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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, 2022
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)
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Delaware |
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23-0458500 |
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(State or other jurisdiction of incorporation or
organization) |
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(I.R.S. Employer Identification No.) |
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1735 Market Street, 15th Floor
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Philadelphia, |
Pennsylvania |
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19103 |
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(Address of principal executive offices) |
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(Zip Code) |
610-208-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Common Stock, $5 Par Value |
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CRS |
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New York Stock Exchange |
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Title of each class |
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Trading Symbol |
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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.
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Large accelerated filer |
☒ |
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Accelerated filer |
☐ |
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Non-accelerated filer |
☐ |
(Do not check if a smaller reporting company) |
Smaller reporting company |
☐ |
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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 24, 2022, was 48,444,926.
CARPENTER TECHNOLOGY CORPORATION
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
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($ in millions, except share data) |
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September 30,
2022 |
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June 30,
2022 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
52.6 |
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$ |
154.2 |
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Accounts receivable, net |
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390.2 |
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382.3 |
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Inventories |
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616.1 |
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496.1 |
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Other current assets |
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92.6 |
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86.8 |
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Total current assets |
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1,151.5 |
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1,119.4 |
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Property, plant and equipment, net |
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1,402.0 |
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1,420.8 |
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Goodwill |
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241.4 |
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241.4 |
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Other intangibles, net |
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32.8 |
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35.2 |
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Deferred income taxes |
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5.1 |
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5.7 |
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Other assets |
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107.1 |
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109.8 |
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Total assets |
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$ |
2,939.9 |
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$ |
2,932.3 |
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LIABILITIES |
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Current liabilities: |
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Accounts payable |
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$ |
288.0 |
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$ |
242.1 |
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Accrued liabilities |
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122.9 |
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133.5 |
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Total current liabilities |
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410.9 |
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375.6 |
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Long-term debt |
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692.1 |
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691.8 |
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Accrued pension liabilities |
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198.0 |
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196.6 |
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Accrued postretirement benefits |
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78.3 |
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77.4 |
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Deferred income taxes |
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158.3 |
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162.4 |
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Other liabilities |
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95.5 |
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98.0 |
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Total liabilities |
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1,633.1 |
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1,601.8 |
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Contingencies and commitments (see Note 9)
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STOCKHOLDERS' EQUITY |
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Common stock — authorized 100,000,000 shares; issued 56,025,510
shares at September 30, 2022 and 56,025,510 shares at
June 30, 2022; outstanding 48,444,925 shares at
September 30, 2022 and 48,286,439 shares at June 30,
2022
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280.1 |
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280.1 |
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Capital in excess of par value |
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314.3 |
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320.3 |
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Reinvested earnings |
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1,194.3 |
|
|
1,211.0 |
|
|
Common stock in treasury (7,580,585 shares and 7,739,071 shares at
September 30, 2022 and June 30, 2022, respectively), at
cost
|
|
(300.8) |
|
|
(307.4) |
|
|
Accumulated other comprehensive loss |
|
(181.1) |
|
|
(173.5) |
|
|
Total stockholders' equity |
|
1,306.8 |
|
|
1,330.5 |
|
|
Total liabilities and stockholders' equity |
|
$ |
2,939.9 |
|
|
$ |
2,932.3 |
|
See accompanying notes to consolidated financial
statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
|
($ in millions, except per share data) |
|
2022 |
|
2021 |
|
|
|
|
|
Net sales |
|
$ |
522.9 |
|
|
$ |
387.6 |
|
|
|
|
|
|
Cost of sales |
|
468.1 |
|
|
362.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
54.8 |
|
|
25.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
46.5 |
|
|
44.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
8.3 |
|
|
(19.1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
12.6 |
|
|
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense (income), net |
|
3.5 |
|
|
(4.1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
(7.8) |
|
|
(25.2) |
|
|
|
|
|
|
Income tax benefit |
|
(0.9) |
|
|
(10.4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6.9) |
|
|
$ |
(14.8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.14) |
|
|
$ |
(0.31) |
|
|
|
|
|
|
Diluted |
|
$ |
(0.14) |
|
|
$ |
(0.31) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
|
Basic |
|
48.7 |
|
|
48.5 |
|
|
|
|
|
|
Diluted |
|
48.7 |
|
|
48.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
|
($ in millions) |
|
2022 |
|
2021 |
|
|
|
|
|
Net loss |
|
$ |
(6.9) |
|
|
$ |
(14.8) |
|
|
|
|
|
|
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement benefits, net of tax of $(0.5) and
$(0.4), respectively
|
|
1.0 |
|
|
1.1 |
|
|
|
|
|
|
Net (loss) gain on derivative instruments, net of tax of $1.6 and
$(0.4), respectively
|
|
(5.3) |
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
(3.3) |
|
|
(2.1) |
|
|
|
|
|
|
Other comprehensive (loss) income, net of tax |
|
(7.6) |
|
|
0.1 |
|
|
|
|
|
|
Comprehensive loss, net of tax |
|
$ |
(14.5) |
|
|
$ |
(14.7) |
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
($ in millions) |
|
2022 |
|
2021 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
Net loss |
|
$ |
(6.9) |
|
|
$ |
(14.8) |
|
|
Adjustments to reconcile net loss to net cash used for operating
activities: |
|
|
|
|
|
Depreciation and amortization |
|
32.3 |
|
|
32.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
(2.2) |
|
|
(8.0) |
|
|
Net pension expense (income) |
|
5.0 |
|
|
(1.8) |
|
|
Share-based compensation expense |
|
3.6 |
|
|
2.8 |
|
|
Net loss on disposals of property, plant and equipment |
|
0.3 |
|
|
— |
|
|
|
|
|
|
|
Changes in working capital and other: |
|
|
|
|
|
Accounts receivable |
|
(12.1) |
|
|
(3.8) |
|
|
Inventories |
|
(121.2) |
|
|
(66.5) |
|
|
Other current assets |
|
(11.5) |
|
|
(13.2) |
|
|
Accounts payable |
|
46.7 |
|
|
69.3 |
|
|
Accrued liabilities |
|
(11.9) |
|
|
(41.7) |
|
|
Pension plan contributions |
|
— |
|
|
(0.2) |
|
|
Other postretirement plan contributions |
|
(0.3) |
|
|
(0.7) |
|
|
|
|
|
|
|
Other, net |
|
0.2 |
|
|
(0.9) |
|
|
Net cash used for operating activities |
|
(78.0) |
|
|
(47.0) |
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
Purchases of property, plant, equipment and software |
|
(13.5) |
|
|
(14.4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities |
|
(13.5) |
|
|
(14.4) |
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid |
|
(9.8) |
|
|
(9.8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Withholding tax payments on share-based compensation
awards |
|
(3.2) |
|
|
(3.0) |
|
|
|
|
|
|
|
Net cash used for financing activities |
|
(13.0) |
|
|
(12.8) |
|
|
Effect of exchange rate changes on cash and cash
equivalents |
|
2.9 |
|
|
— |
|
|
DECREASE IN CASH AND CASH EQUIVALENTS |
|
(101.6) |
|
|
(74.2) |
|
|
Cash and cash equivalents at beginning of year |
|
154.2 |
|
|
287.4 |
|
|
Cash and cash equivalents at end of period |
|
$ |
52.6 |
|
|
$ |
213.2 |
|
|
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
Non-cash investing activities: Purchase of property, plant,
equipment and software |
|
$ |
7.3 |
|
|
$ |
7.6 |
|
See accompanying notes to consolidated financial
statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 AND
2021
(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, 2022 |
|
$ |
280.1 |
|
|
$ |
320.3 |
|
|
$ |
1,211.0 |
|
|
$ |
(307.4) |
|
|
$ |
(173.5) |
|
|
$ |
1,330.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
(6.9) |
|
|
|
|
|
|
(6.9) |
|
|
Pension and postretirement benefits, net of tax |
|
|
|
|
|
|
|
|
|
1.0 |
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on derivative instruments, net of tax |
|
|
|
|
|
|
|
|
|
(5.3) |
|
|
(5.3) |
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
(3.3) |
|
|
(3.3) |
|
|
Cash Dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common @ $0.20 per share
|
|
|
|
|
|
(9.8) |
|
|
|
|
|
|
(9.8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation plans |
|
|
|
(6.0) |
|
|
|
|
6.6 |
|
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2022 |
|
$ |
280.1 |
|
|
$ |
314.3 |
|
|
$ |
1,194.3 |
|
|
$ |
(300.8) |
|
|
$ |
(181.1) |
|
|
$ |
1,306.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2021 |
|
$ |
280.1 |
|
|
$ |
322.6 |
|
|
$ |
1,299.3 |
|
|
$ |
(317.4) |
|
|
$ |
(192.3) |
|
|
$ |
1,392.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
(14.8) |
|
|
|
|
|
|
(14.8) |
|
|
Pension and postretirement benefits gain, net of tax |
|
|
|
|
|
|
|
|
|
1.1 |
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on derivative instruments, net of tax |
|
|
|
|
|
|
|
|
|
1.1 |
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
(2.1) |
|
|
(2.1) |
|
|
Cash Dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common @ $0.20 per share
|
|
|
|
|
|
(9.8) |
|
|
|
|
|
|
(9.8) |
|
|
Share-based compensation plans |
|
|
|
(6.3) |
|
|
|
|
6.1 |
|
|
|
|
(0.2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2021 |
|
$ |
280.1 |
|
|
$ |
316.3 |
|
|
$ |
1,274.7 |
|
|
$ |
(311.3) |
|
|
$ |
(192.2) |
|
|
$ |
1,367.6 |
|
See accompanying notes to consolidated financial
statements.
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, 2022
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 Technology's Annual
Report on Form 10-K for the fiscal year ended June 30,
2022 (the "2022 Form 10-K"). Operating results for the three
months ended September 30, 2022 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
At this time there are no issued pronouncements, adopted or pending
adoption, in the current fiscal year 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. 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.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Each customer purchase order or contract for goods transferred has
a single performance obligation for which revenue is recognized at
a point in time. The standard terms and conditions of a customer
purchase order include general rights of return and product
warranty provisions related to nonconforming product. Depending on
the circumstances, the product is either replaced or a quality
adjustment is issued. Such warranties do not represent a separate
performance obligation.
Each customer purchase order or contract sets forth the transaction
price for the products and services purchased under that
arrangement. Some customer arrangements include variable
consideration, such as volume rebates, which generally depend upon
the Company's customers meeting specified performance criteria,
such as a purchasing level over a period of time. The Company
exercises judgment to estimate the most likely amount of variable
consideration at each reporting date.
