CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended June 30, 2019, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2019
|
|
2018
|
|
2017
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
167.0
|
|
|
$
|
188.5
|
|
|
$
|
47.0
|
|
Adjustments to reconcile net income to net cash provided from operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
121.5
|
|
|
116.6
|
|
|
117.8
|
|
Deferred income taxes
|
|
16.5
|
|
|
(61.1
|
)
|
|
41.6
|
|
Net pension expense
|
|
11.6
|
|
|
14.2
|
|
|
48.4
|
|
Share-based compensation expense
|
|
17.6
|
|
|
17.6
|
|
|
13.0
|
|
Net loss on disposal of property, plant, and equipment and assets held for sale
|
|
1.2
|
|
|
2.5
|
|
|
2.5
|
|
Loss on divestiture of business
|
|
—
|
|
|
—
|
|
|
3.2
|
|
Gain on insurance recovery
|
|
(11.4
|
)
|
|
—
|
|
|
—
|
|
Changes in working capital and other:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(5.3
|
)
|
|
(86.8
|
)
|
|
(34.6
|
)
|
Inventories
|
|
(94.0
|
)
|
|
0.4
|
|
|
(74.6
|
)
|
Other current assets
|
|
6.8
|
|
|
(9.6
|
)
|
|
2.8
|
|
Accounts payable
|
|
20.1
|
|
|
10.7
|
|
|
42.5
|
|
Accrued liabilities
|
|
(4.9
|
)
|
|
28.7
|
|
|
26.6
|
|
Pension plan contributions
|
|
(5.5
|
)
|
|
(6.7
|
)
|
|
(100.0
|
)
|
Other postretirement plan contributions
|
|
(3.1
|
)
|
|
(3.4
|
)
|
|
(3.2
|
)
|
Other, net
|
|
(5.7
|
)
|
|
(2.4
|
)
|
|
(2.7
|
)
|
Net cash provided from operating activities
|
|
232.4
|
|
|
209.2
|
|
|
130.3
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant, equipment and software
|
|
(180.3
|
)
|
|
(135.0
|
)
|
|
(98.5
|
)
|
Acquisition of businesses, net of cash acquired
|
|
(79.0
|
)
|
|
(13.3
|
)
|
|
(35.3
|
)
|
Proceeds from disposals of property, plant and equipment and assets held for sale
|
|
0.4
|
|
|
1.9
|
|
|
2.5
|
|
Proceeds from insurance recovery
|
|
11.4
|
|
|
—
|
|
|
—
|
|
Proceeds from note receivable from sale of equity method investment
|
|
—
|
|
|
6.3
|
|
|
6.3
|
|
Proceeds from sales and maturities of marketable securities
|
|
2.9
|
|
|
0.7
|
|
|
0.9
|
|
Proceeds from divestiture of business
|
|
—
|
|
|
—
|
|
|
12.0
|
|
Net cash used for investing activities
|
|
(244.6
|
)
|
|
(139.4
|
)
|
|
(112.1
|
)
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Credit agreement borrowings
|
|
163.9
|
|
|
—
|
|
|
122.1
|
|
Credit agreement repayments
|
|
(163.9
|
)
|
|
—
|
|
|
(122.1
|
)
|
Net change in short-term credit agreement borrowings
|
|
19.7
|
|
|
—
|
|
|
—
|
|
Dividends paid
|
|
(38.6
|
)
|
|
(34.4
|
)
|
|
(34.1
|
)
|
Payments on long-term debt
|
|
—
|
|
|
(55.0
|
)
|
|
—
|
|
Proceeds from stock options exercised
|
|
3.9
|
|
|
12.9
|
|
|
2.2
|
|
Withholding tax payments on share-based compensation awards
|
|
(4.4
|
)
|
|
(2.4
|
)
|
|
(1.0
|
)
|
Payments of debt issue costs
|
|
—
|
|
|
—
|
|
|
(1.4
|
)
|
Tax benefits on share-based compensation
|
|
—
|
|
|
—
|
|
|
0.5
|
|
Net cash used for financing activities
|
|
(19.4
|
)
|
|
(78.9
|
)
|
|
(33.8
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
2.4
|
|
|
(1.0
|
)
|
|
(0.1
|
)
|
DECREASE IN CASH AND CASH EQUIVALENTS
|
|
(29.2
|
)
|
|
(10.1
|
)
|
|
(15.7
|
)
|
Cash and cash equivalents at beginning of year
|
|
56.2
|
|
|
66.3
|
|
|
82.0
|
|
Cash and cash equivalents at end of year
|
|
$
|
27.0
|
|
|
$
|
56.2
|
|
|
$
|
66.3
|
|
See accompanying notes to consolidated financial statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 2019 and 2018
|
|
|
|
|
|
|
|
|
|
($ in millions, except share data)
|
|
2019
|
|
2018
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
27.0
|
|
|
$
|
56.2
|
|
Accounts receivable, net of allowance for doubtful accounts of $3.7 million and $2.6 million at June 30, 2019 and 2018, respectively
|
|
384.1
|
|
|
378.5
|
|
Inventories
|
|
787.7
|
|
|
689.2
|
|
Other current assets
|
|
37.4
|
|
|
54.9
|
|
Total current assets
|
|
1,236.2
|
|
|
1,178.8
|
|
Property, plant and equipment, net
|
|
1,366.2
|
|
|
1,313.4
|
|
Goodwill
|
|
326.4
|
|
|
268.7
|
|
Other intangibles, net
|
|
67.2
|
|
|
63.3
|
|
Deferred income taxes
|
|
4.2
|
|
|
4.3
|
|
Other assets
|
|
187.6
|
|
|
178.5
|
|
Total assets
|
|
$
|
3,187.8
|
|
|
$
|
3,007.0
|
|
LIABILITIES
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Short-term credit agreement borrowings
|
|
$
|
19.7
|
|
|
$
|
—
|
|
Accounts payable
|
|
238.7
|
|
|
214.7
|
|
Accrued liabilities
|
|
157.6
|
|
|
148.6
|
|
Total current liabilities
|
|
416.0
|
|
|
363.3
|
|
Long-term debt
|
|
550.6
|
|
|
545.7
|
|
Accrued pension liabilities
|
|
371.2
|
|
|
288.8
|
|
Accrued postretirement benefits
|
|
122.1
|
|
|
108.2
|
|
Deferred income taxes
|
|
142.7
|
|
|
161.6
|
|
Other liabilities
|
|
65.1
|
|
|
53.5
|
|
Total liabilities
|
|
1,667.7
|
|
|
1,521.1
|
|
|
|
|
|
|
Contingencies and commitments (see Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
Common stock — authorized 100,000,000 shares; issued 55,808,743 shares at June 30, 2019 and 55,712,229 shares at June 30, 2018; outstanding 47,470,363 shares at June 30, 2019 and 47,191,744 shares at June 30, 2018
|
|
279.0
|
|
|
278.6
|
|
Capital in excess of par value
|
|
320.4
|
|
|
310.0
|
|
Reinvested earnings
|
|
1,605.3
|
|
|
1,475.9
|
|
Common stock in treasury (8,338,380 shares and 8,520,485 shares at June 30, 2019 and 2018, respectively), at cost
|
|
(332.8
|
)
|
|
(338.8
|
)
|
Accumulated other comprehensive loss
|
|
(351.8
|
)
|
|
(239.8
|
)
|
Total stockholders' equity
|
|
1,520.1
|
|
|
1,485.9
|
|
Total liabilities and stockholders' equity
|
|
$
|
3,187.8
|
|
|
$
|
3,007.0
|
|
See accompanying notes to consolidated financial statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
For the Years Ended June 30, 2019, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
($ in millions, except
per share data)
|
|
Par
Value
of $5
|
|
Capital in
Excess of
Par Value
|
|
Reinvested
Earnings
|
|
Common
Stock in
Treasury
|
Accumulated Other Comprehensive (Loss) Income
|
Total Equity
|
|
|
Balances at June 30, 2016
|
|
$
|
276.3
|
|
|
$
|
273.5
|
|
|
$
|
1,308.9
|
|
|
$
|
(343.9
|
)
|
|
$
|
(409.9
|
)
|
|
$
|
1,104.9
|
|
|
Net income
|
|
|
|
|
|
|
|
47.0
|
|
|
|
|
|
|
|
|
47.0
|
|
|
Pension and postretirement benefits gain, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45.3
|
|
|
45.3
|
|
|
Net gain on derivative instruments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.5
|
|
|
19.5
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.0
|
|
|
2.0
|
|
|
Cash Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common @ $0.72 per share
|
|
|
|
|
|
|
|
(34.1
|
)
|
|
|
|
|
|
|
|
(34.1
|
)
|
|
Share-based compensation plans
|
|
|
|
|
10.4
|
|
|
|
|
|
2.3
|
|
|
|
|
|
12.7
|
|
|
Stock options exercised
|
|
0.4
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
|
Tax shortfall on share-based compensation
|
|
|
|
|
(0.9
|
)
|
|
|
|
|
|
|
|
|
|
|
(0.9
|
)
|
|
Balances at June 30, 2017
|
|
276.7
|
|
|
284.8
|
|
|
1,321.8
|
|
|
(341.6
|
)
|
|
(343.1
|
)
|
|
1,198.6
|
|
|
Net income
|
|
|
|
|
|
|
|
188.5
|
|
|
|
|
|
|
|
|
188.5
|
|
|
Pension and postretirement benefits gain, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78.6
|
|
|
78.6
|
|
|
Net gain on derivative instruments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.1
|
|
|
26.1
|
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.4
|
)
|
|
(1.4
|
)
|
|
Cash Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common @ $0.72 per share
|
|
|
|
|
|
|
|
(34.4
|
)
|
|
|
|
|
|
|
|
(34.4
|
)
|
|
Share-based compensation plans
|
|
|
|
|
14.2
|
|
|
|
|
|
2.8
|
|
|
|
|
|
17.0
|
|
|
Stock options exercised
|
|
1.9
|
|
|
11.0
|
|
|
|
|
|
|
|
|
|
|
|
12.9
|
|
|
Balances at June 30, 2018
|
|
278.6
|
|
|
310.0
|
|
|
1,475.9
|
|
|
(338.8
|
)
|
|
(239.8
|
)
|
|
1,485.9
|
|
|
Cumulative adjustment upon adoption of ASU 2017-12
|
|
|
|
|
|
1.0
|
|
|
|
|
(1.0
|
)
|
|
—
|
|
|
Net income
|
|
|
|
|
|
|
|
167.0
|
|
|
|
|
|
|
|
|
167.0
|
|
|
Pension and postretirement benefits loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(72.9
|
)
|
|
(72.9
|
)
|
|
Marketable securities gain, net of tax
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
0.3
|
|
|
Net loss on derivative instruments, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37.6
|
)
|
|
(37.6
|
)
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.8
|
)
|
|
(0.8
|
)
|
|
Cash Dividends:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common @ $0.80 per share
|
|
|
|
|
|
|
|
(38.6
|
)
|
|
|
|
|
|
|
|
(38.6
|
)
|
|
Share-based compensation plans
|
|
|
|
|
6.9
|
|
|
|
|
|
6.0
|
|
|
|
|
|
12.9
|
|
|
Stock options exercised
|
|
0.4
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
3.9
|
|
|
Balances at June 30, 2019
|
|
$
|
279.0
|
|
|
$
|
320.4
|
|
|
$
|
1,605.3
|
|
|
$
|
(332.8
|
)
|
|
$
|
(351.8
|
)
|
|
$
|
1,520.1
|
|
See accompanying notes to consolidated financial statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)
For the Years Ended June 30, 2019, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
Issued
|
|
Treasury
|
|
Net Outstanding
|
Balances at June 30, 2016
|
|
55,254,569
|
|
|
(8,654,444
|
)
|
|
46,600,125
|
|
Stock options exercised
|
|
95,089
|
|
|
—
|
|
|
95,089
|
|
Share-based compensation plans
|
|
—
|
|
|
57,966
|
|
|
57,966
|
|
Balances at June 30, 2017
|
|
55,349,658
|
|
|
(8,596,478
|
)
|
|
46,753,180
|
|
Stock options exercised
|
|
362,571
|
|
|
—
|
|
|
362,571
|
|
Share-based compensation plans
|
|
—
|
|
|
75,993
|
|
|
75,993
|
|
Balances at June 30, 2018
|
|
55,712,229
|
|
|
(8,520,485
|
)
|
|
47,191,744
|
|
Stock options exercised
|
|
96,514
|
|
|
—
|
|
|
96,514
|
|
Share-based compensation plans
|
|
—
|
|
|
182,105
|
|
|
182,105
|
|
Balances at June 30, 2019
|
|
55,808,743
|
|
|
(8,338,380
|
)
|
|
47,470,363
|
|
See accompanying notes to consolidated financial statements.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. All significant intercompany accounts and transactions are eliminated. Investments in companies in which the Company exercises significant influence, but which it does not control (generally a 20 to 50 percent ownership interest), are accounted for by the equity method of accounting and the Company’s share of their income or loss is included in other income (expense), net in the consolidated statements of income.
