Quarterly Report (10-q)

Date : 10/24/2019 @ 7:53PM
Source : Edgar (US Regulatory)
Stock : Carpenter Technology Corp (CRS)
Quote : 53.21  0.0 (0.00%) @ 11:59AM

Quarterly Report (10-q)

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

FORM 10-Q
 
 

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

For the quarterly period ended September 30, 2019
 
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            
 
 
Commission File Number 1-5828
 
CARPENTER TECHNOLOGY CORPORATION
(Exact name of Registrant as specified in its Charter)
 

Delaware
 
23-0458500
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
1735 Market Street
15th Floor
 
19103
Philadelphia
Pennsylvania
 
 
(Address of principal executive offices)
 
(Zip Code)
610-208-2000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $5 Par Value
 
CRS
 
New York Stock Exchange
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.  Yes   No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer
 
Accelerated filer
 
 
 
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company




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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
 
The number of shares outstanding of the issuer’s common stock as of October 16, 2019 was 47,720,105.



CARPENTER TECHNOLOGY CORPORATION
FORM 10-Q
INDEX
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
3
 
 
 
 
 
 
4
 
 
 
 
 
 
5
 
 
 
 
 
 
6
 
 
 
 
 
 
7
 
 
 
 
 
 
8
 
 
 
 
 
25
 
 
 
 
 
37
 
 
 
 
 
38
 
 
 
 
 
 
 
 
 
 
38
 
 
 
 
 
38
 
 
 
 
 
38
 
 
 
 
 
39
 
 
 
 
 
 
40


2


PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
 
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)

($ in millions, except share data)
 
September 30,
2019
 
June 30,
2019
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
24.6

 
$
27.0

Accounts receivable, net
 
383.4

 
384.1

Inventories
 
837.6

 
787.7

Other current assets
 
64.0

 
37.4

Total current assets
 
1,309.6

 
1,236.2

Property, plant and equipment, net
 
1,380.2

 
1,366.2

Goodwill
 
324.5

 
326.4

Other intangibles, net
 
64.9

 
67.2

Deferred income taxes
 
4.0

 
4.2

Other assets
 
258.3

 
187.6

Total assets
 
$
3,341.5

 
$
3,187.8

 
 
 
 
 
LIABILITIES
 
 
 
 
Current liabilities:
 
 
 
 
Short-term credit agreement borrowings
 
$
77.6

 
$
19.7

Accounts payable
 
259.9

 
238.7

Accrued liabilities
 
129.1

 
157.6

Total current liabilities
 
466.6

 
416.0

Long-term debt
 
550.9

 
550.6

Accrued pension liabilities
 
366.8

 
371.2

Accrued postretirement benefits
 
122.3

 
122.1

Deferred income taxes
 
154.6

 
142.7

Other liabilities
 
103.3

 
65.1

Total liabilities
 
1,764.5

 
1,667.7

 
 
 
 
 
Contingencies and commitments (see Note 10)
 

 

 
 
 
 
 
STOCKHOLDERS’ EQUITY
 
 
 
 
Common stock — authorized 100,000,000 shares; issued 55,969,677 shares at September 30, 2019 and 55,808,743 shares at June 30, 2019; outstanding 47,719,523 shares at September 30, 2019 and 47,470,363 shares at June 30, 2019
 
279.8

 
279.0

Capital in excess of par value
 
317.5

 
320.4

Reinvested earnings
 
1,636.8

 
1,605.3

Common stock in treasury (8,250,154 shares and 8,338,380 shares at September 30, 2019 and June 30, 2019, respectively), at cost
 
(329.5
)
 
(332.8
)
Accumulated other comprehensive loss
 
(327.6
)
 
(351.8
)
Total stockholders' equity
 
1,577.0

 
1,520.1

Total liabilities and stockholders' equity
 
$
3,341.5

 
$
3,187.8


See accompanying notes to consolidated financial statements.

3


CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

 


 
Three Months Ended
September 30,
 (in millions, except per share data)
 
2019
 
2018
Net sales
 
$
585.4

 
$
572.4

Cost of sales
 
472.8

 
480.7

Gross profit
 
112.6

 
91.7

 
 
 
 
 
Selling, general and administrative expenses
 
52.8

 
46.7

Operating income
 
59.8

 
45.0

 
 
 
 
 
Interest expense
 
(5.4
)
 
(6.3
)
Other (expense) income, net
 
(0.3
)
 
1.6

 
 
 
 
 
Income before income taxes
 
54.1

 
40.3

Income tax expense
 
12.9

 
8.8

 
 
 
 
 
Net income
 
$
41.2

 
$
31.5

 
 
 
 
 
EARNINGS PER COMMON SHARE:
 
 

 
 

Basic
 
$
0.85

 
$
0.66

Diluted
 
$
0.85

 
$
0.65

 
 
 
 
 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 
 

 
 

Basic
 
47.9

 
47.6

Diluted
 
48.3

 
48.2

 
See accompanying notes to consolidated financial statements.