Revenue is measured as the amount of consideration the Company
expects to receive in exchange for its 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 are classified as cost of sales in the consolidated
statements of operations. Shipping terms may vary for products
shipped outside the United States depending on the mode of
transportation, the country where the material is shipped and any
agreements made with the customers.
Contract liabilities are recognized when the Company has received
consideration from a customer to transfer goods or services at a
future point in time when the Company performs under the purchase
order or contract. Contract liabilities were $15.4 million and
$14.4 million at September 30, 2022 and June 30, 2022,
respectively, and are included in accrued liabilities on the
consolidated balance sheets.
The Company has elected to use the practical expedient that permits
the omission of disclosure for remaining performance obligations
which are expected to be satisfied in one year or
less.
Disaggregation of Revenue
The Company operates in two business segments, Specialty Alloys
Operations ("SAO") and Performance Engineered Products ("PEP").
Revenue is disaggregated within these two business segments by
diversified end-use markets and by geographical location.
Comparative information of the Company's overall revenues by
end-use markets and geography for the three months ended
September 30, 2022 and 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End-Use Market Data |
|
Three Months Ended
September 30, |
|
|
|
($ in millions) |
|
2022 |
|
2021 |
|
|
|
|
|
Aerospace and Defense |
|
$ |
261.6 |
|
|
$ |
166.9 |
|
|
|
|
|
|
Medical |
|
59.2 |
|
|
43.1 |
|
|
|
|
|
|
Transportation |
|
36.9 |
|
|
41.6 |
|
|
|
|
|
|
Energy |
|
27.9 |
|
|
22.2 |
|
|
|
|
|
|
Industrial and Consumer |
|
105.0 |
|
|
86.6 |
|
|
|
|
|
|
Distribution |
|
32.3 |
|
|
27.2 |
|
|
|
|
|
|
Consolidated net sales |
|
$ |
522.9 |
|
|
$ |
387.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic Data |
|
Three Months Ended
September 30, |
|
|
|
($ in millions) |
|
2022 |
|
2021 |
|
|
|
|
|
United States |
|
$ |
319.6 |
|
|
$ |
246.9 |
|
|
|
|
|
|
Europe |
|
90.8 |
|
|
48.5 |
|
|
|
|
|
|
Asia Pacific |
|
58.1 |
|
|
61.5 |
|
|
|
|
|
|
Mexico |
|
33.0 |
|
|
15.8 |
|
|
|
|
|
|
Canada |
|
11.7 |
|
|
7.9 |
|
|
|
|
|
|
Other |
|
9.7 |
|
|
7.0 |
|
|
|
|
|
|
Consolidated net sales |
|
$ |
522.9 |
|
|
$ |
387.6 |
|
|
|
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Loss per Common Share
The Company calculates basic and diluted loss per share using the
two class method. Under the two class method, losses 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 losses available to each class of stock are divided
by the weighted average number of outstanding shares for the period
in each class. Diluted loss per share assumes the issuance of
common stock for all potentially dilutive share equivalents
outstanding. For the three months ended September 30, 2022 and
2021, respectively, the Company incurred a net loss and accordingly
excluded all potentially dilutive securities from the determination
of diluted loss per share as their impact was
anti-dilutive.
The calculations of basic and diluted loss per common share for the
three months ended September 30, 2022 and 2021 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
|
(in millions, except per share data) |
|
2022 |
|
2021 |
|
|
|
|
|
Net loss |
|
$ |
(6.9) |
|
|
$ |
(14.8) |
|
|
|
|
|
|
Dividends allocated under share-based compensation
plans |
|
(0.1) |
|
|
— |
|
|
|
|
|
|
Loss available for common stockholders used in calculation of basic
loss per common share |
|
$ |
(7.0) |
|
|
$ |
(14.8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding,
basic |
|
48.7 |
|
|
48.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share |
|
$ |
(0.14) |
|
|
$ |
(0.31) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6.9) |
|
|
$ |
(14.8) |
|
|
|
|
|
|
Dividends allocated under share-based compensation
plans |
|
(0.1) |
|
|
— |
|
|
|
|
|
|
Loss available for common stockholders used in calculation of
diluted loss per common share |
|
$ |
(7.0) |
|
|
$ |
(14.8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding,
basic |
|
48.7 |
|
|
48.5 |
|
|
|
|
|
|
Effect of shares issuable under share-based compensation
plans |
|
— |
|
|
— |
|
|
|
|
|
|
Weighted average number of common shares outstanding,
diluted |
|
48.7 |
|
|
48.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share |
|
$ |
(0.14) |
|
|
$ |
(0.31) |
|
|
|
|
|
The following awards issued under share-based compensation plans
were excluded from the above calculations of diluted loss per share
because their effects were anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
|
(in millions) |
|
2022 |
|
2021 |
|
|
|
|
|
Stock options |
|
1.9 |
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Inventories
Inventories consisted of the following components as of
September 30, 2022 and June 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
September 30,
2022 |
|
June 30,
2022 |
|
Raw materials and supplies |
|
$ |
155.2 |
|
|
$ |
127.8 |
|
|
Work in process |
|
336.2 |
|
|
261.2 |
|
|
Finished and purchased products |
|
124.7 |
|
|
107.1 |
|
|
Total inventories |
|
$ |
616.1 |
|
|
$ |
496.1 |
|
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, 2022 and June 30, 2022, $133.1 million and
$122.9 million of inventory, respectively, was accounted for using
a method other than the LIFO inventory costing method.
6. Accrued Liabilities
Accrued liabilities consisted of the following as of
September 30, 2022 and June 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
September 30,
2022 |
|
June 30,
2022 |
|
Accrued compensation and benefits |
|
$ |
52.5 |
|
|
$ |
53.2 |
|
|
Contract liabilities |
|
15.4 |
|
|
14.4 |
|
|
Accrued postretirement benefits |
|
14.1 |
|
|
14.1 |
|
|
Current portion of lease liabilities |
|
9.5 |
|
|
9.9 |
|
|
Accrued taxes |
|
7.3 |
|
|
6.3 |
|
|
Accrued interest expense |
|
6.4 |
|
|
18.4 |
|
|
Accrued pension liabilities |
|
3.4 |
|
|
3.4 |
|
|
Derivative financial instruments |
|
1.9 |
|
|
0.3 |
|
|
Accrued income taxes |
|
0.4 |
|
|
0.4 |
|
|
Other |
|
12.0 |
|
|
13.1 |
|
|
Total accrued liabilities |
|
$ |
122.9 |
|
|
$ |
133.5 |
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. Pension and Other Postretirement
Benefits
The components of the net periodic pension expense (income) related
to the Company's pension and other postretirement benefits for the
three months ended September 30, 2022 and 2021 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Pension Plans |
|
Other Postretirement Plans |
|
|
|
|
|
|
($ in millions) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Service cost |
|
$ |
2.0 |
|
|
$ |
2.1 |
|
|
$ |
0.5 |
|
|
$ |
0.6 |
|
|
Interest cost |
|
11.5 |
|
|
9.1 |
|
|
2.4 |
|
|
1.8 |
|
|
Expected return on plan assets |
|
(11.2) |
|
|
(14.9) |
|
|
(1.7) |
|
|
(2.0) |
|
|
Amortization of net loss (gain) |
|
2.4 |
|
|
2.1 |
|
|
(0.4) |
|
|
(0.2) |
|
|
Amortization of prior service cost (credits) |
|
0.5 |
|
|
0.6 |
|
|
(1.0) |
|
|
(1.0) |
|
|
|
|
|
|
|
|
|
|
|
Net pension expense (income) |
|
$ |
5.2 |
|
|
$ |
(1.0) |
|
|
$ |
(0.2) |
|
|
$ |
(0.8) |
|
During the three months ended September 30, 2022 and 2021, the
Company made $0.0 million and $0.2 million, respectively, of
contributions to its qualified defined benefit pension plans. The
Company currently does not expect to contribute to the qualified
defined benefit pension plans during the remainder of fiscal
year
2023.
8. Debt
On March 16, 2022, the Company completed its offering and sale of
$300.0 million in aggregate principal amount of 7.625% Senior
Notes due 2030 (the "2030 Notes"). The 2030 Notes accrue interest
at the rate of 7.625% per annum, with interest payable in cash
semi-annually in arrears on March 15 and September 15, commencing
September 15, 2022. The 2030 Notes will mature on March 15, 2030.
The 2030 Notes are senior unsecured indebtedness of the Company,
ranking equally in right of payment with all its existing and
future senior unsecured indebtedness and senior to its future
subordinated indebtedness. The Company used the net proceeds from
the issuance of the 2030 Notes to repay, in April 2022, in full
$300.0 million in principal of its 4.45% senior unsecured
notes due March 2023, including any interest and premium due
thereon.
On March 26, 2021, the Company entered into a $300.0 million
secured revolving credit facility (the "Credit Facility"). The
Credit Facility amended and restated the Company's previous
revolving credit facility, dated March 31, 2017, which had been set
to expire in March 2022. The Credit Facility extends the maturity
to March 31, 2024, subject to a springing maturity of November
30, 2022. If, by November 30, 2022, the Company's
$300.0 million 4.45% Senior Notes due in March 2023 were not
redeemed, repurchased or refinanced with indebtedness having a
maturity date of October 1, 2024 or later, all indebtedness under
the Credit Facility would have been due. The springing maturity
clause has been satisfied with the issuance of the 2030 Notes and
subsequent payment in full of the 4.45% Senior Notes, as discussed
above. The Credit Facility contains a revolving credit commitment
amount of $300.0 million, subject to the Company's right, from
time to time, to request an increase of the commitment to $500.0
million in the aggregate; and provides for the issuance of letters
of credit subject to a $40.0 million sub-limit. The Company has the
right to terminate or reduce the commitments under the Credit
Facility, and, subject to certain lender approvals, to join
subsidiaries as subsidiary borrowers.
