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MarketScreener Homepage  >  Equities  >  Nyse  >  Carpenter Technology Corporation    CRS

CARPENTER TECHNOLOGY CORPORATION

(CRS)
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CARPENTER TECHNOLOGY : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

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08/29/2019 | 03:21pm EDT

Background and General

Our discussions below in this Item 7 should be read in conjunction with our consolidated financial statements, including the notes thereto, included in this annual report on Form 10-K.


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, transportation, energy, medical, 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.

While we prepare our financial statements in accordance with U.S. generally
accepted accounting principles ("U.S. GAAP"), we also utilize and present
certain financial measures that are not based on or included in U.S. GAAP (we
refer to these as "Non-GAAP financial measures"). Please see the section
"Non-GAAP Financial Measures" below for further discussion of these financial
measures, including the reasons why we use such financial measures and
reconciliations of such financial measures to the nearest U.S. GAAP financial
measures.


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Business Trends

Selected financial results for the past three fiscal years are summarized below:


                                                            Years Ended June 30,
($ in millions, except per share data)               2019           2018    

2017

Net sales                                        $  2,380.2     $  2,157.7  

$ 1,797.6

Net sales excluding surcharge revenue (1) $ 1,942.1 $ 1,792.3

   $  1,558.4

Operating income                                 $    241.4     $    189.3     $    121.5

Net income                                       $    167.0     $    188.5     $     47.0

Diluted earnings per share                       $     3.43     $     3.92     $     0.99

Purchases of property, plant, equipment and
software                                         $    180.3     $    135.0     $     98.5

Free cash flow (1)                               $    (53.7 )   $     34.7     $    (16.8 )

Pounds sold (in thousands) (2)                      267,536        265,620        236,346


(1) See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures.

(2) Includes pounds from Specialty Alloys Operations segment, and certain Performance Engineered Products segment businesses including Dynamet, Carpenter Powder Products and LPW Technology Ltd.

Our sales are across diverse end-use markets. The table below summarizes our sales by end-use market over the past three fiscal years:

                                               Years Ended June 30,
                                 2019                  2018                  2017
                                        % of                  % of                  % of
($ in millions)            Dollars     Total     Dollars     Total     Dollars     Total
Aerospace and Defense     $ 1,327.9      56 %   $ 1,182.3      55 %   $   973.3      54 %
Medical                       205.0       8         175.3       8         125.5       7
Energy                        181.7       8         146.5       7         138.0       8
Transportation                157.7       6         157.0       7         143.9       8
Industrial and Consumer       371.5      16         364.9      17         298.2      17
Distribution                  136.4       6         131.7       6         118.7       6
Total net sales           $ 2,380.2     100 %   $ 2,157.7     100 %   $ 1,797.6     100 %


Impact of Raw Material Prices and Product Mix


We value most of our inventory utilizing the 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 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 and/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 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. The following is a summary of the net
periodic benefit costs for the years ended June 30, 2019, 2018 and 2017:
                                   Years Ended June 30,
($ in millions)                  2019        2018      2017
Pension plans                $    9.8       $ 11.3    $ 45.8
Other postretirement plans        1.8          2.9       2.6
Net periodic benefit costs   $   11.6       $ 14.2    $ 48.4



In September 2016, we announced changes to retirement plans we offer to certain
employees. Benefits accrued to eligible participants of our largest qualified
defined benefit pension plan and certain non-qualified pension plans were frozen
effective December 31, 2016. Approximately 1,900 affected employees were
transitioned to the Company's 401(k) plan that has been in effect for eligible
employees since 2012, when the pension plan was closed to new entrants. We
recognized the plan freeze during fiscal year 2017 as a curtailment, since it
eliminated the accrual for a significant number of participants for all of their
future services. We also made a voluntary pension contribution of $100.0 million
to the affected plan in October 2016.


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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 ("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.

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 and in other income (expense), net. The following is
a summary of the classification of net pension expense for the years ended
June 30, 2019, 2018 and 2017:

                                                              Years Ended June 30,
($ in millions)                                             2019        2018      2017
Cost of sales
Service cost                                            $   10.0       $ 10.5    $ 20.2
   Total cost of sales                                      10.0         10.5      20.2
Selling, general and administrative expenses
Service cost                                                 1.5          

1.6 3.9

   Total selling, general and administrative expenses        1.5          1.6       3.9
Other expense
Pension earnings, interest and deferrals                     0.1          2.1      23.8
Curtailment charge                                             -            -       0.5
   Total other expense                                       0.1          2.1      24.3
Net pension expense                                     $   11.6       $ 14.2    $ 48.4



As of June 30, 2019 and 2018, amounts capitalized in gross inventory were $1.7
million and $1.7 million, respectively.
Operating Performance Overview

We believe fiscal year 2019 was a successful year as strong execution of our commercial and manufacturing strategies combined with growing market demand across most markets resulted in our best operating income performance since fiscal year 2013. We made significant progress in the following areas:

• We expanded customer relationships through market share gains with new and

existing customers based on the strength of our solutions focused customer

       approach.


• Through the ongoing implementation of the Carpenter Operating Model, we

have unlocked incremental capacity through efficiency and productivity

       improvements across our SAO and PEP businesses.


• Our Athens, Alabama facility continues to gain qualifications of submitted

Aerospace Vendor Approved Processes contributing to increased capacity.



•      We expanded our leading additive manufacturing platform with the
       acquisition of LPW Technology Ltd.



•      We increased our focus and investment in core growth areas such as
       additive manufacturing and soft magnetics.


