CARPENTER TECHNOLOGY CORP - 10-K Annual Report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

As of August 31, 2002, 22,343,752 shares of Common Stock of Carpenter Technology Corporation were outstanding. The aggregate market value of Common Stock held only by non-affiliates was $414,190,061 (based upon its closing transaction price on the Composite Tape on August 30, 2002).

Carpenter Technology Corporation (hereinafter called “the Company” or “Carpenter”), incorporated in 1904, is engaged in the manufacturing, fabrication, and distribution of specialty metals and certain engineered products. There were no significant changes in the form of organization or mode of conducting business of Carpenter during the year ended June 30, 2002.

Carpenter is organized on a product basis: Specialty Alloys Operations, Titanium, Carpenter Powder Products, and Engineered Products. For segment reporting, the Specialty Alloys Operations, Titanium, and Carpenter Powder Products segments have been aggregated into one reportable segment, Specialty Metals, because of the similarities in products, processes, customers, distribution methods and economic characteristics. See note 19 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data” for additional segment reporting information.

Carpenter primarily processes basic raw materials such as chromium, nickel, titanium, iron scrap and other metal alloying elements through various melting, hot forming and cold working facilities to produce finished products in the form of billet, bar, rod, wire, narrow strip, special shapes, and hollow forms in many sizes and finishes and produces certain metal powders and fabricated metal products. In addition, ceramic and metal-injection molded products are produced from various raw materials using molding, heating and other processes.

Specialty Metals includes the manufacture and distribution of stainless steels, titanium, high temperature alloys, electronic alloys, tool steels and other alloys in billet, bar, wire, rod, strip and powder forms. Specialty Metals sales are distributed directly from Carpenter’s production plants and its distribution network as well as through independent distributors.

Engineered Products includes the manufacture and sales of structural ceramic products, ceramic cores for the casting industry, metal-injection molded products, tubular metal products for nuclear and aerospace applications, custom shaped bar and ultra hard wear materials.

Other special purpose alloys used in critical components such as bearings and fasteners. Heat resistant alloys that range from slight modifications of the stainless steels to complex nickel and cobalt base alloys. Alloys for electronic, magnetic and electrical applications with controlled thermal expansion characteristics, or high electrical resistivity or special magnetic characteristics. Fabrication of special stainless steels and zirconium base alloys into tubular products for the aircraft industry and nuclear reactors.

Certain engineered products, including ceramic cores for casting ranging from small simple configurations to large complex shapes and structural ceramic components. Also, metal injected molded designs in a variety of materials, ultra-hard parts and precision welded tubular products, as well as drawn solid tubular shapes.

Tool and die steels which are extremely hard alloys used for tooling and other wear-resisting components in metalworking operations such as stamping, extrusion and machining. Other steels include carbon steels purchased for distribution and other miscellaneous products.

	2002			2001			2000
	($ in millions)
Stainless steels	$	395.7	40%	$	513.0	43%	$	532.4	48%
Special alloys		367.9	38%		425.6	36%		310.6	28%
Ceramics and other materials		94.0	10%		115.0	10%		99.8	9%
Titanium products		82.5	8%		81.2	7%		88.7	8%
Tool and other steels		37.0	4%		51.3	4%		77.6	7%

Net sales before accounting change		977.1	100%		1,186.1	100%		1,109.1	100%

Effect of accounting change		—			138.0			—

Total net sales	$	977.1		$	1,324.1		$	1,109.1

In the fourth quarter of fiscal 2001, Carpenter changed its method of accounting for revenue recognition in accordance with the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101 (SAB 101), “Revenue Recognition in Financial Statements”. Carpenter’s standard terms of sale for most of its sales included a provision that title to the goods was retained as a security interest until payment was received, even though the risks and benefits of ownership were passed to the customer at the time of shipment. Under SAB 101, except for certain foreign units, revenue cannot be recognized until title passes to the customer, which in Carpenter’s case was when payment was received. This bulletin was adopted prospectively, and therefore did not result in a restatement of any results reported prior to July 1, 2000.