On February 14, 2022, the Company entered into an amendment (the
"Amendment") to its Credit Facility. The Amendment revised the
interest coverage ratio covenant under the Credit Facility so the
first test date was June 30, 2022, and required a minimum
interest coverage ratio of 2.00 to 1.00 at June 30, 2022
(calculated for the two fiscal quarters then ended), 3.00 to 1.00
at September 30, 2022 (calculated for the three fiscal quarters
then ended) and 3.50 to 1.00 at December 31, 2022 and thereafter
(calculated for the four fiscal quarters then ended). The Amendment
revised the restricted period under the Credit Facility, during
which the Company was prohibited from incurring any secured debt
other than purchase money financing for new equipment and was
subject to additional restrictions on its ability to make dividends
or distributions or to make certain investments. The restricted
period expired on September 30, 2022.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest on the borrowings under the Credit Facility accrues at
variable rates, based upon a "Eurocurrency Rate" 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 Eurocurrency Rate ranges from
1.25% to 2.25% (2.00% as of September 30, 2022), and for Base
Rate-determined loans, from 0.25% to 1.25% (1.00% as of
September 30, 2022). The Company also pays a quarterly
commitment fee ranging from 0.275% to 0.375% (0.35% as of
September 30, 2022), determined based upon the Debt Rating, of
the unused portion of the $300.0 million commitment under the
Credit Facility. In addition, the Company must pay certain letter
of credit fees, ranging from 1.25% to 2.25% (2.00% as of
September 30, 2022), with respect to letters of credit issued
under the Credit Facility. The Company has the right to voluntarily
prepay and re-borrow loans and to terminate or reduce the
commitments under the facility. As of September 30, 2022, the
Company had $1.8 million of issued letters of credit under the
Credit Facility and no short-term borrowings, with the balance of
$298.2 million available to the Company. As
of September 30, 2022, the borrowing rate for the Credit
Facility was 5.12%.
The Company is subject to certain financial and restrictive
covenants under the Credit Facility, which, among other things,
require the maintenance of a minimum interest coverage ratio. The
interest coverage ratio is defined in the Credit Facility as, for
any period, the ratio of consolidated earnings before interest,
taxes, depreciation and amortization and non-cash net pension
expense ("EBITDA") to consolidated interest expense for such
period. The interest coverage covenant was waived until the quarter
ended June 30, 2022 at which time it was required to be 2.00
to 1.00 and then 3.00 to 1.00 at September 30, 2022. The Credit
Facility also requires the Company to maintain a debt to capital
ratio of less than 55 percent. The debt to capital ratio is defined
in the Credit Facility as the ratio of consolidated indebtedness,
as defined therein, to consolidated capitalization, as defined
therein. In addition, the Company is also subject to an asset
coverage ratio minimum of 1.10 to 1.00. The asset coverage ratio is
defined in the Credit Facility as eligible receivables and
inventory, as defined therein, to outstanding loans and
obligations, as defined therein. As of September 30, 2022, the
Company was in compliance with all of the covenants of the Credit
Facility.
Long-term debt outstanding as of September 30, 2022 and
June 30, 2022 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
September 30,
2022 |
|
June 30,
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior unsecured notes, 6.375% due July 2028 (face value of
$400.0 million at September 30, 2022 and June 30,
2022)
|
|
$ |
396.0 |
|
|
$ |
395.9 |
|
|
|
|
|
|
Senior unsecured notes, 7.625% due March 2030 (face value of $300.0
million at September 30, 2022 and June 30,
2022)
|
|
296.1 |
|
|
295.9 |
|
|
|
|
|
|
Total debt |
|
692.1 |
|
|
691.8 |
|
|
|
|
|
|
Less: amounts due within one year |
|
— |
|
|
— |
|
|
|
|
|
|
Long-term debt, net of current portion |
|
$ |
692.1 |
|
|
$ |
691.8 |
|
|
|
|
|
For the three months ended September 30, 2022 and 2021,
interest costs totaled $12.9 million and $10.3 million,
respectively, of which $0.3 million and $0.1 million, respectively,
were capitalized as part of the cost of property, plant, equipment
and software.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9.
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, 2022,
the Company increased the liability for a company-owned former
operating site by $0.1 million. The liabilities recorded for
environmental remediation costs at Superfund sites, other third
party-owned sites and Carpenter-owned current or former operating
facilities remaining at September 30, 2022 and June 30,
2022 were $18.4 million and $18.3 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 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.
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.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10.
Leases
The Company records right-of-use ("ROU") assets and operating lease
liabilities on the consolidated balance sheet for several types of
operating leases, including land and buildings, equipment (e.g.
trucks and forklifts), vehicles and computer equipment. On the
lease commencement date, the Company measures and records a ROU
asset and lease liability equal to the present value of the
remaining lease payments, discounted using the rate implicit in the
lease (or if that rate cannot be readily determined, the Company's
incremental borrowing rate). Operating leases are included in other
assets, accrued liabilities (current) and other liabilities
(long-term) on the consolidated balance sheets.
The Company elected the practical expedient to not separate lease
components from non-lease components for all asset classes. The
Company recognizes lease expense in the consolidated statements of
operations on a straight-line basis over the lease term. The
Company elected to not recognize ROU assets and lease liabilities
for short-term leases with an initial term of 12 months or less for
all asset classes. Leases with the option to extend their term or
terminate early are reflected in the lease term when it is
reasonably certain that the Company will exercise such options.
Some leasing arrangements require variable payments that are
dependent on usage, output, or may vary for other reasons, such as
insurance and tax payments. The variable lease payments are not
presented as part of the ROU asset or lease liability. Income from
subleased properties is recognized and presented as a reduction of
selling, general and administrative expenses in the Company's
consolidated statements of operations.
The following table sets forth the components of the Company's
lease cost for the three months ended September 30, 2022 and
September 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
|
($ in millions) |
|
2022 |
|
2021 |
|
|
|
|
|
Operating lease cost |
|
$ |
2.8 |
|
|
$ |
2.5 |
|
|
|
|
|
|
Short-term lease cost |
|
0.9 |
|
|
0.8 |
|
|
|
|
|
|
Variable lease cost |
|
— |
|
|
0.2 |
|
|
|
|
|
|
Sublease income |
|
(0.2) |
|
|
(0.2) |
|
|
|
|
|
|
Total lease cost |
|
$ |
3.5 |
|
|
$ |
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flow payments from operating leases |
|
$ |
3.1 |
|
|
$ |
2.8 |
|
|
|
|
|
|
Non-cash ROU assets obtained in exchange for lease
obligations |
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
|
|
|
The leases have remaining terms of
one to fifteen years. The following table sets forth the
Company's weighted-average remaining lease term and
weighted-average discount rate at September 30, 2022 and
June 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2022 |
|
June 30,
2022 |
|
Weighted-average remaining lease term - operating
leases |
|
8.4 years |
|
8.5 years |
|
Weighted-average discount rate - operating leases |
|
3.7 |
% |
|
3.7 |
% |
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table sets forth the Company's ROU assets and lease
liabilities at September 30, 2022 and June 30,
2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
September 30,
2022 |
|
June 30,
2022 |
|
Operating lease assets: |
|
|
|
|
|
Other assets |
|
$ |
40.2 |
|
|
$ |
42.9 |
|
|
Operating lease liabilities: |
|
|
|
|
|
Accrued liabilities |
|
$ |
9.5 |
|
|
$ |
9.9 |
|
|
Other liabilities |
|
40.2 |
|
|
42.7 |
|
|
Total operating lease liabilities |
|
$ |
49.7 |
|
|
$ |
52.6 |
|
Minimum lease payments for operating leases by fiscal year expiring
subsequent to September 30, 2022 are as follows:
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
September 30,
2022 |
|
2023 (remaining period of fiscal year) |
|
$ |
8.6 |
|
|
2024 |
|
8.9 |
|
|
2025 |
|
6.3 |
|
|
2026 |
|
5.0 |
|
|
2027 |
|
4.9 |
|
|
Thereafter |
|
24.9 |
|
|
Total future minimum lease payments |
|
58.6 |
|
|
Less imputed interest |
|
(8.9) |
|
|
Total |
|
$ |
49.7 |
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. 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, 2022 |
|
Fair Value
Measurements Using
Input Type |
|
($ in millions) |
|
Level 2 |
|
Assets: |
|
|
|
Derivative financial instruments |
|
$ |
12.0 |
|
|
Liabilities: |
|
|
|
Derivative financial instruments |
|
$ |
2.0 |
|
|
|
|
|
|
|
|
|
|
|
June 30, 2022 |
|
Fair Value
Measurements Using
Input Type |
|
($ in millions) |
|
Level 2 |
|
Assets: |
|
|
|
Derivative financial instruments |
|
$ |
16.6 |
|
|
Liabilities: |
|
|
|
Derivative financial instruments |
|
$ |
0.4 |
|
The Company's derivative financial instruments consist of commodity
forward contracts and foreign currency forward contracts. These
instruments are measured at fair value using the market method
valuation technique. The inputs to this technique utilize
information related to commodity prices and foreign exchange 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 12 Derivatives and Hedging
Activities.
The Company has currently chosen not to elect the fair value option
for any items that are not already required to be measured at fair
value in accordance with accounting principles generally accepted
in the United States of America.
The carrying amounts of other financial instruments not listed in
the table below approximate fair value due to the short-term nature
of these items. The carrying amounts and estimated fair values of
the Company's financial instruments not recorded at fair value in
the financial statements were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
June 30, 2022 |
|
($ in millions) |
|
Carrying
Value |
|
Fair
Value |
|
Carrying
Value |
|
Fair
Value |
|
Long-term debt |
|
$ |
692.1 |
|
|
$ |
660.0 |
|
|
$ |
691.8 |
|
|
$ |
641.5 |
|
|
Company-owned life insurance |
|
$ |
21.9 |
|
|
$ |
21.9 |
|
|
$ |
22.9 |
|
|
$ |
22.9 |
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The fair values of long-term debt as of September 30, 2022 and
June 30, 2022 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 as of
September 30, 2022 and June 30, 2022 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.
12. Derivatives and Hedging
Activities
The Company from time to time 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,
2022, the Company had forward contracts to purchase 5.2 million
pounds of certain raw materials with settlement dates through May
2025.
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 were amortized over
the term of the underlying debt. For the three months ended
September 30, 2022 and 2021, net gains related to the
previously terminated contracts of $0.0 million and $0.1 million,
respectively, were recorded as a reduction to
interest expense.
Cash Flow Hedging — Foreign currency forward contracts:
From time-to-time, the Company uses foreign currency forward
contracts to hedge a portion of anticipated future sales
denominated in foreign currencies, principally the Euro in order to
offset the effect of changes in exchange rates. The qualifying
hedge contracts are marked-to-market at each reporting date and any
unrealized gains or losses are included in AOCI and reclassified to
net sales in the period during which the transaction affects
earnings or it becomes probable that the forecasted transaction
will not occur.