4


CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
 
Three Months Ended
September 30,
 ($ in millions)
 
2019
 
2018
Net income
 
$
41.2

 
$
31.5

Other comprehensive income (loss), net of tax
 
 

 
 

Cumulative adjustment upon adoption of ASU 2017-12 reclassified to reinvested earnings
 

 
(1.0
)
Pension and postretirement benefits, net of tax of $(1.0) and $(0.5), respectively
 
3.0

 
1.7

Net gain (loss) on derivative instruments, net of tax of $(8.5) and $8.7, respectively
 
26.7

 
(23.0
)
Marketable securities gain, net of tax of $0.0 and $0.0, respectively
 

 
0.3

Foreign currency translation
 
(5.5
)
 
0.7

Other comprehensive income (loss), net of tax
 
24.2

 
(21.3
)
Comprehensive income
 
$
65.4

 
$
10.2

 
See accompanying notes to consolidated financial statements.

5



CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
Three Months Ended
September 30,
($ in millions)
 
2019
 
2018
OPERATING ACTIVITIES
 
 

 
 

Net income
 
$
41.2

 
$
31.5

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

 
 

Depreciation and amortization
 
30.6

 
29.7

Deferred income taxes
 
3.5

 
1.2

Net pension expense
 
3.8

 
2.9

Share-based compensation expense
 
4.1

 
3.0

Net loss on disposals of property, plant and equipment and assets held for sale
 

 
0.1

Changes in working capital and other:
 
 

 
 

Accounts receivable
 
(2.1
)
 
(3.5
)
Inventories
 
(51.1
)
 
(50.5
)
Other current assets
 
(10.1
)
 
(6.5
)
Accounts payable
 
18.0

 
47.5

Accrued liabilities
 
(30.8
)
 
(40.8
)
Pension plan contributions
 
(2.4
)
 
(2.3
)
Other postretirement plan contributions
 
(0.9
)
 
(0.8
)
Other, net
 
(3.1
)
 
(2.1
)
Net cash provided from operating activities
 
0.7

 
9.4

INVESTING ACTIVITIES
 
 

 
 

Purchases of property, plant, equipment and software
 
(47.5
)
 
(41.6
)
Proceeds from disposals of property, plant and equipment and assets held for sale
 
0.1

 
0.1

Proceeds from sales and maturities of marketable securities
 

 
2.9

Net cash used for investing activities
 
(47.4
)
 
(38.6
)
FINANCING ACTIVITIES
 
 

 
 

Credit agreement borrowings
 
88.1

 

Credit agreement repayments
 
(38.1
)
 

Net change in short-term credit agreement borrowings
 
7.9

 

Dividends paid
 
(9.7
)
 
(9.6
)
Proceeds from stock options exercised
 
2.6

 
3.2

Withholding tax payments on share-based compensation awards
 
(7.5
)
 
(4.1
)
Net cash provided from (used for) financing activities
 
43.3

 
(10.5
)
Effect of exchange rate changes on cash and cash equivalents
 
1.0

 
0.5

DECREASE IN CASH AND CASH EQUIVALENTS
 
(2.4
)
 
(39.2
)
Cash and cash equivalents at beginning of period
 
27.0

 
56.2

Cash and cash equivalents at end of period
 
$
24.6

 
$
17.0

SUPPLEMENTAL CASH FLOW INFORMATION:
 
 

 
 

Non-cash investing activities:
 
 

 
 

Acquisition of property, plant, equipment and software
 
$
19.6

 
$
10.1


See accompanying notes to consolidated financial statements.

6


CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(Unaudited)

 
 
Common Stock
 
Reinvested Earnings
 
Common Stock in Treasury
 
Accumulated Other Comprehensive (Loss) Income
 
Total Equity
($ in millions, except per share data)
Par Value of $5
 
Capital in Excess of Par Value
 
 
 
 
Balances at June 30, 2019
$
279.0

 
$
320.4

 
$
1,605.3

 
$
(332.8
)
 
$
(351.8
)
 
$
1,520.1

Net income
 

 
 

 
41.2

 
 

 
 

 
41.2

Pension and postretirement benefits gain, net of tax
 

 
 

 
 

 
 

 
3.0

 
3.0

Net gain on derivative instruments, net of tax
 

 
 

 
 

 
 

 
26.7

 
26.7

Foreign currency translation
 

 
 

 
 

 
 

 
(5.5
)
 
(5.5
)
Cash Dividends:
 

 
 

 
 

 
 

 
 

 


Common @ $0.20 per share
 

 
 

 
(9.7
)
 
 

 
 

 
(9.7
)
Share-based compensation plans
0.4

 
(5.1
)
 
 

 
3.3

 
 

 
(1.4
)
Stock options exercised
0.4

 
2.2

 
 

 
 

 
 

 
2.6

Balances at September 30, 2019
$
279.8

 
$
317.5

 
$
1,636.8

 
$
(329.5
)
 
$
(327.6
)
 
$
1,577.0

 
 
Common Stock
 
Reinvested Earnings
 
Common Stock in Treasury
 
Accumulated Other Comprehensive (Loss) Income
 
Total Equity
($ in millions, except per share data)
Par Value of $5
 
Capital in Excess of Par Value
 
 
 
 
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
 

 
 

 
31.5

 
 

 
 

 
31.5

Pension and postretirement benefits gain, net of tax
 

 
 

 
 

 
 

 
1.7

 
1.7

Marketable securities gain, net of tax
 
 
 
 
 
 
 
 
0.3

 
0.3

Net loss on derivative instruments, net of tax
 

 
 

 
 

 
 

 
(23.0
)
 
(23.0
)
Foreign currency translation
 

 
 

 
 

 
 

 
0.7

 
0.7

Cash Dividends:
 

 
 

 
 

 
 

 
 

 
0

Common @ $0.20 per share
 

 
 

 
(9.6
)
 
 

 
 

 
(9.6
)
Share-based compensation plans
 

 
(2.9
)
 
 

 
2.9

 
 

 

Stock options exercised
0.3

 
2.9

 
 

 
 

 
 

 
3.2

Balances at September 30, 2018
$
278.9

 
$
310.0

 
$
1,498.8

 
$
(335.9
)
 
$
(261.1
)
 
$
1,490.7

 
See accompanying notes to consolidated financial statements.