Results of Operations - Fiscal Year 2019 Compared to Fiscal Year 2018


For fiscal year 2019, we reported net income of $167.0 million, or $3.43 per
diluted share. Excluding special items, earnings per share would have been $3.46
per diluted share for fiscal year 2019. This compares with net income of $188.5
million, or $3.92 per diluted share, a year earlier. Excluding special items,
earnings per share would have been $2.50 per diluted share for fiscal year 2018.
Our fiscal year 2019 results reflect strong market conditions combined with our
solutions focused approach that drove increasing sales in the majority of our
end-use markets and further implementation of the Carpenter Operating Model.

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Net Sales


Net sales for fiscal year 2019 were $2,380.2 million, which was a 10 percent
increase from fiscal year 2018. Excluding surcharge revenue, sales were 8
percent higher than fiscal year 2018 on 1 percent higher volume. The results
reflect stronger demand and improved product mix across key end-use markets
demonstrating our focus on high-value solutions and market share gain by
deepening our existing relationships and adding new customers.

Geographically, sales outside the United States increased 6 percent from fiscal
year 2018 to $773.5 million. The increase is primarily due to stronger product
demand in the Aerospace and Defense end-use market in Asia Pacific, South
America and Canada partially offset by lower demand in Europe. In addition,
demand was stronger in the Energy and Medical end-use markets in Europe and Asia
Pacific. A portion of our sales outside the United States are denominated in
foreign currencies. The impact of fluctuations in foreign currency exchange
rates resulted in a $4.5 million decrease in sales during fiscal year 2019
compared to fiscal year 2018. International sales as a percentage of our total
net sales represented 32 percent and 34 percent for fiscal year 2019 and fiscal
year 2018, 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.

                                Fiscal Year              $            %
($ in millions)              2019         2018       Increase      Increase
Aerospace and Defense     $ 1,327.9    $ 1,182.3    $    145.6        12 %
Medical                       205.0        175.3          29.7        17 %
Energy                        181.7        146.5          35.2        24 %
Transportation                157.7        157.0           0.7         - %
Industrial and Consumer       371.5        364.9           6.6         2 %
Distribution                  136.4        131.7           4.7         4 %
Total net sales           $ 2,380.2    $ 2,157.7    $    222.5        10 %


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


                                              Fiscal Year                 $                %
                                                                      Increase         Increase
($ in millions)                           2019           2018        (Decrease)       (Decrease)
Aerospace and Defense                 $  1,051.5     $    957.1     $      94.4            10  %
Medical                                    176.3          149.3            27.0            18  %
Energy                                     154.3          131.3            23.0            18  %
Transportation                             126.6          127.9            (1.3 )          (1 )%
Industrial and Consumer                    298.5          295.9             2.6             1  %
Distribution                               134.9          130.8             4.1             3  %
Total net sales excluding surcharge
revenue                               $  1,942.1     $  1,792.3     $     149.8             8  %



Sales to the Aerospace and Defense market increased 12 percent from fiscal year
2018 to $1,327.9 million. Excluding surcharge revenue, sales increased 10
percent on 2 percent higher shipment volume. The results reflect the impact of
stronger demand for materials used across all aerospace sub-markets and defense,
driven by aerospace engines, fasteners, avionics and program specific defense
applications.

Sales to the Medical market increased 17 percent to $205.0 million from fiscal
year 2018. Excluding surcharge revenue, sales increased 18 percent on 17 percent
higher shipment volume. The results reflect improved product mix for higher
value solutions, market share gains with key customers and the positive impact
of supply chain inventory rebuilding for titanium materials within the surgical
and cardiology sub-markets.


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Sales to the Energy market of $181.7 million reflected a 24 percent increase
from fiscal year 2018. Excluding surcharge revenue, sales increased 18 percent.
The results were driven by revenue and volume increases during the first half of
the fiscal year in the oil and gas sub-market, particularly rental and
replacement activity through our Amega West Services ("Amega West") business,
and higher demand for materials used in power generation applications.

Transportation market sales remained flat from fiscal year 2018 at $157.7
million. Excluding surcharge revenue, sales decreased 1 percent on 6 percent
lower shipment volume. The results reflect a strengthening of heavy-duty truck
applications, partially offset by trade actions and global economic uncertainty.

Industrial and Consumer market sales increased 2 percent to $371.5 million for
fiscal year 2019. Excluding surcharge revenue, sales increased 1 percent on 4
percent lower shipment volume. The results reflect the impact of stronger demand
for materials used in consumer goods including the sporting sub-market.

Gross Profit


Gross profit in fiscal year 2019 increased to $444.8 million, or 18.7 percent of
net sales from $382.3 million, or 17.7 percent of net sales for fiscal year
2018. Excluding the impact of the surcharge revenue, our gross margin in fiscal
year 2019 was 22.9 percent compared to 21.3 percent in fiscal year 2018. The
results reflect the impact of improved product mix coupled with capacity gains
and operating cost reductions compared to the same period a year ago. Fiscal
year 2019 also reflects an $11.4 million benefit related to an insurance
recovery in our third fiscal quarter.

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. We present
and discuss these financial measures because management believes removing the
impact of surcharge provides a more consistent and meaningful basis for
comparing results of operations from period to period. See the section "Non-GAAP
Financial Measures" below for further discussion of these financial measures.

