CARPENTER TECHNOLOGY CORPORATION Background and General
We are a producer and distributor of premium specialty alloys, including
titanium alloys, powder metals, stainless steels, alloy steels, and tool steels
as well as drilling tools. We are a recognized leader in high-performance
specialty alloy-based materials and process solutions for critical applications
in the aerospace, defense, medical, transportation, energy, industrial and
consumer markets. We have evolved to become a pioneer in premium specialty
alloys, including titanium, nickel, and cobalt, as well as alloys specifically
engineered for additive manufacturing ("AM") processes and soft magnetics
applications. We have expanded our AM capabilities to provide a complete
"end-to-end" solution to accelerate materials innovation and streamline parts
production. We primarily process basic raw materials such as nickel, cobalt,
titanium, manganese, chromium, molybdenum, iron scrap and other metal alloying
elements through various melting, hot forming and cold working facilities to
produce finished products in the form of billet, bar, rod, wire and narrow strip
in many sizes and finishes. We also produce certain metal powders and parts. Our
sales are distributed directly from our production plants and distribution
network as well as through independent distributors. Unlike many other specialty
steel producers, we operate our own worldwide network of service and
distribution centers. These service centers, located in the United States ,
Canada , Mexico , Europe and Asia allow us to work more closely with customers and
to offer various just-in-time stocking programs.
As part of our overall business strategy, we have sought out and considered
opportunities related to strategic acquisitions and joint collaborations as well
as possible business unit dispositions aimed at broadening our offering to the
marketplace. We have participated with other companies to explore potential
terms and structures of such opportunities and expect that we will continue to
evaluate these opportunities.
Our discussions below in this Item 2 are based upon the more detailed
discussions about our business, operations and financial condition included in
Item 7 of our 2019 Form 10-K. Our discussions here focus on our results during
or as of the three and nine-month periods ended March 31, 2020 and the
comparable periods of fiscal year 2019, and to the extent applicable, on
material changes from information discussed in the 2019 Form 10-K and other
important intervening developments or information that we have reported on
Form 8-K. These discussions should be read in conjunction with the 2019
Form 10-K for detailed background information and with any such intervening
Form 8-K.
Impact of Raw Material Prices and Product Mix
We value most of our inventory utilizing the last-in, first-out ("LIFO")
inventory costing method. Under the LIFO inventory costing method, changes in
the cost of raw materials and production activities are recognized in cost of
sales in the current period even though these materials may potentially have
been acquired at significantly different values due to the length of time from
the acquisition of the raw materials to the sale of the processed finished goods
to the customers. In a period of rising raw material costs, the LIFO inventory
valuation normally results in higher cost of sales. Conversely, in a period of
decreasing raw material costs, the LIFO inventory valuation normally results in
lower cost of sales.
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The volatility of the costs of raw materials has impacted our operations over the past several years. We, and others in our industry, generally have been able to pass cost increases on major raw materials through to our customers using surcharges that are structured to recover increases in raw material costs. Generally, the formula used to calculate a surcharge is based on published prices of the respective raw materials for the previous month which correlates to the prices we pay for our raw material purchases. However, a portion of our surcharges to customers may be calculated using a different surcharge formula or may be based on the raw material prices at the time of order, which creates a lag between surcharge revenue and corresponding raw material costs recognized in cost of sales. The surcharge mechanism protects our net income on such sales except for the lag effect discussed above. However, surcharges have had a dilutive effect on our gross margin and operating margin percentages as described later in this report. Approximately 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 (loss) together with the actual purchase price of the underlying commodities when the underlying commodities are purchased and recorded in inventory. To the extent that the total purchase price of the commodities, inclusive of the gains or losses on the commodity forward contracts, are higher or lower relative to the beginning of year costs, our cost of goods sold reflects such amounts. Accordingly, the gains and/or losses associated with commodity forward contracts may not impact the same period that the firm price sales arrangements revenue is recognized, and comparisons of gross profit from period to period may be impacted. These firm price sales arrangements are expected to continue as we look to strengthen our long-term customer relationships by expanding, renewing and in certain cases extending to a longer-term, our customer long-term arrangements. We produce hundreds of grades of materials with a wide range of pricing and profit levels depending on the grade. In addition, our product mix within a period is subject to the fluctuating order patterns of our customers as well as decisions we may make on participation in certain products based on available capacity, including the impacts of capacity commitments we may have under existing customer agreements. While we expect to see positive contribution from a more favorable product mix in our margin performance over time, the impact by period may fluctuate and period-to-period comparisons may vary.
Net Pension 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 2020 will be$15.0 million as compared with$11.4 million in fiscal year 2019. The following is the net pension expense for the three and nine months endedMarch 31, 2020 and 2019: Three Months Ended Nine Months Ended March 31, March 31, ($ in millions) 2020 2019 2020 2019 Pension plans$ 3.0 $ 2.4 $ 9.0 $ 7.2 Other postretirement plans 0.8 0.5 2.5 1.5 Net pension expense$ 3.8 $ 2.9 $ 11.5 $ 8.7 31
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Net pension expense is recorded in accounts that are included in cost of sales and selling, general and administrative expenses based on the function of the associated employees and in other (expense) income, net. The following is a summary of the classification of net pension expense for the three and nine months endedMarch 31, 2020 and 2019: Three Months Ended Nine Months Ended March 31, March 31, ($ in millions) 2020 2019 2020 2019 Cost of sales: Service cost$ 2.7 $ 2.5 $ 8.2 $ 7.5 Selling, general and administrative expenses: Service cost 0.4 0.4 1.1 1.2
Other (expense) income, net:
Pension earnings, interest and deferrals 0.7 - 2.2 - Net pension expense$ 3.8 $ 2.9 $ 11.5 $ 8.7
As of
Operating Performance Overview
Our third quarter results reflected solid execution in a challenging environment due to the impact of the 737 MAX production halt as well as the coronavirus disease 2019 (COVID-19) pandemic. Our performance speaks largely to the dedication of our employees who have responded to an unprecedented situation with a focused commitment to delivering for our customers while also adopting enhanced safety programs. In response to COVID-19 we mobilized with a sharp focus on the health and safety of our employees, families and communities. We moved quickly to develop and implement benchmark safety protocols aimed at protecting our employees in a rapidly changing environment. Looking ahead, visibility across our business is limited given the ongoing COVID-19 pandemic and its potential impact on demand patterns across our end-use markets. We remain in close contact with our customers and will continue working alongside them to fulfill their material requirements. We believe our financial position remains healthy and we are executing targeted cost reduction and cash generation initiatives to drive enhanced flexibility. While we cannot predict the duration of COVID-19 and the total impact it will have on our end-use markets, we remain fully committed to the safety of our employees and continue to serve as a critical supply chain partner for our customers during this difficult time. We remain a key supplier of mission-critical applications with strong customer relationships, a deep solutions portfolio and established market leadership across a number of attractive end-use markets.