Revenue Recognition
Revenue, net of related discounts, rebates, returns and allowances of $22.6 million, $26.5 million and $23.8 million for the years ended June 30, 2019, 2018 and 2017, respectively, is recognized when performance obligations are satisfied under the terms of a customer order or contract. This is generally determined when title, ownership and risk of loss has transferred to the customer upon shipment or delivery of a product or when the service has been performed. These criteria are generally met upon shipment or delivery of the product based on the applicable shipping terms. Shipping terms may vary for products shipped outside the United States depending on the mode of transportation, the country where the material is shipped and any agreements made with the customers.
Freight and Handling Fees and Costs
Freight and handling costs billed separately to customers are included as part of net sales, and freight and handling costs expensed are included as part of cost of sales on the consolidated statements of income.
Research and Development
Research and development expenditures, which amounted to $23.3 million, $19.3 million and $16.9 million in fiscal years 2019, 2018 and 2017, respectively, are expensed as incurred and are generally reported in cost of sales in the consolidated statements of income. The research and development expenditures consist principally of salaries and benefits, building costs, utilities and administrative expenses. Substantially all development costs are related to developing new products or designing significant improvements to existing products or processes.
Cash Equivalents
Cash equivalents consist of highly liquid instruments with original maturities of three months or less. Cash equivalents are stated at cost, which approximates market.
Accounts Receivable
Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables based on a review of outstanding amounts. Trade credit is extended based upon periodic evaluation of each customer’s ability to perform its obligations. The Company determines accounts receivable allowances based on an aging of accounts and a review of specific accounts identified as collection risks. The Company does not require collateral to secure accounts receivable.
Inventories
Inventories are valued at the lower of cost or market. Cost for inventories is principally determined by the LIFO method. The Company also uses the FIFO and average cost methods. As of June 30, 2019 and 2018, $173.2 million and $138.6 million of inventory, respectively, was accounted for using a method other than the LIFO method.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment and Depreciation
Fixed assets are stated at historical cost less accumulated depreciation. Depreciation for financial reporting purposes is computed by the straight-line method over the estimated useful lives of the assets. Upon disposal, assets and related depreciation are removed from the accounts and the differences between the net amounts and proceeds from disposal are generally included in cost of goods sold in the consolidated statements of income.
Computer Software and Amortization
Computer software is included in other assets on the consolidated balance sheets and is amortized for financial reporting purposes on a straight-line basis over the respective estimated useful lives ranging from 3 to 7 years. Amortization expense charged to operations related to capitalized software amounted to $6.1 million, $5.1 million and $5.2 million for the years ended June 30, 2019, 2018 and 2017, respectively. The carrying value of computer software net of accumulated amortization at June 30, 2019 and 2018 was $123.8 million and $101.8 million, respectively.
Goodwill
Goodwill, net of accumulated impairment losses, representing the excess of the cost over the net tangible and identifiable intangible assets of acquired businesses, is stated at cost. Goodwill is not amortized but instead is annually tested for impairment as of June 30, or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. Such events or circumstances include a decline in general economic conditions, adverse changes in the industry and markets, poor financial performance affecting earnings and cash flows and a trend of negative or declining cash flows over multiple periods. Potential impairment is identified by comparing the fair value of a reporting unit to its carrying value, including goodwill. The fair value is estimated using discounted cash flows and the use of market multiples valuation techniques. These valuation techniques require the use of estimates and assumptions related to projected revenue growth rates, operating results, capital expenditures and working capital levels as well as the cost of capital. The cash flow forecasts include significant judgments and assumptions relating to revenue growth rates. If the carrying value of the reporting unit exceeds its fair value, any impairment loss is measured by comparing the carrying value of the reporting unit’s goodwill to its implied fair value.
Intangible assets
The costs of intangible assets, consisting principally of trademarks, trade names, non-compete arrangements, technology, patents and customer relationships are amortized on a straight-line basis over the estimated useful lives ranging from 5 to 30 years.
Impairment of Long-Lived Assets
Long-lived assets, including property, plant, equipment and intangible assets, subject to amortization are reviewed for impairment and written down to fair value whenever events or changes in circumstances indicate that the carrying value may not be recoverable through future undiscounted cash flows. The amount of the impairment loss is the excess of the carrying amount of the impaired assets over the fair value of the assets based upon discounted future cash flows.
Environmental Expenditures
Environmental expenditures that pertain to current operations or to future revenues are expensed or capitalized consistent with the Company’s capitalization policy for property, plant and equipment. Expenditures that result from the remediation of an existing condition caused by past operations and that do not contribute to current or future revenues are expensed. Liabilities are recognized for remedial activities when the remediation is probable and the cost can be reasonably estimated. Most estimated liabilities are not discounted to present value due to the uncertainty as to the timing and duration of expected costs. For one former operating facility site, due to the routine nature of the expected costs, the liability for future costs is discounted to present value over 20 years assuming a discount rate of approximately 3 percent as of June 30, 2019 and 2018. The liabilities, net of present value discount, for this former operating site were $11.0 million and $11.0 million, as of June 30, 2019 and 2018, respectively.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Financial Instruments
All derivative financial instruments are recorded on the balance sheet at their fair value and changes in fair value are recorded each period in current earnings or other comprehensive income. The Company enters into derivative financial instruments to hedge certain anticipated transactions, firm commitments or assets and liabilities denominated in foreign currencies. In addition, the Company utilizes interest rate swaps to convert fixed rate debt to floating rate debt.
Foreign Currency Translation
Assets and liabilities of international operations are translated into U.S. dollars at exchange rates in effect at year-end, and their income statements are translated at the average monthly exchange rates prevailing during the year. The resulting translation gains and losses are recorded each period as a component of accumulated other comprehensive income (loss) until the international entity is sold or liquidated. Gains and losses from transactions denominated in foreign currencies are reported in other income (expense), net in the consolidated statements of income.
Income Taxes
Deferred income taxes are recognized by applying enacted statutory tax rates, applicable to future years, to temporary differences between the tax basis and financial statement carrying values of the Company’s assets and liabilities. Valuation allowances are recorded to reduce deferred tax assets to amounts that are more likely than not to be realized.
Significant judgments, estimates and assumptions are required in determining tax return reporting positions and in calculating provisions for income tax, which are based on interpretations of tax regulations and accounting pronouncements. Liabilities are established for uncertain tax positions when it is more likely than not that such positions, if challenged, would not be sustained upon review by taxing authorities. These liabilities are re-evaluated as tax regulations and facts and circumstances change, such as the closing of a tax audit or the expiration of the statute of limitations for a specific exposure.
Earnings per Share
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 (restricted stock 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 shares for the period in each class. Diluted earnings per share assume the issuance of common stock for all potentially dilutive share equivalents outstanding.
Concentration of Credit Risk
Financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash and cash equivalents, investments in marketable securities and trade receivables. Investment and cash management policies have been implemented that limit deposit concentrations and limit investments to investment grade securities. The risk with respect to trade receivables is mitigated by monitoring payment terms and periodic credit evaluations we perform on our customers, the short duration of our payment terms and by the diversification of our customer base. During fiscal years 2019, 2018 and 2017, one customer, Arconic Inc., accounted for approximately 11 percent, 12 percent and 11 percent, respectively, of total net sales. Approximately 12 percent of the accounts receivable outstanding at June 30, 2019 is due from one customer, Arconic Inc. No single customer accounted for 10 percent or more of accounts receivable outstanding at June 30, 2018.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain amounts in the consolidated financial statement for prior years have been reclassified to conform to the fiscal year 2019 presentation.
2. Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements - Adopted in current period
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive framework for all entities in all industries to apply in the determination of when to recognize revenue, and, therefore, supersedes virtually all existing revenue recognition requirements and guidance. This framework resulted in less complex guidance in application while providing a consistent and comparable methodology for revenue recognition. The standard provides a five-step model to be applied to all contracts with customers, with an underlying principle that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.
