Attached files

file filename
EX-31.(A) - EX-31.(A) - CARPENTER TECHNOLOGY CORPa14-20777_1ex31da.htm
EX-31.(B) - EX-31.(B) - CARPENTER TECHNOLOGY CORPa14-20777_1ex31db.htm
EX-32 - EX-32 - CARPENTER TECHNOLOGY CORPa14-20777_1ex32.htm
EXCEL - IDEA: XBRL DOCUMENT - CARPENTER TECHNOLOGY CORPFinancial_Report.xls

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x

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

 

For the quarterly period ended September 30, 2014

 

or

 

o

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

 

For the transition period from             to            

 


 

Commission File Number 1-5828

 

CARPENTER TECHNOLOGY CORPORATION

(Exact name of Registrant as specified in its Charter)

 


 

Delaware

 

23-0458500

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

P.O. Box 14662

Reading, Pennsylvania

 

19610

(Address of principal executive offices)

 

(Zip Code)

 

610-208-2000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

 

Large accelerated filer:

x

 

 

 

Accelerated filer:

o

 

 

 

 

 

Non-accelerated filer:

o

 

(Do not check if a smaller reporting company)

 

Smaller reporting company:

o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number of shares outstanding of the issuer’s common stock as of October 22, 2014 was 53,237,660.

 

 

 



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

FORM 10-Q

INDEX

 

 

 

 

Page

PART I

FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets (unaudited) as of September 30, 2014 and June 30, 2014

3

 

 

 

 

 

 

Consolidated Statements of Income (unaudited) for the Three Months Ended September 30, 2014 and 2013

4

 

 

 

 

 

 

Consolidated Statements of Comprehensive (Loss) Income (unaudited) for the Three Months Ended September 30, 2014 and 2013

5

 

 

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended September 30, 2014 and 2013

6

 

 

 

 

 

 

Consolidated Statements of Changes in Equity (unaudited) for the Three Months Ended September 30, 2014 and 2013

7

 

 

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

8 — 23

 

 

 

 

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

24

 

 

 

 

 

Item 3

Quantitative and Qualitative Disclosures about Market Risk

39

 

 

 

 

 

Item 4

Controls and Procedures

40

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

Item 1

Legal Proceedings

40

 

 

 

 

 

Item 1A

Risk Factors

40

 

 

 

 

 

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

40

 

 

 

 

 

Item 6

Exhibits

41

 

 

 

 

 

 

Signature

42

 

2



Table of Contents

 

PART I

Item 1. Financial Statements

 

CARPENTER TECHNOLOGY CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in millions, except share data)

 

 

 

September 30,

 

June 30,

 

 

 

2014

 

2014

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

66.0

 

$

120.0

 

Accounts receivable, net

 

319.1

 

339.6

 

Inventories

 

728.1

 

699.2

 

Deferred income taxes

 

5.2

 

 

Other current assets

 

34.1

 

35.7

 

Total current assets

 

1,152.5

 

1,194.5

 

Property, plant and equipment, net

 

1,408.1

 

1,407.0

 

Goodwill

 

257.6

 

257.7

 

Other intangibles, net

 

77.8

 

80.6

 

Other assets

 

116.2

 

117.7

 

Total assets

 

$

3,012.2

 

$

3,057.5

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

251.5

 

$

278.1

 

Accrued liabilities

 

138.1

 

148.0

 

Deferred income taxes

 

 

4.5

 

Total current liabilities

 

389.6

 

430.6

 

Long-term debt, net of current portion

 

604.2

 

604.3

 

Accrued pension liabilities

 

205.9

 

203.4

 

Accrued postretirement benefits

 

162.0

 

163.2

 

Deferred income taxes

 

113.9

 

110.7

 

Other liabilities

 

51.1

 

41.0

 

Total liabilities

 

1,526.7

 

1,553.2

 

 

 

 

 

 

 

Contingencies and commitments (see Note 8)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

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

 

275.9

 

275.8

 

Capital in excess of par value

 

260.6

 

263.5

 

Reinvested earnings

 

1,315.4

 

1,311.6

 

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

 

(98.1

)

(101.4

)

Accumulated other comprehensive loss

 

(268.3

)

(245.2

)

Total equity

 

1,485.5

 

1,504.3

 

Total liabilities and equity

 

$

3,012.2

 

$

3,057.5

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

3



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 (in millions, except per share data)

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

NET SALES

 

$

549.8

 

$

498.6

 

Cost of sales

 

480.7

 

395.3

 

Gross profit

 

69.1

 

103.3

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

47.0

 

47.5

 

Operating income

 

22.1

 

55.8

 

 

 

 

 

 

 

Interest expense, net

 

(7.0

)

(4.4

)

Other income, net

 

4.9

 

0.1

 

 

 

 

 

 

 

Income before income taxes

 

20.0

 

51.5

 

Income tax expense

 

6.5

 

16.9

 

 

 

 

 

 

 

Net income

 

$

13.5

 

$

34.6

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

Basic

 

$

0.25

 

$

0.65

 

Diluted

 

$

0.25

 

$

0.65

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

Basic

 

53.5

 

53.1

 

Diluted

 

53.7

 

53.4

 

 

 

 

 

 

 

Cash dividends per common share

 

$

0.18

 

$

0.18

 

 

See accompanying notes to consolidated financial statements.

 

4



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(Unaudited)

($ in millions)

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net income

 

$

13.5

 

$

34.6

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

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

 

3.0

 

3.6

 

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

 

(18.2

)

3.6

 

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

 

 

(0.1

)

Foreign currency translation

 

(7.9

)

3.5

 

Other comprehensive (loss) income

 

(23.1

)

10.6

 

Comprehensive (loss) income

 

$

(9.6

)

$

45.2

 

 

See accompanying notes to consolidated financial statements.