COVID-19 Cost Reduction Actions
COVID-19 related disruptions negatively impacted operating income results by approximately$5.5 million in the third quarter of fiscal 2020. This impact is principally associated with disruption in the ability to ship certain materials late in the quarter as additional safety measures were implemented across our facilities as well as certain customers who were unable to accept deliveries due to shutdowns. 32
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As the COVID-19 pandemic impacts global economic conditions and near-term customer demand patterns, we have taken several actions to initiate cost savings and preserve liquidity. These actions include implementing temporary furloughs for certain production and maintenance employees across facilities based on planned production scheduling, implementing a global hiring freeze and reducing planned capital expenditures for fiscal year 2021 by approximately 25-30% from fiscal year 2020. We also initiated actions to reduce working capital levels, principally inventory, to align with anticipated customer demand and expect that working capital represents a significant opportunity for cash generation in the near-term. In addition, in late April we approved actions to exit the Amega West business and close two domestic powder metals production facilities. As a result of the decisions to close these facilities, we expect to save$15 million to$20 million annually. We expect to record restructuring charges including asset impairments, lease termination costs and employee separation costs between$80 million and$100 million before taxes in the fourth quarter of fiscal year 2020. We have identified additional actions to preserve cost and manage cash and have plans to deploy those actions as deemed necessary to respond to the evolving situation.
Results of Operations - Three Months Ended
For the three months endedMarch 31, 2020 , we reported net income of$39.9 million , or$0.82 per diluted share. This compares with net income for the same period a year earlier of$51.1 million , or$1.05 per diluted share. The current period results reflect the impact of the 737 MAX production halt and the COVID-19 pandemic. Despite these challenges we saw strengthening product mix across all end-use markets and increased sales in our Aerospace and Defense and Medical end-use markets compared to the prior year period. The prior period results included an$11.4 million benefit related to an insurance recovery.
Net sales for the three months endedMarch 31, 2020 were$585.4 million , which was a 4 percent decrease over the same period a year ago. Excluding surcharge revenue, sales decreased 2 percent on a 9 percent decrease in shipment volume from the same period a year ago. The results excluding surcharge revenue reflect a favorable product mix across key end-use markets despite the 737 MAX production halt. Geographically, sales outsidethe United States increased 11 percent from the same period a year ago to$217.7 million for the three months endedMarch 31, 2020 . The increase is primarily due to stronger demand in the Aerospace and Defense end-use market inEurope ,Asia Pacific andCanada . A portion of our sales outsidethe United States are denominated in foreign currencies. The fluctuations in foreign currency exchange rates resulted in a$1.1 million decrease in sales during the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 . Net sales outsidethe United States represented 37 percent and 32 percent of total net sales for the three months endedMarch 31, 2020 and 2019, respectively.
Sales by End-Use Markets
We sell to customers across diversified end-use markets. The following table
includes comparative information for our net sales, which includes surcharge
revenue by principal end-use markets. We believe this is helpful supplemental
information in analyzing the performance of the business from period to period:
Three Months Ended $ %
March 31, Increase Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Aerospace and Defense $ 356.4 $ 342.1 $ 14.3 4 %
Medical 53.0 55.1 (2.1 ) (4 )%
Transportation 33.5 39.9 (6.4 ) (16 )%
Energy 32.7 49.0 (16.3 ) (33 )%
Industrial and Consumer 80.1 87.4 (7.3 ) (8 )%
Distribution 29.7 36.4 (6.7 ) (18 )%
Total net sales $ 585.4 $ 609.9 $ (24.5 ) (4 )%
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The following table includes comparative information for our net sales by the same principal end-use markets, but excluding surcharge revenue:
Three Months Ended $ %
March 31, Increase Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Aerospace and Defense $ 293.4 $ 273.8 $ 19.6 7 %
Medical 47.7 47.1 0.6 1 %
Transportation 27.8 33.5 (5.7 ) (17 )%
Energy 28.8 40.8 (12.0 ) (29 )%
Industrial and Consumer 67.8 71.9 (4.1 ) (6 )%
Distribution 29.5 35.9 (6.4 ) (18 )%
Total net sales excluding surcharge
revenue $ 495.0 $ 503.0 $ (8.0 ) (2 )%
Sales to the Aerospace and Defense end-use market increased 4 percent from the
third quarter a year ago to $356.4 million . Excluding surcharge revenue, sales
increased 7 percent from the third quarter a year ago on a 2 percent decrease in
shipment volume. The results reflect stronger year-over-year demand in key
aerospace sub-markets with limited impact from the 737 MAX slow down in the
current quarter. We continue to experience strong demand for our defense related
applications driven by specific programs.
Medical end-use market sales decreased 4 percent from the third quarter a year
ago to $53.0 million . Excluding surcharge revenue, sales increased 1 percent on
5 percent lower shipment volume from the third quarter a year ago. The results
reflect improved product mix in all of our Medical end-use sub-markets despite
the impact of temporary delays of elective medical procedures from the COVID-19
pandemic.
Transportation end-use market sales decreased 16 percent from the third quarter
a year ago to $33.5 million . Excluding surcharge revenue, sales decreased 17
percent on 19 percent lower shipment volume from the third quarter a year ago.
The results reflect decreased demand caused by COVID-19 related production
disruptions in Asia and Europe in the current quarter.
Sales to the Energy end-use market of $32.7 million reflect a 33 percent
decrease from the third quarter a year ago. Excluding surcharge revenue, sales
decreased 29 percent from a year ago. The results reflect the decreasing demand
globally including a 55% decrease in North America rig counts and the impact of
COVID-19. The decline in oil and gas sub-market is partially offset by modest
increases in the power generation sub-market.