                                                  Fiscal Year
($ in millions)                               2019          2018
Net sales                                  $ 2,380.2     $ 2,157.7
Less: surcharge revenue                        438.1         365.4

Net sales excluding surcharge revenue $ 1,942.1 $ 1,792.3


Gross profit                               $   444.8     $   382.3

Gross margin                                    18.7 %        17.7 %

Gross margin excluding surcharge revenue 22.9 % 21.3 %

Selling, General and Administrative Expenses


Selling, general and administrative expenses in fiscal year 2019 were $203.4
million, or 8.5 percent of net sales (10.5 percent of net sales excluding
surcharge revenue), compared to $193.0 million, or 8.9 percent of net sales
(10.8 percent of net sales excluding surcharge revenue), in fiscal year 2018.
Selling, general and administrative expenses increased in fiscal year 2019
primarily due to higher depreciation, insurance and acquisition related costs
partially offset by lower variable compensation expense compared to fiscal year
2018.
Operating Income

Our operating income in fiscal year 2019 increased to $241.4 million, or 10.1
percent of net sales as compared with $189.3 million, or 8.8 percent of net
sales in fiscal year 2018. Excluding surcharge revenue and special items,
adjusted operating margin was 12.5 percent for the fiscal year 2019 and 10.6
percent for the same period a year ago. The increase in the operating margin
reflects steady demand and improved product mix coupled with operating cost
improvements offset by higher selling, general and administrative expenses
compared to the same period a year ago.


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The following presents our operating income and operating margin, in each case
excluding the impact of surcharge on net sales and special items. We present and
discuss these financial measures because management believes removing the impact
of these items provides a more consistent and meaningful basis for comparing
results of operations from period to period. See the section "Non-GAAP Financial
Measures" below for further discussion of these financial measures.

                                                                    Fiscal Year
($ in millions)                                                 2019           2018
Net sales                                                   $  2,380.2     $  2,157.7
Less: surcharge revenue                                          438.1          365.4
Net sales excluding surcharge revenue                       $  1,942.1     $  1,792.3

Operating income                                            $    241.4     $    189.3

Special items:
Acquisition-related costs                                          1.2              -
Adjusted operating income excluding special items           $    242.6     $    189.3

Operating margin                                                  10.1 %          8.8 %

Adjusted operating margin excluding surcharge revenue and
special items                                                     12.5 %         10.6 %


Interest Expense

Fiscal year 2019 interest expense was $26.0 million compared to $28.3 million in
fiscal year 2018. We have used interest rate swaps to achieve a level of
floating rate debt to fixed rate debt. Interest expense for fiscal year 2019
includes net losses from interest rate swaps of $0.2 million compared with $0.4
million of net gains from interest rate swaps for fiscal year 2018. Capitalized
interest reduced interest expense by $5.1 million for fiscal year 2019 compared
to $2.8 million in fiscal year 2018.
Other Income (Expense), Net

Other income for fiscal year 2019 was $0.6 million as compared with other expense of $0.8 million a year ago. Income Taxes


Our effective tax rate (income tax expense (benefit) as a percent of income
before taxes) for fiscal year 2019 was 22.7 percent as compared to negative 17.7
percent in fiscal year 2018. Excluding the discrete tax benefits recorded in
connection with U.S. Tax reform of $68.3 million that are discussed below, our
effective tax rate for fiscal year 2018 would have been 25.0 percent.

An Act to Provide for Reconciliation Pursuant to Titles II and V of the
Concurrent Resolution on the Budget for Fiscal Year 2018 (the "Act") was enacted
on December 22, 2017. The 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 permanent reduction to the U.S. federal corporate income
tax rate from 35 percent to 21 percent was effective January 1, 2018. Based on
the Company's interpretation of the Act, during fiscal year 2018, the Company
recorded a provisional tax charge of $5.0 million for the transition tax and a
provisional tax benefit of $74.6 million for the remeasurement of deferred tax
assets and liabilities. The accounting for the income tax effects of the Act was
completed by December 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 remeasurement of deferred tax assets and liabilities in the three months
ended December 31, 2018. Under the Act, the transition tax is being paid over an
eight year period beginning in fiscal year 2019.

Fiscal year 2019 income tax expense includes tax benefits of $1.8 million as a result of changes in the Company's prior year tax positions.

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In addition to the impact of the Act discussed above, fiscal year 2018 tax
expense also included a tax charge of $1.3 million for increases in certain
state valuation allowances for deferred tax assets resulting from the impact of
a state law change that will limit the Company's ability to utilize state net
operating loss carryforwards partially offset by the impact of limitations on
interest expense as a result of the Act.

The Act also established new tax provisions that became effective in fiscal year
2019, including but not limited to eliminating the corporate alternative minimum
tax, creating the base erosion anti-abuse tax ("BEAT"), establishing new
limitations on deductible interest expense and certain executive compensation,
creating a new provision designed to tax global intangible low-tax income
("GILTI") and generally eliminating U.S. federal income taxes on dividends from
foreign subsidiaries. The Company has made an accounting policy election to
treat future GILTI inclusions in U.S. taxable income as a current period expense
when incurred.

Undistributed earnings of our foreign subsidiaries, totaling $77.8 million were
considered permanently reinvested. Following enactment of the Act, the
repatriation of cash to the U.S. is generally no longer taxable for federal
income tax purposes. If these earnings were to be repatriated, approximately
$0.3 million of tax expense would be incurred.

See Note 17 to the consolidated financial statements in Item 8. "Financial
Statements and Supplementary Data" for a full reconciliation of the statutory
federal tax rate to the effective tax rates.
Business Segment Results

Summary information about our operating results on a segment basis is set forth
below. For more detailed segment information, see Note 19 to the consolidated
financial statements included in Item 8. "Financial Statements and Supplementary
Data".

 The following table includes comparative information for volumes by business
segment:


                                         Fiscal Year                           %
                                                            (Decrease)    (Decrease)
(Pounds sold, in thousands)           2019        2018       Increase      Increase
Specialty Alloys Operations         256,360     258,326        (1,966 )      (1 )%
Performance Engineered Products *    13,752      12,388         1,364        11  %
Intersegment                         (2,576 )    (5,094 )       2,518        49  %
Consolidated pounds sold            267,536     265,620         1,916         1  %


* Pounds sold data for PEP segment includes Dynamet, Carpenter Powder Products and LPW Technology Ltd. businesses only.