On April 1, 2001, Carpenter changed its terms of sale so that revenue is recognized when product is shipped, in accordance with its historical practice. The combined effect of SAB 101 and the change in terms of sale increased fiscal 2001 sales by $138.0 million and income before cumulative effect of accounting change by $14.1 million, net of $9.4 million of tax. The cumulative effect at July 1, 2000 of this change in accounting principle was a charge of $14.1 million after taxes, or $.62 per diluted share.

As a result of adopting SAB 101 in fiscal 2001, all revenues reported through March 31, 2001 were deferred until cash was received. Results for the quarter ended June 30, 2001 included revenues from sales made in the quarter as well as collections on prior sales.

The fiscal 2001 restatements affected the quarterly distribution of earnings during fiscal 2001, but had no effect on total net income or earnings per share for that year. Carpenter’s consolidated statements of operations and cash flows for the first three quarters of fiscal 2001 have been restated in the fiscal 2001 10-K to include the effects of conforming to SAB 101. See note 1 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.

Fiscal 2000 net sales have been restated due to the adoption, effective July 1, 2000, of the Financial Accounting Standards Board Emerging Issues Task Force’s issuance of EITF 00-10 regarding the classification of freight and handling costs billed to customers. See note 1 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.

Carpenter’s Specialty Metals segment depends on continued delivery of critical raw materials for its day-to-day operations. These raw materials are nickel, ferrochrome, cobalt, molybdenum, titanium, manganese and scrap. Some of these raw materials sources are located in countries subject to potential interruptions of supply. These potential interruptions could cause material shortages and affect the availability and price.

Carpenter is in a strong raw material position because of its long-term relationships with major suppliers. These suppliers provide availability of material and competitive prices for these key raw materials to help Carpenter maintain the appropriate levels of raw materials.

Carpenter owns a number of United States and foreign patents and has granted licenses under some of them. Certain of the products produced by Carpenter are covered by patents of other companies from whom licenses have been obtained. Carpenter does not consider its business to be materially dependent upon any patent or patent rights.

Carpenter’s sales and operational results are normally influenced by seasonal factors. The first fiscal quarter (three months ending September 30) is typically the lowest—principally because of annual plant vacation and maintenance shutdowns in this period by Carpenter as well as by many of its customers. The second half of the fiscal year is typically stronger than the first half. However, the timing of major changes in both the general economy and the markets for Carpenter’s products, as occurred in fiscal 2002, can alter this pattern. The tragic events of September 11^th and the corresponding effects on many economic drivers, as well as weaker demand, especially in the aerospace and power generation markets, and a leaner product mix contributed to net sales being much lower than normal in the fourth quarter of fiscal 2002 (three months ended June 30). Over the longer time frame, the historical patterns generally prevail.

Quarter Ended	2002	Including SAB 101⁽¹⁾ 2001	Pro Forma Excluding SAB 101⁽¹⁾ 2001	2000
September 30	26%	22%	24%	22%
December 31	25%	22%	24%	23%
March 31	26%	23%	26%	27%
June 30	23%	33%	26%	28%

	100%	100%	100%	100%

As of June 30, 2002 Carpenter had a backlog of orders, believed to be firm, of approximately $190 million, substantially all of which is expected to be shipped within the current fiscal year. The backlog as of June 30, 2001 was approximately $305 million. A number of different products may, in certain instances, be substituted for Carpenter’s finished products.

Carpenter’s business is highly competitive. Carpenter supplies materials to a wide variety of end-use market sectors, none of which consumes more than about 30 percent of Carpenter’s output, and competes with various companies depending on end-use sector, product or geography. A number of different products may, in certain instances, be substituted for Carpenter’s finished products.

