the earlier of or later of will control distribution. In the absence of a designation by the Participant, the earlier of will apply to a combination of events.
1.14 Five-Year Medium Term Note Borrowing Rate means the Companys Five-Year Medium Term Note Borrowing Rate, as provided by one of the Companys investment bankers for any such medium term note that would have been issued on August 15 (or the next business day thereafter if August 15 is not a business day) of each Plan Year.
1.15 Participant means a Director who is eligible and elects to participate in the Plan pursuant to Article II.
1.16 Plan Committee means the Plan Committee appointed pursuant to the General Retirement Plan for Employees of Carpenter Technology Corporation, as constituted from time to time.
1.17 Plan means this Carpenter Technology Corporation Deferred Compensation Plan for Non-Management Directors, as may be amended from time to time.
1.18 Plan Administrator means the Plan Committee.
1.19 Plan Year means the 12-month period beginning October 1 and ending September 30.
1.20 Termination means a Participants termination of service as a Director with the Company which constitutes a separation from service within the meaning of Code Section 409A.
1.21 Tranche means the Deferrals and associated investment results related to each separate election made by a Participant under Article IV.
1.22 Unforeseeable Emergency means a severe financial hardship to the Participant or a Beneficiary resulting from an illness or accident of the Participant, the Participants spouse, or a dependent (as defined in Code section 152, without regard to sections 152(b)(1), (b)(2) and (d)(1)(B)) of the Participant, loss of the Participants property due to casualty, need to pay for medical expenses, or need to pay for funeral expenses of a spouse, Beneficiary or dependent (as defined in Code section 152, without regard to sections 152(b)(1), (b)(2) and (d)(1)(B)), or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.
ARTICLE IIPARTICIPATION
2.1 Eligibility to Participate. All Directors who are neither current nor past employees of the Company or any of its subsidiaries are eligible to participate in the Plan.
2.2 Participation. Any Director who elects to participate in the Plan shall become a Participant in the Plan immediately upon enrolling as a Participant by the method required by the Plan Administrator. An individual shall remain a Participant in the Plan until all amounts credited to the Participants Account have been distributed to the Participant or the Participants Beneficiary.
ARTICLE IIIVESTING
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Participants are always fully vested in all amounts credited to their Accounts.
ARTICLE IVDEFERRAL CREDITS
4.1 Eligibility to Receive Deferral Credits. Subject to Section 4.2, a Participant may receive Deferral Credits in each Plan Year that the Participant is a Director and is not an employee of the Company.
4.2 Deferrals. A Participant may elect to defer receipt of up to 100% of the Participants Compensation and to have the Company credit that amount to the Participants Account under the Plan.
4.3 Elections.
4.3.1 Frequency and Timing of Elections. Any elections made pursuant to this Section 4.3 may not be modified during the Plan Year to which such election applies, except that a Participants elections must cease to apply in the event such Participant receives a distribution from this Plan due to an Unforeseeable Emergency. The Participant must make an election prior to the end of the preceding Plan Year for it to take effect for the next Plan Year. Notwithstanding the foregoing, a newly appointed Director may file an initial election governing Deferrals during the first 30 days of eligibility to participate in the Plan.
4.3.2 Duration of Elections. Elections to receive Deferral Credits under this Article IV expire at the end of each Plan Year for which the election was made. Each such election shall constitute a separate Tranche.
4.3.3 Restriction on Elections. Elections to receive Deferral Credits may be in the form of a whole percentage or in $1 increments.
4.4 Earnings. All amounts credited to a Participants Account shall be credited with earnings at a rate equal to the Five-Year Medium Term Note Borrowing Rate, established as of August 15 (or the next business day thereafter if August 15 is not a business day) of the prior Plan Year. For the first Plan Year, the rate is 8.25%. The Plan Committee shall communicate to all Directors the Five-Year Medium Term Note Borrowing Rate for the next Plan Year no later than August 30 of the current Plan Year. Earnings on Credits shall begin to accrue on the date that such Deferral would have been paid to the Participant but for an election to defer under this Article IV. Earnings shall be compounded semi-annually on each October 1 and April 1. In addition, any distribution not made on either October 1 or April 1 shall have earnings compounded as of the date of distribution.
ARTICLE VDISTRIBUTIONS
5.1 Source of Distributions. All distributions shall, at the Companys discretion, be made directly out of the Companys general assets or from the Carpenter Technology Corporation Non-Qualified Benefits Trust for Directors, if available.
5.2 Form of Distributions. A Participant may receive distributions in one of the following manners, which the Participant shall elect on the deferral election form.
5.2.1 A lump sum distribution of the Participants entire Tranche;
5.2.2 Ten annual installments, with the distribution each year equal to the product resulting from multiplying the then current Tranche balance by a fraction. The numerator of the fraction is always one, and the denominator of the fraction is ten for the first distribution and is reduced by one for each subsequent distribution; or
5.2.3 Fifteen annual installments, with the distribution each year equal to the product resulting from multiplying the then current Tranche balance by a fraction. The numerator of the fraction is always one, and the denominator of the fraction is fifteen for the first distribution and is reduced by one for each subsequent distribution.
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5.3 Timing of Distributions. Each Participant shall elect the timing of the distribution with respect to each of his or her Tranches in the manner authorized by the Plan Administrator. The Participants election(s) shall indicate that payment of each Tranche shall be made (in the case of a lump sum election) or shall commence (in the case of an installment election) as soon as administratively practicable and no more than thirty (30) days following the Participants elected Event; provided, however, if the Participant is determined to be a specified employee under Code Section 409A, any distributions scheduled to be paid upon Termination shall not commence before the date which is 6 months following the date of Termination (or, if earlier, the death of the Participant) and, if such distribution is the first in a series of installments, subsequent distributions shall be paid upon the anniversary of the Termination date.
Notwithstanding a Participants elections under Article IV, the balance of a Participants Account shall be paid as soon as practicable and no more than thirty (30) days following the date of the Participants death.