Industrial and Consumer end-use market sales decreased 8 percent from the third
quarter a year ago to $80.1 million . Excluding surcharge revenue, sales
decreased 6 percent on 12 percent lower shipment volume. The results reflect the
impact of reduced demand for materials used in select industrial applications
offset by revenue growth and improved product mix in consumer electronics.
Gross Profit
Our gross profit in the third quarter decreased 11 percent to$109.5 million , or 18.7 percent of net sales as compared with$123.2 million , or 20.2 percent of net sales in the same quarter a year ago. Excluding the impact of surcharge revenue, our adjusted gross margin in the third quarter was 22.1 percent as compared to 24.5 percent in the same period a year ago. The current period results were impacted by the 737 MAX production halt and the COVID-19 pandemic. The prior period results included an$11.4 million benefit related to an insurance recovery. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharge on gross margin for the comparative three-month periods. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures. 34
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Three Months Ended
March 31,
($ in millions) 2020 2019
Net sales $ 585.4 $ 609.9
Less: surcharge revenue 90.4 106.9
Net sales excluding surcharge revenue $ 495.0 $ 503.0
Gross profit $ 109.5 $ 123.2
Gross margin 18.7 % 20.2 %
Adjusted gross margin excluding surcharge revenue 22.1 % 24.5 %
Selling, General and Administrative Expenses
Selling, general and administrative expenses of$50.8 million were 8.7 percent of net sales (10.3 percent of net sales excluding surcharge) as compared with$50.0 million and 8.2 percent of net sales (9.9 percent of net sales excluding surcharge) in the same quarter a year ago. The selling, general and administrative expenses reflect higher spending in key growth areas including additive manufacturing in addition to market driven losses in compensation plans compared to the same quarter a year ago. These items were partially offset by lower costs related to variable compensation in the current quarter.
Operating Income
Our operating income in the recent third quarter was$58.7 million or 10.0 percent of net sales as compared with$73.2 million or 12.0 percent of net sales in the same quarter a year ago. Excluding surcharge revenue, adjusted operating margin was 11.9 percent for the most recent quarter as compared with 14.6 percent a year ago. The results for the third quarter of fiscal year 2020 primarily reflect the negative impact of the ongoing 737 MAX production halt and the COVID-19 pandemic. Our participation in diverse end-use markets and our commitment to the Carpenter Operating Model muted the impact to our operating margin. The prior period results included an$11.4 million benefit related to an insurance recovery. The following presents our operating income and operating margin, in each case excluding the impact of surcharge revenue on net sales. We present and discuss these financial measures because management believes removing these items provides a more consistent and meaningful basis for comparing ongoing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures. Three Months Ended March 31, ($ in millions) 2020 2019 Net sales$ 585.4 $ 609.9 Less: surcharge revenue 90.4 106.9 Net sales excluding surcharge revenue$ 495.0 $ 503.0 Operating income$ 58.7 $ 73.2 Operating margin 10.0 % 12.0 %
Adjusted operating margin excluding surcharge revenue 11.9 % 14.6 %
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Interest Expense
Interest expense for the three months endedMarch 31, 2020 was$4.9 million compared with$7.1 million in the same period a year ago. We have used interest rate swaps to achieve a level of floating rate debt to fixed rate debt where appropriate. Interest expense for the three months endedMarch 31, 2020 and 2019 includes net gains from interest rate swaps of$0.6 million compared with net losses of$0.2 million , respectively. Capitalized interest reduced interest expense by$2.3 million for the three months endedMarch 31, 2020 and$1.3 million for the three months endedMarch 31, 2019 .
Other (Expense) Income, Net
Other expense, net for the three months endedMarch 31, 2020 was$3.9 million as compared with$1.9 million of other income, net for the three months endedMarch 31, 2019 . The current year results include unfavorable market returns on investments used to fund Company-owned life insurance contracts and investments held in rabbi trusts. The market volatility was driven by the COVID-19 pandemic. The other income, net for the three months endedMarch 31, 2019 reflected favorable market returns on investments used to fund Company-owned life insurance contracts and investments held in rabbi trusts.
Income Taxes
Income tax expense in the recent third quarter was$10.0 million , or 20.0 percent of pre-tax income compared with$16.9 million , or 24.9 percent of pre-tax income in the same quarter a year ago. Income tax expense for the three months endedMarch 31, 2020 includes tax benefits of$1.6 million as a result of changes in the Company's prior year tax positions. The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted onMarch 27, 2020 . The CARES Act established new provisions, including but not limited to, expanded deduction of certain qualified capital expenditures, delayed payment of certain employment taxes, expanded use of net operating losses, reduced limitations on deductions of interest expense and extension of funding for defined benefit plans. The Company is continuing to evaluate these provisions but does not anticipate the CARES Act will have a significant impact on our financial position, results of operations or cash flows.
Business Segment Results
We have two reportable business segments: SAO and PEP.
The following table includes comparative information for volumes by business
segment:
Three Months Ended %
March 31, (Decrease) (Decrease)
(Pounds sold, in thousands) 2020 2019 Increase Increase
Specialty Alloys Operations 59,052 65,296 (6,244 ) (10 )%
Performance Engineered Products * 3,202 3,540 (338 ) (10 )%
Intersegment (116 ) (918 ) 802 87 %
Consolidated pounds sold 62,138 67,918 (5,780 ) (9 )%
* Pounds sold data for PEP segment includes
The following table includes comparative information for net sales by business
segment:
Three Months Ended $ %
March 31, (Decrease) (Decrease)
($ in millions) 2020 2019 Increase Increase
Specialty Alloys Operations $ 488.1 $ 498.3 $ (10.2 ) (2 )%
Performance Engineered Products 108.6 128.7 (20.1 ) (16 )%
Intersegment (11.3 ) (17.1 ) 5.8 34 %
Total net sales $ 585.4 $ 609.9 $ (24.5 ) (4 )%
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The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:
Three Months Ended $ %
March 31, Increase Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Specialty Alloys Operations $ 398.8 $ 393.3 $ 5.5 1 %
Performance Engineered Products 107.1 125.9 (18.8 ) (15 )%
Intersegment (10.9 ) (16.2 ) 5.3 33 %
Total net sales excluding surcharge
revenue $ 495.0 $ 503.0 $ (8.0 ) (2 )%
Specialty Alloys Operations Segment
Net sales for the quarter endedMarch 31, 2020 for the SAO segment decreased 2 percent to$488.1 million , as compared with$498.3 million in the same quarter a year ago. Excluding surcharge revenue, net sales increased 1 percent on 10 percent lower shipment volume from a year ago. The SAO Segment results reflect stronger product mix in all end-use markets compared to the prior year same quarter partially offset by the impacts of the 737 MAX production halt and the COVID-19 pandemic. Operating income for the SAO segment was$76.4 million or 15.7 percent of net sales (19.2 percent of net sales excluding surcharge revenue) in the recent third quarter, as compared with$73.6 million or 14.8 percent of net sales (18.7 percent of net sales excluding surcharge revenue) in the same quarter a year ago. The results reflect stronger product mix compared to the prior year same quarter. This was offset by productivity losses in the current quarter due to the COVID-19 pandemic.