7

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


 
1.
Basis of Presentation
 
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting of normal and recurring adjustments, considered necessary for a fair statement of the results are reflected in the interim periods presented. The June 30, 2019 consolidated balance sheet data was derived from audited financial statements, but does not include all of the disclosures required by accounting principles generally accepted in the United States of America. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in Carpenter’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (the “2019 Form 10-K”). Operating results for the three months ended September 30, 2019 are not necessarily indicative of the operating results for any future period.

As used throughout this report, unless the context requires otherwise, the terms “Carpenter”, "Carpenter Technology", the “Company”, “Registrant”, “Issuer”, “we” and “our” refer to Carpenter Technology Corporation.
 
2.
Recent Accounting Pronouncements
 
Recently Issued Accounting Pronouncements - Adopted in current period
        
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 adopted the provisions of ASU 2016-02 in the first quarter of fiscal year 2020 using the modified retrospective transition method, which did not require the Company to adjust comparative periods. Operating leases are included in other assets, accrued liabilities (current) and other liabilities (long-term) on the consolidated balance sheets. The Company’s right-of-use assets ("ROU") and lease liabilities are recognized on the lease commencement date in an amount that represents the present value of future lease payments. Upon adoption of the new lease guidance, the Company recorded a ROU and lease liability on the consolidated balance sheets for several types of operating leases, including land and buildings, equipment (e.g. trucks and forklifts), vehicles and computer equipment. The adoption of the standard had no impact on the Consolidated Statements of Income or the Consolidated Statements of Cash Flows. There was no cumulative effect of adopting the standard at the date of initial application in reinvested earnings.

The Company elected the package of practical expedients included in this guidance, which allowed it to not reassess: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and, (iii) the initial direct costs for existing leases. The Company has elected the practical expedient to not separate lease components from nonlease components for all asset classes. The Company will recognize lease expense in the consolidated statements of operations on a straight-line basis over the lease term. The Company also made a policy election to not recognize ROU assets and lease liabilities for short-term leases with an initial term of 12 months or less for all asset classes. Leases with the option to extend their term or terminate early are reflected in the lease term when it is reasonably certain that the Company will exercise such options. The Company has expanded the disclosure of operating leases included in Note 11.

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 adopted the provisions of ASU 2018-02 in the first quarter of fiscal year 2020. The adoption of ASU 2018-02 did not materially impact the consolidated financial statements.


8

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


In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal - Use Software (Subtopic 350-40) - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. ASU 2018-15 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2019, with early adoption permitted. The Company early adopted the provisions of ASU 2018-15 in the first quarter of fiscal year 2020 and elected the prospective adoption method. The adoption of ASU 2018-15 did not materially impact the consolidated financial statements.

Recently Issued Accounting Pronouncements - Pending Adoption

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

3.
Revenue

The Company recognizes revenue in accordance with Topic 606, Revenue from Contracts. The Company applies the five-step model in the FASB’s guidance, which requires the Company to: (i) identify the contract with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when, or as, the Company satisfies a performance obligation.
        
The Company recognizes revenue when performance obligations under the terms of a customer purchase order or contract are satisfied. This occurs when control of the goods and services has transferred to the customer, which is generally determined when title, ownership, and risk of loss pass to the customer, all of which occurs upon shipment or delivery of the product 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.

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 standard payment terms are 30 days. The Company has elected to use the practical expedient that permits a Company to not adjust for the effects of a significant financing component if it expects that at the contract inception, the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
 
Amounts billed to customers for shipping and handling activities to fulfill the Company’s promise to transfer the goods are included in revenues and costs incurred by the Company for the delivery of goods and are classified as cost of sales in the consolidated statements of 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 $11.7 million and $10.5 million at September 30, 2019 and June 30, 2019, respectively, and are included in accrued liabilities on the consolidated balance sheets.


9

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


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

The Company operates in 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 the three months ended September 30, 2019 and 2018 were as follows:
End-Use Market Data
 
Three Months Ended
September 30,
($ in millions)
 
2019

2018
Aerospace and Defense
 
$
353.3

 
$
310.7

Medical
 
48.9

 
47.0

Transportation
 
40.0

 
40.3

Energy
 
39.3

 
44.3

Industrial and Consumer
 
73.3

 
96.1

Distribution
 
30.6

 
34.0

  Consolidated net sales
 
$
585.4

 
$
572.4


Geographic Data
 
Three Months Ended
September 30,
($ in millions)
 
2019
 
2018
United States
 
$
384.9

 
$
384.0

Europe
 
101.5

 
90.0

Asia Pacific
 
53.4

 
48.6

Mexico
 
21.9

 
22.2

Canada
 
13.4

 
17.7

Other
 
10.3

 
9.9

Consolidated net sales
 
$
585.4

 
$
572.4



4.
Acquisitions

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.
    