The Company adopted ASU 2014-09 for all open contracts as of July 1, 2018 using the modified retrospective transition method. The adoption of the new standard did not have a material impact on the financial position of the Company, the results of its operations or its cash flows for fiscal year ended June 30, 2019. There was no cumulative effect of adopting the standard at the date of initial application in reinvested earnings. The Company’s revenue recognition accounting policy has been updated for the new guidance and the Company has expanded disclosure of revenues from contracts with customers as included in Note 3. Revenue.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory, which outlines updates to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. ASU 2016-16 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company adopted the provisions of ASU 2016-16 in the first quarter of fiscal year 2019. The adoption of ASU 2016-16 did not materially impact the Company’s consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The guidance changes how employers that sponsor defined benefit pension and other post-retirement benefit plans disaggregate the service cost components from other components of net periodic benefit costs in the income statement. This amendment requires that the service cost component be reported in net income as “cost of sales” or “selling, general and administrative expenses” in a manner consistent with the classification of direct labor and personnel costs of the eligible employees. Other components of net periodic benefit costs including interest costs, expected return on plan assets, amortization of net loss, amortization of prior service cost (benefits) (“pension earnings, interest and deferrals”) are classified as non-operating expense in “other income (expense), net” on the consolidated statements of income. The update specifies that only the service cost component is eligible for capitalization, which is consistent with the Company’s current practice. The Company adopted the provisions of ASU 2017-07 effective July 1, 2018 on a retrospective basis. For fiscal year ended June 30, 2018, $0.1 million and $2.0 million have been reclassified from cost of goods sold and selling, general and administrative expenses, respectively, to other income (expense), net on the consolidated statements of income. For fiscal year ended June 30, 2017, $16.5 million and $7.8 million have been reclassified from cost of goods sold and selling, general and administrative expenses, respectively, to other income (expense), net on the consolidated statements of income.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedge Activities, which amended and simplified the requirements of hedge accounting. ASU 2017-12 enables companies to more accurately present the economic effects of risk management activities in the financial statements. The guidance requires the presentation of all items that affect earnings to be recorded in the same income statement line as the hedged item and is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years with early adoption permitted. The Company adopted the provisions of ASU 2017-12 on July 1, 2018. Upon adoption, the Company reclassified $1.0 million of previously recorded hedge ineffectiveness from Reinvested Earnings to Accumulated Other Comprehensive Loss within the equity section of the consolidated balance sheets and provided expanded disclosures of derivative activity.
Recently Issued Accounting Pronouncements - Pending Adoption
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which improves transparency and comparability among companies by recognizing lease assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU 2016-02 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. The Company completed the accumulation of current lease information into the accounting software and validated the data for accuracy. The Company expects to elect the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs. The Company will make a policy election to not recognize right-of-use assets and lease liabilities for short-term leases for all asset classes. Upon adoption of the new lease guidance, the Company expects to record a right-of-use asset and lease liability on the consolidated balance sheets for several types of operating leases, including buildings, equipment, vehicles and computer equipment. The Company anticipates the impact of the adoption on July 1, 2019 will result in a right-of-use asset and total lease liability related to operating leases in the range of $51 million to $57 million. The adoption is not expected to have a material impact on the Consolidated Statements of Income or Consolidated Statements of Cash Flows.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income (loss) to reinvested earnings for standard tax effects resulting from the Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018. ASU 2018-02 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. The Company does not expect the adoption of ASU 2018-02 on July 1, 2019 will have a material impact on the consolidated financial statements.
The Company recognizes revenue in accordance with Topic 606, Revenue from Contracts. The Company applies the five-step model in the FASB’s guidance, which requires the Company to: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the Company satisfies a performance obligation.
The Company recognizes revenue when performance obligations under the terms of a customer purchase order or contract are satisfied. This occurs when control of the goods and services has transferred to the customer, which is generally determined when title, ownership and risk of loss pass to the customer, all of which occurs upon shipment or delivery of the product or the service is performed. Consignment transactions are arrangements where the Company transfers product to a customer location but retains ownership and control of such product until it is used by the customer. Revenue for consignment arrangements is recognized upon usage by the customer. Service revenue is recognized as the services are performed.
The customer purchase order or contract for goods transferred has a single performance obligation for which revenue is recognized at a point in time. The standard terms and conditions of a customer purchase order include general rights of return and product warranty provisions related to nonconforming product. Depending on the circumstances, the product is either replaced or a quality adjustment is issued. Such warranties do not represent a separate performance obligation.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Each customer purchase order or contract sets forth the transaction price for the products and services purchased under that arrangement. Some customer arrangements include variable consideration, such as volume rebates, which generally depend upon the Company’s customers meeting specified performance criteria, such as a purchasing level over a period of time. The Company exercises judgment to estimate the most likely amount of variable consideration at each reporting date.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for its product. The normal payment terms are 30 days. The Company has elected to use the practical expedient that permits a Company to not adjust for the effects of a significant financing component if it expects that at the contract inception, the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Amounts billed to customers for shipping and handling activities to fulfill the Company’s promise to transfer the goods are included in revenues and costs incurred by the Company for the delivery of goods are classified as cost of sales in the consolidated statements of income. Shipping terms may vary for products shipped outside the United States depending on the mode of transportation, the country where the material is shipped and any agreements made with the customers.
Contract liabilities are recognized when the Company has received consideration from a customer to transfer goods or services at a future point in time when the Company performs under the purchase order or contract. Contract liabilities were $10.5 million and $10.4 million at June 30, 2019 and 2018, respectively, and are included in accrued liabilities on the consolidated balance sheets.
The Company elected the practical expedient that permits the omission of disclosure for remaining performance obligations which are expected to be satisfied in one year or less.
Disaggregation of Revenue
The Company operates in two business segments, Specialty Alloys Operations (“SAO”) and Performance Engineered Products (“PEP”). Revenue is disaggregated within these two business segments by diversified end-use markets and by geographical location. Comparative information of the Company’s overall revenues by end-use markets and geography for years ended June 30, 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End-Use Market Data
|
|
Year Ended
June 30,
|
|
Year Ended
June 30,
|
|
Year Ended
June 30,
|
($ in millions)
|
|
2019
|
|
2018
|
|
2017
|
Aerospace and Defense
|
|
$
|
1,327.9
|
|
|
$
|
1,182.3
|
|
|
$
|
973.3
|
|
Medical
|
|
205.0
|
|
|
175.3
|
|
|
125.5
|
|
Energy
|
|
181.7
|
|
|
146.5
|
|
|
138.0
|
|
Transportation
|
|
157.7
|
|
|
157.0
|
|
|
143.9
|
|
Industrial and Consumer
|
|
371.5
|
|
|
364.9
|
|
|
298.2
|
|
Distribution
|
|
136.4
|
|
|
131.7
|
|
|
118.7
|
|
Total net sales
|
|
$
|
2,380.2
|
|
|
$
|
2,157.7
|
|
|
$
|
1,797.6
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Data
|
|
Year Ended
June 30,
|
|
Year Ended
June 30,
|
|
Year Ended
June 30,
|
($ in millions)
|
|
2019
|
|
2018
|
|
2017
|
United States
|
|
$
|
1,606.7
|
|
|
$
|
1,429.4
|
|
|
$
|
1,198.3
|
|
Europe
|
|
387.2
|
|
|
383.0
|
|
|
349.6
|
|
Asia Pacific
|
|
196.3
|
|
|
174.8
|
|
|
127.2
|
|
Mexico
|
|
81.6
|
|
|
61.7
|
|
|
48.5
|
|
Canada
|
|
67.8
|
|
|
65.7
|
|
|
47.7
|
|
Other
|
|
40.6
|
|
|
43.1
|
|
|
26.3
|
|
Total net sales
|
|
$
|
2,380.2
|
|
|
$
|
2,157.7
|
|
|
$
|
1,797.6
|
|
4. Acquisitions and Divestiture
On October 22, 2018, the Company acquired all the outstanding shares of LPW Technology Ltd. (“LPW”), for a cash purchase price of $79.0 million, net of cash acquired. The acquisition combines LPW’s metal powder lifecycle management technology and processes with the Company's technical expertise in producing highly engineered metal powders and additively manufactured components. The purchase price allocation was completed in the fourth quarter of fiscal year 2019 and resulted in the purchase price being allocated to: $2.1 million of accounts receivable, $4.5 million of inventory, $0.5 million of other current assets, $11.9 million of property, plant and equipment, $11.4 million of identifiable intangible assets, $59.0 million of goodwill, $4.4 million of accounts payable, $2.5 million of current liabilities and $3.5 million of other liabilities.
On February 21, 2018, the Company acquired all of the outstanding membership interests of MB CalRAM LLC (“CalRAM”), for a cash purchase price of $13.3 million. The acquisition provides the Company with immediate entry into the rapidly expanding part production segment of the additive manufacturing value chain. The purchase price allocation was completed in the fourth quarter of fiscal year 2018 and resulted in the purchase price being allocated to $0.2 million of working capital, $2.6 million of property, plant and equipment, $5.2 million of identifiable intangible assets and $5.3 million of goodwill.
On February 28, 2017, the Company acquired substantially all the assets of Puris LLC (“Puris”), for a cash purchase price of $35.3 million. The acquisition provides the Company with immediate entry into the rapidly growing titanium powder market, an expanded presence in additive manufacturing and strengthens the Company’s capabilities as a solutions provider for customers across its end-use markets. The purchase price allocation was completed in the fourth quarter of fiscal year 2017 and resulted in the purchase price being allocated to $1.7 million of working capital, $6.5 million of property, plant and equipment, $8.5 million of identifiable intangible assets and $18.6 million of goodwill.