Performance Engineered Products Segment
Net sales for the quarter endedMarch 31, 2020 for the PEP segment decreased 16 percent to$108.6 million , as compared with$128.7 million in the same quarter a year ago. Excluding surcharge revenue, net sales of$107.1 million decreased from$125.9 million a year ago. The results reflect lower sales in our Energy end-use market, primarily in the domestic oil and gas sub-market. Distribution sales were also down as a result of the impact of tariffs. These decreases were partially offset by an increase in the Medical end-use market. Operating loss for the PEP segment was$0.3 million or negative 0.3 percent of net sales in the recent third quarter, compared with operating income of$16.6 million or 12.9 percent of net sales in the same quarter a year ago. The results were impacted by our continuing strategic investment in additive manufacturing, decreased activity in the North American oil and gas sub-market and the impact of tariffs on our distribution business. The prior year third quarter results were impacted by an$11.4 million benefit related to an insurance recovery.
Results of Operations - Nine Months Ended
Net Sales Net sales for the nine months endedMarch 31, 2020 were$1,743.8 million , which was flat compared to the same period a year ago. Excluding surcharge revenue, sales increased 3 percent on 7 percent lower shipment volume from the same period a year ago. Our participation in diverse end-use markets resulted in comparable sales in the current fiscal year versus the prior year period despite the challenging environment. The results reflect the impact of stronger product mix and demand for materials used in the Aerospace and Defense and Medical end-use markets. Geographically, sales outsidethe United States increased 12 percent from the same period a year ago to$620.2 million for the nine months endedMarch 31, 2020 . The increase is primarily due to stronger product demand in the Aerospace and Defense end-use market inEurope ,Asia Pacific andCanada . A portion of our sales outsidethe United States are denominated in foreign currencies. The impact of fluctuations in foreign currency exchange rates resulted in a$2.0 million decrease in sales during the nine months endedMarch 31, 2020 compared to the nine months endedMarch 31, 2019 . Net sales outsidethe United States represented 36 percent and 32 percent of total net sales for the nine months endedMarch 31, 2020 and 2019, respectively. 37
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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:
Nine Months Ended $ %
March 31, Increase Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Aerospace and Defense $ 1,058.4 $ 951.9 $ 106.5 11 %
Medical 151.0 147.6 3.4 2 %
Transportation 111.9 118.0 (6.1 ) (5 )%
Energy 103.2 136.1 (32.9 ) (24 )%
Industrial and Consumer 231.4 280.9 (49.5 ) (18 )%
Distribution 87.9 104.3 (16.4 ) (16 )%
Total net sales $ 1,743.8 $ 1,738.8 $ 5.0 - %
The following table includes comparative information for our net sales by the same principal end-use markets, but excluding surcharge revenue:
Nine Months Ended $ %
March 31, Increase Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Aerospace and Defense $ 858.3 $ 747.6 $ 110.7 15 %
Medical 135.2 125.0 10.2 8 %
Transportation 91.4 94.3 (2.9 ) (3 )%
Energy 88.7 114.7 (26.0 ) (23 )%
Industrial and Consumer 191.9 224.0 (32.1 ) (14 )%
Distribution 87.3 103.2 (15.9 ) (15 )%
Total net sales excluding surcharge
revenue $ 1,452.8 $ 1,408.8 $ 44.0 3 %
Sales to the Aerospace and Defense end-use market increased 11 percent from the
same period a year ago to $1,058.4 million . Excluding surcharge revenue, sales
increased 15 percent from the same period a year ago on a 5 percent increase in
shipment volume. The results reflect stronger demand in all sub-markets and
improved product mix for key sub-markets compared to the prior year quarter.
Medical end-use market sales increased 2 percent from the same period a year ago
to $151.0 million . Excluding surcharge revenue, sales increased 8 percent on 2
percent higher shipment volume from the same period a year ago. The results
reflect strong market conditions with increased sales and improved product mix
within the orthopedic and dental sub-markets.
Transportation end-use market sales of $111.9 million decreased by 5 percent
from the same period a year ago. Excluding surcharge revenue, sales of $91.4
million decreased 3 percent on 10 percent lower shipment volume from the same
period a year ago. The results reflect weaker demand for our applications due to
trade actions and tariffs during the first half of the fiscal year and COVID-19
production disruptions in the most recent quarter.
Sales to the Energy end-use market decreased 24 percent from the same period a
year ago to $103.2 million . Excluding surcharge revenue, sales decreased 23
percent from a year ago. The results reflect decreased sales in the domestic oil
and gas sub-market from global demand decreases and the impact of the COVID-19
pandemic. This is partially offset by modest increases in the international
power generation sub-market.
Industrial and Consumer end-use market sales decreased 18 percent from the same
period a year ago to $231.4 million . Excluding surcharge revenue, sales
decreased 14 percent on a 24 percent decrease in shipment volume. The results
reflect the impact of lower demand primarily in the industrial sub-market offset
partially by increased sales and stronger product mix in consumer electronics.