5.
Earnings per Common Share
 
The Company calculates basic and diluted earnings per share using the two class method. Under the two class method, earnings are allocated to common stock and participating securities (non-vested restricted shares and units that receive non-forfeitable dividends) according to their participation rights in dividends and undistributed earnings. The earnings available to each class of stock are divided by the weighted average number of outstanding shares for the period in each class. Diluted earnings per share assumes the issuance of common stock for all potentially dilutive share equivalents outstanding.

10

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



The calculations of basic and diluted earnings per common share for the three months ended September 30, 2019 and 2018 were as follows: 
 
 
Three Months Ended
September 30,
(in millions, except per share data)
 
2019
 
2018
Net income
 
$
41.2

 
$
31.5

Less: earnings and dividends allocated to participating securities
 
(0.4
)
 
(0.3
)
Earnings available for common stockholders used in calculation of basic earnings per common share
 
$
40.8

 
$
31.2

 
 
 
 
 
Weighted average number of common shares outstanding, basic
 
47.9

 
47.6

 
 
 
 
 
Basic earnings per common share
 
$
0.85

 
$
0.66

 
 
 
 
 
Net income
 
$
41.2

 
$
31.5

Less: earnings and dividends allocated to participating securities
 
(0.4
)
 
(0.3
)
Earnings available for common stockholders used in calculation of diluted earnings per common share
 
$
40.8

 
$
31.2

 
 
 
 
 
Weighted average number of common shares outstanding, basic
 
47.9

 
47.6

Effect of shares issuable under share-based compensation plans
 
0.4

 
0.6

Weighted average number of common shares outstanding, diluted
 
48.3

 
48.2

 
 
 
 
 
Diluted earnings per common share
 
$
0.85

 
$
0.65


 
The following awards issued under share-based compensation plans were excluded from the above calculations of diluted earnings per share because their effects were anti-dilutive:
 
 
 
Three Months Ended
September 30,
(in millions)
 
2019
 
2018
Stock options
 
0.8

 
0.1


 
6.
Inventories
 
Inventories consisted of the following components as of September 30, 2019 and June 30, 2019:
 
($ in millions)
 
September 30,
2019
 
June 30,
2019
Raw materials and supplies
 
$
194.3

 
$
169.8

Work in process
 
459.2

 
425.7

Finished and purchased products
 
184.1

 
192.2

Total inventory
 
$
837.6

 
$
787.7


 
Inventories are valued at the lower of cost or market. Cost for inventories is principally determined using the last-in, first-out (“LIFO”) inventory costing method. The Company also uses the first-in, first-out (“FIFO”) and average cost methods. As of September 30, 2019 and June 30, 2019, $179.6 million and $172.3 million of inventory, respectively, was accounted for using a method other than the LIFO inventory costing method.
 

11

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



7.
Accrued Liabilities
 
Accrued liabilities consisted of the following as of September 30, 2019 and June 30, 2019:
 
($ in millions)
 
September 30,
2019
 
June 30,
2019
Accrued compensation and benefits
 
$
42.1

 
$
71.2

Accrued postretirement benefits
 
14.7

 
14.7

Deferred revenue
 
11.7

 
10.5

Derivative financial instruments
 
10.7

 
16.7

Current portion of lease liabilities
 
10.2

 

Accrued income taxes
 
7.0

 
4.2

Accrued interest expense
 
3.8

 
10.4

Accrued pension liabilities
 
3.4

 
3.4

Other
 
25.5

 
26.5

Total accrued liabilities
 
$
129.1

 
$
157.6


 
8.
Pension and Other Postretirement Benefits
 
The components of the net periodic benefit cost related to the Company’s pension and other postretirement benefits for the three months ended September 30, 2019 and 2018 were as follows:
 
 
 
Pension Plans
 
Other Postretirement Plans
 
 
Three Months Ended September 30,
 
Three Months Ended September 30,
($ in millions)
 
2019
 
2018
 
2019
 
2018
Service cost
 
$
2.4

 
$
2.3

 
$
0.7

 
$
0.6

Interest cost
 
11.7

 
13.2

 
2.3

 
2.5

Expected return on plan assets
 
(15.5
)
 
(16.2
)
 
(1.8
)
 
(1.7
)
Amortization of net loss
 
3.9

 
2.6

 
0.6

 
0.4

Amortization of prior service cost (benefit)
 
0.5

 
0.5

 
(1.0
)
 
(1.3
)
    Net periodic benefit costs
 
$
3.0

 
$
2.4

 
$
0.8

 
$
0.5


During the three months ended September 30, 2019 and 2018, the Company made $2.4 million and $2.3 million, respectively, of contributions to its qualified defined benefit pension plans. The Company currently expects to contribute $3.8 million to its qualified defined benefit pension plans during the remainder of fiscal year 2020.

