Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



FORM 10-Q



(Mark One)

x

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


For the quarterly period ended September 30, 20142015

or

o

oTRANSITION 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.)

P.O. Box 14662

Reading, Pennsylvania

19610

(Address of principal executive offices)

(Zip Code)

610-208-2000

(Registrant’s telephone number, including area code)

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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer:

x

Accelerated filer:

o

Non-accelerated filer:

o

(Do not check if a smaller reporting company)

Smaller reporting company:

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’s common stock as of October 22, 201421, 2015 was 53,237,660.


49,121,273.


Table of Contents


CARPENTER TECHNOLOGY CORPORATION

FORM 10-Q

INDEX

Page

Page

24

39

40

40

40

40

41

42

2




2

Table of Contents


PART I

Item 1. Financial Statements

CARPENTER TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in millions, except share data)

 

 

September 30,

 

June 30,

 

 

 

2014

 

2014

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

66.0

 

$

120.0

 

Accounts receivable, net

 

319.1

 

339.6

 

Inventories

 

728.1

 

699.2

 

Deferred income taxes

 

5.2

 

 

Other current assets

 

34.1

 

35.7

 

Total current assets

 

1,152.5

 

1,194.5

 

Property, plant and equipment, net

 

1,408.1

 

1,407.0

 

Goodwill

 

257.6

 

257.7

 

Other intangibles, net

 

77.8

 

80.6

 

Other assets

 

116.2

 

117.7

 

Total assets

 

$

3,012.2

 

$

3,057.5

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

251.5

 

$

278.1

 

Accrued liabilities

 

138.1

 

148.0

 

Deferred income taxes

 

 

4.5

 

Total current liabilities

 

389.6

 

430.6

 

Long-term debt, net of current portion

 

604.2

 

604.3

 

Accrued pension liabilities

 

205.9

 

203.4

 

Accrued postretirement benefits

 

162.0

 

163.2

 

Deferred income taxes

 

113.9

 

110.7

 

Other liabilities

 

51.1

 

41.0

 

Total liabilities

 

1,526.7

 

1,553.2

 

 

 

 

 

 

 

Contingencies and commitments (see Note 8)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock — authorized 100,000,000 shares; issued 55,188,983 shares at September 30, 2014 and 55,161,875 shares at June 30, 2014; outstanding 53,237,703 shares at September 30, 2014 and 53,137,144 shares at June 30, 2014

 

275.9

 

275.8

 

Capital in excess of par value

 

260.6

 

263.5

 

Reinvested earnings

 

1,315.4

 

1,311.6

 

Common stock in treasury (1,951,280 shares and 2,024,731 shares at September 30, 2014 and June 30, 2014, respectively), at cost

 

(98.1

)

(101.4

)

Accumulated other comprehensive loss

 

(268.3

)

(245.2

)

Total equity

 

1,485.5

 

1,504.3

 

Total liabilities and equity

 

$

3,012.2

 

$

3,057.5

 

See accompanying notes to consolidated financial statements.

3


 September 30,
2015
 June 30,
2015
ASSETS   
Current assets:   
Cash and cash equivalents$30.6
 $70.0
Accounts receivable, net278.9
 304.1
Inventories686.7
 655.8
Deferred income taxes8.1
 3.3
Other current assets42.7
 37.2
Total current assets1,047.0
 1,070.4
Property, plant and equipment, net1,389.6
 1,397.0
Goodwill257.2
 257.4
Other intangibles, net69.6
 71.6
Other assets107.7
 109.5
Total assets$2,871.1
 $2,905.9
LIABILITIES   
Current liabilities:   
Accounts payable$165.4
 $169.5
Accrued liabilities159.0
 152.6
Total current liabilities324.4
 322.1
Long-term debt611.0
 607.1
Accrued pension liabilities338.9
 334.1
Accrued postretirement benefits109.5
 111.2
Deferred income taxes149.2
 146.5
Other liabilities60.9
 59.0
Total liabilities1,593.9
 1,580.0
Contingencies and commitments (see Note 8)
 
STOCKHOLDERS’ EQUITY   
Common stock — authorized 100,000,000 shares; issued 55,236,407 shares at September 30, 2015 and 55,234,942 shares at June 30, 2015; outstanding 49,121,470 shares at September 30, 2015 and 50,318,244 shares at June 30, 2015276.2
 276.2
Capital in excess of par value268.6
 266.6
Reinvested earnings1,332.3
 1,332.4
Common stock in treasury (6,114,937 shares and 4,916,698 shares at September 30, 2015 and June 30, 2015, respectively), at cost(266.6) (221.1)
Accumulated other comprehensive loss(333.3) (328.2)
Total stockholders' equity1,277.2
 1,325.9
Total liabilities and stockholders' equity$2,871.1
 $2,905.9

Table of Contents

CARPENTER TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 (in millions, except per share data)

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

NET SALES

 

$

549.8

 

$

498.6

 

Cost of sales

 

480.7

 

395.3

 

Gross profit

 

69.1

 

103.3

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

47.0

 

47.5

 

Operating income

 

22.1

 

55.8

 

 

 

 

 

 

 

Interest expense, net

 

(7.0

)

(4.4

)

Other income, net

 

4.9

 

0.1

 

 

 

 

 

 

 

Income before income taxes

 

20.0

 

51.5

 

Income tax expense

 

6.5

 

16.9

 

 

 

 

 

 

 

Net income

 

$

13.5

 

$

34.6

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

Basic

 

$

0.25

 

$

0.65

 

Diluted

 

$

0.25

 

$

0.65

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

Basic

 

53.5

 

53.1

 

Diluted

 

53.7

 

53.4

 

 

 

 

 

 

 

Cash dividends per common share

 

$

0.18

 

$

0.18

 

See accompanying notes to consolidated financial statements.

4



Table of Contents

CARPENTER TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

($ in millions)

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net income

 

$

13.5

 

$

34.6

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

Pension and postretirement benefits, net of tax of $(1.8) and $(2.3), respectively

 

3.0

 

3.6

 

Net (loss) gain on derivative instruments, net of tax of $11.0 and $(2.2), respectively

 

(18.2

)

3.6

 

Unrealized loss on marketable securities, net of tax of $0.0 and $0.0, respectively

 

 

(0.1

)

Foreign currency translation

 

(7.9

)

3.5

 

Other comprehensive (loss) income

 

(23.1

)

10.6

 

Comprehensive (loss) income

 

$

(9.6

)

$

45.2

 

See accompanying notes to consolidated financial statements.

5



3

Table of Contents


CARPENTER TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

INCOME

(Unaudited)

(in millions)

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

13.5

 

$

34.6

 

Adjustments to reconcile net income to net cash provided from operating activities:

 

 

 

 

 

Depreciation and amortization

 

30.3

 

26.7

 

Deferred income taxes

 

2.6

 

(0.7

)

Net pension expense

 

11.5

 

15.0

 

Stock-based compensation expense

 

2.5

 

3.1

 

Changes in working capital and other:

 

 

 

 

 

Accounts receivable

 

16.2

 

57.7

 

Inventories

 

(30.8

)

(47.4

)

Other current assets

 

(6.3

)

(9.0

)

Accounts payable

 

1.3

 

(14.9

)

Accrued liabilities

 

(17.2

)

(18.5

)

Pension contributions

 

(2.8

)

(1.5

)

Other postretirement plan contributions

 

(3.6

)

(3.2

)

Other, net

 

(2.2

)

(2.4

)

Net cash provided from operating activities

 

15.0

 

39.5

 

INVESTING ACTIVITIES

 

 

 

 

 

Purchases of property, equipment and software

 

(59.0

)

(90.4

)

Proceeds from disposals of property and equipment

 

0.1

 

 

Net cash used for investing activities

 

(58.9

)

(90.4

)

FINANCING ACTIVITIES

 

 

 

 

 

Dividends paid

 

(9.6

)

(9.6

)

Tax benefits on share-based compensation

 

0.1

 

1.0

 

Proceeds from stock options exercised

 

0.7

 

2.5

 

Net cash used for financing activities

 

(8.8

)

(6.1

)

Effect of exchange rate changes on cash and cash equivalents

 

(1.3

)

0.5

 

 

 

 

 

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

(54.0

)

(56.5

)

Cash and cash equivalents at beginning of period

 

120.0

 

257.5

 

Cash and cash equivalents at end of period

 

$

66.0

 

$

201.0

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

Acquisition of property, equipment and software

 

$

37.9

 

$

81.5

 

millions, except per share data)

 Three Months Ended
September 30,
 2015 2014
Net sales$455.6
 $549.8
Cost of sales387.0
 480.7
Gross profit68.6
 69.1
    
Selling, general and administrative expenses43.4
 47.0
Restructuring charges0.4
 
Operating income24.8
 22.1
    
Interest expense(6.6) (7.0)
Other (expense) income, net(2.1) 4.9
    
Income before income taxes16.1
 20.0
Income tax expense7.2
 6.5
    
Net income$8.9
 $13.5
    
EARNINGS PER COMMON SHARE: 
  
Basic$0.18
 $0.25
Diluted$0.18
 $0.25
    
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: 
  
Basic49.7
 53.5
Diluted49.9
 53.7
    
Cash dividends per common share$0.18
 $0.18
See accompanying notes to consolidated financial statements.

6



4

Table of Contents


CARPENTER TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
($ in millions)
 Three Months Ended
September 30,
 2015 2014
Net income$8.9
 $13.5
Other comprehensive income (loss), net of tax 
  
Pension and postretirement benefits, net of tax of $(2.3) and $(1.8), respectively3.7
 3.0
Net loss on derivative instruments, net of tax of $3.4 and $11.0, respectively(5.5) (18.2)
Foreign currency translation(3.3) (7.9)
Other comprehensive loss(5.1) (23.1)
Comprehensive income (loss)$3.8
 $(9.6)
See accompanying notes to consolidated financial statements.

5


CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
 Three Months Ended
September 30,
 2015 2014
OPERATING ACTIVITIES 
  
Net income$8.9
 $13.5
Adjustments to reconcile net income to net cash provided from operating activities: 
  
Depreciation and amortization29.9
 30.3
Deferred income taxes(1.0) 2.6
Net pension expense13.4
 11.5
Share-based compensation expense2.7
 2.5
Net loss on disposal of property and equipment0.1
 
Changes in working capital and other: 
  
Accounts receivable24.4
 16.2
Inventories(33.0) (30.8)
Other current assets(4.8) (6.3)
Accounts payable2.5
 1.3
Accrued liabilities(1.6) (17.2)
Pension plan contributions
 (2.8)
Other postretirement plan contributions(3.4) (3.6)
Other, net3.4
 (2.2)
Net cash provided from operating activities41.5
 15.0
INVESTING ACTIVITIES 
  
Purchases of property, equipment and software(29.9) (59.0)
Proceeds from disposals of property and equipment
 0.1
Other4.0
 
Net cash used for investing activities(25.9) (58.9)
FINANCING ACTIVITIES 
  
Dividends paid(9.0) (9.6)
Purchase of treasury stock(45.9) 
Payments on seller financed debt related to software(1.2) 
Tax benefits on share-based compensation
 0.1
Proceeds from stock options exercised0.1
 0.7
Net cash used for financing activities(56.0) (8.8)
Effect of exchange rate changes on cash and cash equivalents1.0
 (1.3)
DECREASE IN CASH AND CASH EQUIVALENTS(39.4) (54.0)
Cash and cash equivalents at beginning of period70.0
 120.0
Cash and cash equivalents at end of period$30.6
 $66.0
SUPPLEMENTAL CASH FLOW INFORMATION: 
  
Non-cash investing activities: 
  
Acquisition of property, equipment and software$10.7
 $37.9
Non-cash financing activities:   
Seller financed debt related to purchase of software$
 $4.9

See accompanying notes to consolidated financial statements.

