UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-Q


(Mark One)
 
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2017September 30, 2021
 
or
 
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐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
Delaware23-0458500
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
1735 Market Street, 15th Floor
Philadelphia, Pennsylvania
19103
Philadelphia,Pennsylvania19103
(Address of principal executive offices)(Zip Code)
610-208-2000
(Registrant’sRegistrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5 Par ValueCRSNew York Stock Exchange
Title of each classTrading SymbolName of each exchange on which registered
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x☒  No o☐
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.  Yes x☒  No o☐


 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large"large accelerated filer,” “accelerated" "accelerated filer,” “smaller" "smaller reporting company”company" and “emerging"emerging growth company”company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer☒Accelerated filer☐
Non-accelerated filer☐(Do not check if a smaller reporting company)Smaller reporting company☐
Large accelerated filer:xAccelerated filer:o
Non-accelerated filer:o(Do not check if a smaller reporting company)Smaller reporting company:o
Emerging growth companyo☐







If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
 
The number of shares outstanding of the issuer’sissuer's common stock as of January 25, 2018October 22, 2021 was 46,916,395.48,187,094.


Table of Contents

CARPENTER TECHNOLOGY CORPORATION
FORM 10-Q
INDEX
 
Page
32
43
54
65
76
87
26
4641
4742
4742
4742
4742
4843
4944


1
Table of Contents

PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
 
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
($ in millions, except share data)
($ in millions, except share data)September 30,
2021		June 30,
2021
ASSETS
Current assets:
Cash and cash equivalents$213.2 $287.4 
Accounts receivable, net311.6 308.7 
Inventories491.4 425.7 
Other current assets110.7 95.6 
Total current assets1,126.9 1,117.4 
Property, plant and equipment, net1,440.9 1,457.5 
Goodwill241.4 241.4 
Other intangibles, net41.1 43.1 
Deferred income taxes6.2 5.3 
Other assets103.4 106.5 
Total assets$2,959.9 $2,971.2 
LIABILITIES  
Current liabilities:  
Accounts payable$212.0 $142.4 
Accrued liabilities120.4 163.9 
Total current liabilities332.4 306.3 
Long-term debt694.8 694.5 
Accrued pension liabilities218.1 222.6 
Accrued postretirement benefits98.3 98.6 
Deferred income taxes150.5 156.9 
Other liabilities98.2 100.0 
Total liabilities1,592.3 1,578.9 
Contingencies and commitments (see Note 11)00
STOCKHOLDERS' EQUITY  
Common stock — authorized 100,000,000 shares; issued 56,024,619 shares at September 30, 2021 and 56,024,619 shares at June 30, 2021; outstanding 48,187,028 shares at September 30, 2021 and 48,040,676 shares at June 30, 2021280.1 280.1 
Capital in excess of par value316.3 322.6 
Reinvested earnings1,274.7 1,299.3 
Common stock in treasury (7,837,591 shares and 7,983,943 shares at September 30, 2021 and June 30, 2021, respectively), at cost(311.3)(317.4)
Accumulated other comprehensive loss(192.2)(192.3)
Total stockholders' equity1,367.6 1,392.3 
Total liabilities and stockholders' equity$2,959.9 $2,971.2 
 December 31,
2017		 June 30,
2017
ASSETS   
Current assets:   
Cash and cash equivalents$20.7
 $66.3
Accounts receivable, net297.2
 290.4
Inventories771.8
 690.4
Other current assets69.8
 46.5
Total current assets1,159.5
 1,093.6
Property, plant and equipment, net1,298.7
 1,316.8
Goodwill263.4
 263.4
Other intangibles, net61.6
 64.9
Deferred income taxes4.1
 7.6
Other assets156.8
 131.8
Total assets$2,944.1
 $2,878.1
LIABILITIES   
Current liabilities: 
  
Short-term credit agreement borrowings$9.3
 $—
Current portion of long-term debt55.0
 55.0
Accounts payable205.1
 201.1
Accrued liabilities118.4
 139.9
Total current liabilities387.8
 396.0
Long-term debt, net of current portion548.3
 550.0
Accrued pension liabilities369.7
 378.3
Accrued postretirement benefits123.4
 122.6
Deferred income taxes128.1
 184.8
Other liabilities50.0
 47.8
Total liabilities1,607.3
 1,679.5
Contingencies and commitments (see Note 8)
 
STOCKHOLDERS’ EQUITY   
Common stock — authorized 100,000,000 shares; issued 55,450,861 shares at December 31, 2017 and 55,349,658 shares at June 30, 2017; outstanding 46,894,896 shares at December 31, 2017 and 46,753,180 shares at June 30, 2017277.3
 276.7
Capital in excess of par value294.4
 284.8
Reinvested earnings1,420.1
 1,321.8
Common stock in treasury (8,555,965 shares and 8,596,478 shares at December 31, 2017 and June 30, 2017, respectively), at cost(339.9) (341.6)
Accumulated other comprehensive loss(315.1) (343.1)
Total stockholders' equity1,336.8
 1,198.6
Total liabilities and stockholders' equity$2,944.1
 $2,878.1


See accompanying notes to consolidated financial statements.
2
Table of Contents

CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(Unaudited)
($ in millions, except per share data)

Three Months Ended
September 30,
Three Months Ended
December 31,		 Six Months Ended
December 31,
2017 2016 2017 2016
(in millions, except per share data) (in millions, except per share data)20212020
Net sales$487.8
 $427.4
 $967.5
 $816.3
Net sales$387.6 $353.3 
Cost of sales402.1
 364.9
 796.2
 707.8
Cost of sales362.4 349.8 
Gross profit85.7
 62.5
 171.3
 108.5
Gross profit25.2 3.5 
       
Selling, general and administrative expenses44.9
 47.1
 88.8
 91.7
Selling, general and administrative expenses44.3 42.3 
Operating income40.8
 15.4
 82.5
 16.8
Restructuring and asset impairment chargesRestructuring and asset impairment charges— 10.0 
       
Interest expense(7.3) (7.4) (14.5) (14.8)
Other income, net0.2
 0.3
 0.9
 1.0
Operating lossOperating loss(19.1)(48.8)
       
Income before income taxes33.7
 8.3
 68.9
 3.0
Income tax (benefit) expense(58.4) 1.3
 (46.6) 2.2
Interest expense, netInterest expense, net10.2 6.7 
Debt extinguishment losses, netDebt extinguishment losses, net— 8.2 
Other (income) expense, netOther (income) expense, net(4.1)2.3 
       
Net income$92.1
 $7.0
 $115.5
 $0.8
Loss before income taxesLoss before income taxes(25.2)(66.0)
Income tax benefitIncome tax benefit(10.4)(18.9)
       
EARNINGS PER COMMON SHARE: 
  
  
  
Net lossNet loss$(14.8)$(47.1)
LOSS PER COMMON SHARE:LOSS PER COMMON SHARE:  
Basic$1.93
 $0.15
 $2.43
 $0.01
Basic$(0.31)$(0.98)
Diluted$1.92
 $0.15
 $2.41
 $0.01
Diluted$(0.31)$(0.98)
       
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: 
  
  
  
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:  
Basic47.2
 47.0
 47.1
 47.0
Basic48.5 48.3 
Diluted47.6
 47.1
 47.5
 47.1
Diluted48.5 48.3 
       
Cash dividends per common share$0.18
 $0.18
 $0.36
 $0.36
 
See accompanying notes to consolidated financial statements.
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CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMELOSS
(Unaudited)
($ in millions)
 Three Months Ended
December 31,		 Six Months Ended
December 31,
 2017 2016 2017 2016
Net income$92.1
 $7.0
 $115.5
 $0.8
Other comprehensive income, net of tax 
  
  
  
Pension and postretirement benefits, net of tax of $(0.8), $(3.5), $(2.1) and $(14.0), respectively2.5
 5.7
 4.6
 23.1
Net gain on derivative instruments, net of tax of $(5.6), $(2.4), $(10.4) and $(8.8), respectively15.0
 3.8
 23.1
 14.6
Foreign currency translation(1.5) (4.0) 0.3
 (4.7)
Other comprehensive income16.0
 5.5
 28.0
 33.0
Comprehensive income$108.1
 $12.5
 $143.5
 $33.8
Three Months Ended
September 30,
 ($ in millions)20212020
Net loss$(14.8)$(47.1)
Other comprehensive income (loss), net of tax  
Pension and postretirement benefits, net of tax of $(0.4) and $(1.1), respectively1.1 3.6 
Net gain on derivative instruments, net of tax of $(0.4) and $(2.7) respectively1.1 8.3 
Foreign currency translation(2.1)5.7 
Other comprehensive income, net of tax0.1 17.6 
Comprehensive loss$(14.7)$(29.5)
 
See accompanying notes to consolidated financial statements.
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CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
 Three Months Ended
September 30,
($ in millions)($ in millions)20212020
OPERATING ACTIVITIESOPERATING ACTIVITIES  
Net lossNet loss$(14.8)$(47.1)
Adjustments to reconcile net loss to net cash (used for) provided from operating activities:Adjustments to reconcile net loss to net cash (used for) provided from operating activities:  
Depreciation and amortizationDepreciation and amortization32.5 30.9 
Six Months Ended
December 31,
2017 2016
OPERATING ACTIVITIES 
  
Net income$115.5
 $0.8
Adjustments to reconcile net income to net cash provided from (used for) operating activities: 
  
Depreciation and amortization58.0
 58.7
Non-cash restructuring and asset impairment chargesNon-cash restructuring and asset impairment charges— 8.7 
Debt extinguishment losses, netDebt extinguishment losses, net— 8.2 
Deferred income taxes(66.2) 39.1
Deferred income taxes(8.0)(3.9)
Net pension expense7.1
 31.0
Net pension (income) expenseNet pension (income) expense(1.8)4.1 
Share-based compensation expense8.1
 6.5
Share-based compensation expense2.8 2.7 
Loss on disposals of property and equipment0.4
 0.3
Net loss on disposals of property, plant and equipmentNet loss on disposals of property, plant and equipment— 0.1 
Changes in working capital and other: 
  
Changes in working capital and other:  
Accounts receivable(3.8) 0.8
Accounts receivable(3.8)42.0 
Inventories(81.5) (74.2)Inventories(66.5)84.9 
Other current assets(17.6) (5.6)Other current assets(13.2)(23.0)
Accounts payable11.8
 17.2
Accounts payable69.3 (7.4)
Accrued liabilities(6.2) 4.0
Accrued liabilities(41.7)(8.0)
Pension plan contributions(4.9) (100.0)Pension plan contributions(0.2)(2.9)
Other postretirement plan contributions(1.8) (1.8)Other postretirement plan contributions(0.7)(0.6)
Other, net(1.6) (2.2)Other, net(0.9)(0.7)
Net cash provided from (used for) operating activities17.3
 (25.4)
Net cash (used for) provided from operating activitiesNet cash (used for) provided from operating activities(47.0)88.0 
INVESTING ACTIVITIES 
  
INVESTING ACTIVITIES  
Purchases of property, equipment and software(55.7) (45.1)
Purchases of property, plant, equipment and softwarePurchases of property, plant, equipment and software(14.4)(33.3)
Proceeds from divestiture of businessProceeds from divestiture of business— 17.6 
Net cash used for investing activities(55.7) (45.1)Net cash used for investing activities(14.4)(15.7)
FINANCING ACTIVITIES 
  
FINANCING ACTIVITIES  
Credit agreement borrowings—
 80.0
Credit agreement repayments—
 (55.0)
Net change in short-term credit agreement borrowings9.3
 —
Net change in short-term credit agreement borrowings— (170.0)
Proceeds from issuance of long-term debt, net of offering costsProceeds from issuance of long-term debt, net of offering costs— 395.5 
Payments on long-term debtPayments on long-term debt— (250.0)
Payments for debt extinguishment costs, netPayments for debt extinguishment costs, net— (8.2)
Payments for debt issue costsPayments for debt issue costs— (1.1)
Dividends paid(17.2) (17.0)Dividends paid(9.8)(9.7)
Tax benefits on share-based compensation—
 0.3
Proceeds from stock options exercised3.5
 1.8
Withholding tax payments on share-based compensation awards(0.6) (0.4)Withholding tax payments on share-based compensation awards(3.0)(2.2)
Net cash (used for) provided from financing activities(5.0) 9.7
Net cash used for financing activitiesNet cash used for financing activities(12.8)(45.7)
Effect of exchange rate changes on cash and cash equivalents(2.2) 1.3
Effect of exchange rate changes on cash and cash equivalents— (0.8)
DECREASE IN CASH AND CASH EQUIVALENTS(45.6) (59.5)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS(74.2)25.8 
Cash and cash equivalents at beginning of period66.3
 82.0
Cash and cash equivalents at beginning of period287.4 193.1 
Cash and cash equivalents at end of period$20.7
 $22.5
Cash and cash equivalents at end of period$213.2 $218.9 
SUPPLEMENTAL CASH FLOW INFORMATION: 
  
SUPPLEMENTAL CASH FLOW INFORMATION:  
Non-cash investing activities: 
  
Acquisition of property, equipment and software$5.8
 $6.0
Non-cash investing activities: Purchase of property, plant, equipment and softwareNon-cash investing activities: Purchase of property, plant, equipment and software$7.6 $9.0 
See accompanying notes to consolidated financial statements.
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CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE SIXTHREE MONTHS ENDED DECEMBER 31, 2017SEPTEMBER 30, 2021 AND 20162020
(Unaudited)
($ in millions, except per share data)
 Common StockReinvested EarningsCommon Stock in TreasuryAccumulated Other Comprehensive (Loss) IncomeTotal Equity
($ in millions, except per share data)Par Value of $5Capital in Excess of Par Value
Balances at June 30, 2021$280.1 $322.6 $1,299.3 $(317.4)$(192.3)$1,392.3 
Net loss  (14.8)  (14.8)
Pension and postretirement benefits gain, net of tax    1.1 1.1 
Net gain on derivative instruments, net of tax    1.1 1.1 
Foreign currency translation    (2.1)(2.1)
Cash Dividends:     
     Common @ $0.20 per share  (9.8)  (9.8)
Share-based compensation plans(6.3) 6.1  (0.2)
Balances at September 30, 2021$280.1 $316.3 $1,274.7 $(311.3)$(192.2)$1,367.6 
 
 Common Stock Reinvested Earnings Common Stock in Treasury Accumulated Other Comprehensive (Loss) Income Total Equity
 Par Value of $5 Capital in Excess of Par Value    
Balances at June 30, 2017$276.7
 $284.8
 $1,321.8
 $(341.6) $(343.1) $1,198.6
Net income 
  
 115.5
  
  
 115.5
Pension and postretirement benefits gain, net of tax 
  
  
  
 4.6
 4.6
Net gain on derivative instruments, net of tax 
  
  
  
 23.1
 23.1
Foreign currency translation 
  
  
  
 0.3
 0.3
Cash Dividends: 
  
  
  
  
 0
Common @ $0.36 per share 
  
 (17.2)  
  
 (17.2)
Share-based compensation plans 
 6.7
  
 1.7
  
 8.4
Stock options exercised0.6
 2.9
  
  
  
 3.5
Balances at December 31, 2017$277.3
 $294.4
 $1,420.1
 $(339.9) $(315.1) $1,336.8
 Common Stock Reinvested Earnings Common Stock in Treasury Accumulated Other Comprehensive (Loss) Income Total Equity
 Par Value of $5 Capital in Excess of Par Value    
Balances at June 30, 2016$276.3
 $273.5
 $1,308.9
 $(343.9) $(409.9) $1,104.9
Net income 
  
 0.8
  
  
 0.8
Pension and postretirement benefits gain, net of tax 
  
  
  
 23.1
 23.1
Net gain on derivative instruments, net of tax 
  
  
  
 14.6
 14.6
Foreign currency translation 
  
  
  
 (4.7) (4.7)
Cash Dividends: 
  
  
  
  
 0
Common @ $0.36 per share 
  
 (17.0)  
  
 (17.0)
Share-based compensation plans 
 5.0
  
 1.5
  
 6.5
Stock options exercised0.4
 1.4
  
  
  
 1.8
Tax windfall on share-based compensation 
 0.3
  
  
  
 0.3
Balances at December 31, 2016$276.7
 $280.2
 $1,292.7
 $(342.4) $(376.9) $1,130.3
 Common StockReinvested EarningsCommon Stock in TreasuryAccumulated Other Comprehensive (Loss) IncomeTotal Equity
($ in millions, except per share data)Par Value of $5Capital in Excess of Par Value
Balances at June 30, 2020$280.1 $321.4 $1,568.0 $(325.8)$(398.0)$1,445.7 
Net loss  (47.1)  (47.1)
Pension and postretirement benefits gain, net of tax    3.6 3.6 
Net gain on derivative instruments, net of tax    8.3 8.3 
Foreign currency translation    5.7 5.7 
Cash Dividends:     
     Common @ $0.20 per share  (9.7)  (9.7)
Share-based compensation plans(5.5) 6.5  1.0 
Balances at September 30, 2020$280.1 $315.9 $1,511.2 $(319.3)$(380.4)$1,407.5 
 
See accompanying notes to consolidated financial statements.

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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


 
1.Basis of Presentation
1.    Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting of normal and recurring adjustments, considered necessary for a fair statement of the results are reflected in the interim periods presented. The June 30, 20172021 consolidated balance sheet data was derived from audited financial statements, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in Carpenter’s annual reportCarpenter Technology's Annual Report on Form 10-K for the fiscal year ended June 30, 20172021 (the “2017"2021 Form 10-K”10-K"). Operating results for the three and six months ended December 31, 2017September 30, 2021 are not necessarily indicative of the operating results for any future period.


Certain amounts in the consolidated statement of operations as presented in Carpenter Technology’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 have been reclassified to conform to the current quarter presentation.

As used throughout this report, unless the context requires otherwise, the terms “Carpenter”"Carpenter", "Carpenter Technology", the “Company”"Company", “Registrant”"Registrant", “Issuer”"Issuer", “we”"we" and “our”"our" refer to Carpenter Technology Corporation.

During
2.    Restructuring and Asset Impairment Charges

Restructuring and asset impairment charges for the sixthree months ended December 31, 2017,September 30, 2021 and 2020 were $0.0 million and $10.0 million, respectively.

In the quarter ended September 30, 2020, the Company changedinitiated a restructuring plan to consolidate certain operations within the presentationAdditive business in the Performance Engineered Products "PEP" segment. This included $8.7 million of borrowingsnon-cash impairment charges related primarily to certain long-lived assets and repayments madecertain definite-lived intangible assets. The Company also recognized $1.3 million of charges for various personnel-related costs for severance payments, medical coverage and other items.

