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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 December 31, 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
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No
☒
The number of shares outstanding of the issuer's common stock as of
January 23, 2023, was 48,509,209.
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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December 31,
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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$ |
20.0 |
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$ |
154.2 |
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Accounts receivable, net |
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441.6 |
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382.3 |
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Inventories |
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722.7 |
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496.1 |
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Other current assets |
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99.1 |
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86.8 |
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Total current assets |
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1,283.4 |
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1,119.4 |
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Property, plant and equipment, net |
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1,390.5 |
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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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31.7 |
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35.2 |
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Deferred income taxes |
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5.2 |
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5.7 |
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Other assets |
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104.3 |
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109.8 |
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Total assets |
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$ |
3,056.5 |
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$ |
2,932.3 |
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LIABILITIES |
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Current liabilities: |
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Short-term credit agreement borrowings |
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$ |
81.2 |
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$ |
— |
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Accounts payable |
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304.7 |
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242.1 |
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Accrued liabilities |
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124.4 |
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133.5 |
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Total current liabilities |
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510.3 |
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375.6 |
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Long-term debt |
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692.4 |
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691.8 |
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Accrued pension liabilities |
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199.4 |
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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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162.0 |
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162.4 |
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Other liabilities |
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93.0 |
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98.0 |
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Total liabilities |
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1,735.4 |
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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 56,026,448
shares at December 31, 2022 and 56,025,510 shares at
June 30, 2022; outstanding 48,507,489 shares at
December 31, 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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315.3 |
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320.3 |
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Reinvested earnings |
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1,190.7 |
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1,211.0 |
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Common stock in treasury (7,518,959 shares and 7,739,071 shares at
December 31, 2022 and June 30, 2022, respectively), at
cost
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(298.4) |
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(307.4) |
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Accumulated other comprehensive loss |
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(166.6) |
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(173.5) |
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Total stockholders' equity |
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1,321.1 |
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1,330.5 |
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Total liabilities and stockholders' equity |
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$ |
3,056.5 |
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$ |
2,932.3 |
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See accompanying notes to consolidated financial
statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended
December 31, |
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Six Months Ended
December 31, |
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($ in millions, except per share data) |
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2022 |
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2021 |
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2022 |
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2021 |
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Net sales |
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$ |
579.1 |
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$ |
396.0 |
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$ |
1,102.0 |
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$ |
783.6 |
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Cost of sales |
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509.1 |
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382.9 |
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977.2 |
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745.3 |
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Gross profit |
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70.0 |
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13.1 |
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124.8 |
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38.3 |
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Selling, general and administrative expenses |
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47.4 |
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44.6 |
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93.9 |
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88.9 |
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Operating income (loss) |
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22.6 |
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(31.5) |
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30.9 |
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(50.6) |
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Interest expense, net |