The following table includes comparative information for net sales by business
segment:

                                         Fiscal Year               $            %
($ in millions)                      2019          2018        Increase      Increase
Specialty Alloys Operations       $ 1,967.3     $ 1,803.8     $    163.5         9 %
Performance Engineered Products       479.8         429.7           50.1        12 %
Intersegment                          (66.9 )       (75.8 )          8.9        12 %
Total net sales                   $ 2,380.2     $ 2,157.7     $    222.5        10 %




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The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:

                                              Fiscal Year                 $               %
($ in millions)                           2019           2018         Increase        Increase
Specialty Alloys Operations           $  1,536.6     $  1,434.1     $     102.5             7 %
Performance Engineered Products            467.0          426.3            40.7            10 %
Intersegment                               (61.5 )        (68.1 )           6.6            10 %
Total net sales excluding surcharge
revenue                               $  1,942.1     $  1,792.3     $     149.8             8 %


Specialty Alloys Operations Segment


Net sales in fiscal year 2019 for the SAO segment increased 9 percent to
$1,967.3 million, as compared with $1,803.8 million in fiscal year 2018.
Excluding surcharge revenue, net sales increased 7 percent from a year ago. The
fiscal year 2019 net sales reflected 1 percent lower shipment volume as compared
to fiscal year 2018. The results reflect the impact of a higher valued product
mix driven by increased demand in our premium products compared to the same
period a year ago.

Operating income for the SAO segment in fiscal year 2019 was $282.2 million, or
14.3 percent of net sales (18.4 percent of net sales excluding surcharge
revenue), compared to $232.4 million, or 12.9 percent of net sales (16.2 percent
of net sales excluding surcharge revenue), for fiscal year 2018. The increase in
operating income reflects the impact of the higher valued product mix driven by
the increased demand in our premium products compared to the same period a year
ago.
Performance Engineered Products Segment

Net sales for fiscal year 2019 for the PEP segment were $479.8 million as
compared with $429.7 million for fiscal year 2018. Excluding surcharge revenue,
net sales increased 10 percent from a year ago. The results reflect an increase
in sales primarily in the Medical and Energy end-use markets.

Operating income for the PEP segment for fiscal year 2019 was $30.0 million, or
6.3 percent of net sales, as compared with operating income of $26.1 million, or
6.1 percent of net sales for fiscal year 2018. The results reflect the
continuing demand for titanium products combined with cost reduction initiatives
as well as an $11.4 million benefit related to an insurance recovery in our
third fiscal quarter.


Results of Operations - Fiscal Year 2018 Compared to Fiscal Year 2017


For fiscal year 2018, we reported net income of $188.5 million, or $3.92 per
diluted share. Excluding special items, earnings per share would have been $2.50
per diluted share for fiscal year 2018. This compared to net income of $47.0
million, or $0.99 per diluted share, a year earlier. Excluding special items,
earnings per share would have been $1.08 per diluted share for fiscal year 2017.
Our fiscal year 2018 results reflected strong market conditions combined with
our solutions focused approach that drove increasing sales in all of our end-use
markets and further implementation of the Carpenter Operating Model.
Net Sales

Net sales for fiscal year 2018 were $2,157.7 million, which was a 20 percent
increase from fiscal year 2017. Excluding surcharge revenue, sales were 15
percent higher than fiscal year 2017 on 12 percent higher volume. The results
reflect stronger demand and improved product mix across certain end-use markets
demonstrating our focus on high-value solutions and market share gain by
deepening our existing relationships and adding new customers.

Geographically, sales outside the United States increased 22 percent from fiscal
year 2017 to $728.3 million. The increase is primarily due to stronger product
demand in the Aerospace and Defense, Medical and Industrial and Consumer end-use
markets in Europe and Asia Pacific. In addition, the Energy end-use market had
stronger demand for oil and gas materials in Asia Pacific and Canada partially
offset by weaker demand in Europe for power generation materials. A portion of
our sales outside the United States are denominated in foreign currencies. The
impact of fluctuations in foreign currency exchange rates resulted in a $9.3
million increase in sales during fiscal year 2018 compared to fiscal year 2017.
International sales as a percentage of our total net sales represented 34
percent and 33 percent for fiscal year 2018 and fiscal year 2017, respectively.

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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 performance of the business from period to period.

                                Fiscal Year              $            %
($ in millions)              2018         2017       Increase      Increase
Aerospace and Defense     $ 1,182.3    $   973.3    $    209.0        21 %
Medical                       175.3        125.5          49.8        40 %
Energy                        146.5        138.0           8.5         6 %
Transportation                157.0        143.9          13.1         9 %
Industrial and Consumer       364.9        298.2          66.7        22 %
Distribution                  131.7        118.7          13.0        11 %
Total net sales           $ 2,157.7    $ 1,797.6    $    360.1        20 %


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

                                              Fiscal Year                 $               %
($ in millions)                           2018           2017         Increase        Increase
Aerospace and Defense                 $    957.1     $    817.1     $     140.0            17 %
Medical                                    149.3          115.7            33.6            29 %
Energy                                     131.3          124.2             7.1             6 %
Transportation                             127.9          122.7             5.2             4 %
Industrial and Consumer                    295.9          260.7            35.2            14 %
Distribution                               130.8          118.0            12.8            11 %
Total net sales excluding surcharge
revenue                               $  1,792.3     $  1,558.4     $     233.9            15 %



Sales to the Aerospace and Defense market increased 21 percent from fiscal year
2017 to $1,182.3 million. Excluding surcharge revenue, sales increased 17
percent on 18 percent higher shipment volume. The results reflect the impact of
stronger demand for materials used in aerospace engine and structural
applications, the distribution sub-market and defense applications driven by
specific programs partially offset by lower fastener sales.