On June 29, 2017, the Company divested the Specialty Steel Supply (“SSS”) business. The divestiture was completed in two separate transactions for total cash proceeds of $12.0 million. In connection with the divestiture, the Company recorded a pretax loss of $3.2 million. The operations of the SSS business were historically included in our Performance Engineered Products (“PEP”) segment. The Company does not have any significant continuing involvement in the operations of SSS after the divestiture.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Earnings per Common Share
The calculations of basic and diluted earnings per common share for the years ended June 30, 2019, 2018 and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
(in millions, except per share data)
|
|
2019
|
|
2018
|
|
2017
|
Net income
|
|
$
|
167.0
|
|
|
$
|
188.5
|
|
|
$
|
47.0
|
|
Less: earnings and dividends allocated to participating securities
|
|
(1.9
|
)
|
|
(1.7
|
)
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
Earnings available for common shareholders used in calculation of basic earnings per share
|
|
$
|
165.1
|
|
|
$
|
186.8
|
|
|
$
|
46.7
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding, basic
|
|
47.7
|
|
|
47.2
|
|
|
47.0
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
3.46
|
|
|
$
|
3.96
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
167.0
|
|
|
$
|
188.5
|
|
|
$
|
47.0
|
|
Less: earnings and dividends allocated to participating securities
|
|
(1.9
|
)
|
|
(1.7
|
)
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
Earnings available for common shareholders used in calculation of diluted earnings per share
|
|
$
|
165.1
|
|
|
$
|
186.8
|
|
|
$
|
46.7
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding, basic
|
|
47.7
|
|
|
47.2
|
|
|
47.0
|
|
Effect of shares issuable under share-based compensation plans
|
|
0.4
|
|
|
0.4
|
|
|
0.1
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding, diluted
|
|
48.1
|
|
|
47.6
|
|
|
47.1
|
|
|
|
|
|
|
|
|
Diluted earnings per common share
|
|
$
|
3.43
|
|
|
$
|
3.92
|
|
|
$
|
0.99
|
|
The following awards issued under share-based compensation plans were excluded from the calculations of diluted earnings per share above because their effects were anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
(in millions)
|
|
2019
|
|
2018
|
|
2017
|
Stock options
|
|
0.7
|
|
|
0.7
|
|
|
1.9
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Inventories
Inventories consisted of the following components at June 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
($ in millions)
|
|
2019
|
|
2018
|
Raw materials and supplies
|
|
$
|
169.8
|
|
|
$
|
157.5
|
|
Work in process
|
|
425.7
|
|
|
372.5
|
|
Finished and purchased products
|
|
192.2
|
|
|
159.2
|
|
Total inventory
|
|
$
|
787.7
|
|
|
$
|
689.2
|
|
If the FIFO method of inventory had been used instead of the LIFO method, inventories would have been $178.4 million and $210.3 million higher as of June 30, 2019 and 2018, respectively. Current cost of LIFO-valued inventories was $793.0 million at June 30, 2019 and $760.8 million at June 30, 2018. The reductions in LIFO-valued inventories decreased cost of sales by $0.0 million during fiscal year 2019 and $0.6 million during fiscal year 2018 and $0.0 million during fiscal year 2017.
7. Property, Plant and Equipment
Property, plant and equipment consisted of the following components at June 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
($ in millions)
|
|
2019
|
|
2018
|
Land
|
|
$
|
35.6
|
|
|
$
|
34.8
|
|
Buildings and building equipment
|
|
512.9
|
|
|
500.0
|
|
Machinery and equipment
|
|
2,183.6
|
|
|
2,129.0
|
|
Construction in progress
|
|
150.7
|
|
|
83.6
|
|
Total at cost
|
|
2,882.8
|
|
|
2,747.4
|
|
Less: accumulated depreciation and amortization
|
|
1,516.6
|
|
|
1,434.0
|
|
Total property, plant, and equipment
|
|
$
|
1,366.2
|
|
|
$
|
1,313.4
|
|
The estimated useful lives of depreciable assets are as follows:
|
|
|
|
Asset Category
|
|
Useful Life
(in Years)
|
Buildings and building equipment
|
|
10 – 45
|
Machinery and equipment
|
|
3 – 30
|
Depreciation for the years ended June 30, 2019, 2018 and 2017 was $108.1 million, $104.7 million and $105.8 million, respectively.
8. Goodwill and Other Intangible Assets, Net
Goodwill
The Company conducts goodwill impairment testing at least annually as of June 30, or more often if events, changes or circumstances indicate that the carrying amount may not be recoverable.
The Company has determined there was no goodwill impairment for the years ended June 30, 2019 and 2018.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The changes in the carrying amount of goodwill by reportable segment for fiscal years 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
June 30, 2017
|
|
Acquisition
|
|
June 30, 2018
|
|
Acquisition
|
|
June 30, 2019
|
Goodwill
|
|
$
|
310.6
|
|
|
$
|
5.3
|
|
|
$
|
315.9
|
|
|
$
|
57.7
|
|
|
$
|
373.6
|
|
Accumulated impairment losses
|
|
(47.2
|
)
|
|
—
|
|
|
(47.2
|
)
|
|
—
|
|
|
(47.2
|
)
|
Total goodwill
|
|
$
|
263.4
|
|
|
$
|
5.3
|
|
|
$
|
268.7
|
|
|
$
|
57.7
|
|
|
$
|
326.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Alloys Operations
|
|
$
|
195.5
|
|
|
$
|
—
|
|
|
$
|
195.5
|
|
|
$
|
—
|
|
|
$
|
195.5
|
|
Performance Engineered Products
|
|
67.9
|
|
|
5.3
|
|
|
73.2
|
|
|
57.7
|
|
|
130.9
|
|
Total goodwill
|
|
$
|
263.4
|
|
|
$
|
5.3
|
|
|
$
|
268.7
|
|
|
$
|
57.7
|
|
|
$
|
326.4
|
|
Other Intangible Assets, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
($ in millions)
|
|
Useful Life
(in Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Carrying
Amount
|
Trademarks and trade names
|
|
15 - 30
|
|
$
|
33.5
|
|
|
$
|
(24.3
|
)
|
|
$
|
9.2
|
|
|
$
|
33.5
|
|
|
$
|
(23.2
|
)
|
|
$
|
10.3
|
|
Customer relationships
|
|
10 - 15
|
|
76.9
|
|
|
(36.0
|
)
|
|
40.9
|
|
|
76.9
|
|
|
(30.8
|
)
|
|
46.1
|
|
Non-compete agreements
|
|
5
|
|
0.2
|
|
|
(0.1
|
)
|
|
0.1
|
|
|
0.2
|
|
|
(0.1
|
)
|
|
0.1
|
|
Technology
|
|
15
|
|
7.3
|
|
|
(1.0
|
)
|
|
6.3
|
|
|
7.3
|
|
|
(0.5
|
)
|
|
6.8
|
|
Patents
|
|
14 - 20
|
|
11.4
|
|
|
(0.7
|
)
|
|
10.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
|
$
|
129.3
|
|
|
$
|
(62.1
|
)
|
|
$
|
67.2
|
|
|
$
|
117.9
|
|
|
$
|
(54.6
|
)
|
|
$
|
63.3
|
|
The Company recorded $7.3 million of amortization expense related to intangible assets during fiscal year 2019, $6.8 million during fiscal year 2018 and $6.8 million during fiscal year 2017. The estimated annual amortization expense related to intangible assets for each of the succeeding five fiscal years is $7.6 million in fiscal years 2020, 2021, 2022, 2023 and 2024.
9. Accrued Liabilities
Accrued liabilities consisted of the following as of June 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
($ in millions)
|
|
2019
|
|
2018
|
Accrued compensation and benefits
|
|
$
|
71.2
|
|
|
$
|
83.3
|
|
Derivative financial instruments
|
|
16.7
|
|
|
—
|
|
Accrued postretirement benefits
|
|
14.7
|
|
|
15.4
|
|
Deferred revenue
|
|
10.5
|
|
|
10.4
|
|
Accrued interest expense
|
|
10.4
|
|
|
10.4
|
|
Accrued income taxes
|
|
4.2
|
|
|
1.4
|
|
Accrued pension liabilities
|
|
3.4
|
|
|
3.3
|
|
Other
|
|
26.5
|
|
|
24.4
|
|
Total accrued liabilities
|
|
$
|
157.6
|
|
|
$
|
148.6
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Debt
On March 31, 2017, the Company entered into a $400.0 million syndicated credit facility (“Credit Agreement”) that extends to March 2022. 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 1.00% to 1.75% (1.25% as of June 30, 2019), and for Base Rate-determined loans, from 0.00% to 0.75% (0.25% as of June 30, 2019). The Company also pays a quarterly commitment fee ranging from 0.125% to 0.400% (0.20% as of June 30, 2019), determined based upon the Debt Rating, of the unused portion of the $400.0 million commitment under the Credit Agreement. In addition, the Company must pay certain letter of credit fees, ranging from 1.00% to 1.75% (1.25% as of June 30, 2019), with respect to letters of credit issued under the Credit Agreement. The Company has the right to voluntarily prepay and re-borrow loans and to terminate or reduce the commitments under the facility. As of June 30, 2019, the Company had $6.0 million of issued letters of credit under the Credit Agreement and $19.7 million of short-term borrowings, with the balance of $374.3 million available to the Company. As of June 30, 2019, the borrowing rate for the Credit Agreement was 3.90%.
The Company is subject to certain financial and restrictive covenants under the Credit Agreement, which, among other things, require the maintenance of a minimum interest coverage ratio of 3.50 to 1.00. The interest coverage ratio is defined in the Credit Agreement as, for any period, the ratio of consolidated earnings before interest, taxes, depreciation and amortization and non-cash net pension expense (“EBITDA”) to consolidated interest expense for such period. The Credit Agreement also requires the Company to maintain a debt to capital ratio of less than 55 percent. The debt to capital ratio is defined in the Credit Agreement as the ratio of consolidated indebtedness, as defined therein, to consolidated capitalization, as defined therein. As of June 30, 2019, the Company was in compliance with all of the covenants of the Credit Agreement.
Long-term debt outstanding as of June 30, 2019 and 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
($ in millions)
|
|
2019
|
|
2018
|
Senior unsecured notes, 5.20% due July 2021 (face value of $250.0 million at June 30, 2019 and 2018)
|
|
$
|
251.2
|
|
|
$
|
246.6
|
|
Senior unsecured notes, 4.45% due March 2023 (face value of $300.0 million at June 30, 2019 and 2018)
|
|
299.4
|
|
|
299.1
|
|
Total
|
|
550.6
|
|
|
545.7
|
|
Less: amounts due within one year
|
|
—
|
|
|
—
|
|
Long-term debt, net of current portion
|
|
$
|
550.6
|
|
|
$
|
545.7
|
|
Aggregate maturities of long-term debt for the five years subsequent to June 30, 2019, are $0.0 million in fiscal years 2020, 2021, $250.0 million in 2022, $300.0 million in 2023 and $0.0 million in 2024.