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13.0 |
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10.1 |
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25.6 |
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20.3 |
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|
|
|
Other expense (income), net |
|
1.9 |
|
|
(6.6) |
|
|
5.4 |
|
|
(10.7) |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
7.7 |
|
|
(35.0) |
|
|
(0.1) |
|
|
(60.2) |
|
|
Income tax expense (benefit) |
|
1.5 |
|
|
(5.6) |
|
|
0.5 |
|
|
(16.1) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
6.2 |
|
|
$ |
(29.4) |
|
|
$ |
(0.6) |
|
|
$ |
(44.1) |
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS (LOSS) PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.13 |
|
|
$ |
(0.61) |
|
|
$ |
(0.02) |
|
|
$ |
(0.91) |
|
|
Diluted |
|
$ |
0.13 |
|
|
$ |
(0.61) |
|
|
$ |
(0.02) |
|
|
$ |
(0.91) |
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: |
|
|
|
|
|
|
|
|
|
Basic |
|
48.8 |
|
|
48.6 |
|
|
48.7 |
|
|
48.5 |
|
|
Diluted |
|
49.0 |
|
|
48.6 |
|
|
48.7 |
|
|
48.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial
statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31, |
|
Six Months Ended
December 31, |
|
($ in millions) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Net income (loss) |
|
$ |
6.2 |
|
|
$ |
(29.4) |
|
|
$ |
(0.6) |
|
|
$ |
(44.1) |
|
|
Other comprehensive income (loss), net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement benefits, net of tax of $(0.4), $(0.4),
$(0.8) and $(0.8), respectively
|
|
1.1 |
|
|
0.8 |
|
|
2.1 |
|
|
1.9 |
|
|
Net gain on derivative instruments, net of tax of $(2.1), $(0.5),
$(0.4) and $(0.9), respectively
|
|
6.5 |
|
|
1.7 |
|
|
1.2 |
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
6.9 |
|
|
(0.7) |
|
|
3.6 |
|
|
(2.8) |
|
|
Other comprehensive income, net of tax |
|
14.5 |
|
|
1.8 |
|
|
6.9 |
|
|
1.9 |
|
|
Comprehensive income (loss), net of tax |
|
$ |
20.7 |
|
|
$ |
(27.6) |
|
|
$ |
6.3 |
|
|
$ |
(42.2) |
|
See accompanying notes to consolidated financial
statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
December 31, |
|
($ in millions) |
|
2022 |
|
2021 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
Net loss |
|
$ |
(0.6) |
|
|
$ |
(44.1) |
|
|
Adjustments to reconcile net loss to net cash used for operating
activities: |
|
|
|
|
|
Depreciation and amortization |
|
64.8 |
|
|
65.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
(0.9) |
|
|
(17.6) |
|
|
Net pension expense (income) |
|
9.9 |
|
|
(3.6) |
|
|
Share-based compensation expense |
|
7.1 |
|
|
5.6 |
|
|
Net loss on disposals of property, plant and equipment |
|
0.6 |
|
|
0.2 |
|
|
|
|
|
|
|
Changes in working capital and other: |
|
|
|
|
|
Accounts receivable |
|
(58.5) |
|
|
— |
|
|
Inventories |
|
(226.7) |
|
|
(109.8) |
|
|
Other current assets |
|
(4.1) |
|
|
(7.4) |
|
|
Accounts payable |
|
62.1 |
|
|
26.9 |
|
|
Accrued liabilities |
|
(12.1) |
|
|
(42.9) |
|
|
Pension plan contributions |
|
— |
|
|
(0.2) |
|
|
Other postretirement plan contributions |
|
(1.5) |
|
|
(1.9) |
|
|
|
|
|
|
|
Other, net |
|
(4.6) |
|
|
(6.8) |
|
|
Net cash used for operating activities |
|
(164.5) |
|
|
(136.3) |
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
Purchases of property, plant, equipment and software |
|
(31.0) |
|
|
(33.4) |
|
|
Proceeds from disposals of property, plant and equipment and assets
held for sale |
|
— |
|
|
1.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities |
|
(31.0) |
|
|
(31.6) |
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
Short-term credit agreement borrowings, net change |
|
41.2 |
|
|
— |
|
|
Credit agreement borrowings |
|
60.1 |
|
|
— |
|
|
Credit agreement repayments |
|
(20.1) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid |
|
(19.7) |
|
|
(19.7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Withholding tax payments on share-based compensation
awards |
|
(3.4) |
|
|
(3.1) |
|
|
|
|
|
|
|
Net cash provided from (used for) financing activities |
|
58.1 |
|
|
(22.8) |
|
|
Effect of exchange rate changes on cash and cash
equivalents |
|
3.2 |
|
|
0.2 |
|
|
DECREASE IN CASH AND CASH EQUIVALENTS |
|
(134.2) |
|
|
(190.5) |
|
|
Cash and cash equivalents at beginning of year |
|
154.2 |
|
|
287.4 |
|
|
Cash and cash equivalents at end of period |
|
$ |
20.0 |
|
|
$ |
96.9 |
|
|
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
Non-cash investing activities: Purchase of property, plant,
equipment and software |
|
$ |
8.1 |
|
|
$ |
8.4 |
|
See accompanying notes to consolidated financial
statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 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 September 30, 2022 |
|
$ |
280.1 |
|
|
$ |
314.3 |
|
|
$ |
1,194.3 |
|
|
$ |
(300.8) |
|
|
$ |
(181.1) |
|
|
$ |
1,306.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
6.2 |
|
|
|
|
|
|
6.2 |
|
|
Pension and postretirement benefits, net of tax |
|
|
|
|
|
|
|
|
|
1.1 |
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on derivative instruments, net of tax |
|
|
|
|
|
|
|
|
|
6.5 |
|
|
6.5 |
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
6.9 |
|
|
6.9 |
|
|
Cash Dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common @ $0.20 per share
|
|
|
|
|
|
(9.8) |
|
|
|
|
|
|
(9.8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation plans |
|
|
|
1.0 |
|
|
|
|
2.4 |
|
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2022 |
|
$ |
280.1 |
|
|
$ |
315.3 |
|
|
$ |
1,190.7 |
|
|
$ |
(298.4) |
|
|
$ |
(166.6) |
|
|
$ |
1,321.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2021 |
|
$ |
280.1 |
|
|
$ |
316.3 |
|
|
$ |
1,274.7 |
|
|
$ |
(311.3) |
|
|
$ |
(192.2) |
|
|
$ |
1,367.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
(29.4) |
|
|
|
|
|
|
(29.4) |
|
|
Pension and postretirement benefits, net of tax |
|
|
|
|
|
|
|
|
|
0.8 |
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on derivative instruments, net of tax |
|
|
|
|
|
|
|
|
|
1.7 |
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
(0.7) |
|
|
(0.7) |
|
|
Cash Dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common @ $0.20 per share
|
|
|
|
|
|
(9.8) |
|
|
|
|
|
|
(9.8) |
|
|
Share-based compensation plans |
|
|
|
(0.4) |
|
|
|
|
3.3 |
|
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2021 |
|
$ |
280.1 |
|
|
$ |
315.9 |
|
|
$ |
1,235.5 |
|
|
$ |
(308.0) |
|
|
$ |
(190.4) |
|
|
$ |
1,333.1 |
|
See accompanying notes to consolidated financial
statements.
CARPENTER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 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 |
|
|
|
|
|
(0.6) |
|
|
|
|
|
|
(0.6) |
|
|
Pension and postretirement benefits, net of tax |
|
|
|
|
|
|
|
|
|
2.1 |
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on derivative instruments, net of tax |
|
|
|
|
|
|
|
|
|
1.2 |
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
3.6 |
|
|
3.6 |
|
|
Cash Dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common @ $0.40 per share
|
|
|
|
|
|
(19.7) |
|
|
|
|
|
|
(19.7) |
|
|
Share-based compensation plans |
|
|
|
(5.0) |
|
|
|
|
9.0 |
|
|
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2022 |
|
$ |
280.1 |
|
|
$ |
315.3 |
|
|
$ |
1,190.7 |
|
|
$ |
(298.4) |
|
|
$ |
(166.6) |
|
|
$ |
1,321.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
(44.1) |
|
|
|
|
|
|
(44.1) |
|
|
Pension and postretirement benefits, net of tax |
|
|
|
|
|
|
|
|
|
1.9 |
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain on derivative instruments, net of tax |
|
|
|
|
|
|
|
|
|
2.8 |
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
(2.8) |
|
|
(2.8) |
|
|
Cash Dividends: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common @ $0.40 per share
|
|
|
|
|
|
(19.7) |
|
|
|
|
|
|
(19.7) |
|
|
Share-based compensation plans |
|
|
|
(6.7) |
|
|
|
|
9.4 |
|
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2021 |
|
$ |
280.1 |
|
|
$ |
315.9 |
|
|
$ |
1,235.5 |
|
|
$ |
(308.0) |
|
|
$ |
(190.4) |
|
|
$ |
1,333.1 |
|
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
and six months ended December 31, 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.