Sales to the Medical market increased 40 percent to $175.3 million from fiscal
year 2017. Excluding surcharge revenue, sales increased 29 percent on 19 percent
higher shipment volume. The results reflect improved product mix for higher
value solutions, market share gains with key customers and the positive impact
of supply chain inventory rebuilding for titanium materials within the
orthopedic and cardiology sub-markets.

Sales to the Energy market of $146.5 million reflected a 6 percent increase from
fiscal year 2017. Excluding surcharge revenue, sales increased 6 percent. The
results were driven by an increase in the oil and gas sub-market, particularly
rental and replacement activity through our Amega West Services ("Amega West")
business offset by weaker demand for materials used in power generation
applications, which has been significantly impacted by depressed industrial gas
turbine industry conditions.

Transportation market sales increased 9 percent from fiscal year 2017 to $157.0
million. Excluding surcharge revenue, sales increased 4 percent on 1 percent
higher shipment volume. The results reflect a strengthening mix of medium and
heavy-duty truck applications, partially offset by softer demand in light duty
vehicles applications.

Industrial and Consumer market sales increased 22 percent to $364.9 million for
fiscal year 2018. Excluding surcharge revenue, sales increased 14 percent on 7
percent higher shipment volume. The results reflect the impact of stronger
demand for materials used in industrial applications due in part to a moderate
increase in recovery of oil and gas activity.

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Gross Profit

Gross profit in fiscal year 2018 increased to $382.3 million, or 17.7 percent of
net sales from $300.8 million, or 16.7 percent of net sales for fiscal year
2017. Excluding the impact of the surcharge revenue, our gross margin in fiscal
year 2018 was 21.3 percent compared to 19.3 percent in fiscal year 2017. The
results reflect the impact of stronger demand and improved product mix coupled
with operating cost improvements compared to fiscal year 2017.

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. We present
and discuss these financial measures because management believes removing the
impact of surcharge provides a more consistent and meaningful basis for
comparing results of operations from period to period. See the section "Non-GAAP
Financial Measures" below for further discussion of these financial measures.


                                                  Fiscal Year
($ in millions)                               2018          2017
Net sales                                  $ 2,157.7     $ 1,797.6
Less: surcharge revenue                        365.4         239.2

Net sales excluding surcharge revenue $ 1,792.3 $ 1,558.4


Gross profit                               $   382.3     $   300.8

Gross margin                                    17.7 %        16.7 %

Gross margin excluding surcharge revenue 21.3 % 19.3 %

Selling, General and Administrative Expenses


Selling, general and administrative expenses in fiscal year 2018 were $193.0
million, or 8.9 percent of net sales (10.8 percent of net sales excluding
surcharge revenue), compared to $176.1 million, or 9.8 percent of net sales
(11.3 percent of net sales excluding surcharge revenue), in fiscal year 2017.
Selling, general and administrative expenses increased in fiscal year 2018
primarily due to higher variable compensation expense partially offset by lower
pension expense compared to fiscal year 2017.

Operating Income


Our operating income in fiscal year 2018 increased to $189.3 million, or 8.8
percent of net sales as compared with $121.5 million, or 6.8 percent in net
sales in fiscal year 2017. Excluding surcharge revenue and special items,
adjusted operating margin was 10.6 percent for the fiscal year 2018 and 8.0
percent for fiscal year 2017. The increase in the operating margin reflects the
stronger demand and improved product mix coupled with operating cost
improvements partially offset by higher variable compensation expense compared
to fiscal year 2017.

 Operating income has been impacted by special items. The following presents our
operating income and operating margin, in each case excluding the impact of
surcharge on net sales and the loss on divestiture of business. We present and
discuss these financial measures because management believes removing the impact
of these items provides a more consistent and meaningful basis for comparing
results of operations from period to period. See the section "Non-GAAP Financial
Measures" below for further discussion of these financial measures.


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                                                                    Fiscal Year
($ in millions)                                                 2018           2017
Net sales                                                   $  2,157.7     $  1,797.6
Less: surcharge revenue                                          365.4          239.2
Net sales excluding surcharge revenue                       $  1,792.3     $  1,558.4

Operating income                                            $    189.3     $    121.5

Special items:
Loss on divestiture of business                                      -      

3.2

Adjusted operating income excluding special items           $    189.3     $    124.7

Operating margin                                                   8.8 %          6.8 %

Adjusted operating margin excluding surcharge revenue and
special items                                                     10.6 %          8.0 %


Interest Expense

Fiscal year 2018 interest expense was $28.3 million compared to $29.8 million in
fiscal year 2017. We have used interest rate swaps to achieve a level of
floating rate debt to fixed rate debt. Interest expense for fiscal year 2018
includes net gains from interest rate swaps of $0.4 million compared with $1.8
million of net gains from interest rate swaps for fiscal year 2017. Capitalized
interest reduced interest expense by $2.8 million for fiscal year 2018 compared
to $1.3 million in fiscal year 2017.

Other Expense, Net


Other expense, net for fiscal year 2018 was $0.8 million as compared with other
expense, net of $21.5 million for fiscal year 2017. The Company adopted the
provisions of ASU 2017-07, Compensation - Retirement Benefits (Topic 715),
effective July 1, 2018 on a retrospective basis. For fiscal year ended June 30,
2018, $0.1 million and $2.0 million have been reclassified from cost of goods
sold and selling, general and administrative expenses, respectively, to other
income (expense), net on the consolidated statements of income. For fiscal year
ended June 30, 2017, $16.5 million and $7.8 million have been reclassified from
cost of goods sold and selling, general and administrative expenses,
respectively, to other income (expense), net on the consolidated statements of
income. See Note 2 to our consolidated financial statements included in Item 8.
"Financial Statements and Supplementary Data" for additional information.