5.4 Change in Form or Time of Distribution. A Participant may change his or her form and timing election applicable to the distribution of any Tranche under Sections 5.2 and 5.3, provided that such request for change is made (i) at least twelve (12) consecutive months prior to the date on which such distribution would otherwise have been made or commenced and (ii) the first payment with respect to such new election is deferred for a period of not less than 5 years beyond the date such distribution would otherwise have been made.
5.5 Distributions Due to Unforeseeable Emergency. Distributions hereunder may commence if the Plan Administrator determines, based on uniform, established standards, that the Participant has incurred an Unforeseeable Emergency. The amount distributed under this Section 5.5 shall not exceed the amount necessary to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participants assets (to the extent the liquidation of such assets would not itself cause severe financial hardship). The Plan Administrator shall make such distribution from the Tranche(s) identified by the Participant. If the Participant fails to identify Tranches with sufficient Credits to satisfy the Unforeseeable Emergency, the Plan Administrator shall determine any additional Tranches required to complete the distribution.
5.6 Termination of Service. Upon Termination, a Participant, or the Beneficiary if the Termination is caused by the Participants death, shall receive distribution of the Participants Account pursuant to the election(s) in place under Sections 5.2, 5.3 and 5.4.
ARTICLE VIPLAN ADMINISTRATION
6.1 General. The Plan shall be administered by the Company subject to the oversight of the Plan Administrator. Employees (of the Company) and members (of the Committee or Plan Committee), including any appointee or designee of such entity, shall use that degree of care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use in the employees or members conduct of a similar situation.
The Committee, Company or Plan Committee may appoint such agents, who need not be members (of the Committee or Plan Committee) or employees (of the Company), as it deems necessary for the effective exercise of its duties and may delegate to such agents any powers and duties, both ministerial and discretionary, as the Committee, Company or Plan Committee, as applicable, may deem expedient and appropriate.
6.2 Responsibilities and Reports. The Plan Administrator may pursuant to a written resolution allocate specific responsibilities under the Plan among one or more of its members, or such other persons it deems appropriate. The Plan Administrator shall be entitled to rely conclusively upon all tables, valuations, certificates, opinions and reports that are furnished by any actuary, accountant, controller, counsel, investment banker or other person who is employed or engaged for such purposes.
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6.3 Governing Law. This Plan shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, to the extent not preempted by federal law.
ARTICLE VIICLAIMS PROCEDURE
7.1 Plan Interpretation. The Human Resources Committee of the Board of Directors (including any designated sub-committee or successor committee performing similar duties, hereafter the Committee) shall have the authority and responsibility to interpret and construe the Plan and to decide all questions arising thereunder, including without limitation, questions of eligibility for participation, eligibility for Deferral Credits, the amount of Account balances, and the timing of the distribution thereof, and shall have the authority to deviate from the literal terms of the Plan to the extent it shall determine to be necessary or appropriate to operate the Plan in compliance with the provisions of applicable law. Notwithstanding the above, a member of the Human Resources Committee shall not take any part in decisions regarding his participation in the Plan. The decisions of the Committee upon all matters within the scope of its authority shall be final, binding and conclusive upon all parties.
7.2 Denial of Claim for Benefits. Any denial by the Committee of any claim for benefits under the Plan by a Participant or Beneficiary shall be stated in writing by the Committee and delivered or mailed to the Participant or Beneficiary. The Committee shall furnish the claimant with notice of the decision not later than 90 days after receipt of the claim, unless special circumstances require an extension of time for processing the claim. If such an extension of time for processing is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90 day period. In no event shall such extension exceed a period of 90 days from the end of such initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Committee expects to render the final decision. The notice of the Committees decision shall be written in a manner calculated to be understood by the claimant and shall include (i) the specific reasons for the denial, including, where appropriate, references to the Plan, (ii) any additional information necessary to perfect the claim with an explanation of why the information is necessary, and (iii) an explanation of the procedure for perfecting the claim.
7.3 Appeal of Denial. The claimant shall have 60 days after receipt of written notification of denial of his or her claim in which to file a written appeal with the Committee. As a part of any such appeal, the claimant may submit issues and comments in writing and shall, on request, be afforded an opportunity to review any documents pertinent to the perfection of his or her claim. The Committee shall render a written decision on the claimants appeal ordinarily within 60 days of receipt of notice thereof but, in no case, later than 120 days.
ARTICLE VIIIFUNDING
8.1 Funding. The Company shall not segregate or hold separately from its general assets any amounts credited to the Accounts, and shall be under no obligation whatsoever to fund in advance any amounts under the Plan, including all Credits and earnings thereon.
8.2 Insolvency. In the event that the Company becomes insolvent, all Participants and Beneficiaries shall be treated as general, unsecured creditors of the Company with respect to any amounts credited to the Accounts under the Plan.
ARTICLE IXAMENDMENT AND TERMINATION
9.1 Reservation of Rights. The Company reserves the right to amend or terminate the Plan at any time by action of the Board of Directors. Notwithstanding the foregoing, no such amendment or termination shall reduce the balance of any Participants Account as of the date of such amendment or termination.
9.2 Funding upon Termination. Upon a complete termination of the Plan, the Company shall contribute to the Carpenter Technology Corporation Non-Qualified Benefits Trust for Directors an amount equal to the aggregate of all amounts credited to Participants Accounts as of the date of such termination. If the
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Carpenter Technology Corporation Non-Qualified Benefits Trust for Directors does not exist at the time the Plan is terminated, the Company shall create an irrevocable grantor trust to which it will contribute such amounts. This newly created trust shall be designed to ensure that Participants will not be subject to taxation on amounts contributed to and held under the trust on their behalf before the amounts are distributed.
9.3 Survival of Accounts and Elections. Notwithstanding any termination of the Plan, the trustee of the trust to which amounts are contributed under Section 9.2 shall maintain the Accounts for Participants in the same manner as under this Plan and all elections for distributions under Article V of the Plan shall survive the termination and remain in effect.
ARTICLE XMISCELLANEOUS
10.1 Limited Purpose of Plan. The establishment or existence of the Plan shall not confer upon any individual the right to continue as a Director.