6


CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 20142015 AND 20132014

(Unaudited)

($ in millions, except per share data)

 

 

Common Stock

 

 

 

 

 

Accumulated

 

 

 

 

 

Par

 

Capital in

 

 

 

Common

 

Other

 

 

 

 

 

Value

 

Excess of

 

Reinvested

 

Stock in

 

Comprehensive

 

 

 

 

 

Of $5

 

Par Value

 

Earnings

 

Treasury

 

(Loss) Gain

 

Total Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2014

 

$

275.8

 

$

263.5

 

$

1,311.6

 

$

(101.4

)

$

(245.2

)

$

1,504.3

 

Net income

 

 

 

 

 

13.5

 

 

 

 

 

13.5

 

Pension and postretirement benefits gain, net of tax

 

 

 

 

 

 

 

 

 

3.0

 

3.0

 

Net loss on derivative instruments, net of tax

 

 

 

 

 

 

 

 

 

(18.2

)

(18.2

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

(7.9

)

(7.9

)

Cash Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

Common @ $0.18 per share

 

 

 

 

 

(9.6

)

 

 

 

 

(9.6

)

Share-based compensation plans

 

 

 

(3.6

)

 

 

3.3

 

 

 

(0.3

)

Stock options exercised

 

0.1

 

0.6

 

 

 

 

 

 

 

0.7

 

Tax windfall on share-based compensation

 

 

 

0.1

 

 

 

 

 

 

 

0.1

 

Other

 

 

 

 

 

(0.1

)

 

 

 

 

(0.1

)

Balances at September 30, 2014

 

$

275.9

 

$

260.6

 

$

1,315.4

 

$

(98.1

)

$

(268.3

)

$

1,485.5

 

 

 

Common Stock

 

 

 

 

 

Accumulated

 

 

 

 

 

Par

 

Capital in

 

 

 

Common

 

Other

 

 

 

 

 

Value

 

Excess of

 

Reinvested

 

Stock in

 

Comprehensive

 

 

 

 

 

Of $5

 

Par Value

 

Earnings

 

Treasury

 

(Loss) Gain

 

Total Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2013

 

$

274.6

 

$

254.4

 

$

1,217.3

 

$

(107.5

)

$

(335.7

)

$

1,303.1

 

Net income

 

 

 

 

 

34.6

 

 

 

 

 

34.6

 

Pension and postretirement benefits gain, net of tax

 

 

 

 

 

 

 

 

 

3.6

 

3.6

 

Net gain on derivative instruments, net of tax

 

 

 

 

 

 

 

 

 

3.6

 

3.6

 

Unrealized loss on marketable securities, net of tax

 

 

 

 

 

 

 

 

 

(0.1

)

(0.1

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

3.5

 

3.5

 

Cash Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

Common @ $0.18 per share

 

 

 

 

 

(9.6

)

 

 

 

 

(9.6

)

Share-based compensation plans

 

 

 

(4.0

)

 

 

4.2

 

 

 

0.2

 

Stock options exercised

 

0.4

 

2.1

 

 

 

 

 

 

 

2.5

 

Tax windfall on share-based compensation

 

 

 

1.1

 

 

 

 

 

 

 

1.1

 

Balances at September 30, 2013

 

$

275.0

 

$

253.6

 

$

1,242.3

 

$

(103.3

)

$

(325.1

)

$

1,342.5

 

 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, 2015$276.2
 $266.6
 $1,332.4
 $(221.1) $(328.2) $1,325.9
Net income 
  
 8.9
  
  
 8.9
Pension and postretirement benefits gain, net of tax 
  
  
  
 3.7
 3.7
Net loss on derivative instruments, net of tax 
  
  
  
 (5.5) (5.5)
Foreign currency translation 
  
  
  
 (3.3) (3.3)
Cash Dividends: 
  
  
  
  
 0
Common @ $0.18 per share 
  
 (9.0)  
  
 (9.0)
Purchase of treasury stock      (45.9)   (45.9)
Share-based compensation plans 
 2.0
  
 0.4
  
 2.4
Stock options exercised

 0.1
  
  
  
 0.1
Tax shortfall on share-based compensation 
 (0.1)  
  
  
 (0.1)
Balances at September 30, 2015$276.2
 $268.6
 $1,332.3
 $(266.6) $(333.3) $1,277.2
 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, 2014$275.8
 $263.5
 $1,311.6
 $(101.4) $(245.2) $1,504.3
Net income 
  
 13.5
  
  
 13.5
Pension and postretirement benefits gain, net of tax 
  
  
  
 3.0
 3.0
Net loss on derivative instruments, net of tax 
  
  
  
 (18.2) (18.2)
Foreign currency translation 
  
  
  
 (7.9) (7.9)
Cash Dividends: 
  
  
  
  
 0
Common @ $0.18 per share 
  
 (9.6)  
  
 (9.6)
Share-based compensation plans 
 (3.6)  
 3.3
  
 (0.3)
Stock options exercised0.1
 0.6
  
  
  
 0.7
Tax windfall on share-based compensation 
 0.1
  
  
  
 0.1
Other    (0.1)     (0.1)
Balances at September 30, 2014$275.9
 $260.6
 $1,315.4
 $(98.1) $(268.3) $1,485.5
See accompanying notes to consolidated financial statements.

7



7

Table of Contents

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


(Unaudited)

1.Basis of Presentation

1.Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles 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 U.S. generally accepted accounting principles 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, 20142015 consolidated balance sheet data was derived from audited financial statements, but does not include all of the disclosures required by U.S. generally accepted accounting principles. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in Carpenter’s annual report on Form 10-K for the year ended June 30, 20142015 (the “2014“2015 Form 10-K”). Operating results for the three months ended September 30, 20142015 are not necessarily indicative of the operating results for any future period.


Certain amounts in the consolidated financial statements and notes to the consolidated financial statements for prior year periods have been reclassified to conform to the fiscal year 20142015 presentation.


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

2.Revision to Statement of Cash Flows

2.Restructuring Charges
During the third quarter of fiscal year 2014,2015, the Company identified an error in the classification of amounts reported in previously reported statements of cash flows. The classification error is related to the reporting of purchases of property, equipment and software that should be adjusted for amounts not yet paid in cash as of the balance sheet date,initiated a restructuring plan, which were incorrectly reflected as cash used in investing activities and cash provided from operating activities. The Company assessed the materiality of this classification error and determined that the classification error is not material to any previously reported financial statements. The revision of prior reported amounts has no impact on the reported change in cash and cash equivalents or amounts reported in the consolidated balance sheets, statements of income, statements of comprehensive income or statements of changes in equity. The effects of the revisions to the statement of cash flows forwas substantially concluded during the three months ended September 30, 2013 are presented2015. The plan focused on position eliminations, site closures and exiting a material development program.

Activity and reserve balances for restructuring charges at September 30, 2015 were as follows:

($ in millions) Reserve Balance
Reserve balance at June 30, 2015 $2.3
Cash payments (0.9)
Restructuring charges 0.4
Other (0.4)
Reserve balance at September 30, 2015 $1.4

The remaining reserve is expected to be substantially paid in the following table:

($ in millions)

 

As Reported

 

Revision
Impact

 

As Revised

 

Net cash provided from (used for) operating activities

 

$

64.0

 

$

(24.5

)

$

39.5

 

Net cash (used for) provided from investing activities

 

(114.9

)

24.5

 

(90.4

)

Net cash used for financing activities

 

(6.1

)

 

(6.1

)

Effect of exchange rate changes on cash and cash equivalents

 

0.5

 

 

0.5

 

Decrease in cash and cash equivalents

 

$

(56.5

)

$

 

$

(56.5

)

8cash during fiscal year 2016.


3.Earnings per Common Share


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CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3.Earnings Per Common Share

The Company calculates basic and diluted earnings per share using the two class method. Under the two class method, earnings are allocated to common stock and participating securities (nonvested restricted shares and units that receive non-forfeitable dividends) according to their participation rights in dividends and undistributed earnings. The earnings available to each class of stock are divided by the weighted average number of outstanding shares for the period in each class. Diluted earnings per share assumeassumes the issuance of common stock for all potentially dilutive share equivalents outstanding.


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


The calculations of basic and diluted earnings per common share for the three months ended September 30, 20142015 and 20132014 were as follows:

 

 

Three Months Ended

 

 

 

September 30,

 

(in millions, except per share data)

 

2014

 

2013

 

Net income

 

$

13.5

 

$

34.6

 

Less: earnings and dividends allocated to participating securities

 

 

(0.1

)

Earnings available for Carpenter common stockholders used in calculation of basic earnings per share

 

$

13.5

 

$

34.5

 

 

 

 

 

 

 

Weighted average number of common shares outstanding, basic

 

53.5

 

53.1

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.25

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13.5

 

$

34.6

 

Less: earnings and dividends allocated to participating securities

 

 

(0.1

)

Earnings available for Carpenter common stockholders used in calculation of diluted earnings per share

 

$

13.5

 

$

34.5

 

 

 

 

 

 

 

Weighted average number of common shares outstanding, basic

 

53.5

 

53.1

 

Effect of shares issuable under share-based compensation plans

 

0.2

 

0.3

 

 

 

 

 

 

 

Weighted average number of common shares outstanding, diluted

 

53.7

 

53.4

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.25

 

$

0.65

 

  Three Months Ended
September 30,
(in millions, except per share data) 2015 2014
Net income $8.9
 $13.5
Less: earnings and dividends allocated to participating securities 
 
Earnings available for common stockholders used in calculation of basic earnings per share $8.9
 $13.5
     
Weighted average number of common shares outstanding, basic 49.7
 53.5
     
Basic earnings per common share $0.18
 $0.25
     
Net income $8.9
 $13.5
Less: earnings and dividends allocated to participating securities 
 
Earnings available for common stockholders used in calculation of diluted earnings per share $8.9
 $13.5
     
Weighted average number of common shares outstanding, basic 49.7
 53.5
Effect of shares issuable under share-based compensation plans 0.2
 0.2
Weighted average number of common shares outstanding, diluted 49.9
 53.7
     
Diluted earnings per common share $0.18
 $0.25
The following awards issued under share-based compensation plans were excluded from the above calculations of diluted earnings per share because their effects were anti-dilutive:

 

 

Three Months Ended

 

 

 

September 30,

 

(in millions)

 

2014

 

2013

 

Stock options

 

0.3

 

0.2

 

9

  Three Months Ended
September 30,
(in millions) 2015 2014
Stock options 1.3
 0.3

4.Inventories


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CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.Inventories

Inventories consisted of the following components as of September 30, 20142015 and June 30, 2014:

 

 

September 30,

 

June 30,

 

($ in millions)

 

2014

 

2014

 

Raw materials and supplies

 

$

138.4

 

$

122.3

 

Work in process

 

400.5

 

393.9

 

Finished and purchased products

 

189.2

 

183.0

 

Total inventory

 

$

728.1

 

$

699.2

 

2015:

($ in millions) September 30,
2015
 June 30,
2015
Raw materials and supplies $141.5
 $121.7
Work in process 341.0
 346.1
Finished and purchased products 204.2
 188.0
Total inventory $686.7
 $655.8
Inventories are valued at the lower of cost or market. Cost for inventories is principally determined using the last-in, first-out (“LIFO”) method.

5.Accrued Liabilities

The Company also uses the first-in, first-out (“FIFO”) and average costs methods.


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


5.Accrued Liabilities
Accrued liabilities consisted of the following as of September 30, 20142015 and June 30, 2014:

 

 

September 30,

 

June 30,

 

($ in millions)

 

2014

 

2014

 

Accrued compensation and benefits

 

$

47.7

 

$

49.8

 

Accrued pension liabilities

 

17.6

 

19.3

 

Accrued postretirement benefits

 

15.5

 

15.5

 

Accrued interest expense

 

5.6

 

11.2

 

Deferred revenue

 

5.9

 

7.5

 

Derivative financial instruments

 

13.0

 

4.7

 

Accrued income taxes

 

2.4

 

8.4

 

Other

 

30.4

 

31.6

 

Total accrued liabilities

 

$

138.1

 

$

148.0

 

102015:

($ in millions) September 30,
2015
 June 30,
2015
Accrued compensation and benefits $44.3
 $44.3
Derivative financial instruments 42.2
 32.7
Accrued postretirement benefits 14.0
 14.0
Accrued income taxes 9.3
 8.7
Accrued interest expense 5.6
 11.2
Accrued pension liabilities 3.3
 3.3
Other 40.3
 38.4
Total accrued liabilities $159.0
 $152.6

6.Pension and Other Postretirement Benefits


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CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6.Pension and Other Postretirement Benefits

The components of the net periodic benefit cost related to the Company’s pension and other postretirement benefits for the three months ended September 30, 20142015 and 20132014 were as follows:

 

 

 

 

 

 

Other Postretirement

 

Three months ended September 30,

 

Pension Plans

 

Plans

 

($ in millions)

 

2014

 

2013

 

2014

 

2013

 

Service cost

 

$

8.0

 

$

8.0

 

$

1.1

 

$

1.0

 

Interest cost

 

13.5

 

14.3

 

3.0

 

3.1

 

Expected return on plan assets

 

(17.2

)

(15.7

)

(1.7

)

(1.6

)

Amortization of net loss

 

4.2

 

5.5

 

0.5

 

0.3

 

Amortization of prior service cost

 

0.1

 

0.1

 

 

 

 

 

$

8.6

 

$

12.2

 

$

2.9

 

$

2.8

 

Three months ended September 30, Pension Plans Other Postretirement Plans
($ in millions) 2015 2014 2015 2014
Service cost $7.7
 $8.0
 $0.8
 $1.1
Interest cost 14.5
 13.5
 2.5
 3.0
Expected return on plan assets (16.4) (17.2) (1.7) (1.7)
Amortization of net loss 6.8
 4.2
 0.7
 0.5
Amortization of prior service cost (benefit) 0.1
 0.1
 (1.6) 
Net periodic benefit costs $12.7
 $8.6
 $0.7
 $2.9

During the three months ended September 30, 20142015 and 2013,2014, the Company made $2.8$0 million and $1.5$2.8 million, respectively, of contributions to its qualified defined benefit pension plans. The Company currently expects to make approximately $12.7 million ofno contributions to its qualified defined benefit pension plans during the remainder of fiscal year 2015.