12

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


9.
Debt
 
The Company maintains a $400.0 million unsecured revolving 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 are determined based upon the credit 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 September 30, 2019), and for Base Rate-determined loans, from 0.00% to 0.75% (0.25% as of September 30, 2019). The Company also pays a quarterly commitment fee ranging from 0.125% to 0.400% (0.20% as of September 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 September 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 September 30, 2019, the Company had $5.9 million of issued letters of credit and $77.6 million of short-term borrowings under the Credit Agreement with the balance of $316.5 million available to the Company. As of September 30, 2019, the borrowing rate for the Credit Agreement was 3.30%.
 
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 September 30, 2019 and June 30, 2019, the Company was in compliance with all of the covenants of the Credit Agreement.

Long-term debt outstanding as of September 30, 2019 and June 30, 2019 consisted of the following:
 
($ in millions)
 
September 30,
2019
 
June 30,
2019
Senior unsecured notes, 5.20% due July 2021 (face value of $250.0 million at September 30, 2019 and June 30, 2019)
 
$
251.5

 
$
251.2

Senior unsecured notes, 4.45% due March 2023 (face value of $300.0 million at September 30, 2019 and June 30, 2019)
 
299.4

 
299.4

Total
 
550.9

 
550.6

Less: amounts due within one year
 

 

Long-term debt, net of current portion
 
$
550.9

 
$
550.6


 
For the three months ended September 30, 2019 and 2018, interest costs totaled $7.4 million and $7.2 million, respectively, of which $2.0 million and $0.9 million, respectively, were capitalized as part of the cost of property, plant, equipment and software.


13

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


10.
Contingencies and Commitments

Environmental
 
The Company is subject to various federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Although compliance with these laws and regulations may affect the costs of the Company’s operations, compliance costs to date have not been material. The Company has environmental remediation liabilities at some of its owned operating facilities and has been designated as a potentially responsible party (“PRP”) with respect to certain third party Superfund waste-disposal sites and other third party-owned sites. The Company accrues amounts for environmental remediation costs that represent management’s best estimate of the probable and reasonably estimable future costs related to environmental remediation. During the three months ended September 30, 2019, the Company decreased the liability for a company-owned former operating site by $0.2 million. The liabilities recorded for environmental remediation costs at Superfund sites, other third party-owned sites and Carpenter-owned current or former operating facilities remaining at September 30, 2019 and June 30, 2019 were $15.9 million and $16.1 million, respectively. Additionally, the Company has been notified that it may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against the Company. Neither the exact amount of remediation costs nor the final method of their allocation among all designated PRPs at these Superfund sites have been determined. Accordingly, at this time, the Company cannot reasonably estimate expected costs for such matters. The liability for future environmental remediation costs that can be reasonably estimated is evaluated by management on a quarterly basis.

Estimates of the amount and timing of future costs of environmental remediation requirements are inherently imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of currently unknown remediation sites and the allocation of costs among the PRPs. Based upon information currently available, such future costs are not expected to have a material effect on the Company's financial position, results of operations or cash flows over the long-term. However, such costs could be material to the Company's financial position, results of operations or cash flows in a particular future quarter or year.

Other
 
The Company is defending various routine claims and legal actions that are incidental to its business and common to its operations, including those pertaining to product claims, commercial disputes, patent infringement, employment actions, employee benefits, compliance with domestic and foreign laws, personal injury claims and tax issues. Like many other manufacturing companies in recent years, the Company, from time to time, has been named as a defendant in lawsuits alleging personal injury as a result of exposure to chemicals and substances in the workplace such as asbestos. The Company provides for costs relating to these matters when a loss is probable and the amount of the loss is reasonably estimable. The effect of the outcome of these matters on the Company’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.

11.
Leases

As a result of adoption of ASU 2016-02, Leases, the Company recorded ROU assets and operating lease liabilities, each in the amount of $53.8 million, on the consolidated balance sheet as of July 1, 2019 for several types of operating leases, including land and buildings, equipment (e.g. trucks and forklifts), vehicles, and computer equipment. These amounts are equivalent to the aggregate future lease payments on a discounted basis. The discount rate applied to these leases is the Company’s incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Some leasing arrangements require variable payments that are dependent on usage, output, or may vary for other reasons, such as insurance and tax payments. The variable lease payments are not presented as part of the initial ROU asset or lease liability. The leases have remaining terms of one to eighteen years.
 

14

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


The following table sets forth the components of the Company’s lease cost for the three months ended September 30, 2019:
 
 
Three Months Ended September 30,
($ in millions)
 
2019
Operating lease cost
 
$
3.4

Short-term lease cost
 
0.8

Variable lease cost
 
0.1

Total lease cost
 
$
4.3

 
 
 
Operating cash flow payments from operating leases
 
$
3.3

Non-cash ROU assets obtained in exchange for lease obligations
 
$
0.9

Weighted-average remaining lease term - operating leases
 
8.5 years

Weighted-average discount rate - operating leases
 
3.8
%


The following table sets forth the Company’s ROU and lease liabilities at September 30, 2019:

($ in millions)
 
September 30,
2019
Operating lease assets:
 
 
    Other assets
 
$
51.6

Operating lease liabilities:
 

    Other accrued liabilities
 
$
10.2

    Other liabilities
 
42.3

Total operating lease liabilities
 
$
52.5



Minimum lease payments for operating leases expiring subsequent to September 30, 2019 are as follows:

($ in millions)
 
September 30,
2019
2020 (remaining period of fiscal year)
 