The reserve balances and activity for restructuring charges at September 30, 2021 and June 30, 2021 were as follows:

($ in millions)September 30, 2021June 30, 2021
Reserve balance at beginning of period$1.4 $9.5 
Restructuring charges excluding non-cash impairments— 1.2 
Cash payments(1.1)(9.3)
Reserve balance at end of period$0.3 $1.4 

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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3.    Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements - Adopted in current fiscal year

In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The guidance removes certain exceptions to the general principles related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year, and recognition of deferred tax liabilities for outside basis differences. The new standard also simplifies the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the basis of goodwill. ASU 2019-12 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2020, with early adoption permitted. The Company adopted the provisions of ASU 2019-12 in the first quarter of fiscal year 2022. As a result, the Company recorded tax benefits on its year-to-date net loss for the first quarter of fiscal year 2022 in excess of its forecasted total tax benefits for the full fiscal year. Adoption of the other provisions in ASU 2019-12 did not materially impact the consolidated financial statements.

Recently Issued Accounting Pronouncements - Pending adoption

At this time there are no issued pronouncements, pending adoption, that would materially impact the Company.

4.    Revenue

The Company recognizes revenue in accordance with Topic 606, Revenue from Contracts. The Company applies the five-step model in the FASB's guidance, which requires the Company to: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the Company satisfies a performance obligation.

The Company recognizes revenue when performance obligations under the terms of a customer purchase order or contract are satisfied. This occurs when control of the goods and services has transferred to the customer, which is generally determined when title, ownership, and risk of loss pass to the customer, all of which occurs upon shipment or delivery of the product. Consignment transactions are arrangements where the Company transfers product to a customer location but retains ownership and control of such product until it is used by the customer. Revenue for consignment arrangements is recognized upon usage by the customer. Service revenue is recognized as the services are performed.

Each customer purchase order or contract for goods transferred has a single performance obligation for which revenue is recognized at a point in time. The standard terms and conditions of a customer purchase order include general rights of return and product warranty provisions related to nonconforming product. Depending on the circumstances, the product is either replaced or a quality adjustment is issued. Such warranties do not represent a separate performance obligation.

Each customer purchase order or contract sets forth the transaction price for the products and services purchased under that arrangement. Some customer arrangements include variable consideration, such as volume rebates, which generally depend upon the Company's customers meeting specified performance criteria, such as a purchasing level over a period of time. The Company exercises judgment to estimate the most likely amount of variable consideration at each reporting date.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for its revolving credit facilityproduct. The standard payment terms are 30 days. The Company has elected to use the practical expedient that permits a Company to not adjust for the effects of a significant financing component if it expects that at the contract inception, the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

8
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Amounts billed to customers for shipping and handling activities to fulfill the Company's promise to transfer the goods are included in revenues and costs incurred by the Company for the delivery of goods and are classified as cost of sales in the consolidated statements of operations. Shipping terms may vary for products shipped outside the United States depending on the mode of transportation, the country where the material is shipped and any agreements made with the customers.

Contract liabilities are recognized when the Company has received consideration from a customer to transfer goods or services at a future point in time when the Company performs under the purchase order or contract. Contract liabilities were $11.9 million and $8.6 million at September 30, 2021 and June 30, 2021, respectively, and are included in accrued liabilities on the consolidated balance sheets.

The Company has elected to use the practical expedient that permits the omission of disclosure for remaining performance obligations which are expected to be satisfied in one year or less.  

Disaggregation of Revenue

The Company operates in 2 business segments, Specialty Alloys Operations ("SAO") and Performance Engineered Products ("PEP"). Revenue is disaggregated within these 2 business segments by diversified end-use markets and by geographical location. Comparative information of the Company's overall revenues by end-use markets and geography for the three months ended September 30, 2021 and 2020 were as follows:
End-Use Market DataThree Months Ended
September 30,
($ in millions)20212020
Aerospace and Defense$166.9 $172.0 
Medical43.1 32.8 
Transportation41.6 29.1 
Energy22.2 25.1 
Industrial and Consumer86.6 73.4 
Distribution27.2 20.9 
Consolidated net sales$387.6 $353.3 

Geographic DataThree Months Ended
September 30,
($ in millions)20212020
United States$246.9 $224.7 
Asia Pacific61.5 37.9 
Europe48.5 61.3 
Mexico15.8 13.1 
Canada7.9 7.8 
Other7.0 8.5 
Consolidated net sales$387.6 $353.3 

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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5.    Divestiture

On September 30, 2020, the Company divested the Amega West business for a total sale price of $20.0 million. In connection with the divestiture, the Company received $17.6 million of cash flows. Prior year amounts have been reclassified to conform toin the six monthsquarter ended September 30, 2020 and the remaining $2.4 million of cash in the quarter ended December 31, 2017 presentation.
2.Acquisition and Divestiture
On February 28, 2017, the Company acquired substantially all the assets of Puris LLC (“Puris”), for a cash purchase price of $35.3 million. The acquisition provides the Company with immediate entry into the rapidly growing titanium powder market, an expanded presence in additive manufacturing and strengthens the Company’s capabilities as a solutions provider for customers across its end-use markets.  The purchase price allocation resulted in the purchase price being allocated as follows: $1.7 million of working capital, $6.5 million of property and equipment, $8.5 million of identifiable intangible assets and $18.6 million to goodwill.

In the fourth quarter of fiscal year 2017, the Company divested its Specialty Steel Supply (“SSS”) business. The divestiture was completed in two separate transactions for total cash proceeds of $12.0 million.2020. The operations of the SSSAmega West business were historically included in our PEP segment and the Performance Engineered Products (“PEP”) segment.Energy end-use market. The Company does not have any significant continuing involvement in the operations of SSSAmega West after the divestiture.


3.Earnings per Common Share
6.    Loss per Common Share
 
The Company calculates basic and diluted earningsloss per share using the two class method. Under the two class method, earningslosses are allocated to common stock and participating securities (non-vested restricted shares and units that receive non-forfeitable dividends) according to their participation rights in dividends and undistributed earnings. The earningslosses available to each class of stock are divided by the weighted average number of outstanding shares for the period in each class. Diluted earningsloss per share assumes the issuance of common stock for all potentially dilutive share equivalents outstanding. For the three months ended September 30, 2021 and 2020, respectively, the Company incurred a net loss and accordingly excluded all potentially dilutive securities from the determination of diluted loss per share as their impact was anti-dilutive.

CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



The calculations of basic and diluted earningsloss per common share for the three and six months ended December 31, 2017September 30, 2021 and 20162020 were as follows: 
  Three Months Ended
December 31,		 Six Months Ended
December 31,
(in millions, except per share data) 2017 2016 2017 2016
Net income $92.1
 $7.0
 $115.5
 $0.8
Less: earnings and dividends allocated to participating securities (0.9) (0.1) (1.0) (0.1)
Earnings available for common stockholders used in calculation of basic earnings per common share $91.2
 $6.9
 $114.5
 $0.7
         
Weighted average number of common shares outstanding, basic 47.2
 47.0
 47.1
 47.0
         
Basic earnings per common share $1.93
 $0.15
 $2.43
 $0.01
         
Net income $92.1
 $7.0
 $115.5
 $0.8
Less: earnings and dividends allocated to participating securities (0.9) (0.1) (1.0) (0.1)
Earnings available for common stockholders used in calculation of diluted earnings per common share $91.2
 $6.9
 $114.5
 $0.7
         
Weighted average number of common shares outstanding, basic 47.2
 47.0
 47.1
 47.0
Effect of shares issuable under share-based compensation plans 0.4
 0.1
 0.4
 0.1
Weighted average number of common shares outstanding, diluted 47.6
 47.1
 47.5
 47.1
         
Diluted earnings per common share $1.92
 $0.15
 $2.41
 $0.01
Three Months Ended
September 30,
(in millions, except per share data)20212020
Net loss$(14.8)$(47.1)
Dividends allocated to participating securities— — 
Loss available for common stockholders used in calculation of basic loss per common share$(14.8)$(47.1)
Weighted average number of common shares outstanding, basic48.5 48.3 
Basic loss per common share$(0.31)$(0.98)
Net loss$(14.8)$(47.1)
Dividends allocated to participating securities— — 
Loss available for common stockholders used in calculation of diluted loss per common share$(14.8)$(47.1)
Weighted average number of common shares outstanding, basic48.5 48.3 
Effect of shares issuable under share-based compensation plans— — 
Weighted average number of common shares outstanding, diluted48.5 48.3 
Diluted loss per common share$(0.31)$(0.98)
 
The following awards issued under share-based compensation plans were excluded from the above calculations of diluted earningsloss per share because their effects were anti-dilutive:
 
Three Months Ended
September 30,
(in millions)20212020
Stock options1.9 2.1 
10
  Three Months Ended
December 31,		 Six Months Ended
December 31,
(in millions) 2017 2016 2017 2016
Stock options 0.6
 2.0
 0.8
 1.8
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


7.    Inventories
4.Inventories
 
Inventories consisted of the following components as of December 31, 2017September 30, 2021 and June 30, 2017:2021:
 
($ in millions) December 31,
2017		 June 30,
2017		($ in millions)September 30,
2021		June 30,
2021
Raw materials and supplies $186.1
 $152.8
Raw materials and supplies$124.8 $115.0 
Work in process 395.5
 365.6
Work in process251.1 206.2 
Finished and purchased products 190.2
 172.0
Finished and purchased products115.5 104.5 
Total inventory $771.8
 $690.4
Total inventoriesTotal inventories$491.4 $425.7 
 
Inventories are valued at the lower of cost or market. Cost for inventories is principally determined using the last-in, first-out (“LIFO”("LIFO") inventory costing method. The Company also uses the first-in, first-out (“FIFO”("FIFO") and average cost methods. As of December 31, 2017September 30, 2021 and June 30, 2017, $128.82021, $118.5 million and $107.3$107.5 million of inventory, respectively, was accounted for using a method other than the LIFO inventory costing method.

5.Accrued Liabilities
8.    Accrued Liabilities
 
Accrued liabilities consisted of the following as of December 31, 2017September 30, 2021 and June 30, 2017:2021:
($ in millions)September 30,
2021		June 30,
2021
Accrued compensation and benefits$45.9 $81.4 
Accrued postretirement benefits14.4 14.4 
Contract liabilities11.9 8.6 
Current portion of lease liabilities8.8 9.0 
Accrued interest expense6.5 16.2 
Accrued pension liabilities3.5 3.5 
Derivative financial instruments2.5 4.2 
Accrued income taxes0.7 0.5 
Other26.2 26.1 
Total accrued liabilities$120.4 $163.9 
 
11
($ in millions) December 31,
2017		 June 30,
2017
Accrued compensation and benefits $52.6
 $59.1
Accrued postretirement benefits 15.5
 15.5
Accrued interest expense 11.2
 11.2
Deferred revenue 10.7
 9.8
Derivative financial instruments 2.9
 13.1
Other 25.5
 31.2
Total accrued liabilities $118.4
 $139.9
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


9.    Pension and Other Postretirement Benefits
6.Pension and Other Postretirement Benefits
 
The components of the net periodic benefit costpension (income) expense related to the Company’sCompany's pension and other postretirement benefits for the three and six months ended December 31, 2017September 30, 2021 and 20162020 were as follows:
 
Three months ended September 30,Pension PlansOther Postretirement Plans
($ in millions)2021202020212020
Service cost$2.1 $2.4 $0.6 $0.7 
Interest cost9.1 9.9 1.8 1.9 
Expected return on plan assets(14.9)(13.9)(2.0)(1.6)
Amortization of net loss (gain)2.1 4.3 (0.2)0.9 
Amortization of prior service cost (credits)0.6 0.5 (1.0)(1.0)
Net pension (income) expense$(1.0)$3.2 $(0.8)$0.9 
Three months ended December 31, Pension Plans Other Postretirement Plans
($ in millions) 2017 2016 2017 2016
Service cost $2.4
 $7.7
 $0.7
 $0.9
Interest cost 13.0
 12.4
 2.4
 2.3
Expected return on plan assets (16.5) (16.6) (1.7) (1.7)
Amortization of net loss 3.4
 9.5
 0.7
 0.8
Amortization of prior service cost (benefit) 0.5
 0.5
 (1.3) (1.6)
    Net periodic benefit costs $2.8
 $13.5
 $0.8
 $0.7

Six months ended December 31, Pension Plans Other Postretirement Plans
($ in millions) 2017 2016 2017 2016
Service cost $4.7
 $16.0
 $1.3
 $1.8
Interest cost 26.1
 25.3
 4.8
 4.6
Expected return on plan assets (33.0) (31.9) (3.5) (3.4)
Amortization of net loss 6.8
 18.9
 1.5
 1.6
Amortization of prior service cost (benefit) 1.0
 0.8
 (2.6) (3.2)
Curtailment charge —
 0.5
 —
 —
    Net periodic benefit costs $5.6
 $29.6
 $1.5
 $1.4
In September 2016, the Company announced changes to retirement plans it offers to certain employees. Benefits accrued to eligible participants of its largest qualified defined benefit pension plan and certain non-qualified benefit plans were frozen effective December 31, 2016.  The Company recognized the plan freeze inDuring the three months ended September 30, 2016 as a curtailment, since the plan changes eliminated the accrual of defined benefits for future services for a significant number of participants. The impact of the curtailment included a one-time accelerated recognition of outstanding unamortized prior service costs of $0.5 million, which was recognized in the three months ended September 30, 2016.
During the six months ended December 31, 20172021 and 2016,2020, the Company made $4.9$0.2 million and $100.0$2.9 million, respectively, of contributions to its qualified defined benefit pension plans. The Company currently expectsdoes not expect to contribute $1.8 millionadditional amounts to its U.S. qualified defined benefit pension plans during the remainder of fiscal year 2018.2022.

7.Debt
10.    Debt
 
On July 10, 2020, the Company completed its offering and sale of $400.0 million in aggregate principal amount of 6.375% Senior Notes due 2028 (the "Notes"). The Notes accrue interest at the rate of 6.375% per annum, with interest payable in cash semi-annually in arrears on each January 15th and July 15th, commencing January 15, 2021. The Notes will mature on July 15, 2028. The Notes are senior unsecured indebtedness of the Company, ranking equally in right of payment with all its existing and future senior unsecured indebtedness and senior to any future subordinated indebtedness. The Company utilized a portion of the net proceeds from the issuance of the Notes to repay in full $250.0 million in aggregate principal amount of its senior unsecured notes due July 2021. The Company used or intends to use the remaining net proceeds from the issuance of the Notes for general corporate purposes.

On March 31, 2017,26, 2021, the Company entered into a $400.0$300.0 million unsecuredsecured revolving credit facility (“("the Credit Agreement”Facility") that. The Credit Facility amended and restated the Company's previous revolving credit facility, dated March 31, 2017, which had been set to expire in March 2022. The Credit Facility extends the maturity to March 31, 2024, subject to a springing maturity of November 30, 2022. If, by November 30, 2022, the Company's outstanding $300.0 million 4.45% Senior Notes due in March 2023 are not redeemed, repurchased or refinanced with indebtedness having a maturity date of October 1, 2024 or later, all indebtedness under the Credit Facility will be due. The Credit Facility contains a revolving credit commitment amount of $300.0 million, subject to the Company's right, from time to time, to request an increase of the commitment to $500.0 million in the aggregate; and provides for the issuance of letters of credit subject to a $40.0 million sub-limit. The Company has the right to terminate or reduce the commitments under the Credit Facility, and, subject to certain lender approvals, to join subsidiaries as subsidiary borrowers.

Interest on the borrowings under the Credit Agreement accrueFacility accrues at variable rates, based upon LIBORa "Eurocurrency Rate" or a defined “Base Rate,” both"Base Rate". Both are determined based upon the credit rating of the Company’sCompany's senior unsecured long-term debt (the “Debt Rating”"Debt Rating"). The applicablemargin to be added to LIBOREurocurrency Rate ranges from 1.00%1.25% to 1.75% (1.50%2.25% (2.00% as of December 31, 2017)September 30, 2021), and for Base Rate-determined loans, from 0.00%0.25% to 0.75% (0.50%1.25% (1.00% as of December 31, 2017)September 30, 2021). The Company also pays a quarterly commitment fee ranging from 0.125%0.275% to 0.400% (0.275%0.375% (0.35% as of December 31, 2017)September 30, 2021), determined based upon the Debt Rating, of the unused portion of the $400.0$300.0 million commitment under the Credit Agreement.Facility. In addition, the Company must pay certain letter of credit fees, ranging from 1.00%1.25% to 1.75% (1.50%2.25% (2.00% as of December 31, 2017)September 30, 2021), with respect to letters of credit issued under the Credit Agreement.Facility. The Company has the right to voluntarily prepay and re-borrow loans and to terminate or reduce the commitments under the facility. As of December 31, 2017,September 30, 2021, the Company had $6.0$5.4 million of issued letters of credit and $9.3 million of borrowings under the Credit AgreementFacility and no short-term borrowings, with the balance of $384.7$294.6 million available to the Company. As of September 30, 2021, the borrowing rate for the Credit Facility was 2.08%.


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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The Company is subject to certain financial and restrictive covenants under the Credit Agreement,Facility, which, among other things, require the maintenance of a minimum interest coverage ratio of 3.50 to 1.00.ratio. The interest coverage ratio is defined in the Credit AgreementFacility as, for any period, the ratio of consolidated earnings before interest, taxes, depreciation and amortization and non-cash net pension expense (“EBITDA”("EBITDA") to consolidated interest expense for such period. The interest coverage covenant is waived until the quarter ended March 31, 2022 at which time it will be 3.00 to 1.00 and then 3.50 to 1.00 thereafter. The Credit AgreementFacility also requires the Company to maintain a debt to capital ratio of less than 55 percent. The debt to capital ratio is defined in the Credit AgreementFacility as the ratio of consolidated indebtedness, as defined therein, to consolidated capitalization, as defined therein. During the period which the interest coverage covenant is waived, the Credit Facility requires that the Company maintain a minimum available liquidity of $150.0 million for certain periods, which is defined in the Credit Facility as aggregate amount of loans available to be drawn under the credit facility plus non-restricted cash and cash equivalents as defined therein. In addition, the Company is also subject to an asset coverage ratio minimum of 1.10 to 1.00. The asset coverage ratio is defined in the Credit Facility as eligible receivables and inventory, as defined therein, to outstanding loans and obligations, as defined therein. As of December 31, 2017 and JuneSeptember 30, 2017,2021, the Company was in compliance with all of the covenants of the Credit Agreement.Facility.