 

5



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ in millions)

 

 

 

Three Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

13.5

 

$

34.6

 

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

 

 

 

 

 

Depreciation and amortization

 

30.3

 

26.7

 

Deferred income taxes

 

2.6

 

(0.7

)

Net pension expense

 

11.5

 

15.0

 

Stock-based compensation expense

 

2.5

 

3.1

 

Changes in working capital and other:

 

 

 

 

 

Accounts receivable

 

16.2

 

57.7

 

Inventories

 

(30.8

)

(47.4

)

Other current assets

 

(6.3

)

(9.0

)

Accounts payable

 

1.3

 

(14.9

)

Accrued liabilities

 

(17.2

)

(18.5

)

Pension contributions

 

(2.8

)

(1.5

)

Other postretirement plan contributions

 

(3.6

)

(3.2

)

Other, net

 

(2.2

)

(2.4

)

Net cash provided from operating activities

 

15.0

 

39.5

 

INVESTING ACTIVITIES

 

 

 

 

 

Purchases of property, equipment and software

 

(59.0

)

(90.4

)

Proceeds from disposals of property and equipment

 

0.1

 

 

Net cash used for investing activities

 

(58.9

)

(90.4

)

FINANCING ACTIVITIES

 

 

 

 

 

Dividends paid

 

(9.6

)

(9.6

)

Tax benefits on share-based compensation

 

0.1

 

1.0

 

Proceeds from stock options exercised

 

0.7

 

2.5

 

Net cash used for financing activities

 

(8.8

)

(6.1

)

Effect of exchange rate changes on cash and cash equivalents

 

(1.3

)

0.5

 

 

 

 

 

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

 

(54.0

)

(56.5

)

Cash and cash equivalents at beginning of period

 

120.0

 

257.5

 

Cash and cash equivalents at end of period

 

$

66.0

 

$

201.0

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

Non-cash investing activities:

 

 

 

 

 

Acquisition of property, equipment and software

 

$

37.9

 

$

81.5

 

 

See accompanying notes to consolidated financial statements.

 

6



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

(Unaudited)

($ in millions, except per share data)

 

 

 

Common Stock

 

 

 

 

 

Accumulated

 

 

 

 

 

Par

 

Capital in

 

 

 

Common

 

Other

 

 

 

 

 

Value

 

Excess of

 

Reinvested

 

Stock in

 

Comprehensive

 

 

 

 

 

Of $5

 

Par Value

 

Earnings

 

Treasury

 

(Loss) Gain

 

Total Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2014

 

$

275.8

 

$

263.5

 

$

1,311.6

 

$

(101.4

)

$

(245.2

)

$

1,504.3

 

Net income

 

 

 

 

 

13.5

 

 

 

 

 

13.5

 

Pension and postretirement benefits gain, net of tax

 

 

 

 

 

 

 

 

 

3.0

 

3.0

 

Net loss on derivative instruments, net of tax

 

 

 

 

 

 

 

 

 

(18.2

)

(18.2

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

(7.9

)

(7.9

)

Cash Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

Common @ $0.18 per share

 

 

 

 

 

(9.6

)

 

 

 

 

(9.6

)

Share-based compensation plans

 

 

 

(3.6

)

 

 

3.3

 

 

 

(0.3

)

Stock options exercised

 

0.1

 

0.6

 

 

 

 

 

 

 

0.7

 

Tax windfall on share-based compensation

 

 

 

0.1

 

 

 

 

 

 

 

0.1

 

Other

 

 

 

 

 

(0.1

)

 

 

 

 

(0.1

)

Balances at September 30, 2014

 

$

275.9

 

$

260.6

 

$

1,315.4

 

$

(98.1

)

$

(268.3

)

$

1,485.5

 

 

 

 

Common Stock

 

 

 

 

 

Accumulated

 

 

 

 

 

Par

 

Capital in

 

 

 

Common

 

Other

 

 

 

 

 

Value

 

Excess of

 

Reinvested

 

Stock in

 

Comprehensive

 

 

 

 

 

Of $5

 

Par Value

 

Earnings

 

Treasury

 

(Loss) Gain

 

Total Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at June 30, 2013

 

$

274.6

 

$

254.4

 

$

1,217.3

 

$

(107.5

)

$

(335.7

)

$

1,303.1

 

Net income

 

 

 

 

 

34.6

 

 

 

 

 

34.6

 

Pension and postretirement benefits gain, net of tax

 

 

 

 

 

 

 

 

 

3.6

 

3.6

 

Net gain on derivative instruments, net of tax

 

 

 

 

 

 

 

 

 

3.6

 

3.6

 

Unrealized loss on marketable securities, net of tax

 

 

 

 

 

 

 

 

 

(0.1

)

(0.1

)

Foreign currency translation

 

 

 

 

 

 

 

 

 

3.5

 

3.5

 

Cash Dividends:

 

 

 

 

 

 

 

 

 

 

 

 

 

Common @ $0.18 per share

 

 

 

 

 

(9.6

)

 

 

 

 

(9.6

)

Share-based compensation plans

 

 

 

(4.0

)

 

 

4.2

 

 

 

0.2

 

Stock options exercised

 

0.4

 

2.1

 

 

 

 

 

 

 

2.5

 

Tax windfall on share-based compensation

 

 

 

1.1

 

 

 

 

 

 

 

1.1

 

Balances at September 30, 2013

 

$

275.0

 

$

253.6

 

$

1,242.3

 

$

(103.3

)

$

(325.1

)

$

1,342.5

 

 

See accompanying notes to consolidated financial statements.

 

7



Table of Contents

 

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 U.S. generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal and recurring adjustments, considered necessary for a fair statement of the results are reflected in the interim periods presented. The June 30, 2014 consolidated balance sheet data was derived from audited financial statements, but does not include all the disclosures required by U.S. generally accepted accounting principles. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in Carpenter’s annual report on Form 10-K for the year ended June 30, 2014 (the “2014 Form 10-K”). Operating results for the three months ended September 30, 2014 are not necessarily indicative of the operating results for any future period.