The Company also uses foreign currency forward contracts to protect
certain short-term positions denominated in foreign currencies
against the effect of changes in exchange rates. These positions do
not qualify for hedge accounting and accordingly are
marked-to-market at each reporting date through charges to other
expense (income), net. As of September 30, 2022 and
June 30, 2022, the fair value of the outstanding foreign
currency forwards not designated as hedging instruments and the
charges to income for changes in fair value for these contracts
were not material.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The fair value and location of outstanding derivative contracts
recorded in the accompanying consolidated balance sheets were as
follows as of September 30, 2022 and June 30,
2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
|
|
Foreign
Currency
Contracts |
|
Commodity
Contracts |
|
Total
Derivatives |
|
($ in millions) |
|
|
|
|
|
Asset Derivatives: |
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
Other current assets |
|
|
|
$ |
0.5 |
|
|
$ |
5.4 |
|
|
$ |
5.9 |
|
|
Other assets |
|
|
|
5.0 |
|
|
1.1 |
|
|
6.1 |
|
|
Total asset derivatives |
|
|
|
$ |
5.5 |
|
|
$ |
6.5 |
|
|
$ |
12.0 |
|
|
Liability Derivatives: |
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
Accrued liabilities |
|
|
|
$ |
— |
|
|
$ |
1.9 |
|
|
$ |
1.9 |
|
|
Other liabilities |
|
|
|
— |
|
|
0.1 |
|
|
0.1 |
|
|
Total liability derivatives |
|
|
|
$ |
— |
|
|
$ |
2.0 |
|
|
$ |
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2022 |
|
|
|
Foreign
Currency
Contracts |
|
Commodity
Contracts |
|
Total
Derivatives |
|
($ in millions) |
|
|
|
|
|
Asset Derivatives: |
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
Other current assets |
|
|
|
$ |
— |
|
|
$ |
11.5 |
|
|
$ |
11.5 |
|
|
Other assets |
|
|
|
2.6 |
|
|
2.5 |
|
|
5.1 |
|
|
Total asset derivatives |
|
|
|
$ |
2.6 |
|
|
$ |
14.0 |
|
|
$ |
16.6 |
|
|
Liability Derivatives: |
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
Accrued liabilities |
|
|
|
$ |
0.2 |
|
|
$ |
0.1 |
|
|
$ |
0.3 |
|
|
Other liabilities |
|
|
|
— |
|
|
0.1 |
|
|
0.1 |
|
|
Total liability derivatives |
|
|
|
$ |
0.2 |
|
|
$ |
0.2 |
|
|
$ |
0.4 |
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $17.5 million and total liability derivatives would have been
$7.5 million as of September 30, 2022.
According to the provisions of the Company's derivative
arrangements, in the event that the fair value of outstanding
derivative positions with certain counterparties exceeds certain
thresholds, the Company may be required to issue cash collateral to
the counterparties. As of September 30, 2022 and June 30,
2022, the Company had no cash collateral held by
counterparties.
The Company is exposed to credit loss in the event of
nonperformance by counterparties on its derivative instruments as
well as credit or performance risk with respect to its customer
commitments to perform. Although nonperformance is possible, the
Company does not anticipate nonperformance by any of the parties.
In addition, various master netting arrangements are in place with
counterparties to facilitate settlements of gains and losses on
these contracts.
Cash Flow and Fair Value Hedges
For derivative instruments that are designated and qualify as cash
flow hedges, the gain or loss on the derivative is reported as a
component of AOCI and reclassified into earnings in the same period
or periods during which the hedged transactions affect earnings or
it becomes probable the forecasted transactions will not occur. The
following is a summary of the losses to cash flow hedges recognized
during the three months ended September 30, 2022 and
2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Loss
Recognized in AOCI on
Derivatives |
|
|
|
Three Months Ended
September 30, |
|
|
|
($ in millions) |
|
2022 |
|
2021 |
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationship: |
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
$ |
(0.2) |
|
|
$ |
(0.3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(0.2) |
|
|
$ |
(0.3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
Location of (Loss) Gain
Reclassified from AOCI into
Income |
|
Amount of (Loss) Gain Reclassified from AOCI
into Income |
|
|
Three Months Ended
September 30, |
|
|
2022 |
|
2021 |
|
Derivatives in Cash Flow Hedging Relationship: |
|
|
|
|
|
|
|
Commodity contracts |
|
Cost of sales |
|
$ |
6.7 |
|
|
$ |
(1.8) |
|
|
|
|
|
|
|
|
|
Forward interest rate swaps |
|
Interest expense, net |
|
— |
|
|
0.1 |
|
|
Total |
|
|
|
$ |
6.7 |
|
|
$ |
(1.7) |
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following is a summary of total amounts presented in the
consolidated statements of operations in which the effects of cash
flow and fair value hedges are recorded during the three months
ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2022 |
|
|
|
Three Months Ended
September 30, 2021 |
|
($ in millions) |
|
|
|
Cost of Sales |
|
Interest Expense, Net |
|
|
|
Cost of Sales |
|
Interest Expense, Net |
|
Total amounts presented in the consolidated statement of operations
in which the effects of cash flow and fair value hedges are
recorded |
|
|
|
$ |
468.1 |
|
|
$ |
12.6 |
|
|
|
|
$ |
362.4 |
|
|
$ |
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Derivatives in Cash Flow Hedging
Relationship: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from AOCI to income |
|
|
|
$ |
6.7 |
|
|
$ |
— |
|
|
|
|
$ |
(1.8) |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain reclassified from AOCI to income |
|
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gain (loss) |
|
|
|
$ |
6.7 |
|
|
$ |
— |
|
|
|
|
$ |
(1.8) |
|
|
$ |
0.1 |
|
The Company estimates that $2.5 million of net derivative gains
included in AOCI as of September 30, 2022 will be reclassified
into income within the next 12 months. No significant cash flow
hedges were discontinued during the three months ended
September 30, 2022.
As of September 30, 2022, and June 30, 2022, there were
no amounts recorded on the consolidated balance sheets related to
cumulative basis adjustments for fair value hedges of interest rate
risk.
13. Other Expense (Income), Net
Other expense (income), net consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
|
|
|
($ in millions) |
|
2022 |
|
2021 |
|
|
|
|
|
|
|
|
|
Unrealized losses on company-owned life insurance contracts and
investments held in rabbi trusts |
|
$ |
1.0 |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
|
|
Foreign exchange loss |
|
0.1 |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
Interest income |
|
(0.1) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Pension earnings, interest and deferrals expense
(income) |
|
2.5 |
|
|
(4.5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
— |
|
|
(0.1) |
|
|
|
|
|
|
|
|
|
|
Total other expense (income), net |
|
$ |
3.5 |
|
|
$ |
(4.1) |
|
|
|
|
|
|
|
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
14. Income Taxes
The effective tax rate used for interim periods is the estimated
annual effective consolidated tax rate, based on the current
estimate of full year results, except that taxes related to
specific events, if any, are recorded in the interim period in
which they occur. The annual effective tax rate is based upon a
number of significant estimates and judgments, including the
estimated annual pre-tax income, or loss, of the Company in each
tax jurisdiction in which it operates, and the development of tax
planning strategies during the year. In addition, the Company’s tax
expense or benefit can be impacted by changes in tax rates or laws,
the finalization of tax audits, and other factors that cannot be
predicted with certainty. As such, there can be significant
volatility in interim tax provisions.
During the three months ended September 30, 2022, deferred
taxes were determined by the year-to-date tax benefit with current
taxes accounting for the remaining tax benefit recorded in the
period. Income tax benefit was $0.9 million, or 11.5 percent of
pre-tax loss for the three months ended September 30, 2022, as
compared with income tax benefit of $10.4 million, or 41.3 percent
of pre-tax loss for the three months ended September 30,
2021.
Income tax benefit for the three months ended September 30,
2022, includes the unfavorable impact of losses in certain
jurisdictions for which no tax benefit can be recognized. Also
included is a discrete tax charge of $0.6 million for the
impact of a state tax legislative change and a discrete tax benefit
of $0.3 million attributable to employee share-based
compensation. Income tax benefit for the three months ended
September 30, 2021 included the unfavorable impacts of losses
in certain foreign jurisdictions for which no tax benefit can be
recognized.
The Inflation Reduction Act of 2022 (the "IRA") was enacted on
August 16, 2022. The IRA includes climate and energy
provisions, extends the Affordable Care Act subsidies, increases
Internal Revenue Enforcement funding and allows Medicare to
negotiate prescription drug prices. The IRA creates a 15 percent
corporate alternative minimum tax on profits of corporations whose
average annual adjusted financial statement income for any
consecutive three-tax-year period preceding the tax year exceeds
$1.0 billion and is effective for tax years beginning after
December 31, 2022. The IRA also creates an excise tax of 1
percent on stock repurchases by publicly traded U.S. corporations,
effective for repurchases after December 31, 2022. The
provisions of the IRA are not expected to have a significant impact
on our financial position, results of operations or cash
flows.
15. Business Segments
The Company has two reportable segments, Specialty Alloys
Operations ("SAO") and Performance Engineered Products
("PEP").
The SAO segment is comprised of the Company's major premium alloy
and stainless steel manufacturing operations. This includes
operations performed at mills primarily in Reading and Latrobe,
Pennsylvania and surrounding areas as well as South Carolina and
Alabama. The combined assets of the SAO operations are 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 Additive business and the Latrobe and Mexico
distribution businesses. The businesses in the PEP segment are
managed with an entrepreneurial structure to promote flexibility
and agility to quickly respond to market dynamics.
The Company's executive management evaluates the performance of
these operating segments based on sales, operating income and cash
flow generation. Segment operating results exclude general
corporate costs, which are comprised of executive and director
compensation and other corporate facilities and administrative
expenses not allocated to the segments. Also excluded are items
that management considers not representative of ongoing operations,
such as restructuring charges and other specifically-identified
income or expense items.