Long-term debt outstanding as of December 31, 2017September 30, 2021 and June 30, 20172021 consisted of the following:
 
($ in millions) December 31,
2017		 June 30,
2017		($ in millions)September 30,
2021		June 30,
2021
Medium-term notes, Series B at 6.97% to 7.10% due from April 2018 to May 2018 (face value of $55.0 million at December 31, 2017 and June 30, 2017) $55.0
 $55.0
Senior unsecured notes, 5.20% due July 2021 (face value of $250.0 million at December 31, 2017 and June 30, 2017) 249.3
 251.2
Senior unsecured notes, 4.45% due March 2023 (face value of $300.0 million at December 31, 2017 and June 30, 2017) 299.0
 298.8
Senior unsecured notes, 4.45% due March 2023 (face value of $300.0 million at September 30, 2021 and June 30, 2021)Senior unsecured notes, 4.45% due March 2023 (face value of $300.0 million at September 30, 2021 and June 30, 2021)$299.6 $299.5 
Senior unsecured notes, 6.375% due July 2028 (face value of $400.0 million at September 30, 2021 and June 30, 2021)Senior unsecured notes, 6.375% due July 2028 (face value of $400.0 million at September 30, 2021 and June 30, 2021)395.2 395.0 
Total 603.3
 605.0
Total694.8 694.5 
Less: amounts due within one year 55.0
 55.0
Less: amounts due within one year— — 
Long-term debt, net of current portion $548.3
 $550.0
Long-term debt, net of current portion$694.8 $694.5 
 
For the three months ended December 31, 2017September 30, 2021 and 2016,2020, interest costs totaled $7.9$10.3 million and $7.7$9.5 million, respectively, of which $0.6$0.1 million and $0.3$2.8 million, respectively, were capitalized as part of the cost of property, plant, equipment and software. For the sixthree months ended December 31, 2017September 30, 2021, there were no debt extinguishment losses, net. Debt extinguishment losses, net for the three months ended September 30, 2020 includes $10.5 million of debt prepayment costs on the Notes that were due July 2021 offset by gains of $2.3 million on related interest rate swaps that were terminated in connection with the prepayment.

13
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11.    Contingencies and 2016, interest costs totaled $15.6 million and $15.3 million, respectively, of which $1.1 million and $0.5 million, respectively, were capitalized as part of the cost of property, equipment and software.Commitments

8.
Contingencies and Commitments


Environmental
 
The Company 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 the Company’sCompany's operations, compliance costs to date have not been material. The Company has environmental remediation liabilities at some of its owned operating facilities and has been designated as a potentially responsible party (“PRP”("PRP") with respect to certain third party Superfund waste-disposal sites and other third party-owned sites. The Company accrues amounts for environmental remediation costs that represent management’smanagement's best estimate of the probable and reasonably estimable future costs related to environmental remediation. During the sixthree months ended December 31, 2017,September 30, 2021, the Company increased the liability for a Company-ownedcompany-owned former operating site by $0.1 million. The liabilities recorded for environmental remediation costs at Superfund sites, other third party-owned sites and Carpenter-owned current or former operating facilities remaining at December 31, 2017September 30, 2021 and June 30, 20172021 were $16.2$16.1 million and $16.1$16.0 million, respectively. Additionally, the Company has been notified that it may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against the Company. Neither the exact amount of remediation costs nor the final method of their allocation among all designated PRPs at these Superfund sites have been determined. Accordingly, at this time, the Company cannot reasonably estimate expected costs for such matters. The liability for future environmental remediation costs that can be reasonably estimated is evaluated by management on a quarterly basis.


CARPENTER TECHNOLOGY CORPORATIONEstimates 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 the Company's financial position, results of operations or cash flows over the long-term. However, such costs could be material to the Company's financial position, results of operations or cash flows in a particular future quarter or year.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Other
 
The Company is defending various routine claims and legal actions that are incidental to its business and common to its operations, including those pertaining to product claims, commercial disputes, patent infringement, employment actions, employee benefits, compliance with domestic and foreign laws, personal injury claims and tax issues. Like many other manufacturing companies in recent years, the Company, from time to time, has been named as a defendant in lawsuits alleging personal injury as a result of exposure to chemicals and substances in the workplace such as asbestos. 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 Company’sCompany's future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount and timing (both as to recording future charges to operations and cash expenditures) of the resolution of such matters. While it is not feasible to determine the outcome of these matters, management believes that the total liability from these matters will not have a material effect on the Company’sCompany's 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 Company’sCompany's financial position, results of operations or cash flows in a particular future quarter or year.


14
Table of Contents
9.Fair Value Measurements
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12.    Leases

The Company records right-of-use "ROU" assets and operating lease liabilities on the consolidated balance sheet for several types of operating leases, including land and buildings, equipment (e.g. trucks and forklifts), vehicles and computer equipment. On the lease commencement date, the Company measures and records a ROU asset and lease liability equal to the present value of the remaining lease payments, discounted using the rate implicit in the lease (or if that rate cannot be readily determined, the Company's incremental borrowing rate). Operating leases are included in other assets, accrued liabilities (current) and other liabilities (long-term) on the consolidated balance sheets.

The Company elected the practical expedient to not separate lease components from non-lease components for all asset classes. The Company recognizes lease expense in the consolidated statements of operations on a straight-line basis over the lease term. The Company elected to not recognize ROU assets and lease liabilities for short-term leases with an initial term of 12 months or less for all asset classes. Leases with the option to extend their term or terminate early are reflected in the lease term when it is reasonably certain that the Company will exercise such options. Some leasing arrangements require variable payments that are dependent on usage, output, or may vary for other reasons, such as insurance and tax payments. The variable lease payments are not presented as part of the ROU asset or lease liability. Income from subleased properties is recognized and presented as a reduction of selling, general and administrative expenses in the Company's consolidated statements of operations. The leases have remaining terms of one to sixteen years.

The following table sets forth the components of the Company's lease cost for the three months ended September 30, 2021 and September 30, 2020:

Three Months Ended
September 30,
($ in millions)20212020
Operating lease cost$2.5 $3.6 
Short-term lease cost0.8 0.8 
Variable lease cost0.2 0.2 
Sublease income(0.2)— 
Total lease cost$3.3 $4.6 
Operating cash flow payments from operating leases$2.8 $3.5 
Non-cash ROU assets obtained in exchange for lease obligations$0.2 $1.4 

The following table sets forth the Company's weighted-average remaining lease term and weighted-average discount rate at September 30, 2021 and June 30, 2021:

September 30,
2021		June 30,
2021
Weighted-average remaining lease term - operating leases8.3 years8.4 years
Weighted-average discount rate - operating leases4.0 %4.0 %
15
Table of Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following table sets forth the Company's ROU assets and lease liabilities at September 30, 2021 and June 30, 2021:

($ in millions)September 30,
2021		June 30,
2021
Operating lease assets:
    Other assets$32.2 $34.3 
Operating lease liabilities:
    Accrued liabilities$8.8 $9.0 
    Other liabilities33.4 35.5 
Total operating lease liabilities$42.2 $44.5 

Minimum lease payments for operating leases expiring subsequent to September 30, 2021 are as follows:
($ in millions)September 30,
2021
2022 (remaining period of fiscal year)$7.8 
20238.7 
20246.4 
20254.1 
20263.4 
Thereafter20.4 
Total future minimum lease payments50.8 
Less imputed interest(8.6)
Total$42.2 

13.     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 or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 refers to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. Currently, the Company does not use Level 1 and 3 inputs.
 
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following tables present the Company’sCompany's assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
December 31, 2017 
Fair Value
Measurements Using
Input Type
($ in millions) Level 2
Assets:  
Marketable securities:  
Municipal auction rate securities $3.5
Derivative financial instruments 31.7
Total assets $35.2
   
Liabilities:  
Derivative financial instruments $4.1
September 30, 2021Fair Value
Measurements Using
Input Type
($ in millions)Level 2
Assets:
Derivative financial instruments$16.1 
Liabilities:
Derivative financial instruments$2.9 
 
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2017 
Fair Value
Measurements Using
Input Type
($ in millions) Level 2
Assets:  
Marketable securities:  
Municipal auction rate securities $3.4
Derivative financial instruments 14.5
Total assets $17.9
   
Liabilities:  
Derivative financial instruments $19.1
June 30, 2021Fair Value
Measurements Using
Input Type
($ in millions)Level 2
Assets:
Derivative financial instruments$15.9 
Liabilities:
Derivative financial instruments$5.3 
 
The Company’sCompany's derivative financial instruments consist of commodity forward contracts, foreign currency 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 commodity prices, 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 and, as such, they are classified as Level 2. The Company’sCompany's use of derivatives and hedging policies are more fully discussed in Note 10.14. Derivatives and Hedging Activities.
 
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 of America.
 
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 the Company’sCompany's financial instruments not recorded at fair value in the financial statements were as follows:
 
 December 31, 2017 June 30, 2017 September 30, 2021June 30, 2021
($ in millions) 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
($ in millions)Carrying
Value		Fair
Value		Carrying
Value		Fair
Value
Long-term debt, including current portion $603.3
 $622.0
 $605.0
 $622.5
Long-term debtLong-term debt$694.8 $741.7 $694.5 $754.7 
Company-owned life insurance $16.0
 $16.0
 $15.9
 $15.9
Company-owned life insurance$25.4 $25.4 $24.6 $24.6 
 
CARPENTER TECHNOLOGY CORPORATIONThe fair values of long-term debt as of September 30, 2021 and June 30, 2021 were determined by using current interest rates for debt with terms and maturities similar to the Company's existing debt arrangements and accordingly would be classified as Level 2 inputs in the fair value hierarchy.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



The carrying amount of company-owned life insurance reflects cash surrender values based upon the market values of underlying securities, using Level 2 inputs, 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
17
Table of long-term debt as of December 31, 2017Contents
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14.    Derivatives and June 30, 2017 were determined by using current interest rates for debt with terms and maturities similar to the Company’s existing debt arrangements and accordingly would be classified as Level 2 inputs in the fair value hierarchy.Hedging Activities
10.Derivatives and Hedging Activities
 
The Company uses commodity forwards, interest rate swaps, forward 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 aboutsummary of the impact the derivative instruments had on the Company’sCompany's 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 accumulated other comprehensive (loss) income (loss) (“AOCI”("AOCI") to the extent effective, and reclassified to cost of sales in the period during which the hedged transaction affects earnings or it becomes probable that the forecasted transaction will not occur. As of December 31, 2017,September 30, 2021, the Company had forward contracts to purchase 21.05.6 million pounds of certain raw materials with settlement dates through December 2023.
 
Cash Flow Hedging — Forward interest rate swaps: Historically, the Company has entered into forward interest rate swap contracts to manage the risk of cash flow variability associated with fixed interest debt expected to be issued. The forward interest rate swaps were designated as cash flow hedges. The qualifying hedge contracts were marked-to-market at each reporting date and any unrealized gains or losses were included in AOCI to the extent effective, and reclassified to interest expense in the period during which the hedged transaction affected earnings or it became probable that the forecasted transaction would not occur. Upon the issuance of the fixed rate debt, the forward interest rate swap contracts were terminated. The realized gains at the time the interest rate swap contracts were terminated are being amortized over the term of the underlying debt. For the three months ended December 31, 2017September 30, 2021 and 2016,2020, net gains related to the previously terminated contracts of $0.1 million and $0.1 million, respectively, related to the previously terminated contracts were recorded as a reduction to interest expense. For the six months ended December 31, 2017 and 2016, net gains of $0.2 million and $0.2 million, respectively, related to the previously terminated contracts were recorded as a reduction to interest expense.

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 AOCI 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.
 
The Company also uses foreign currency forward contracts to protect certain short-term asset positions denominated in foreign currencies 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(income) and expense. As of December 31, 2017September 30, 2021 and June 30, 2017,2021, 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 were not material.
 
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Fair Value Hedging -— Interest rate swaps: The Company uses 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.operations. As of December 31, 2017the quarter ended September 30, 2020, all interest rate swaps were terminated in connection with the prepayment of Notes due July 2021. At September 30, 2021 and June 30, 2017,2021, the total notional amount of floating interest rate contracts was $150.0 million.$0.0 million and $0.0 million, respectively. For the three months ended December 31, 2017September 30, 2021, there were no interest rate swaps and 2016, netno gains of $0.2 million and $0.5 million, respectively, wereor losses recorded as a reduction to interest expense. For the sixthree months ended December 31, 2017 and 2016,September 30, 2020, net gains of $0.4 million and $0.9 million, respectively, were recorded as a reductiondecrease to interest expense.expense and $2.3 million of gains were recorded as a decrease to debt extinguishment losses.
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The fair value and location of outstanding derivative contracts recorded in the accompanying consolidated balance sheets were as follows as of December 31, 2017September 30, 2021 and June 30, 2017:2021:
 
December 31, 2017 
Interest
Rate Swaps
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
Total
Derivatives
September 30, 2021September 30, 2021Interest
Rate Swaps		Foreign
Currency
Contracts		Commodity
Contracts		Total
Derivatives
($ in millions) 
Interest
Rate Swaps
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
Total
Derivatives
($ in millions)
Asset Derivatives: Asset Derivatives:    
Derivatives designated as hedging instruments:  
  
  
  
Derivatives designated as hedging instruments:    
Other current assets $0.5
 $—
 $12.7
 $13.2
Other current assets$— $— $12.0 $12.0 
Other assets 0.6
 —
 17.9
 18.5
Other assets— — 4.1 4.1 
Total asset derivatives $1.1
 $—
 $30.6
 $31.7
Total asset derivatives$— $— $16.1 $16.1 
Liability Derivatives:  
  
  
  
Liability Derivatives:    
Derivatives designated as hedging instruments:  
  
  
  
Derivatives designated as hedging instruments:    
Accrued liabilities $—
 $1.3
 $1.6
 $2.9
Accrued liabilities$— $2.1 $0.4 $2.5 
Other liabilities 0.9
 —
 0.3
 1.2
Other liabilities— — 0.4 0.4 
Total liability derivatives $0.9
 $1.3
 $1.9
 $4.1
Total liability derivatives$— $2.1 $0.8 $2.9 
 
June 30, 2021Interest
Rate Swaps		Foreign
Currency
Contracts		Commodity
Contracts		Total
Derivatives
($ in millions)
Asset Derivatives:    
Derivatives designated as hedging instruments:    
Other current assets$— $— $10.0 $10.0 
Other assets— — 5.9 5.9 
Total asset derivatives$— $— $15.9 $15.9 
Liability Derivatives:    
Derivatives designated as hedging instruments:    
Accrued liabilities$— $2.6 $1.6 $4.2 
Other liabilities— — 1.1 1.1 
Total liability derivatives$— $2.6 $2.7 $5.3 
June 30, 2017 
Interest
Rate Swaps
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
Total
Derivatives
($ in millions)    
Asset Derivatives:  
  
  
  
Derivatives designated as hedging instruments:  
  
  
  
Other current assets $0.6
 $0.2
 $6.4
 $7.2
Other assets 1.6
 —
 5.7
 7.3
Total asset derivatives $2.2
 $0.2
 $12.1
 $14.5
Liability Derivatives:  
  
  
  
Derivatives designated as hedging instruments:  
  
  
  
Accrued liabilities $—
 $1.0
 $12.1
 $13.1
Other liabilities —
 —
 6.0
 6.0
Total liability derivatives $—
 $1.0
 $18.1
 $19.1


Substantially all of the derivative contracts are subject to master netting arrangements, or similar agreements with each counterparty, which provide for the option to settle contracts on a net basis when they settle on the same day and in the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. The Company presents the outstanding derivative contracts on a net basis by counterparty in the consolidated balance sheets. If the Company had chosen to present the derivative contracts on a gross basis, the total asset derivatives would have been $33.6$19.2 million and total liability derivatives would have been $6.0 million as of December 31, 2017.September 30, 2021.

CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



According to the provisions of the Company’sCompany's 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. As of December 31, 2017September 30, 2021 and June 30, 2017,2021, the Company had no cash collateral held by counterparties.
 
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 settlements of gains and losses on these contracts.
 
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Cash Flow and Fair Value 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 AOCI and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings or it becomes probable the forecasted transactions will not occur. The following is a summary of the (losses) gains (losses) related to cash flow hedges recognized during the three and six months ended December 31, 2017September 30, 2021 and 2016:2020:
 
 Amount of Gain (Loss)
Recognized in AOCI on
Derivatives
(Effective Portion)		 Amount of (Loss) Gain
Recognized in AOCI on
Derivatives
 Three Months Ended
December 31,		 Six Months Ended
December 31,		 Three Months Ended
September 30,
($ in millions) 2017 2016 2017 2016($ in millions)20212020
Derivatives in Cash Flow Hedging Relationship:  
  
  
  
Derivatives in Cash Flow Hedging Relationship:  
Commodity contracts $20.7
 $(22.5) $30.3
 $(15.4) Commodity contracts$(0.3)$13.8 
Foreign exchange contracts (0.3) 0.6
 (0.7) 0.6
 Foreign exchange contracts— — 
Total $20.4
 $(21.9) $29.6
 $(14.8)Total$(0.3)$13.8 
 
($ in millions)Location of (Loss) Gain
Reclassified from AOCI into
Income		Amount of (Loss) Gain Reclassified from AOCI
into Income
Three Months Ended
September 30,
20212020
Derivatives in Cash Flow Hedging Relationship:
  Commodity contractsCost of sales$(1.8)$2.8 
  Foreign exchange contractsNet sales— — 
  Forward interest rate swapsInterest expense0.1 0.1 
Total $(1.7)$2.9 

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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
($ in millions) 
Location of (Loss) Gain
Reclassified from AOCI into
Income
 
Amount of (Loss) Gain
Reclassified from AOCI
into Income
(Effective Portion)
 Amount of (Loss) Gain 
Reclassified from AOCI
into Income
(Ineffective Portion)
  Three Months Ended
December 31,		 Three Months Ended
December 31,
  2017 2016 2017 2016
Derivatives in Cash Flow Hedging Relationship:        
  Commodity contracts Cost of sales $(0.2) $(7.9) $—
 $—
  Foreign exchange contracts Net sales (0.1) 0.5
 —
 —
  Forward interest rate swaps Interest expense 0.1
 0.1
 —
 —
Total   $(0.2) $(7.3) $—
 $—
The following is a summary of total amounts presented in the consolidated statements of operations in which the effects of cash flow and fair value hedges are recorded during the three months ended September 30, 2021 and 2020:


Three Months Ended
September 30, 2021		Three Months Ended
September 30, 2020
($ in millions)Net SalesCost of SalesInterest ExpenseNet SalesCost of SalesInterest Expense *
Total amounts presented in the consolidated statement of operations in which the effects of cash flow and fair value hedges are recorded$387.6 $362.4 $10.2 $353.3 $349.8 $6.7 
(Loss) Gain on Derivatives in Cash Flow Hedging Relationship:
   Commodity contracts
Amount of (loss) gain reclassified from AOCI to income$— $(1.8)$— $— $2.8 $— 
   Interest rate swap agreements
Amount of gain reclassified from AOCI to income— — 0.1 — — 0.1 
(Loss) gain on Derivatives in Fair Value Hedging Relationship:
   Interest rate swap agreements
         Hedged Item— — — — — (2.7)
Derivatives designated as hedging instruments— — — — — 2.7 
Total (loss) gain$— $(1.8)$0.1 $— $2.8 $0.1 
($ in millions) Location of (Loss) Gain
Reclassified from AOCI into
Income		 Amount of (Loss) Gain
Reclassified from AOCI
into Income
(Effective Portion)		 Amount of (Loss) Gain
Reclassified from AOCI
into Income
(Ineffective Portion)
  Six Months Ended
December 31,		 Six Months Ended
December 31,
  2017 2016 2017 2016
Derivatives in Cash Flow Hedging Relationship:        
  Commodity contracts Cost of sales $(2.8) $(18.0) $(0.8) $0.5
  Foreign exchange contracts Net sales (0.5) 0.6
 —
 —
  Forward interest rate swaps Interest expense 0.2
 0.2
 —
 —
Total   $(3.1) $(17.2) $(0.8) $0.5
*$2.3 million of gains related to the interest rate swap agreements were recorded as a decrease to debt extinguishment losses.