 

Certain amounts in the consolidated financial statements and notes to the consolidated financial statements for prior year periods have been reclassified to conform to the fiscal year 2014 presentation.

 

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

 

2.                                      Revision to Statement of Cash Flows

 

During the third quarter of fiscal year 2014, the Company identified an error in the classification of amounts reported in previously reported statements of cash flows. The classification error is related to the reporting of purchases of property, equipment and software that should be adjusted for amounts not yet paid in cash as of the balance sheet date, which were incorrectly reflected as cash used in investing activities and cash provided from operating activities. The Company assessed the materiality of this classification error and determined that the classification error is not material to any previously reported financial statements. The revision of prior reported amounts has no impact on the reported change in cash and cash equivalents or amounts reported in the consolidated balance sheets, statements of income, statements of comprehensive income or statements of changes in equity. The effects of the revisions to the statement of cash flows for the three months ended September 30, 2013 are presented in the following table:

 

($ in millions)

 

As Reported

 

Revision
Impact

 

As Revised

 

Net cash provided from (used for) operating activities

 

$

64.0

 

$

(24.5

)

$

39.5

 

Net cash (used for) provided from investing activities

 

(114.9

)

24.5

 

(90.4

)

Net cash used for financing activities

 

(6.1

)

 

(6.1

)

Effect of exchange rate changes on cash and cash equivalents

 

0.5

 

 

0.5

 

Decrease in cash and cash equivalents

 

$

(56.5

)

$

 

$

(56.5

)

 

8



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

3.                                      Earnings Per Common Share

 

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

 

The calculations of basic and diluted earnings per common share for the three months ended September 30, 2014 and 2013 were as follows:

 

 

 

Three Months Ended

 

 

 

September 30,

 

(in millions, except per share data)

 

2014

 

2013

 

Net income

 

$

13.5

 

$

34.6

 

Less: earnings and dividends allocated to participating securities

 

 

(0.1

)

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

 

$

13.5

 

$

34.5

 

 

 

 

 

 

 

Weighted average number of common shares outstanding, basic

 

53.5

 

53.1

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.25

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13.5

 

$

34.6

 

Less: earnings and dividends allocated to participating securities

 

 

(0.1

)

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

 

$

13.5

 

$

34.5

 

 

 

 

 

 

 

Weighted average number of common shares outstanding, basic

 

53.5

 

53.1

 

Effect of shares issuable under share-based compensation plans

 

0.2

 

0.3

 

 

 

 

 

 

 

Weighted average number of common shares outstanding, diluted

 

53.7

 

53.4

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.25

 

$

0.65

 

 

The following awards issued under share-based compensation plans were excluded from the above calculations of diluted earnings per share because their effects were anti-dilutive:

 

 

 

Three Months Ended

 

 

 

September 30,

 

(in millions)

 

2014

 

2013

 

Stock options

 

0.3

 

0.2

 

 

9



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

4.                                      Inventories

 

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

 

 

 

September 30,

 

June 30,

 

($ in millions)

 

2014

 

2014

 

Raw materials and supplies

 

$

138.4

 

$

122.3

 

Work in process

 

400.5

 

393.9

 

Finished and purchased products

 

189.2

 

183.0

 

Total inventory

 

$

728.1

 

$

699.2

 

 

Inventories are valued at the lower of cost or market. Cost for inventories is principally determined using the last-in, first-out (“LIFO”) method.

 

5.                                      Accrued Liabilities

 

Accrued liabilities consisted of the following as of September 30, 2014 and June 30, 2014:

 

 

 

September 30,

 

June 30,

 

($ in millions)

 

2014

 

2014

 

Accrued compensation and benefits

 

$

47.7

 

$

49.8

 

Accrued pension liabilities

 

17.6

 

19.3

 

Accrued postretirement benefits

 

15.5

 

15.5

 

Accrued interest expense

 

5.6

 

11.2

 

Deferred revenue

 

5.9

 

7.5

 

Derivative financial instruments

 

13.0

 

4.7

 

Accrued income taxes

 

2.4

 

8.4

 

Other

 

30.4

 

31.6

 

Total accrued liabilities

 

$

138.1

 

$

148.0

 

 

10



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

6.                                      Pension and Other Postretirement Benefits

 

The components of the net periodic benefit cost related to the Company’s pension and other postretirement benefits for the three months ended September 30, 2014 and 2013 were as follows:

 

 

 

 

 

 

 

Other Postretirement

 

Three months ended September 30,

 

Pension Plans

 

Plans

 

($ in millions)

 

2014

 

2013

 

2014

 

2013

 

Service cost

 

$

8.0

 

$

8.0

 

$

1.1

 

$

1.0

 

Interest cost

 

13.5

 

14.3

 

3.0

 

3.1

 

Expected return on plan assets

 

(17.2

)

(15.7

)

(1.7

)

(1.6

)

Amortization of net loss

 

4.2

 

5.5

 

0.5

 

0.3

 

Amortization of prior service cost

 

0.1

 

0.1

 

 

 

 

 

$

8.6

 

$

12.2

 

$

2.9

 

$

2.8

 

 

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

 

7.                                      Debt

 

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

 

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

 

11



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Long-term debt outstanding as of September 30, 2014 and June 30, 2014 consisted of the following:

 

 

 

September 30,

 

June 30,

 

($ in millions)

 

2014

 

2014

 

Medium-term notes, Series B at 6.97% to 7.10% due from April 2018 to May 2018 (face value of $55.0 million at September 30, 2014 and June 30, 2014)

 

$

55.0

 

$

55.0

 

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

 

249.6

 

249.7

 

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

 

299.6

 

299.6

 

Total

 

604.2

 

604.3

 

Less: amounts due within one year

 

 

 

Long-term debt, net of current portion

 

$

604.2

 

$

604.3

 

 

For the three months ended September 30, 2014 and 2013, interest costs totaled $7.7 million and $7.9 million, respectively, of which $0.7 million and $3.5 million, respectively, were capitalized as part of the cost of property, plant, equipment and software.

