In 1903 Orville Wright flew an airplane a fraction of a mile and defined a new era of transportation. In 1998 Robert W. Cardy will log about 100,000 air miles as he continues to redefine the Reading, Pa.-based company that made the steel used in the Wright flyer. Cardy sees Carpenter Technology Corp. -- the name Carpenter Steel Co. was scrapped in 1968 -- as a major, profitable, and growing international producer and distributor of high-performance alloys, specialty metals, and advanced materials that these days find their ways into, among other things, industrial tools, jet engines, automobile windshield wipers, and antilock brakes. In Cardy's vision, Carpenter is and will be a leader in the niche market that Wall Street analysts dub the materials-science business. With revenues of $1 billion expected in the fiscal year that closes June 30, Carpenter certainly isn't the mainly domestic $570 million specialty-steel maker it was in July 1992 when Cardy became CEO. Cardy, who is also Carpenter's chairman and president, has presided over nearly six years of selective acquisition, international expansion, and added manufacturing capacity.
| Doing Diligence |
| Acquisition questions to ask. In the nearly six years that Robert W. Cardy has been CEO of Carpenter Technologies, he has presided over 11 acquisitions. But Cardy doesn't add just any company in hopes that it will somehow grow the specialty-materials firm's top and bottom lines. He's methodical -- and strategically exacting. For example, although Carpenter works in stainless steel and other metals, Cardy wouldn't acquire a maker of metal ladders. "There is precious little if anything other than maybe some understanding of the processes that would be a synergy for us," Cardy declares. So, how does Cardy determine whether a company is likely to fit into Carpenter's "matrix of materials capability"? Cardy, of course, asks if the acquisition candidate company is making any money. That question aside, Cardy's due diligence involves five sets of questions covering customers, technology, capital, operating metrics, and culture: What's the customer base? Do they know us? And do we know them? (In most of the acquisitions Carpenter has made, the company being acquired has been selling to companies that Carpenter knows.) Do we really understand the technology involved in the product they're manufacturing? Do we have some technical expertise we can bring to them? Do they have some technical expertise that we can leverage into the balance of the corporation? Are we avoiding a capital expenditure? Or, putting it another way, if we don't acquire the company, will customer demand force us to build a facility to satisfy that demand? Will operating synergies between the companies materially improve our economics? Do we have an environment where 2+2 can equal 5 or 6? What's the culture of the employee group? Will the workers buy into Carpenter's culture or be difficult to bring along? Will they accept the changes that must come if they are going to really soar? |
The result, Cardy will argue, has been not so much a reengineered or a restructured company, but a company better positioned to meet the demands of its markets for customer closeness, superior quality, speed, and global reach. Carpenter has 5,100 employees serving 14,000 customers around the world. About 2,800 employees are based at the headquarters and main plant in Reading. The company has three operating groups:
- Specialty Alloys Operations is the company's core division, producing more than 22,000 products in more than 400 grades of specialty metals and alloys.
- The Engineered Products Group produces ceramics and other alternatives to specialty metals -- as well as metallic and nonmetallic materials that can't be created by conventional methods. Product applications include dot-matrix printers, automobile turn signals, and bypass clips used in open-heart surgery.
- Dynamet, an acquired operation, makes titanium bar, wire, and alloy-powder products used in such things as aircraft, medical devices, and sports equipment.