On a consolidated basis, no single customer accounted for 10
percent or more of net sales for the three months ended
September 30, 2022 and September 30, 2021. On a
consolidated basis, no single customer accounted for 10 percent or
more of accounts receivable outstanding at September 30, 2022
and June 30, 2022.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
|
($ in millions) |
|
2022 |
|
2021 |
|
|
|
|
|
Net Sales: |
|
|
|
|
|
|
|
|
|
Specialty Alloys Operations |
|
$ |
447.3 |
|
|
$ |
331.9 |
|
|
|
|
|
|
Performance Engineered Products |
|
93.2 |
|
|
74.6 |
|
|
|
|
|
|
Intersegment |
|
(17.6) |
|
|
(18.9) |
|
|
|
|
|
|
Consolidated net sales |
|
$ |
522.9 |
|
|
$ |
387.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
|
($ in millions) |
|
2022 |
|
2021 |
|
|
|
|
|
Operating Income (Loss): |
|
|
|
|
|
|
|
|
|
Specialty Alloys Operations |
|
$ |
19.9 |
|
|
$ |
(5.9) |
|
|
|
|
|
|
Performance Engineered Products |
|
6.3 |
|
|
0.6 |
|
|
|
|
|
|
Corporate costs |
|
(17.1) |
|
|
(14.2) |
|
|
|
|
|
|
Intersegment |
|
(0.8) |
|
|
0.4 |
|
|
|
|
|
|
Consolidated operating income (loss) |
|
$ |
8.3 |
|
|
$ |
(19.1) |
|
|
|
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
|
($ in millions) |
|
2022 |
|
2021 |
|
|
|
|
|
Depreciation and Amortization: |
|
|
|
|
|
|
|
|
|
Specialty Alloys Operations |
|
$ |
27.1 |
|
|
$ |
27.2 |
|
|
|
|
|
|
Performance Engineered Products |
|
3.8 |
|
|
3.9 |
|
|
|
|
|
|
Corporate |
|
1.4 |
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated depreciation and amortization |
|
$ |
32.3 |
|
|
$ |
32.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
|
($ in millions) |
|
2022 |
|
2021 |
|
|
|
|
|
Capital Expenditures: |
|
|
|
|
|
|
|
|
|
Specialty Alloys Operations |
|
$ |
11.4 |
|
|
$ |
12.1 |
|
|
|
|
|
|
Performance Engineered Products |
|
2.0 |
|
|
1.3 |
|
|
|
|
|
|
Corporate |
|
0.1 |
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated capital expenditures |
|
$ |
13.5 |
|
|
$ |
14.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2022 |
|
June 30,
2022 |
|
($ in millions) |
|
|
|
Total Assets: |
|
|
|
|
|
Specialty Alloys Operations |
|
$ |
2,339.3 |
|
|
$ |
2,262.4 |
|
|
Performance Engineered Products |
|
433.2 |
|
|
418.9 |
|
|
Corporate |
|
163.9 |
|
|
248.9 |
|
|
Intersegment |
|
3.5 |
|
|
2.1 |
|
|
Consolidated total assets |
|
$ |
2,939.9 |
|
|
$ |
2,932.3 |
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
16. Reclassifications from Accumulated Other
Comprehensive Loss
The changes in AOCI by component, net of tax, for the three months
ended September 30, 2022 and 2021 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2022
($ in millions) (a) |
|
Cash flow
hedging items |
|
Pension and
other
postretirement
benefit plan
items |
|
|
|
Foreign
currency
items |
|
Total |
|
Balances at June 30, 2022 |
|
$ |
5.5 |
|
|
$ |
(132.9) |
|
|
|
|
$ |
(46.1) |
|
|
$ |
(173.5) |
|
|
Other comprehensive loss before reclassifications |
|
(0.2) |
|
|
— |
|
|
|
|
(3.3) |
|
|
(3.5) |
|
|
Amounts reclassified from AOCI (b) |
|
(5.1) |
|
|
1.0 |
|
|
|
|
— |
|
|
(4.1) |
|
|
Net other comprehensive (loss) income |
|
(5.3) |
|
|
1.0 |
|
|
|
|
(3.3) |
|
|
(7.6) |
|
|
Balances at September 30, 2022 |
|
$ |
0.2 |
|
|
$ |
(131.9) |
|
|
|
|
$ |
(49.4) |
|
|
$ |
(181.1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2021
($ in millions) (a) |
|
Cash flow
hedging items |
|
Pension and
other
postretirement
benefit plan
items |
|
|
|
Foreign
currency
items |
|
Total |
|
Balances at June 30, 2021 |
|
$ |
6.9 |
|
|
$ |
(159.1) |
|
|
|
|
$ |
(40.1) |
|
|
$ |
(192.3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassifications |
|
(0.2) |
|
|
— |
|
|
|
|
(2.1) |
|
|
(2.3) |
|
|
Amounts reclassified from AOCI (b) |
|
1.3 |
|
|
1.1 |
|
|
|
|
— |
|
|
2.4 |
|
|
Net other comprehensive income (loss) |
|
1.1 |
|
|
1.1 |
|
|
|
|
(2.1) |
|
|
0.1 |
|
|
Balances at September 30, 2021 |
|
$ |
8.0 |
|
|
$ |
(158.0) |
|
|
|
|
$ |
(42.2) |
|
|
$ |
(192.2) |
|
(a) All amounts are net of tax. Amounts in
parentheses indicate debits.
(b) See separate table below for further
details.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following is a summary of amounts reclassified from AOCI for
the three months ended September 30, 2022 and
2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about AOCI Components |
|
Location of
gain (loss) |
|
Amount Reclassified from AOCI
Three Months Ended September 30, |
|
|
|
|
|
($ in millions) (a) |
|
|
2022 |
|
2021 |
|
|
|
|
|
|
|
|
|
Cash flow hedging items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
Cost of sales |
|
$ |
6.7 |
|
|
$ |
(1.8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward interest rate swaps |
|
Interest expense, net |
|
— |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
Total before tax |
|
|
|
6.7 |
|
|
(1.7) |
|
|
|
|
|
|
|
|
|
|
Tax (expense) benefit |
|
|
|
(1.6) |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
Net of tax |
|
|
|
$ |
5.1 |
|
|
$ |
(1.3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about AOCI Components |
|
Location of
(loss) gain |
|
Amount Reclassified from AOCI
Three Months Ended September 30, |
|
|
|
|
|
($ in millions) (a) |
|
|
2022 |
|
2021 |
|
|
|
|
|
|
|
|
|
Amortization of pension and other postretirement benefit plan
items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss |
|
(b) |
|
$ |
(2.0) |
|
|
$ |
(1.9) |
|
|
|
|
|
|
|
|
|
|
Prior service benefit |
|
(b) |
|
0.5 |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total before tax |
|
|
|
(1.5) |
|
|
(1.5) |
|
|
|
|
|
|
|
|
|
|
Tax benefit |
|
|
|
0.5 |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
Net of tax |
|
|
|
$ |
(1.0) |
|
|
$ |
(1.1) |
|
|
|
|
|
|
|
|
|
(a) Amounts in parentheses indicate debits
to income/loss.
(b) These AOCI components are included in
the computation of net periodic benefit cost (see Note 7. Pension
and Other Postretirement Benefits for additional
details).
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Background and General
We are a producer and distributor of premium specialty alloys,
including titanium alloys, powder metals, stainless steels, alloy
steels and tool steels. We are a recognized leader in
high-performance specialty alloy-based materials and process
solutions for critical applications in the aerospace, defense,
medical, transportation, energy, industrial and consumer markets.
We have evolved to become a pioneer in premium specialty alloys,
including titanium, nickel, and cobalt, as well as alloys
specifically engineered for additive manufacturing ("AM") processes
and soft magnetics applications. We have expanded our AM
capabilities to provide a complete "end-to-end" solution to
accelerate materials innovation and streamline parts production. We
primarily process basic raw materials such as nickel, cobalt,
titanium, manganese, chromium, molybdenum, iron scrap and other
metal alloying elements through various melting, hot forming and
cold working facilities to produce finished products in the form of
billet, bar, rod, wire and narrow strip in many sizes and finishes.
We also produce certain metal powders and parts. Our sales are
distributed directly from our production plants and distribution
network as well as through independent distributors. Unlike many
other specialty steel producers, we operate our own worldwide
network of service and distribution centers. These service centers,
located in the United States, Canada, Mexico, Europe and Asia allow
us to work more closely with customers and to offer various
just-in-time stocking programs.
As part of our overall business strategy, we have sought out and
considered opportunities related to strategic acquisitions and
joint collaborations as well as possible business unit dispositions
aimed at broadening our offering to the marketplace. We have
participated with other companies to explore potential terms and
structures of such opportunities and expect that we will continue
to evaluate these opportunities.
Our discussions below in this Item 2 are based upon the more
detailed discussions about our business, operations and financial
condition included in Item 7 of our 2022 Form 10-K. Our
discussions here focus on our results during or as of the
three-month period ended September 30, 2022 and the comparable
period of fiscal year 2022, and to the extent applicable, on
material changes from information discussed in the 2022
Form 10-K and other important intervening developments or
information that we have reported on Form 8-K. These
discussions should be read in conjunction with the 2022
Form 10-K for detailed background information and with any
such intervening Form 8-K.
Impact of Raw Material Prices and Product Mix
We value most of our inventory utilizing the last-in, first-out
("LIFO") inventory costing method. Under the LIFO inventory costing
method, changes in the cost of raw materials and production
activities are recognized in cost of sales in the current period
even though these materials may potentially have been acquired at
significantly different values due to the length of time from the
acquisition of the raw materials to the sale of the processed
finished goods to the customers. In a period of rising raw material
costs, the LIFO inventory valuation normally results in higher cost
of sales. Conversely, in a period of decreasing raw material costs,
the LIFO inventory valuation normally results in lower cost of
sales.
The volatility of the costs of raw materials has impacted our
operations over the past several years. We, and others in our
industry, generally have been able to pass cost increases on major
raw materials through to our customers using surcharges that are
structured to recover increases in raw material costs. Generally,
the formula used to calculate a surcharge is based on published
prices of the respective raw materials for the previous month which
correlates to the prices we pay for our raw material purchases.
However, a portion of our surcharges to customers may be calculated
using a different surcharge formula or may be based on the raw
material prices at the time of order, which creates a lag between
surcharge revenue and corresponding raw material costs recognized
in cost of sales. The surcharge mechanism protects our net income
on such sales except for the lag effect discussed above. However,
surcharges have had a dilutive effect on our gross margin and
operating margin percentages as described later in this
report.
Approximately 40 percent of our net sales are sales to customers
under firm price sales arrangements. Firm price sales arrangements
involve a risk of profit margin fluctuations, particularly when raw
material prices are volatile. In order to reduce the risk of
fluctuating profit margins on these sales, we enter into commodity
forward contracts to purchase certain critical raw materials
necessary to produce the related products sold. Firm price sales
arrangements generally include certain annual purchasing
commitments and consumption schedules agreed to by the customers at
selling prices based on raw material prices at the time the
arrangements are established. If a customer fails to meet the
volume commitments (or the consumption schedule deviates from the
agreed-upon terms of the firm price sales arrangements), we may
need to absorb the gains or losses associated with the commodity
forward contracts on a temporary basis. Gains or losses associated
with commodity forward contracts are reclassified to earnings/loss
when earnings are impacted by the hedged transaction. Because we
value most of our inventory under the LIFO costing methodology,
changes in the cost of raw materials and production activities are
recognized in cost of sales in the current period attempting to
match the most recently incurred costs with revenues. Gains or
losses on the commodity forward contracts are reclassified from
other comprehensive (loss) income together with the actual purchase
price of the underlying commodities when the underlying commodities
are purchased and recorded in inventory. To the extent that the
total purchase price of the commodities, inclusive of the gains or
losses on the commodity forward contracts, are higher or lower
relative to the beginning of year costs, our cost of goods sold
reflects such amounts. Accordingly, the gains and/or losses
associated with commodity forward contracts may not impact the same
period that the firm price sales arrangements revenue is
recognized, and comparisons of gross profit from period to period
may be impacted. These firm price sales arrangements are expected
to continue as we look to strengthen our long-term customer
relationships by expanding, renewing and in certain cases extending
to a longer-term, our customer long-term arrangements.