 

8.                                      Contingencies and Commitments

 

Environmental

 

The Company is subject to various federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Although compliance with these laws and regulations may affect the costs of the Company’s operations, compliance costs to date have not been material. The Company has environmental remediation liabilities at some of its owned operating facilities and has been designated as a potentially responsible party (“PRP”) with respect to certain third party Superfund waste-disposal sites and other third party-owned sites. Additionally, the Company has been notified that it may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against the Company. Neither the exact amount of remediation costs nor the final method of their allocation among all designated PRP’s at these Superfund sites have been determined. The liability for future environmental remediation costs is evaluated by management on a quarterly basis. The Company accrues amounts for environmental remediation costs that represent management’s best estimate of the probable and reasonably estimable undiscounted future costs related to environmental remediation. During the three months ended September 30, 2014, the Company increased the liability for a company-owned former operating site by $0.1 million. The liabilities recorded for environmental remediation costs at Superfund sites, other third party-owned sites and Carpenter-owned current or former operating facilities remaining at September 30, 2014 and June 30, 2014 were $15.6 million and $15.5 million, respectively.

 

12



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

Other

 

The Company is defending various routine claims and legal actions that are incidental to its business, and that are common to its operations, including those pertaining to product claims, commercial disputes, patent infringement, employment actions, employee benefits, compliance with domestic and foreign laws, personal injury claims and tax issues. Like many other manufacturing companies in recent years, the Company, from time to time, has been named as a defendant in lawsuits alleging personal injury as a result of exposure to chemicals and substances in the workplace. The Company provides for costs relating to these matters when a loss is probable and the amount of the loss is reasonably estimable. The effect of the outcome of these matters on the Company’s future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount and timing (both as to recording future charges to operations and cash expenditures) of the resolution of such matters. While it is not feasible to determine the outcome of these matters, management believes that the total liability from these matters will not have a material effect on the Company’s financial position, results of operations or cash flows over the long-term. However, there can be no assurance that an increase in the scope of pending matters or that any future lawsuits, claims, proceedings or investigations will not be material to the Company’s financial position, results of operations or cash flows in a particular future quarter or year.

 

9.                                      Fair Value Measurements

 

The fair value hierarchy has three levels based on the inputs used to determine fair value. Level 1 refers to quoted prices in active markets for identical assets or liabilities. Level 2 refers to observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 refers to unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs. Currently, the Company does not use Level 1 and 3 inputs.

 

13



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

September 30, 2014

 

Fair Value
Measurements Using
Input Type

 

($ in millions)

 

Level 2

 

Assets:

 

 

 

Marketable securities

 

 

 

Municipal auction rate securities

 

$

5.2

 

Derivative financial instruments

 

6.1

 

Total assets

 

$

11.3

 

 

 

 

 

Liabilities:

 

 

 

Derivative financial instruments

 

$

25.1

 

 

June 30, 2014

 

Fair Value
Measurements Using
Input Type

 

($ in millions)

 

Level 2

 

Assets:

 

 

 

Marketable securities

 

 

 

Municipal auction rate securities

 

$

5.2

 

Derivative financial instruments

 

20.4

 

Total assets

 

$

25.6

 

 

 

 

 

Liabilities:

 

 

 

Derivative financial instruments

 

$

10.9

 

 

The Company’s derivative financial instruments consist of commodity forward contracts, foreign currency forward contracts, interest rate swaps and forward interest rate swaps. These instruments are measured at fair value using the market method valuation technique. The inputs to this technique utilize information related to foreign exchange rates, commodity prices and interest rates published by third party leading financial news and data providers. This is observable data; however, the valuation of these instruments is not based on actual transactions for the same instruments and, as such, they are classified as Level 2. The Company’s use of derivatives and hedging policies are more fully discussed in Note 11.

 

The Company has currently chosen not to elect the fair value option for any items that are not already required to be measured at fair value in accordance with accounting principles generally accepted in the United States.

 

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.

 

14



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

 

 

September 30, 2014

 

June 30, 2014

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

($ in millions)

 

Value

 

Value

 

Value

 

Value

 

Long-term debt, including current portion

 

$

604.2

 

$

637.4

 

$

604.3

 

$

638.7

 

Company-owned life insurance

 

$

16.2

 

$

16.2

 

$

16.2

 

$

16.2

 

 

The carrying amount for company-owned life insurance reflects cash surrender values based upon the market values of underlying securities, using level 2 inputs, net of any outstanding policy loans. The carrying value associated with the cash surrender value of these policies is recorded in other assets in the accompanying consolidated balance sheets.

 

The fair values of long-term debt as of September 30, 2014 and June 30, 2014 were determined by using current interest rates for debt with terms and maturities similar to the Company’s existing debt arrangements and accordingly would be classified as Level 2 inputs in the fair value hierarchy.

 

10.                               Other Income, Net

 

Other income, net consisted of the following:

 

 

 

Three Months Ended

 

 

 

September 30,

 

($ in millions)

 

2014

 

2013

 

 

 

 

 

 

 

Legal settlement

 

$

4.4

 

$

 

Foreign exchange

 

0.6

 

(0.4

)

Equity in earnings of unconsolidated subsidiaries

 

0.1

 

0.2

 

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

 

(0.3

)

0.4

 

Other

 

0.1

 

(0.1

)

Total other income, net

 

$

4.9

 

$

0.1

 

 

11.                               Derivatives and Hedging Activities

 

The Company uses commodity forwards, interest rate swaps, forward interest rate swaps and foreign currency forwards to manage risks generally associated with commodity price, interest rate and foreign currency rate fluctuations. The following explains the various types of derivatives and includes a recap about the impact the derivative instruments had on the Company’s financial position, results of operations and cash flows.