For the years ended June 30, 2019, 2018 and 2017, interest costs totaled $31.1 million, $31.1 million and $31.1 million, respectively, of which $5.1 million, $2.8 million and $1.3 million, respectively, were capitalized as part of the cost of property, plant, equipment and software.
11. Pension and Other Postretirement Benefits
The Company provides several noncontributory defined benefit pension plans to certain employees. The plans provide defined benefits based on years of service and final average salary.
The Company made minimum required contributions of $5.5 million and $6.7 million during fiscal years 2019 and 2018, respectively, to its qualified defined benefit pension plans.
The Company also provides other postretirement benefit plans to certain of its employees. The postretirement benefit plans consist of health care and life insurance plans. Plan assets are maintained in a Voluntary Employee Benefit Association (“VEBA”) Trust. During fiscal years 2019 and 2018, the Company funded benefit payments using assets in the VEBA Trust.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Postretirement Plans
|
($ in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at beginning of year
|
|
$
|
1,264.5
|
|
|
$
|
1,369.1
|
|
|
$
|
241.5
|
|
|
$
|
255.1
|
|
Service cost
|
|
9.2
|
|
|
9.5
|
|
|
2.3
|
|
|
2.6
|
|
Interest cost
|
|
53.0
|
|
|
52.1
|
|
|
10.1
|
|
|
9.5
|
|
Benefits paid
|
|
(88.7
|
)
|
|
(89.8
|
)
|
|
(12.6
|
)
|
|
(13.0
|
)
|
Actuarial loss (gains)
|
|
101.3
|
|
|
(76.6
|
)
|
|
14.5
|
|
|
(12.7
|
)
|
Special termination benefits
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
Projected benefit obligation at end of year
|
|
1,339.3
|
|
|
1,264.5
|
|
|
255.8
|
|
|
241.5
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
972.5
|
|
|
987.6
|
|
|
117.9
|
|
|
117.0
|
|
Actual return
|
|
72.2
|
|
|
64.7
|
|
|
10.5
|
|
|
10.6
|
|
Benefits paid
|
|
(88.7
|
)
|
|
(89.8
|
)
|
|
(12.6
|
)
|
|
(13.0
|
)
|
Contributions
|
|
8.7
|
|
|
10.0
|
|
|
3.2
|
|
|
3.3
|
|
Fair value of plan assets at end of year
|
|
964.7
|
|
|
972.5
|
|
|
119.0
|
|
|
117.9
|
|
Funded status of the plans
|
|
$
|
(374.6
|
)
|
|
$
|
(292.0
|
)
|
|
$
|
(136.8
|
)
|
|
$
|
(123.6
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets - noncurrent
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accrued liabilities - current
|
|
(3.4
|
)
|
|
(3.3
|
)
|
|
(14.7
|
)
|
|
(15.4
|
)
|
Accrued pension liabilities - noncurrent
|
|
(371.2
|
)
|
|
(288.8
|
)
|
|
—
|
|
|
—
|
|
Accrued postretirement benefits - noncurrent
|
|
—
|
|
|
—
|
|
|
(122.1
|
)
|
|
(108.2
|
)
|
|
|
$
|
(374.6
|
)
|
|
$
|
(292.0
|
)
|
|
$
|
(136.8
|
)
|
|
$
|
(123.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Postretirement Plans
|
($ in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Amounts recognized in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
445.7
|
|
|
$
|
362.1
|
|
|
$
|
42.3
|
|
|
$
|
32.9
|
|
Prior service cost (credit)
|
|
14.1
|
|
|
16.2
|
|
|
(17.9
|
)
|
|
(23.1
|
)
|
Total
|
|
$
|
459.8
|
|
|
$
|
378.3
|
|
|
$
|
24.4
|
|
|
$
|
9.8
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
|
$
|
94.1
|
|
|
$
|
(75.0
|
)
|
|
$
|
10.9
|
|
|
$
|
(16.3
|
)
|
Amortization of net loss
|
|
(10.4
|
)
|
|
(13.5
|
)
|
|
(1.6
|
)
|
|
(2.9
|
)
|
Amortization of prior service (cost) benefit
|
|
(2.1
|
)
|
|
(2.1
|
)
|
|
5.2
|
|
|
5.2
|
|
Total, before tax effect
|
|
$
|
81.6
|
|
|
$
|
(90.6
|
)
|
|
$
|
14.5
|
|
|
$
|
(14.0
|
)
|
Additional information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation for all pension plans
|
|
$
|
1,331.6
|
|
|
$
|
1,257.8
|
|
|
N/A
|
|
|
N/A
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is additional information related to plans with projected benefit obligations in excess of plan assets as of June 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Postretirement Plans
|
($ in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Projected benefit obligation
|
|
$
|
1,339.3
|
|
|
$
|
1,264.4
|
|
|
$
|
255.9
|
|
|
$
|
241.5
|
|
Fair value of plan assets
|
|
$
|
964.7
|
|
|
$
|
972.4
|
|
|
$
|
119.0
|
|
|
$
|
117.9
|
|
The following additional information is for plans with accumulated benefit obligations in excess of plan assets as of June 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Postretirement Plans
|
($ in millions)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Accumulated benefit obligation
|
|
$
|
1,331.5
|
|
|
$
|
1,257.7
|
|
|
$
|
255.9
|
|
|
$
|
241.5
|
|
Fair value of plan assets
|
|
$
|
964.7
|
|
|
$
|
972.4
|
|
|
$
|
119.0
|
|
|
$
|
117.9
|
|
The components of the net periodic benefit cost related to the Company’s pension and other postretirement benefits for the years ended June 30, 2019, 2018 and 2017 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Postretirement Plans
|
($ in millions)
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Service cost
|
|
$
|
9.2
|
|
|
$
|
9.5
|
|
|
$
|
20.5
|
|
|
$
|
2.3
|
|
|
$
|
2.6
|
|
|
$
|
3.6
|
|
Interest cost
|
|
53.0
|
|
|
52.1
|
|
|
50.3
|
|
|
10.1
|
|
|
9.5
|
|
|
9.2
|
|
Expected return on plan assets
|
|
(64.9
|
)
|
|
(65.9
|
)
|
|
(65.1
|
)
|
|
(7.0
|
)
|
|
(6.9
|
)
|
|
(6.9
|
)
|
Amortization of net loss
|
|
10.4
|
|
|
13.5
|
|
|
37.8
|
|
|
1.6
|
|
|
2.9
|
|
|
3.2
|
|
Amortization of prior service cost (benefit)
|
|
2.1
|
|
|
2.1
|
|
|
1.8
|
|
|
(5.2
|
)
|
|
(5.2
|
)
|
|
(6.5
|
)
|
Curtailment loss
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit costs
|
|
$
|
9.8
|
|
|
$
|
11.3
|
|
|
$
|
45.8
|
|
|
$
|
1.8
|
|
|
$
|
2.9
|
|
|
$
|
2.6
|
|
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 presented in "Other Income (Expense), Net". See Note 18 to our consolidated financial statements included in Item 8. “Financial Statements and Supplementary Data”.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine benefit obligations at fiscal year end
|
|
Pension Plans
|
|
Other Postretirement Plans
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Discount rate
|
|
3.61
|
%
|
|
4.32
|
%
|
|
3.60
|
%
|
|
4.32
|
%
|
Rate of compensation increase
|
|
3.39
|
%
|
|
3.44
|
%
|
|
N/A
|
|
|
N/A
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to determine net periodic benefit cost for the fiscal year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plans
|
|
Other Postretirement Plans
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Discount rate
|
|
4.32
|
%
|
|
3.92
|
%
|
|
3.91
|
%
|
|
4.32
|
%
|
|
3.89
|
%
|
|
3.86
|
%
|
Expected long-term rate of return on plan assets
|
|
6.88
|
%
|
|
6.87
|
%
|
|
6.88
|
%
|
|
6.25
|
%
|
|
6.25
|
%
|
|
6.25
|
%
|
Long-term rate of compensation increase
|
|
3.39
|
%
|
|
3.44
|
%
|
|
3.50
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
The following table shows the expected health care rate increase and the future rate and time at which it is expected to remain constant:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
2019
|
|
2018
|
Assumed health care cost trend rate
|
|
6.25
|
%
|
|
6.50
|
%
|
Rate to which the cost trend rate is assumed to decline and remain (the ultimate trend rate)
|
|
5.00
|
%
|
|
5.00
|
%
|
Year that the rate reaches the ultimate trend rate
|
|
2025
|
|
|
2022
|
|
Assumed health care cost trend rates have an effect on the amounts reported for other postretirement benefits. A one percentage point increase in the assumed health care cost trend rate would increase service and interest cost by $0.1 million and increase the postretirement benefit obligation by $2.6 million. A one percentage point decrease in the assumed health care cost trend rate would decrease service and interest cost by $0.1 million and decrease the postretirement benefit obligation by $2.3 million.
Amounts in other comprehensive loss (gain) that are expected to be recognized as components of net periodic benefit cost in the year ended June 30, 2020 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Pension Plans
|
|
Other Postretirement Plans
|
|
Total
|
Amortization of prior service cost (benefit)
|
|
$
|
2.1
|
|
|
$
|
(3.9
|
)
|
|
$
|
(1.8
|
)
|
Amortization of net actuarial loss
|
|
15.5
|
|
|
2.5
|
|
|
18.0
|
|
Amortization of accumulated other comprehensive loss (gain)
|
|
$
|
17.6
|
|
|
$
|
(1.4
|
)
|
|
$
|
16.2
|
|
The Company’s U.S. pension plans’ weighted-average asset allocations at June 30, 2019 and 2018, by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Equity securities
|
|
53.7
|
%
|
|
55.7
|
%
|
Fixed income securities
|
|
46.3
|
|
|
44.3
|
|
Total
|
|
100.0
|
%
|
|
100.0
|
%
|
The Company’s policy for developing a pension plan investment strategy includes the periodic development of an asset and liability study by an independent investment consultant. Management considers this study in establishing an asset allocation that is presented to and approved by the Company’s Retirement Plan Committee.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on the current funding level, the allocation policy for the Company’s largest pension plan assets is to have approximately 60 percent in return seeking assets and 40 percent in liability matching assets. Return seeking assets include domestic and international equities and diversified loan funds. Liability matching assets include long duration bond funds. As the funding level of the plan improves in increments of 5 percent, assets will be shifted from return seeking to liability matching in increments of 4 percent as a de-risking strategy. The assets related to the Company’s other postretirement benefit plans were invested in approximately 70 percent U.S. equities, 23 percent short term investments and 7 percent fixed income securities as of June 30, 2019. Management establishes the expected long-term rate of return assumption by reviewing historical trends and analyzing the current and projected market conditions in relation to the plan’s asset allocation and risk management objectives. In determining the expected long-term rate of return, the Company considered historical returns for individual asset classes and the impact of active portfolio management.