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Table of Contents Gross Profit Our gross profit in the nine months endedMarch 31, 2020 increased 4 percent to$334.8 million , or 19.2 percent of net sales as compared with$321.9 million , or 18.5 percent of net sales in the same period a year ago. Excluding the impact of surcharge revenue, our gross margin in the nine months endedMarch 31, 2020 was 23.0 percent as compared to 22.8 percent in the same period a year ago. The results for the nine months endedMarch 31, 2020 reflect stronger product mix across all end-use markets as well as operating cost improvements during the first half of the current fiscal year partially offset by impacts related to the 737 MAX production halt and the COVID-19 pandemic during the third quarter of fiscal year 2020. Our surcharge mechanism is structured to recover increases in raw material costs, although in certain cases with a lag effect as discussed above. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharge on gross margin for the comparative nine-month periods. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures. Nine Months Ended March 31, ($ in millions) 2020 2019 Net sales$ 1,743.8 $ 1,738.8 Less: surcharge revenue 291.0 330.0 Net sales excluding surcharge revenue$ 1,452.8 $ 1,408.8 Gross profit$ 334.8 $ 321.9 Gross margin 19.2 % 18.5 %
Adjusted gross margin excluding surcharge revenue 23.0 % 22.8 %
Selling, General and Administrative Expenses
Selling, general and administrative expenses of$159.0 million were 9.1 percent of net sales (10.9 percent of net sales excluding surcharge) for the nine months endedMarch 31, 2020 as compared with$148.3 million or 8.5 percent of net sales (10.5 percent of net sales excluding surcharge) in the same period a year ago. Selling, general and administrative expenses increased in the nine months endedMarch 31, 2020 reflecting the full impact from the LPW acquisition in the second quarter of fiscal year 2019 and higher spending in key growth areas including additive manufacturing and soft magnetics.
Restructuring Charges
During the nine months endedMarch 31, 2020 , the Company incurred$2.3 million , before taxes, of restructuring charges in order to reduce overhead costs and position the Company to drive long-term, profitable growth. 39
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Operating Income
Our operating income in the nine months endedMarch 31, 2020 was$173.5 million , or 9.9 percent of net sales as compared with$173.6 million , or 10.0 percent of net sales in the same period a year ago. Excluding surcharge revenue and special items, adjusted operating margin was 12.1 percent for the nine months endedMarch 31, 2020 and 12.4 percent for the same period a year ago. The decrease in the operating margin is a result of a strong first half of our fiscal year with increased sales and stronger product mix in key end-use markets partially offset by higher spending in additive manufacturing compared to the same period a year ago. The most recent quarter was impacted by the production halt of the 737 MAX and the COVID-19 pandemic. The following presents our operating income and operating margin, in each case excluding the impact of surcharge revenue on net sales and special items. We present and discuss these financial measures because management believes removing these items provides a more consistent and meaningful basis for comparing ongoing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures. Nine Months Ended March 31, ($ in millions) 2020 2019 Net sales$ 1,743.8 $ 1,738.8 Less: surcharge revenue 291.0 330.0 Net sales excluding surcharge revenue$ 1,452.8 $ 1,408.8 Operating income$ 173.5 $ 173.6 Special items: Restructuring charges 2.3 - Acquisition-related costs - 1.2 Operating income excluding special items$ 175.8 $ 174.8 Operating margin 9.9 % 10.0 % Adjusted operating margin excluding surcharge revenue and special items 12.1 % 12.4 % Interest Expense Interest expense for the nine months endedMarch 31, 2020 was$15.6 million compared with$20.3 million in the same period a year ago. Capitalized interest reduced interest expense by$6.5 million for the nine months endedMarch 31, 2020 and$3.2 million for the nine months endedMarch 31, 2019 .
Other (Expense) Income, Net
Other expense, net was$3.4 million for the recent nine months endedMarch 31, 2020 compared with other income, net of$0.1 million in the same period a year ago. Income Taxes Income tax expense in the nine months endedMarch 31, 2020 was$34.6 million , or 22.4 percent of pre-tax income compared with$35.3 million , or 23.0 percent of pre-tax income in the nine months endedMarch 31, 2019 . Income tax expense for the nine months endedMarch 31, 2020 includes tax benefits of$1.6 million as a result of changes in the Company's prior year tax positions. Income tax expense for the nine months endedMarch 31, 2019 includes tax benefits of$1.8 million as a result of changes in the Company's prior year tax positions. The CARES Act was enacted onMarch 27, 2020 . The CARES Act established new provisions, including but not limited to, expanded deduction of certain qualified capital expenditures, delayed payment of certain employment taxes, expanded use of net operating losses, reduced limitations on deductions of interest expense and extension of funding for defined benefit plans. The Company is continuing to evaluate these provisions but does not anticipate the CARES Act will have a significant impact on our financial position, results of operations or cash flows. 40
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The Tax Cuts and Jobs Act was enacted onDecember 22, 2017 . The Tax Cuts and Jobs Act included provisions that reduced the federal corporate income tax rate, created a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings (i.e. transition tax), and changed certain business deductions including allowing for immediate expensing of certain qualified capital expenditures and limitations on deductions of interest expense. The accounting for the income tax effects of the Tax Cuts and Jobs Act was completed byDecember 31, 2018 . A discrete tax benefit of$0.2 million was recorded for the transition tax offset by a discrete tax charge of$0.2 million for the re-measurement of deferred tax assets and liabilities in the three months endedDecember 31, 2018 . Business Segment Results
We have two reportable business segments: SAO and PEP.