7.Debt

2016.

7.Debt
The Company has a $500Company's $500.0 million syndicated credit agreementfacility (“Credit Agreement”) that extends to June 2018. Interest on the borrowings under the Credit Agreement accrue at variable rates, based upon LIBOR or a defined “Base Rate,” both determined based upon the rating of the Company’s senior unsecured long-term debt (the “Debt Rating”). The applicable margin to be added to LIBOR ranges from 0.75% to 1.90% (1.25% as of September 30, 2014)2015), and for Base Rate-determined loans, from 0.00% to 0.90% (0.25% as of September 30, 2014)2015). The Company also pays a quarterly commitment fee ranging from 0.075% to 0.375% (0.150% as of September 30, 2014)2015), determined based upon the Debt Rating, of the unused portion of the $500$500.0 million commitment under the Credit Agreement. In addition, the Company must pay certain letter of credit fees, ranging from 0.75% to 1.90% (1.25% as of September 30, 2014)2015), with respect to letters of credit issued under the Credit Agreement. The Company has the right to voluntarily prepay and reborrow loans and to terminate or reduce the commitments under the facility. As of September 30, 2014,2015, the Company had $8.2$7.1 million of issued letters of credit under the Credit Agreement, with the balance of $491.8$492.9 million available for future borrowings.

to the Company.

The Company is subject to certain financial and restrictive covenants under the Credit Agreement, which, among other things, require the maintenance of a minimum interest coverage ratio of 3.50 to 1.00. The interest coverage ratio is defined in the Credit Agreement as, for any period, the ratio of consolidated earnings before interest, taxes, depreciation and

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


amortization and non-cash net pension expense (“EBITDA”) to consolidated interest expense for such period. The Credit Agreement also requires the Company to maintain a debt to capital ratio of less than 55%.55 percent. The debt to capital ratio is defined in the Credit Agreement as the ratio of consolidated indebtedness, as defined therein, to consolidated capitalization, as defined therein. As of September 30, 20142015 and June 30, 2014,2015, the Company was in compliance with all of the covenants of the Credit Agreement.

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CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Long-term debt outstanding as of September 30, 20142015 and June 30, 20142015 consisted of the following:

 

 

September 30,

 

June 30,

 

($ in millions)

 

2014

 

2014

 

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 September 30, 2014 and June 30, 2014)

 

$

55.0

 

$

55.0

 

Senior unsecured notes, 5.20% due July 2021 (face value of $250.0 million at September 30, 2014 and June 30, 2014)

 

249.6

 

249.7

 

Senior unsecured notes, 4.45% due March 2023 (face value of $300.0 million at September 30, 2014 and June 30, 2014)

 

299.6

 

299.6

 

Total

 

604.2

 

604.3

 

Less: amounts due within one year

 

 

 

Long-term debt, net of current portion

 

$

604.2

 

$

604.3

 

($ in millions) September 30,
2015
 June 30,
2015
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 September 30, 2015 and June 30, 2015) $55.0
 $55.0
Senior unsecured notes, 5.20% due July 2021 (face value of $250.0 million at September 30, 2015 and June 30, 2015) 256.3
 252.5
Senior unsecured notes, 4.45% due March 2023 (face value of $300.0 million at September 30, 2015 and June 30, 2015) 299.7
 299.6
Total 611.0
 607.1
Less: amounts due within one year 
 
Long-term debt, net of current portion $611.0
 $607.1
For the three months ended September 30, 20142015 and 2013,2014, interest costs totaled $7.7$7.2 million and $7.9$7.7 million, respectively, of which $0.7$0.6 million and $3.5$0.7 million, respectively, were capitalized as part of the cost of property, plant, equipment and software.

8.Contingencies and 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’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”) 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’s best estimate of the probable and reasonably estimable future costs related to environmental remediation. During the three months ended September 30, 2015, there was no change to the liability for a company-owned former operating site. 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 September 30, 2015 and June 30, 2015 were $15.9 million. 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 PRP’s 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 by management on a quarterly basis. The Company accrues amounts for environmental remediation costs that represent management’s best estimate of the probable and reasonably estimable undiscounted future costs related to environmental remediation. During the three months ended September 30, 2014, the Company increased the liability for a company-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 September 30, 2014 and June 30, 2014 were $15.6 million and $15.5 million, respectively.

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CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 PRP’s. Based upon information currently available, such future costs are not expected to have a material effect on Carpenter’s financial position, results of operations or cash flows over the long-term. However, such costs could be material to Carpenter’s financial position, results of operations or cash flows in a particular future quarter or year.



Other

The Company is defending various routine claims and legal actions that are incidental to its business and that are 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.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’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’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’s financial position, results of operations or cash flows in a particular future quarter or year.


9.Fair Value Measurements

    Share Repurchase Program


In October 2014, the Company’s Board of Directors authorized a share repurchase program. The program authorizes the purchase of up to $500.0 million of the Company’s outstanding common stock over two years. The shares may be repurchased from time to time at the Company's discretion based on capital needs of the business, general market conditions and the market price of the stock. The share repurchase program may be discontinued at any time. During the three months ended September 30, 2015, the Company purchased 1,206,600 of its common stock on the open market for an aggregate of $45.9 million. As of September 30, 2015, $329.6 million remains available for future purchases.

10.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 andor liabilities in active markets; quoted prices for identical or similar assets andor 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 andor 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.

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CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:

September 30, 2014

 

Fair Value
Measurements Using
Input Type

 

($ in millions)

 

Level 2

 

Assets:

 

 

 

Marketable securities

 

 

 

Municipal auction rate securities

 

$

5.2

 

Derivative financial instruments

 

6.1

 

Total assets

 

$

11.3

 

 

 

 

 

Liabilities:

 

 

 

Derivative financial instruments

 

$

25.1

 

June 30, 2014

 

Fair Value
Measurements Using
Input Type

 

($ in millions)

 

Level 2

 

Assets:

 

 

 

Marketable securities

 

 

 

Municipal auction rate securities

 

$

5.2

 

Derivative financial instruments

 

20.4

 

Total assets

 

$

25.6

 

 

 

 

 

Liabilities:

 

 

 

Derivative financial instruments

 

$

10.9

 

September 30, 2015 
Fair Value
Measurements Using
Input Type
($ in millions) Level 2
Assets:  
Marketable securities  
Municipal auction rate securities $5.0
Derivative financial instruments 7.8
Total assets $12.8
   
Liabilities:  
Derivative financial instruments $64.9
June 30, 2015 
Fair Value
Measurements Using
Input Type
($ in millions) Level 2
Assets:  
Marketable securities  
Municipal auction rate securities $5.0
Derivative financial instruments 4.4
Total assets $9.4
   
Liabilities:  
Derivative financial instruments $53.5
The Company’s derivative financial instruments consist of commodity forward contracts, foreign currency forward contracts, interest rate swaps and forward interest rate swaps. These instruments are measured at fair value using the market method valuation technique. The inputs to this technique utilize information related to foreign exchange rates, commodity prices and interest rates published by third party leading financial news and data providers. This is observable data; however, the valuation of these instruments is not based on actual transactions for the same instruments and, as such, they are classified as Level 2. The Company’s use of derivatives and hedging policies are more fully discussed in Note 11.

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.

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.

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CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The carrying amounts and estimated fair values of the Company’s financial instruments not recorded at fair value in the financial statements were as follows:

 

 

September 30, 2014

 

June 30, 2014

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

($ in millions)

 

Value

 

Value

 

Value

 

Value

 

Long-term debt, including current portion

 

$

604.2

 

$

637.4

 

$

604.3

 

$

638.7

 

Company-owned life insurance

 

$

16.2

 

$

16.2

 

$

16.2

 

$

16.2

 

  September 30, 2015 June 30, 2015
($ in millions) 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Long-term debt $611.0
 $619.6
 $607.1
 $628.6
Company-owned life insurance $12.3
 $12.3
 $13.0
 $13.0

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


The carrying amount forof company-owned life insurance reflects cash surrender values based upon the market values of underlying securities, using levelLevel 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 of long-term debt as of September 30, 20142015 and June 30, 20142015 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.

10.Other Income, Net

Other income, net consisted of the following:

 

 

Three Months Ended

 

 

 

September 30,

 

($ in millions)

 

2014

 

2013

 

 

 

 

 

 

 

Legal settlement

 

$

4.4

 

$

 

Foreign exchange

 

0.6

 

(0.4

)

Equity in earnings of unconsolidated subsidiaries

 

0.1

 

0.2

 

Unrealized (losses) gains on company-owned life insurance contracts and investments held in rabbi trusts

 

(0.3

)

0.4

 

Other

 

0.1

 

(0.1

)

Total other income, net

 

$

4.9

 

$

0.1

 

11.Derivatives and Hedging Activities

11.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 about the impact the derivative instruments had on the Company’s financial position, results of operations and cash flows.

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CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 income (loss) (“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 September 30, 2014,2015, the Company had forward contracts to purchase 28.225.5 million pounds of certain raw materials with settlement dates through JuneDecember 2019.

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 have beenwere designated as cash flow hedges. The qualifying hedge contracts arewere marked-to-market at each reporting date and any unrealized gains or losses arewere included in accumulated other comprehensive incomeAOCI to the extent effective, and reclassified to interest expense in the period during which the hedged transaction affects earnings or it becomes probable that the forecasted transaction will not occur.  For the three months ended September 30, 20142015 and 2013,2014, net gains of $0.1 million and $0.1 million, respectively, were recorded as a reduction to interest expense. These amounts includerepresent the impact of previously terminated swaps which are being amortized over the remaining term of the underlying debt.

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 accumulated other comprehensive incomeAOCI 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 currency against the effect of changes in exchange rates. These positions do not qualify for hedge accounting and accordingly are marked-to-market at each reporting date through charges to other income and expense. As of September 30, 20142015 and June 30, 2014,2015, 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.

Fair Value Hedging - Interest rate swaps: The Company has useduses interest rate swaps to achieve a level of floating rate debt relative to fixed rate debt where appropriate. The Company has designated fixed to floating interest rate swaps as fair value hedges. Accordingly, the changes in the fair value of these instruments are immediately recorded in earnings. The mark-to-market values of both the fair value hedging instruments and the underlying debt obligations are recorded as equal and offsetting gains and losses in interest expense in the consolidated statements of income. As of September 30, 20142015 and June 30, 2014,2015, the total notional amount of floating interest rate contracts was $100.0 million and $0.0 million, respectively.$150.0 million. For the three months ended September 30, 20142015 and 2013,2014, net gains of $0.4$0.7 million and $0.0$0.4 million, respectively, were recorded as a reduction to interest expense.

16



14

Table of Contents

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 September 30, 20142015 and June 30, 2014:

September 30, 2014
($ in millions)

 

Interest
Rate Swaps

 

Foreign
Currency
Contracts

 

Commodity
Contracts

 

Total
Derivatives

 

Asset Derivatives:

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Other current assets

 

$

0.4

 

$

1.3

 

$

1.9

 

$

3.6

 

Other assets

 

 

 

2.5

 

2.5

 

Total asset derivatives

 

$

0.4

 

$

1.3

 

$

4.4

 

$

6.1

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

$

 

$

0.1

 

$

12.9

 

$

13.0

 

Other liabilities

 

0.2

 

 

11.9

 

12.1

 

Total liability derivatives

 

$

0.2

 

$

0.1

 

$

24.8

 

$

25.1

 

June 30, 2014
($ in millions)

 

Interest
Rate Swaps

 

Foreign
Currency
Contracts

 

Commodity
Contracts

 

Total
Derivatives

 

Asset Derivatives:

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Other current assets

 

$

 

$

 

$

11.3

 

$

11.3

 

Other assets

 

 

 

9.1

 

9.1

 

Total asset derivatives

 

$

 

$

 

$

20.4

 

$

20.4

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

$

 

$

0.4

 

$

4.3

 

$

4.7

 

Other liabilities

 

 

0.2

 

6.0

 

6.2

 

Total liability derivatives

 

$

 

$

0.6

 

$

10.3

 

$

10.9

 

Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion2015:

September 30, 2015 
Interest
Rate Swaps
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
Total
Derivatives
($ in millions)    
Asset Derivatives:  
  
  
  
Derivatives designated as hedging instruments:  
  
  
  
Other current assets $0.6
 $0.6
 $
 $1.2
Other assets 6.6
 
 
 6.6
Total asset derivatives $7.2
 $0.6
 $
 $7.8
Liability Derivatives:  
  
  
  
Derivatives designated as hedging instruments:  
  
  
  
Accrued liabilities $
 $0.2
 $42.0
 $42.2
Other liabilities 
 
 22.7
 22.7
Total liability derivatives $
 $0.2
 $64.7
 $64.9
June 30, 2015 
Interest
Rate Swaps
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
Total
Derivatives
($ in millions)    
Asset Derivatives:  
  