$
9.6

2021
 
10.5

2022
 
8.5

2023
 
6.8

2024
 
5.1

Thereafter
 
24.7

Total future minimum lease payments
 
65.2

Less imputed interest
 
(12.7
)
Total
 
$
52.5





15

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


The below table as of June 30, 2019 is carried forward, including certain amounts that were historically included in the table as a result of the historical lease term conclusions but were not included in the initial ROU asset and lease liability measurement as of June 30, 2019. Minimum lease payments for operating leases under ASC 840 expiring subsequent to June 30, 2019 were as follows:

($ in millions)
 
June 30,
2019
2020
 
$
12.7

2021
 
10.4

2022
 
8.3

2023
 
6.6

2024
 
5.0

Thereafter
 
23.5

Total future minimum lease payments
 
$
66.5




12.
Fair Value Measurements
 
The fair value hierarchy has three levels based on the inputs used to determine fair value. Level 1 refers to quoted prices in active markets for identical assets or liabilities. Level 2 refers to observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 refers to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. Currently, the Company does not use Level 1 and 3 inputs.
 
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy:
 
September 30, 2019
 
Fair Value
Measurements Using
Input Type
($ in millions)
 
Level 2
Assets:
 
 

Derivative financial instruments
 
$
39.8

 
 
 

Liabilities:
 
 

Derivative financial instruments
 
$
18.0

 
June 30, 2019
 
Fair Value
Measurements Using
Input Type
($ in millions)
 
Level 2
Assets:
 
 

Derivative financial instruments
 
$
12.5

 
 
 

Liabilities:
 
 

Derivative financial instruments
 
$
28.0


 

16

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


The Company’s derivative financial instruments consist of commodity forward contracts, foreign currency forward contracts and interest rate swaps. These instruments are measured at fair value using the market method valuation technique. The inputs to this technique utilize information related to commodity prices, foreign exchange rates 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 13.
 
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:
 
 
 
September 30, 2019
 
June 30, 2019
($ in millions)
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Long-term debt
 
$
550.9

 
$
566.2

 
$
550.6

 
$
560.6

Company-owned life insurance
 
$
18.5

 
$
18.5

 
$
17.9

 
$
17.9


 
The fair values of long-term debt as of September 30, 2019 and June 30, 2019 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.

 
13.
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 summary of 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 (loss) income (“AOCI”) and reclassified to cost of sales in the period during which the hedged transaction affects earnings or it becomes probable that the forecasted transaction will not occur. As of September 30, 2019, the Company had forward contracts to purchase 17.3 million pounds of certain raw materials with settlement dates through December 2023.
 

17

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


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 and reclassified to interest expense in the period during which the hedged transaction affected earnings or it became probable that the forecasted transaction would not occur. Upon the issuance of the fixed rate debt, the forward interest rate swap contracts were terminated. The realized gains at the time the interest rate swap contracts were terminated are being amortized over the term of the underlying debt. For the three months ended September 30, 2019 and 2018, net gains of $0.1 million and $0.1 million, respectively, related to the previously terminated contracts, were recorded as a reduction to interest expense.

Cash Flow Hedging — Foreign currency forward contracts: The Company uses foreign currency forward contracts to hedge a portion of anticipated future sales denominated in foreign currencies, principally the Euro and Pound Sterling, in order to offset the effect of changes in exchange rates. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in AOCI 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 September 30, 2019 and 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 where appropriate. The Company has designated fixed to floating interest rate swaps as fair value hedges. Accordingly, the changes in the fair value of these instruments are immediately recorded in earnings. The mark-to-market values of both the fair value hedging instruments and the underlying debt obligations are recorded as equal and offsetting gains and losses in interest expense in the consolidated statements of income. As of September 30, 2019 and June 30, 2019, the total notional amount of floating interest rate contracts was $150.0 million for both periods. For the three months ended September 30, 2019 and 2018, net losses of $0.0 million and $0.3 million, respectively, were recorded as an increase to interest expense, respectively.
 

18

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


The fair value and location of outstanding derivative contracts recorded in the accompanying consolidated balance sheets were as follows as of September 30, 2019 and June 30, 2019:
 
September 30, 2019
 
Interest
Rate Swaps
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
Total
Derivatives
($ in millions)
 
 
 
 
Asset Derivatives:
 
 

 
 

 
 

 
 

Derivatives designated as hedging instruments:
 
 

 
 

 
 

 
 

Other current assets
 
$
0.1

 
$
0.9

 
$
20.2

 
$
21.2

Other assets
 
1.9

 
0.5

 
16.2

 
18.6

Total asset derivatives
 
$
2.0

 
$
1.4

 
$
36.4

 
$
39.8

Liability Derivatives:
 
 

 
 

 
 

 
 

Derivatives designated as hedging instruments:
 
 

 
 

 
 

 
 

Accrued liabilities
 
$

 
$

 
$
10.7

 
$
10.7

Other liabilities
 

 

 
7.3

 
7.3

Total liability derivatives
 
$

 
$

 
$
18.0

 
$
18.0

 
June 30, 2019
 
Interest
Rate Swaps
 
Foreign
Currency
Contracts
 
Commodity
Contracts
 
Total
Derivatives
($ in millions)
 
 
 
 
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



Substantially all of the derivative contracts are subject to master netting arrangements, or similar agreements with each counterparty, which provide for the option to settle contracts on a net basis when they settle on the same day and in the same currency. In addition, these arrangements provide for a net settlement of all contracts with a given counterparty in the event that the arrangement is terminated due to the occurrence of default or a termination event. The Company presents the outstanding derivative contracts on a net basis by counterparty in the consolidated balance sheets. If the Company had chosen to present the derivative contracts on a gross basis, the total asset derivatives would have been $39.2 million and total liability derivatives would have been $17.4 million as of September 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 September 30, 2019 and 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.
 