10.2 Non-alienation. No amounts payable under the Plan shall be subject in any manner to anticipation, assignment, or voluntary or involuntary alienation.
10.3 Facility of Payment. If the Plan Administrator, in its sole discretion, deems a Participant or Beneficiary who is eligible to receive any payment hereunder to be incompetent to receive the same by reason of age, illness or any infirmity or incapacity of any kind, the Plan Administrator may direct the Company to apply such payment directly for the benefit of such person, or to make payment to any person selected by the Plan Administrator to disburse the same for the benefit of the Participant or Beneficiary. Payments made pursuant to this Section 10.3 shall operate as a discharge, to the extent thereof, of all liabilities of the Company and the Plan Administrator to the person for whose benefit the payments are made.
10.4 Section 409A of the Code . The Plan is intended to comply in form and operation with the requirements of section 409A of the Code and applicable regulations and other guidance of general applicability issued thereunder (Section 409A). It is the intention of the Company that the amounts deferred pursuant to this Plan shall not be included in the gross income of the Directors or their Beneficiaries until such time as the deferred amounts are distributed from the Plan. At all times, this Plan shall be interpreted and operated in accordance with the requirements of Section 409A, unless an exemption from Section 409A is available and applicable. Notwithstanding any provision to the contrary in this Plan, if, at the time of a Directors separation from service, such Director has an account in this Plan and is determined to be a specified employee under Section 409A, any payment due to the Director on account of his or her separation from service may not be made before the date that is six months after the date of separation from service (or, if earlier, the date of death of the Director), except as may be otherwise permitted pursuant to Section 409A.
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Exhibit 10(F)
CARPENTER TECHNOLOGY CORPORATION
STOCK-BASED COMPENSATION PLAN FOR
NON-EMPLOYEE DIRECTORS
Effective August 9, 1990
As Amended and Restated on April 21, 2009
and Amended on July 29, 2009 and June 29, 2010
1. | Purpose: |
The purposes of the Plan are to attract and retain the services of experienced and knowledgeable non-employee directors, to encourage Eligible Directors of Carpenter Technology Corporation (the Company) to acquire a proprietary and vested interest in the growth and performance of the Company, and to generate an increased incentive for Eligible Directors to contribute to the Companys future success and prosperity, thus enhancing the value of the Company for the benefit of its stockholders.
This Plan is an amendment and restatement of the Carpenter Technology Corporation Non-Qualified Stock Option Plan for Non-Employee Directors as adopted effective August 9, 1990, and subsequently amended and/or restated as set out in Section 15 below. The rights of any Eligible Director whose service as an Eligible Director ended on or before June 29, 2010 shall be governed by the terms of the Plan as in effect when that Eligible Directors Award was granted. This amendment and restatement of the Plan does not increase the number of Shares theretofore otherwise available under the Plan.
2. | Definitions: |
As used in the Plan, the following terms shall have the meanings set forth below:
a) Annual Retainer shall mean base compensation for services as an Eligible Director. Annual Retainer shall not include meeting fees, committee service fees, if any, expense allowances or reimbursements or any other additional compensation for services as an Eligible Director.
b) Award shall mean the Options and Stock Units granted under the Plan.
c) Award Agreement shall mean a written agreement, instrument or document evidencing an Award.
d) Beneficiary shall mean the person who the Eligible Director designates to receive any unpaid portion of the Eligible Directors account should the Eligible Directors death occur before the Eligible Director receives the entire balance to the credit of such Eligible Directors account. If the Eligible Director does not designate a Beneficiary, the Beneficiary shall be the persons spouse if the person is married at the time of death, or the Eligible Directors estate if unmarried at the time of the persons death.
e) Board shall mean the Board of Directors of the Company.
f) Cause shall mean the Eligible Directors: (i) willful misconduct or gross negligence in connection with the performance of the Eligible Directors duties for the Company or any affiliated company; (ii) conviction of, or a plea of guilty or nolo contendere to, a felony or a crime involving fraud or moral turpitude; (iii) engagement in any business that directly or indirectly competes with the Company or any affiliated company; or (iv) disclosure of trade secrets, customer lists or confidential information of the Company or any affiliated company to a competitor or unauthorized person.
g) Chair Retainer shall mean compensation for services as Chair of a committee of the Board of Directors of the Company.
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h) Code shall mean the Internal Revenue Code of 1986, as amended from time to time.
i) Common Stock shall mean the Common Stock, $5.00 par value, of the Company.
j) Company shall mean Carpenter Technology Corporation, a Delaware corporation, or any successor corporation.
k) Disability shall mean that a qualified physician designated by the Company has reviewed and approved the determination that an Eligible Director is either:
(i) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or
(ii) by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees or directors of the Company or any subsidiary.
l) Election Date shall mean with respect to an Option hereunder the date of the appointment, election, or re-election of the Eligible Director that prompted the grant of such Option.
m) Eligible Director shall mean each director of the Company who is not an employee of the Company or any of the Companys subsidiaries [as defined in section 424(f) of the Code], or who is not otherwise excluded from participation by agreement.
n) Exchange Act shall mean the Securities Exchange Act of 1934, as amended.
o) Fair Market Value shall mean the fair market value of the Companys Common Stock, determined in accordance with section 409A of the Code, and based upon (i) the last sale price of the Common Stock on the date on which such value is determined, as reported on the consolidated tape of New York Stock Exchange issues or, if there shall be no trades on such date, on the date nearest preceding such date; (ii) if the Common Stock is not then listed for trading on the New York Stock Exchange, the last sale price of the Common Stock on the date on which such value is determined, as reported on another recognized securities exchange or on the NASDAQ National Market System if the Common Stock shall then be listed and traded upon such exchange or system or, if there shall be no trades on such date, on the date nearest preceding such date; or (iii) the mean between the bid and asked quotations for such stock on such date (as reported by a recognized stock quotation services) or, in the event that there shall be no bid or asked quotations on such date, then upon the basis of the mean between the bid and asked quotations on the date nearest preceding such date.
p) Grant Date shall mean, with respect to an Option hereunder, the date upon which such Option is granted; and with respect to Stock Units, the date upon which such Stock Units are awarded.
q) Option shall mean any right granted to an Eligible Director allowing such Eligible Director to purchase Shares at such price or prices and during such period or periods as set forth under the Plan. All Options shall be non-qualified options not entitled to special tax treatment under section 422 of the Code.
r) Plan Year shall mean the 12-month period beginning October 1 and ending September 30.
s) Shares shall mean shares of Common Stock.
t) Stock Unit shall mean the right to receive, upon satisfaction or lapse of any applicable vesting requirement or forfeiture condition specified in this Plan or as otherwise specified in an Award Agreement, one share
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of Common Stock. For purposes of this Plan, fractional Stock Units, measured to the nearest four decimal places, may be credited.
u) Unit shall mean a Stock Unit.