The following table includes comparative information for volumes by business
segment:
Nine Months Ended %
March 31, Decrease Decrease
(Pounds sold, in thousands) 2020 2019 (Increase) (Increase)
Specialty Alloys Operations 175,660 189,678 (14,018 ) (7 )%
Performance Engineered Products * 9,874 9,572 302 3 %
Intersegment (1,800 ) (1,798 ) (2 ) - %
Consolidated pounds sold 183,734 197,452 (13,718 ) (7 )%
* Pounds sold data for PEP segment includes
The following table includes comparative information for net sales by business
segment:
Nine Months Ended $ %
March 31, Increase Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Specialty Alloys Operations $ 1,462.2 $ 1,435.4 $ 26.8 2 %
Performance Engineered Products 324.0 353.4 (29.4 ) (8 )%
Intersegment (42.4 ) (50.0 ) 7.6 15 %
Total net sales $ 1,743.8 $ 1,738.8 $ 5.0 - %
The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:
Nine Months Ended $ %
March 31, Increase Increase
($ in millions) 2020 2019 (Decrease) (Decrease)
Specialty Alloys Operations $ 1,174.5 $ 1,111.0 $ 63.5 6 %
Performance Engineered Products 319.1 343.3 (24.2 ) (7 )%
Intersegment (40.8 ) (45.5 ) 4.7 10 %
Total net sales excluding surcharge
revenue $ 1,452.8 $ 1,408.8 $ 44.0 3 %
Specialty Alloys Operations Segment
Net sales for the nine months endedMarch 31, 2020 for the SAO segment increased 2 percent to$1,462.2 million , as compared with$1,435.4 million in the same period a year ago. Excluding surcharge revenue, net sales increased 6 percent on 7 percent lower shipment volume from a year ago. The results primarily reflect increased sales in the Aerospace and Defense and Medical end-use markets compared to the prior year same period. 41
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Operating income for the SAO segment was$233.7 million or 16.0 percent of net sales (19.9 percent of net sales excluding surcharge revenue) in the recent nine months endedMarch 31, 2020 as compared with$195.3 million or 13.6 percent of net sales (17.6 percent of net sales excluding surcharge revenue) in the same period a year ago. The increase in operating income reflects the impact of stronger product mix across all end-use markets as well as operating cost improvements compared to the prior year same period.
Performance Engineered Products Segment
Net sales for the nine months endedMarch 31, 2020 for the PEP segment decreased 8 percent to$324.0 million , as compared with$353.4 million in the same period a year ago. Excluding surcharge revenue, net sales decreased 7 percent from a year ago. The results reflect decreases in the Energy and Distribution end-use markets partially offset by increases in sales in the Aerospace and Defense and Medical end-use markets. Operating loss for the PEP segment was$2.0 million or negative 0.6 percent of net sales in the recent nine months endedMarch 31, 2020 , compared with an operating income of$28.3 million or 8.0 percent of net sales in the same period a year ago. The current year results were impacted by weak demand in the oil and gas sub-market and ongoing trade actions and tariffs on our distribution business. The prior year results were impacted by an$11.4 million benefit related to an insurance recovery.
Liquidity and Financial Resources
During the nine months endedMarch 31, 2020 , we generated cash from operations of$94.9 million compared to$57.2 million in the same period a year ago. Our free cash flow, which we define under "Non-GAAP Financial Measures" below, was negative$77.9 million as compared to negative$169.7 million for the same period a year ago. The increase in cash provided from operating activities for the nine months endedMarch 31, 2020 compared to the same period a year ago was driven by working capital improvements, primarily inventory. The free cash flow results reflect higher capital spending levels in the current period as we continued to increase our investment in strategic growth areas. Prior year results included the impact of the acquisition of LPW. Capital expenditures for property, plant, equipment and software were$144.0 million for the nine months endedMarch 31, 2020 as compared to$130.7 million for the same period a year ago. In fiscal year 2020, we expect capital expenditures to be approximately$170 million .
Dividends during the nine months ended
We have demonstrated the ability to generate cash to meet our needs through cash flows from operations, management of working capital and the ability to access capital markets to supplement internally generated funds. We generally target minimum liquidity of$150 million , consisting of cash and cash equivalents added to available borrowing capacity under our Credit Agreement. Our Credit Agreement contains a revolving credit commitment of$400 million , which expires inMarch 2022 . As ofMarch 31, 2020 , we had$5.9 million of issued letters of credit and$170 million of short-term borrowings under the Credit Agreement. The balance of the Credit Agreement,$224.1 million , remains available to us. As ofMarch 31, 2020 , we had total liquidity of$317.1 million , including$93.0 million of cash and cash equivalents. From time to time during the nine months endedMarch 31, 2020 , we have borrowed under our Credit Agreement. The weighted average daily borrowing under the Credit Agreement during the nine months endedMarch 31, 2020 was approximately$85.3 million with daily outstanding borrowings ranging from$11.0 million to$170.0 million during the period.
We believe that our cash and cash equivalents of
During the nine months endedMarch 31, 2020 , we made pension contributions of$4.9 million to our qualified defined benefit pension plans. We currently expect to make$1.3 million of additional contributions to our qualified defined benefit pension plans during the remainder of fiscal year 2020. As ofMarch 31, 2020 , we had cash and cash equivalents of approximately$20.4 million held at various foreign subsidiaries. Our global deployment considers, among other things, geographic location of our subsidiaries' cash balances, the locations of our anticipated liquidity needs, and the cost to access international cash balances, as necessary. From time to time, we may make short-term intercompany borrowings against our cash held outsidethe United States in order to reduce or eliminate any required borrowing under our Credit Agreement. 42
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We are subject to certain financial and restrictive covenants under the Credit Agreement, which, among other things, require the maintenance of a minimum interest coverage ratio (3.50 to 1.00 as ofMarch 31, 2020 ). 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 ofMarch 31, 2020 , the Company was in compliance with all of the covenants of the Credit Agreement.
The following table shows our actual ratio performance with respect to the
financial covenants as of
Covenant Covenant Requirement Actual Ratio
Consolidated interest coverage 3.50 to 1.00 (minimum) 18.61 to 1.00 Consolidated debt to capital 55% (maximum)
30.9%
We continue to believe that we will maintain compliance with the financial and
restrictive covenants in future periods. To the extent that we do not comply
with the covenants under the Credit Agreement, this could reduce our liquidity
and flexibility due to potential restrictions on borrowings available to us
unless we are able to obtain waivers or modifications of the covenants.
Non-GAAP Financial Measures
The following provides additional information regarding certain non-GAAP financial measures that we use in this report. Our definitions and calculations of these items may not necessarily be the same as those used by other companies.
This report includes discussions of net sales as adjusted to exclude the impact of raw material surcharge and the resulting impact on gross margins, which represent financial measures that have not been determined in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"). We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net sales and cost of sales provides a more consistent basis for comparing results of operations from period to period for the reasons discussed earlier in this report. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, our board of directors and others. See our earlier discussion of "Gross Profit" for a reconciliation of net sales and gross margin, excluding surcharge revenue and special items, to net sales as determined in accordance withU.S. GAAP. Net sales and gross margin excluding surcharge revenue and special items is not aU.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, net sales and gross margin calculated in accordance withU.S. GAAP.