Income Taxes


Our effective tax rate (income tax (benefit) expense as a percent of income
before taxes) for fiscal year 2018 was negative 17.7 percent as compared to
positive 33.0 percent in fiscal year 2017. Excluding the discrete tax benefits
recorded in connection with U.S. Tax reform of $68.3 million that are discussed
below, our effective tax rate for fiscal year 2018 would have been 25.0
percent.

As of the date of enactment of the Act, we re-measured our deferred tax assets
and liabilities and recorded a provisional net tax benefit of $74.6 million.
While we were able to make a reasonable estimate of the impact of the reduction
in the corporate tax rate, changes to estimates the Company has made to
calculate existing temporary differences, among other items, may result in
further adjustments to the amounts recorded.

During fiscal year 2018 in connection with the Act, we also recorded a
provisional tax charge of $5.0 million for the transition tax. The Company
determined that the amounts recorded for the transition tax are provisional
because various components of the computation were not yet finalized as of June
30, 2018, including the following significant items: the actual aggregate
foreign cash position and the earnings and profits of the foreign entities as of
June 30, 2018, the interpretation and identification of cash positions as of
June 30, 2018, and computations of accumulated earnings and profits balances as
of November 2, 2017 and December 31, 2017. Under the Act, the transition tax
will be paid over an eight-year period beginning in fiscal year 2019.


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Fiscal year 2018 tax expense also includes a tax charge of $1.3 million for
increases in certain state valuation allowances for deferred tax assets
resulting from the impact of a state law change that will limit the Company's
ability to utilize state net operating loss carryforwards partially offset by
the impact of limitations on interest expense as a result of the Act. Future
adjustments to the provisional amounts related to the Act will be recorded as
discrete adjustments to income tax expense in the period in which those
adjustments are determined.

As a result of the voluntary pension contribution, income tax expense for fiscal
year 2017 includes a tax charge of $2.1 million due to reduced tax benefits for
domestic manufacturing claimed in prior periods. The fiscal year 2017 tax rate
also includes tax benefits of $0.9 million associated with the repatriation of
earnings from one of our foreign subsidiaries and a tax charge of $0.9 million
for prior year adjustments in various tax jurisdictions.

Prior to the "Act", undistributed earnings of our foreign subsidiaries, totaling $93.8 million were considered permanently reinvested. We have accrued $5.0 million for the transition tax on these earnings.


See Note 17 to the consolidated financial statements in Item 8. "Financial
Statements and Supplementary Data" for a full reconciliation of the statutory
federal tax rate to the effective tax rates.
Business Segment Results

Summary information about our operating results on a segment basis is set forth
below. For more detailed segment information, see Note 19 to the consolidated
financial statements included in Item 8. "Financial Statements and Supplementary
Data".

 The following table includes comparative information for volumes by business
segment:


                                         Fiscal Year                           %
                                                             Increase       Increase
(Pounds sold, in thousands)           2018        2017      (Decrease)     (Decrease)
Specialty Alloys Operations         258,326     227,744        30,582          13  %
Performance Engineered Products *    12,388      10,902         1,486          14  %
Intersegment                         (5,094 )    (2,300 )      (2,794 )      (121 )%
Consolidated pounds sold            265,620     236,346        29,274          12  %


* Pounds sold data for PEP segment includes Dynamet and Carpenter Powder Products businesses only.


The following table includes comparative information for net sales by business
segment:


                                         Fiscal Year                $              %
                                                                Increase        Increase
($ in millions)                      2018          2017        (Decrease)      (Decrease)
Specialty Alloys Operations       $ 1,803.8     $ 1,461.6     $     342.2          23  %
Performance Engineered Products       429.7         366.6            63.1          17  %
Intersegment                          (75.8 )       (30.6 )         (45.2 )      (148 )%
Total net sales                   $ 2,157.7     $ 1,797.6     $     360.1          20  %


The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:


                                              Fiscal Year                 $               %
                                                                      Increase         Increase
($ in millions)                           2018           2017        (Decrease)       (Decrease)
Specialty Alloys Operations           $  1,434.1     $  1,221.8     $     212.3            17  %
Performance Engineered Products            426.3          365.7            60.6            17  %
Intersegment                               (68.1 )        (29.1 )         (39.0 )        (134 )%
Total net sales excluding surcharge
revenue                               $  1,792.3     $  1,558.4     $     233.9            15  %



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Specialty Alloys Operations Segment


Net sales in fiscal year 2018 for the SAO segment increased 23 percent to
$1,803.8 million, as compared with $1,461.6 million in fiscal year 2017.
Excluding surcharge revenue, net sales increased 17 percent from fiscal year
2017. The fiscal year 2018 net sales reflected 13 percent higher shipment volume
as compared to fiscal year 2017. The results reflect the impact of stronger
product demand driven by improving market conditions across our end-use markets
compared to fiscal year 2017.

 Operating income for the SAO segment in fiscal year 2018 was $232.4 million, or
12.9 percent of net sales (16.2 percent of net sales excluding surcharge
revenue), compared to $172.3 million, or 11.8 percent of net sales (14.1 percent
of net sales excluding surcharge revenue), for fiscal year 2017. The increase in
operating income reflects the impact of higher product demand and stronger
product mix driven by improving market conditions across our end-use markets
compared to fiscal year 2017.
Performance Engineered Products Segment

Net sales for fiscal year 2018 for the PEP segment were $429.7 million as
compared with $366.6 million for fiscal year 2017. Excluding surcharge revenue,
net sales increased 17 percent from fiscal year 2017. The results reflect an
increase in sales primarily in the Energy and Medical end-use markets.