  
  
Derivatives designated as hedging instruments:  
  
  
  
Other current assets $1.5
 $0.2
 $
 $1.7
Other assets 2.7
 
 
 2.7
Total asset derivatives $4.2
 $0.2
 $
 $4.4
Liability Derivatives:  
  
  
  
Derivatives designated as hedging instruments:  
  
  
  
Accrued liabilities $
 $
 $32.7
 $32.7
Other liabilities 
 
 20.8
 20.8
Total liability derivatives $
 $
 $53.5
 $53.5

Substantially all of the gainCompany's derivative contracts are subject to master netting arrangements, or losssimilar agreements with each counterparty, which provide for the option to settle contracts on a net basis when they settle on the derivative is reported as a component of accumulated other comprehensive incomesame day and reclassified into earnings in the same periodcurrency. 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 periods during which the hedged transactions affect earnings or it becomes probable the forecasted transaction will not occur. The following is a summary of the (losses) gains related to cash flow hedges recognized during the three months ended September 30, 2014 and 2013:

17



Table of Contents

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Amount of (Loss) Gain
Recognized in AOCI on
Derivatives
(Effective Portion)

 

 

 

Three Months Ended

 

 

 

September 30,

 

($ in millions)

 

2014

 

2013

 

Derivatives in Cash Flow Hedging Relationship:

 

 

 

 

 

Commodity contracts

 

$

(28.3

)

$

(1.4

)

Foreign exchange contracts

 

1.5

 

(0.5

)

Total

 

$

(26.8

)

$

(1.9

)

 

 

 

 

Amount of Gain (Loss)
Reclassified from AOCI
into Income
(Effective Portion)

 

Amount of Gain
Reclassified from AOCI
into Income
(Ineffective Portion)

 

($ in millions)

 

Location of Gain (Loss)

 

Three Months Ended

 

Three Months Ended

 

Derivatives in Cash Flow

 

Reclassified from AOCI into

 

September 30,

 

September 30,

 

Hedging Relationship:

 

Income

 

2014

 

2013

 

2014

 

2013

 

Commodity contracts

 

Cost of sales

 

$

2.0

 

$

(7.7

)

$

0.4

 

$

 

Foreign exchange contracts

 

Net sales

 

0.3

 

(0.1

)

 

 

Forward interest rate swaps

 

Interest expense

 

0.1

 

0.1

 

 

 

Total

 

 

 

$

2.4

 

$

(7.7

)

$

0.4

 

$

 

termination event. The Company estimates that $6.7presents 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 $8.4 million of net derivative losses included in AOCIand total liability derivatives would have been $65.5 million as of September 30, 2014 will be reclassified into earnings within the next 12 months. No significant cash flow hedges were discontinued during the quarter ended September 30, 2014.

The changes in AOCI associated with derivative hedging activities during the three months ended September 30, 2014 and 2013 were as follows:

 

 

Three Months Ended

 

 

 

September 30,

 

($ in millions)

 

2014

 

2013

 

Balance, beginning

 

$

7.6

 

$

(41.5

)

Current period changes in fair value, net of tax

 

(16.7

)

(1.2

)

Reclassification to earnings, net of tax

 

(1.5

)

4.8

 

Balance, ending

 

$

(10.6

)

$

(37.9

)

2015.


According to the provisions of the Company’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. The Company’s contracts with these counterparties allow for netting of derivative instrument positions executed under each contract. As of September 30, 20142015 and June 30, 2014,2015, the Company had no cash collateral held by counterparties.

18



Table of Contents

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.



15

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


Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of 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 related to cash flow hedges recognized during the three months ended September 30, 2015 and 2014:
  Amount of (Loss) Gain
Recognized in AOCI on
Derivatives
(Effective Portion)
  Three Months Ended
September 30,
($ in millions) 2015 2014
Derivatives in Cash Flow Hedging Relationship:  
  
Commodity contracts $(18.5) $(28.3)
Foreign exchange contracts 0.2
 1.5
Total $(18.3) $(26.8)
($ 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
September 30,
 Three Months Ended
September 30,
  2015 2014 2015 2014
Derivatives in Cash Flow Hedging Relationship:        
Commodity contracts Cost of sales $(9.3) $2.0
 $
 $0.4
Foreign exchange contracts Net sales (0.1) 0.3
 
 
Forward interest rate swaps Interest expense 0.1
 0.1
 
 
Total   $(9.3) $2.4
 $
 $0.4
The Company estimates that $21.8 million of net derivative losses included in AOCI as of September 30, 2015 will be reclassified into earnings within the next 12 months. No significant cash flow hedges were discontinued during the three months ended September 30, 2015.
The changes in AOCI associated with derivative hedging activities during the three months ended September 30, 2015 and 2014 were as follows:
  Three Months Ended
September 30,
($ in millions) 2015 2014
Balance, beginning $(28.5) $7.6
Current period changes in fair value, net of tax (11.4) (16.7)
Reclassification to earnings, net of tax 5.9
 (1.5)
Balance, ending $(34.0) $(10.6)

16

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


12.Other (Expense) Income, Net
Other (expense) income, net consisted of the following:
  Three Months Ended
September 30,
($ in millions) 2015 2014
Foreign exchange $(1.2) $0.6
Unrealized losses on company-owned life insurance contracts and investments held in rabbi trusts (1.2) (0.3)
Equity in earnings of unconsolidated subsidiaries 0.3
 0.1
Legal settlement 
 4.4
Other 
 0.1
Total other (expense) income, net $(2.1) $4.9
13.Income Taxes
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.

Income tax expense for the three months ended September 30, 20142015 was $6.5$7.2 million, or 32.544.7 percent of pre-tax income as compared with $16.9$6.5 million, or 32.832.5 percent of pre-tax income for the three months ended September 30, 2013. The2014. Tax expense for the three months ended September 30, 2015 includes a discrete tax ratecharge for the deferred tax liability on unremitted foreign earnings of one of our foreign subsidiaries.

As of June 30, 2015, we had $118.5 million of indefinitely reinvested foreign earnings for which we have not provided deferred income taxes.  Due to a change in both periods is lower than the statutory tax ratebusiness strategy for one of 35 percent, primarily dueour foreign subsidiaries, we have changed our intent with regard to the benefits associated withindefinite reinvestment of the domestic manufacturing deduction.

13.Superalloy Powders Technical Assistance and Powder Supply Agreements

On September 30, 2013, the Company entered into a multi-level agreement with United Technologies Corporation (“UTC”) through its Pratt & Whitney Division, which includes a technical assistance agreement and a long-term powder supply agreement. The technical assistance agreement providesforeign earnings for the licensing of technology associated with the production of superalloy powders.this subsidiary.  As a result of this change, we recorded a discrete deferred tax charge of $2.0 million in the agreements, the Company began construction of a superalloy powder facility which is expected to takequarter.  The remaining balance, approximately 18 months to construct at an estimated cost of $30 million. Once the facility is qualified by UTC, the Company will supply UTC with superalloy powder for up to 20 years. The powder supply agreement provides for minimum guaranteed purchase quantities of specified materials for a period of 12 years.

According to the terms of the technology licensing agreement, the Company agreed to pay a $13.0 million up-front license fee, which is payable in equal quarterly installments beginning on December 15, 2013. This amount has been capitalized and will be amortized as a reduction to revenue over the term of the minimum guarantee period of 12 years. During fiscal year 2014 the Company paid $9.8 million related to the up-front license fee. As of September 30, 2014, $13.0 million and $3.2$112.9 million, of the upfront license fee are included in other assets and accrued liabilities, respectively.

19undistributed foreign earnings continues to be indefinitely reinvested.


14.Business Segments


Table of Contents

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

14.Business Segments

The Company has two reportable segments, Specialty Alloys Operations (“SAO”) and Performance Engineered Products (“PEP”).

The SAO segment is comprised of the Company’s major premium alloy and stainless steel manufacturing operations. This includes operations performed at mills primarily in Reading and Latrobe and surrounding areas in Pennsylvania, 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’s differentiated operations. This segment includes the Dynamet titanium business, the Carpenter Powder Products business, the Amega West business, the Specialty Steel Supply business, and the Latrobe Special Metals Distribution business and Aceros Fortuna based in Mexico.Mexico distribution businesses. The businesses in the PEP segment are managed with an entrepreneurial structure to promote flexibility and agility to quickly respond to market dynamics. It is our belief this model will ultimately drive overall revenue and profit growth.

The Company’s executive management evaluates the performance of these operating segments based on sales, operating income and cash flow generation. Segment operating profit excludes general corporate costs, which include 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 related charges transaction costs associated with acquisitions and other specifically-identified income or expense items.


17

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


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 expense.”

deferrals”.

On a consolidated basis, there were no significant individual customers thatone customer, Alcoa Inc., accounted for 10approximately 13 percent or more of the Company’s net sales for the three months ended September 30, 20142015, and 2013, respectively.

20

no single customer accounted for 10 percent or more of the Company's net sales for the three months ended September 30, 2014. Approximately 16 percent and 17 percent of the accounts receivable outstanding at September 30, 2015 and June 30, 2015, respectively, are due from one customer, Alcoa, Inc.

Segment Data Three Months Ended
September 30,
($ in millions) 2015 2014
Net Sales:  
  
Specialty Alloys Operations $372.6
 $436.0
Performance Engineered Products 91.5
 129.9
Intersegment (8.5) (16.1)
Consolidated net sales $455.6
 $549.8
Segment Data Three Months Ended
September 30,
($ in millions) 2015 2014
Operating Income:  
  
Specialty Alloys Operations $41.1
 $24.6
Performance Engineered Products (0.4) 9.7
Corporate costs (12.0) (10.3)
     Pension earnings, interest and deferrals (4.8) (2.4)
Intersegment 0.9
 0.5
Consolidated operating income $24.8
 $22.1
Segment Data Three Months Ended
September 30,
($ in millions) 2015 2014
Depreciation and Amortization:  
  
Specialty Alloys Operations $23.5
 $23.5
Performance Engineered Products 5.7
 6.0
Corporate 0.9
 1.1
Intersegment (0.2) (0.3)
Consolidated depreciation and amortization $29.9
 $30.3

18

Table of Contents

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Three Months Ended

 

Segment Data

 

September 30,

 

($ in millions)

 

2014

 

2013

 

Net Sales:

 

 

 

 

 

Specialty Alloys Operations

 

$

436.0

 

$

394.9

 

Performance Engineered Products

 

129.9

 

118.5

 

Intersegment

 

(16.1

)

(14.8

)

Consolidated net sales

 

$

549.8

 

$

498.6

 

 

 

 

 

 

 

Operating Income:

 

 

 

 

 

Specialty Alloys Operations

 

$

24.6

 

$

63.7

 

Performance Engineered Products

 

9.7

 

11.6

 

Corporate costs

 

(10.3

)

(12.9

)

Pension earnings, interest and deferrals

 

(2.4

)

(6.0

)

Intersegment

 

0.5

 

(0.6

)

Consolidated operating income

 

$

22.1

 

$

55.8

 

 

 

 

 

 

 

Depreciation and Amortization:

 

 

 

 

 

Specialty Alloys Operations

 

$

23.5

 

$

19.5

 

Performance Engineered Products

 

6.0

 

5.8

 

Corporate

 

1.1

 

1.4

 

Intersegment

 

(0.3

)

 

Consolidated depreciation and amortization

 

$

30.3

 

$

26.7

 

 

 

 

 

 

 

Capital Expenditures:

 

 

 

 

 

Specialty Alloys Operations

 

$

51.6

 

$

83.0

 

Performance Engineered Products

 

6.8

 

7.0

 

Corporate

 

1.0

 

0.6

 

Intersegment

 

(0.4

)

(0.2

)

Consolidated capital expenditures

 

$

59.0

 

$

90.4

 

 

 

September 30,
2014

 

June 30,
2014

 

Total Assets:

 

 

 

 

 

Specialty Alloys Operations

 

$

2,466.1

 

$

2,454.8

 

Performance Engineered Products

 

499.0

 

491.7

 

Corporate

 

80.6

 

144.9

 

Intersegment

 

(33.5

)

(33.9

)

Consolidated total assets

 

$

3,012.2

 

$

3,057.5

 

21




Segment Data Three Months Ended
September 30,
($ in millions) 2015 2014
Capital Expenditures:  
  
Specialty Alloys Operations $19.7
 $51.6
Performance Engineered Products 9.1
 6.8
Corporate 1.1
 1.0
Intersegment 
 (0.4)
Consolidated capital expenditures $29.9
 $59.0
Segment Data
($ in millions)
 September 30,
2015
 June 30,
2015
Total Assets:  
  
Specialty Alloys Operations $2,324.9
 $2,323.0
Performance Engineered Products 494.5
 499.2
Corporate 91.7
 125.0
Intersegment (40.0) (41.3)
Consolidated total assets $2,871.1
 $2,905.9

Table of Contents

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

15.Recent Accounting Pronouncements

15.Recent Accounting Pronouncements

In May 2014, the FASBFinancial Accounting Standards Board (FASB) issued Accounting Standards Update 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 is requiredeffective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In August 2015, The FASB issued ASU 2015-14, which defers the effective date of this guidance by one year. As such, the Company is required to adopt this standard for its interim and annual periods beginning after December 15, 2017. Early applicationadoption is not permitted.permitted for interim and annual periods beginning after December 15, 2016. The Company is evaluating the impact of the adoption of ASU 2014-09 and doeson the Consolidated Financial Statements.