There are approximately 10 domestic companies producing one or more similar specialty metal products that are considered to be major competitors to the specialty metals operations in one or more product sectors. There are several dozen smaller producing companies and converting companies in the United States who are competitors. Carpenter also competes directly with several hundred independent distributors of products similar to those distributed by Carpenter. Additionally, numerous foreign producers export into the United States various specialty metal products similar to those produced by Carpenter. Furthermore, new stainless steel capacity continues to be added worldwide. In 2001, a report prepared by the Specialty Steel Industry of North America indicated that more than one million tons of new stainless bar and rod capacity is expected to be added worldwide by 2004. This represents about a 40 percent increase in current total global stainless bar and rod capacity. Most of this new capacity is expected to be focused on the production and worldwide consumption of stainless commodity products.

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 foreign producers. Such pricing practices have usually been supported by foreign governments through direct and indirect subsidies. These unfair trade practices have resulted in high import penetration into the U.S. stainless steel markets, with calendar year 2001 levels at about 46% for stainless bar, 79% for stainless rod and 51% for stainless wire.

Because of the unfair trade practices and the resulting injury, Carpenter has joined with other domestic producers in the filing of trade actions against foreign producers who have dumped their stainless steel products into the United States. As a result of these actions, the U.S. Department of Commerce issued antidumping orders for the collection of dumping duties on imports of stainless bar from Brazil, India, Japan and Spain at rates ranging up to about 63% of their value and on imports of stainless rod from Brazil, France and India at rates ranging up to about 49% of their value. Those orders will continue in effect until January 2006 and July 2005, respectively.

Additional antidumping orders are in place with regard to imports of stainless rod from Italy, Japan, Korea, Spain, Sweden and Taiwan at rates ranging up to 34% of their value. Countervailing duty orders are also in place against stainless rod imports from Italy. These orders were established in 1998 and will continue in effect until September 2003. New antidumping orders were issued in March 2002 against imports of stainless bar from France, Germany, Italy, Korea and the United Kingdom and will continue in effect until March 2007.

Section 201 trade action against imports of selected steel products, including several specialty steel products. This action led to the imposition of additional tariffs for a period of three years against imports of stainless bar, rod and wire from most of the steel producing countries of the world. The other two parts included the initiation of multilateral negotiations to reduce excess world steel capacity and to eliminate government subsidies and other trade distortive practices.

Carpenter is subject to various stringent federal, state, local and foreign environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. The liability for future environmental remediation costs is evaluated by management on a quarterly basis. Carpenter accrues amounts for environmental remediation costs which represent management’s best estimate of the probable and reasonably estimable costs relating to environmental remediation. For further information on environmental remediation, see the Contingencies section included in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and note 12 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.

The costs of maintaining and operating environmental control equipment were $5.1 million and $6.1 million for fiscal 2002 and 2001, respectively. The capital expenditures for environmental control equipment were $.4 million and $1.3 million for fiscal 2002 and 2001, respectively. Carpenter anticipates spending approximately $2.6 million on major domestic environmental capital projects over the next five fiscal years. This includes approximately $.7 million in both fiscal 2003 and 2004. Due to the possibility of future regulatory developments, the amount of future capital expenditures may vary from these estimates.

The primary locations of Carpenter’s specialty metals manufacturing plants are: Reading, Pennsylvania; Hartsville, South Carolina; Washington, Pennsylvania; Orangeburg, South Carolina; Bridgeville, Pennsylvania; Orwigsburg, Pennsylvania; Clearwater, Florida and Crawley, England. The Reading, Hartsville, Washington, Orangeburg, Bridgeville, Orwigsburg and Crawley plants are owned. The Clearwater plant is owned, but the land is leased.

The primary locations of Carpenter’s engineered products manufacturing operations are: Wood-Ridge, New Jersey; Wilkes-Barre, Pennsylvania; Twinsburg, Ohio; Auburn, California; El Cajon, California; Palmer, Massachusetts; Corby, England; Querétaro, Mexico and Monash, Australia. The El Cajon, Corby and Querétaro plants are owned, while the rest of the locations are leased. The land at the El Cajon plant is leased.