The fair values of the Company’s pension plan assets as of June 30, 2019 and 2018, by asset category and by the levels of inputs used to determine fair value were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
Fair Value
Measurements Using
Input Type
|
|
|
|
|
($ in millions)
|
|
Level 1
|
|
Level 2
|
|
Net Asset Value
|
|
Total
|
Short-term investments
|
|
$
|
5.4
|
|
|
$
|
9.5
|
|
|
$
|
—
|
|
|
$
|
14.9
|
|
Domestic and international equities
|
|
132.6
|
|
|
—
|
|
|
—
|
|
|
132.6
|
|
Commingled funds
|
|
—
|
|
|
—
|
|
|
371.4
|
|
|
371.4
|
|
Limited partnerships
|
|
—
|
|
|
—
|
|
|
45.4
|
|
|
45.4
|
|
Government agency bonds
|
|
4.8
|
|
|
172.0
|
|
|
—
|
|
|
176.8
|
|
Corporate bonds
|
|
—
|
|
|
220.2
|
|
|
—
|
|
|
220.2
|
|
Mutual funds
|
|
1.9
|
|
|
—
|
|
|
—
|
|
|
1.9
|
|
Mortgage/asset backed securities and other
|
|
—
|
|
|
1.5
|
|
|
—
|
|
|
1.5
|
|
|
|
$
|
144.7
|
|
|
$
|
403.2
|
|
|
$
|
416.8
|
|
|
$
|
964.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
Fair Value
Measurements Using
Input Type
|
|
|
|
|
($ in millions)
|
|
Level 1
|
|
Level 2
|
|
Net Asset Value
|
|
Total
|
Short-term investments
|
|
$
|
2.5
|
|
|
$
|
14.6
|
|
|
$
|
—
|
|
|
$
|
17.1
|
|
Domestic and international equities
|
|
156.4
|
|
|
—
|
|
|
—
|
|
|
156.4
|
|
Commingled funds
|
|
—
|
|
|
—
|
|
|
365.3
|
|
|
365.3
|
|
Limited partnerships
|
|
—
|
|
|
—
|
|
|
43.3
|
|
|
43.3
|
|
Government agency bonds
|
|
3.5
|
|
|
151.6
|
|
|
—
|
|
|
155.1
|
|
Corporate bonds
|
|
—
|
|
|
226.3
|
|
|
—
|
|
|
226.3
|
|
Mutual funds
|
|
—
|
|
|
—
|
|
|
1.8
|
|
|
1.8
|
|
Mortgage/asset backed securities and other
|
|
—
|
|
|
7.2
|
|
|
—
|
|
|
7.2
|
|
|
|
$
|
162.4
|
|
|
$
|
399.7
|
|
|
$
|
410.4
|
|
|
$
|
972.5
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of the Company’s other postretirement benefit plans as of June 30, 2019 and 2018, by asset category and by the level of inputs used to determine fair value, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
Fair Value
Measurements Using
Input Type
|
|
|
|
|
($ in millions)
|
|
Level 1
|
|
Level 2
|
|
Net Asset Value
|
|
Total
|
Commingled fund
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
83.7
|
|
|
$
|
83.7
|
|
Short-term investments
|
|
—
|
|
|
27.1
|
|
|
—
|
|
|
27.1
|
|
Government agency bonds
|
|
—
|
|
|
4.8
|
|
|
—
|
|
|
4.8
|
|
Corporate bonds and other
|
|
—
|
|
|
3.4
|
|
|
—
|
|
|
3.4
|
|
|
|
$
|
—
|
|
|
$
|
35.3
|
|
|
$
|
83.7
|
|
|
$
|
119.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
Fair Value
Measurements Using
Input Type
|
|
|
|
|
($ in millions)
|
|
Level 1
|
|
Level 2
|
|
Net Asset Value
|
|
Total
|
Commingled fund
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
80.3
|
|
|
$
|
80.3
|
|
Short-term investments
|
|
—
|
|
|
23.0
|
|
|
—
|
|
|
23.0
|
|
Government agency bonds
|
|
—
|
|
|
8.7
|
|
|
—
|
|
|
8.7
|
|
Corporate bonds and other
|
|
—
|
|
|
5.4
|
|
|
—
|
|
|
5.4
|
|
Mortgage backed securities
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
0.5
|
|
|
|
$
|
—
|
|
|
$
|
37.6
|
|
|
$
|
80.3
|
|
|
$
|
117.9
|
|
|
|
|
|
|
|
|
|
|
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Investments in domestic and international equities are generally valued at the closing price reported on the active market on which they are traded. Commingled funds, limited partnerships and mutual funds are valued based on the net asset value (“NAV”) established for the fund at each valuation date. The NAV is based on the value of the underlying assets owned by the fund, minus its liabilities, and then divided by the number of units/shares outstanding. Corporate and government agency bonds and other fixed income securities are valued using closing bid prices on an active market when possible, otherwise using evaluated bid prices.
Cash Flows — Employer Contributions
The Company made contributions to the qualified U.S. pension plans of $5.5 million, $6.7 million and $100.0 million during fiscal years 2019, 2018 and 2017, respectively. The Company currently expects to make $6.2 million in required cash pension contributions to the qualified defined benefit pension plans during fiscal year 2020. During the years ended June 30, 2019, 2018 and 2017, the Company made contributions of $3.2 million, $3.3 million and $3.5 million to other non-qualified pension plans, respectively.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid. Pension benefits are currently paid from plan assets and other benefits are currently paid from corporate assets.
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Pension
Benefits
|
|
Other
Benefits
|
2020
|
|
$
|
83.0
|
|
|
$
|
14.7
|
|
2021
|
|
$
|
82.4
|
|
|
$
|
15.1
|
|
2022
|
|
$
|
82.6
|
|
|
$
|
15.1
|
|
2023
|
|
$
|
82.4
|
|
|
$
|
15.1
|
|
2024
|
|
$
|
81.8
|
|
|
$
|
15.1
|
|
2025-2029
|
|
$
|
395.5
|
|
|
$
|
73.1
|
|
Other Benefit Plans
Carpenter also maintains defined contribution retirement and savings plans for substantially all domestic employees. Company contributions to the plans were $24.8 million in fiscal year 2019, $22.6 million in fiscal year 2018 and $16.7 million in fiscal year 2017.
12. 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. Additionally, the Company has been notified that it may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against the Company. Neither the exact amount of remediation costs nor the final method of their allocation among all designated PRPs at these Superfund sites have been determined. Accordingly, at this time, 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 future costs related to environmental remediation. For fiscal years 2019 and 2018, the Company had no change to the liability for a company-owned former operating site. During fiscal year 2017, the Company decreased 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 June 30, 2019 and 2018 were $16.1 million and $16.1 million, respectively.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other
The Company is defending various routine claims and legal actions that are incidental to its business and common to its operations, including those pertaining to product claims, commercial disputes, patent infringement, employment actions, employee benefits, compliance with domestic and foreign laws and regulations, 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. 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.
The Company has entered into purchase agreements primarily for various key raw materials at market related prices, all made in the normal course of business. The commitments include both fixed and variable price provisions. Raw material prices as of June 30, 2019 were used for commitments with variable pricing. The purchase commitments covered by these agreements aggregate to $300.5 million as of June 30, 2019. Of this amount $212.7 million relates to fiscal year 2020, $42.6 million to fiscal year 2021, $30.1 million to fiscal year 2022 and $15.1 million to fiscal year 2023.
13. Operating Leases
The Company leases certain facilities and equipment under operating leases. Total rent expense was $16.1 million, $13.4 million and $13.2 million for the fiscal years ended June 30, 2019, 2018 and 2017, respectively.
Future minimum payments for noncancelable operating leases in effect at June 30, 2019 are: $12.7 million in fiscal year 2020, $10.4 million in fiscal year 2021, $8.3 million in fiscal year 2022, $6.6 million in fiscal year 2023, $5.0 million in fiscal year 2024 and $23.5 million thereafter.
14. Fair Value Measurements
The fair value hierarchy has three levels based on the inputs used to determine fair value. Level 1 refers to quoted prices in active markets for identical assets or liabilities. Level 2 refers to observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 refers to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Fair Value Measurements
Using Input Type
|
($ in millions)
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
12.5
|
|
|
$
|
12.5
|
|
Liabilities:
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
28.0
|
|
|
$
|
28.0
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
Fair Value Measurements
Using Input Type
|
($ in millions)
|
|
Level 2
|
|
Total
|
Assets:
|
|
|
|
|
|
|
Marketable securities
|
|
|
|
|
|
|
Municipal auction rate securities
|
|
$
|
2.9
|
|
|
$
|
2.9
|
|
Derivative financial instruments
|
|
35.2
|
|
|
35.2
|
|
Total assets
|
|
$
|
38.1
|
|
|
$
|
38.1
|
|
Liabilities:
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
3.4
|
|
|
$
|
3.4
|
|
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 16.
The Company has currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with accounting principles generally accepted in the United States of America.
The carrying amounts of other financial instruments not listed in the table below approximate fair value due to the short-term nature of these items. The carrying amounts and estimated fair values of the Company’s financial instruments not recorded at fair value in the financial statements were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
June 30, 2018
|
($ in millions)
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
Long-term debt
|
|
$
|
550.6
|
|
|
$
|
560.6
|
|
|
$
|
545.7
|
|
|
$
|
558.3
|
|
Company-owned life insurance
|
|
$
|
17.9
|
|
|
$
|
17.9
|
|
|
$
|
16.4
|
|
|
$
|
16.4
|
|
The fair values of long-term debt as of June 30, 2019 and June 30, 2018 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.
The carrying amount of company-owned life insurance reflects cash surrender values based upon the market values of underlying securities, using Level 2 inputs, net of any outstanding policy loans. The carrying value associated with the cash surrender value of these policies is recorded in other assets in the accompanying consolidated balance sheets.