Cardy, the acquirer During Cardy's stewardship, Carpenter has plowed capital into facilities far in excess of depreciation -- $94 million in fiscal 1997 and about $108 million this fiscal year. The company has introduced Project 7000 stainless-steel products and formed a joint venture in Taiwan to produce stainless steel rod. However, acquisitions -- 11 since mid-1992 -- have been
the distinguishing feature of Cardy's CEO years. For example, during its 1997 fiscal year, which ended last June 30, Carpenter entered the manufacture of titanium bar and wire with the acquisition of Dynamet Inc. Also in fiscal 1997, the acquisition of Rathbone Precision Metals Inc. increased Carpenter's capability to roll bar and wire into complex shapes that need little finishing. During the current fiscal year, Carpenter has expanded its customer base and product line in Mexico with the acquisition of Aceromex Atlas SA de CV, has gained access to ceramic-part-production technology with the acquisition of ICI Australia Ltd.'s advanced-ceramics business, and has added metal manufacturing capacity and distribution capability in the U.S. with the acquisition of Talley Industries Inc. All indications are that Carpenter will continue to seek growth through acquisition, increasing its specialty alloys manufacturing capacity, adding specialty product lines, and expanding its distribution channels in the U.S. and elsewhere. And presumably what G. Walton Cottrell, senior vice president of finance and CFO at Carpenter, describes as Cardy's "deep understanding of our industry" will continue to make a material difference. "Bob is able to identify acquisition opportunities that make sense," says Cottrell. For example, Rathbone was "a smallish company that most people, unless they were really into the industry, wouldn't know about." And, Cottrell relates, Cardy not only knew about Talley's stainless-steel processing and distribution businesses, which were buried within the 1960s-style conglomerate, but knew that its hot mill would be a significantly better strategic fit for Carpenter than the hot mill at another company Carpenter was looking at. Cardy is a disciplined acquirer. To get serious consideration a company must fit what Cardy calls Carpenter's "matrix of materials capability." In practical terms that means a company must complement Carpenter's core competencies in specialty materials, be able to answer rising customer demand for technologically advanced products, and fit in with Carpenter's company-owned distribution system. If not, there's no acquisition. "I can grow by buying companies that don't fit," Cardy acknowledges. But he doesn't. "If you look down the list [of the companies Carpenter has purchased], there is a connection to the customer base and the technologies that we have." A case in point: this year's Talley Industries acquisition. Carpenter is keeping only two of the acquired operations -- the former Talley Metals Technology Inc., which has a stainless-steel minimill in Hartsville, S.C., and the former Amcan Specialty Steels Inc., a stainless-steel master distributor. Eight others will be sold, because although they are "good, profitable" operations, there's no way to fit them into Carpenter's materials matrix, Cardy insists. "We are responding to what [a] long-established customer interface is telling us we should become if we're going to be a successful specialty-materials company in the next century."
Global competition A decade ago, Carpenter had about a dozen domestic competitors across its specialty-alloy product line. In 1998 Carpenter's competition is global, with mills in Italy, France, and Japan, for example, going after many of the same customers Carpenter seeks to attract and retain. Indeed, Europe's per capita consumption of specialty alloys is larger than the U.S. level. And the demand for specialty alloys and materials is growing in Latin America. To continue to be financially successful, Carpenter must be an international -- and eventually a global -- company. Cardy wants the company to be on every continent -- Antarctica excepted -- early in the 21st century. "I want to have a presence in every major market in the world." Today, the company has operating units and subsidiaries in North America (Canada, Mexico, and the U.S.), in Europe (Belgium, England, France, Germany, and Italy), and in Asia/Pacific (Taiwan). They're generating revenues now. And the company also is using them to help scope out its future. For example, from its 10-warehouse base in Mexico, Carpenter is doing market research on Brazil and other promising South American markets. It may build on its distribution network in Mexico, adding a ceramics manufacturing plant to serve the Mexican market. From its offices in Taipei and Singapore, Carpenter is moving into the markets of China, South Korea, Singapore, and Hong Kong, "trying to put into focus what the market opportunity is for us there and what additional structural presence is going to be called for to properly serve customers," Cardy relates. In Australia, a country where there's not much specialty-metal consumption, Carpenter has a ceramics production and R&D facility. In India, Carpenter has been talking to customers and joint-venture partners. "We're still in the process of trying to determine what the right, prudent first step for us will be to expand our presence," Cardy says. Carpenter has yet to enter the markets of eastern Europe and Russia. "But we are going to have to stay alert to [them], because there's a lot of technology there, a lot of people, and as the quality of life increases, the natural tendency is that their demand for the kind of products we produce will also grow," Cardy states. However, Carpenter's five-year-old joint-venture experience in Taiwan offers an object lesson in the challenges of globalizing a business. In 1990, when Cardy was still the company's COO, Carpenter was looking at China, Hong Kong, South Korea, and Taiwan as places to establish an Asia presence. Taiwan seemed most culturally and commercially receptive to Carpenter, Cardy recalls. And as it was doing market research on the customer base in Taiwan, Carpenter was approached by Walsin Lihwa Corp., a cable producer planning to install a stainless- steel rod mill and searching for a technology partner. "We stepped back and said, 'Wow.'" Partnering with the firm would put Carpenter farther and faster down the business road in Taiwan than its management had contemplated. However, it seemed to offer remarkable market entry: affiliation with a successful company in a venture that appeared to be profitable. An agreement was signed, giving Carpenter a 19% stake in the rod mill and the option to increase its presence to 35%. The pact also contained an escape clause; if the facility failed to fly, Carpenter could return its stake to its Taiwanese partner and get its money back. It later became clear that Carpenter had not been involved early enough in the process to help Walsin Lihwa spec-out the equipment that it had ordered and that farmers near the southern Taiwan town of Yenshui would object to power lines passing over their fields and delay the plant's opening. There were serious problems in getting the purchased technology to work. And Carpenter spent a lot of time educating its partner about the product line, its customers, and pricing. The time delay allowed another Taiwanese firm to open up a stainless rod mill about 30 miles away. "And all of a sudden the transaction prices that had been used in the development of the model to justify the expenditure had significantly deteriorated," Cardy says. The mill technology turned out not to be suitable. Profits would be coming later than expected. Carpenter exercised its option and began to reduce its equity investment to the roughly 3% that it is today. "It could have worked well, but it didn't, and out we had to come," Cardy states. "It wasn't because the partner was bad. There were just a lot of issues -- relative to timing and some of them cultural -- that caused this [venture's] outlook to change significantly from what it looked like initially."