We produce hundreds of grades of materials with a wide range of
pricing and profit levels depending on the grade. In addition, our
product mix within a period is subject to the fluctuating order
patterns of our customers as well as decisions we may make on
participation in certain products based on available capacity,
including the impacts of capacity commitments we may have under
existing customer agreements. While we expect to see positive
contribution from a more favorable product mix in our margin
performance over time, the impact by period may fluctuate and
period-to-period comparisons may vary.
Net Pension Benefit
Net pension benefit, as we define it below, includes the net
periodic benefit costs related to both our pension and other
postretirement plans. The net periodic benefit costs are determined
annually based on beginning of year balances and are recorded
ratably throughout the fiscal year, unless a significant
remeasurement event occurs. We currently expect the total net
pension expense for fiscal year 2023 will be $19.6 million as
compared with total net pension income of $7.3 million in fiscal
year 2022.
The following is the net pension expense (income) for the three
months ended September 30, 2022 and September 30,
2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
|
|
|
($ in millions) |
|
2022 |
|
2021 |
|
|
|
|
|
|
|
|
|
Pension plans |
|
$ |
5.2 |
|
|
$ |
(1.0) |
|
|
|
|
|
|
|
|
|
|
Other postretirement plans |
|
(0.2) |
|
|
(0.8) |
|
|
|
|
|
|
|
|
|
|
Net pension expense (income) |
|
$ |
5.0 |
|
|
$ |
(1.8) |
|
|
|
|
|
|
|
|
|
Net pension expense (income) is recorded in accounts that are
included in cost of sales and selling, general and administrative
expenses based on the function of the associated employees and in
other expense (income), net. The following is a summary of the
classification of net pension expense (income) for the three months
ended September 30, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
|
|
|
($ in millions) |
|
2022 |
|
2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost included in Cost of sales |
|
$ |
2.2 |
|
|
$ |
2.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost included in Selling, general and administrative
expenses |
|
0.3 |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension earnings, interest and deferrals included in
Other expense (income), net
|
|
2.5 |
|
|
(4.5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension expense (income) |
|
$ |
5.0 |
|
|
$ |
(1.8) |
|
|
|
|
|
|
|
|
|
As of September 30, 2022 and June 30, 2022, service cost
amounts related to the net pension expense (income) capitalized in
gross inventory were $2.6 million and $1.7 million,
respectively.
Operating Performance Overview
During the quarter ended September 30, 2022, demand in each of
our end-use markets remained strong, with our backlog up 10 percent
sequentially and 155 percent year-over-year. The growth was led by
increasing sales across each of the Aerospace sub-markets with lead
times extending for our materials. The SAO segment finished the
quarter ended September 30, 2022, at the upper end of our
expected range, driven by the aerospace growth and continued
improvement in our operations. The PEP segment came in just below
expectations due to delayed shipments caused by Hurricane Ian at
our Dynamet facility in Florida. We remain confident as we continue
to see strength across all of our end-use markets with order entry
activity driving backlog growth, and with continued improvement in
our operations.
Results of Operations — Three Months Ended September 30, 2022
vs. Three Months Ended September 30, 2021
For the three months ended September 30, 2022, we reported net
loss of $6.9 million, or $0.14 loss per diluted share. This
compares with net loss for the same period a year earlier of $14.8
million, or $0.31 loss per diluted share. There were no reported
special items for the quarter ended September 30, 2022.
COVID-19 related costs negatively impacted operating results by
$1.6 million in the three months ended September 30, 2021.
Excluding these costs, adjusted loss per diluted share was $0.28
for the quarter ended September 30, 2021. The results for the
three months ended September 30, 2022 reflect improving demand
patterns, higher prices and improving mix with 35 percent increased
sales compared to the prior year quarter.
Net Sales
Net sales for the three months ended September 30, 2022 were
$522.9 million, which was a 35 percent increase over the same
period a year ago. Excluding surcharge revenue, sales increased 20
percent on a 3 percent increase in shipment volume from the same
period a year ago. The results reflect higher demand in all end-use
markets except Transportation during the three months ended
September 30, 2022 compared to the three months ended
September 30, 2021. Net sales in the Aerospace and Defense
end-use market increased 57 percent compared to the same period a
year ago.
Geographically, sales in the United States increased 29 percent
from the same period a year ago to $319.6 million. The increase is
driven by higher demand in all end-use markets except
Transportation. Sales outside the United States increased 44
percent from the same period a year ago to $203.3 million for the
three months ended September 30, 2022. The increase is driven
primarily by higher demand in the Aerospace and Defense end-use
market in the European and South America regions. A portion of our
sales outside the United States are denominated in foreign
currencies. The fluctuations in foreign currency exchange rates
resulted in a $2.8 million decrease in sales during the three
months ended September 30, 2022 compared to the three months
ended September 30, 2021. Net sales outside the United States
represented 39 percent and 36 percent of total net sales for the
three months ended September 30, 2022 and 2021,
respectively.
Sales by End-Use Markets
We sell to customers across diversified end-use markets. The
following table includes comparative information for our net sales,
which includes surcharge revenue by principal end-use
markets. We believe this is helpful supplemental information
in analyzing the performance of the business from period to
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
$
Increase (Decrease) |
|
%
Increase (Decrease) |
|
($ in millions) |
|
2022 |
|
2021 |
|
|
|
Aerospace and Defense |
|
$ |
261.6 |
|
|
$ |
166.9 |
|
|
$ |
94.7 |
|
|
57 |
% |
|
Medical |
|
59.2 |
|
|
43.1 |
|
|
16.1 |
|
|
37 |
% |
|
Transportation |
|
36.9 |
|
|
41.6 |
|
|
(4.7) |
|
|
(11) |
% |
|
Energy |
|
27.9 |
|
|
22.2 |
|
|
5.7 |
|
|
26 |
% |
|
Industrial and Consumer |
|
105.0 |
|
|
86.6 |
|
|
18.4 |
|
|
21 |
% |
|
Distribution |
|
32.3 |
|
|
27.2 |
|
|
5.1 |
|
|
19 |
% |
|
Total net sales |
|
$ |
522.9 |
|
|
$ |
387.6 |
|
|
$ |
135.3 |
|
|
35 |
% |
The following table includes comparative information for our net
sales by the same principal end-use markets, but excluding
surcharge revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
$
Increase (Decrease) |
|
%
Increase (Decrease) |
|
($ in millions) |
|
2022 |
|
2021 |
|
|
|
Aerospace and Defense |
|
$ |
183.5 |
|
|
$ |
134.9 |
|
|
$ |
48.6 |
|
|
36 |
% |
|
Medical |
|
49.8 |
|
|
37.1 |
|
|
12.7 |
|
|
34 |
% |
|
Transportation |
|
23.7 |
|
|
31.4 |
|
|
(7.7) |
|
|
(25) |
% |
|
Energy |
|
18.3 |
|
|
16.2 |
|
|
2.1 |
|
|
13 |
% |
|
Industrial and Consumer |
|
68.4 |
|
|
66.3 |
|
|
2.1 |
|
|
3 |
% |
|
Distribution |
|
32.0 |
|
|
27.0 |
|
|
5.0 |
|
|
19 |
% |
|
Total net sales excluding surcharge revenue |
|
$ |
375.7 |
|
|
$ |
312.9 |
|
|
$ |
62.8 |
|
|
20 |
% |
Sales to the Aerospace and Defense end-use market increased 57
percent from the first quarter a year ago to $261.6 million.
Excluding surcharge revenue, sales increased 36 percent from the
first quarter a year ago on a 24 percent increase in shipment
volume. The results for the three months ended September 30,
2022 reflect increases in all sub-markets driven by ramping
activity levels across the aerospace supply change due to higher
aircraft build rates to meet increasing passenger
travel.
Medical end-use market sales increased 37 percent from the first
quarter a year ago to $59.2 million. Excluding surcharge revenue,
sales increased 34 percent on 20 percent higher shipment volume
from the first quarter a year ago. The current first quarter
results reflect stronger demand as a result of the medical supply
chain replenishing inventory levels with steady increases in
elective medical procedures.
Transportation end-use market sales decreased 11 percent from the
first quarter a year ago to $36.9 million. Excluding surcharge
revenue, sales decreased 25 percent on 42 percent lower shipment
volume from the first quarter a year ago. The results reflect
reduced heavy-duty build rates from ongoing supply shortages and
lower demand for light, medium and heavy duty vehicles
internationally.
Sales to the Energy end-use market of $27.9 million in the current
quarter reflect a 26 percent increase from the first quarter a year
ago. Excluding surcharge revenue, sales increased 13 percent from a
year ago. The results reflect increasing global rig counts
benefiting the oil and gas sub-market partially offset by lower
sales for power generation materials compared to the prior year
period.
Industrial and Consumer end-use market sales of $105.0 million
increased $18.4 million compared to the first quarter a year ago.
Excluding surcharge revenue, sales increased 3 percent on 2 percent
lower shipment volume. The results reflect higher demand for
semiconductor materials and increased sales in the electronic
sub-market.
Gross Profit
Our gross profit in the first quarter increased $29.6 million to
$54.8 million, or 10.5 percent of net sales as compared with $25.2
million, or 6.5 percent of net sales in the same quarter a year
ago. Excluding the impact of surcharge revenue, our adjusted gross
margin in the first quarter was 14.6 percent as compared to 8.1
percent in the same period a year ago. The increased gross profit
for the three months ended September 30, 2022 reflects
improving demand patterns with 35 percent increased sales and a
stronger product mix, higher prices and improved operational
efficiencies.
While the surcharge generally protects the absolute gross profit
dollars, it does have a dilutive effect on gross margin as a
percent of sales. The following represents a summary of the
dilutive impact of the surcharge on gross margin for the
comparative three-month periods. See the section "Non-GAAP
Financial Measures" below for further discussion of these financial
measures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
($ in millions) |
|
2022 |
|
2021 |
|
Net sales |
|
$ |
522.9 |
|
$ |
387.6 |
|
Less: surcharge revenue |
|
147.2 |
|
74.7 |
|
Net sales excluding surcharge revenue |
|
$ |
375.7 |
|
$ |
312.9 |
|
|
|
|
|
|
|
Gross profit |
|
$ |
54.8 |
|
$ |
25.2 |
|
|
|
|
|
|
|
Gross margin |
|
10.5 |
% |
|
6.5 |
% |
|
|
|
|
|
|
|
Gross margin excluding surcharge revenue |
|
14.6 |
% |
|
8.1 |
% |
Selling, General and Administrative Expenses
Selling, general and administrative expenses of $46.5 million were
8.9 percent of net sales (12.4 percent of net sales excluding
surcharge) as compared with $44.3 million and 11.4 percent of net
sales (14.2 percent of net sales excluding surcharge) in the same
quarter a year ago. The selling, general and administrative
expenses for the three months ended September 30, 2022 reflect
higher salary and benefit costs compared to the same period a year
ago.