3. | Administration: |
a) The Plan shall be administered by the Company. Subject to the terms of the Plan, the Board shall have the power to interpret the provisions and supervise the administration of the Plan. Any action of the Board in administering the Plan shall be final, conclusive and binding on all persons, including the Company, Eligible Directors, persons claiming rights from or through Eligible Directors and stockholders of the Company.
b) Subject to the provisions of the Plan, the Board shall have full and final authority in its discretion (i) to determine the terms and conditions of any Award granted under the Plan (including, but not limited to, restrictions as to vesting, transferability or forfeiture, exercisability or settlement of an Award and waivers or accelerations thereof, based in each case on such considerations as the Board shall determine) and all other matters to be determined in connection with an Award; (ii) to determine whether, to what extent, and under what circumstances an Award may be canceled, forfeited, or surrendered; (iii) to correct any defect or supply any omission or reconcile any inconsistency in the Plan, and to adopt, amend and rescind such rules and regulations as, in its opinion, may be advisable in the administration of the Plan; and (iv) to make all other determinations as it may deem necessary or advisable for the administration of the Plan. Notwithstanding the foregoing, an Eligible Director must be recused and abstain from participating in any action of the Board that affects his or her outstanding Award.
c) Notwithstanding anything to the contrary herein, discretionary Awards to any Eligible Director under the Plan shall be made by the Board or an independent committee of the Board without the vote of any directors who are also employees of the Company.
4. | Shares Subject to the Plan: |
a) Total Number . Subject to future adjustment as provided in this Section, the total number of Shares available for Awards under the Plan as of the June 29, 2010 date of the amendment and restatement is 923,443, which amount reflects the Companys 2 for 1 stock split effected on November 15, 2007 and otherwise is derivative from the number of Shares available under this Plan as of August 18, 2006 when this Plan was amended to increase the number of available Shares. Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued Shares or treasury Shares.
b) Reduction of Shares Available .
(i) The grant of an Option will reduce the number of Shares available for further grants by the number of Shares subject to such Option.
(ii) Any shares issued by the Company through the assumption or substitution of outstanding grants from an acquired company shall not reduce the Shares available for grants under the Plan.
(iii) The grant of Stock Units will reduce the number of Shares available for further grants by the number of Units granted.
c) Increase of Shares Available . The lapse, cancellation or other termination of an Option or Unit that has not been fully exercised or paid shall increase the available Shares for such Options or Units by the number of Shares that have not been issued upon exercise of such Option or payment of such Unit.
d) Other Adjustments . The total number and kind of Shares available for Options or Units under the Plan or which may be allocated to any one Eligible Director, the number and kind of Shares subject to outstanding Options or Units, and the exercise price for such Options or the value of Units shall be appropriately adjusted by the
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Board for any increase or decrease in the number of outstanding Shares resulting from a stock dividend, subdivision, combination of Shares, reclassification, or other change in corporate structure affecting the Shares or for any conversion of the Shares into or exchange of the Shares for other Shares as a result of any merger or consolidation (including a sale of assets) or other recapitalization as may be necessary to maintain the proportionate interest of the Option or Unit holder.
5. | Initial Options: |
Initial Options may be granted to Eligible Directors as follows: Each Eligible Director who has not previously received a grant under this Plan may be granted an Option to acquire up to 4,000 Shares (or such different number of Shares as the Board may determine by duly adopted resolution, consistent with any applicable requirements under securities laws or continued listing standards of the principal stock exchange for trading of the Common Stock) on such Eligible Directors Election Date or such later date as may be required to comply with the Companys normal practices under applicable securities laws and regulations.
6. | Retainer Stock Units: |
a) Required Annual Grant of Stock Units . On the date of the annual meeting of stockholders or on such other date as the Board may determine from time to time in light of the Companys prevailing practices for the grant of equity-based awards to other personnel, each Eligible Director shall be granted each year, in place of equivalent cash compensation, a number of Stock Units determined by dividing 50% of the Eligible Directors Annual Retainer by the Fair Market Value on that date.
b) Election as to Annual Stock Units . By written election filed with the Board prior to the end of the preceding Plan Year, an Eligible Director may elect to increase the percentage in Section 6(a) above up to 100%, and thereby have up to the entire amount of the Eligible Directors Annual Retainer for the following Plan Year granted in Stock Units. An Eligible Director may also elect, by written election filed with the Board prior to the end of the preceding Plan Year, to have a portion or all of his or her Chair Retainer for the following Plan Year granted in Stock Units. An election under this Section 6(b) shall expire at the end of each Plan Year for which the election was made.
c) Other Stock Units . In addition to and not in lieu of the provisions of this Section 6, other Stock Units may be awarded to Eligible Directors pursuant to Section 7 of this Plan.