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.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 $13.8 million and
$14.4 million at December 31, 2022 and June 30, 2022,
respectively, and are included in accrued liabilities on the
consolidated balance sheets.
The Company has elected to use the practical expedient that permits
the omission of disclosure for remaining performance obligations
which are expected to be satisfied in one year or
less.
Disaggregation of Revenue
The Company operates in two business segments, Specialty Alloys
Operations ("SAO") and Performance Engineered Products ("PEP").
Revenue is disaggregated within these two business segments by
diversified end-use markets and by geographical location.
Comparative information of the Company's overall revenues by
end-use markets and geography for the three and six months ended
December 31, 2022 and 2021 were as follows:
|
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|
|
|
|
End-Use Market Data |
|
Three Months Ended
December 31, |
|
Six Months Ended
December 31, |
|
($ in millions) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Aerospace and Defense |
|
$ |
280.1 |
|
|
$ |
167.6 |
|
|
$ |
541.8 |
|
|
$ |
334.7 |
|
|
Medical |
|
73.7 |
|
|
46.7 |
|
|
132.9 |
|
|
89.8 |
|
|
Transportation |
|
41.4 |
|
|
38.2 |
|
|
78.3 |
|
|
79.8 |
|
|
Energy |
|
34.8 |
|
|
23.1 |
|
|
62.7 |
|
|
45.3 |
|
|
Industrial and Consumer |
|
119.7 |
|
|
90.5 |
|
|
224.6 |
|
|
177.0 |
|
|
Distribution |
|
29.4 |
|
|
29.9 |
|
|
61.7 |
|
|
57.0 |
|
|
Total net sales |
|
$ |
579.1 |
|
|
$ |
396.0 |
|
|
$ |
1,102.0 |
|
|
$ |
783.6 |
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
Geographic Data |
|
Three Months Ended
December 31, |
|
Six Months Ended
December 31, |
|
($ in millions) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
United States |
|
$ |
353.7 |
|
|
$ |
254.2 |
|
|
$ |
673.3 |
|
|
$ |
501.1 |
|
|
Europe |
|
87.2 |
|
|
52.3 |
|
|
178.0 |
|
|
100.8 |
|
|
Asia Pacific |
|
79.2 |
|
|
53.2 |
|
|
137.3 |
|
|
114.8 |
|
|
Mexico |
|
32.2 |
|
|
21.6 |
|
|
65.2 |
|
|
37.5 |
|
|
Canada |
|
15.4 |
|
|
8.1 |
|
|
27.1 |
|
|
15.9 |
|
|
Other |
|
11.4 |
|
|
6.6 |
|
|
21.1 |
|
|
13.5 |
|
|
Total net sales |
|
$ |
579.1 |
|
|
$ |
396.0 |
|
|
$ |
1,102.0 |
|
|
$ |
783.6 |
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Earnings (Loss) per Common
Share
The Company calculates basic and diluted earnings (loss) per share
using the two class method. Under the two class method, earnings
(loss) are allocated to common stock and participating securities
(non-vested restricted shares and units that receive
non-forfeitable dividends) according to their participation rights
in dividends and undistributed earnings. The earnings (loss)
available to each class of stock are divided by the weighted
average number of outstanding shares for the period in each class.
Diluted earnings (loss) per share assumes the issuance of common
stock for all potentially dilutive share equivalents outstanding.
For the three months ended December 31, 2021, and the six
months ended December 31, 2022 and 2021, 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 earnings (loss) per common
share for the three and six months ended December 31, 2022 and
2021 were as follows:
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|
|
Three Months Ended
December 31, |
|
Six Months Ended
December 31, |
|
(in millions, except per share data) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Net income (loss) |
|
$ |
6.2 |
|
|
$ |
(29.4) |
|
|
$ |
(0.6) |
|
|
$ |
(44.1) |
|
|
Dividends allocated under share-based compensation
plans |
|
(0.1) |
|
|
— |
|
|
(0.2) |
|
|
(0.1) |
|
|
Earnings (loss) available for common stockholders used in
calculation of basic loss per common share |
|
$ |
6.1 |
|
|
$ |
(29.4) |
|
|
$ |
(0.8) |
|
|
$ |
(44.2) |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding,
basic |
|
48.8 |
|
|
48.6 |
|
|
48.7 |
|
|
48.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share |
|
$ |
0.13 |
|
|
$ |
(0.61) |
|
|
$ |
(0.02) |
|
|
$ |
(0.91) |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
6.2 |
|
|
$ |
(29.4) |
|
|
$ |
(0.6) |
|
|
$ |
(44.1) |
|
|
Dividends allocated under share-based compensation
plans |
|
(0.1) |
|
|
— |
|
|
(0.2) |
|
|
(0.1) |
|
|
Earnings (loss) available for common stockholders used in
calculation of diluted loss per common share |
|
$ |
6.1 |
|
|
$ |
(29.4) |
|
|
$ |
(0.8) |
|
|
$ |
(44.2) |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding,
basic |
|
48.8 |
|
|
48.6 |
|
|
48.7 |
|
|
48.5 |
|
|
Effect of shares issuable under share-based compensation
plans |
|
0.2 |
|
|
— |
|
|
— |
|
|
— |
|
|
Weighted average number of common shares outstanding,
diluted |
|
49.0 |
|
|
48.6 |
|
|
48.7 |
|
|
48.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share |
|
$ |
0.13 |
|
|
$ |
(0.61) |
|
|
$ |
(0.02) |
|
|
$ |
(0.91) |
|
The following awards issued under share-based compensation plans
were excluded from the above calculations of diluted earnings
(loss) per share because their effects were
anti-dilutive:
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|
Three Months Ended
December 31, |
|
Six Months Ended
December 31, |
|
(in millions) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Stock options |
|
1.7 |
|
|
2.0 |
|
|
1.8 |
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Inventories
Inventories consisted of the following components as of
December 31, 2022 and June 30, 2022:
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|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
December 31,
2022 |
|
June 30,
2022 |
|
Raw materials and supplies |
|
$ |
186.3 |
|
|
$ |
127.8 |
|
|
Work in process |
|
403.3 |
|
|
261.2 |
|
|
Finished and purchased products |
|
133.1 |
|
|
107.1 |
|
|
Total inventories |
|
$ |
722.7 |
|
|
$ |
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
December 31, 2022 and June 30, 2022, $137.1 million and
$122.9 million of inventory, respectively, was accounted for using
a method other than the LIFO inventory costing method.