.
Operating Income (Loss)
Our operating income in the recent first quarter was $8.3 million,
or 1.6 percent of net sales, as compared with operating loss of
$19.1 million or negative 4.9 percent of net sales in the same
quarter a year ago. Excluding surcharge revenue, adjusted operating
margin was 2.2 percent for the current quarter as compared with
negative 5.6 percent a year ago excluding special items. The
operating results for the three months ended September 30,
2022 reflect higher sales compared to the prior year quarter and
improved operational efficiencies. The three months ended
September 30, 2021 reflected the ongoing impact from COVID-19
with lower demand and operational challenges with labor shortages
and supply chain interruptions.
The following presents our operating income (loss) and operating
margin, in each case excluding the impact of surcharge revenue on
net sales and special items. We present and discuss these financial
measures because management believes removing these items provides
a more consistent and meaningful basis for comparing ongoing
results of operations from period to period. See the section
"Non-GAAP Financial Measures" below for further discussion of these
financial measures.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
($ in millions) |
|
2022 |
|
2021 |
|
Net sales |
|
$ |
522.9 |
|
$ |
387.6 |
|
Less: surcharge revenue |
|
147.2 |
|
74.7 |
|
Net sales excluding surcharge revenue |
|
$ |
375.7 |
|
$ |
312.9 |
|
|
|
|
|
|
|
Operating income (loss) |
|
$ |
8.3 |
|
$ |
(19.1) |
|
Special item: |
|
|
|
|
|
|
|
|
|
|
COVID-19 costs |
|
— |
|
1.6 |
|
|
|
|
|
|
Adjusted operating income (loss) |
|
$ |
8.3 |
|
$ |
(17.5) |
|
|
|
|
|
|
|
Operating margin |
|
1.6 |
% |
|
(4.9) |
% |
|
|
|
|
|
|
|
Adjusted operating margin excluding surcharge revenue and special
item |
|
2.2 |
% |
|
(5.6) |
% |
Interest Expense, Net
Interest expense, net for the three months ended September 30,
2022 was $12.6 million compared with $10.2 million in the same
period a year ago. Capitalized interest reduced interest expense by
$0.3 million for the three months ended September 30, 2022 and
$0.1 million for the three months ended September 30, 2021.
The higher interest expense is largely due to higher interest costs
on debt that was refinanced.
Other Expense (Income), Net
Other expense, net for the three months ended September 30,
2022 was $3.5 million as compared with $4.1 million of other
income, net for the three months ended September 30, 2021. The
current quarter reflects $2.5 million of expense from pension
earnings, interest and deferrals compared to $4.5 million of
pension income in the prior year driven by favorable returns on
plan assets.
Income Taxes
Income tax benefit was $0.9 million, or 11.5 percent of pre-tax
loss for the three months ended September 30, 2022, as
compared with $10.4 million, or 41.3 percent of pre-tax loss in the
same quarter a year ago. Income tax benefit for the three months
ended September 30, 2022 includes the unfavorable impact of
losses in certain foreign jurisdictions for which no tax benefit
can be recognized. Also included is a discrete tax charge of
$0.6 million for the impact of a state tax legislative change
and a discrete tax benefit of $0.3 million attributable to
employee share-based compensation. Income tax benefit for the three
months ended September 30, 2021 included the unfavorable
impacts of losses in certain foreign jurisdictions for which no tax
benefit can be recognized.
The Inflation Reduction Act of 2022 (the "IRA") was enacted on
August 16, 2022. The IRA includes climate and energy provisions,
extends the Affordable Care Act subsidies, increases Internal
Revenue Enforcement funding and allows Medicare to negotiate
prescription drug prices. The IRA creates a 15 percent corporate
alternative minimum tax on profits of corporations whose average
annual adjusted financial statement income for any consecutive
three-tax-year period preceding the tax year exceeds
$1.0 billion and is effective for tax years beginning after
December 31, 2022. The IRA also creates an excise tax of 1 percent
on stock repurchases by publicly traded U.S. corporations,
effective for repurchases after December 31, 2022. The
provisions of the IRA are not expected to have a significant impact
on our financial position, results of operations or cash
flows.
Business Segment Results
We have two reportable business segments: SAO and PEP.
The following table includes comparative information for volumes by
business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
Increase
(Decrease) |
|
%
Increase (Decrease) |
|
(Pounds sold, in thousands) |
|
2022 |
|
2021 |
|
|
|
Specialty Alloys Operations |
|
44,562 |
|
|
43,008 |
|
|
1,554 |
|
|
4 |
% |
|
Performance Engineered Products * |
|
2,326 |
|
|
2,372 |
|
|
(46) |
|
|
(2) |
% |
|
Intersegment |
|
(1,998) |
|
|
(1,852) |
|
|
(146) |
|
|
(8) |
% |
|
Consolidated pounds sold |
|
44,890 |
|
|
43,528 |
|
|
1,362 |
|
|
3 |
% |
* Pounds sold data for PEP segment includes Dynamet and Additive
businesses only.
The following table includes comparative information for net sales
by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
$
Increase |
|
%
Increase |
|
($ in millions) |
|
2022 |
|
2021 |
|
|
|
Specialty Alloys Operations |
|
$ |
447.3 |
|
|
$ |
331.9 |
|
|
$ |
115.4 |
|
|
35 |
% |
|
Performance Engineered Products |
|
93.2 |
|
|
74.6 |
|
|
18.6 |
|
|
25 |
% |
|
Intersegment |
|
(17.6) |
|
|
(18.9) |
|
|
1.3 |
|
|
7 |
% |
|
Total net sales |
|
$ |
522.9 |
|
|
$ |
387.6 |
|
|
$ |
135.3 |
|
|
35 |
% |
The following table includes comparative information for our net
sales by business segment, but excluding surcharge
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
$
Increase |
|
%
Increase |
|
($ in millions) |
|
2022 |
|
2021 |
|
|
|
Specialty Alloys Operations |
|
$ |
305.7 |
|
|
$ |
258.2 |
|
|
$ |
47.5 |
|
|
18 |
% |
|
Performance Engineered Products |
|
87.7 |
|
|
73.6 |
|
|
14.1 |
|
|
19 |
% |
|
Intersegment |
|
(17.7) |
|
|
(18.9) |
|
|
1.2 |
|
|
6 |
% |
|
Total net sales excluding surcharge revenue |
|
$ |
375.7 |
|
|
$ |
312.9 |
|
|
$ |
62.8 |
|
|
20 |
% |
Specialty Alloys Operations Segment
Net sales for the quarter ended September 30, 2022 for the SAO
segment increased 35 percent to $447.3 million, as compared with
$331.9 million in the same quarter a year ago. Excluding surcharge
revenue, net sales for the current quarter increased 18 percent on
4 percent higher shipment volume from a year ago. The higher sales
in the SAO segment reflect increases in all end-use markets except
Transportation driven by improving demand and price increases
compared to the prior year same quarter.
Operating income for the SAO segment was $19.9 million or 4.4
percent of net sales (6.5 percent of net sales excluding surcharge
revenue) in the recent first quarter, as compared with operating
loss of $5.9 million or negative 1.8 percent of net sales (negative
2.3 percent of net sales excluding surcharge revenue) in the same
quarter a year ago. The operating income reflects higher volume in
all end-use markets except Transportation and Industrial and
Consumer, stronger product mix and improved operational
efficiencies in the quarter ended September 30, 2022. The
results for the quarter ended September 30, 2021 continued to
be impacted by COVID-19 including labor shortages and supply chain
disruptions.
Performance Engineered Products Segment
Net sales for the quarter ended September 30, 2022 for the PEP
segment increased 25 percent to $93.2 million, as compared with
$74.6 million in the same quarter a year ago. Excluding surcharge
revenue, net sales for the current quarter of $87.7 million
increased from $73.6 million a year ago. The results reflect
improving demand in all end-use markets except Industrial and
Consumer compared to the prior year period. In particular, the
Medical end-use market increased 45 percent with steady increases
in elective surgical procedures compared to the same period last
year.
Operating income for the PEP segment was $6.3 million or 6.8
percent of net sales (7.2 percent of net sales excluding surcharge
revenue) in the current first quarter, compared with operating
income of $0.6 million or 0.8 percent of net sales in the same
quarter a year ago. The improved results for the quarter ended
September 30, 2022 reflect stronger demand conditions
partially offset by delayed shipments caused by Hurricane Ian at
our Dynamet facility in Florida.
Liquidity and Financial Resources
During the three months ended September 30, 2022, we used cash
for operating activities of $78.0 million compared to cash used for
operating activities of $47.0 million in the same period a year
ago. Our free cash flow, which we define under "Non-GAAP Financial
Measures" below, was negative $101.3 million as compared to
negative $71.2 million for the same period a year ago. The decrease
in cash provided from operating activities and free cash flow for
the three months ended September 30, 2022 compared to the same
period a year ago resulted from higher inventory to meet growing
demand partially offset by improved earnings. Cash used to build
inventory was $121.2 million in the current period ended
September 30, 2022 compared to $66.5 million in the same
period a year ago. The increase in inventory during the current
fiscal year is in response to growing demand. During the three
months ended September 30, 2022, cash used for accounts
receivable was $12.1 million compared to $3.8 million in the same
period a year ago.
Capital expenditures for property, plant, equipment and software
were $13.5 million for the three months ended September 30,
2022 as compared to $14.4 million for the same period a year ago.
In fiscal year 2023, we expect capital expenditures to be
approximately $100 million.
Dividends during the three months ended September 30, 2022 and
2021 were $9.8 million and $9.8 million, respectively, and were
paid at the same quarterly rate of $0.20 per share of common stock
in both periods.
We have demonstrated the ability to generate cash to meet our needs
through cash flows from operations, management of working capital
and the ability to access capital markets to supplement internally
generated funds. We target minimum liquidity of $150 million,
consisting of cash and cash equivalents added to available
borrowing capacity under our Credit Facility.