 

15



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Cash Flow Hedging — Commodity forward contracts: The Company enters into commodity forward contracts to fix the price of a portion of anticipated future purchases of certain critical raw materials and energy to manage the risk of cash flow variability associated with volatile commodity prices. The commodity forward contracts have been designated as cash flow hedges. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in accumulated other comprehensive income (“AOCI”) to the extent effective, and reclassified to cost of sales in the period during which the hedged transaction affects earnings or it becomes probable that the forecasted transaction will not occur. As of September 30, 2014, the Company had forward contracts to purchase 28.2 million pounds of certain raw materials with settlement dates through June 2019.

 

Cash Flow Hedging — Forward interest rate swaps: Historically, the Company has entered into forward interest rate swap contracts to manage the risk of cash flow variability associated with fixed interest debt expected to be issued. The forward interest rate swaps have been designated as cash flow hedges. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in accumulated other comprehensive income to the extent effective, and reclassified to interest expense in the period during which the hedged transaction affects earnings or it becomes probable that the forecasted transaction will not occur.  For the three months ended September 30, 2014 and 2013, net gains of $0.1 million and $0.1 million, respectively, were recorded as a reduction to interest expense. These amounts include the impact of previously terminated swaps which are being amortized over the remaining term of the underlying debt.

 

Cash Flow Hedging — Foreign currency forward contracts: The Company uses foreign currency forward contracts to hedge a portion of anticipated future sales denominated in foreign currencies, principally the Euro and Pound Sterling, in order to offset the effect of changes in exchange rates. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in accumulated other comprehensive income to the extent effective, and reclassified to net sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.

 

The Company also uses foreign currency forward contracts to protect certain short-term asset positions denominated in foreign currency against the effect of changes in exchange rates. These positions do not qualify for hedge accounting and accordingly are marked-to-market at each reporting date through charges to other income and expense. As of September 30, 2014 and June 30, 2014, the fair value of the outstanding foreign currency forwards not designated as hedging instruments and the charges to income for changes in fair value for these contracts were not material.

 

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

 

16



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The fair value and location of outstanding derivative contracts recorded in the accompanying consolidated balance sheets were as follows as of September 30, 2014 and June 30, 2014:

 

September 30, 2014
($ in millions)

 

Interest
Rate Swaps

 

Foreign
Currency
Contracts

 

Commodity
Contracts

 

Total
Derivatives

 

Asset Derivatives:

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Other current assets

 

$

0.4

 

$

1.3

 

$

1.9

 

$

3.6

 

Other assets

 

 

 

2.5

 

2.5

 

Total asset derivatives

 

$

0.4

 

$

1.3

 

$

4.4

 

$

6.1

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

$

 

$

0.1

 

$

12.9

 

$

13.0

 

Other liabilities

 

0.2

 

 

11.9

 

12.1

 

Total liability derivatives

 

$

0.2

 

$

0.1

 

$

24.8

 

$

25.1

 

 

June 30, 2014
($ in millions)

 

Interest
Rate Swaps

 

Foreign
Currency
Contracts

 

Commodity
Contracts

 

Total
Derivatives

 

Asset Derivatives:

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Other current assets

 

$

 

$

 

$

11.3

 

$

11.3

 

Other assets

 

 

 

9.1

 

9.1

 

Total asset derivatives

 

$

 

$

 

$

20.4

 

$

20.4

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Accrued liabilities

 

$

 

$

0.4

 

$

4.3

 

$

4.7

 

Other liabilities

 

 

0.2

 

6.0

 

6.2

 

Total liability derivatives

 

$

 

$

0.6

 

$

10.3

 

$

10.9

 

 

Cash Flow Hedges

 

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings or it becomes probable the forecasted transaction will not occur. The following is a summary of the (losses) gains related to cash flow hedges recognized during the three months ended September 30, 2014 and 2013:

 

17



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

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

 

 

 

Three Months Ended

 

 

 

September 30,

 

($ in millions)

 

2014

 

2013

 

Derivatives in Cash Flow Hedging Relationship:

 

 

 

 

 

Commodity contracts

 

$

(28.3

)

$

(1.4

)

Foreign exchange contracts

 

1.5

 

(0.5

)

Total

 

$

(26.8

)

$

(1.9

)

 

 

 

 

 

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

 

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

 

($ in millions)

 

Location of Gain (Loss)

 

Three Months Ended

 

Three Months Ended

 

Derivatives in Cash Flow

 

Reclassified from AOCI into

 

September 30,

 

September 30,

 

Hedging Relationship:

 

Income

 

2014

 

2013

 

2014

 

2013

 

Commodity contracts

 

Cost of sales

 

$

2.0

 

$

(7.7

)

$

0.4

 

$

 

Foreign exchange contracts

 

Net sales

 

0.3

 

(0.1

)

 

 

Forward interest rate swaps

 

Interest expense

 

0.1

 

0.1

 

 

 

Total

 

 

 

$

2.4

 

$

(7.7

)

$

0.4

 

$

 

 

The Company estimates that $6.7 million of net derivative losses included in AOCI as of September 30, 2014 will be reclassified into earnings within the next 12 months. No significant cash flow hedges were discontinued during the quarter ended September 30, 2014.

 

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

 

 

 

Three Months Ended

 

 

 

September 30,

 

($ in millions)

 

2014

 

2013

 

Balance, beginning

 

$

7.6

 

$

(41.5

)

Current period changes in fair value, net of tax

 

(16.7

)

(1.2

)

Reclassification to earnings, net of tax

 

(1.5

)

4.8

 

Balance, ending

 

$

(10.6

)

$

(37.9

)

 

According to the provisions of the Company’s derivative arrangements, in the event that the fair value of outstanding derivative positions with certain counterparties exceeds certain thresholds, the Company may be required to issue cash collateral to the counterparties. The Company’s contracts with these counterparties allow for netting of derivative instrument positions executed under each contract. As of September 30, 2014 and June 30, 2014, the Company had no cash collateral held by counterparties.