6. Accrued Liabilities
Accrued liabilities consisted of the following as of
December 31, 2022 and June 30, 2022:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
December 31,
2022 |
|
June 30,
2022 |
|
Accrued compensation and benefits |
|
$ |
42.5 |
|
|
$ |
53.2 |
|
|
Accrued interest expense |
|
18.7 |
|
|
18.4 |
|
|
Accrued postretirement benefits |
|
14.1 |
|
|
14.1 |
|
|
Contract liabilities |
|
13.8 |
|
|
14.4 |
|
|
Current portion of lease liabilities |
|
9.6 |
|
|
9.9 |
|
|
Accrued taxes |
|
4.9 |
|
|
6.3 |
|
|
Accrued pension liabilities |
|
3.4 |
|
|
3.4 |
|
|
Derivative financial instruments |
|
2.8 |
|
|
0.3 |
|
|
Accrued income taxes |
|
0.4 |
|
|
0.4 |
|
|
Other |
|
14.2 |
|
|
13.1 |
|
|
Total accrued liabilities |
|
$ |
124.4 |
|
|
$ |
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 and six months ended December 31, 2022 and 2021 were as
follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, |
|
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) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended December 31, |
|
Pension Plans |
|
Other Postretirement Plans |
|
|
|
|
|
|
($ in millions) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Service cost |
|
$ |
4.0 |
|
|
$ |
4.2 |
|
|
$ |
1.0 |
|
|
$ |
1.3 |
|
|
Interest cost |
|
23.0 |
|
|
18.2 |
|
|
4.8 |
|
|
3.5 |
|
|
Expected return on plan assets |
|
(22.4) |
|
|
(29.8) |
|
|
(3.4) |
|
|
(4.0) |
|
|
Amortization of net loss (gain) |
|
4.8 |
|
|
4.2 |
|
|
(0.8) |
|
|
(0.4) |
|
|
Amortization of prior service cost (credits) |
|
1.0 |
|
|
1.2 |
|
|
(2.1) |
|
|
(2.0) |
|
|
|
|
|
|
|
|
|
|
|
Net pension expense (income) |
|
$ |
10.4 |
|
|
$ |
(2.0) |
|
|
$ |
(0.5) |
|
|
$ |
(1.6) |
|
During the six months ended December 31, 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 percent
Senior Notes due 2030 (the "2030 Notes"). The 2030 Notes accrue
interest at the rate of 7.625 percent 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 percent 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. This was subject to a springing maturity of
November 30, 2022. If, by November 30, 2022, the Company's
$300.0 million 4.45 percent 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 percent
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.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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 the Eurocurrency Rate ranges from
1.25 percent to 2.25 percent (2.00 percent as of December 31,
2022), and for Base Rate-determined loans, from 0.25 percent to
1.25 percent (1.00 percent as of December 31, 2022). The
Company also pays a quarterly commitment fee ranging from 0.275
percent to 0.375 percent (0.35 percent as of December 31,
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 percent to 2.25 percent (2.00 percent as of
December 31, 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 December 31, 2022, the
Company had $1.8 million of issued letters of credit under the
Credit Facility and $81.2 million of short-term borrowings
with the balance of $217.0 million available to the Company. As
of December 31, 2022, the borrowing rate for the Credit
Facility was 6.38 percent.
The Company is subject to certain financial and restrictive
covenants under the Credit Facility, which, among other things,
require the maintenance of a minimum interest coverage ratio. The
interest coverage ratio is defined in the Credit Facility as, for
any period, the ratio of consolidated earnings before interest,
taxes, depreciation and amortization and non-cash net pension
expense ("EBITDA") to consolidated interest expense for such
period. The interest coverage covenant was waived until the quarter
ended June 30, 2022 at which time it was required to be 2.00
to 1.00, then 3.00 to 1.00 at September 30, 2022 and then 3.50 to
1.00 at December 31, 2022. The Credit Facility also requires the
Company to maintain a debt to capital ratio of less than 55
percent. The debt to capital ratio is defined in the Credit
Facility as the ratio of consolidated indebtedness, as defined
therein, to consolidated capitalization, as defined therein. In
addition, the Company is also subject to an asset coverage ratio
minimum of 1.10 to 1.00. The asset coverage ratio is defined in the
Credit Facility as eligible receivables and inventory, as defined
therein, to outstanding loans and obligations, as defined therein.
As of December 31, 2022, the Company was in compliance with
all of the covenants of the Credit Facility.