7. | Other Awards of Options or Stock Units: |
In addition to an initial grant of an Option pursuant to Section 5, or an award of Stock Units pursuant to Section 6, other Options or Stock Units may be granted to Eligible Directors as follows:
a) Annual Grant . Each Eligible Director on or after the Effective Date of the Plan may be granted, immediately after the annual meeting of the Companys stockholders or on such other regularly scheduled date as the Board may determine from time to time in light of the Companys prevailing practices for the grant of equity-based awards to other personnel, Options, Stock Units, or a combination of Options and Stock Units with respect to that number of Shares having a Fair Market Value on the Grant Date of up to Ninety Thousand Dollars ($90,000) (or such different dollar amount as the Board may determine by duly adopted resolution, consistent with any applicable requirements under securities laws or continued listing standards of the principal stock exchange for trading of the Common Stock), either in lieu of or in addition to such Eligible Directors Annual Retainer.
b) Other Grants or Awards . In addition to an annual Option grant or Stock Units award pursuant to Section 7(a) above, each Eligible Director may be granted or awarded, at any time and from time to time as may be determined by the Board, Options or Stock Units with respect to such number of Shares as the Board may determine by duly adopted resolution, consistent with any applicable requirements under this Plan, securities laws or continued listing standards of the principal stock exchange for trading of the Common Stock.
8. | General Terms of Options: |
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The following provisions shall apply to any Option:
a) Option Price . The purchase price per Share purchasable under an Option shall be 100% of the Fair Market Value of a Share on the Grant Date.
b) Option Period . Each Option shall expire ten years from its Grant Date, subject to earlier termination as hereinafter provided.
c) Exercisability . Each Option granted under this Plan shall become exercisable by the Eligible Director only after completion of one year of Board service immediately following the Grant Date; provided, however, that one quarter of the Options granted within the one year period preceding the Eligible Directors separation from service (for any reason other than death or Disability) shall become exercisable in whole or in part for every three months of service completed following the Grant Date. In the event of separation from service due to death or Disability, all Options granted to such Eligible Director shall become immediately exercisable. Exercise of any or all prior existing Options shall not be required. In the event of the separation from service as an Eligible Director other than for Cause, an exercisable Option may be exercised at any time prior to the expiration of the original ten-year term. In the event of removal for Cause, all outstanding Options shall be of no force and effect.
d) Nontransferability of Options . No Option under this Plan may be transferable by the Eligible Director except by will or the laws of descent and distribution. If an option is exercisable under Section 8(c) as of the date of an Eligible Directors death, the Option may be transferred to the Eligible Directors personal representative, heirs or legatees (Transferee) and may be exercised by the Transferee for the remainder of the exercise period then available to the Eligible Director.
e) Method of Exercise . Any Option may be exercised by the Eligible Director in whole or in part at such time or times and by such methods as the Board may specify. An applicable Award Agreement may provide that the Eligible Director may make payment of the Option price in cash, Shares held for at least six months (or such other period specified by the Board), or such other consideration as the Board may specify, or any combination thereof, having a Fair Market Value on the exercise date equal to the total Option price.
9. | General Terms of Stock Units: |
a) Vesting or Forfeiture of Stock Units .
(i) Stock Units granted pursuant to an election under Section 6(b) are at all times fully vested and are non-forfeitable.
(ii) Stock Units granted pursuant to Section 6(a) or Section 7 shall vest one year after the Grant Date; provided, however, that one quarter of the Stock Units granted within the one year period preceding the Eligible Directors separation from service (for any reason other than death or Disability) shall vest for every three months of service completed following the Grant Date. In the event of separation from service due to death or Disability, all Stock Units granted pursuant to Section 6(a) and Section 7 to such Eligible Director shall immediately vest. In the event of removal for Cause, all Stock Units granted pursuant to Section 6(a) and Section 7 to such Eligible Director shall be forfeited.
b) Nontransferability of Units . Stock Units may not be sold, transferred, pledged, assigned or otherwise alienated, other than by will or by the laws of descent and distribution.
10. | Dividend Equivalents: |
An Eligible Director who has been granted Stock Units will also be allocated additional Units, determined on a quarterly basis, with respect to the payment of dividends on outstanding Common Stock within thirty (30) days following the date the dividend was paid to the holders of the Common Stock. The number of additional Units to be allocated will be determined by multiplying the quarterly dividend per Share, if any, for the immediately preceding
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quarter by the number of Units credited to the Eligible Directors account on the first day of that calendar quarter and dividing the result by the Fair Market Value on the last business day of that quarter. Any additional Units credited to the Eligible Directors account with respect to Stock Units will be forfeited if and when such Stock Units are forfeited and will be payable if and when such Stock Units are payable.
11. | Payment of Stock Units: |
a) Credit to Eligible Directors Account . In connection with each grant of Stock Units to an Eligible Director, the Eligible Directors account shall be credited with such amount of Stock Units, subject to the forfeiture or vesting terms and conditions established as part of the grant or as set forth in an Award Agreement. Separate accounts or subaccounts shall be established for crediting Stock Units granted under Section 6 and for crediting Stock Units granted under Section 7. Stock Units granted under Section 6(a) and Section 7 shall vest and no longer be subject to forfeiture as provided in Section 9(a)(ii) or as otherwise provided in an applicable Award Agreement. Upon forfeiture, Stock Units shall be subtracted from the Eligible Directors account, along with any additional Units that were credited to the account as dividend equivalents.
b) Payment of Stock Units Awarded Under Section 6 and Section 7 . The following applies in the event neither an election for deferral of units has been made under Section 11(c) nor an election for installment payments has been made under Section 11(d). All vested Stock Units awarded pursuant to Section 6 and Section 7 shall be settled and payable in Shares only upon the Eligible Directors separation from service with the Board. As soon as practicable and no more than thirty (30) days following the Eligible Directors separation from service from the Board, the Eligible Director (or, in the event of death, the Eligible Directors Beneficiary) shall receive Shares in payment of the vested Stock Units credited to the Eligible Directors account in a single lump sum distribution, with the number of Shares equal to the number of such whole Stock Units credited to the Eligible Directors account and with cash paid in lieu of any fractional Units based on the Fair Market Value on the date of the Eligible Directors separation from service as an Eligible Director.