The Company estimates that $10.5$8.4 million of net derivative gains included in AOCI as of December 31, 2017September 30, 2021 will be reclassified into income within the next 12 months. No significant cash flow hedges were discontinued during the three and six months ended December 31, 2017.September 30, 2021.

As of September 30, 2021, and June 30, 2021, there were no amounts recorded on the consolidated balance sheets related to cumulative basis adjustments for fair value hedges of interest rate risk.
 
15.    Other (Income) Expense, Net
Other (income) expense, net consisted of the following:
Three Months Ended
September 30,
($ in millions)20212020
Unrealized losses (gains) on company-owned life insurance contracts and investments held in rabbi trusts$0.2 $(1.4)
Foreign exchange loss0.3 2.7 
Pension earnings, interest and deferrals(4.5)1.0 
Other(0.1)— 
Total other (income) expense, net$(4.1)$2.3 
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


11.Other Income, Net
16.    Income Taxes
Other income, net consisted of the following:
  Three Months Ended
December 31,		 Six Months Ended
December 31,
($ in millions) 2017 2016 2017 2016
Foreign exchange loss $(0.9) $(0.2) $(0.8) $(0.2)
Unrealized gains on company-owned life insurance contracts and investments held in rabbi trusts 0.9
 0.3
 1.4
 0.8
Other 0.2
 0.2
 0.3
 0.4
Total other income, net $0.2
 $0.3
 $0.9
 $1.0
12.Income Taxes
The effective tax rate used for interim periods is the estimated annual effective consolidated tax rate, based on the current estimate of full year results, except that taxes related to specific events, if any, are recorded in the interim period in which they occur. The annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pre-tax income or loss of the Company in each tax jurisdiction in which it operates, and the development of tax planning strategies during the year. In addition, the Company’s tax expense or benefit can be impacted by changes in tax rates or laws, the finalization of tax audits, and other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

During the three months ended September 30, 2021, deferred taxes were determined by the year-to-date tax benefit with current taxes accounting for the remaining tax benefit recorded in the period. Income tax expensebenefit was $10.4 million, or 41.3 percent of pre-tax loss for the three months ended December 31, 2017 was aSeptember 30, 2021 as compared with income tax benefit of $58.4$18.9 million, or negative 173.328.6 percent of pre-tax income as compared with expense of $1.3 million, or 15.7 percent of pre-tax incomeloss for the three months ended December 31, 2016. Income tax expense for the six months ended December 31, 2017 was a benefit of $46.6 million or negative 67.6 percent of pre-tax income as compared with expense of $2.2 million, or 73.3 percent of pre-tax income for the six months ended December 31, 2016.September 30, 2020.

An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018” (the “Act”) was enacted on December 22, 2017. The Act includes provisions that reduce the federal corporate income tax rate, create a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings (i.e. transition tax), and change certain business deductions including allowing for immediate expensing of certain qualified capital expenditures. The permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% is effective January 1, 2018. Based on the provisions of the Act, during the quarter ended December 31, 2017, the Company’s estimated annual effective tax rate was adjusted to incorporate the lower federal tax rate that will be phased in for fiscal year 2018. The Company also recorded discrete income tax net benefits of $66.0 million during the quarter ended December 31, 2017. Included in this benefit are a $73.3 million tax benefit to reflect the impact of the re-measurement of deferred tax assets and liabilities at the reduced federal tax rate, $5.1 million expense for the transition tax and income tax expense of $2.2 million for increases in certain state valuation allowances for deferred tax assets resulting from the impact of a state law change that will limit the Company’s ability to utilize state net operating loss carryforwards.

The Company determined that the amounts recorded for the liability associated transition tax are provisional because various components of the computation are not yet finalized as of December 31, 2017, including the following significant items: the actual aggregate foreign cash position and the earnings and profits of the foreign entities as of June 30, 2018, the interpretation and identification of cash positions as of June 30, 2018, and computations of accumulated earnings and profits balances as of November 2, 2017 and December 31, 2017. Under the Act, the transition tax will be paid over an eight year period beginning in fiscal year 2019.

The Company also determined that the re-measurement of deferred tax assets and liabilities at the lower federal corporate income tax rate is provisional until such time that the underlying temporary differences are known rather than estimated.

CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Future adjustments to the provisional amounts related to the Act will be recorded as discrete adjustments to income tax expense in the period in which those adjustments are determined.

Income tax expensebenefit for the three months ended December 31, 2016September 30, 2021 includes the unfavorable impact of losses in certain foreign jurisdictions for which no tax benefit can be recognized. Income tax benefit for the three months ended September 30, 2020 included discrete tax benefits of $0.9$2.0 million associated with the repatriationdebt prepayments costs and $2.4 million for the impact of earnings from one of our foreign subsidiaries. Income tax expense also includes a $0.3 millionrestructuring and asset impairment charges. Additionally, the anticipated benefit primarily due to additional research and development credits claimed infor the prior year.

In October 2016, the Company made a voluntary pension contribution of $100.0 million that was announced in connection with the plan freeze.  As a resultcarryback of the pension contribution, incomefiscal year 2021 net operating loss to fiscal years with higher tax rates was included in this period. Also included was the unfavorable impact of losses in certain foreign jurisdictions for which no tax benefit can be recognized as well as tax benefits of $0.4 million attributable to employee share-based compensation.

The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted on March 27, 2020. The CARES Act established new provisions, including but not limited to, expanded deduction of certain qualified capital expenditures, delayed payment of certain employment taxes, expanded use of net operating losses, reduced limitations on deductions of interest expense in the six months ended December 31, 2016 included a discreteand extension of funding for defined benefit plans. The net operating loss provision is expected to provide incremental tax chargebenefits of $2.1approximately $7.0 million due to reducedthe higher tax benefits for domestic manufacturing claimed in prior periods.

As of June 30, 2017, the Company had $99.1 million of indefinitely reinvested foreign earnings for which deferred income taxes had not been provided.  Given the Act’s significant changes and potential opportunities to repatriate cash tax free, the Company isrates in the processexpanded carryback period. The other provisions in the CARES Act are not expected to have a significant impact on our financial position, results of evaluating its assertions for indefinite reinvestment.operations or cash flows.


13.Business Segments
17.    Business Segments
 
The Company has two2 reportable segments, Specialty Alloys Operations (“SAO”)SAO and Performance Engineered Products (“PEP”).PEP.
 
The SAO segment is comprised of the Company’sCompany's major premium alloy and stainless steel manufacturing operations. This includes operations performed at mills primarily in Reading and Latrobe, Pennsylvania and surrounding areas as well as South Carolina and Alabama. The combined assets of the SAO operations are being managed in an integrated manner to optimize efficiency and profitability across the total system.
 
The PEP segment is comprised of the Company’sCompany's differentiated operations. This segment includes the Dynamet titanium business, the Carpenter Powder Products business, the Amega WestAdditive business and the Latrobe and Mexico distribution businesses. The Amega West business was part of the PEP segment however it was sold during the quarter ended September 30, 2020. The businesses in the PEP segment are managed with an entrepreneurial structure to promote flexibility and agility to quickly respond to market dynamics.
 
The Company’sCompany's executive management evaluates the performance of these operating segments based on sales, operating income and cash flow generation. Segment operating profitresults excludes general corporate costs, which includeare comprised of executive and director compensation and other corporate facilities and administrative expenses not allocated to the segments. Also excluded are items that management considers not representative of ongoing operations, such as restructuring charges and other specifically-identified income or expense items.
The service cost component of the Company’s 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 and deferrals”.


On a consolidated basis, one customer, Arconic Inc., accounted for approximately 10 percent of the net sales for both the three and six months ended December 31, 2017. On a consolidated basis, one customer, Arconic Inc., accounted for approximately 17 percent and 15 percent of the net sales for the three and six months ended December 31, 2016, respectively. Approximately 22 percent of the accounts receivable outstanding at December 31, 2017 is due from two customers, Arconic Inc. and Precision Castparts Corporation. Nono single customer accounted for 10 percent or more of net sales for the three months ended September 30, 2021 and September 30, 2020. On a consolidated basis, no single customer accounted for 10 percent or more of accounts receivable outstanding at September 30, 2021 and June 30, 2017.2021.
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Three Months Ended
September 30,
($ in millions)20212020
Net Sales:  
Specialty Alloys Operations$331.9 $300.7 
Performance Engineered Products74.6 61.8 
Intersegment(18.9)(9.2)
Consolidated net sales$387.6 $353.3 
Three Months Ended
September 30,
($ in millions)20212020
Operating (Loss) Income:  
Specialty Alloys Operations$(5.9)$(18.6)
Performance Engineered Products0.6 (3.6)
Corporate costs (including restructuring and asset impairment charges)(14.2)(26.6)
Intersegment0.4 — 
Consolidated operating (loss) income$(19.1)$(48.8)
Three Months Ended
September 30,
($ in millions)20212020
Depreciation and Amortization:  
Specialty Alloys Operations$27.2 $23.2 
Performance Engineered Products3.9 6.0 
Corporate1.4 1.7 
Consolidated depreciation and amortization$32.5 $30.9 
Three Months Ended
September 30,
($ in millions)20212020
Capital Expenditures:  
Specialty Alloys Operations$12.1 $21.8 
Performance Engineered Products1.3 2.2 
Corporate1.0 9.4 
Intersegment— (0.1)
Consolidated capital expenditures$14.4 $33.3 
September 30,
2021		June 30,
2021
($ in millions)
Total Assets:  
Specialty Alloys Operations$2,209.8 $2,150.1 
Performance Engineered Products416.1 418.5 
Corporate331.7 402.2 
Intersegment2.3 0.4 
Consolidated total assets$2,959.9 $2,971.2 

23

Segment Data Three Months Ended
December 31,		 Six Months Ended
December 31,
($ in millions) 2017 2016 2017 2016
Net Sales:  
  
  
  
Specialty Alloys Operations $406.3
 $348.6
 $803.1
 $663.7
Performance Engineered Products 104.8
 83.2
 205.5
 161.7
Intersegment (23.3) (4.4) (41.1) (9.1)
Consolidated net sales $487.8
 $427.4
 $967.5
 $816.3
Segment Data Three Months Ended
December 31,		 Six Months Ended
December 31,
($ in millions) 2017 2016 2017 2016
Operating Income:  
  
    
Specialty Alloys Operations $49.8
 $35.6
 $100.3
 $60.6
Performance Engineered Products 7.5
 0.8
 12.8
 (2.0)
Corporate costs (13.9) (16.0) (26.9) (29.8)
     Pension earnings, interest and deferrals (0.5) (5.6) (1.1) (12.7)
Intersegment (2.1) 0.6
 (2.6) 0.7
Consolidated operating income $40.8
 $15.4
 $82.5
 $16.8
Segment Data Three Months Ended
December 31,		 Six Months Ended
December 31,
($ in millions) 2017 2016 2017 2016
Depreciation and Amortization:  
  
    
Specialty Alloys Operations $23.4
 $23.7
 $46.5
 $47.2
Performance Engineered Products 5.1
 5.2
 10.1
 10.3
Corporate 0.9
 0.9
 1.8
 1.7
Intersegment (0.2) 0.1
 (0.4) (0.5)
Consolidated depreciation and amortization $29.2
 $29.9
 $58.0
 $58.7
Segment Data Three Months Ended
December 31,		 Six Months Ended
December 31,
($ in millions) 2017 2016 2017 2016
Capital Expenditures:  
  
    
Specialty Alloys Operations $11.2
 $8.3
 $28.4
 $23.0
Performance Engineered Products 6.3
 2.5
 11.1
 7.0
Corporate 9.6
 7.7
 16.7
 15.2
Intersegment (0.3) —
 (0.5) (0.1)
Consolidated capital expenditures $26.8
 $18.5
 $55.7
 $45.1
Segment Data December 31,
2017		 June 30,
2017
($ in millions)  
Total Assets:  
  
Specialty Alloys Operations $2,337.9
 $2,292.1
Performance Engineered Products 475.7
 434.3
Corporate 148.4
 167.2
Intersegment (17.9) (15.5)
Consolidated total assets $2,944.1
 $2,878.1
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



14.Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements - Adopted in current period

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation — Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting, which outlines new provisions intended to simplify various aspects related to accounting for share-based payments and their presentation in the financial statements. The update revises requirements in the following areas: income tax consequences, forfeitures and classification on the statement of cash flows. The Company adopted this standard in the quarter ended September 30, 2017. The standard did not have a material impact on the consolidated financial statements of the Company. The amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement will be applied prospectively. The inclusion of excess tax benefits and deficiencies as a component of income tax expense will increase volatility of the provision for income taxes as the amount of excess tax benefits or deficiencies18.    Reclassifications from share-based compensation awards are dependent on the stock price at the date the awards are exercised or vested. The Company does not expect the impact to be material to the Company’s consolidated results of operations; however, such determination is subject to change based on facts and circumstances at the time when awards vest or settle. The Company accounts for forfeitures of share-based awards when they occur. The Company applied the amendments related to the presentation of excess tax benefits on the consolidated statement of cash flows using a prospective transition method, and as a result, excess tax benefits related to share-based awards will be reported as cash flows from operating activities. The Company applied the amendments related to the presentation of statutory tax withholding on the consolidated statement of cash flows using a retrospective transition method as required, and as a result, statutory tax withholding related to share-based awards which had been previously classified as cash flows used for operating activities has been be reclassified as cash flows used for financing activities.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments, which outlines new provisions intended to reduce the existing diversity in practice related to accounting for the cash flow and its presentation in the financial statements. ASU 2016-15 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company adopted the provisions of ASU 2016-15 in the quarter ended September 30, 2017. The adoption of ASU 2016-15 did not materially impact the Company’s consolidated statement of cash flows.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash, which outlines that a statement of cash flows explains the change during the period in total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company adopted the provisions of ASU 2016-18 in the quarter ended September 30, 2017. The adoption of ASU 2016-18 did not materially impact the Company’s consolidated statement of cash flows.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill andAccumulated Other (Topic 350) - Simplifying the Test for Goodwill Impairment, which outlines updates to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. The Company adopted ASU 2017-04 in the quarter ended September 30, 2017. The adoption of ASU 2017-04 did not have an impact on the Company’s financial statements.

CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Recently Issued Accounting Pronouncements - Pending Adoption

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in ASU 2014-09 requires that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in ASU 2014-09 permits two methods of adoption: full retrospective in which the standard is applied to all of the periods presented or modified retrospective where an entity would recognize the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings. The adoption will include updates as provided under ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net); ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing; ASU 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients; ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers; ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments and ASU 2017-14, Income Statement-Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606).Loss

The Company is in the process of evaluating the effect that Topic 606 will have on its Consolidated Financial Statements and related disclosures, as well as the expected method of adoption. Currently, the Company is in the process of completing the assessment phase of its evaluation.   The assessment phase includes conducting and evaluating the results of internal surveys of its businesses, holding revenue recognition workshops with commercial and business unit finance leadership, and reviewing revenue arrangements across all businesses to initially identify a set of applicable qualitative revenue recognition changes related to the standards update.   The Company’s method of adoption for Topic 606 has not yet been determined and is not expected to be finalized until the assessment phase of the evaluation has been completed.  The Company’s effective date for the adoption of Topic 606 is July 1, 2018.
In February 2016, the FASB issued ASU 2016-02 Leases (Topic 842). ASU 2016-02 improves transparency and comparability among companies by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-02 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the impact of the adoption of ASU 2016-02 on the consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory, which outlines updates to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. ASU 2016-16 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the impact of the adoption of ASU 2016-16 on the consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which outlines updates to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. ASU 2017-07 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the impact of the adoption of ASU 2017-07 on the consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands and refines hedge accounting for both financial and non-financial risk components, aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. ASU 2017-12 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. The Company is evaluating the impact of the adoption of ASU 2017-12 on the consolidated financial statements.

CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


15.Reclassifications from Accumulated Other Comprehensive Income (Loss) (AOCI)
 
The changes in AOCI by component, net of tax, for the three months ended December 31, 2017September 30, 2021 and 20162020 were as follows:
 

Three Months Ended December 31, 2017
($ in millions) (a)		 
Cash flow
hedging items
 
Pension and
other
postretirement
benefit plan
items
 
Unrealized
losses on
available-for-
sale securities
 Foreign currency items Total
Balance at September 30, 2017 $5.8
 $(296.9) $(0.3) $(39.7) $(331.1)
Other comprehensive income (loss) before reclassifications 14.9
 —
 —
 (1.5) 13.4
Amounts reclassified from AOCI (b) 0.1
 2.5
 —
 —
 2.6
Net other comprehensive income (loss) 15.0
 2.5
 —
 (1.5) 16.0
Balance at December 31, 2017 $20.8
 $(294.4) $(0.3) $(41.2) $(315.1)

Three Months Ended December 31, 2016
($ in millions) (a)		 
Cash flow
hedging items
 
Pension and
other
postretirement
benefit plan
items
 
Unrealized
losses on
available-for-
sale securities
 Foreign currency items Total
Balance at September 30, 2016 $(11.0) $(326.9) $(0.3) $(44.2) $(382.4)

Three Months Ended September 30, 2021
($ in millions) (a)
Three Months Ended September 30, 2021
($ in millions) (a)		Cash flow
hedging items		Pension and
other
postretirement
benefit plan
items		Foreign
currency
items		Total
Balances at June 30, 2021Balances at June 30, 2021$6.9 $(159.1)$(40.1)$(192.3)
Other comprehensive loss before reclassifications (0.6) —
 —
 (4.0) (4.6)Other comprehensive loss before reclassifications(0.2)— (2.1)(2.3)
Amounts reclassified from AOCI (b) 4.4
 5.7
 —
 —
 10.1
Amounts reclassified from AOCI (b)1.3 1.1 — 2.4 
Net other comprehensive income (loss) 3.8
 5.7
 —
 (4.0) 5.5
Net other comprehensive income (loss)1.1 1.1 (2.1)0.1 
Balance at December 31, 2016 $(7.2) $(321.2) $(0.3) $(48.2) $(376.9)
Balances at September 30, 2021Balances at September 30, 2021$8.0 $(158.0)$(42.2)$(192.2)
 
(a)

Three Months Ended September 30, 2020
($ in millions) (a)		Cash flow
hedging items		Pension and
other
postretirement
benefit plan
items		Foreign
currency
items		Total
Balances at June 30, 2020$(11.1)$(334.3)$(52.6)$(398.0)
Other comprehensive gain before reclassifications10.5 — 5.7 16.2 
Amounts reclassified from AOCI (b)(2.2)3.6 — 1.4 
Net other comprehensive income8.3 3.6 5.7 17.6 
Balances at September 30, 2020$(2.8)$(330.7)$(46.9)$(380.4)

(a)    All amounts are net of tax. Amounts in parentheses indicate debits.
(b)See separate table below for further details.