Long-term debt outstanding as of December 31, 2022 and
June 30, 2022 consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
December 31,
2022 |
|
June 30,
2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior unsecured notes, 6.375% due July 2028 (face value of
$400.0 million at December 31, 2022 and June 30,
2022)
|
|
$ |
396.2 |
|
|
$ |
395.9 |
|
|
|
|
|
|
Senior unsecured notes, 7.625% due March 2030 (face value of $300.0
million at December 31, 2022 and June 30,
2022)
|
|
296.2 |
|
|
295.9 |
|
|
|
|
|
|
Total debt |
|
692.4 |
|
|
691.8 |
|
|
|
|
|
|
Less: amounts due within one year |
|
— |
|
|
— |
|
|
|
|
|
|
Long-term debt, net of current portion |
|
$ |
692.4 |
|
|
$ |
691.8 |
|
|
|
|
|
For the three months ended December 31, 2022 and 2021,
interest costs totaled $13.3 million and $10.3 million,
respectively, of which $0.3 million and $0.2 million, respectively,
were capitalized as part of the cost of property, plant, equipment
and software. For the six months ended December 31, 2022 and
2021, interest costs totaled $26.1 million and $20.6 million,
respectively, of which $0.5 million and $0.3 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 six months ended December 31, 2022,
the Company increased the liability for environmental remediation
costs by $0.5 million. The liabilities recorded for
environmental remediation costs at Superfund sites, other third
party-owned sites and Carpenter-owned current or former operating
facilities remaining at December 31, 2022 and June 30,
2022 were $18.8 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 and six months ended December 31,
2022 and December 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31, |
|
Six Months Ended
December 31, |
|
($ in millions) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Operating lease cost |
|
$ |
2.8 |
|
|
$ |
2.5 |
|
|
$ |
5.6 |
|
|
$ |
5.0 |
|
|
Short-term lease cost |
|
1.0 |
|
|
0.8 |
|
|
1.9 |
|
|
1.7 |
|
|
Variable lease cost |
|
— |
|
|
0.1 |
|
|
— |
|
|
0.3 |
|
|
Sublease income |
|
(0.2) |
|
|
(0.2) |
|
|
(0.5) |
|
|
(0.5) |
|
|
Total lease cost, net |
|
$ |
3.6 |
|
|
$ |
3.2 |
|
|
$ |
7.0 |
|
|
$ |
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flow payments from operating leases |
|
$ |
3.1 |
|
|
$ |
2.8 |
|
|
$ |
6.2 |
|
|
$ |
5.6 |
|
|
Non-cash ROU assets obtained in exchange for lease
obligations |
|
$ |
0.9 |
|
|
$ |
15.1 |
|
|
$ |
1.2 |
|
|
$ |
15.5 |
|
The leases have remaining terms of
one to fourteen years. The following table sets forth the
Company's weighted-average remaining lease term and
weighted-average discount rate at December 31, 2022 and
June 30, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2022 |
|
June 30,
2022 |
|
Weighted-average remaining lease term - operating
leases |
|
8.3 years |
|
8.5 years |
|
Weighted-average discount rate - operating leases |
|
3.8 |
% |
|
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 December 31, 2022 and June 30,
2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
December 31,
2022 |
|
June 30,
2022 |
|
Operating lease assets: |
|
|
|
|
|
Other assets |
|
$ |
39.4 |
|
|
$ |
42.9 |
|
|
Operating lease liabilities: |
|
|
|
|
|
Accrued liabilities |
|
$ |
9.6 |
|
|
$ |
9.9 |
|
|
Other liabilities |
|
39.1 |
|
|
42.7 |
|
|
Total operating lease liabilities |
|
$ |
48.7 |
|
|
$ |
52.6 |
|
Minimum lease payments for operating leases by fiscal year expiring
subsequent to December 31, 2022 are as follows:
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
December 31,
2022 |
|
2023 (remaining period of fiscal year) |
|
$ |
6.0 |
|
|
2024 |
|
9.2 |
|
|
2025 |
|
6.6 |
|
|
2026 |
|
5.1 |
|
|
2027 |
|
5.1 |
|
|
Thereafter |
|
25.4 |
|
|
Total future minimum lease payments |
|
57.4 |
|
|
Less: imputed interest |
|
(8.7) |
|
|
Total |
|
$ |
48.7 |
|
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:
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
Fair Value
Measurements Using
Input Type |
|
($ in millions) |
|
Level 2 |
|
Assets: |
|
|
|
Derivative financial instruments |
|
$ |
21.8 |
|
|
Liabilities: |
|
|
|
Derivative financial instruments |
|
$ |
3.1 |
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
June 30, 2022 |
|
($ in millions) |
|
Carrying
Value |
|
Fair
Value |
|
Carrying
Value |
|
Fair
Value |
|
Long-term debt |
|
$ |
692.4 |
|
|
$ |
683.8 |
|
|
$ |
691.8 |
|
|
$ |
641.5 |
|
|
Company-owned life insurance |
|
$ |
23.6 |
|
|
$ |
23.6 |
|
|
$ |
22.9 |
|
|
$ |
22.9 |
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The fair values of long-term debt as of December 31, 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
December 31, 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 December 31,
2022, the Company had forward contracts to purchase 3.9 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
December 31, 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. For the six months ended
December 31, 2022 and 2021, net gains related to the
previously terminated contracts of $0.0 million and
$0.2 million, respectively, were recorded as a reduction to
interest expense.
Cash Flow Hedging — Foreign currency forward contracts:
From time-to-time, the Company uses foreign currency forward
contracts to hedge a portion of anticipated future sales
denominated in foreign currencies, principally the Euro in order to
offset the effect of changes in exchange rates. The qualifying
hedge contracts are marked-to-market at each reporting date and any
unrealized gains or losses are included in AOCI and reclassified to
net sales in the period during which the transaction affects
earnings or it becomes probable that the forecasted transaction
will not occur.