In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs. The guidance in ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The guidance in ASU 2015-03 is required for annual reporting periods beginning after December 15, 2015, including interim periods within the reporting period. Early adoption is permitted for financial statements that have not expectbeen previously issued. The Company expects the adoption to have a significantreclassification impact on the Company’s Consolidated Financial Statements.

16.ReclassificationsBalance Sheets to be $4.4 million from Accumulated Other Comprehensive Income (AOCI)

other assets to long-term debt as of September 30, 2015.



19

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


16.Reclassifications from Accumulated Other Comprehensive Income (Loss)
The changes in AOCI by component, net of tax, for the three months ended September 30, 20142015 and 20132014 were as follows:

($ 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, 2014

 

$

7.6

 

$

(236.7

)

$

(0.4

)

$

(15.7

)

$

(245.2

)

Other comprehensive loss before reclassifications

 

(16.7

)

 

 

(7.9

)

(24.6

)

Amounts reclassified from AOCI (b)

 

(1.5

)

3.0

 

 

 

1.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive (loss) income

 

(18.2

)

3.0

 

 

(7.9

)

(23.1

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2014

 

$

(10.6

)

$

(233.7

)

$

(0.4

)

$

(23.6

)

$

(268.3

)

($ 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, 2013

 

$

(41.5

)

$

(273.6

)

$

(0.4

)

$

(20.2

)

$

(335.7

)

Other comprehensive (loss) income before reclassifications

 

(1.2

)

 

(0.1

)

3.5

 

2.2

 

Amounts reclassified from AOCI (b)

 

4.8

 

3.6

 

 

 

8.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income (loss)

 

3.6

 

3.6

 

(0.1

)

3.5

 

10.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2013

 

$

(37.9

)

$

(270.0

)

$

(0.5

)

$

(16.7

)

$

(325.1

)


(a)All amounts are net of tax. Amounts in parentheses indicate debits.

(b)See separate table below for further details.

22


Three Months Ended September 30, 2015
($ 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, 2015 $(28.5) $(256.8) $(0.3) $(42.6) $(328.2)
Other comprehensive loss before reclassifications (11.4) 
 
 (3.3) (14.7)
Amounts reclassified from AOCI (b) 5.9
 3.7
 
 
 9.6
Net current-period other comprehensive (loss) income (5.5) 3.7
 
 (3.3) (5.1)
Balance at September 30, 2015 $(34.0) $(253.1) $(0.3) $(45.9) $(333.3)
Three Months Ended September 30, 2014
($ 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, 2014 $7.6
 $(236.7) $(0.4) $(15.7) $(245.2)
Other comprehensive loss before reclassifications (16.7) 
 
 (7.9) (24.6)
Amounts reclassified from AOCI (b) (1.5) 3.0
 
 
 1.5
Net current-period other comprehensive (loss) income (18.2) 3.0
 
 (7.9) (23.1)
Balance at September 30, 2014 $(10.6) $(233.7) $(0.4) $(23.6) $(268.3)
(a)All amounts are net of tax. Amounts in parentheses indicate debits.
(b)See separate table below for further details.

Table of Contents

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following is a summary of amounts reclassified from AOCI for the three months ended September 30, 20142015 and 2013:

 

 

 

 

Amount Reclassified from AOCI

 

($ in millions) (a)

 

Location of

 

Three Months Ended September 30,

 

Details about AOCI Components

 

gain (loss)

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Cash flow hedging items:

 

 

 

 

 

 

 

Commodity contracts

 

Cost of sales

 

$

2.0

 

$

(7.7

)

Foreign exchange contracts

 

Net sales

 

0.3

 

(0.1

)

Forward interest rate swaps

 

Interest expense

 

0.1

 

0.1

 

 

 

Total before tax

 

2.4

 

(7.7

)

 

 

Tax (expense) benefit

 

(0.9

)

2.9

 

 

 

Net of tax

 

$

1.5

 

$

(4.8

)

Amortization of pension and other postretirement benefit plan items

 

 

 

 

 

 

 

Net actuarial loss

 

(b)

 

$

(4.7

)

$

(5.8

)

Prior service cost

 

(b)

 

(0.1

)

(0.1

)

 

 

Total before tax

 

(4.8

)

(5.9

)

 

 

Tax benefit

 

1.8

 

2.3

 

 

 

Net of tax

 

$

(3.0

)

$

(3.6

)

2014:

(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 for additional details).

23


($ in millions) (a) 
Location of
(loss) gain
 Amount Reclassified from AOCI
Three Months Ended September 30,
Details about AOCI Components  2015 2014
Cash flow hedging items:    
  
Commodity contracts Cost of sales $(9.3) $2.0
Foreign exchange contracts Net sales (0.1) 0.3
Forward interest rate swaps Interest expense 0.1
 0.1
  Total before tax (9.3) 2.4
  Tax (expense) benefit 3.4
 (0.9)
  Net of tax $(5.9) $1.5


20

Table of Contents

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


($ in millions) (a) 
Location of
(loss) gain
 Amount Reclassified from AOCI
Three Months Ended September 30,
Details about AOCI Components  2015 2014
Amortization of pension and other postretirement benefit plan items    
  
Net actuarial loss (b) $(7.5) $(4.7)
Prior service cost (credits) (b) 1.5
 (0.1)
  Total before tax (6.0) (4.8)
  Tax benefit 2.3
 1.8
  Net of tax $(3.7) $(3.0)

(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 for additional details).


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Background and General

We are engaged in the manufacturing, fabrication and distribution of specialty metals. We primarily process basic raw materials such as nickel, cobalt, titanium, manganese, chromium, molybdenum, iron scrap and other metal alloying elements through various melting, hot forming and cold working facilities to produce finished products in the form of billet, bar, rod, wire and narrow strip in many sizes and finishes. We also produce certain metal powders. Our sales are distributed directly from our production plants and distribution network as well as through independent distributors. Unlike many other specialty steel producers, we operate our own worldwide network of service 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 oilOil and gasGas 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 structurestructures of such opportunities and we expect that we will continue to evaluate these opportunities.

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 20142015 Form 10-K. Our discussions here focus on our results during or as of the three month period ended September 30, 20142015 and the comparable periodsperiod of fiscal year 2014,2015, and to the extent applicable, on material changes from information discussed in the 20142015 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 20142015 Form 10-K for detailed background information and with any such intervening Form 8-K.

Impact of Raw Material Prices and Product Mix

We value most of our inventory utilizing the last-in, first-out (“LIFO”) inventory costing methodology. Under the LIFO inventory costing method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials may potentially have been acquired at potentially significantly different values due to the length of time from the acquisition of the raw materials to the sale of the processed finished goods to the customers. In a period of rising raw material costs, the LIFO inventory valuation normally results in higher costscost of sales. Conversely, in a period of decreasing raw material costs, the LIFO inventory valuation normally results in lower costscost 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

21

Table of Contents

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 costscost 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.

24




Table of Contents

Approximately 25 percent of our net sales are sales to customers under firm price sales arrangements.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 Company may need to absorb the gains or losses associated with the commodity forward contracts on a temporary basis. Gains or losses associated with commodity forward contracts are reclassified to earnings/loss when earnings are impacted by the hedged transaction. Because we value most of our inventory under the LIFO costing methodology, 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 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 costscost of goods sold reflectreflects 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,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.

Net Pension Expense

Net pension expense, 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-measurement event occurs. We currently expect that the total net periodic benefit costs for fiscal year 20152016 will be $45.9$53.6 million as compared with $60.1$44.5 million in fiscal year 2014.2015.  The following is the pension expense for the three months ended September 30, 20142015 and 2013:

 

 

Three Months Ended

 

 

 

September 30,

 

($ in millions)

 

2014

 

2013

 

Pension plans

 

$

8.6

 

$

12.2

 

Other postretirement plans

 

2.9

 

2.8

 

Net periodic benefit costs

 

$

11.5

 

$

15.0

 

2014:

  Three Months Ended
September 30,
($ in millions) 2015 2014
Pension plans $12.7
 $8.6
Other postretirement plans 0.7
 2.9
Net periodic benefit costs $13.4
 $11.5
The service cost component of net pension expense represents the estimated cost of future pension liabilities earned associated with active employees. The pension earnings, interest and deferrals expense (“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.

25




22

Table of Contents


Net pension 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. The following is a summary of the classification of net pension expense for the three months ended September 30, 20142015 and 2013:

 

 

Three Months Ended

 

 

 

September 30,

 

($ in millions)

 

2014

 

2013

 

Cost of sales

 

 

 

 

 

Service cost

 

$

7.3

 

$

7.1

 

Pension earnings, interest and deferrals expense

 

1.3

 

4.1

 

 

 

$

8.6

 

$

11.2

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

 

 

 

Service cost

 

$

1.8

 

$

1.9

 

Pension earnings, interest and deferrals expense

 

1.1

 

1.9

 

 

 

$

2.9

 

$

3.8

 

 

 

 

 

 

 

Net pension expense

 

$

11.5

 

$

15.0

 

Historically, we2014:

  Three Months Ended
September 30,
($ in millions) 2015 2014
Cost of sales  
  
Service cost $7.0
 $7.3
Pension earnings, interest and deferrals 3.3
 1.3
  $10.3
 $8.6
Selling, general and administrative expenses  
  
Service cost $1.5
 $1.8
Pension earnings, interest and deferrals 1.6
 1.1
  $3.1
 $2.9
     
Net pension expense $13.4
 $11.5
As of September 30, 2015 and June 30, 2015 amounts capitalized only the service cost component of net pension expense related to manufacturing employees. Beginning with the quarter ended December 31, 2013, we began to capitalize the portion of pension EID related to current manufacturing employees in inventory. We will continue to expense the portion of pension EID related to inactive manufacturing employees as period cost in cost of sales. gross inventory were $9.7 million and $9.5 million, respectively.
Operating Performance Overview
For the three months ended September 30, 2014 and 2013, the amount of pension EID included in cost of sales related to inactive manufacturing employees was $0.7 million and $2.4 million, respectively. As of September 30, 2014 and June 30, 2014, amounts capitalized in gross inventory were $9.2 million.

Operating Performance Overview

For the quarter ended September 30, 2014,2015, we reported net income of $13.5$8.9 million, or $0.25$0.18 earnings per diluted share. Excluding restructuring charges and special items, earnings per share comparedwould have been $0.26 per diluted share. This compares with net income for the same period a year earlier of $34.6$13.5 million, or $0.65$0.25 per diluted share. Our first quarter of fiscal year 2015The results reflect weakerthe impacts of lower volumes offset by an improving product mix and operating cost improvements.  The three months ended September 30, 2014 included a $4.4 million favorable legal settlement.


We continue to evaluate the impacts of the challenges in the oil and gas business. We have taken actions where appropriate to reduce our cost structure. To the extent that we become aware that the current oil and gas business environment deteriorates further or our expectations for the duration of the downturn are worse than anticipated, mix exacerbated by operational inefficiencies atfurther actions to align our Specialty Alloys Operations (“SAO”) locationscost structure could be necessary. These actions may result in Readingadditional restructuring charges and Latrobe, Pa. which negatively impacted earnings in the quarter. Early in the current quarter, the Reading mill experienced unanticipated startup issues after scheduled summer shutdowns and the Latrobe mill had an unplanned outage due to a cracked dome on its primary press. As a result, SAO experienced higher labor costs, increased maintenance and supply expenses and reduced output levels.  possible charges associated with asset impairments.After a difficult start to the quarter, performance improved later in the quarter. The Latrobe press is now back on line and sales mix improved as the quarter progressed.

26



Table of Contents

Results of Operations — Three Months Ended September 30, 20142015 vs. Three Months Ended September 30, 20132014

Net Sales

Net sales for the three months ended September 30, 20142015 were $549.8$455.6 million, which was a 1017 percent increasedecrease over the same period a year ago. Excluding surcharge revenue, sales increased 7decreased 12 percent on 11a 19 percent higherdecrease in shipment volumesvolume from the same period a year ago indicating strongago. The results reflect weakness in demand for materials used in the Energy end-use market primarily the Oil and weaker mix. Excluding surcharge revenue, all ofGas sector. In addition, this weakness in the Energy end-use market has affected order patterns for customers in our Industrial and Consumer end-use market. Partially offsetting the demand weakness in the Energy and Industrial and Consumer end-use markets net sales increased except for aerospace and defense which was relatively flat versus prior year quarter.

is the demand growth in the Transportation end-use market.