c) Deferral of Units . Effective for Units granted on or after June 29, 2010, for compensation earned and paid in the Plan Year commencing October 1, 2010 and annual elections thereafter, the Company may, but need not, permit an Eligible Director to defer receipt of payment in satisfaction of earned Units, provided that any such deferral shall be administered in good faith compliance with section 409A of the Code and the guidance thereunder, including the following rules:
(i) An Eligible Director may only elect to defer payment of vested Stock Units by making a valid, irrevocable election prior to the close of the Plan Year preceding the Plan Year for which the award of Stock Units is granted;
(ii) Unless otherwise provided by the Company, during the deferral period, the Eligible Director shall have those rights with respect to Units set forth at Section 10;
(iii) An Eligible Director may elect to have such Units paid upon:
(a) Such Eligible Directors Separation from Service, within the meaning of section 409A of the Code and the guidance thereunder, either in a lump sum no more than thirty (30) days following such Directors Separation from Service, or, if an election has been properly made under Section 11(d), in installments pursuant to such election;
(b) A Change in Control as defined in Section 12(b), provided the Eligible Director also has a Separation from Service, within the meaning of section 409A of the Code and the guidance thereunder;
(c) Disability, provided the Eligible Director also has a Separation from Service, within the meaning of section 409A of the Code and the guidance thereunder; or
(d) A date specified by the Eligible Director, provided that such date shall be no earlier than the first day of the fourth month of the Companys fiscal year following the year during which such Units
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are vested, and further provided the Eligible Director also has a Separation from Service, within the meaning of section 409A of the Code and the guidance thereunder.
(iv) Notwithstanding the foregoing, an Eligible Director who is a Specified Employee within the meaning of section 409A of the Code and the guidance thereunder, may not receive payment with respect to any deferred Units earlier than six (6) months following such Eligible Directors Separation from Service, except that in the event of any Eligible Directors earlier death, such Units shall be paid within thirty (30) days after the Company receives notice of the Eligible Directors death; and
(v) The Company is authorized to take such action as it deems necessary and reasonable to avoid the application of the additional tax described in section 409A(a)(1)(B) of the Code to any Award deferred hereunder.
d) Installment Payments . Effective for Units granted on or after June 29, 2010, for compensation earned and paid in Plan Years beginning on or after October 1, 2010 and annual elections thereafter, the Company may, but need not, permit an Eligible Director to elect to receive Shares in payment of Units credited to the Eligible Directors account and otherwise vested and payable under Section 9 and Section 11(a) in annual installments payable over either ten or fifteen years beginning (1) as soon as is practicable following the Eligible Directors separation from service, provided, however, that no payment shall begin more than thirty (30) days following the Eligible Directors separation from service as an Eligible Director or (2) upon a permissible payment event under Section 409A of the Code as provided for in a deferral election made pursuant to Section 11(c). Subsequent installment payments shall be made on the same date thereafter annually. Such election shall be made in the manner prescribed by the Company, but in no event later than the close of the Plan Year preceding the Plan Year for which the award of Units is granted. An election made under this Section 11(d) shall be administered in good faith compliance with Section 409A of the Code and the guidance issued thereunder. If an Eligible Director does not make a valid, irrevocable election under this Section or Section 11 (c), the Eligible Directors Shares in payment of Units credited to the Eligible Directors account shall be paid in accordance with Section 11(b).
The provisions of Sections 11(c) and 11(d) above shall apply to any Units awarded that are subject to the application of Code Section 409A.
12. | Change in Control: |
a) Notwithstanding anything in this Plan to the contrary, in the event of a Change in Control of the Company, the Options granted under Sections 5 and 7 shall vest and become immediately exercisable and any unvested Stock Units granted under Sections 6 and 7 shall vest.
b) For purposes of this Plan, Change in Control means:
(i) the acquisition by any individual, entity or group within the meaning of section 13(d)(3) or 14(d)(2) of the Exchange Act (a Person) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than 50% of either (A) the then-outstanding shares of common stock of the Company (the Outstanding Company Common Stock) or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the Outstanding Company Voting Securities); provided , however , that, for purposes of this Section 12(b), the following acquisitions shall not constitute a Change in Control: (1) any acquisition directly from the Company, (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any affiliated company or (4) any acquisition by any corporation pursuant to a transaction that complies with Sections 12(b)(iii)(A), 12(b)(iii)(B) and 12(b)(iii)(C);
(ii) individuals who, as of the date hereof, constitute the Board (the Incumbent Board) cease for any reason to constitute at least a majority of the Board during any 12 month period; provided , however , that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Companys stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but
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excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board;
(iii) consummation of a reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of the assets or stock of another entity (a Business Combination), in each case, unless, following such Business Combination, (A) all or substantially all of the individuals and entities that were the beneficial owners of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that, as a result of such transaction, owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership immediately prior to such Business Combination of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (B) no Person [excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination] beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation, except to the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or of the action of the Board providing for such Business Combination; or
(iv) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company.
13. | Amendments and Termination: |
a) General Authority of the Board . The Board may amend or terminate the Plan at any time, without approval thereof by the stockholders of the Company or any other person, except that (i) the Board may not amend the Plan without approval of the Companys stockholders if (A) stockholder approval is necessary in order for the Plan to comply with any requirement that confers a material benefit on the Company or its stockholders under the Code or other applicable tax or securities laws or regulations or (B) such amendment would constitute a repricing or exchange of any outstanding Option or Unit, which would require stockholder approval under the rules of any exchange upon which the Companys Common Stock is listed; and (ii) the Board may not amend or terminate the Plan at a time (or in a manner) that would adversely impair or affect any rights or obligations under any outstanding Option or Unit, without the consent of the affected Eligible Director, unless such amendment or termination is required by the Code, applicable securities laws, or the rules of any exchange upon which the Companys Common Stock is listed.
b) Amendment With Approval of Stockholders . The Plan may otherwise be amended or terminated by the Board, at any time and in any manner that is permitted by applicable law, if the effectiveness thereof is subject to approval by the stockholders of the Company, and such stockholder approval is obtained.