The changes in AOCI by component, net of tax,tax. Amounts in parentheses indicate debits.
(b)    See separate table below for the six months ended December 31, 2017 and 2016 were as follows:further details.

24
Six Months Ended December 31, 2017
($ in millions) (a)		 Cash flow
hedging items		 Pension and
other
postretirement
benefit plan
items		 Unrealized
losses on
available-for-
sale securities		 Foreign currency items Total
Balance at June 30, 2017 $(2.3) $(299.0) $(0.3) $(41.5) $(343.1)
Other comprehensive income before reclassifications 21.0
 —
 —
 0.3
 21.3
Amounts reclassified from AOCI (b) 2.1
 4.6
 —
 —
 6.7
Net other comprehensive income 23.1
 4.6
 —
 0.3
 28.0
Balance at December 31, 2017 $20.8
 $(294.4) $(0.3) $(41.2) $(315.1)
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CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Six Months Ended December 31, 2016
($ in millions) (a)		 Cash flow
hedging items		 Pension and
other
postretirement
benefit plan
items		 Unrealized
losses on
available-for-
sale securities		 Foreign currency items Total
Balance at June 30, 2016 $(21.8) $(344.3) $(0.3) $(43.5) $(409.9)
Other comprehensive income (loss) before reclassifications 3.9
 11.4
 —
 (4.7) 10.6
Amounts reclassified from AOCI (b) 10.7
 11.7
 —
 —
 22.4
Net current-period other comprehensive income (loss) 14.6
 23.1
 —
 (4.7) 33.0
Balance at December 31, 2016 $(7.2) $(321.2) $(0.3) $(48.2) $(376.9)

(a)All amounts are net of tax. Amounts in parentheses indicate debits.
(b)See separate table below for further details.


CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


The following is a summary of amounts reclassified from AOCI for the three and six months ended December 31, 2017September 30, 2021 and 2016:2020:

Details about AOCI ComponentsLocation of
(loss) gain		Amount Reclassified from AOCI
Three Months Ended September 30,
($ in millions) (a)20212020
Cash flow hedging items:   
Commodity contractsCost of sales$(1.8)$2.8 
Forward interest rate swapsInterest expense0.1 0.1 
Total before tax(1.7)2.9 
Tax benefit (expense)0.4 (0.7)
Net of tax$(1.3)$2.2 

Details about AOCI ComponentsLocation of
(loss) gain		Amount Reclassified from AOCI
Three Months Ended September 30,
($ in millions) (a)20212020
Amortization of pension and other postretirement benefit plan items:   
Net actuarial loss(b)$(1.9)$(5.2)
Prior service benefit(b)0.4 0.5 
Total before tax(1.5)(4.7)
Tax benefit0.4 1.1 
Net of tax$(1.1)$(3.6)

(a)    Amounts in parentheses indicate debits to income/loss.
(b)    These AOCI components are included in the computation of net periodic benefit cost (see Note 9. Pension and Other Postretirement Benefits for additional details).

25
($ in millions) (a) 
Location of
(loss) gain
 Amount Reclassified from AOCI
Three Months Ended December 31,		 Amount Reclassified from AOCI
Six Months Ended December 31,
Details about AOCI Components  2017 2016 2017 2016
Cash flow hedging items:    
  
  
  
Commodity contracts Cost of sales $(0.2) $(7.9) $(2.8) $(18.0)
Foreign exchange contracts Net sales (0.1) 0.5
 (0.5) 0.6
Forward interest rate swaps Interest expense 0.1
 0.1
 0.2
 0.2
  Total before tax (0.2) (7.3) (3.1) (17.2)
  Tax benefit 0.1
 2.9
 1.0
 6.5
  Net of tax $(0.1) $(4.4) $(2.1) $(10.7)

Table of Contents
($ in millions) (a) 
Location of
(loss) gain
 Amount Reclassified from AOCI
Three Months Ended December 31,		 Amount Reclassified from AOCI Six Months Ended December 31,
Details about AOCI Components  2017 2016 2017 2016
Amortization of pension and other postretirement benefit plan items:    
  
    
Net actuarial loss (b) $(4.1) $(10.3) $(8.3) $(20.5)
Prior service benefit (b) 0.8
 1.1
 1.6
 2.4
Curtailment charge (b) —
 —
 —
 (0.5)
  Total before tax (3.3) (9.2) (6.7) (18.6)
  Tax benefit 0.8
 3.5
 2.1
 6.9
  Net of tax $(2.5) $(5.7) $(4.6) $(11.7)

(a)Amounts in parentheses indicate debits to income/loss.
(b)These AOCI components are included in the computation of net periodic benefit cost (see Note 6. Pension and Other Postretirement Benefits for additional details).


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Background and General
 
We are engageda producer and distributor of premium specialty alloys, including titanium alloys, powder metals, stainless steels, alloy steels and tool steels. We are a recognized leader in high-performance specialty alloy-based materials and process solutions for critical applications in the aerospace, defense, medical, transportation, energy, industrial and consumer markets. We have evolved to become a pioneer in premium specialty alloys, including titanium, nickel, and cobalt, as well as alloys specifically engineered for additive manufacturing fabrication("AM") processes and distribution of specialty metals.soft magnetics applications. We have expanded our AM capabilities to provide a complete "end-to-end" solution to accelerate materials innovation and streamline parts production. 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.powders and parts. 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 and 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. We also manufacture and rent down-hole drilling tools and components used in the oil and gas industry.


As part of our overall business strategy, we have sought out and considered opportunities related to strategic acquisitions divestitures and joint collaborations as well as possible business unit dispositions aimed at broadening our offering to the marketplace. We have participated with other companies to explore potential terms and structures of such opportunities and expect that we will continue to evaluate these opportunities.
Table of Contents


Our discussions below in this Item 2 are based upon the more detailed discussions about our business, operations and financial condition included in Item 7 of our 20172021 Form 10-K. Our discussions here focus on our results during or as of the three and six-month periodsthree-month period ended December 31, 2017September 30, 2021 and the comparable periodsperiod of fiscal year 2017,2021, and to the extent applicable, on material changes from information discussed in the 20172021 Form 10-K and other important intervening developments or information that we have reported on Form 8-K. These discussions should be read in conjunction with the 20172021 Form 10-K for detailed background information and with any such intervening Form 8-K.

26
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Impact of Raw Material Prices and Product Mix
 
We value most of our inventory utilizing the last-in, first-out (“LIFO”("LIFO") inventory costing method. 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 potentially have been acquired at 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 cost of sales. Conversely, in a period of decreasing raw material costs, the LIFO inventory valuation normally results in lower cost 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 to customers may be calculated using a different surcharge formula or may be 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 cost of sales. The surcharge mechanism protects our net income on such sales except for the lag effect discussed above. However, surcharges have had a dilutive effect on our gross margin and operating margin percentages as described later in this report.


Approximately 3020 percent of our net sales are 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 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 Companywe 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, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period attempting to match the most recently incurred costs with revenues. Gains or losses on the commodity forward contracts are reclassified from other comprehensive (loss) income (loss) together with the actual purchase price of the underlying commodities when the underlying commodities are purchased and recorded in inventory. To the extent that the total purchase price of the commodities, inclusive of the gains or losses on the commodity forward contracts, are higher or lower relative to the beginning of year costs, our cost of goods sold reflects such amounts. Accordingly, 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. These firm price sales arrangements are expected to continue as we look to strengthen our long-term customer relationships by expanding, renewing and in certain cases extending to a longer-term, our customer long-term arrangements.
 
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 on participation in certain products based on available capacity, including the impacts of capacity commitments we may have under existing customer agreements. 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.

27
Table of Contents

Net Pension ExpenseBenefit
 
Net pension expense,benefit, as we define it below, includes the net periodic benefit costs related to both our pension and other postretirement plans. The net periodic benefit costs are determined annually based on beginning of year balances and are recorded ratably throughout the fiscal year, unless a significant re-measurementremeasurement event occurs. We currently expect that the total net periodic benefit costspension income for fiscal year 20182022 will be $14.0$7.3 million as compared with $48.2net pension expense of $24.6 million in fiscal year 2017.  2021, which included a settlement charge of $11.4 million recorded within other (income) expense, net.

The following is the net pension (income) expense for the three and six months ended December 31, 2017 and 2016:
  Three Months Ended
December 31,		 Six Months Ended
December 31,
($ in millions) 2017 2016 2017 2016
Pension plans $2.8
 $13.5
 $5.6
 $29.6
Other postretirement plans 0.8
 0.7
 1.5
 1.4
Net periodic benefit costs $3.6
 $14.2
 $7.1
 $31.0
In September 2016, we announced changes to retirement plans we offer to certain employees. The decision was consistent with addressing costs and actively managing the business. Benefits accrued to eligible participants of our largest qualified defined benefit pension plan and certain non-qualified pension plans were frozen effective December 31, 2016. Approximately 1,900 affected employees were transitioned to the Company’s 401(k) plan that has been in effect for eligible employees since 2012, when the pension plan was closed to new entrants. We recognized the plan freeze in the three months ended September 30, 2016 as a curtailment, since it eliminated the accrual for a significant number of participants for all of their future services. We also made a voluntary pension contribution of $100.0 million to the affected plan in October 2016.  2021 and 2020:

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 (“pension EID”) 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.
Three Months Ended
September 30,
($ in millions)20212020
Pension plans$(1.0)$3.2 
Other postretirement plans(0.8)0.9 
Net pension (income) expense$(1.8)$4.1 

Net pension (income) expense is recorded in accounts that are included in both the cost of sales and selling, general and administrative expenses based on the function of the associated employees.employees and in other (income) expense, net. The following is a summary of the classification of net pension (income) expense for the three and six months ended December 31, 2017September 30, 2021 and 2016:2020:
 
  Three Months Ended
December 31,		 Six Months Ended
December 31,
($ in millions) 2017 2016 2017 2016
Cost of sales:  
  
    
Service cost $2.7
 $7.2
 $5.3
 $14.8
Pension earnings, interest and deferrals —
 3.8
 —
 8.9
  2.7
 11.0
 5.3
 23.7
Selling, general and administrative expenses:  
  
    
Service cost 0.4
 1.4
 0.7
 3.0
Pension earnings, interest and deferrals 0.5
 1.8
 1.1
 3.8
Curtailment charge —
 —
 —
 0.5
  0.9
 3.2
 1.8
 7.3
Net pension expense $3.6
 $14.2
 $7.1
 $31.0
Three Months Ended
September 30,
($ in millions)20212020
Service cost included in Cost of sales$2.4 $2.7 
Service cost included in Selling, general and administrative expenses0.3 0.4 
Pension earnings, interest and deferrals included in Other (income) expense, net(4.5)1.0 
Net pension (income) expense$(1.8)$4.1 
 
As of December 31, 2017September 30, 2021 and June 30, 2017,2021, service cost amounts related to the net pension (income) expense capitalized in gross inventory were $1.6$1.0 million and $3.4$1.0 million, respectively.

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Operating Performance Overview

We delivered a solidDuring the first half toquarter of fiscal year 2018 including driving consistent backlog growth, gaining market share through expanded and new customer relationships, and enhancing our manufacturing discipline through the Carpenter Operating Model. Our SAO segment recorded its best second quarter and best first half since fiscal year 2014, while results at our PEP segment finished well ahead of our expectations. In addition, we submitted the majority of our Aerospace Vendor Approved Processes qualifications for our Athens facility, representing a major milestone. We are now actively working with our major customers to secure necessary approvals.

Conditions2022, demand patterns across our end-use markets continued to improve as our backlog finished up 25 percent sequentially and 49 percent year-over-year. We continue to improve and we are generating increased customersee signs of a broad-based recovery taking hold across the Aerospace supply chain with an acceleration of demand conditions expected in calendar year 2022. Our Performance Engineered Products segment finished ahead of our expectations driven primarily by strong demand for our solutions and growing our backlog. Intitanium fasteners in the Aerospace and Defense end-use market, new engine platform demand is increasingmarket. Within the Specialty Alloys Operations segment, performance was impacted by short-term operational delays including COVID-19 isolations at key work centers, supply chain disruptions across the world and hiring challenges in a difficult industry labor environment. The operational delays resulted in a temporary build in inventory during the current quarter, which negatively impacted our cash flow.

Looking ahead, we are further benefiting from our strong position across a range of attractive sub-markets. In addition, demand for our solutions portfolio in the Medical end-use market remains high while the recovery in the oil and gas sub-market is strengthening.

Moving forward, we willplan to continue to strategically investnavigate near-term challenges and partner with our customers during the recovery. We are well positioned for growth in our core business with a strong financial position, including $507.8 million in total liquidity, and a positive long-term growth capabilities. In addition, given the recent US tax reform, we plan to accelerateoutlook for our investment into key areas includingend-use markets. Our core business and our soft magnetics and additive manufacturing capabilities position us to build on our foundation for sustainable growth and soft magnetics, which is consistent withdeliver increasing returns to our commitment to being a leading solutions provider for our customers.shareholders.


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Results of Operations — Three Months Ended December 31, 2017September 30, 2021 vs. Three Months Ended December 31, 2016September 30, 2020
 
For the three months ended December 31, 2017,September 30, 2021, we reported a net incomeloss of $92.1$14.8 million, or $1.92$0.31 loss per diluted share. Excluding the special items, earnings per share would have been $0.55item of $1.6 million, as identified below, adjusted loss per diluted share forwas $0.28 in the three months ended December 31, 2017.current quarter. This compares with net incomeloss for the same period a year earlier of $7.0$47.1 million, or $0.15$0.98 loss per diluted share. Excluding special items for three months ended September 30, 2020, adjusted loss per diluted share was $0.58. The results for the three months ended September 30, 2021 reflect improving demand patterns with 10 percent increased sales compared to the prior year quarter. The prior year three months ended September 30, 2020 included special items of $7.9 million of COVID-19 costs, $10.0 million of restructuring and asset impairment charges and $8.2 million of debt extinguishment losses, net. The current period results reflect stronger product demand driventhe continued impact of the COVID-19 pandemic on the global economy.

COVID-19 related costs negatively impacted operating results by improving market conditions acrossapproximately $1.6 million in the quarter ended September 30, 2021 compared to $7.9 million in the prior year quarter. These COVID-19 costs principally consist of direct incremental operating costs including outside services to execute enhanced cleaning protocols, additional personal protective equipment, isolation pay for production employees potentially exposed to COVID-19 and various operating supplies necessary to maintain the operations while keeping employees safe against possible exposure in our end-use markets. facilities.


Net Sales
 
Net sales for the three months ended December 31, 2017September 30, 2021 were $487.8$387.6 million, which was a 1410 percent increase over the same period a year ago. Excluding surcharge revenue, sales increased 132 percent on a 132 percent increasedecrease in shipment volume from the same period a year ago. The results primarily reflect the impact of strongerlower demand for materials primarily used in thekey end-use markets driven by COVID-19 headwinds particularly in our Aerospace and Defense Industrial and Consumer and Medical end-use markets.markets during the three months ended September 30, 2021 compared to the three months ended September 30, 2020. The current year net sales results reflect the divestiture of the Amega West business on September 30, 2020.
 
Geographically, sales outside the United States increased 179 percent from the same period a year ago to $160.7$140.7 million for the three months ended December 31, 2017.September 30, 2021. The increase is primarily due todriven by stronger demand in Europethe Asia Pacific region across all end-use markets partially offset by lower demand in the Aerospace and Defense and Medical end-use markets and Asia Pacificmarket in the Aerospace and Defense and Industrial and Consumer end-use markets.European region. A portion of our sales outside the United States are denominated in foreign currencies. The impact of fluctuations in foreign currency exchange rates resulted in a $2.0$0.6 million increase in sales during the three months ended December 31, 2017September 30, 2021 compared to the three months ended December 31, 2016.September 30, 2020. Net sales outside the United States represented 3336 percent and 3236 percent of total net sales for the three months ended December 31, 2017September 30, 2021 and 2016,2020, respectively.
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Sales by End-Use Markets
 
We sell to customers across diversified end-use markets. The following table includes comparative information for our net sales, which includes surcharge revenue by principal end-use markets. We believe this is helpful supplemental information in analyzing the performance of the business from period to period:
 
 Three Months Ended
December 31,		 $
Increase		 %
Increase		Three Months Ended
September 30,		$
(Decrease) Increase		%
(Decrease) Increase
($ in millions) 2017 2016 ($ in millions)20212020
Aerospace and Defense $264.9
 $242.7
 $22.2
 9%Aerospace and Defense$166.9 $172.0 $(5.1)(3)%
MedicalMedical43.1 32.8 10.3 31 %
TransportationTransportation41.6 29.1 12.5 43 %
Energy 31.8
 30.1
 1.7
 6%Energy22.2 25.1 (2.9)(12)%
Transportation 35.8
 33.5
 2.3
 7%
Medical 42.8
 26.8
 16.0
 60%
Industrial and Consumer 83.1
 66.6
 16.5
 25%Industrial and Consumer86.6 73.4 13.2 18 %
Distribution 29.4
 27.7
 1.7
 6%Distribution27.2 20.9 6.3 30 %
Total net sales $487.8
 $427.4
 $60.4
 14%Total net sales$387.6 $353.3 $34.3 10 %
 
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The following table includes comparative information for our net sales by the same principal end-use markets, but excluding surcharge revenue:
 
Three Months Ended
September 30,		$
(Decrease) Increase		%
(Decrease) Increase
($ in millions)20212020
Aerospace and Defense$134.9 $147.5 $(12.6)(9)%
Medical37.1 30.0 7.1 24 %
Transportation31.4 24.5 6.9 28 %
Energy16.2 21.3 (5.1)(24)%
Industrial and Consumer66.3 63.1 3.2 5 %
Distribution27.0 20.8 6.2 30 %
Total net sales excluding surcharge revenue$312.9 $307.2 $5.7 2 %
  Three Months Ended
December 31,		 $
Increase		 %
Increase
($ in millions) 2017 2016  
Aerospace and Defense $220.3
 $199.0
 $21.3
 11%
Energy 28.9
 27.1
 1.8
 7%
Transportation 29.7
 28.7
 1.0
 3%
Medical 37.2
 25.1
 12.1
 48%
Industrial and Consumer 70.2
 59.2
 11.0
 19%
Distribution 29.2
 27.6
 1.6
 6%
Total net sales excluding surcharge $415.5
 $366.7
 $48.8
 13%


Sales to the Aerospace and Defense end-use market increased 9decreased 3 percent from the secondfirst quarter a year ago to $264.9$166.9 million. Excluding surcharge revenue, sales decreased 9 percent from the first quarter a year ago on a 14 percent decrease in shipment volume. The prior year results reflect higher shipments, as we were then continuing to process and ship orders placed prior to the pandemic.
Medical end-use market sales increased 31 percent from the first quarter a year ago to $43.1 million. Excluding surcharge revenue, sales increased 1124 percent on 25 percent higher shipment volume from the first quarter a year ago. The results reflect stronger demand as a result of the medical supply chain replenishing inventory levels as patient confidence begins to improve for elective medical procedures.