The Reading plant has an annual practical melting capacity of approximately 231,000 ingot tons of its normal product mix. The annual tons shipped will be considerably less than the tons melted due to processing losses and finishing operations. During the years ended June 30, 2002 and 2001, the plant operated at approximately 67 percent and 76 percent, respectively, of its melting capacity.

The Talley Metals plant in Hartsville, South Carolina has an annual hot rolling capacity of approximately 78,500 tons. The annual tons shipped will be less than the tons hot rolled due to processing losses and finishing operations. During the year ended June 30, 2002 and 2001, the plant operated at approximately 57 percent and 56 percent, respectively, of its hot rolling capacity.

The plants, customer service centers, and distribution centers of Carpenter have been acquired or leased at various times over several years. There is an active maintenance program to keep facilities in good condition. In addition, Carpenter has had an active capital spending program to replace equipment as needed to keep it technologically competitive on a world-wide-basis. Carpenter believes its facilities are in good condition and suitable for its business needs.

Pending legal proceedings involve ordinary routine litigation incidental to the business of Carpenter. There are no material proceedings to which any Director, Officer, or affiliate of Carpenter, or any owner of more than five percent of any class of voting securities of Carpenter, or any associate of any Director, Officer, affiliate, or security holder of Carpenter, is a party adverse to Carpenter or has a material interest adverse to the interest of Carpenter or its subsidiaries. There is no administrative or judicial proceeding arising under any Federal, State or local provisions regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment that (1) is material to the business or financial condition of Carpenter, (2) involves a claim for damages, potential monetary sanctions or capital expenditures exceeding ten percent of the current assets of Carpenter, or (3) includes a governmental authority as a party and involves potential monetary sanctions in excess of $100,000.

Listed below are the names of corporate executive officers as of fiscal year end, including those required to be listed as executive officers for Securities and Exchange Commission purposes, each of whom assumes office after the annual organization meeting of the Board of Directors which immediately follows the Annual Meeting of Stockholders. All of the corporate officers listed below have held responsible positions with the registrant for more than five years except for Terrence E. Geremski, who joined Carpenter January 29, 2001.

Dennis M. Draeger, previously Carpenter’s Chairman, President and Chief Executive Officer, became Chairman and Chief Executive Officer effective July 1, 2002. Prior to his being Chairman, President and Chief Executive Officer, Mr. Draeger was President and Chief Operating Officer from June 1999 through July 2001, Executive Vice President of Carpenter beginning 1998 and Senior Vice President—Specialty Alloys Operations beginning 1996. Mr. Draeger was a Director of Carpenter from 1992 through June 1996, at which time he resigned from the Board, and was re-elected as a Director effective June 1, 1999.

Terrence E. Geremski was elected Senior Vice President—Finance and Chief Financial Officer effective January 29, 2001. Mr. Geremski previously served as Executive Vice President and Chief Financial Officer and as a director of Guilford Mills, Inc., Greensboro, North Carolina. He was employed by Guilford Mills in various financial positions from 1992 through August 2000, with the most current position held being Executive Vice President and Chief Financial Officer. Mr. Geremski’s experience also includes Dayton Walther Corp., Dayton, Ohio; Varity Corp. (formerly Massey-Ferguson), Toronto, Ontario and Buffalo, New York; and Morris Bean & Co., Yellow Springs, Ohio. He began his career with Price Waterhouse in Chicago. Guilford Mills filed for reorganization under Chapter 11 of the federal bankruptcy laws on March 13, 2002.

Michael L. Shor was elected Senior Vice President—Specialty Alloys Operations, effective January 31, 2000. Prior to that, Mr. Shor held the following positions within Specialty Alloys Operations: Vice President—Manufacturing Operations from March 3, 1997 through January 30, 2000; General Manager—Global Marketing and Product Services from July 13, 1995 through March 2, 1997; and General Manager—Marketing from October 1, 1994 through July 12, 1995.