For purposes of performing Step 1 of goodwill impairment testing, the Company uses certain nonrecurring fair value measurements using significant unobservable inputs (Level 3). Fair value of each reporting unit for purposes of the goodwill impairment test is based on a weighting of an income approach and a market approach. Under the income approach, fair value is determined based on a discounted cash flow analysis that uses estimates of cash flows discounted to present value using rates commensurate with the risks associated with those cash flows. Under the market approach, a market-based value is derived by relating multiples for earnings and cash flow measures for a group of comparable public companies to the same measure for each reporting unit to estimate fair value. The assumptions used by the Company to determine fair value of the reporting units are similar to those that would be used by market participants performing valuations.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. Share-Based Compensation
The Company has two share-based compensation plans: Amended and Restated Stock-Based Incentive Compensation Plan for Officers and Key Employees (the “Omnibus Plan”) and the Stock-Based Compensation Plan for Non-Employee Directors (“Director's Plan”). The Company recognizes compensation cost based on the fair value of the awards on the date of grant. The compensation cost is recognized over the requisite service period of the award, which is generally the shorter of the vesting period that the holder is required to provide service, or the period from the grant date to the date on which the employee is eligible to retire. Upon retirement, as defined in the Company’s share-based compensation plans, outstanding awards are subject to certain accelerated vesting terms.
Awards granted under the share-based compensation plans are paid from shares held in treasury and newly issued shares. The total compensation cost that has been charged against income related to these share-based compensation plans was $17.6 million, $17.6 million and $13.0 million for the years ended June 30, 2019, 2018 and 2017, respectively.
Omnibus Plan
The Omnibus Plan provides that the Board of Directors or a designated committee may grant stock options, restricted stock and restricted stock units, and determine the terms and conditions of each grant. The Omnibus Plan provides the Chief Executive Officer with limited authority to grant awards. As of June 30, 2019, 2,132,417 shares were available for awards which may be granted under this plan.
Director’s Plan
The Director’s Plan provides for the granting of stock options and stock units to non-employee directors. As of June 30, 2019, 518,801 shares were available for awards which may be granted under this plan.
Stock Options (all plans)
Stock options granted under the plans above are granted with an exercise price equal to at least the fair market value of the Company’s common stock on the date of grant. The options are typically exercisable after one to three years of service and expire no longer than ten years from the grant date.
The fair value of stock options awarded in fiscal years 2019, 2018 and 2017 was estimated on the date of each grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended June 30,
|
|
|
2019
|
|
2018
|
|
2017
|
Expected volatility
|
|
36
|
%
|
|
35
|
%
|
|
37
|
%
|
Dividend yield
|
|
1.3
|
%
|
|
1.8
|
%
|
|
1.8
|
%
|
Risk-free interest rate
|
|
2.8
|
%
|
|
1.8
|
%
|
|
1.1
|
%
|
Expected term (in years)
|
|
5.0
|
|
|
5.0
|
|
|
5.0
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The assumptions are based on multiple factors, including historical exercise patterns of employees in relatively homogeneous groups with respect to exercise and post-vesting employment termination behaviors, expected future exercising patterns for these same homogeneous groups and the implied volatility of our stock price based on historical performance for the same expected term of the options granted. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of each grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Awards
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
($ in millions)
|
Outstanding at June 30, 2016
|
|
1,701,502
|
|
|
$
|
43.35
|
|
|
|
|
|
|
Granted
|
|
907,141
|
|
|
$
|
38.98
|
|
|
|
|
|
|
Exercised
|
|
(95,289
|
)
|
|
$
|
23.21
|
|
|
|
|
|
|
Forfeited
|
|
(80,926
|
)
|
|
$
|
44.35
|
|
|
|
|
|
|
Expired
|
|
(40,000
|
)
|
|
$
|
55.12
|
|
|
|
|
|
Outstanding at June 30, 2017
|
|
2,392,428
|
|
|
$
|
42.27
|
|
|
|
|
|
|
Granted
|
|
252,545
|
|
|
$
|
41.27
|
|
|
|
|
|
|
Exercised
|
|
(362,571
|
)
|
|
$
|
35.70
|
|
|
|
|
|
|
Forfeited
|
|
(25,915
|
)
|
|
$
|
45.27
|
|
|
|
|
|
|
Expired
|
|
(33,226
|
)
|
|
$
|
63.12
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
2,223,261
|
|
|
$
|
42.88
|
|
|
|
|
|
|
Granted
|
|
124,977
|
|
|
$
|
57.92
|
|
|
|
|
|
|
Exercised
|
|
(96,514
|
)
|
|
$
|
39.93
|
|
|
|
|
|
|
Forfeited
|
|
(125,435
|
)
|
|
$
|
40.17
|
|
|
|
|
|
|
Outstanding at June 30, 2019
|
|
2,126,289
|
|
|
$
|
44.06
|
|
|
6.1 years
|
|
$
|
12.4
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2019
|
|
1,258,605
|
|
|
$
|
45.66
|
|
|
5.1 years
|
|
$
|
5.8
|
|
Outstanding and Exercisable Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
Range
|
|
Number Outstanding at June 30, 2019
|
|
Weighted
Average
Remaining
Contractual
Term (in Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number Exercisable at June 30, 2019
|
|
Weighted
Average
Exercise
Price
|
$17.29 - $20.00
|
|
14,166
|
|
|
0.1
|
|
$
|
17.29
|
|
|
14,166
|
|
|
$
|
17.29
|
|
$20.01 - $30.00
|
|
167
|
|
|
0.5
|
|
$
|
24.62
|
|
|
167
|
|
|
$
|
24.62
|
|
$30.01 - $40.00
|
|
918,282
|
|
|
6.7
|
|
$
|
38.41
|
|
|
296,488
|
|
|
$
|
37.20
|
|
$40.01 - $50.00
|
|
513,090
|
|
|
6.4
|
|
$
|
41.94
|
|
|
375,876
|
|
|
$
|
42.39
|
|
$50.01 - $59.53
|
|
680,584
|
|
|
5.3
|
|
$
|
53.84
|
|
|
571,908
|
|
|
$
|
52.90
|
|
|
|
2,126,289
|
|
|
|
|
$
|
44.06
|
|
|
1,258,605
|
|
|
$
|
45.66
|
|
The weighted average grant date fair value of options awarded during fiscal years 2019, 2018 and 2017 was $18.35, $11.65 and $10.81, respectively. Share-based compensation charged against income related to stock options for the years ended June 30, 2019, 2018 and 2017 was $3.6 million, $5.0 million and $4.7 million, respectively. As of June 30, 2019, $1.4 million of compensation cost related to nonvested stock options will be recognized over a weighted average remaining life of 1.1 years.
Of the options outstanding at June 30, 2019, 1,921,219 relate to the Omnibus Plan and 205,070 relate to the Directors’ Plan.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock Unit Awards (Omnibus Plan)
Restricted stock unit awards are granted to employees with performance and/or service conditions. Earned restricted stock unit awards receive non-forfeitable cash dividends during the restriction period. The fair value of the restricted stock unit awards is determined based on the close price of the Company’s stock on the grant date.
Performance-based restricted stock unit awards are earned dependent upon how certain performance goals are achieved during a specified performance period according to the terms determined at the date of the grant. These shares typically vest zero to two years from the date of the attainment of the specified performance goals. Compensation cost is determined and charged to expense beginning in the performance period through the vesting period.
Time-based restricted stock unit awards typically vest zero to three years from the date of grant. Compensation cost related to time-based stock unit awards is recognized over the vesting period of the award.
Amounts charged to compensation expense for restricted stock unit awards were $9.8 million, $8.8 million and $5.0 million for the years ended June 30, 2019, 2018 and 2017, respectively. As of June 30, 2019, $6.5 million of compensation cost related to restricted stock unit awards remains to be recognized over a weighted average remaining life of 1.0 years.
|
|
|
|
|
|
|
|
|
|
|
Number of Awards
|
|
Weighted Average Grant Date Fair Value
|
Restricted Balance at June 30, 2016
|
|
188,469
|
|
|
$
|
35.69
|
|
Time-based granted
|
|
231,195
|
|
|
$
|
38.82
|
|
Performance-based granted
|
|
55,478
|
|
|
$
|
36.18
|
|
Vested
|
|
(44,873
|
)
|
|
$
|
34.24
|
|
Forfeited
|
|
(37,792
|
)
|
|
$
|
38.80
|
|
Restricted Balance at June 30, 2017
|
|
392,477
|
|
|
$
|
37.47
|
|
Time-based granted
|
|
138,718
|
|
|
$
|
41.49
|
|
Performance-based granted
|
|
124,432
|
|
|
$
|
50.99
|
|
Vested
|
|
(62,215
|
)
|
|
$
|
35.35
|
|
Forfeited
|
|
(21,384
|
)
|
|
$
|
39.48
|
|
Restricted Balance at June 30, 2018
|
|
572,028
|
|
|
$
|
41.54
|
|
Time-based granted
|
|
132,421
|
|
|
$
|
57.92
|
|
Vested
|
|
(175,554
|
)
|
|
$
|
38.39
|
|
Forfeited
|
|
(54,560
|
)
|
|
$
|
41.62
|
|
Restricted Balance at June 30, 2019
|
|
474,335
|
|
|
$
|
44.66
|
|
The Company granted a new class of performance-based awards in fiscal year 2019 within the Omnibus Plan. The awards are granted at a target number of shares. These awards are earned dependent upon how certain performance goals are achieved during a specified performance period according to the terms determined at the date of the grant. The actual number of shares awarded may range from a minimum of 0 percent of the target shares to a maximum of 200 percent of the target shares. Participants do not have any rights to dividends (or equivalents) during the performance period. These shares typically vest on the date of the attainment of the specified performance goals. Compensation cost is determined and charged to expense beginning in the performance period through the vesting period. Compensation cost related to these awards granted in fiscal year 2019 was $1.4 million for the fiscal year ended June 30, 2019.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total Stockholder Return Awards
The Company granted Total Stockholder Return (“TSR”) awards in fiscal years 2018 and 2017. The TSR awards are granted at a target number of shares. The TSR awards are earned based on the Company’s total stockholder return compared to the total stockholder returns of the Russell RSCC Materials & Processing Growth Index at the end of a three-year period. The actual number of shares awarded may range from a minimum of 0 percent of the target shares to a maximum of 200 percent of the target shares. Participants do not have any rights to dividends (or equivalents) during the performance period. The fair value of the TSR awards was estimated using Monte Carlo valuation models. Compensation cost related to TSR awards recognized in fiscal years 2019, 2018 and 2017 was $1.7 million, $2.8 million and $2.0 million, respectively.