Transportation end-use market sales increased 43 percent from the secondfirst quarter a year ago to $41.6 million. Excluding surcharge revenue, sales increased 28 percent on 48 percent higher shipment volume from the first quarter a 15 percent increase in shipment volume.year ago. The results reflect improvedhigher demand in North America for heavy-duty vehicles slightly offset by lower demand in light-duty vehicles resulting from chip shortages compared to the fastener, structural and distribution sub-markets as we benefited from our broad industry participation. In addition, we experienced stronger demand for our defense related applications driven by specific programs.prior year period.
 
Sales to the Energy end-use market of $31.8$22.2 million in the current quarter reflect a 612 percent increasedecrease from the secondfirst quarter a year ago. Excluding surcharge revenue, sales decreased 24 percent from a year ago. The results reflect lower sales for oil and gas and power generation materials compared to the prior year period. The prior year results include the Amega West business which was divested on September 30, 2020.
Industrial and Consumer end-use market sales of $86.6 million increased $13.2 million compared to the first quarter a year ago. Excluding surcharge revenue, sales increased 7 percent from a year ago. The results reflect the impact of an increase in sales, particularly rental and replacement activity through our Amega West business outpacing the moderate oil and gas sub-market expansion, partially offset by weaker demand for materials used in power generation applications.
Transportation end-use market sales increased 7 percent from the second quarter a year ago to $35.8 million. Excluding surcharge revenue, sales increased 35 percent on 24 percent higher shipment volume from the second quarter a year ago. The results reflect the impact of stronger demand for our material as a result of increases in medium and heavy duty truck production partially offset by continued softness in passenger car production.
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Medical end-use market sales increased 60 percent from the second quarter a year ago to $42.8 million. Excluding surcharge revenue, sales increased 48 percent on 39 percent higher shipment volume from the second quarter a year ago. The results reflect improved market conditions, share gains with key customers and the positive impact of supply chain inventory rebuilding for titanium materials used within the orthopedic and cardiology sub-markets.

Industrial and Consumer end-use market sales increased 25 percent from the second quarter a year ago to $83.1 million. Excluding surcharge revenue, sales increased 19 percent on a 15 percent increase inlower shipment volume. The results reflect the impact of strongerhigher demand in select industrial applicationsthe Consumer housing, electronics, and consumer electronics applications.sporting goods sub-markets partially offset by lower demand in Industrial driven by COVID-19 related market impacts.


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Gross Profit
 
Our gross profit in the secondfirst quarter increased 37 percent$21.7 million to $85.7$25.2 million, or 17.66.5 percent of net sales as compared with $62.5$3.5 million, or 14.61.0 percent of net sales in the same quarter a year ago. Excluding the impact of surcharge revenue our adjusted gross margin in the secondfirst quarter was 20.68.1 percent as compared to 17.01.1 percent in the same period a year ago. The current quarter results reflect stronger productincreased gross profit for the three months ended September 30, 2021 reflects improving demand across end-use markets driving higher volumespatterns with 10 percent increased sales compared to the same period aprior year ago.quarter. The prior year three months ended September 30, 2020 included the impact of targeted inventory reductions taken to generate cash flow which resulted in negative impacts to gross profit.

 Our surcharge mechanism is structured to recover increases in raw material costs, although in certain cases with a lag effect as discussed above. We estimate that the effect of surcharge lag negatively impacted our operating income by $3.0 million for the current second quarter.


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 surcharge on gross margin for the comparative three monththree-month periods. See the section “Non-GAAP"Non-GAAP Financial Measures”Measures" below for further discussion of these financial measures.


Three Months Ended
September 30,
($ in millions)20212020
Net sales$387.6$353.3
Less: surcharge revenue74.746.1
Net sales excluding surcharge revenue$312.9$307.2
Gross profit$25.2$3.5
Gross margin6.5%1.0%
Gross margin excluding surcharge revenue8.1%1.1%
  Three Months Ended
December 31,
($ in millions) 2017 2016
Net sales $487.8
 $427.4
Less: surcharge revenue 72.3
 60.7
Net sales excluding surcharge revenue $415.5
 $366.7
     
Gross profit $85.7
 $62.5
     
Gross margin 17.6% 14.6%
     
Gross margin excluding surcharge revenue 20.6% 17.0%

Selling, General and Administrative Expenses
 
Selling, general and administrative expenses of $44.9$44.3 million were 9.211.4 percent of net sales (10.8(14.2 percent of net sales excluding surcharge) as compared with $47.1$42.3 million and 11.012.0 percent of net sales (12.8(13.8 percent of net sales excluding surcharge) in the same quarter a year ago. Selling,The selling, general and administrative expenses decreasedfor the three months ended September 30, 2021 reflect higher amortization costs related to an ERP system that was placed in service during the secondthird quarter primarily as a result of lower consulting costsfiscal year 2021 compared to the same quarterperiod a year ago.


Restructuring and Asset Impairment Charges

Restructuring and asset impairment charges for the three months ended September 30, 2021 were $0.0 million as compared with $10.0 million for the three months ended September 30, 2020.

In the quarter ended September 30, 2020, we initiated a restructuring plan to consolidate certain operations within the Additive business in the PEP segment. This included $8.7 million of non-cash impairment charges related primarily to certain long-lived assets and certain definite-lived intangible assets. We also recognized $1.3 million of charges for various personnel-related costs for severance payments, medical coverage and other items. Activities undertaken in connection with this fiscal year 2021 restructuring plan were substantially completed in the first quarter of fiscal year 2022.

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Operating IncomeLoss
 
Our operating incomeloss in the recent secondfirst quarter was $40.8$19.1 million or 8.4negative 4.9 percent of net sales as compared with $15.4operating loss of $48.8 million or 3.6negative 13.8 percent of net sales in the same quarter a year ago. Excluding surcharge revenue and pension EID,special items, adjusted operating margin was 9.9negative 5.6 percent for the most recentcurrent quarter as compared with 5.7negative 10.1 percent a year ago. The increase in ourimproved operating marginresults for the secondthree months ended September 30, 2021 reflect higher sales compared to the prior year quarter as well as the full recognition of various cost savings actions taken in fiscal year 2021 and the fourth quarter of fiscal year 2018 reflects the impacts2020. The prior year three months ended September 30, 2020 included $10.0 million of stronger product demand across end-use marketsrestructuring and lower selling, general and administrative expenses compared to the same period a year ago.asset impairment charges.
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Operating income has been significantly impacted by our pension EID, which may be volatile based on conditions in the financial markets. The following presents our operating incomeloss and operating margin, in each case excluding the impact of surcharge revenue on net sales.sales and special items. We present and discuss these financial measures because management believes removing these items provides a more consistent and meaningful basis for comparing ongoing results of operations from period to period. See the section “Non-GAAP"Non-GAAP Financial Measures”Measures" below for further discussion of these financial measures.


Three Months Ended
September 30,
($ in millions)20212020
Net sales$387.6$353.3
Less: surcharge revenue74.746.1
Net sales excluding surcharge revenue$312.9$307.2
Operating loss$(19.1)$(48.8)
Special items:
  COVID-19 costs1.67.9
  Restructuring and asset impairment charges—10.0
Operating loss$(17.5)$(30.9)
Operating margin(4.9)%(13.8)%
Adjusted operating margin excluding surcharge revenue and special items(5.6)%(10.1)%
  Three Months Ended
December 31,
($ in millions) 2017 2016
Net sales $487.8
 $427.4
Less: surcharge revenue 72.3
 60.7
Net sales excluding surcharge revenue $415.5
 $366.7
     
Operating income $40.8
 $15.4
Pension EID 0.5
 5.6
Operating income excluding pension EID $41.3
 $21.0
     
Operating margin 8.4% 3.6%
     
Operating margin excluding surcharge and pension EID 9.9% 5.7%


Interest Expense, Net and Debt Extinguishment Losses, Net
 
Interest expense, net for the three months ended December 31, 2017September 30, 2021 was $7.3$10.2 million compared with $7.4compared with $6.7 million in the same period a year ago. We have historically used interest rate swaps to achieve a level of floating rate debt to fixed rate debt where appropriate. Interest expense for the three months ended December 31, 2017 includes net gains fromappropriate; all interest rate swaps were terminated as of $0.2 million comparedSeptember 30, 2020 in connection with $0.5 millionthe prepayment of net gains from interest rate swaps for the three months ended December 31, 2016.related Notes. Capitalized interest reduced interest expense, net by $0.6$0.1 million for the three months ended December 31, 2017September 30, 2021 and $0.3$2.8 million for the three months ended December 31, 2016.September 30, 2020. Debt extinguishment losses, net for the three months ended September 30, 2020 includes $10.5 million of debt prepayment costs on the Notes that were due July 2021 offset by gains of $2.3 million on the related interest rate swaps that were terminated in connection with the prepayment.


Other Income,(Income) Expense, Net


Other income, net for the three months ended December 31, 2017September 30, 2021 was $0.2$4.1 million as compared with $0.3$2.3 million of other expense, net for the three months ended December 31, 2016.September 30, 2020. The current quarter reflects income in pension earnings, interest and deferrals from favorable returns on plan assets compared to expense in the prior year.

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Income Taxes
 
Income tax expensebenefit for the three months ended September 30, 2021 includes the unfavorable impact of losses in certain foreign jurisdictions for which no tax benefit can be recognized. Income tax benefit for the recent second quarter was athree months ended September 30, 2020 included discrete tax benefits of $2.0 million associated with the debt prepayments costs and $2.4 million for the impact of restructuring and asset impairment charges. Additionally, the anticipated benefit of $58.4 million, or negative 173.3 percent of pre-tax income compared with expense of $1.3 million, or 15.7 percent of pre-tax income infor the same quarter a year ago.

An Act to Provide for Reconciliation Pursuant to Titles II and Vcarryback of the Concurrent Resolution onfiscal year 2021 net operating loss to fiscal years with higher tax rates was included in this period. Also included was the Budgetunfavorable impact of losses in certain foreign jurisdictions for Fiscal Year 2018which no tax benefit can be recognized as well as tax benefits of $0.4 million attributable to employee share-based compensation.

The Coronavirus Aid, Relief and Economic Security Act (the “Act”"CARES Act") was enacted on December 22, 2017.March 27, 2020. The CARES Act includesestablished new provisions, that reduce the federal corporate income tax rate, create a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings (i.e. transition tax), and change certain business deductions including allowing for immediate expensingbut not limited to, expanded deduction of certain qualified capital expenditures.expenditures, delayed payment of certain employment taxes, expanded use of net operating losses, reduced limitations on deductions of interest expense and extension of funding for defined benefit plans. The permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% is effective January 1, 2018. Based on the provisions of the Act, we adjusted our estimated annual effective tax rate to incorporate the lower blended federal tax rate that will be phased in for our fiscal year 2018. We also recorded a discrete net tax benefit of $66 million which reflects a $73.3 tax benefit related to the re-measurement of deferred tax assets and liabilities at the reduced federal tax rate, and a charge of $5.1 million for the transition tax. The discrete net tax benefit also includes a charge of $2.2 million associated with a state law change that will limit our ability to utilize certain state net operating loss carryforwards.

Income tax expense in the prior year includesprovision is expected to provide incremental tax benefits of $0.9approximately $7.0 million associated with the repatriation of earnings from one of our foreign subsidiaries. Income tax expense also includes benefits of $0.3 million primarily due to additional research and development credits claimedthe higher tax rates in the prior year.expanded carryback period. The other provisions in the CARES Act are not expected to have a significant impact on our financial position, results of operations or cash flows.
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Business Segment Results
 
We have two reportable business segments: SAO and PEP.


The following table includes comparative information for volumes by business segment:
 
Three Months Ended
September 30,		$
(Decrease) Increase		%
(Decrease) Increase
(Pounds sold, in thousands) 20212020
Specialty Alloys Operations43,008 43,368 (360)(1)%
Performance Engineered Products *2,372 1,466 906 62 %
Intersegment(1,852)(486)(1,366)(281)%
Consolidated pounds sold43,528 44,348 (820)(2)%
  Three Months Ended
December 31,		 
Increase
(Decrease)		 %
Increase
(Decrease)
(Pounds sold, in thousands)  2017 2016  
Specialty Alloys Operations 60,080
 51,314
 8,766
 17 %
Performance Engineered Products * 3,282
 2,350
 932
 40 %
Intersegment (3,098) (378) (2,720) (720)%
Consolidated pounds sold 60,264
 53,286
 6,978
 13 %


* Pounds sold data for PEP segment includes Dynamet and Carpenter Powder ProductsAdditive businesses only.


The following table includes comparative information for net sales by business segment:
 Three Months Ended
December 31,		 $
Increase
(Decrease)		 %
Increase
(Decrease)		Three Months Ended
September 30,		$
Increase (Decrease)		%
Increase (Decrease)
($ in millions) 2017 2016 ($ in millions)20212020
Specialty Alloys Operations $406.3
 $348.6
 $57.7
 17 %Specialty Alloys Operations$331.9 $300.7 $31.2 10 %
Performance Engineered Products 104.8
 83.2
 21.6
 26 %Performance Engineered Products74.6 61.8 12.8 21 %
Intersegment (23.3) (4.4) (18.9) (430)%Intersegment(18.9)(9.2)(9.7)(105)%
Total net sales $487.8
 $427.4
 $60.4
 14 %Total net sales$387.6 $353.3 $34.3 10 %
 
The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:
Three Months Ended
September 30,		$
Increase (Decrease)		%
Increase (Decrease)
($ in millions)20212020
Specialty Alloys Operations$258.2 $254.8 $3.4 1 %
Performance Engineered Products73.6 61.2 12.4 20 %
Intersegment(18.9)(8.8)(10.1)(115)%
Total net sales excluding surcharge revenue$312.9 $307.2 $5.7 2 %
 
33
  Three Months Ended
December 31,		 $
Increase
(Decrease)		 %
Increase
(Decrease)
($ in millions) 2017 2016  
Specialty Alloys Operations $331.8
 $288.1
 $43.7
 15 %
Performance Engineered Products 104.6
 83.0
 21.6
 26 %
Intersegment (20.9) (4.4) (16.5) (375)%
Total net sales excluding surcharge revenue $415.5
 $366.7
 $48.8
 13 %
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Specialty Alloys Operations Segment
 
Net sales for the quarter ended December 31, 2017September 30, 2021 for the SAO segment increased 1710 percent to $406.3$331.9 million, as compared with $348.6$300.7 million in the same quarter a year ago. Excluding surcharge revenue, net sales increased 151 percent on 171 percent higherlower shipment volume from a year ago. The SAO segment results reflect the impact of stronger product demand drivenhigher sales in Medical, Transportation and Industrial and Consumer end-use markets partially offset by improving market conditions across ourlower sales Aerospace and Defense and Energy end-use markets compared to the prior year same quarter.quarter as the COVID-19 pandemic continues to impact these key end-use markets.
 
Operating incomeloss for the SAO segment was $49.8$5.9 million or 12.3negative 1.8 percent of net sales (15.0(negative 2.3 percent of net sales excluding surcharge revenue) in the recent secondfirst quarter, as compared with $35.6operating loss of $18.6 million or 10.2negative 6.2 percent of net sales (12.4(negative 7.3 percent of net sales excluding surcharge revenue) in the same quarter a year ago. The increase in operating income reflects higher demand across certain end-use markets in the impact of higher volumequarter ended September 30, 2021 compared to negative impacts from targeted inventory reductions in the prior year same quarter.period. The results for the quarter ended September 30, 2021 also include $1.3 million of expenses due to COVID-19 compared to $7.3 million during the prior year period.

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Performance Engineered Products Segment
 
Net sales for the quarter ended December 31, 2017September 30, 2021 for the PEP segment increased 2621 percent to $104.8$74.6 million, as compared with $83.2$61.8 million in the same quarter a year ago. Excluding surcharge revenue, net sales of $104.6$73.6 million increased 26 percent from $61.2 million a year ago. The results reflect an increaseimproving demand off COVID-19 lows in Aerospace and Defense and increased sales primarily in the EnergyIndustrial and MedicalConsumer and Distribution end-use markets.markets compared to the prior year period. The prior year results included net sales from the Amega West business which was divested by the Company on September 30, 2020.

Operating income for the PEP segment was $7.5$0.6 million or 7.20.8 percent of net sales in the recent secondcurrent first quarter, compared with an operating incomeloss of $0.8$3.6 million or 1.0negative 5.8 percent of net sales in the same quarter a year ago. The improved results reflect the increasing demand for titanium products combined with ongoing improvements in our oil and gas businesses and cost reduction initiatives.

Results of Operations — Six Months Ended December 31, 2017 vs. Six Months Ended December 31, 2016
Net Sales
Net sales for the six monthsquarter ended December 31, 2017 were $967.5 million, which was a 19 percent increase over the same period a year ago. Excluding surcharge revenue,September 30, 2021 reflect higher sales increased 17 percent on 15 percent higher shipment volume from the same period a year ago. The results primarily reflect the impact of stronger product demand for materials primarily used in the Aerospace and Defense, Medical and Industrial and Consumer end-use markets.

Geographically, sales outside the United States increased 24 percent from the same period a year ago to $320.6 million for the six months ended December 31, 2017. The increase is primarily due to higher demand in Europe in the Aerospace and Defense and Medical end-use markets, Asia Pacific in the Aerospace and Defense and Industrial and Consumerkey end-use markets and Canadareduced expenses in the Energy end-use market. A portioncurrent year quarter from the restructuring actions taken in fiscal year 2021. The results for the quarter ended September 30, 2021 also include $0.3 million of our sales outside the United States are denominated in foreign currencies. The impact of fluctuations in foreign currency exchange rates resulted in a $3.3expenses due to COVID-19 compared to $0.6 million increase in sales during the sixprior year period.

Liquidity and Financial Resources
During the three months ended December 31, 2017September 30, 2021, we used cash for operating activities of $47.0 million compared to the six months ended December 31, 2016. Net sales outside the United States represented 33 percent and 32 percentcash provided from operations of total net sales for the six months ended December 31, 2017 and 2016, respectively.
Sales by End-Use Markets
We sell to customers across diversified end-use markets. The following table includes comparative information for our net sales, which includes surcharge revenue by principal end-use markets.  We believe this is helpful supplemental information in analyzing the performance of the business from period to period:
  Six Months Ended
December 31,		 
$
Increase
 %
Increase
($ in millions) 2017 2016  
Aerospace and Defense $523.5
 $448.9
 $74.6
 17%
Energy 63.8
 58.5
 5.3
 9%
Transportation 72.5
 68.7
 3.8
 6%
Medical 81.0
 51.4
 29.6
 58%
Industrial and Consumer 167.5
 133.0
 34.5
 26%
Distribution 59.2
 55.8
 3.4
 6%
Total net sales $967.5
 $816.3
 $151.2
 19%
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The following table includes comparative information for our net sales by the same principal end-use markets, but excluding surcharge revenue:
  Six Months Ended
December 31,		 $
Increase		 %
Increase
($ in millions) 2017 2016  
Aerospace and Defense $435.8
 $372.5
 $63.3
 17%
Energy 57.8
 52.8
 5.0
 9%
Transportation 60.3
 59.2
 1.1
 2%
Medical 70.6
 48.1
 22.5
 47%
Industrial and Consumer 141.9
 118.5
 23.4
 20%
Distribution 58.9
 55.5
 3.4
 6%
Total net sales excluding surcharge $825.3
 $706.6
 $118.7
 17%

Sales to the Aerospace and Defense end-use market increased 17 percent from the same period a year ago to $523.5 million. Excluding surcharge revenue, sales increased 17 percent from the same period a year ago on a 20 percent increase in shipment volume. The results reflect the impact of stronger demand for materials used in aerospace engines and structural applications as well as defense applications driven by specific programs.