 

18



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company is exposed to credit loss in the event of nonperformance by counterparties on its derivative instruments as well as credit or performance risk with respect to its customer commitments to perform. Although nonperformance is possible, the Company does not anticipate nonperformance by any of the parties. In addition, various master netting arrangements are in place with counterparties to facilitate settlements of gains and losses on these contracts.

 

12.                               Income Taxes

 

The effective tax rate used for interim periods is the estimated annual effective consolidated tax rate, based on the current estimate of full year results, except that taxes related to specific events, if any, are recorded in the interim period in which they occur.

 

Income tax expense for the three months ended September 30, 2014 was $6.5 million, or 32.5 percent of pre-tax income as compared with $16.9 million, or 32.8 percent of pre-tax income for the three months ended September 30, 2013. The tax rate in both periods is lower than the statutory tax rate of 35 percent, primarily due to the benefits associated with the domestic manufacturing deduction.

 

13.                               Superalloy Powders Technical Assistance and Powder Supply Agreements

 

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

 

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

 

19



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

14.                               Business Segments

 

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

 

The SAO segment is comprised of the Company’s major premium alloy and stainless steel manufacturing operations. This includes operations performed at mills primarily in Reading and Latrobe and surrounding areas in Pennsylvania, South Carolina and Alabama. The combined assets of the SAO operations are being managed in an integrated manner to optimize efficiency and profitability across the total system.

 

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

 

The Company’s executive management evaluates the performance of these operating segments based on sales, operating income and cash flow generation. Segment operating profit excludes general corporate costs, which include executive and director compensation, and other corporate facilities and administrative expenses not allocated to the segments. Also excluded are items that management considers not representative of ongoing operations, such as restructuring related charges, transaction costs associated with acquisitions and other specifically-identified income or expense items.

 

The service cost component of the Company’s net pension expense, which represents the estimated cost of future pension liabilities earned associated with active employees, is included in the operating income of the business segments. The residual net pension expense, which is comprised of the expected return on plan assets, interest costs on the projected benefit obligations of the plans and amortization of actuarial gains and losses and prior service costs, is included under the heading “Pension earnings, interest and deferrals expense.”

 

On a consolidated basis, there were no significant individual customers that accounted for 10 percent or more of the Company’s net sales for the three months ended September 30, 2014 and 2013, respectively.

 

20



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Three Months Ended

 

Segment Data

 

September 30,

 

($ in millions)

 

2014

 

2013

 

Net Sales:

 

 

 

 

 

Specialty Alloys Operations

 

$

436.0

 

$

394.9

 

Performance Engineered Products

 

129.9

 

118.5

 

Intersegment

 

(16.1

)

(14.8

)

Consolidated net sales

 

$

549.8

 

$

498.6

 

 

 

 

 

 

 

Operating Income:

 

 

 

 

 

Specialty Alloys Operations

 

$

24.6

 

$

63.7

 

Performance Engineered Products

 

9.7

 

11.6

 

Corporate costs

 

(10.3

)

(12.9

)

Pension earnings, interest and deferrals

 

(2.4

)

(6.0

)

Intersegment

 

0.5

 

(0.6

)

Consolidated operating income

 

$

22.1

 

$

55.8

 

 

 

 

 

 

 

Depreciation and Amortization:

 

 

 

 

 

Specialty Alloys Operations

 

$

23.5

 

$

19.5

 

Performance Engineered Products

 

6.0

 

5.8

 

Corporate

 

1.1

 

1.4

 

Intersegment

 

(0.3

)

 

Consolidated depreciation and amortization

 

$

30.3

 

$

26.7

 

 

 

 

 

 

 

Capital Expenditures:

 

 

 

 

 

Specialty Alloys Operations

 

$

51.6

 

$

83.0

 

Performance Engineered Products

 

6.8

 

7.0

 

Corporate

 

1.0

 

0.6

 

Intersegment

 

(0.4

)

(0.2

)

Consolidated capital expenditures

 

$

59.0

 

$

90.4

 

 

 

 

September 30,
2014

 

June 30,
2014

 

Total Assets:

 

 

 

 

 

Specialty Alloys Operations

 

$

2,466.1

 

$

2,454.8

 

Performance Engineered Products

 

499.0

 

491.7

 

Corporate

 

80.6

 

144.9

 

Intersegment

 

(33.5

)

(33.9

)

Consolidated total assets

 

$

3,012.2

 

$

3,057.5

 

 

21



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

15.                          Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in ASU 2014-09 requires that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in ASU 2014-09 is required for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is evaluating the impact of the adoption of ASU 2014-09 and does not expect the adoption to have a significant impact on the Company’s Consolidated Financial Statements.

 

16.                               Reclassifications from Accumulated Other Comprehensive Income (AOCI)

 

The changes in AOCI by component, net of tax, for the three months ended September 30, 2014 and 2013 were as follows:

 

($ in millions) (a)

 

Cash flow
hedging items

 

Pension and
other
postretirement
benefit plan
items

 

Unrealized
losses on
available-for-
sale securities

 

Foreign
currency
items

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2014

 

$

7.6

 

$

(236.7

)

$

(0.4

)

$

(15.7

)

$

(245.2

)

Other comprehensive loss before reclassifications

 

(16.7

)

 

 

(7.9

)

(24.6

)

Amounts reclassified from AOCI (b)

 

(1.5

)

3.0

 

 

 

1.5

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive (loss) income

 

(18.2

)

3.0

 

 

(7.9

)

(23.1

)

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2014

 

$

(10.6

)

$

(233.7

)

$

(0.4

)

$

(23.6

)

$

(268.3

)

 

($ in millions) (a)

 

Cash flow
hedging items

 

Pension and
other
postretirement
benefit plan
items

 

Unrealized
losses on
available-for-
sale securities

 

Foreign
currency
items

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2013

 

$

(41.5

)

$

(273.6

)

$

(0.4

)

$

(20.2

)

$

(335.7

)

Other comprehensive (loss) income before reclassifications

 

(1.2

)

 

(0.1

)

3.5

 

2.2

 

Amounts reclassified from AOCI (b)

 

4.8

 

3.6

 

 

 

8.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Net current-period other comprehensive income (loss)

 

3.6

 

3.6

 

(0.1

)

3.5

 

10.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2013

 

$

(37.9

)

$

(270.0

)

$

(0.5

)

$

(16.7

)

$

(325.1

)

 


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

(b)        See separate table below for further details.