At risk Cardy's strategy clearly isn't without risk. "The demand for Carpenter's products and thus its financial performance generally are affected by domestic economic fluctuations, as well as changes in the world economy," cautioned a preliminary prospectus supplement prepared when Carpenter offered 2.75 million common shares to investors this year. "Because of the comparatively high level of fixed costs associated with Carpenter's manufacturing processes, changes in production volumes can result in significant variations in net income," it said. And "any significant decrease in demand for Carpenter's products or a decline in prices for such products could have material adverse effect on Carpenter's business, financial condition, or results of operations." About 25% of Carpenter's customers are in the aerospace industry, an economic sector that has been upset by the Asian financial flu that began in Thailand last July. Carpenter supplies titanium and high-temperature alloys that find their way into fuselage fasteners and aircraft engines. "Any developments in the aerospace market resulting in a significant reduction in future aircraft deliveries, including cancellations and deferrals of scheduled deliveries, could have a material adverse effect on Carpenter's businesses, financial condition, or results of operations," the securities supplement warned. Ron Woodard, president of Boeing Co.'s Commercial Airplane Group, a Carpenter customer, figures less than 5% of its total production during the next three years may be subject to delivery delays. Airbus Industrie, the European consortium that's Boeing's market rival and also a Carpenter customer, could increase production of its passenger jets to 30 planes a month by mid-1999. Cardy is guardedly optimistic. "We may see some shifting of schedules -- some shifting in demand from year to year," he says. "But . . . down in the supply chain as far as we are, we'll still have the demand taxing our capabilities [at] near capacity." No doubt between now and 2002, when he's slated to retire, Cardy will be taxing himself and the other Carpenter employees as well. Cardy is an aggressive person, and while he has a reputation among colleagues as an effective talker and a good listener, he is above all a doer. "He's done the things at Carpenter that needed to get done," says Samuel A. McCullough, former chairman and CEO of Meridian Bank Corp. and now secretary of Pennsylvania's Dept. of Community and Economic Development in Harrisburg. "Carpenter for a long, long time just stuck to its knitting in making specialty steel, particularly stainless. And Bob said, 'We have got to move this company in some other directions -- both internationally and in product mix.' And through the acquisition program he established, they've done that." Cardy was on Meridian's board during McCullough's tenure, and "rubber stamp" is
not an adjective that McCullough would use to describe Cardy. "He was very thoughtful, always did his homework, and raised issues" -- even if he was the only one raising the issue. In a 1997 speech to Carpenter shareholders, Cardy talked about corporate vision, speed in responding to customer inquiries, and extending the company's global presence. He sounded a lot like John F. Welch Jr. or Lawrence A. Bossidy, the CEOs, respectively, of much-larger General Electric Co. and AlliedSignal Corp. Like them, Cardy has set some stretch goals -- for example, to schedule all orders within 24 hours and to respond to repeat inquiries with 10 minutes. And like Welch and Bossidy, Cardy is pushing the virtues of Six Sigma quality. Cardy contends he's not consciously emulating either of the other CEOs. And McCullough agrees. "I am sure he has taken advantage of learning from others. But he really is his own guy."