Sales to the Energy end-use market of $63.8$88.0 million reflect a 9 percent increase from the same period a year ago. Excluding surcharge revenue, sales increased 9 percent from a year ago. The results reflect an increase in sales of rental and replacement activity through our Amega West business driven by a moderate increase in the oil and gas sub-market offset by weaker demand for materials used in power generation applications.

Transportation end-use market sales increased 6 percent from the same period a year ago to $72.5 million. Excluding surcharge revenue, sales increased 2 percent on 2 percent lower shipment volume from the same period a year ago. The results reflect the impact of stronger demand for our materials as a result of increases in medium and heavy duty truck production offset by continued softness in passenger car production.

Medical end-use market sales increased 58 percent from the same period a year ago to $81.0 million. Excluding surcharge revenue, sales increased 47 percent on 30 percent higher shipment volume from the same period a year ago. The results reflect improved market conditions, share gains with key customers and the positive impact of supply chain inventory rebuilding for titanium materials within the orthopedic and cardiology sub-markets.
Industrial and Consumer end-use market sales increased 26 percent from the same period a year ago to $167.5 million. Excluding surcharge revenue, sales increased 20 percent on a 13 percent increase in shipment volume. The results reflect the impact of stronger demand for materials used in consumer electronics applications and industrial applications due in part to a moderate increase in recovery of oil and gas activity.

Gross Profit
Our gross profit in the six months ended December 31, 2017 increased 58 percent to $171.3 million, or 17.7 percent of net sales as compared with $108.5 million, or 13.3 percent of net sales in the same period a year ago. Excluding the impact of surcharge revenue, our gross margin in the six months ended December 31, 2017Our free cash flow, which we define under "Non-GAAP Financial Measures" below, was 20.8 percentnegative $71.2 million as compared to 15.4 percent in the same period a year ago. The results for the six months ended December 31, 2017 reflect stronger product demand across end-use markets and stronger product mix compared to the same period a year ago.
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Our surcharge mechanism is structured to recover increases in raw material costs, although in certain cases with a lag effect as discussed above. 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 surcharge on gross margin for the comparative six month periods. See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.

  Six Months Ended
December 31,
($ in millions) 2017 2016
Net sales $967.5
 $816.3
Less: surcharge revenue 142.2
 109.7
Net sales excluding surcharge revenue $825.3
 $706.6
     
Gross profit $171.3
 $108.5
     
Gross margin 17.7% 13.3%
     
Gross margin excluding surcharge revenue 20.8% 15.4%
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $88.8positive $62.6 million were 9.2 percent of net sales (10.8 percent of net sales excluding surcharge) for the six months ended December 31, 2017 as compared with $91.7 million or 11.2 percent of net sales (13.0 percent of net sales excluding surcharge) in the same period a year ago.  Selling, general and administrative expenses decreased in the six months ended December 31, 2017 primarily as a result of lower consulting costs and pension expense offset by higher variable compensation accruals compared to the same period a year ago.
Operating Income
Our operating income in the six months ended December 31, 2017 was $82.5 million, or 8.5 percent of net sales as compared with $16.8 million, or 2.1 percent of net sales in the same period a year ago. Excluding surcharge revenue, pension EID and special items, operating margin was 10.1 percent for the six months ended December 31, 2017 and 4.2 percent for the same period a year ago. The increasedecrease in cash provided from operating activities for the operating margin reflects the impact of stronger product demand across end-use markets combined with stronger product mix and lower selling, general and administrative expensesthree months ended September 30, 2021 compared to the same period a year ago.

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Operating income has been significantly impactedago was driven by our pension EID, which may be volatile based on conditions in the financial markets, as well as special items. The following presents our operating income and operating margin, in each case excluding the impact of surcharge on net sales, pension EID and special items. We present and discuss these financial measures because management believes removing the impact of these items provides a more consistent and meaningful basis for comparing results of operations from periodworking capital changes. Cash used to period. See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.

  Six Months Ended
December 31,
($ in millions) 2017 2016
Net sales $967.5
 $816.3
Less: surcharge revenue 142.2
 109.7
Net sales excluding surcharge revenue $825.3
 $706.6
     
Operating income $82.5
 $16.8
Pension EID 1.1
 12.7
Operating income excluding pension EID 83.6
 29.5
     
Special items:    
Pension curtailment charge —
 0.5
Operating income excluding pension EID and special items $83.6
 $30.0
     
Operating margin 8.5%
2.1%
     
Operating margin excluding surcharge, pension EID and special items 10.1%
4.2%
Interest Expense
Interest expense for the six months ended December 31, 2017build inventory was $14.5 million compared with $14.8$66.5 million in the samecurrent period a year ago. We have used interest rate swaps to achieve a level of floating rate debt to fixed rate debt where appropriate. Interest expense for the six months ended December 31, 2017 includes net gains from interest rate swaps of $0.4 million compared with $0.9 million for the six months ended December 31, 2016. Capitalized interest reduced interest expense by $1.1 million for the six months ended December 31, 2017 and $0.5 million for the six months ended December 31, 2016.
Other Income, Net
Other income, net was $0.9 million for the recent six months ended December 31, 2017September 30, 2021 compared to $1.0cash generated from reductions in inventory of $84.9 million in the same period a year ago.
Income Taxes
Income tax expenseprior year. The increase in the six months ended December 31, 2017 was a benefit of $46.6 million, or negative 67.6 percent of pre-tax income as compared with expense of $2.2 million, or 73.3 percent of pre-tax income in the six months ended December 31, 2016.

In December 2017, the United States enacted tax reform legislation. The Act includes provisions that reduce the federal corporate income tax rate, create a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings (i.e. transition tax), and change certain business deductions including allowing for immediate expensing of certain qualified capital expenditures. The permanent reduction to the U.S. federal corporate income tax rate from 35% to 21% is effective January 1, 2018. Based on the provisions of the Act,inventory during the current quarter we adjusted our estimated annual effective tax rateis a temporary build caused by short-term operational delays including COVID-19 isolations at key work centers. The prior year reflects impacts from targeted inventory reductions taken to incorporatestrengthen liquidity. During the lower blended federal tax rate. We also recorded a discrete net tax benefit of $66 million which reflects a $73.3 tax benefit related to the re-measurement of deferred tax assets and liabilities at the reduced federal tax rate and a charge of $5.1 million for the transition tax. The discrete net tax benefit also includes a charge of $2.2 million associated with a state law change that will limit our ability to utilize certain state net operating loss carryforwards.

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In October 2016, the Company made a voluntary pension contribution of $100.0 million that was announced in connection with the plan freeze.  As a result of the pension contribution, income tax expense in the sixthree months ended December 31, 2016 included a discrete tax charge of $2.1September 30, 2021, the change in accounts receivable decreased cash by $3.8 million due to reduced tax benefits for domestic manufacturing claimed in prior periods.
Business Segment Results
We have two reportable business segments: SAO and PEP.

The following table includes comparative information for volumes by business segment:
  Six Months Ended
December 31,		 Increase
(Decrease)		 %
Increase
(Decrease)
(Pounds sold, in thousands)  2017 2016  
Specialty Alloys Operations 121,270
 103,674
 17,596
 17 %
Performance Engineered Products * 6,808
 4,764
 2,044
 43 %
Intersegment (4,468) (972) (3,496) (360)%
Consolidated pounds sold 123,610
 107,466
 16,144
 15 %
* Pounds sold data for PEP segment includes Dynamet and Carpenter Powder Products businesses only.

The following table includes comparative information for net sales by business segment:
  Six Months Ended
December 31,		 $
Increase
(Decrease)		 %
Increase
(Decrease)
($ in millions) 2017 2016  
Specialty Alloys Operations $803.1
 $663.7
 $139.4
 21 %
Performance Engineered Products 205.5
 161.7
 43.8
 27 %
Intersegment (41.1) (9.1) (32.0) (352)%
Total net sales $967.5
 $816.3
 $151.2
 19 %
The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:
  Six Months Ended
December 31,		 $
Increase
(Decrease)		 %
Increase
(Decrease)
($ in millions) 2017 2016  
Specialty Alloys Operations $657.4
 $554.0
 $103.4
 19 %
Performance Engineered Products 205.1
 161.3
 43.8
 27 %
Intersegment (37.2) (8.7) (28.5) (328)%
Total net sales excluding surcharge revenue $825.3
 $706.6
 $118.7
 17 %
Specialty Alloys Operations Segment
Net sales for the six months ended December 31, 2017 for the SAO segment increased 21 percent to $803.1 million, as compared with $663.7 million in the same period a year ago. Excluding surcharge revenue, net sales increased 19 percent on 17 percent higher shipment volume from a year ago.  The results reflect the impact of stronger product demand driven by improving market conditions across our end-use markets compared to the prior year same period.
Operating income for the SAO segment was $100.3generation of cash of $42.0 million or 12.5 percent of net sales (15.3 percent of net sales excluding surcharge revenue) in the recent six months ended December 31, 2017 as compared with $60.6 million or 9.1 percent of net sales (10.9 percent of net sales excluding surcharge revenue) in the same period a year ago. The increase in operating income reflects the impact of higher product demand and stronger product mix driven by improving market conditions across our end-use markets compared to the prior year same period.
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Performance Engineered Products Segment
Net sales for the six months ended December 31, 2017 for the PEP segment increased 27 percent to $205.5 million, as compared with $161.7 million in the same period a year ago. Excluding surcharge revenue, net sales increased 27 percent from a year ago. The results reflect an increase in sales primarily in the Energy and Medical end-use markets.

Operating income for the PEP segment was $12.8 million or 6.2 percent of net sales in the recent six months ended December 31, 2017, compared with an operating loss of $2.0 million or 1.2 percent of net sales in the same period a year ago. The results reflect the increasing demand for titanium products combined with ongoing improvements in our oil and gas businesses and cost reduction initiatives.

Liquidity and Financial Resources
During the six months ended December 31, 2017, we generated cash flows from operations of $17.3 million compared to cash used for operations of $25.4 million in the same period a year ago. Our free cash flow, which we define under “Non-GAAP Financial Measures” below, was negative $55.6 million as compared to negative $87.5 million for the same period a year ago. The free cash flow results in the current period ended September 30, 2021 reflect unfavorable working capital levels driven by increased investment in inventory to meet customer demands and higher accounts receivable driven by increased shipments. The results also reflect higherlower capital spending levels as we increased our investment in key growth initiatives during fiscal year 2018. In addition,compared to the prior year period as certain large projects were completed in fiscal year 2021. The prior period results reflectalso included $17.6 million of proceeds related to the impactsale of the $100 million pension contribution offset by cash tax benefits realized with the contribution of approximately $39 million.our Amega West business.


Capital expenditures for property, plant, equipment and software were $55.7$14.4 million for the sixthree months ended December 31, 2017September 30, 2021 as compared to $45.1$33.3 million for the same period a year ago. In fiscal year 2018,2022, we expect capital expenditures to be approximately $135$125 million. However, we are monitoring the impact of labor shortages and supply chain disruptions on the timing of our anticipated projects for the balance of the fiscal year.

Dividends during the sixthree months ended December 31, 2017September 30, 2021 and 20162020 were $17.2$9.8 million and $17.0$9.7 million, respectively, and were paid at the same quarterly rate of $0.18$0.20 per share of common stock in both periods.
 
We have demonstrated the ability to generate cash to meet our needs through cash flows from operations, management of working capital and the availability of outside sources of financingability to access capital markets to supplement internally generated funds. We generally target minimum liquidity of $150 million, consisting of cash and cash equivalents added to available borrowing capacity under our Credit Facility.

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On March 26, 2021, we entered into our $300.0 million secured revolving Credit Facility. The Credit Facility amended and restated the previous revolving credit facility, dated March 31, 2017, which had been set to expire in March 2022. The Credit Facility makes several changes from the prior Credit Agreement. OurThe Credit AgreementFacility extends the maturity to March 31, 2024, subject to a springing maturity of November 30, 2022. If, by November 30, 2022, our outstanding $300.0 million 4.45% Senior Notes due in March 2023 are not redeemed, repurchased or refinanced with indebtedness having a maturity date of October 1, 2024 or later, all indebtedness under the Credit Facility will be due. The Credit Facility contains a revolving credit commitment amount of $400.0$300.0 million, which expiressubject to our right, from time to time, to request an increase of the commitment to $500.0 million in March 2022. the aggregate; and provides for the issuance of letters of credit subject to a $40.0 million sub-limit. We have the right to voluntarily prepay and re-borrow loans, to terminate or reduce the commitments under the Credit Facility, and, subject to certain lender approvals, to join subsidiaries as subsidiary borrowers.

As of December 31, 2017,September 30, 2021, we had $6$5.4 million of issued letters of credit and $9.3 million ofno short-term borrowings under the Credit Agreement.Facility. The balance of the Credit Agreement ($384.7 million)Facility, $294.6 million, remains available to us. As of December 31, 2017, we had total liquidity of $405.4 million, including $20.7 million of cash and cash equivalents. From time to time duringSeptember 30, 2021, the six months ended December 31, 2017, we have borrowed under our Credit Agreement. The weighted average daily borrowing underrate for the Credit Agreement during the six months ended December 31, 2017Facility was approximately $8.6 million with daily outstanding borrowings ranging from $0.0 million to $30.8 million during the period.2.08%.


We believe that our total liquidity of $507.8 million as of September 30, 2021, which includes total cash and cash equivalents of $20.7$213.2 million as of December 31, 2017 and available borrowing capacity of $384.7$294.6 million under our credit facility, will be sufficient to fund our cash needs over the foreseeable future.

In the fourth quarter of fiscal year 2018, $55.0 million of medium term notes are due for redemption. We currently expect to fund the redemption of these notes using available cash.

During the sixthree months ended December 31, 2017,September 30, 2021, we made pension contributions of $4.9$0.2 million to our qualified defined benefit pension plans. We currently do not expect to make approximately $1.8 million of contributionscontribute to our U.S. qualified defined benefit pension plans during the remainder of fiscal year 2018.2022.
 
As of December 31, 2017,September 30, 2021, we had cash and cash equivalents of approximately $19.0$45.4 million held at various foreign subsidiaries. Our global cash deployment considers, among other things, the geographic location of our subsidiaries’ cash balances, the locations of our anticipated liquidity needs, and the cost to access international cash balances, as necessary. The Act requiresDuring the three months ended September 30, 2021, we repatriated cash of approximately $1.6 million from a one-timeforeign jurisdiction that resulted in minimal tax on previously deferred foreign earnings and generally provides for tax-free repatriations of these earnings beginning January 1, 2018. This will allow additional opportunities to access cash generated internationally.cost. From time to time, we may make short-term intercompany borrowings against our cash held outside the United States in order to reduce or eliminate any required borrowing under our Credit Agreement.

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We are subject to certain financial and restrictive covenants under the Credit Agreement,Facility, which, among other things, require the maintenance of a minimum interest coverage ratio (3.50 to 1.00 as of December 31, 2017).ratio. The interest coverage ratio is defined in the Credit AgreementFacility as, for any period, the ratio of consolidated earnings before interest, taxes, depreciation and amortization and non-cash net pension expense (“EBITDA”("EBITDA") to consolidated interest expense for such period. The interest coverage covenant is waived until the quarter ended March 31, 2022 at which time it will be 3.00 to 1.00 and then 3.50 to 1.00 thereafter. The Credit AgreementFacility also requires the Company to maintain a debt to capital ratio of less than 55%.55 percent. The debt to capital ratio is defined in the Credit AgreementFacility as the ratio of consolidated indebtedness, as defined therein, to consolidated capitalization, as defined therein. During the period in which the interest coverage covenant is waived the Credit Facility requires that we maintain a minimum available liquidity of $150 million which is defined in the Credit Facility as the aggregate amount of loans available to be drawn under the facility plus non-restricted cash and cash equivalents as defined therein. In addition, we are subject to an asset coverage ratio minimum of 1.10 to 1.00. The asset coverage ratio is defined in the Credit Facility as eligible receivables and inventory, as defined therein, to outstanding loans and obligations, as defined therein. As of December 31, 2017, the Company wasSeptember 30, 2021, we were in compliance with all of the covenants of the Credit Agreement.Facility.

The following table shows our actual ratio performance with respect to the financial covenants as of December 31, 2017:September 30, 2021:
 
CovenantCovenant RequirementActual Ratio
CovenantCovenant RequirementActual Ratio
Consolidated interest coverage3.50 to 1.00 (minimum)10.91 to 1.00
Consolidated debt to capital55% (maximum)31.4%33.7%
Available liquidity (excludes certain foreign cash)$150.0 (minimum)$467.3 million
Asset coverage ratio1.10 to 1.0063.20 to 1.00
 
We continue to believe that we will maintain compliance with the financial and restrictive covenants in future periods. To the extent that we do not comply with the current or modified covenants under the Credit Agreement,Facility, this could reduce our liquidity and flexibility due to potential restrictions on borrowings available to us unless we are able to obtain waivers or modifications of the covenants.

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Non-GAAP Financial Measures
 
The following provides additional information regarding certain non-GAAP financial measures that we use in this report. 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 Surcharge Revenue
 
This report includes discussions of net sales as adjusted to exclude the impact of raw material surcharge and the resulting impact on gross margins, which represent financial measures that have not been determined in accordance with accounting principles generally accepted in the United States of America (“("U.S. GAAP”GAAP"). We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net sales and cost of sales provides a more consistent basis for comparing results of operations from period to period for the reasons discussed earlier in this report. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, our Boardboard of Directorsdirectors and others. See our earlier discussion of “Gross Profit”"Gross Profit" for a reconciliation of net sales and gross margin, excluding surcharge revenue, to net sales as determined in accordance with U.S. GAAP. Net sales and gross margin excluding surcharge revenue is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, net sales and gross margin calculated in accordance with U.S. GAAP.


Operating Income andAdjusted Operating Margin Excluding Surcharge Revenue Pension EID and Special Items

This report includes discussions of operating income and operating margin as adjusted to exclude the impact of raw material surcharge revenue pension EID and special items which represent financial measures that have not been determined in accordance with U.S. GAAP. We present and discuss thesethis financial measuresmeasure because management believes removing the impact of raw material surcharge from net sales and cost of 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 EID and special items from operating income and operating margin is helpful in analyzing our operating performance, particularly as pension EID may be volatile due to changes in the financial markets.these items are not indicative of ongoing operating performance. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, our Boardboard of Directorsdirectors and others. See our earlier discussion of operating income for a reconciliation of operating income and operating margin excluding pension EIDsurcharge revenue and special items to operating income and operating margin determined in accordance with U.S. GAAP. Operating income and operating margin excluding surcharge revenue pension EID and special items is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, operating income and operating margin calculated in accordance with U.S. GAAP.