Geographically, sales outside the United States increased 11decreased 9 percent from the same period a year ago to $153.9$139.5 million for the three months ended September 30, 2014.2015. The increasedecrease is due to additionala reduction in sales primarily to Europe, in the Aerospace and Asia. Total internationalDefense and Medical end-use markets. International sales represented 31 percent and 28 percent of total net sales in this quarterfor the three months ended September 30, 2015 and in prior year quarter.

2014, respectively.


23


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

 

 

 

 

 

 

 

September 30,

 

$

 

%

 

($ in millions)

 

2014

 

2013

 

Increase

 

Increase

 

Aerospace and defense

 

$

235.1

 

$

229.5

 

$

5.6

 

2

%

Industrial and consumer

 

128.6

 

109.2

 

19.4

 

18

 

Energy

 

79.1

 

66.3

 

12.8

 

19

 

Transportation

 

41.6

 

32.4

 

9.2

 

28

 

Medical

 

29.4

 

27.1

 

2.3

 

8

 

Distribution

 

36.0

 

34.1

 

1.9

 

6

 

Total net sales

 

$

549.8

 

$

498.6

 

$

51.2

 

10

%

  Three Months Ended
September 30,
 $
Increase
(Decrease)
 %
Increase
(Decrease)
($ in millions) 2015 2014  
Aerospace and defense $228.9
 $235.1
 $(6.2) (3)%
Energy 37.2
 79.1
 (41.9) (53)%
Transportation 45.1
 41.6
 3.5
 8 %
Medical 27.0
 29.4
 (2.4) (8)%
Industrial and consumer 87.4
 128.6
 (41.2) (32)%
Distribution 30.0
 36.0
 (6.0) (17)%
Total net sales $455.6
 $549.8
 $(94.2) (17)%
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,

 

Increase

 

Increase

 

($ in millions)

 

2014

 

2013

 

(Decrease)

 

(Decrease)

 

Aerospace and defense

 

$

180.7

 

$

182.9

 

$

(2.2

)

(1

)%

Industrial and consumer

 

98.6

 

85.8

 

12.8

 

15

 

Energy

 

67.8

 

59.1

 

8.7

 

15

 

Transportation

 

30.7

 

25.5

 

5.2

 

20

 

Medical

 

26.7

 

25.0

 

1.7

 

7

 

Distribution

 

35.6

 

33.8

 

1.8

 

5

 

Total net sales excluding surcharge revenue

 

$

440.1

 

$

412.1

 

$

28.0

 

7

%

27


  Three Months Ended
September 30,
 $
Increase
(Decrease)
 %
Increase
(Decrease)
($ in millions) 2015 2014  
Aerospace and defense $187.0
 $180.7
 $6.3
 3 %
Energy 32.0
 67.8
 (35.8) (53)%
Transportation 36.6
 30.7
 5.9
 19 %
Medical 25.0
 26.7
 (1.7) (6)%
Industrial and consumer 74.7
 98.6
 (23.9) (24)%
Distribution 29.8
 35.6
 (5.8) (16)%
Total net sales excluding surcharge revenue $385.1
 $440.1
 $(55.0) (12)%

Table of Contents

Sales to the aerospaceAerospace and defenseDefense end-use market increased 2decreased 3 percent from the first quarter a year ago to $235.1$228.9 million. Excluding surcharge revenue, sales decreased 1increased 3 percent from the first quarter a year ago on a 31 percent increase in shipment volume. The results reflect lower demand for certain high-value engine and defense-related materials which led to lower sales and a weaker mix from the same period a year ago.   In addition, the results reflect demand for materials in aerospace distribution market improving but at lower average selling prices as compared to the prior year first quarter. Also, we experienced anmodest increase in revenue for aerospacesales of engine materials and fastener materials from the year ago period.

Industrial and consumer market sales increased 18 percent from the first quarter a year ago to $128.6 million. Excluding surcharge revenue, sales increased 15 percent on an 11 percent increase in shipment volume. The results reflectstronger demand growth in the consumer market sector driven by high-value consumer electronics and sporting goods applications as well as strong sales growth infor materials used in the semiconductors sector. The results also reflect steady demand for premium tool steels.

structural applications. In addition, we are experiencing strength in our defense related sales with continued spending on supported programs.

Sales to the energyEnergy market of $79.1$37.2 million reflectedreflect a 1953 percent increasedecrease from the first quarter a year ago. Excluding surcharge revenue, sales increased 15decreased 53 percent from a year ago on higherlower shipment volume of 3750 percent. The results reflect strong growth in the power generation sector as compared toimpact of low Oil and Gas prices and decreased global demand, which has significantly reduced drilling and completion activity. The North American quarterly average directional rig count decreased 51 percent from the same period a year ago. Our Amega West manufacturing and rental business reported solid revenue growth in both manufacturing and rentals compared to the same period a year ago as the directional rig count grew 13 percent versus the same period last year.  Demand for completion materials was down relative to the year ago period which impacted the mix.

Transportation market sales increased 288 percent from the first quarter a year ago to $41.6$45.1 million. Excluding surcharge revenue, sales increased 2019 percent on 157 percent higher shipment volume from the first quarter a year ago. The results reflect a favorable shift instrengthening product mix to higher value components for more demanding applications going into high pressure/temperaturematerials used in engine systems.

fasteners, valve and fuel system applications. In addition, increasing fuel efficiency standards are driving global demand growth for our materials.


24


Medical market sales increaseddecreased 8 percent from the first quarter a year ago to $29.4$27.0 million. Excluding surcharge revenue, sales increased 7decreased 6 percent on 1810 percent higherlower shipment volume from the first quarter a year ago. The results reflect an unfavorable shift in product mix.  Titanium revenue was downpricing pressures on transactional business for titanium and stainless instrument revenue was up.  Original equipment manufacturers (OEMs) have resumed more normalized buying patterns as supply chain inventories appear to have stabilized.

Sales by Product Class

The following table includes comparative information for our netsteel materials.


Industrial and Consumer market sales by major product class:

 

 

Three Months Ended

 

$

 

%

 

 

 

September 30,

 

Increase

 

Increase

 

($ in millions)

 

2014

 

2013

 

(Decrease)

 

(Decrease)

 

Special alloys

 

$

234.0

 

$

204.3

 

$

29.7

 

15

%

Stainless steel

 

162.1

 

146.3

 

15.8

 

11

 

Alloy and tool steel

 

56.7

 

59.2

 

(2.5

)

(4

)

Titanium products

 

38.6

 

36.9

 

1.7

 

5

 

Powder metals

 

14.3

 

10.4

 

3.9

 

38

 

Distribution and other

 

44.1

 

41.5

 

2.6

 

6

 

Total net sales

 

$

549.8

 

$

498.6

 

$

51.2

 

10

%

28



Table of Contents

The following table includes comparative information for our net sales bydecreased 32 percent from the same major product class, but excluding surcharge revenue:

 

 

Three Months Ended

 

$

 

%

 

 

 

September 30,

 

Increase

 

Increase

 

($ in millions)

 

2014

 

2013

 

(Decrease)

 

(Decrease)

 

Special alloys

 

$

163.2

 

$

149.8

 

$

13.4

 

9

%

Stainless steel

 

135.6

 

125.2

 

10.4

 

8

 

Alloy and tool steel

 

45.2

 

49.1

 

(3.9

)

(8

)

Titanium products

 

38.6

 

36.9

 

1.7

 

5

 

Powder metals

 

14.2

 

10.4

 

3.8

 

37

 

Distribution and other

 

43.3

 

40.7

 

2.6

 

6

 

Total net sales excluding surcharge revenue

 

$

440.1

 

$

412.1

 

$

28.0

 

7

%

Sales of special alloys products increased 15 percent fromfirst quarter a year ago to $234.0 million. Excluding surcharge revenue, sales increased 9 percent on a 17 percent increase in shipment volume.

Sales of stainless steel increased 11 percent from a year ago to $162.1 million. Excluding surcharge revenue, sales increased 8 percent on 15 percent higher shipment volume.

Sales of alloy and tool steel decreased 4 percent from a year ago to $56.7$87.4 million. Excluding surcharge revenue, sales decreased 824 percent on 5 percent lower shipment volumes.

Sales of titanium products increased 5 percent from a year ago to $38.6 million on 8 percent higher volume.

Sales of powder metals increased 38 percent from a year ago to $14.3 million on a 2936 percent decrease in shipment volume. The results reflect a favorable shiftdecrease in demand for materials used in industrial components and related processing equipment due to the depressed Oil and Gas markets. Slowing global economies have reduced demand for these products, especially through the distribution end-use market. Despite the decrease in demand, the sales declined at a lower rate indicating a stronger product mix.


Gross Profit

Our gross profit in the first quarter decreased 331 percent to $68.6 million, or 15.1 percent of net sales (17.8 percent of net sales excluding surcharge), as compared with $69.1 million, or 12.6 percent of net sales (15.7 percent of net sales excluding surcharge), as compared with $103.3 million, or 20.7 percent of net sales (25.1 percent of net sales excluding surcharge), in the same quarter a year ago. The current quarter results reflect the impact of weakeran improving SAO product mix and lower operating costs associated withwhich were partially offset by lower volume compared to the unanticipated startup issues at the Reading mill and an unplanned outage at the Latrobe mill to repairsame period a critical piece of equipment during the current quarter.

year ago.


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 three month periods. See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.

29




Table of Contents

 

 

Three Months Ended

 

 

 

September 30,

 

($ in millions)

 

2014

 

2013

 

Net sales

 

$

549.8

 

$

498.6

 

Less: surcharge revenue

 

109.7

 

86.5

 

Net sales excluding surcharge revenue

 

$

440.1

 

$

412.1

 

 

 

 

 

 

 

Gross profit

 

$

69.1

 

$

103.3

 

 

 

 

 

 

 

Gross margin

 

12.6

%

20.7

%

 

 

 

 

 

 

Gross margin excluding dilutive effect of surcharge revenue

 

15.7

%

25.1

%

  Three Months Ended
September 30,
($ in millions) 2015 2014
Net sales $455.6
 $549.8
Less: surcharge revenue 70.5
 109.7
Net sales excluding surcharge revenue $385.1
 $440.1
     
Gross profit $68.6
 $69.1
     
Gross margin 15.1% 12.6%
     
Gross margin excluding surcharge revenue 17.8% 15.7%

Selling, General and Administrative Expenses

Selling, general and administrative expenses of $47.0$43.4 million were 8.59.5 percent of net sales (10.7(11.3 percent of net sales excluding surcharge) as compared with $47.5$47.0 million or 9.5and 8.5 percent of net sales (11.5(10.7 percent of net sales excluding surcharge) in the same quarter a year ago. Selling, general and administrative expenses were flat relativedecreased due to priorlower salaries, benefits and variable compensation expense of $3.8 million, lower depreciation and amortization of $0.9 million partially offset by consulting costs of $2.6 million related to the Business Management Office and strategic business review.

Restructuring Charges

During the three months ended September 30, 2015, we incurred $0.4 million of restructuring charges. These costs are trailing costs associated with the restructuring plan announced in the third quarter of fiscal year levels.

2015.


25


Operating Income

Our operating income in the recent first quarter was $22.1$24.8 million as compared with $55.8$22.1 million in the same period a year ago. Excluding surcharge revenue, pension EID, restructuring charges and pension earnings, interest and deferrals expense,special items, operating margin was 5.68.5 percent for the current quarter as compared with 15.05.6 percent a year ago. TheOur operating results for the first quarter of fiscal year 2016 reflect an improving SAO product mix and lower operating costs which were partially offset by lower volume compared to the impact of the operational issues experienced early in the quarter and weaker product mix.

same period a year ago.


Operating income has been significantly impacted by our pension earnings, interest and deferrals expense (“pension EID”),EID, which may be volatile based on conditions in the financial markets.markets, as well as restructuring charges and special items. The following presents our operating income and operating margin, in each case excluding the impact of surcharge revenue on net sales, pension EID, restructuring charges and excluding the impacts of pension EID.special items. We present and discuss these financial measures because management believes removing the impact of volatile and non-recurring chargesthese items provides a more consistent and meaningful basis for comparing ongoing results of operations from period to period. See the section “Non-GAAP Financial Measures” below for further discussion of these financial measures.