14. | General Provisions: |
a) Compliance Regulations . All certificates for Shares delivered under this Plan pursuant to any Option or Unit shall be subject to such stock-transfer orders and other restrictions as the Board may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable federal or state securities law, and the Board may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. The Company shall not be required to issue or deliver any Shares under the Plan prior to the completion of any registration or
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qualification of such Shares under any federal or state law, or under any ruling or regulations of any governmental body or national securities exchange that the Board in its sole discretion shall deem to be necessary or appropriate.
b) Other Plans . Nothing contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required by applicable law or the rules of any stock exchange on which the Common Stock is then listed; and such arrangements may be either generally applicable or applicable only in specific cases.
c) Governing Law . The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Delaware and applicable federal law.
d) Conformity With Law . If any provision of this Plan is or becomes or is deemed invalid, illegal, or unenforceable in any jurisdiction, or would disqualify the Plan or any Option or Unit under any law deemed applicable by the Board, such provision shall be construed or deemed amended in such jurisdiction to conform to applicable laws or if it cannot be construed or deemed amended without, in the determination of the Board, materially altering the intent of the Plan, it shall be stricken and the remainder of the Plan shall remain in full force and effect.
e) Insufficient Shares . In the event there are insufficient Shares remaining to satisfy all of the grants of Options or Units made on the same day, such Options or Units shall be reduced pro-rata.
f) Section 409A of the Code . The Plan is intended to comply in form and operation with the requirements of section 409A of the Code and applicable regulations and other guidance of general applicability issued thereunder (Section 409A). It is the intention of the Company that the amounts deferred pursuant to this Plan shall not be included in the gross income of the Eligible Directors or their Beneficiaries until such time as the deferred amounts are distributed from the Plan. At all times, this Plan shall be interpreted and operated (i) in accordance with the requirements of Section 409A, unless an exemption from Section 409A is available and applicable, and (ii) to maintain the exemption from Section 409A of awards designed to meet the short-term deferral exception under Section 409A, and (iii) to preserve the status of deferrals made prior to the effective date of Section 409A as exempt from Section 409A (i.e., to preserve the grandfathered status of Awards that were vested as of, and not modified after, December 31, 2004). To the extent any Award is subject to and not exempt from the requirements of Section 409A, any reference to the Eligible Directors separation from service shall mean the Eligible Directors separation from service within the meaning of Section 409A. Notwithstanding any provision to the contrary in this Plan, if, at the time of a directors separation from service, such director has an account in this Plan and is determined to be a specified employee under Section 409A, any payment due to the director on account of his or her separation from service may not be made before the date that is six months after the date of separation from service (or, if earlier, the date of death of the director), except as may be otherwise permitted pursuant to Section 409A.
15. | Effective Date, Prior Amendments and Termination: |
The effective date of this amendment of the Plan is June 29, 2010. The Plans original effective date, as approved by the Board and ratified by the stockholders on October 30, 1990, was August 9, 1990. The Plan was thereafter amended (and restated) by the Board on August 10, 1995, with the same ratified by the stockholders on October 23, 1995; was restated under its current title (and ratified by the stockholders) on October 20, 1997; and was thereafter amended effective on April 26, 2001, October 22, 2001, June 29, 2006, and April 24, 2007, with a ratification of the June 29, 2006 amendment (which increased the number of available Shares under the Plan) by the Companys stockholders on October 16, 2006; and was thereafter amended (and restated) by the Board effective on April 21, 2009; and was thereafter amended effective on July 29, 2009. The Plan will terminate upon the date on which all outstanding Options have expired or terminated, and all outstanding Units have been paid or otherwise provided for.
9
Exhibit 12
Carpenter Technology Corporation
Computation of Ratios of Earnings to Fixed Charges unaudited
Five Years ended June 30, 2010
(dollars in millions)
Year Ended June 30, | |||||||||||||||||||
2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
Fixed charges: |
|||||||||||||||||||
Interest costs (a) |
$ | 18.8 | $ | 20.1 | $ | 22.8 | $ | 23.3 | $ | 23.6 | |||||||||
Interest component of non-capitalized lease rental expense (b) |
2.3 | 2.1 | 2.2 | 3.0 | 1.8 | ||||||||||||||
Total fixed charges |
$ | 21.1 | $ | 22.2 | $ | 25.0 | $ | 26.3 | $ | 25.4 | |||||||||
Earnings as defined: |
|||||||||||||||||||
Income before income taxes |
$ | 4.7 | $ | 63.0 | $ | 297.3 | $ | 312.0 | $ | 291.4 | |||||||||
Less income from less-than-fifty-percent owned entities, and loss on sale of partial interest in less-than-fifty percent owned enities |
(1.0 | ) | 0.1 | (1.1 | ) | (1.2 | ) | (1.6 | ) | ||||||||||
Fixed charges less interest capitalized |
20.1 | 18.2 | 22.7 | 25.8 | 25.1 | ||||||||||||||
Amortization of capitalized interest |
2.8 | 2.5 | 2.5 | 2.5 | 2.5 | ||||||||||||||
Earnings as defined |
$ | 26.6 | $ | 83.8 | $ | 321.4 | $ | 339.1 | $ | 317.4 | |||||||||
Ratio of earnings to fixed charges |
1.3x | 3.8x | 12.9x | 12.9x | 12.5x | ||||||||||||||
(a) |
Includes interest capitalized relating to significant construction projects, and amortization of debt discount and debt issue costs. |
(b) |
One-third of rental expense which approximates the interest component of non-capitalized leases. |
Exhibit 21
SUBSIDIARY LIST
Doing Business As |
State of Incorporation |
|
Carpenter Investments, Inc. |
Delaware | |
CRS Holdings, Inc. |
Delaware | |
Dynamet Incorporated |
Delaware | |
Talley Industries, Inc. |
Delaware |
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File Nos. 2-83780, 2-81019, 2-60469, 33-42536, 33-42997, 3365077, 33-54045, 333-40991, 333-55667, 333-55669, 333-57774, 333-147057, and 333-147059) of Carpenter Technology Corporation of our report dated August 17, 2010 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K .