19

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


Cash Flow and Fair Value Hedges
 
For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings or it becomes probable the forecasted transactions will not occur. The following is a summary of the (losses) gains related to cash flow hedges recognized during the three months ended September 30, 2019 and 2018:
 
 
 
Amount of (Loss) Gain
Recognized in AOCI on
Derivatives
 
 
Three Months Ended
September 30,
($ in millions)
 
2019
 
2018
Derivatives in Cash Flow Hedging Relationship:
 
 

 
 

  Commodity contracts
 
$
(39.8
)
 
$
(33.6
)
  Foreign exchange contracts
 
(0.7
)
 
0.2

Total
 
$
(40.5
)
 
$
(33.4
)
 
($ in millions)
 
Location of Gain (Loss) Reclassified from AOCI into
Income
 
Amount of Gain (Loss) Reclassified from AOCI
into Income
 
 
Three Months Ended
September 30,
 
 
2019
 
2018
Derivatives in Cash Flow Hedging Relationship:
 
 
 
 
 
 
  Commodity contracts
 
Cost of sales
 
$
4.8

 
$
(2.0
)
  Foreign exchange contracts
 
Net sales
 
0.4

 
0.2

  Forward interest rate swaps
 
Interest expense
 
0.1

 
0.1

Total
 
 
 
$
5.3

 
$
(1.7
)


20

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


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 three months ended September 30, 2019 and 2018:

 
 
Three Months Ended
September 30, 2019
 
Three Months Ended
September 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
 
$
585.4

 
$
472.8

 
$
5.4

 
$
572.4

 
$
480.7

 
$
6.3

 
 
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) on Derivatives in Cash Flow Hedging Relationship:
 

 

 

 

 

 

   Commodity contracts
 
 
 

 

 

 

 

Amount of gain (loss) reclassified from AOCI to income
 
$

 
$
4.8

 
$

 
$

 
$
(2.0
)
 
$

   Foreign currency forward contracts
 
 
 

 

 

 

 

Amount of gain reclassified from AOCI to income
 
0.4

 

 

 
0.2

 

 

   Interest rate swap agreements
 
 
 

 

 

 

 

Amount of gain reclassified from AOCI to income
 

 

 
0.1

 

 

 
0.1

Gain (loss) on Derivatives in Fair Value Hedging Relationship:
 
 
 

 

 

 

 

   Interest rate swap agreements
 
 
 
 
 
 
 
 
 
 
 
 
         Hedged Item
 

 

 

 

 

 
0.3

Derivatives designated as hedging instruments
 

 

 

 

 

 
(0.3
)
Total gain (loss)
 
$
0.4

 
$
4.8

 
$
0.1

 
$
0.2

 
$
(2.0
)
 
$
0.1



The Company estimates that $10.1 million of net derivative losses included in AOCI as of September 30, 2019 will be reclassified into income within the next 12 months. No significant cash flow hedges were discontinued during the three months ended September 30, 2019.
    
As of September 30, 2019, and June 30, 2019, the following amounts were recorded on the consolidated balance sheets related to cumulative basis adjustments for fair value hedges of interest rate risk:

 
 
Carrying amount of the hedged liabilities
 
Cumulative amount of fair value loss in the carrying amount of the hedged liabilities
($ in millions)
 
September 30,
2019
 
June 30,
2019
 
September 30,
2019
 
June 30,
2019
Line item in the consolidated balance sheets in which the hedged item is included:
 
 
 
 
 
 
 
 
Long-Term Debt
 
$
151.9

 
$
151.6

 
$
1.9

 
$
1.6



   

21

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


14.
Other (Expense) Income, Net
 
Other (expense) income, net consisted of the following:
 
 
 
Three Months Ended
September 30,
($ in millions)
 
2019
 
2018
Unrealized gains on company-owned life insurance contracts and investments held in rabbi trusts
 
$
0.1

 
$
1.0

Foreign exchange gain
 
0.2

 
0.5

Interest income
 

 
0.1

Pension earnings, interest and deferrals
 
(0.7
)
 

Other
 
0.1

 

Total other (expense) income, net
 
$
(0.3
)
 
$
1.6


 
15.
Income Taxes
 
The effective tax rate used for interim periods is the estimated annual effective consolidated tax rate, based on the current estimate of full year results, except that taxes related to specific events, if any, are recorded in the interim period in which they occur. The annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pre-tax income of the Company in each tax jurisdiction in which it operates, and the development of tax planning strategies during the year. In addition, the Company’s tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits, and other factors that cannot be predicted with certainty. As such there can be significant volatility in interim tax provisions.
 
Income tax expense for the three months ended September 30, 2019 was $12.9 million, or 23.8 percent of pre-tax income as compared with $8.8 million, or 21.8 percent of pre-tax income for the three months ended September 30, 2018.