30



  Three Months Ended
September 30,
($ in millions) 2015 2014
Net sales $455.6
 $549.8
Less: surcharge revenue 70.5
 109.7
Net sales excluding surcharge revenue $385.1
 $440.1
     
Operating income $24.8
 $22.1
Pension EID 4.8
 2.4
Operating income excluding pension EID 29.6
 24.5
     
Restructuring charges and special items:    
Restructuring charges 0.4
 
Consulting costs 2.6
 
Operating income excluding pension EID, restructuring charges and special items $32.6
 $24.5
     
Operating margin 5.4% 4.0%
     
Operating margin excluding surcharge revenue, pension EID, restructuring charges and special items 8.5% 5.6%

Table of Contents

 

 

Three Months Ended

 

 

 

September 30,

 

($ in millions)

 

2014

 

2013

 

Net sales

 

$

549.8

 

$

498.6

 

Less: surcharge revenue

 

109.7

 

86.5

 

Net sales excluding surcharge revenue

 

$

440.1

 

$

412.1

 

 

 

 

 

 

 

Operating income

 

$

22.1

 

$

55.8

 

Pension EID

 

2.4

 

6.0

 

Operating income excluding pension EID

 

$

24.5

 

$

61.8

 

 

 

 

 

 

 

Operating margin

 

4.0

%

11.2

%

 

 

 

 

 

 

Operating margin excluding surcharge revenue and pension EID

 

5.6

%

15.0

%

In addition to the impacts of the surcharge mechanism and pension EID, fluctuations in raw material prices (combined with fluctuations in inventory levels) and the lag effect of the surcharge mechanism have impacted our operating income from quarter to quarter. We estimate that the effect of such combined fluctuations negatively impacted our operating margin, excluding surcharge revenue, by 110 basis points during the recent first quarter and positively impacted our operating margin, excluding surcharge revenue, by 80 basis points during the prior year’s first quarter.

Interest Expense

Interest expense for the quarterthree months ended September 30, 2015 was $7.0$6.6 million compared with $4.4$7.0 million in the first quartersame 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 three months ended September 30, 2015 includes net gains from interest rate swaps of $0.7 million compared with $0.4 million net gains from interest rate swaps for three months ended September 30, 2014.

Other (expense) income, net

Other expense for the three months ended September 30, 2015 was $2.1 million as compared with other income of $4.9 million in the same period a year ago. The current quarter included $0.7 million of capitalized interest compared to $3.5 million in the same quarter a year ago which reflects the impact of placing a significant amount of the assets attributable to the construction project at our Alabama manufacturing plant in service late in fiscal year 2014.

Other Income, Net

Other income was $4.9 millionresults for the recent quarter compared to other incomethree months ended September 30, 2015 reflect foreign exchange losses of $0.1$1.2 million inand unfavorable market return on company-owned life insurance of $1.2 million. The results for the first quarterthree months ended September 30, 2014 reflect a year ago. The current quarter includes a $4.4 million favorable legal settlement.

settlement of $4.4 million.


Income Taxes

Income taxes in the recent first quarter were $6.5$7.2 million, or 32.544.7 percent of pre-tax income versus $16.9$6.5 million, or 32.832.5 percent of pre-tax income in the same quarter a year ago. The current period includes a $2.0 million discrete tax ratecharge recorded as a result of a decision to sell our equity investment in both periods is lower than the statutory tax rateIndia.  

26


Business Segment Results

We have two reportable business segments: Specialty Alloys Operations (“SAO”) and Performance Engineered Products (“PEP”).

31




Table of Contents

The following table includes comparative information for volumes by business segment:

 

 

Three Months Ended

 

 

 

%

 

 

 

September 30,

 

Increase

 

Increase

 

(Pounds sold, in thousands) 

 

2014

 

2013

 

(Decrease)

 

(Decrease)

 

Specialty Alloys Operations

 

70,120

 

63,414

 

6,706

 

11

%

Performance Engineered Products

 

3,034

 

2,666

 

368

 

14

 

Intersegment

 

(1,408

)

(1,188

)

(220

)

(19

)

Consolidated pounds sold

 

71,746

 

64,892

 

6,854

 

11

%

  Three Months Ended
September 30,
 
Increase
(Decrease)
 %
Increase
(Decrease)
(Pounds sold, in thousands)  2015 2014  
Specialty Alloys Operations 56,814
 70,120
 (13,306) (19)%
Performance Engineered Products * 2,956
 3,034
 (78) (3)%
Intersegment (1,348) (1,408) 60
 4 %
Consolidated pounds sold 58,422
 71,746
 (13,324) (19)%

* 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:

 

 

Three Months Ended

 

$

 

%

 

 

 

September 30,

 

Increase

 

Increase

 

($ in millions)

 

2014

 

2013

 

(Decrease)

 

(Decrease)

 

Specialty Alloys Operations

 

$

436.0

 

$

394.9

 

$

41.1

 

10

%

Performance Engineered Products

 

129.9

 

118.5

 

11.4

 

10

 

Intersegment

 

(16.1

)

(14.8

)

(1.3

)

(9

)

Total net sales

 

$

549.8

 

$

498.6

 

$

51.2

 

10

%

  Three Months Ended
September 30,
 $
Increase
(Decrease)
 %
Increase
(Decrease)
($ in millions) 2015 2014  
Specialty Alloys Operations $372.6
 $436.0
 $(63.4) (15)%
Performance Engineered Products 91.5
 129.9
 (38.4) (30)%
Intersegment (8.5) (16.1) 7.6
 47 %
Total net sales $455.6
 $549.8
 $(94.2) (17)%
The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:

 

 

Three Months Ended

 

$

 

%

 

 

 

September 30,

 

Increase

 

Increase

 

($ in millions)

 

2014

 

2013

 

(Decrease)

 

(Decrease)

 

Specialty Alloys Operations

 

$

324.1

 

$

307.6

 

$

16.5

 

5

%

Performance Engineered Products

 

129.6

 

117.5

 

12.1

 

10

 

Intersegment

 

(13.6

)

(13.0

)

(0.6

)

(5

)

Total net sales excluding surcharge revenue

 

$

440.1

 

$

412.1

 

$

28.0

 

7

%

  Three Months Ended
September 30,
 $
Increase
(Decrease)
 %
Increase
(Decrease)
($ in millions) 2015 2014  
Specialty Alloys Operations $301.6
 $324.1
 $(22.5) (7)%
Performance Engineered Products 91.4
 129.6
 (38.2) (29)%
Intersegment (7.9) (13.6) 5.7
 42 %
Total net sales excluding surcharge revenue $385.1
 $440.1
 $(55.0) (12)%
Specialty Alloys Operations Segment

Net sales for the quarter ended September 30, 20142015 for the SAO segment increased 10decreased 15 percent to $436.0$372.6 million, as compared with $394.9$436.0 million in the same quarter a year ago. Excluding surcharge revenue, net sales increased 5decreased 7 percent on 1119 percent higherlower shipment volume from a year ago.  Net sales were upThe results reflect weakness in allthe Energy and Industrial and Consumer end-use markets except for aerospace and defense, however we had an overall weakerpartially offset by strengthening product mix exacerbated by operating inefficiencies.

particularly in the Aerospace and Defense and Transportation end-use markets compared to the prior year quarter.

Operating income for the SAO segment was $41.1 million or 11.0 percent of net sales (13.6 percent of net sales excluding surcharge revenue) in the recent first quarter, as compared with $24.6 million or 5.6 percent of net sales (7.6 percent of net sales excluding surcharge revenue) in the recent first quarter, as compared with $63.7 million or 16.1 percent of net sales (20.7 percent of net sales excluding surcharge revenue) in the same quarter a year ago. The decreaseincrease in operating income reflects the impactsoperating cost improvements, insurance recovery benefit of a weaker$4.0 million and stronger product mix and unanticipated startup issues at the Reading mill and an unplanned outage at Latrobe.

32

partially offset by lower volume.



27


Performance Engineered Products Segment

Net sales for the quarter ended September 30, 20142015 for the PEP segment increased 10decreased 30 percent to $129.9$91.5 million, as compared with $118.5$129.9 million in the same quarter a year ago. Excluding surcharge revenue, net sales of $129.6$91.4 million increased 10decreased 29 percent from a year ago. The results reflect increaseddecreased net sales in all PEP businesses primarily driven by rentals and sales of down-hole drilling tools shipment of powder productsdue to the current weakness in the Oil and shipments from the distribution business.

Gas businesses.

Operating incomeloss for the PEP segment was $0.4 million or negative 0.4 percent of net sales in the recent first quarter, compared with operating income of $9.7 million or 7.5 percent of net sales (7.5 percent of net sales excluding surcharge revenue) in the recent first quarter, compared with $11.6 million or 9.8 percent of net sales (9.9 percent of net sales excluding surcharge revenue) in the same quarter a year ago. The results reflect the impactsimpact of a weaker mix which primarily affecteddecreased sales in the Oil and Gas businesses due to limited drilling activity.

Outlook

As we move further into fiscal year 2016, we currently expect the second quarter volumes to be in-line with the recent first quarter. We also expect increased volume in the second half of fiscal year 2016 versus both the prior year same period and the first half of fiscal year 2016, driven by an increase in Aerospace demand and further opportunities in the Transportation end-use market. We will continue our distributionfocused efforts to drive further operating cost improvements and titanium businesses.

pursue initiatives to improve working capital. We remain committed to prioritizing our cash deployment to execute against the share repurchase program.

Liquidity and Financial Resources

During the three months ended September 30, 2014,2015, we generated cash flows from operations of $41.5 million, which included a $33.0 million increase in inventory and $20.5 million decrease in other working capital. In the same period a year ago, we generated $15.0 million, as compared with $39.5which included a $30.8 million increase in inventory, an $11.8 million increase in other working capital and $2.8 million of pension contributions in the same period a year ago. Historically, our sales in the first two fiscal quarters are typically the lowest due to the seasonality of our business and our customer order patterns. Accordingly, we generally build inventory in the first half of the fiscal year and reduce inventory in the second half of the fiscal year. We remain committed to reducing inventory from June 30, 2015 levels.
Our free cash flow, which we define under “Non-GAAP Financial Measures” below, was negative $53.5positive $6.6 million as compared to negative $60.5$53.5 million for the same period a year ago. The increase in free cash flow reflects significantly lower capital spending levels largely related to the Alabama facility offset by lower earnings and unfavorable workingwinding down in capital levels.expenditures associated with the construction of our Athens facility.  Capital expenditures for plant,property, equipment and software were $59.0$29.9 million which included $32.3 related to the construction of the Alabama facility, for the three months ended September 30, 2014,2015, as compared with $90.4to $59.0 million which included $67.4 million related to Alabama for the same period a year ago.

Dividends during the three months ended September 30, 2015 and 2014 were $9.0 million and 2013 were $9.6 million, respectively, and were paid at the same quarterly rate of $0.18 per share of common stock in both periods.

We have demonstrated the ability to generate cash to meet our needs through cash flowflows from operations, management of working capital and the availability of outside sources of financing to supplement internally generated funds. We believe that our cash and cash equivalents of approximately $66.0 million as of September 30, 2014, together with cash generated from operations and available borrowing capacity of approximately $491.8 million under our credit facilities will be sufficient to fund our cash needs over the foreseeable future. From time to time during the quarter ended September 30, 2014 we have borrowed under our Credit Agreement and subsequently repaid any outstanding borrowings prior to September 30, 2014. The weighted average daily borrowing under the Credit Agreement during the quarter ended September 30, 2014 was approximately $23.6 million with daily outstanding borrowings ranging from $0.0 million to $90.7 million during the period.

During the three months ended September 30, 2014, we made $2.8 million in cash contributions to our qualified pension plans, and expect to make approximately $12.7 million of cash contributions to the qualified pension plans for the remainder of fiscal year 2015.

We generally target minimum liquidity, consisting of cash and cash equivalents added to available borrowing capacity under our credit agreement, of $150.0$150 million. Our syndicated revolving credit agreement (“Credit Agreement”) contains a revolving credit commitment of $500.0$500 million and expires in June 2018. As of September 30, 2014,2015, we had $8.2$7.1 million of issued letters of credit under the Credit Agreement.credit. The balance of the Credit Agreement ($491.8492.9 million) remains available to us. As of September 30, 2014,2015, we had total liquidity of $523.5 million, including $30.6 million of cash and cash equivalents.


We believe that our cash and cash equivalents of $30.6 million as of September 30, 2015, together with cash generated from operations and available borrowing capacity of approximately $557.8 million.

33

$492.9 million under our credit facilities will be sufficient to fund our cash needs over the foreseeable future. From time to time during the three months ended September 30, 2015, we have borrowed under our Credit Agreement. The weighted average daily borrowing under the Credit Agreement during the three months ended September 30, 2015 was approximately $9.3 million with daily outstanding borrowings ranging from $0 million to $49.9 million during the period.

During the three months ended September 30, 2015, no cash contributions were required to be made to our qualified pension plans, and we do not expect to be required to make any cash contributions to our qualified pension plans for the remainder of fiscal year 2016.

28


As of September 30, 2014,2015, we had cash and cash equivalents of approximately $63.0$27.7 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 repatriation of cash from certain foreign subsidiaries could have adverse tax consequences as we may be required to pay and record U.S. income taxes and foreign withholding taxes in various tax jurisdictions on these funds to the extent they were previously considered permanently reinvested. We are currently evaluating additional opportunities
During the three months ended September 30, 2015, we used $45.9 million to repatriate cash from foreign jurisdictions. Our current plans consider repatriating cash only at levels that would result in minimal or no net adverse tax consequences inpurchase 1,206,600 shares of common stock pursuant to the near term. From time to time, we may make short-term intercompany borrowings against our cash held outsideterms of the United States in order to reduce or eliminate any required borrowing under our Credit Agreement.