 

22



Table of Contents

 

CARPENTER TECHNOLOGY CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following is a summary of amounts reclassified from AOCI for the three months ended September 30, 2014 and 2013:

 

 

 

 

 

Amount Reclassified from AOCI

 

($ in millions) (a)

 

Location of

 

Three Months Ended September 30,

 

Details about AOCI Components

 

gain (loss)

 

2014

 

2013

 

 

 

 

 

 

 

 

 

Cash flow hedging items:

 

 

 

 

 

 

 

Commodity contracts

 

Cost of sales

 

$

2.0

 

$

(7.7

)

Foreign exchange contracts

 

Net sales

 

0.3

 

(0.1

)

Forward interest rate swaps

 

Interest expense

 

0.1

 

0.1

 

 

 

Total before tax

 

2.4

 

(7.7

)

 

 

Tax (expense) benefit

 

(0.9

)

2.9

 

 

 

Net of tax

 

$

1.5

 

$

(4.8

)

Amortization of pension and other postretirement benefit plan items

 

 

 

 

 

 

 

Net actuarial loss

 

(b)

 

$

(4.7

)

$

(5.8

)

Prior service cost

 

(b)

 

(0.1

)

(0.1

)

 

 

Total before tax

 

(4.8

)

(5.9

)

 

 

Tax benefit

 

1.8

 

2.3

 

 

 

Net of tax

 

$

(3.0

)

$

(3.6

)

 


(a)         Amounts in parentheses indicate debits to income/loss.

(b)         These AOCI components are included in the computation of net periodic benefit cost (see Note 6 for additional details).

 

23



Table of Contents

 

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

 

Background and General

 

We are engaged in the manufacturing, fabrication and distribution of specialty metals. We primarily process basic raw materials such as nickel, cobalt, titanium, manganese, chromium, molybdenum, iron scrap and other metal alloying elements through various melting, hot forming and cold working facilities to produce finished products in the form of billet, bar, rod, wire and narrow strip in many sizes and finishes. We also produce certain metal powders. Our sales are distributed directly from our production plants and distribution network as well as through independent distributors. Unlike many other specialty steel producers, we operate our own worldwide network of service and distribution centers. These service centers, located in the United States, Canada, Mexico, Europe and Asia allow us to work more closely with customers and to offer various just-in-time stocking programs. We also manufacture and rent down-hole drilling tools and components used in the oil and gas industry.

 

As part of our overall business strategy, we have sought out and considered opportunities related to strategic acquisitions, divestitures and joint collaborations as well possible business unit dispositions aimed at broadening our offering to the marketplace. We have participated with other companies to explore potential terms and structure of such opportunities and we expect that we will continue to evaluate these opportunities.

 

Our discussions below in this Item 2 are based upon the more detailed discussions about our business, operations and financial condition included in Item 7 of our 2014 Form 10-K. Our discussions here focus on our results during or as of the three month period ended September 30, 2014 and the comparable periods of fiscal year 2014, and to the extent applicable, on material changes from information discussed in the 2014 Form 10-K, other important intervening developments or information that we have reported on Form 8-K. These discussions should be read in conjunction with the 2014 Form 10-K for detailed background information and with any such intervening Form 8-K.

 

Impact of Raw Material Prices and Product Mix

 

We value most of our inventory utilizing the last-in, first-out (“LIFO”) inventory costing methodology. Under the LIFO inventory costing method, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period even though these materials may have been acquired at potentially significantly different values due to the length of time from the acquisition of the raw materials to the sale of the processed finished goods to the customers. In a period of rising raw material costs, the LIFO inventory valuation normally results in higher costs of sales. Conversely, in a period of decreasing raw material costs, the LIFO inventory valuation normally results in lower costs 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 costs of sales. The surcharge mechanism protects our net income on such sales except for the lag effect discussed above. However, surcharges have had a dilutive effect on our gross margin and operating margin percentages as described later in this report.

 

24



Table of Contents

 

Approximately 25 percent of our net sales are sales to customers under firm price sales arrangements. Firm price sales arrangements involve a risk of profit margin fluctuations, particularly when raw material prices are volatile. In order to reduce the risk of fluctuating profit margins on these sales, we enter into commodity forward contracts to purchase certain critical raw materials necessary to produce the related products sold. Firm price sales arrangements generally include certain annual purchasing commitments and consumption schedules agreed to by the customers at selling prices based on raw material prices at the time the arrangements are established. If a customer fails to meet the volume commitments (or the consumption schedule deviates from the agreed-upon terms of the firm price sales arrangements), the Company may need to absorb the gains or losses associated with the commodity forward contracts on a temporary basis. Gains or losses associated with commodity forward contracts are reclassified to earnings/loss when earnings are impacted by the hedged transaction. Because we value most of our inventory under the LIFO costing methodology, changes in the cost of raw materials and production activities are recognized in cost of sales in the current period attempting to match the most recently incurred costs with revenues. Gains or losses on the commodity forward contracts are reclassified from other comprehensive 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 costs of goods sold reflect 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 Expense

 