Operating income for the PEP segment for fiscal year 2018 was $26.1 million, or
6.1 percent of net sales, as compared with operating income of $8.5 million, or
2.3 percent of net sales for fiscal year 2017. The results reflect the
increasing demand for titanium products combined with ongoing improvements in
our oil and gas businesses and cost reduction initiatives.

Liquidity and Financial Resources


We ended fiscal year 2019 with $27.0 million of cash and cash equivalents, a
decrease of $29.2 million from fiscal year 2018. During fiscal year 2019 our
cash provided from operating activities was $232.4 million as compared with
$209.2 million in fiscal year 2018. Our free cash flow, which we define under
"Non-GAAP Financial Measures" below, was negative $53.7 million as compared to
positive $34.7 million for the same period a year ago. Included in the free cash
flow results during the current period is the acquisition of a business, LPW
Technology Ltd., for a cash purchase price of $79.0 million. During the prior
fiscal year, we acquired a business, MB CalRAM LLC, for a cash purchase price of
$13.3 million. The free cash flow results also reflect higher capital spending
levels in the current period as we increased our investment in key growth
initiatives during fiscal year 2019.

Capital expenditures for property, plant, equipment and software were $180.3
million for fiscal year 2019 as compared to $135.0 million for fiscal year 2018.
In fiscal year 2020, we expect capital expenditures to be approximately $170
million.

Dividends for fiscal year 2019 were $38.6 million, as compared with $34.4 million in the prior year and were paid at the quarterly rate of $0.20 and $0.18 per share of common stock in fiscal year 2019 and 2018, respectively.


For the fiscal years ended June 30, 2019, 2018 and 2017, interest costs totaled
$31.1 million, $31.1 million and $31.1 million, respectively, of which $5.1
million, $2.8 million and $1.3 million, respectively, were capitalized as part
of the cost of property, plant, equipment and software.

During fiscal year 2019, we made required minimum pension contributions of $5.5
million to one of our qualified pension plans, and are required to make cash
contributions of $6.2 million during fiscal year 2020. Over the next five years,
current estimates indicate that we will be required to make about $171.0 million
of cash contributions to our pension plans, based on the laws in effect for
pension funding as of June 30, 2019, and subject to market returns and interest
rate assumptions.


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We have demonstrated the ability to generate cash to meet our needs through cash
flows from operations, management of working capital and the availability of
outside sources of financing to supplement internally generated funds. We
generally target minimum liquidity, consisting of cash and cash equivalents
added to available borrowing capacity under our credit agreement, of $150.0
million. On March 31, 2017, we entered into a new $400.0 million Credit
Agreement (the "Credit Agreement") that extends to March 2022. As of June 30,
2019, we had $6.0 million of issued letters of credit and $19.7 million of
short-term borrowings. The balance of the Credit Agreement ($374.3 million as of
June 30, 2019) remains available to us. As of June 30, 2019, we had total
liquidity of $401.3 million, including $27.0 million of cash and cash
equivalents. The Credit Agreement provides flexibility to fund our ongoing cash
requirements as needed. From time to time during the year ended June 30, 2019 we
have borrowed under our Credit Agreement. The weighted average daily borrowing
under the Credit Agreement during the year ended June 30, 2019 was $77.9 million
with daily outstanding borrowings ranging from $0.0 million to $154.5 million.

We evaluate liquidity needs for alternative uses including funding external
growth opportunities, share repurchases as well as funding consistent dividend
payments to stockholders. In fiscal year 2019 we declared and paid quarterly
cash dividends of $0.20 per share. In fiscal year 2018 and several years before,
we declared and paid quarterly cash dividends of $0.18 per share.

As of June 30, 2019, we had cash and cash equivalents of approximately $22.6
million held at various foreign subsidiaries. Our global cash deployment
considers, among other things, the geographic location of our subsidiaries' cash
balances, the locations of our anticipated liquidity needs and the cost to
access international cash balances, as necessary. The Act required a one-time
tax on previously deferred foreign earnings and generally provides for tax-free
repatriations of these earnings beginning January 1, 2018. During the fiscal
year ended June 30, 2019, we repatriated cash of $9.8 million from foreign
jurisdictions. From time to time, we may make short-term intercompany borrowings
against our cash held outside the United States in order to reduce or eliminate
any required borrowing under our Credit Agreement.

We are subject to certain financial and restrictive covenants under the Credit
Agreement, which, among other things, require the maintenance of a minimum
interest coverage ratio (3.50 to 1.00 as of June 30, 2019). The interest
coverage ratio is defined in the Credit Agreement as, for any period, the ratio
of consolidated earnings before interest, taxes, depreciation and amortization
and non-cash net pension expense ("EBITDA") to consolidated interest expense for
such period. The Credit Agreement also requires the Company to maintain a debt
to capital ratio of less than 55 percent. The debt to capital ratio is defined
in the Credit Agreement as the ratio of consolidated indebtedness, as defined
therein, to consolidated capitalization, as defined therein. As of June 30,
2019, 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 June 30, 2019:


                                                             Actual
Covenant                          Covenant Requirement        Ratio

Consolidated interest coverage 3.50 to 1.00 (minimum) 15.03 to 1.00 Consolidated debt to capital 55% (maximum)

             27%


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.

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Net Sales and Gross Margin Excluding Surcharge Revenue and Special Items


This report includes discussions of net sales as adjusted to exclude the impact
of raw material surcharge and the resulting impact on gross margins, which
represent financial measures that have not been determined in accordance with
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, the
Company's board of directors and others. See our earlier discussions of "Gross
Profit" for reconciliations of net sales and gross margin, excluding surcharge
revenue and special items, to net sales as determined in accordance with U.S.
GAAP. Net sales and gross margin excluding surcharge revenue and special items
is not a U.S. GAAP financial measure and should not be considered in isolation
of, or as a substitute for, net sales and gross margin calculated in accordance
with U.S. GAAP.