Robert J. Torcolini was elected Carpenter’s President and Chief Operating Officer and Director, effective July 1, 2002. Mr. Torcolini had been Senior Vice President—Engineered Products Operations, since January 31, 2000, President of Dynamet, Incorporated, a subsidiary of Carpenter Technology Corporation since February 28, 1997 and was Vice President—Manufacturing Operations—Specialty Alloys Operations from January 29, 1993 through February 27, 1997.

Name	Age	Positions	Assumed Present Position
Dennis M. Draeger	61	Chairman and Chief Executive Officer Director	July 2002
Terrence E. Geremski	55	Senior Vice President— Finance & Chief Financial Officer	January 2001
Robert W. Lodge	59	Vice President— Human Resources	September 1991
Michael L. Shor	43	Senior Vice President— Specialty Alloys Operations	January 2000
Robert J. Torcolini	51	President and Chief Operating Officer Director	July 2002
John R. Welty	53	Vice President, General Counsel & Secretary	January 1993

	2002				2001
Quarter Ended:	High		Low		High		Low
September 30	$	29.90	$	19.83	$	33.25	$	21.00
December 31	$	27.37	$	21.26	$	38.25	$	26.25
March 31	$	29.20	$	21.90	$	34.81	$	25.80
June 30	$	30.55	$	25.90	$	31.80	$	25.35

Annual	$	30.55	$	19.83	$	38.25	$	21.00

Carpenter had 5,211 common stockholders of record as of August 30, 2002. Information relating to certain common stock purchase rights issued by Carpenter is disclosed in note 14 to the consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.

Certain information relating to securities authorized for issuance under Carpenter’s equity compensation plans is disclosed in note 15 to the consolidated financial statements in Item 8. “Financial Statements and Supplementary Data”.

	2002			2001^(a)			2000			1999^(b)			1998
Summary of Operations
Net sales	$	977.1		$	1,324.1		$	1,109.1	^(c)	$	1,049.3	^(c)	$	1,189.7	^(c)

Net sales—pro-forma under SAB 101^(d)	$	977.1		$	1,324.1		$	1,085.4		$	1,075.6		$	1,183.9

Income (loss) before cumulative effect of accounting changes	$	(6.0	)	$	35.2		$	53.3		$	37.1		$	84.0
Cumulative effect of accounting changes, (net of $9.4 million tax in fiscal 2001)		(112.3	)		(14.1	)		—			—			—

Net income (loss)	$	(118.3	)	$	21.1

Delaware		23-0458500
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1047 N. Park Road, Wyomissing, Pennsylvania		19610-1339
(Address of principal executive offices)		(Zip Code)

(Title of each class)		(Name of each exchange on which registered)
Common stock, par value $5 per share		New York Stock Exchange

			Page Number
PART I
	Item 1	Business	3-7
	Item 2	Properties	7-8
	Item 3	Legal Proceedings	8
	Item 4	Submission of Matters to a Vote of Security Holders	8
	Executive Officers of the Registrant		8-9
PART II
	Item 5	Market for Registrant’s Common Stock and Related Stockholder Matters	10
	Item 6	Selected Financial Data	11
	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-24
	Forward-looking Statements		25
	Item 8	Financial Statements and Supplementary Data	26-59
	Item 9	Disagreements on Accounting and Financial Disclosure	59
PART III
	Item 10	Directors and Executive Officers of the Registrant	60
	Item 11	Executive Compensation	60
	Item 12	Security Ownership of Certain Beneficial Owners and Management	60
	Item 13	Certain Relationships and Related Transactions	60
PART IV
	Item 14	Exhibits, Financial Statement Schedules and Reports on Form 8-K	61-62
SIGNATURES			63-64
	Certifications of Periodic Reports		65-66
SCHEDULE II	Valuation and Qualifying Accounts		F-1
EXHIBIT INDEX			E-1 – E-4

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