Net pension expense, as we define it below, includes the net periodic benefit costs related to both our pension and other postretirement plans. The net periodic benefit costs are determined annually based on beginning of year balances and are recorded ratably throughout the fiscal year, unless a significant re-measurement event occurs. We currently expect that the total net periodic benefit costs for fiscal year 2015 will be $45.9 million as compared with $60.1 million in fiscal year 2014.  The following is the pension expense for the three months ended September 30, 2014 and 2013:

 

 

 

Three Months Ended

 

 

 

September 30,

 

($ in millions)

 

2014

 

2013

 

Pension plans

 

$

8.6

 

$

12.2

 

Other postretirement plans

 

2.9

 

2.8

 

Net periodic benefit costs

 

$

11.5

 

$

15.0

 

 

The service cost component of net pension expense represents the estimated cost of future pension liabilities earned associated with active employees. The pension earnings, interest and deferrals expense (“pension EID”) is comprised of the expected return on plan assets, interest costs on the projected benefit obligations of the plans and amortization of actuarial gains and losses and prior service costs.

 

25



Table of Contents

 

Net pension expense is recorded in accounts that are included in both the cost of sales and selling, general and administrative expenses based on the function of the associated employees. The following is a summary of the classification of net pension expense for the three months ended September 30, 2014 and 2013:

 

 

 

Three Months Ended

 

 

 

September 30,

 

($ in millions)

 

2014

 

2013

 

Cost of sales

 

 

 

 

 

Service cost

 

$

7.3

 

$

7.1

 

Pension earnings, interest and deferrals expense

 

1.3

 

4.1

 

 

 

$

8.6

 

$

11.2

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

 

 

 

Service cost

 

$

1.8

 

$

1.9

 

Pension earnings, interest and deferrals expense

 

1.1

 

1.9

 

 

 

$

2.9

 

$

3.8

 

 

 

 

 

 

 

Net pension expense

 

$

11.5

 

$

15.0

 

 

Historically, we capitalized only the service cost component of net pension expense related to manufacturing employees. Beginning with the quarter ended December 31, 2013, we began to capitalize the portion of pension EID related to current manufacturing employees in inventory. We will continue to expense the portion of pension EID related to inactive manufacturing employees as period cost in cost of sales. For the three months ended September 30, 2014 and 2013, the amount of pension EID included in cost of sales related to inactive manufacturing employees was $0.7 million and $2.4 million, respectively. As of September 30, 2014 and June 30, 2014, amounts capitalized in gross inventory were $9.2 million.

 

Operating Performance Overview

 

For the quarter ended September 30, 2014, we reported net income of $13.5 million, or $0.25 per diluted share, compared with net income for the same period a year earlier of $34.6 million, or $0.65 per diluted share. Our first quarter of fiscal year 2015 results reflect weaker than anticipated mix exacerbated by operational inefficiencies at our Specialty Alloys Operations (“SAO”) locations in Reading and Latrobe, Pa. which negatively impacted earnings in the quarter. Early in the current quarter, the Reading mill experienced unanticipated startup issues after scheduled summer shutdowns and the Latrobe mill had an unplanned outage due to a cracked dome on its primary press. As a result, SAO experienced higher labor costs, increased maintenance and supply expenses and reduced output levels.  After a difficult start to the quarter, performance improved later in the quarter. The Latrobe press is now back on line and sales mix improved as the quarter progressed.

 

26



Table of Contents

 

Results of Operations — Three Months Ended September 30, 2014 vs. Three Months Ended September 30, 2013

 

Net Sales

 

Net sales for the three months ended September 30, 2014 were $549.8 million, which was a 10 percent, increase over the same period a year ago. Excluding surcharge revenue, sales increased 7 percent on 11 percent higher shipment volumes from the same period a year ago indicating strong demand and weaker mix. Excluding surcharge revenue, all of our end-use markets net sales increased except for aerospace and defense which was relatively flat versus prior year quarter.

 

Geographically, sales outside the United States increased 11 percent from the same period a year ago to $153.9 million for the three months ended September 30, 2014. The increase is due to additional sales to Europe and Asia. Total international sales represented 28 percent of total net sales in this quarter and in prior year quarter.

 

Sales by End-Use Markets

 

We sell to customers across diversified end-use markets. The following table includes comparative information for our net sales, which includes surcharge revenue by principal end-use markets.  We believe this is helpful supplemental information in analyzing the performance of the business from period to period:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

September 30,

 

$

 

%

 

($ in millions)

 

2014

 

2013

 

Increase

 

Increase

 

Aerospace and defense

 

$

235.1

 

$

229.5

 

$

5.6

 

2

%

Industrial and consumer

 

128.6

 

109.2

 

19.4

 

18

 

Energy

 

79.1

 

66.3

 

12.8

 

19

 

Transportation

 

41.6

 

32.4

 

9.2

 

28

 

Medical

 

29.4

 

27.1

 

2.3

 

8

 

Distribution

 

36.0

 

34.1

 

1.9

 

6

 

Total net sales

 

$

549.8

 

$

498.6

 

$

51.2

 

10

%

 

The following table includes comparative information for our net sales by the same principal end-use markets, but excluding surcharge revenue:

 

 

 

Three Months Ended

 

$

 

%

 

 

 

September 30,

 

Increase

 

Increase

 

($ in millions)

 

2014

 

2013

 

(Decrease)

 

(Decrease)

 

Aerospace and defense

 

$

180.7

 

$

182.9

 

$

(2.2

)

(1

)%

Industrial and consumer

 

98.6

 

85.8

 

12.8

 

15

 

Energy

 

67.8

 

59.1

 

8.7

 

15

 

Transportation

 

30.7

 

25.5

 

5.2

 

20

 

Medical

 

26.7

 

25.0

 

1.7

 

7

 

Distribution

 

35.6

 

33.8

 

1.8

 

5

 

Total net sales excluding surcharge revenue

 

$

440.1

 

$

412.1