The Company also uses foreign currency forward contracts to protect
certain short-term positions denominated in foreign currencies
against the effect of changes in exchange rates. These positions do
not qualify for hedge accounting and accordingly are
marked-to-market at each reporting date through charges to other
expense (income), net. As of December 31, 2022 and
June 30, 2022, the fair value of the outstanding foreign
currency forwards not designated as hedging instruments and the
charges to income for changes in fair value for these contracts
were not material.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The fair value and location of outstanding derivative contracts
recorded in the accompanying consolidated balance sheets were as
follows as of December 31, 2022 and June 30,
2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
|
|
Foreign
Currency
Contracts |
|
Commodity
Contracts |
|
Total
Derivatives |
|
($ in millions) |
|
|
|
|
|
Asset Derivatives: |
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
Other current assets |
|
|
|
$ |
4.5 |
|
|
$ |
15.2 |
|
|
$ |
19.7 |
|
|
Other assets |
|
|
|
— |
|
|
2.1 |
|
|
2.1 |
|
|
Total asset derivatives |
|
|
|
$ |
4.5 |
|
|
$ |
17.3 |
|
|
$ |
21.8 |
|
|
Liability Derivatives: |
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
Accrued liabilities |
|
|
|
$ |
— |
|
|
$ |
2.8 |
|
|
$ |
2.8 |
|
|
Other liabilities |
|
|
|
— |
|
|
0.3 |
|
|
0.3 |
|
|
Total liability derivatives |
|
|
|
$ |
— |
|
|
$ |
3.1 |
|
|
$ |
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
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 $22.8 million and total liability derivatives would have been
$4.1 million as of December 31, 2022.
According to the provisions of the Company's derivative
arrangements, in the event that the fair value of outstanding
derivative positions with certain counterparties exceeds certain
thresholds, the Company may be required to issue cash collateral to
the counterparties. As of December 31, 2022 and June 30,
2022, the Company had no cash collateral held by
counterparties.
The Company is exposed to credit loss in the event of
nonperformance by counterparties on its derivative instruments as
well as credit or performance risk with respect to its customer
commitments to perform. Although nonperformance is possible, the
Company does not anticipate nonperformance by any of the parties.
In addition, various master netting arrangements are in place with
counterparties to facilitate settlements of gains and losses on
these contracts.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash Flow and Fair Value Hedges
For derivative instruments that are designated and qualify as cash
flow hedges, the gain or loss on the derivative is reported as a
component of AOCI and reclassified into earnings in the same period
or periods during which the hedged transactions affect earnings or
it becomes probable the forecasted transactions will not occur. The
following is a summary of the gains (losses) on cash flow hedges
recognized during the three and six months ended December 31,
2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain
Recognized in AOCI on
Derivatives |
|
|
|
Three Months Ended
December 31, |
|
Six Months Ended
December 31, |
|
($ in millions) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Derivatives
in Cash Flow Hedging Relationship: |
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
$ |
9.8 |
|
|
$ |
1.3 |
|
|
$ |
9.6 |
|
|
$ |
1.0 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9.8 |
|
|
$ |
1.3 |
|
|
$ |
9.6 |
|
|
$ |
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
Location of Gain (Loss)
Reclassified from AOCI into
Income |
|
Amount of Gain (Loss) Reclassified from AOCI
into Income |
|
|
Three Months Ended
December 31, |
|
|
2022 |
|
2021 |
|
Derivatives in Cash Flow Hedging Relationship: |
|
|
|
|
|
|
|
Commodity contracts |
|
Cost of sales |
|
$ |
1.2 |
|
|
$ |
(1.0) |
|
|
|
|
|
|
|
|
|
Forward interest rate swaps |
|
Interest expense, net |
|
— |
|
|
0.1 |
|
|
Total |
|
|
|
$ |
1.2 |
|
|
$ |
(0.9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
Location of Gain (Loss)
Reclassified from AOCI into
Income |
|
Amount of Gain (Loss) Reclassified from AOCI
into Income |
|
|
Six Months Ended
December 31, |
|
|
2022 |
|
2021 |
|
Derivatives in Cash Flow Hedging Relationship: |
|
|
|
|
|
|
|
Commodity contracts |
|
Cost of sales |
|
$ |
7.9 |
|
|
$ |
(2.9) |
|
|
|
|
|
|
|
|
|
Forward interest rate swaps |
|
Interest expense, net |
|
— |
|
|
0.2 |
|
|
Total |
|
|
|
$ |
7.9 |
|
|
$ |
(2.7) |
|
|
|
|
|
|
|
|
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 and six
months ended December 31, 2022 and 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31, 2022 |
|
|
Three Months Ended
December 31, 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 |
|
|
$ |
509.1 |
|
|
$ |
13.0 |
|
|
|
$ |
382.9 |
|
|
$ |
10.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Derivatives in Cash Flow Hedging
Relationship: |
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from AOCI to income |
|
|
$ |
1.2 |
|
|
$ |
— |
|
|
|
$ |
(1.0) |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
|
|
|
|
|
|
|
|
|
|
Amount of gain reclassified from AOCI to income |
|
|
— |
|
|
— |
|
|
|
— |
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gain (loss) |
|
|
$ |
1.2 |
|
|
$ |
— |
|
|
|
$ |
(1.0) |
|
|
$ |
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
December 31, 2022 |
|
|
Six Months Ended
December 31, 2021 |
|
($ in millions) |
|
|
Cost of Sales |
|
Interest Expense, Net |
|
|
Cost of Sales |
|
Interest Expense, Net |
|
Total amounts presented in the consolidated statement of income in
which the effects of cash flow and fair value hedges are
recorded |
|
|
$ |
977.2 |
|
|
25.6 |
|
|
|
$ |
745.3 |
|
|
$ |
20.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Derivatives in Cash Flow Hedging
Relationship: |
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from AOCI to income |
|
|
$ |
7.9 |
|
|
$ |
— |
|
|
|
$ |
(2.9) |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap agreements |
|
|
|
|
|
|
|
|
|
|
|
Amount of gain reclassified from AOCI to income |
|
|
— |
|
|
— |
|
|
|
— |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gain (loss) |
|
|
$ |
7.9 |
|
|
$ |
— |
|
|
|
$ |
(2.9) |
|
|
$ |
0.2 |
|
The Company estimates that $8.3 million of net derivative gains
included in AOCI as of December 31, 2022 will be reclassified
into income within the next 12 months. No significant cash flow
hedges were discontinued during the three and six months ended
December 31, 2022.