We recently authorized a share repurchase program which authorizes the repurchaseauthorized by our Board of up to $500Directors in October 2014. As of September 30, 2015, $329.6 million of the Company’s shares over two years.  The shares may be repurchased from time to time at our discretion based on capital needs of the business, general market conditions and market price of the stock.  The share repurchase program may be discontinued at any time.

remains available for future purchases.

We are subject to certain financial and restrictive covenants under the Credit Agreement, which, among other things, require the maintenance of a minimum interest coverage ratio (3.50 to 1.00 as of September 30, 2014)2015). The interest coverage ratio is defined in the Credit Agreement as, for any period, the ratio of consolidated earnings before interest, taxes, depreciation and amortization and non-cash net pension expense (“EBITDA”) to consolidated interest expense for such period. The Credit Agreement also requires the Company to maintain a debt to capital ratio of less than 55%. The debt to capital ratio is defined in the Credit Agreement as the ratio of consolidated indebtedness, as defined as total long-term debt added to outstanding capital lease obligations and outstanding letters of credit,therein, to consolidated capitalization, as defined as consolidated indebtedness added to total equity.therein. As of September 30, 2014,2015, the Company was in compliance with all of the covenants of the Credit Agreement.

The following table shows our actual ratio performance with respect to the financial covenants, as of September 30, 2014:

2015:

Covenant Requirement

Actual
Ratio

Covenant RequirementActual Ratio
Consolidated interest coverage

3.50 to 1.00 (minimum)

18.310.71 to 1.00

Consolidated debt to capital

55% (maximum)

29%

33%

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 covenants under the Credit Agreement, this could reduce our liquidity and flexibility due to potential restrictions on borrowings available to us unless we are able to obtain waivers or modificationmodifications of the covenants.

covenants.

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.

34




Table of Contents

Net Sales and Gross Margin Excluding Surcharge Revenue

This report includes discussions of net sales and gross margin 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 U.S. GAAP. We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net sales and gross margincost of sales provides a more consistent basis for comparing results of operations from period to period for the reasons discussed earlier in this report. See our earlier discussion of “Gross Profit” for a reconciliation of net sales and gross margin, excluding 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.


29


Operating Income and Operating Margin Excluding Surcharge Revenue, and Pension EID,

Restructuring Charges and Special Items

This report includes discussions of operating income and operating margin as adjusted to exclude the impact of raw material surcharge andrevenue, pension EID, restructuring charges and special items which represent financial measures that have not been determined in accordance with U.S. GAAP. We present and discuss these financial measures because management believes removing the impact of raw material 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 earnings, interestEID, restructuring charges and deferrals expensespecial 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.markets and restructuring charges and special items are not indicative of ongoing operating performance. See our earlier discussion of operating income for a reconciliation of operating income and operating margin excluding pension EID, restructuring charges and special items to operating income and operating margin determined in accordance with U.S. GAAP. Operating income and operating margin excluding surcharge revenue, and pension EID, restructuring charges 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.


Adjusted Earnings Per Share
The following provides a reconciliation of adjusted earnings per share, to its most directly comparable U.S. GAAP financial measures:
($ in millions, except per share amounts) Income Before Income Taxes Income Tax Expense Net Income Earnings Per Diluted Share**
Three months ended September 30, 2015, as reported $16.1
 $(7.2) $8.9
 $0.18
Restructuring charges 0.4
 (0.1) 0.3
 0.01
Consulting costs 2.6
 (0.9) 1.7
 0.03
Income tax item* 
 2.0
 2.0
 0.04
Total impact of restructuring charges and special items 3.0
 1.0
 4.0
 0.08
Three months ended September 30, 2015, as adjusted $19.1
 $(6.2) $12.9
 $0.26

* As a result of a decision to sell our equity method investment in India, we have changed our intent with regard to the indefinite reinvestment of the foreign earnings from one of our subsidiaries. Accordingly, we recorded a discrete income tax charge during the three months ended September 30, 2015.

** Impact per diluted share calculated using weighted average common shares outstanding of 49.9 million.
Management believes that the presentation of earnings per share adjusted to exclude the impacts of restructuring charges and special items is helpful in analyzing the operating performance of the Company, as these costs 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. Adjusted earnings per share is not a U.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, earnings per share calculated in accordance with U.S. GAAP.

30


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:

 

 

Three Months Ended

 

 

 

September 30,

 

($ in millions)

 

2014

 

2013

 

Net cash provided from operating activities

 

$

15.0

 

$

39.5

 

Purchases of property, equipment and software

 

(59.0

)

(90.4

)

Proceeds from disposals of property and equipment

 

0.1

 

 

Dividends paid

 

(9.6

)

(9.6

)

Free cash flow

 

$

(53.5

)

$

(60.5

)

  Three Months Ended
September 30,
($ in millions) 2015 2014
Net cash provided from operating activities $41.5
 $15.0
Purchases of property, equipment and software (29.9) (59.0)
Proceeds from disposals of property and equipment 
 0.1
Proceeds from insurance claim 4.0
 
Dividends paid (9.0) (9.6)
Free cash flow $6.6
 $(53.5)
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’s current intention to use excess cash to fund investments in capital equipment, acquisition opportunities, treasury stock repurchases 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.

35


Contingencies

Table of Contents

Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)

The following provides a reconciliation of adjusted EBITDA, to its most directly comparable U.S. GAAP financial measures:

 

 

Three Months Ended

 

 

 

September 30,

 

($ in millions)

 

2014

 

2013

 

Net income

 

$

13.5

 

$

34.6

 

 

 

 

 

 

 

Interest expense

 

7.0

 

4.4

 

Income tax expense

 

6.5

 

16.9

 

Depreciation and amortization

 

30.3

 

26.7

 

Other income, net

 

(4.9

)

(0.1

)

EBITDA

 

$

52.4

 

$

82.5

 

Net pension expense

 

11.5

 

15.0

 

 

 

 

 

 

 

Adjusted EBITDA

 

$

63.9

 

$

97.5

 

Management believes that adjusted EBITDA is helpful in analyzing the operating performance. Our definitions and calculations of these items may not necessarily be the same as those used by other companies. Adjusted EBITDA is not a measure of liquidity or profitability and should not be considered as an alternative to net income, operating income, net cash provided by operating activities or any other measure determined in accordance with U.S. GAAP.

Contingencies

Environmental

We are subject to various federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Although compliance with these laws and regulations may affect the costs of our operations, compliance costs to date have not been material. We have environmental remediation liabilities at some of our owned operating facilities and have been designated as a potentially responsible party (“PRP”) with respect to certain third party Superfund waste-disposal sites and other third party-owned sites. 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 three months ended September 30, 2015, there was no change to the liability for a company-owned former operating site. 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 September 30, 2015 and June 30, 2015 were $15.9 million. 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 PRP’s 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. We accrue amounts for environmental remediation costs that represent our best estimate of the probable and reasonably estimable undiscounted future costs related to environmental remediation. During the three months ended September 30, 2014, we increased the liability for a company-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 September 30, 2014 and June 30, 2014 were $15.6 million and $15.5 million, respectively.

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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 PRP’s. 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.


31


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.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.

Critical Accounting Policies and Estimates

A summary of other significant accounting policies is discussed in our 20142015 Form 10-K Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of 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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Forward-Looking Statements

Table of Contents

Forward Looking Statements

This Quarterly Report on Form 10-Q10Q 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’s filings with the Securities and Exchange Commission, including its annual report on Form 10-K for the year ended June 30, 2014 and the exhibits attached to that filing.2015. They include but are not limited to: (1) the cyclical nature of the specialty materials business and certain end-use markets, including aerospace, defense, industrial, transportation, consumer, medical and energy, or other influences on Carpenter’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 to achieve cash generation, growth, earnings, profitability, cost savings and reductions, 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 success of government trade actions; (7) the valuation of the assets and liabilities in Carpenter’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, 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’s manufacturing processes are dependent upon highly specialized equipment located primarily in facilities in Reading, Latrobe and Athens 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; (15) fluctuations in Oil and (15)Gas prices and production; (16) the success of restructuring actions; and (17) share repurchases are at Carpenter’s discretion and could be affected by changes in Carpenter’s share price, operating results, capital spending, cash flows, inventory, acquisitions, investments, tax laws and general market conditions. Any of these factors could have an adverse and/or fluctuating effect on Carpenter’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, and Section 21E of the Securities Exchange Act of 1934, as amended. Carpenter undertakes no obligation to update or revise any forward-looking statements.

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Item 3. Quantitative and Qualitative Disclosures aboutAbout 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 11 to the consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q, “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, 2014,2015, we had approximately $20.5$59.5 million of net deferred losses 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 7162 percent of these net deferred losses 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 risk.

risks.

We have useduse interest rate swaps to achieve a level of floating rate debt relative to fixed rate debt where appropriate.  Historically, we have enteredWe enter 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 60%60 percent in return seeking assets and 40%40 percent in liability matching assets. Return seeking assets include domestic and international equities and high yield bonddiversified loan funds. Liability matching assets include long duration bond funds. As the funding level of the plans improves in increments of 5%, assets will be shifted from return seeking to liability matching in increments of 4% as a de-risking strategy.

The status of our financial instruments as of September 30, 20142015 is provided in Note 11 to the consolidated financial statements included in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form 10-Q. Assuming either of the following occurred on September 30, 2014,2015, (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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33


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’s management, with the participation of the Company’s President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, evaluated the effectiveness of the Company’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”), as of September 30, 2014.2015. 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’s disclosure controls and procedures as of September 30, 20142015 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’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’s management, including the Company’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’s internal control over financial reporting that occurred during the quarter ended September 30, 20142015 that have materially affected, or are likely to materially affect, the Company’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 Discussion and Analysis of Financial Condition and Results of Operations — Contingences.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 20142015 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
In October 2014, the Company’s Board of Directors authorized a share repurchase program of up to $500 million of the Company's shares over two years. The shares may be repurchased from time to time at our discretion based on capital needs of the business, general market conditions and the market price of the stock. The timing or amount of the shares to be repurchased cannot be assured. The share repurchase program may be discontinued at any time. As of September 30, 2015, $329.6 million of the $500 million remained available for future purchases. During the quarter ended September 30, 2015, the Company purchased 1,206,600 shares pursuant to the terms of the share repurchase program.


34

Table of Contents

There were no reportable


The following table contains information about purchases by us of our common stock during the quarter ended September 30, 2014, provided however that 47,5412015:
Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (in millions)
July 1-31, 2015 753,300
 $38.28
 753,300
 $346.7
August 1-31, 2015 350,300
 37.44
 350,300
 333.6
September 1-30, 2015 103,000
 38.18
 103,000
 329.6
Quarter ended September 30, 2015 1,206,600
 $38.03
 1,206,600
 $329.6
In addition to the share repurchase program, for the three months ended September 30, 2015, 4,075 shares, at an average purchase price of $57.35,$37.30, were surrendered by employees to the Company 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 5. Other Information
Amended and Restated By-Laws and Stockholder Proposals for Director Nominees
As we previously disclosed in a Form 8-K filed with the SEC on August 17, 2015, our Board of Directors amended and restated our By-Laws, effective on August 11, 2015, to, among other things, require nominating stockholders to disclose additional information about their, and their affiliates' and associates', interests in the Company, and provide that the deadline for submitting stockholder proposals, including such proposals for director nominees, is not less than 90 nor more than 120 days prior to the anniversary of the preceding year's annual meeting, with some exceptions. Our By-Laws were amended and restated as of August 11, 2015 (Exhibit 3.1 to our Current Report on Form 8-K filed on August 17, 2015) and incorporated herein by reference.


35


Item 6. Exhibits

Exhibit
No.

Description

Exhibit
No.
Description
3(A)By-Laws, amended and restated as of August 11, 2015 (Exhibit 3.1 to our Current Report on Form 8-K filed on August 17, 2015 and incorporated herein by reference).
10(A)Offer Letter, dated October 13, 2015, by and between Carpenter Technology Corporation and Damon Audia (Exhibit 10.1 to our Current Report on Form 8-K filed on October 16, 2015 and incorporated herein by reference).
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)

101

The following financial information from this Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2014,2015, 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 (Loss); (iv) the Consolidated Statements of Cash Flows; (v) the Consolidated Statements of Changes in Equity; and (vi) the Notes to the Consolidated Financial Statements.

41



36



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: October 31, 2014

30, 2015

/s/ Tony R. Thene

Damon J. Audia

Tony R. Thene

Damon J. Audia

Senior Vice President and

Chief Financial Officer

(duly authorized officer and principal accounting officerPrincipal Financial Officer)

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37



Exhibit Index

Exhibit
No.

Description

Exhibit
No.
Description
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.

101

The following financial information from this Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2014,2015, 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 (Loss); (iv) the Consolidated Statements of Cash Flows; (v) the Consolidated Statements of Changes in Equity; and (vi) the Notes to the Consolidated Financial Statements.

43




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