Director Stock Units
According to the provisions of the Director’s Plan, on the date of each annual stockholders’ meeting or on such other regularly scheduled date as the Board of Directors may determine from time to time in light of the Company’s prevailing practices for the grant of equity awards to employees, each Director shall be granted, in place of cash compensation, a number of stock units determined by dividing 50 percent of the Director’s annual retainer by the fair market value of the Company’s common stock on that date. These stock units vest as to one-quarter of the units for every three months of service following the grant date and are fully vested on the first anniversary of the grant date. At the Director’s election, the remaining 50 percent of the annual retainer and 100 percent of committee chair fees may be paid in stock units in lieu of cash. These units are immediately vested.
In addition to the grant of retainer stock units described above, each Director may be granted annually an additional award of stock units as the Board may determine by resolution. These stock units vest as to one-quarter of the units for every three months of service following the grant date and are fully vested on the first anniversary of the grant date.
Additional units are credited to each Director on a quarterly basis to reflect dividend equivalents on the Company’s common stock.
In the case of separation from service due to death or disability, all stock units shall immediately vest.
Following a Director’s separation from service, or such other elected distribution date or event, the number of stock units credited to the Director’s account will be converted to an equivalent number of the Company’s common stock.
|
|
|
|
|
|
|
|
|
|
|
Number of Units
|
|
Weighted Average Grant Date Fair Value
|
Outstanding at June 30, 2016
|
|
334,943
|
|
|
$
|
38.64
|
|
Granted
|
|
27,285
|
|
|
$
|
39.69
|
|
Distributed
|
|
(30,022
|
)
|
|
$
|
34.19
|
|
Dividend equivalents
|
|
6,347
|
|
|
$
|
—
|
|
Outstanding at June 30, 2017
|
|
338,553
|
|
|
$
|
42.47
|
|
Granted
|
|
21,813
|
|
|
$
|
49.14
|
|
Distributed
|
|
(35,489
|
)
|
|
$
|
35.22
|
|
Dividend equivalents
|
|
4,869
|
|
|
$
|
—
|
|
Outstanding at June 30, 2018
|
|
329,746
|
|
|
$
|
33.05
|
|
Granted
|
|
21,158
|
|
|
$
|
56.00
|
|
Distributed
|
|
(32,352
|
)
|
|
$
|
39.01
|
|
Dividend equivalents
|
|
6,003
|
|
|
$
|
—
|
|
Outstanding at June 30, 2019
|
|
324,555
|
|
|
$
|
35.25
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Compensation cost is determined using the grant date fair value and charged to expense over the vesting period of one year and amounted to $1.1 million, $1.0 million and $1.2 million for the years ended June 30, 2019, 2018 and 2017, respectively. As of June 30, 2019, $0.3 million of compensation cost related to director stock units remains to be recognized over a weighted average remaining life of 0.3 years.
16. 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.
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 (“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 June 30, 2019, the Company had forward contracts to purchase 19.0 million pounds of certain raw materials with settlement dates through December 2023.
Cash Flow Hedging — Forward interest rate swaps: Historically, the Company has entered into forward interest rate swap contracts to manage the risk of cash flow variability associated with fixed interest debt expected to be issued. The forward interest rate swaps were designated as cash flow hedges. The qualifying hedge contracts were marked-to-market at each reporting date and any unrealized gains or losses were included in AOCI to the extent effective and reclassified to interest expense in the period during which the hedged transaction affects earnings or it becomes probable that the forecasted transaction will not occur. For the years ended June 30, 2019, 2018 and 2017 net gains of $0.3 million, $0.3 million, $0.3 million, respectively, were recorded as a reduction to interest expense. These amounts represent 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 AOCI to the extent effective and reclassified to net sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.
The Company also uses foreign currency forward contracts to protect certain short-term asset positions denominated in foreign currencies against the effect of changes in exchange rates. These positions do not qualify for hedge accounting and accordingly are marked-to-market at each reporting date through charges to other income and expense. As of June 30, 2019, 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 uses interest rate swaps to achieve a level of floating rate debt relative to fixed rate debt. The Company has designated fixed to floating interest rate swaps as fair value hedges. Accordingly, the changes in the fair value of these instruments are immediately recorded in earnings. The mark-to-market values of both the fair value hedging instruments and the underlying debt obligations are recorded as equal and offsetting gains and losses in interest expense in the consolidated statements of income. As of June 30, 2019 and 2018, the total notional amount of floating interest rate contracts was $150.0 million and $150.0 million, respectively. For the years ended June 30, 2019, 2018 and 2017, net losses of $0.2 million were recorded as an increase to interest expense and net gains of $0.4 million and $1.8 million, were recorded as a reduction to interest expense, respectively.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value and location of outstanding derivative contracts recorded in the accompanying consolidated balance sheets were as follows as of June 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
($ in millions)
|
|
Interest Rate Swaps
|
|
Foreign Currency Contracts
|
|
Commodity Contracts
|
|
Total Derivatives
|
Asset Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
0.3
|
|
|
$
|
0.6
|
|
|
$
|
3.8
|
|
|
$
|
4.7
|
|
Other assets
|
|
1.6
|
|
|
0.2
|
|
|
6.0
|
|
|
7.8
|
|
Total asset derivatives
|
|
$
|
1.9
|
|
|
$
|
0.8
|
|
|
$
|
9.8
|
|
|
$
|
12.5
|
|
Liability Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16.7
|
|
|
$
|
16.7
|
|
Other liabilities
|
|
—
|
|
|
—
|
|
|
11.3
|
|
|
11.3
|
|
Total liability derivatives
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28.0
|
|
|
$
|
28.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
($ in millions)
|
|
Interest Rate Swaps
|
|
Foreign Currency Contracts
|
|
Commodity Contracts
|
|
Total Derivatives
|
Asset Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
0.1
|
|
|
$
|
0.4
|
|
|
$
|
15.3
|
|
|
$
|
15.8
|
|
Other assets
|
|
—
|
|
|
—
|
|
|
19.4
|
|
|
19.4
|
|
Total asset derivatives
|
|
$
|
0.1
|
|
|
$
|
0.4
|
|
|
$
|
34.7
|
|
|
$
|
35.2
|
|
Liability Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
$
|
0.1
|
|
Other liabilities
|
|
2.9
|
|
|
—
|
|
|
0.4
|
|
|
3.3
|
|
Total liability derivatives
|
|
$
|
2.9
|
|
|
$
|
0.1
|
|
|
$
|
0.4
|
|
|
$
|
3.4
|
|
Substantially all of the Company’s derivative contracts are subject to master netting arrangements, or similar agreements with each counterparty, which provide for the option to settle contracts on a net basis when they settle on the same day and in the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. The Company presents the outstanding derivative contracts on a net basis by counterparty in the consolidated balance sheets. If the Company had chosen to present the derivative contracts on a gross basis, the total asset derivatives would have been $14.9 million and total liability derivatives would have been $30.4 million as of June 30, 2019.
According to the provisions of the Company’s derivative arrangements, in the event that the fair value of outstanding derivative positions with certain counterparties exceeds certain thresholds, the Company may be required to issue cash collateral to the counterparties. As of June 30, 2019 the Company had no cash collateral held by counterparties.
The Company is exposed to credit loss in the event of nonperformance by counterparties on its derivative instruments as well as credit or performance risk with respect to its customer commitments to perform. Although nonperformance is possible, the Company does not anticipate nonperformance by any of the parties. In addition, various master netting arrangements are in place with counterparties to facilitate settlements of gains and losses on these contracts.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings or it becomes probable the forecasted transactions will not occur. The following is a summary of the gains (losses) related to cash flow hedges recognized during the years ended June 30, 2019, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in AOCI on Derivatives
Years Ended June 30,
|
($ in millions)
|
|
2019
|
|
2018
|
|
2017
|
Derivatives in Cash Flow Hedging Relationship:
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
$
|
45.4
|
|
|
$
|
41.4
|
|
|
$
|
9.4
|
|
Foreign exchange contracts
|
|
(0.9
|
)
|
|
(0.4
|
)
|
|
(0.1
|
)
|
Total
|
|
$
|
44.5
|
|
|
$
|
41.0
|
|
|
$
|
9.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Reclassified from AOCI into Income
Years Ended June 30,
|
($ in millions)
|
|
Location of Gain (Loss)
Reclassified from AOCI
into Income
|
|
2019
|
|
2018
|
|
2017
|
Derivatives in Cash Flow Hedging Relationship:
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
Cost of sales
|
|
$
|
5.1
|
|
|
$
|
3.8
|
|
|
$
|
(22.8
|
)
|
Foreign exchange contracts
|
|
Net sales
|
|
1.0
|
|
|
(1.0
|
)
|
|
0.5
|
|
Forward interest rate swaps
|
|
Interest expense
|
|
0.4
|
|
|
0.4
|
|
|
0.4
|
|
Total
|
|
|
|
$
|
6.5
|
|
|
$
|
3.2
|
|
|
$
|
(21.9
|
)
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of total amounts presented in the consolidated statements of income in which the effects of cash flow and fair value hedges are recorded during the years ended June 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
June 30, 2019
|
|
Year Ended
June 30, 2018
|
($ in millions)
|
|
Net Sales
|
|
Cost of Sales
|
|
Interest Expense
|
|
Net Sales
|
|
Cost of Sales
|
|
Interest Expense
|
Total amounts presented in the consolidated statements of income in which the effects of cash flow and fair value hedges are recorded
|
|
$
|
2,380.2
|
|
|
$
|
1,935.4
|
|
|
$
|
26.0
|
|
|
$
|
2,157.7
|
|
|
$
|
1,775.4
|
|
|
$
|
28.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on Derivatives in Cash Flow Hedging Relationship:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain reclassified from AOCI to income
|
|
—
|
|
|
5.1
|
|
|
—
|
|
|
—
|
|
|
3.8
|
|
|
—
|
|
Foreign currency forward contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from AOCI to income
|
|
1.0
|
|
|
—
|
|
|
—
|
|
|
(1.0
|
)
|
|
—
|
|
|
—
|
|
Interest rate swap agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain reclassified from AOCI to income
|
|
—
|
|
|
—
|
|
|
0.4
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
Gain (Loss) on Derivatives in Fair Value Hedging Relationship:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
Hedged Item
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
Derivatives designated as hedging instruments
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
|
0.4
|
|
Total gain (loss)
|
|
$
|
1.0
|
|
|
$
|
5.1
|
|
|
$
|
0.4
|
|
|
$
|
(1.0
|
)
|
|
$
|
3.8
|
|
|
$
|
0.4
|
|