As of December 31, 2022, and June 30, 2022, there were no
amounts recorded on the consolidated balance sheets related to
cumulative basis adjustments for fair value hedges of interest rate
risk.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. Other Expense (Income), Net
Other expense (income), net consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31, |
|
Six Months Ended
December 31, |
|
|
|
($ in millions) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
|
|
|
|
Unrealized gains on company-owned life insurance contracts and
investments held in rabbi trusts |
|
$ |
(1.6) |
|
|
$ |
(2.4) |
|
|
$ |
(0.6) |
|
|
$ |
(2.2) |
|
|
|
|
|
|
Foreign exchange loss |
|
1.2 |
|
|
0.3 |
|
|
1.2 |
|
|
0.6 |
|
|
|
|
|
|
Interest income |
|
(0.1) |
|
|
— |
|
|
(0.2) |
|
|
— |
|
|
|
|
|
|
Pension earnings, interest and deferrals expense
(income) |
|
2.5 |
|
|
(4.5) |
|
|
4.9 |
|
|
(9.1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
(0.1) |
|
|
— |
|
|
0.1 |
|
|
— |
|
|
|
|
|
|
Total other expense (income), net |
|
$ |
1.9 |
|
|
$ |
(6.6) |
|
|
$ |
5.4 |
|
|
$ |
(10.7) |
|
|
|
|
|
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 and six months ended December 31, 2022 and
2021, deferred taxes were determined by the year-to-date tax
benefit with current taxes accounting for the remaining tax expense
or benefit recorded in the period. Income tax expense was $1.5
million, or 19.5 percent of pre-tax income for the three months
ended December 31, 2022, as compared with income tax benefit of
$5.6 million, or 16.0 percent of pre-tax loss for the three months
ended December 31, 2021. Income tax expense for the six months
ended December 31, 2022, was $0.5 million, or negative 500.0
percent of pre-tax loss as compared with income tax benefit of
$16.1 million, or 26.7 percent of pre-tax loss for the six months
ended December 31, 2021. The effective tax rate for the six
months ended December 31, 2022 of negative 500.0 percent is
due primarily to the near breakeven year-to-date pre-tax loss of
$0.1 million for the six months ended December 31, 2022 in
relation to permanent tax adjustments and discrete items during the
current period.
Income tax expense for the three months ended December 31, 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 benefit of $0.6 million for
anticipated interest on IRS income tax refund claims. Income tax
benefit for the three months ended December 31, 2021 reflected
a change in the estimated full year results for the fiscal year.
Also included was the unfavorable impact of losses in certain
foreign jurisdictions for which no tax benefit can be
recognized.
Income tax expense for the six months ended December 31, 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 benefit of $0.6 million for
anticipated interest on IRS income tax refund claims as well as a
discrete tax charge of $0.6 million for the impact of a state
tax legislative change. Income tax benefit for the six months ended
December 31, 2021 included the unfavorable impacts of losses in
certain foreign jurisdictions for which no tax benefit can be
recognized.
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 and six months ended
December 31, 2022 and December 31, 2021. On a
consolidated basis, no single customer accounted for 10 percent or
more of accounts receivable outstanding at December 31, 2022
and June 30, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31, |
|
Six Months Ended
December 31, |
|
($ in millions) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Net Sales: |
|
|
|
|
|
|
|
|
|
Specialty Alloys Operations |
|
$ |
495.8 |
|
|
$ |
330.8 |
|
|
$ |
943.2 |
|
|
$ |
662.8 |
|
|
Performance Engineered Products |
|
106.7 |
|
|
85.7 |
|
|
200.0 |
|
|
160.3 |
|
|
Intersegment |
|
(23.4) |
|
|
(20.5) |
|
|
(41.2) |
|
|
(39.5) |
|
|
Consolidated net sales |
|
$ |
579.1 |
|
|
$ |
396.0 |
|
|
$ |
1,102.0 |
|
|
$ |
783.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31, |
|
Six Months Ended
December 31, |
|
($ in millions) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Operating Income (Loss): |
|
|
|
|
|
|
|
|
|
Specialty Alloys Operations |
|
$ |
30.3 |
|
|
$ |
(20.3) |
|
|
$ |
50.2 |
|
|
$ |
(26.2) |
|
|
Performance Engineered Products |
|
9.3 |
|
|
3.0 |
|
|
15.6 |
|
|
3.6 |
|
|
Corporate costs |
|
(16.4) |
|
|
(14.5) |
|
|
(33.5) |
|
|
(28.6) |
|
|
Intersegment |
|
(0.6) |
|
|
0.3 |
|
|
(1.4) |
|
|
0.6 |
|
|
Consolidated operating income (loss) |
|
$ |
22.6 |
|
|
$ |
(31.5) |
|
|
$ |
30.9 |
|
|
$ |
(50.6) |
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31, |
|
Six Months Ended
December 31, |
|
($ in millions) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Depreciation and Amortization: |
|
|
|
|
|
|
|
|
|
Specialty Alloys Operations |
|
$ |