/s/ PricewaterhouseCoopers LLP |
PricewaterhouseCoopers LLP |
Philadelphia, Pennsylvania |
August 17, 2010 |
Exhibit 24
CARPENTER TECHNOLOGY CORPORATION
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints William A. Wulfsohn and K. Douglas Ralph, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2010, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The 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 exercise of any of the rights and powers herein granted, 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 voluntarily executed this instrument this 17th day of August, 2010.
/s/ Carl G. Anderson, Jr. |
Carl G. Anderson, Jr. |
Director |
CARPENTER TECHNOLOGY CORPORATION
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints William A. Wulfsohn and K. Douglas Ralph, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2010, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The 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 exercise of any of the rights and powers herein granted, 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 voluntarily executed this instrument this 17th day of August, 2010.
/s/ Philip M. Anderson |
Philip M. Anderson |
Director |
CARPENTER TECHNOLOGY CORPORATION
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints William A. Wulfsohn and K. Douglas Ralph, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2010, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The 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 exercise of any of the rights and powers herein granted, 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 voluntarily executed this instrument this 17th day of August, 2010.
/s/ I. Martin Inglis |
I. Martin Inglis |
Director |
CARPENTER TECHNOLOGY CORPORATION
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints William A. Wulfsohn and K. Douglas Ralph, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2010, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The 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 exercise of any of the rights and powers herein granted, 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 voluntarily executed this instrument this 17th day of August, 2010.
/s/ Robert R. McMaster |
Robert R. McMaster |
Director |
CARPENTER TECHNOLOGY CORPORATION
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints William A. Wulfsohn and K. Douglas Ralph, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2010, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The 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 exercise of any of the rights and powers herein granted, 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 voluntarily executed this instrument this 17th day of August, 2010.
/s/ Gregory A. Pratt |
Gregory A. Pratt |
Director |
CARPENTER TECHNOLOGY CORPORATION
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints William A. Wulfsohn and K. Douglas Ralph, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2010, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The 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 exercise of any of the rights and powers herein granted, 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 voluntarily executed this instrument this 17th day of August, 2010.
/s/ Peter N. Stephans |
Peter N. Stephans |
Director |
CARPENTER TECHNOLOGY CORPORATION
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints William A. Wulfsohn and K. Douglas Ralph, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2010, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The 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 exercise of any of the rights and powers herein granted, 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 voluntarily executed this instrument this 17th day of August, 2010.
/s/ Kathryn C. Turner |
Kathryn C. Turner |
Director |
CARPENTER TECHNOLOGY CORPORATION
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints William A. Wulfsohn and K. Douglas Ralph, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2010, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The 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 exercise of any of the rights and powers herein granted, 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 voluntarily executed this instrument this 17th day of August, 2010.
/s/ Jeffrey Wadsworth |
Jeffrey Wadsworth |
Director |
CARPENTER TECHNOLOGY CORPORATION
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints William A. Wulfsohn and K. Douglas Ralph, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2010, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The 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 exercise of any of the rights and powers herein granted, 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 voluntarily executed this instrument this 17th day of August, 2010.
/s/ Stephen M. Ward, Jr. |
Stephen M. Ward, Jr. |
Director |
CARPENTER TECHNOLOGY CORPORATION
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that the undersigned, in his or her capacity as a Director of Carpenter Technology Corporation, hereby appoints William A. Wulfsohn and K. Douglas Ralph, or either of them, his or her true and lawful attorneys to execute in his name, place and stead, in his or her capacity as Director of the Company, the Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 on Form 10-K, for the year ended June 30, 2010, of said Company, and any and all amendments to said Annual Report and all instruments necessary or incidental in connection therewith and to file them with the Securities and Exchange Commission. The 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 exercise of any of the rights and powers herein granted, 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 voluntarily executed this instrument this 17th day of August, 2010.
/s/ William A. Wulfsohn |
William A. Wulfsohn |
Director |
Exhibit 31(A)
CERTIFICATIONS OF PERIODIC REPORTS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William A. Wulfsohn, certify that:
1. | I have reviewed this Annual Report on Form 10-K (the Report) of the Registrant; |
2. | Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report; |
4. | The Registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and |
(d) | Disclosed in this Report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
Dated: August 20, 2010 |
/s/ William A. Wulfsohn |
|
William A. Wulfsohn, President and Chief Executive Officer |
Exhibit 31(B)
CERTIFICATIONS OF PERIODIC REPORTS PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, K. Douglas Ralph, certify that:
1. | I have reviewed this Annual Report on Form 10-K (the Report) of the Registrant; |
2. | Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this Report; |
4. | The Registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the Registrants disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and |
(d) | Disclosed in this Report any change in the Registrants internal control over financial reporting that occurred during the Registrants most recent fiscal quarter (the Registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrants internal control over financial reporting; and |
5. | The Registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrants auditors and the audit committee of the Registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrants internal control over financial reporting. |
Dated: August 20, 2010 |
/s/ K. Douglas Ralph |
|
K. Douglas Ralph, Senior Vice President - Finance & Chief Financial Officer |
Exhibit 32
CERTIFICATION OF PERIODIC FINANCIAL REPORTS PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Carpenter Technology Corporation (the Issuer) on Form 10-K for the year ended June 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the Periodic Report), I, William A. Wulfsohn, and I, K. Douglas Ralph, each hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Periodic Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and that information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer.
Date: August 20, 2010
/s/ William A. Wulfsohn |
/s/ K. Douglas Ralph |
|||
William A. Wulfsohn | K. Douglas Ralph | |||
President and Chief Executive Officer | Senior Vice President-Finance and Chief Financial Officer |
Exhibit 99
AGREEMENT TO FURNISH DEBT INSTRUMENTS
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, Carpenter has not included as an Exhibit any instrument with respect to long-term debt if the total amount of debt authorized by such instrument does not exceed 10% of the total assets of Carpenter. Carpenter agrees, pursuant to this Item, to furnish a copy of any such instrument to the Securities and Exchange Commission upon request of the Commission.
CARPENTER TECHNOLOGY CORPORATION | ||
By: |
/s/ K. Douglas Ralph. |
|
K. Douglas Ralph, Senior Vice President - | ||
Finance & Chief Financial Officer |