On March 26, 2021, we entered into our $300.0 million secured
revolving Credit Facility. The Credit Facility amended and restated
our previous revolving credit facility, dated March 31, 2017, which
had been set to expire in March 2022. The Credit Facility extends
the maturity to March 31, 2024, subject to a springing
maturity of November 30, 2022. If, by November 30, 2022,
our $300.0 million 4.45% Senior Notes due in March 2023 were
not redeemed, repurchased or refinanced with indebtedness having a
maturity date of October 1, 2024 or later, all indebtedness
under the Credit Facility will be due. The springing maturity
clause has been satisfied with the issuance of the 2030 Notes and
subsequent payment in full of the 4.45% Senior Notes, as discussed
in Note 8 Debt. The Credit Facility contains a revolving credit
commitment amount of $300.0 million, subject to our right,
from time to time, to request an increase of the commitment to
$500.0 million in the aggregate; and provides for the issuance of
letters of credit subject to a $40.0 million sub-limit. We have the
right to voluntarily prepay and re-borrow loans, to terminate or
reduce the commitments under the Credit Facility, and, subject to
certain lender approvals, to join subsidiaries as subsidiary
borrowers.
On February 14, 2022, we entered into the Amendment to the Credit
Facility. The Amendment revised the interest coverage ratio
covenant under the Credit Facility so that the first test date was
June 30, 2022, and required a minimum interest coverage ratio of
2.00 to 1.00 at June 30, 2022 (calculated for the two fiscal
quarters then ended), 3.00 to 1.00 at September 30, 2022
(calculated for the three fiscal quarters then ended) and 3.50 to
1.00 at December 31, 2022 and thereafter (calculated for the four
fiscal quarters then ended). The Amendment revised the restricted
period under the Credit Facility, during which we were prohibited
from incurring any secured debt other than purchase money financing
for new equipment and were subject to additional restrictions on
its ability to make dividends or distributions or to make certain
investments. This expired on September 30, 2022.
As of September 30, 2022, we had $1.8 million of issued
letters of credit and no short-term borrowings under the Credit
Facility. The balance of the Credit Facility, $298.2 million,
remains available to us. As of September 30, 2022, the
borrowing rate for the Credit Facility was 5.12%.
We believe that our total liquidity of $350.8 million as of
September 30, 2022, which includes total cash and cash
equivalents of $52.6 million and available borrowing capacity of
$298.2 million under our credit facility, will be sufficient to
fund our cash needs over the foreseeable future.
During the three months ended September 30, 2022, we made no
pension contributions to our qualified defined benefit pension
plans. We currently do not expect to contribute to our qualified
defined benefit pension plans during the remainder of fiscal
year
2023.
As of September 30, 2022, we had cash and cash equivalents of
approximately $17.9 million held at various foreign subsidiaries.
Our global deployment considers, among other things, geographic
location of our subsidiaries’ cash balances, the locations of our
anticipated liquidity needs, and the cost to access international
cash balances, as necessary. During the three months ended
September 30, 2022, we repatriated no cash from foreign
jurisdictions. From time to time, we may make short-term
intercompany borrowings against our cash held outside the United
States in order to reduce or eliminate any required borrowing under
our Credit Agreement.
We are subject to certain financial and restrictive covenants under
the Credit Facility, which, among other things, require the
maintenance of a minimum interest coverage ratio. The interest
coverage ratio is defined in the Credit Facility 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
interest coverage covenant was waived until the quarter ended June
30, 2022 at which time it was required to be 2.00 to 1.00, for the
quarter ended September 30, 2022 it is 3.00 to 1.00 and then 3.50
to 1.00 thereafter. The Credit Facility also requires us to
maintain a debt to capital ratio of less than 55 percent. The debt
to capital ratio is defined in the Credit Facility as the ratio of
consolidated indebtedness, as defined therein, to consolidated
capitalization, as defined therein. In addition, we are subject to
an asset coverage ratio minimum of 1.10 to 1.00. The asset coverage
ratio is defined in the Credit Facility as eligible receivables and
inventory, as defined therein, to outstanding loans and
obligations, as defined therein. As of September 30, 2022, we
were in compliance with all of the covenants of the Credit
Facility.
The following table shows our actual ratio performance with respect
to the financial covenants as of September 30,
2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covenant |
|
Covenant Requirement |
|
Actual Ratio |
|
|
|
|
|
|
Consolidated debt to capital |
|
55% (maximum) |
|
35% |
|
Consolidated interest coverage ratio |
|
3.00 to 1.00 (minimum) |
|
3.69 to 1.00 |
|
Asset coverage ratio |
|
1.10 to 1.00 (minimum) |
|
233.7 to 1.00 |
To the extent that we do not comply with the current or modified
covenants under the Credit Facility, this could reduce our
liquidity and flexibility due to potential restrictions on
borrowings available to us unless we are able to obtain waivers or
modifications of the covenants.
Non-GAAP Financial Measures
The following provides additional information regarding certain
non-GAAP financial measures that we use in this report. Our
definitions and calculations of these items may not necessarily be
the same as those used by other companies.
Net Sales and Gross Margin Excluding Surcharge Revenue and Special
Items
This report includes discussions of net sales as adjusted to
exclude the impact of raw material surcharge and special items and
the resulting impact on gross margins, which represent financial
measures that have not been determined in accordance with
accounting principles generally accepted in the United States of
America ("U.S. GAAP"). We present and discuss these financial
measures because management believes removing the impact of raw
material surcharge from net sales provides a more consistent basis
for comparing results of operations from period to period for the
reasons discussed earlier in this report. Management uses its
results excluding these amounts to evaluate its operating
performance and to discuss its business with investment
institutions, our board of directors and others. See our earlier
discussion of "Gross Profit" for a reconciliation of net sales and
gross margin, excluding surcharge revenue, to net sales as
determined in accordance with U.S. GAAP. Net sales and gross margin
excluding surcharge revenue is not a U.S. GAAP financial measure
and should not be considered in isolation of, or as a substitute
for, net sales and gross margin calculated in accordance with U.S.
GAAP.
Adjusted Operating Margin Excluding Surcharge Revenue and Special
Items
This report includes discussions of operating margin as adjusted to
exclude the impact of raw material surcharge revenue and special
items which represent financial measures that have not been
determined in accordance with U.S. GAAP. We present and discuss
this financial measure because management believes removing the
impact of raw material surcharge from net sales provides a more
consistent and meaningful basis for comparing results of operations
from period to period for the reasons discussed earlier in this
report. In addition, management believes that excluding special
items from operating margin is helpful in analyzing our operating
performance, as these items are not indicative of ongoing operating
performance. Management uses its results excluding these amounts to
evaluate its operating performance and to discuss its business with
investment institutions, our board of directors and others. See our
earlier discussion of operating income (loss) for a reconciliation
of operating income (loss) and operating margin excluding surcharge
revenue and special items to operating income (loss) and operating
margin determined in accordance with U.S. GAAP. Operating margin
excluding surcharge revenue and special items is not a U.S. GAAP
financial measure and should not be considered in isolation of, or
as a substitute for, operating margin calculated in accordance with
U.S. GAAP.
Adjusted Loss Per Share
The following provides a reconciliation of adjusted loss per share,
to its most directly comparable U.S. GAAP financial
measures:
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($ in millions, except per share amounts) |
|
Loss Before Income Taxes |
|
Income Tax Benefit |
|
Net Loss |
|
Loss Per Diluted Share* |
|
Three Months Ended September 30, 2022, as reported
|
|
$ |
(7.8) |
|
|
$ |
0.9 |
|
|
$ |
(6.9) |
|
|
$ |
(0.14) |
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|
Special item: |
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None reported |
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— |
|
|
— |
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|
— |
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|
— |
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|
|
|
|
|
|
Three Months Ended September 30, 2022, as adjusted
|
|
$ |
(7.8) |
|
|
$ |
0.9 |
|
|
$ |
(6.9) |
|
|
$ |
(0.14) |
|
* Impact per diluted share calculated using weighted average common
shares outstanding of 48.7 million for the three months ended
September 30, 2022.
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|
|
($ in millions, except per share amounts) |
|
Loss Before Income Taxes |
|
Income Tax Benefit |
|
Net Loss |
|
Loss Per Diluted Share* |
|
Three Months Ended September 30, 2021, as
reported
|
|
$ |
(25.2) |
|
|
$ |
10.4 |
|
|
$ |
(14.8) |
|
|
$ |
(0.31) |
|
|
Special item: |
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|
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|
|
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COVID-19 costs |
|
1.6 |
|
|
(0.7) |
|
|
0.9 |
|
|
0.03 |
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2021, as
adjusted
|
|
$ |
(23.6) |
|
|
$ |
9.7 |
|
|
$ |
(13.9) |
|
|
$ |
(0.28) |
|
* Impact per diluted share calculated using weighted average common
shares outstanding of 48.5 million for the three months ended
September 30, 2021.
Management believes that the presentation of loss per share
adjusted to exclude special items is helpful in analyzing the
operating performance of the Company, as these items are not
indicative of ongoing operating performance. Our definitions
and calculations of these items may not necessarily be the same as
those used by other companies. Management uses its results
excluding these amounts to evaluate its operating performance and
to discuss its business with investment institutions, our board of
directors and others. Adjusted loss per share is not a U.S. GAAP
financial measure and should not be considered in isolation of, or
as a substitute for, loss per share calculated in accordance with
U.S. GAAP.
Free Cash Flow
The following provides a reconciliation of free cash flow, as used
in this report, to its most directly comparable U.S. GAAP financial
measures:
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|
|
Three Months Ended
September 30, |
|
($ in millions) |
|
2022 |
|
2021 |
|
Net cash used for operating activities |
|
$ |
(78.0) |
|
|
$ |
(47.0) |
|
|
Purchases of property, plant, equipment and software |
|
(13.5) |
|
|
(14.4) |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid |
|
(9.8) |
|
|
(9.8) |
|
|
|
|
|
|
|
Free cash flow |
|
$ |
(101.3) |
|
|
$ |
(71.2) |
|
Management believes that the presentation of free cash flow
provides useful information to investors regarding our financial
condition because it is a measure of cash generated which
management evaluates for alternative uses. It is management's
current intention to use excess cash to fund investments in capital
equipment, acquisition opportunities and consistent dividend
payments. Free cash flow is not a U.S. GAAP financial measure and
should not be considered in isolation of, or as a substitute for,
cash flows calculated in accordance with U.S. GAAP.
Contingencies
Environmental
We are subject to various federal, state, local and international
environmental laws and regulations relating to pollution,
protection of public health and the environment, natural resource
damages and occupational safety and health. Although compliance
with these laws and regulations may affect the costs of our
operations, compliance costs to date have not been material. We
have environmental remediation liabilities at some of our owned
operating facilities and have been designated as a PRP with respect
to certain third party Superfund waste-disposal sites and other
third party-owned sites. We accrue amounts for environmental
remediation costs that represent our best esti