27.3 |
|
|
$ |
27.4 |
|
|
$ |
54.4 |
|
|
$ |
54.6 |
|
|
Performance Engineered Products |
|
3.8 |
|
|
4.0 |
|
|
7.7 |
|
|
7.9 |
|
|
Corporate |
|
1.4 |
|
|
1.4 |
|
|
2.7 |
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated depreciation and amortization |
|
$ |
32.5 |
|
|
$ |
32.8 |
|
|
$ |
64.8 |
|
|
$ |
65.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31, |
|
Six Months Ended
December 31, |
|
($ in millions) |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Capital Expenditures: |
|
|
|
|
|
|
|
|
|
Specialty Alloys Operations |
|
$ |
16.0 |
|
|
$ |
16.6 |
|
|
$ |
27.4 |
|
|
$ |
28.7 |
|
|
Performance Engineered Products |
|
1.2 |
|
|
2.0 |
|
|
3.1 |
|
|
3.2 |
|
|
Corporate |
|
0.3 |
|
|
0.5 |
|
|
0.5 |
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated capital expenditures |
|
$ |
17.5 |
|
|
$ |
19.1 |
|
|
$ |
31.0 |
|
|
$ |
33.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2022 |
|
June 30,
2022 |
|
($ in millions) |
|
|
|
Total Assets: |
|
|
|
|
|
Specialty Alloys Operations |
|
$ |
2,482.1 |
|
|
$ |
2,262.4 |
|
|
Performance Engineered Products |
|
444.9 |
|
|
418.9 |
|
|
Corporate |
|
136.0 |
|
|
248.9 |
|
|
Intersegment |
|
(6.5) |
|
|
2.1 |
|
|
Consolidated total assets |
|
$ |
3,056.5 |
|
|
$ |
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 December 31, 2022 and 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended December 31, 2022
($ in millions) (a) |
|
Cash flow
hedging items |
|
Pension and
other
postretirement
benefit plan
items |
|
|
|
Foreign
currency
items |
|
Total |
|
Balances at September 30, 2022 |
|
$ |
0.2 |
|
|
$ |
(131.9) |
|
|
|
|
$ |
(49.4) |
|
|
$ |
(181.1) |
|
|
Other comprehensive income before reclassifications |
|
7.4 |
|
|
— |
|
|
|
|
6.9 |
|
|
14.3 |
|
|
Amounts reclassified from AOCI (b) |
|
(0.9) |
|
|
1.1 |
|
|
|
|
— |
|
|
0.2 |
|
|
Net other comprehensive income |
|
6.5 |
|
|
1.1 |
|
|
|
|
6.9 |
|
|
14.5 |
|
|
Balances at December 31, 2022 |
|
$ |
6.7 |
|
|
$ |
(130.8) |
|
|
|
|
$ |
(42.5) |
|
|
$ |
(166.6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended December 31, 2021
($ in millions) (a) |
|
Cash flow
hedging items |
|
Pension and
other
postretirement
benefit plan
items |
|
|
|
Foreign
currency
items |
|
Total |
|
Balances at September 30, 2021 |
|
$ |
8.0 |
|
|
$ |
(158.0) |
|
|
|
|
$ |
(42.2) |
|
|
$ |
(192.2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before
reclassifications |
|
1.0 |
|
|
(0.3) |
|
|
|
|
(0.7) |
|
|
— |
|
|
Amounts reclassified from AOCI (b) |
|
0.7 |
|
|
1.1 |
|
|
|
|
— |
|
|
1.8 |
|
|
Net other comprehensive income (loss) |
|
1.7 |
|
|
0.8 |
|
|
|
|
(0.7) |
|
|
1.8 |
|
|
Balances at December 31, 2021 |
|
$ |
9.7 |
|
|
$ |
(157.2) |
|
|
|
|
$ |
(42.9) |
|
|
$ |
(190.4) |
|
(a) All amounts are net of tax. Amounts in
parentheses indicate debits.
(b) See separate table below for further
details.
The changes in AOCI by component, net of tax, for the six months
ended December 31, 2022 and 2021 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31, 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 income before reclassifications |
|
7.2 |
|
|
— |
|
|
|
3.6 |
|
|
10.8 |
|
|
Amounts reclassified from AOCI (b) |
|
(6.0) |
|
|
2.1 |
|
|
|
— |
|
|
(3.9) |
|
|
Net other comprehensive income |
|
1.2 |
|
|
2.1 |
|
|
|
3.6 |
|
|
6.9 |
|
|
Balances at December 31, 2022 |
|
$ |
6.7 |
|
|
$ |
(130.8) |
|
|
|
$ |
(42.5) |
|
|
$ |
(166.6) |
|
CARPENTER TECHNOLOGY CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended December 31, 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 income (loss) before
reclassifications |
|
0.7 |
|
|
(0.3) |
|
|
|
|
(2.8) |
|
|
(2.4) |
|
|
Amounts reclassified from AOCI (b) |
|
2.1 |
|
|
2.2 |
|
|
|
|
— |
|
|
4.3 |
|
|
Net other comprehensive income (loss) |
|
2.8 |
|
|
1.9 |
|
|
|
|
(2.8) |
|
|
1.9 |
|
|
Balances at December 31, 2021 |
|
$ |
9.7 |
|
|
$ |
(157.2) |
|
|
|
|
$ |
(42.9) |
|
|
$ |
(190.4) |
|
(a) All amounts are net of tax. Amounts in
parentheses indicate debits.
(b) See separate table below for further
details.
The following is a summary of amounts reclassified from AOCI for
the three and six months ended December 31, 2022 and
2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details about AOCI Components |
|
Location of
gain (loss) |
|
Amount Reclassified from AOCI
Three Months Ended December 31, |
|
Amount Reclassified from AOCI
Six Months Ended December 31, |
|
|
|
($ in millions) (a) |
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
|
|
|
|
Cash flow hedging items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts |
|
Cost of sales |
|
$ |
1.2 |
|
|
$ |
(1.0) |
|
|
$ |
7.9 |
|
|
$ |
(2.9) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward interest rate swaps |
|
Interest expense, net |
|