The effective tax rate for the three months ended September 30, 2019 is higher than the prior year period due to losses in certain foreign jurisdictions for which no tax benefit can be recorded as well as a lower tax benefit for employee share-based compensation.

16.
Business Segments
 
The Company has two reportable segments, SAO and PEP.
 
The SAO segment is comprised of the Company’s major premium alloy and stainless steel manufacturing operations. This includes operations performed at mills primarily in Reading and Latrobe, Pennsylvania and surrounding areas as well as South Carolina and Alabama. The combined assets of the SAO operations are being managed in an integrated manner to optimize efficiency and profitability across the total system.
 
The PEP segment is comprised of the Company’s differentiated operations. This segment includes the Dynamet titanium business, the Carpenter Powder Products business, the Amega West business, the Carpenter Additive business, and the Latrobe and Mexico distribution businesses. Effective July 1, 2019, the Company's LPW, CalRAM and Powder business in Alabama and West Virginia were combined into the Carpenter Additive business. The businesses in the PEP segment are managed with an entrepreneurial structure to promote flexibility and agility to quickly respond to market dynamics. 
 
The Company’s executive management evaluates the performance of these operating segments based on sales, operating income and cash flow generation. Segment operating profit excludes general corporate costs, which is comprised of executive and director compensation and other corporate facilities and administrative expenses not allocated to the segments.
        

22

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


On a consolidated basis, one customer, Arconic Inc., accounted for approximately 10 percent of net sales for the three months ended September 30, 2019 and 2018. Approximately 11 percent of the accounts receivable outstanding at September 30, 2019 was due from one customer, Arconic Inc. Approximately 12 percent of the accounts receivable outstanding at June 30, 2019 was due from one customer, Arconic Inc.
 
 
Three Months Ended
September 30,
($ in millions)
 
2019
 
2018
Net Sales:
 
 

 
 

Specialty Alloys Operations
 
$
491.1

 
$
475.5

Performance Engineered Products
 
109.4

 
111.7

Intersegment
 
(15.1
)
 
(14.8
)
Consolidated net sales
 
$
585.4

 
$
572.4

 
 
Three Months Ended
September 30,
($ in millions)
 
2019
 
2018
Operating Income (Loss):
 
 

 
 

Specialty Alloys Operations
 
$
81.0

 
$
52.8

Performance Engineered Products
 
(2.0
)
 
7.3

Corporate
 
(19.1
)
 
(15.8
)
Intersegment
 
(0.1
)
 
0.7

Consolidated operating income
 
$
59.8

 
$
45.0

 
 
Three Months Ended
September 30,
($ in millions)
 
2019
 
2018
Depreciation and Amortization:
 
 

 
 

Specialty Alloys Operations
 
$
23.6

 
$
23.7

Performance Engineered Products
 
5.9

 
5.0

Corporate
 
1.3

 
1.2

Intersegment
 
(0.2
)
 
(0.2
)
Consolidated depreciation and amortization
 
$
30.6

 
$
29.7

 
 
Three Months Ended
September 30,
($ in millions)
 
2019
 
2018
Capital Expenditures:
 
 

 
 

Specialty Alloys Operations
 
$
25.2

 
$
20.6

Performance Engineered Products
 
6.2

 
13.6

Corporate
 
16.2

 
7.7

Intersegment
 
(0.1
)
 
(0.3
)
Consolidated capital expenditures
 
$
47.5

 
$
41.6


23

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


 
 
September 30,
2019
 
June 30,
2019
($ in millions)
 
 
Total Assets:
 
 

 
 

Specialty Alloys Operations
 
$
2,442.1

 
$
2,349.2

Performance Engineered Products
 
704.3

 
664.8

Corporate
 
216.6

 
192.5

Intersegment
 
(21.5
)
 
(18.7
)
Consolidated total assets
 
$
3,341.5

 
$
3,187.8



17.
Reclassifications from Accumulated Other Comprehensive (Loss) Income (AOCI)
 
The changes in AOCI by component, net of tax, for the three months ended September 30, 2019 and 2018 were as follows:
 

Three Months Ended September 30, 2019
($ in millions) (a)
 
Cash flow hedging items
 
Pension and other postretirement benefit plan items
 
Unrealized gains (losses) on available-for-sale securities
 
Foreign currency items
 
Total
Balances at June 30, 2019
 
$
(14.8
)
 
$
(293.3
)
 
$

 
$
(43.7
)
 
$
(351.8
)
Other comprehensive income (loss) before reclassifications
 
30.7

 

 

 
(5.5
)
 
25.2

Amounts reclassified from AOCI (b)
 
(4.0
)
 
3.0

 

 

 
(1.0
)
Net other comprehensive income (loss)
 
26.7

 
3.0

 

 
(5.5
)
 
24.2

Balances at September 30, 2019
 
$
11.9

 
$
(290.3
)
 
$

 
$
(49.2
)
 
$
(327.6
)
 

Three Months Ended September 30, 2018
($ in millions) (a)
 
Cash flow hedging items
 
Pension and other postretirement benefit plan items
 
Unrealized gains (losses) on available-for-sale securities
 
Foreign currency items
 
Total
Balances at June 30, 2018
 
$
23.8

 
$
(220.4
)
 
$
(0.3
)
 
$
(42.9
)