Adjusted Operating Margin Excluding Surcharge Revenue and Special Items
This report includes discussions of operating margin as adjusted to exclude the impact of raw material surcharge revenue and special items which represent financial measures that have not been determined in accordance withU.S. GAAP. We present and discuss this financial measure because management believes removing the impact of raw material surcharge from net sales and cost of sales provides a more consistent and meaningful basis for comparing results of operations from period to period for the reasons discussed earlier in this report. In addition, management believes that excluding special items from operating margin is helpful in analyzing our operating performance, as these items are not indicative of ongoing operating performance. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, our board of directors and others. See our earlier discussion of operating income for a reconciliation of operating income and operating margin excluding surcharge revenue and special items to operating income and operating margin determined in accordance withU.S. GAAP. Operating margin excluding surcharge revenue is not aU.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, operating margin calculated in accordance withU.S. GAAP. 43
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Adjusted Earnings Per Share
The following provides a reconciliation of adjusted earnings per share, to its
most directly comparable
($ in millions, except per share Income Before Earnings Per amounts) Income Taxes Income Tax Expense Net Income Diluted Share* Three months endedMarch 31, 2020 , as reported $ 49.9 $ (10.0 )$ 39.9 $ 0.82 Special item: None reported - - - - Three months endedMarch 31, 2020 , as adjusted $ 49.9 $ (10.0 )$ 39.9 $ 0.82
* Impact per diluted share calculated using weighted average common shares
outstanding of 48.3 million for the three months ended
($ in millions, except per share Income Before Earnings Per amounts) Income Taxes Income Tax Expense Net Income Diluted Share* Three months endedMarch 31, 2019 , as reported $ 68.0 $ (16.9 )$ 51.1 $ 1.05 Special item: None reported - - - - Three months endedMarch 31, 2019 , as adjusted $ 68.0 $ (16.9 )$ 51.1 $ 1.05
* Impact per diluted share calculated using weighted average common shares
outstanding of 48.1 million for the three months ended
($ in millions, except per share Income Before Earnings Per amounts) Income Taxes Income Tax Expense Net Income Diluted Share* Nine months endedMarch 31, 2020 , as reported$ 154.5 $ (34.6 )$ 119.9 $ 2.46 Special item: Restructuring charges 2.3 (0.5 ) 1.8 0.04 Nine months endedMarch 31, 2020 , as adjusted$ 156.8 $ (35.1 )$ 121.7 $ 2.50
* Impact per diluted share calculated using weighted average common shares
outstanding of 48.4 million for the nine months ended
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($ in millions, except per share Income Before Earnings Per amounts) Income Taxes Income Tax Expense Net Income Diluted Share* Nine months endedMarch 31, 2019 , as reported$ 153.4 $ (35.3 )$ 118.1 $ 2.43 Special item: Acquisition-related costs 1.2 - 1.2 0.03 Nine months endedMarch 31, 2019 , as adjusted$ 154.6 $ (35.3 )$ 119.3 $ 2.46
* Impact per diluted share calculated using weighted average common shares
outstanding of 48.1 million for the nine months ended
Management believes that the presentation of earnings per share adjusted to exclude special items is helpful in analyzing the operating performance of the Company, as these items are not indicative of ongoing operating performance. Our definitions and calculations of these items may not necessarily be the same as those used by other companies. Management uses its results excluding these amounts to evaluate its operating performance and to discuss its business with investment institutions, our Board of Directors and others. Adjusted earnings per share is not aU.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, earnings per share calculated in accordance withU.S. GAAP.
Free Cash Flow
The following provides a reconciliation of free cash flow, as used in this
report, to its most directly comparable
Nine Months Ended
March 31,
($ in millions) 2020 2019
Net cash provided from operating activities $ 94.9 $ 57.2
Purchases of property, plant, equipment and software (144.0 ) (130.7 ) Proceeds from disposals of property, plant and equipment and assets held for sale
0.3 0.3
Acquisition of business, net of cash acquired - (79.0 ) Dividends paid (29.1 ) (28.9 ) Proceeds from insurance recovery - 11.4 Free cash flow$ (77.9 ) $ (169.7 ) Management believes that the presentation of free cash flow provides useful information to investors regarding our financial condition because it is a measure of cash generated which management evaluates for alternative uses. It is management's current intention to use excess cash to fund investments in capital equipment, acquisition opportunities and consistent dividend payments. Free cash flow is not aU.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, cash flows calculated in accordance withU.S. GAAP. 45
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Table of Contents Contingencies Environmental We are subject to various federal, state, local and international environmental laws and regulations relating to pollution, protection of public health and the environment, natural resource damages and occupational safety and health. Although compliance with these laws and regulations may affect the costs of our operations, compliance costs to date have not been material. We have environmental remediation liabilities at some of our owned operating facilities and have been designated as a PRP with respect to certain third party Superfund waste-disposal sites and other third party-owned sites. We accrue amounts for environmental remediation costs that represent our best estimate of the probable and reasonably estimable future costs related to environmental remediation. During the nine months endedMarch 31, 2020 , the Company decreased the liability for a Company-owned former operating site by$0.1 million . The liabilities recorded for environmental remediation costs at Superfund sites, other third party-owned sites and Carpenter-owned current or former operating facilities remaining atMarch 31, 2020 andJune 30, 2019 were$16.0 million and$16.1 million , respectively. Additionally, we have been notified that we may be a PRP with respect to other Superfund sites as to which no proceedings have been instituted against us. 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 on a quarterly basis. Estimates of the amount and timing of future costs of environmental remediation requirements are inherently imprecise because of the continuing evolution of environmental laws and regulatory requirements, the availability and application of technology, the identification of currently unknown remediation sites and the allocation of costs among the PRPs. Based upon information currently available, such future costs are not expected to have a material effect on our financial position, results of operations or cash flows over the long-term. However, such costs could be material to our financial position, results of operations or cash flows in a particular future quarter or year.
Other
We are defending various routine claims and legal actions that are incidental to our business, and that are common to our 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 we, from time to time, have 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. We provide 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 our 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, we believe that the total liability from these matters will not have a material effect on our 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 our financial position, results of operations or cash flows in a particular future quarter or year.