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Adjusted EarningsLoss Per Share


The following provides a reconciliation of adjusted earningsloss per share, to its most directly comparable U.S. GAAP financial measures:
($ in millions, except per share amounts) Income Before Income Taxes Income Tax Benefit (Expense) Net Income Earnings Per Diluted Share*
Three months ended December 31, 2017, as reported $33.7
 $58.4
 $92.1
 $1.92
Special items:        
Impact of US tax reform and other legislative changes —
 (66.0) (66.0) (1.37)
         
Three months ended December 31, 2017, as adjusted $33.7
 $(7.6) $26.1
 $0.55


($ in millions, except per share amounts)Loss Before Income TaxesIncome Tax BenefitNet LossLoss Per Diluted Share*
Three months ended September 30, 2021, as reported$(25.2)$10.4 $(14.8)$(0.31)
Special item:
COVID-19 costs1.6 (0.7)0.9 0.03 
Three months ended September 30, 2021, as adjusted$(23.6)$9.7 $(13.9)$(0.28)

* Impact per diluted share calculated using weighted average common shares outstanding of 47.648.5 million for the three months ended December 31, 2017.September 30, 2021.


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($ in millions, except per share amounts) Income Before Income Taxes Income Tax Expense Net Income Earnings Per Diluted Share*
Three months ended December 31, 2016, as reported $8.3
 $(1.3) $7.0
 $0.15
Special items:        
None reported —
 —
 —
 —
         
Three months ended December 31, 2016, as adjusted $8.3
 $(1.3) $7.0
 $0.15
($ in millions, except per share amounts)Loss Before Income TaxesIncome Tax BenefitNet LossLoss Per Diluted Share*
Three months ended September 30, 2020, as reported$(66.0)$18.9 $(47.1)$(0.98)
Special items:
COVID-19 costs7.9 (2.6)5.3 0.11 
Restructuring and asset impairment charges10.0 (2.4)7.6 0.16 
Debt extinguishment losses, net8.2 (2.0)6.2 0.13 
Three months ended September 30, 2020, as adjusted$(39.9)$11.9 $(28.0)$(0.58)


* Impact per diluted share calculated using weighted average common shares outstanding of 47.148.3 million for the three months ended December 31, 2016.
($ in millions, except per share amounts) Income Before Income Taxes Income Tax Benefit (Expense) Net Income Earnings Per Diluted Share**
Six months ended December 31, 2017, as reported $68.9
 $46.6
 $115.5
 $2.41
         
Special items:        
Impact of US tax reform and other legislative changes —
 (66.0) (66.0) (1.38)
         
Six months ended December 31, 2017, as adjusted $68.9
 $(19.4) $49.5
 $1.03

** Impact per diluted share calculated using weighted average common shares outstanding of 47.5 million for the six months ended December 31, 2017.


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($ in millions, except per share amounts) Income Before Income Taxes Income Tax (Expense) Benefit Net Income Earnings Per Diluted Share**
Six months ended December 31, 2016, as reported $3.0
 $(2.2) $0.8
 $0.01
         
Special items:        
Pension curtailment 0.5
 (0.1) 0.4
 0.01
  Income tax item* —
 2.1
 2.1
 0.04
Total impact of special items 0.5
 2.0

2.5

0.05
         
Six months ended December 31, 2016, as adjusted $3.5
 $(0.2) $3.3
 $0.06

* Discrete income tax charge recorded during the three months ended September 30, 2016 as a result of changes to prior year income taxes in connection with our decision to make a voluntary pension contribution in October 2016.2020.
** Impact per diluted share calculated using weighted average common shares outstanding of 47.1 million for the six months ended December 31, 2016.



Management believes that the presentation of earningsloss per share adjusted to exclude the special items is helpful in analyzing the operating performance of the Company, as these items are not indicative of ongoing operating performance. Our definitions and calculations of these items may not necessarily be the same as those used by other companies. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, our Board of Directors and others. Adjusted earningsloss per share is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, earningsloss per share calculated in accordance with U.S. GAAP.

Free Cash Flow
 
The following provides a reconciliation of free cash flow, as used in this report, to its most directly comparable U.S. GAAP financial measures:
 Six Months Ended
December 31,		 Three Months Ended
September 30,
($ in millions) 2017 2016($ in millions)20212020
Net cash provided from (used for) operating activities $17.3
 $(25.4)
Purchases of property, equipment and software (55.7) (45.1)
Net cash (used for) provided from operating activitiesNet cash (used for) provided from operating activities$(47.0)$88.0 
Purchases of property, plant, equipment and softwarePurchases of property, plant, equipment and software(14.4)(33.3)
Proceeds from divestiture of businessProceeds from divestiture of business— 17.6 
Dividends paid (17.2) (17.0)Dividends paid(9.8)(9.7)
Free cash flow $(55.6) $(87.5)Free cash flow$(71.2)$62.6 
 
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 management’smanagement's 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.

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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 PRP with respect to certain third party Superfund waste-disposal sites and other third party-owned sites. We accrue amounts for environmental remediation costs that represent our best estimate of the probable and reasonably estimable future costs related to environmental remediation. During the sixthree months ended December 31, 2017,September 30, 2021, the companyCompany increased the liability for a company-ownedCompany-owned former operating site by $0.1 million. The liabilities recorded for environmental remediation costs at Superfund sites, other third party-owned sites and Carpenter-owned current or former operating facilities remaining at December 31, 2017September 30, 2021 and June 30, 20172021 were $16.2$16.1 million and $16.1$16.0 million, respectively. 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 have been determined. Accordingly, at this time, we cannot reasonably estimate expected costs for such matters. The liability for future environmental remediation costs that can be reasonably estimated is evaluated on a quarterly basis.


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.
 
Other


We are defending various routine claims and legal actions that are incidental to our business, and that are common to our operations, including those pertaining to product claims, commercial disputes, patent infringement, employment actions, employee benefits, compliance with domestic and foreign laws, personal injury claims and tax issues. Like many other manufacturing companies in recent years we, from time to time, have been named as a defendant in lawsuits alleging personal injury as a result of exposure to chemicals and substances in the workplace such as asbestos. 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.

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Critical Accounting Policies and Estimates
 
A summary of other significant accounting policies is discussed in our 20172021 Form 10-K Item 7. “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations”Operations", and in Note 1, Summary of Significant Accounting Policies, of the Notes to our consolidated financial statements included in Part II, Item 8 thereto.


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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 atfor impairment as of June 30, or more frequently if events or circumstances indicate that the reporting unit level.carrying amount of goodwill may be impaired. Potential impairment is identified by comparing the fair value of a reporting unit to its carrying value.  The fair value is estimated based principally upon discounted cash flow analysis. If the carrying value of the reporting unit exceeds its fair value, any impairment loss is measured by comparingthe difference between the carrying value of the reporting unit’s goodwillunit and its fair value, not to its implied fair value.exceed the carrying amount of goodwill. The discounted cash flow analysis for each reporting unit tested requires significant estimates and assumptions related to cash flow forecasts, discount rates, terminal values and income tax rates. The cash flow forecasts include significant judgments and assumptions related to revenue growth rates, which include perpetual growth rates, gross margin and weighted average cost of capital. The cash flow forecasts are developed based on assumptions about each reporting unit’sunit's markets, product offerings, pricing, capital expenditure and working capital requirements as well as cost performance.

The discount rates used in the discounted cash flow are estimated based on a market participant’sparticipant's perspective of each reporting unit's weighted average cost of capital. The terminal value, which represents the value attributed to the reporting unit beyond the forecast period, is estimated using a perpetuity growth rate assumption. The income tax rates used in the discounted cash flow analysis represent estimates of the long-term statutory income tax rates for each reporting unit based on the jurisdictions in which the reporting units operate.


As of JuneSeptember 30, 2017,2021, we had fourhave three reporting units with goodwill recorded. Goodwill associated with the SAO reporting unit as of September 30, 2021 was $195.5 million and represents approximately 81 percent of our total goodwill. The remaining goodwill is associated with the PEP segment, which includes two reporting units, Dynamet and Latrobe Distribution, with goodwill recorded as of September 30, 2021 of $31.9 million and $14.0 million, respectively.

Goodwill associated with the SAO reporting unit is tested at the SAO segment levellevel. The fair value is estimated using a weighting of discounted cash flows and represents approximately 75 percentthe use of our total goodwill. All other goodwill is associated with our PEP segment, which includes 3 reporting units with goodwill recorded.

market multiples valuation techniques. As of June 30, 2017,2021, the fair value of the SAO reporting unit exceeded the carrying value by approximately 2026.3 percent. The goodwill recorded related to the SAO reporting unit as of June 30, 2017 was $195.5 million. The discounted cash flows analysis for the SAO reporting unit includes assumptions related to our ability to increase volume, improve mix, expand product offerings and continue to implement opportunities to reduce costs over the next several years. For purposes of the discounted cash flow analysis for SAO’sSAO's fair value, we used a weighted average cost of capital of 109.0 percent and a terminal growth rate assumption of 33.0 percent were used. If the long-term growth rate for this reporting unit had been hypothetically reduced by 0.5 percent at June 30, 2021, the SAO reporting unit would have a fair value that exceeded the carrying value by approximately 22.0 percent.


All other goodwill is associated with the PEP segment, which includes two reporting units with goodwill recorded. The fair value is estimated using a weighting of discounted cash flows and the use of market multiples valuation techniques for the PEP segment reporting units. The fair values of the two remaining PEP segment reporting units exceeded their carrying values, in each case, by 45 percent or more.
The estimate of fair value requires significant judgment. We based our fair value estimates on assumptions that we believe to be reasonable but that are unpredictable and inherently uncertain, including estimates of future growth rates and operating margins and assumptions about the overall economic climate and the competitive environment for our business units. There can be no assurance that our estimates and assumptions made for purposes of our goodwill and identifiable intangible asset testing as of the time of testing will prove to be accurate predictions of the future. If our assumptions regarding business projections, competitive environments or anticipated growth rates are not correct, we may be required to record goodwill and/or intangible asset impairment charges in future periods, whether in connection with our next annual impairment testing or earlier, if an indicator of an impairment is present before our next annual evaluation. We continuously monitor for events and circumstances that could negatively impact the key assumptions in determining fair value of the reporting units. Given the ongoing uncertainty driven by the COVID-19 pandemic, we will continue to evaluate the impact on the reporting units as adverse changes to these assumptions could result in future impairments.


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New Accounting Pronouncements
For information with respect to new accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 3 to Notes to Consolidated Financial Statements included in Item 1.

Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. 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 Carpenter’sCarpenter Technology's filings with the Securities and Exchange Commission, including its report on Form 10-K for the year ended June 30, 2017, Form 10-Q for the quarter ended September 30, 2017,2021, and the exhibits attached to those filings.that filing. They include but are not limited to: (1) the cyclical nature of the specialty materials business and certain end-use markets, including aerospace, defense, medical, transportation, energy, industrial transportation,and consumer, medical, and energy, or other influences on Carpenter’sCarpenter Technology's business such as new competitors, the consolidation of competitors, customers, and suppliers or the transfer of manufacturing capacity from the United States to foreign countries; (2) the ability of Carpenter Technology to achieve cash generation, growth, earnings, profitability, operating income, cost savings and reductions, qualifications, productivity improvements or process changes; (3) the ability to recoup increases in the cost of energy, raw materials, freight or other factors; (4) domestic and foreign excess manufacturing capacity for certain metals; (5) fluctuations in currency exchange rates; (6) the degree of successeffect of government trade actions; (7) the valuation of the assets and liabilities in Carpenter’sCarpenter Technology's pension trusts and the accounting for pension plans; (8) possible labor disputes or work stoppages; (9) the potential that our customers may substitute alternate materials or adopt different manufacturing practices that replace or limit the suitability of our products; (10) the ability to successfully acquire and integrate acquisitions; (11) the availability of credit facilities to Carpenter Technology, its customers or other members of the supply chain; (12) the ability to obtain energy or raw materials, especially from suppliers located in countries that may be subject to unstable political or economic conditions; (13) Carpenter’sCarpenter Technology's manufacturing processes are dependent upon highly specialized equipment located primarily in facilities in Reading and Latrobe, Pennsylvania and Athens, Alabama for which there may be limited alternatives if there are significant equipment failures or a catastrophic event; (14) the ability to hire and retain key personnel, including members of the executive management team, management, metallurgists and other skilled personnel; and (15) fluctuations in oil and gas prices and production.production; (16) uncertainty regarding the return to service of the Boeing 737 MAX aircraft and the related supply chain disruption; (17) potential impacts of the COVID-19 pandemic on our operations, financial results and financial position; (18) our efforts and efforts by governmental authorities to mitigate the COVID-19 pandemic, such as travel bans, shelter in place orders and business closures, and the related impact on resource allocations and manufacturing and supply chains; (19) our status as a "critical", "essential" or "life-sustaining" business in light of COVID-19 business closure laws, orders and guidance being challenged by a governmental body or other applicable authority; (20) our ability to execute our business continuity, operational, budget and fiscal plans in light of the COVID-19 pandemic; and (21) our ability to successfully carry out restructuring and business exit activities on the expected terms and timelines. Any of these factors could have an adverse and/or fluctuating effect on Carpenter’sCarpenter Technology's 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 (the “Securities Act”"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended. Carpenter Technology undertakes no obligation to update or revise any forward-looking statements.
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Item 3. 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 Note 1014 to the consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, “Financial Statements”"Financial Statements", 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. As of September 30, 2021, we had approximately $9.8 million of net deferred gains related to commodity forward contracts to purchase certain raw materials. A large portion of this balance is related to commodity forward contracts to support firm price sales arrangements associated with many customers. However, approximately 41 percent of these contracts relate to commodity forward contracts entered into to support sales under firm price sales arrangements with one customer in addition to the credit already extended to this customer in connection with outstanding trade receivables. Our customers have historically performed under these arrangements, and we believe that they will honor such obligations in the future.
 
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 risks.
 
We use interest rate swaps to achieve a level of floating rate debt relative to fixed rate debt where appropriate. Historically, we have entered into forward interest rate swap contracts to manage the risk of cash flow variability associated with fixed interest debt expected to be issued.
 
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.
 
Based on the current funding level, the allocation policy for pension plan assets is to have approximately 6075 percent in return seeking assets and 4025 percent in liability matching assets. Return seeking assets include domestic and international equities, real assets and diversified loan funds.credit strategies. Liability matching assets include long duration bond funds.
 
The status of our financial instruments as of December 31, 2017September 30, 2021 is provided in Note 1014 to the consolidated financial statements included in Part I, Item 1, “Financial Statements”"Financial Statements" of this Quarterly Report on Form 10-Q. Assuming either of the following occurred on December 31, 2017,September 30, 2021, (a) an instantaneous 10 percent decrease in the price of raw materials and energy for which we have commodity forward contracts, or (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 in either scenario.
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Item 4. Controls and Procedures
 
(a)Evaluation of Effectiveness of Disclosure Controls and Procedures
(a)Evaluation of Effectiveness of Disclosure Controls and Procedures
 
The Company’sCompany's management, with the participation of the Company’sCompany's President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, evaluated the effectiveness of the Company’sCompany's disclosure controls and procedures as defined in Rules 13a—15(e) and 15d—15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”"Exchange Act"), as of December 31, 2017.September 30, 2021. Based on that evaluation, our management, including the President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, concluded that the Company’sCompany's disclosure controls and procedures as of December 31, 2017September 30, 2021 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 Commission’sCommission's 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 Company’sCompany's management, including the Company’sCompany's President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
 
(b)Changes in Internal Control over Financial Reporting
(b)Changes in Internal Control over Financial Reporting
     
There have been no changes in the Company’sCompany's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2017September 30, 2021 that have materially affected, or are likely to materially affect, the Company’sCompany's internal control over financial reporting.
 
PART II — OTHER INFORMATION
 
Item 1. Legal Proceedings
 
Pending legal proceedings involve ordinary routine litigation incidental to our business, which we do not believe would have a material adverse effect on our business regardless of their outcome. See “Management’s"Management's Discussion and Analysis of Financial Condition and Results of Operations — Contingencies.”"
 
Item 1A. Risk Factors
 
We have evaluated the risks associated with our business and operations and determined that those risk factors included in Part 1, Item 1A of our 20172021 Annual Report on Form 10-K adequately disclose the material risks that we face.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
There were no reportable purchases during the quarter ended December 31, 2017,September 30, 2021, however employees surrendered 24984,601 shares to the Company, at an average purchase price of $48.61,$36.05, during such quarter for the payment of the minimum tax liability withholding obligations upon the vesting of shares of restricted stock and the exercise of options. We do not consider this a share buyback program.



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Item 6. Exhibits
 
Exhibit
No.		Description
10(A)
Executive incentive bonus compensation plan of Carpenter Technology Corporation effective July 1, 2021 (Exhibit 10(CC) to our Annual Report on Form 10-K filed on August 19, 2021 and incorporated herein by reference)
Exhibit
No.10(B)
Description
10.A
Amended and RestatedFirst amendment to the executive incentive bonus compensation plan of Carpenter Technology Corporation Change in Control Severance Plan.effective as of July 1, 2021. (filed herewith)
31 (A)
Certification of President and Chief Executive Officer pursuant to Rule 13a—14(a) and Rule 15d—14(a) of the Securities Exchange Act, as amended. (filed herewith)
31 (B)
Certification of Senior Vice President and Chief Financial Officer pursuant to Rule 13a—14(a) and Rule 15d—14(a) of the Securities Exchange Act, as amended. (filed herewith)
32
Certification of President and Chief Executive Officer and Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)
101The following financial information from this Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2017,September 30, 2021, formatted in Inline XBRL (Extensible Business Reporting Language) and filed electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income;Operations; (iii) the Consolidated Statements of Comprehensive (Loss) Income; (iv) the Consolidated Statements of Cash Flows; (v) the Consolidated Statements of Changes in Equity; and (vi) the Notes to the Consolidated Financial Statements.Statements


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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized officer.
 
 
Carpenter Technology Corporation
(Registrant)
Date: February 1, 2018October 28, 2021/s/ Damon J. AudiaTimothy Lain
Damon J. AudiaTimothy Lain
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
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Exhibit Index
Exhibit
No.
Description
10.A
Amended and Restated Carpenter Technology Corporation Change in Control Severance Plan.
31 (A)
Certification of President and Chief Executive Officer pursuant to Rule 13a—14(a) and Rule 15d—14(a) of the Securities Exchange Act, as amended.
31 (B)
Certification of Senior Vice President and Chief Financial Officer pursuant to Rule 13a—14(a) and Rule 15d—14(a) of the Securities Exchange Act, as amended.
32
Certification of President and Chief Executive Officer and Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101The following financial information from this Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2017, formatted in XBRL (Extensible Business Reporting Language) and filed electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows; (v) the Consolidated Statements of Changes in Equity; and (vi) the Notes to the Consolidated Financial Statements.


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