Critical Accounting Policies and Estimates
A summary of other significant accounting policies is discussed in our 2019 Form 10-K Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations", and in Note 1, Summary of Significant Accounting Policies, of the Notes to our consolidated financial statements included in Part II, Item 8 thereto.
Goodwill is not amortized but instead is at least annually tested for impairment as ofJune 30 , or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. Potential impairment is identified by comparing the fair value of a reporting unit to its carrying value. The fair value is estimated using discounted cash flows and the use of market multiples valuation techniques. If the carrying value of the reporting unit exceeds its fair value, any impairment loss is measured by comparing the carrying value of the reporting unit's goodwill to its implied fair value. The discounted cash flow analysis for each reporting unit tested requires significant estimates and assumptions related to cash flow forecasts, discount rates, terminal values and income tax rates. The cash flow forecasts include significant judgments and assumptions relating to revenue growth rates. The cash flow forecasts are developed based on assumptions about each reporting unit's markets, product offerings, pricing, capital expenditure and working capital requirements as well as cost performance. 46
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The discount rates used in the discounted cash flow are estimated based on a market participant's perspective of each reporting unit's weighted average cost of capital. The terminal value, which represents the value attributed to the reporting unit beyond the forecast period, is estimated using a perpetuity growth rate assumption. The income tax rates used in the discounted cash flow analysis represent estimates of the long-term statutory income tax rates for each reporting unit based on the jurisdictions in which the reporting units operate. As ofMarch 31, 2020 , we had five reporting units with goodwill recorded.Goodwill associated with our SAO reporting unit is tested at the SAO segment level and represents approximately 60 percent of our total goodwill. All other goodwill is associated with our PEP segment, which includes four reporting units with goodwill recorded. As ofJune 30, 2019 , the fair value of the SAO reporting unit exceeded the carrying value by approximately 32 percent. The goodwill recorded related to the SAO reporting unit as ofJune 30, 2019 was$195.5 million . The discounted cash flows analysis for the SAO reporting unit includes assumptions related to our ability to increase volume, improve mix, expand product offerings and continue to implement opportunities to reduce costs over the next several years. For purposes of the discounted cash flow analysis for SAO's fair value, we used a weighted average cost capital of 10 percent and a terminal growth rate assumption of 3 percent. As ofJune 30, 2019 , the fair value ofCarpenter Powder Products ("Powders") exceeded the carrying value by 8 percent. The goodwill recorded related to Powders as ofJune 30, 2019 was$22.0 million . The discounted cash flows analysis for the Powders reporting unit includes assumptions related to our ability to increase volume, improve mix, expand product offerings and implement opportunities to reduce costs over the next several years. For purposes of the discounted cash flow analysis for the Powders reporting unit's fair value, we used a weighted average cost capital of 14.5 percent and a terminal growth rate assumption of 3 percent. OnJuly 1, 2019 , the Company reorganized certain business units within our PEP segment. The LPW, CalRAM and Powder businesses inAlabama andWest Virginia were combined to create the Carpenter Additive reporting unit. The Powders reporting unit remains but now excludes theAlabama andWest Virginia sites. As a result, the Company performed an interim goodwill impairment test as ofJuly 1, 2019 for the reporting units impacted by the reorganization noting the fair value exceeded the carrying value in all instances. The estimate of fair value requires significant judgment. We based our fair value estimates on assumptions that we believe to be reasonable but that are unpredictable and inherently uncertain, including estimates of future growth rates and operating margins and assumptions about the overall economic climate and the competitive environment for our business units. There can be no assurance that our estimates and assumptions made for purposes of our goodwill and identifiable intangible asset testing as of the time of testing will prove to be accurate predictions of the future. If our assumptions regarding business projections, competitive environments or anticipated growth rates are not correct, or if market conditions were to change, including as a result of the current COVID-19 pandemic, we may be required to record goodwill and/or intangible asset impairment charges in future periods, whether in connection with our next annual impairment testing or earlier, if an indicator of an impairment is present before our next annual evaluation. 47
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ from those projected, anticipated or implied. The most significant of these uncertainties are described inCarpenter Technology's filings with theSecurities and Exchange Commission , including its report on Form 10-K for the year endedJune 30, 2019 , Form 10-Q for the quarters endedSeptember 30, 2019 andDecember 31, 2019 , and the exhibits attached to those filings. They include but are not limited to: (1) the cyclical nature of the specialty materials business and certain end-use markets, including aerospace, defense, medical, transportation, energy, industrial and consumer, or other influences onCarpenter Technology's business such as new competitors, the consolidation of competitors, customers, and suppliers or the transfer of manufacturing capacity fromthe United States to foreign countries; (2) the ability ofCarpenter Technology to achieve cash generation, growth, earnings, profitability, operating income, cost savings and reductions, qualifications, productivity improvements or process changes; (3) the ability to recoup increases in the cost of energy, raw materials, freight or other factors; (4) domestic and foreign excess manufacturing capacity for certain metals; (5) fluctuations in currency exchange rates; (6) the effect of government trade actions; (7) the valuation of the assets and liabilities inCarpenter Technology's pension trusts and the accounting for pension plans; (8) possible labor disputes or work stoppages; (9) the potential that our customers may substitute alternate materials or adopt different manufacturing practices that replace or limit the suitability of our products; (10) the ability to successfully acquire and integrate acquisitions; (11) the availability of credit facilities toCarpenter Technology , its customers or other members of the supply chain; (12) the ability to obtain energy or raw materials, especially from suppliers located in countries that may be subject to unstable political or economic conditions; (13)Carpenter Technology's manufacturing processes are dependent upon highly specialized equipment located primarily in facilities inReading andLatrobe, Pennsylvania andAthens, Alabama for which there may be limited alternatives if there are significant equipment failures or a catastrophic event; (14) the ability to hire and retain key personnel, including members of the executive management team, management, metallurgists and other skilled personnel; (15) fluctuations in oil and gas prices and production; (16) uncertainty regarding the return to service of the Boeing 737 MAX aircraft and the related supply chain disruption; (17) potential impacts of the COVID-19 pandemic on our operations, financial results and financial position; and (18) our ability to successfully carry out restructuring and business exit activities on the expected terms and time lines. Any of these factors could have an adverse and/or fluctuating effect onCarpenter Technology's results of operations. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended.Carpenter Technology undertakes no obligation to update or revise any forward-looking statements. 48
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