Adjusted Operating Income and Adjusted Operating Margin Excluding Surcharge Revenue and Special Items


This report includes discussions of operating income and operating margin as
adjusted to exclude the impact of raw material surcharge revenue and special
items which represent financial measures that have not been determined in
accordance with U.S. GAAP. We present and discuss these financial measures
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 income and 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,
the Company's board of directors and others. See our earlier discussion of
operating income for a reconciliation of adjusted operating income and adjusted
operating margin excluding special items to operating income and operating
margin determined in accordance with U.S. GAAP. Adjusted operating income and
adjusted operating margin excluding surcharge revenue and special items is not a
U.S. GAAP financial measure and should not be considered in isolation of, or as
a substitute for, operating income and operating margin calculated in accordance
with U.S. GAAP.

Adjusted Earnings Per Share

The following provides a reconciliation of adjusted earnings per share, to its most directly comparable U.S. GAAP financial measures:


                                          Income Before                                                Earnings Per

($ in millions, except per share data) Income Taxes Income Tax Expense Net Income Diluted Share* Year ended June 30, 2019, as reported $ 216.0 $ (49.0 ) $ 167.0 $ 3.43


Special items:
 Acquisition-related costs                          1.2                     -                1.2                0.03

Year ended June 30, 2019, as adjusted $ 217.2 $ (49.0 ) $ 168.2 $ 3.46

* Impact per diluted share calculated using weighted average common shares outstanding of 48.1 million for the year ended June 30, 2019.

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($ in millions, except per share Income Before Income Tax Benefit

                   Earnings Per Diluted
data)                                     Income Taxes         (Expense)         Net Income            Share*

Year ended June 30, 2018, as reported $ 160.2 $ 28.3

$ 188.5 $ 3.92


Special items:
Impact of U.S. tax reform and other
legislative changes                                  -             (68.3 )            (68.3 )            (1.42 )

Year ended June 30, 2018, as adjusted $ 160.2 $ (40.0 )

$ 120.2 $ 2.50

* Impact per diluted share calculated using weighted average common shares outstanding of 47.6 million for the year ended June 30, 2018.


Management believes that the presentation of earnings per share adjusted to
exclude the impact of special items is helpful in analyzing the operating
performance of the Company, 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, the Company's board of directors and others. Our definitions and
calculations of these items may not necessarily be the same as those used by
other companies. Adjusted earnings per share is not a U.S. GAAP financial
measure and should not be considered in isolation of, or as a substitute for,
earnings per share calculated in accordance with U.S. GAAP.

Free Cash Flow

The following provides a reconciliation of free cash flow, as used in this annual report, to its most directly comparable U.S. GAAP financial measures:

                                                                Fiscal Year
($ in millions)                                      2019           2018    

2017

Net cash provided from operating activities $ 232.4 $ 209.2

    $    130.3
Purchases of property, plant, equipment and
software                                             (180.3 )       (135.0 )        (98.5 )
Acquisition of businesses, net of cash
acquired                                              (79.0 )        (13.3 )        (35.3 )
Proceeds from divestiture of business                     -              -  

12.0

Proceeds from disposals of property, plant and
equipment and assets held for sale                      0.4            1.9  

2.5

Proceeds from note receivable from sale of
equity method investment                                  -            6.3  

6.3

Proceeds from insurance recovery                       11.4              -              -
Dividends paid                                        (38.6 )        (34.4 )        (34.1 )
Free cash flow                                   $    (53.7 )   $     34.7     $    (16.8 )



Management believes that the free cash flow measure provides useful information
to investors regarding our financial condition because it is a measure of cash
generated which management evaluates for alternative uses. It is management's
current intention to use excess cash to fund investments in capital equipment,
acquisition opportunities and consistent dividend payments. Free cash flow is
not a U.S. GAAP financial measure and should not be considered in isolation of,
or as a substitute for, cash flows calculated in accordance with U.S. GAAP.
Critical Accounting Policies and Estimates

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. On an on-going basis,
we evaluate our estimates, including those related to bad debts, customer
claims, inventories, goodwill, intangible assets, income taxes, pensions and
other postretirement benefits, contingencies and litigation, environmental
liabilities and derivative instruments and hedging activities.


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We believe the following are the critical accounting policies and areas affected by significant judgments and estimates impacting the preparation of our consolidated financial statements.

Allowance for Doubtful Accounts


We maintain an allowance for doubtful accounts for estimated losses resulting
from the failure of our customers to make required payments. We perform ongoing
credit evaluations of our customers and monitor their payment patterns. Should
the financial condition of our customers deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.

Inventories


Inventories are stated at the lower of cost or market. The cost of inventories
is primarily determined using the LIFO method. We also use the FIFO and average
cost methods. As of June 30, 2019 and 2018, $173.2 million and $138.6 million of
inventory, respectively, was accounted for using a method other than the LIFO
method.

Costs include direct materials, direct labor, applicable manufacturing overhead
and other direct costs. Under the LIFO inventory valuation 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 and other costs may have
been incurred at significantly different values due to the length of time of our
production cycle. The prices for many of the raw materials we use have been
volatile. Since we value most of our inventory utilizing the LIFO inventory
costing methodology, rapid changes in raw material costs have an impact on our
operating results. In a period of rising prices, cost of sales expense
recognized under LIFO is generally higher than the cash costs incurred to
acquire the inventory sold. Conversely, in a period of declining raw material
prices, cost of sales recognized under LIFO is generally lower than cash costs
incurred to acquire the inventory sold.

Since the LIFO inventory valuation methodology is designed for annual
determination, interim estimates of the annual LIFO valuation are required. We
recognize the effects of the LIFO inventory valuation method on an interim basis
by estimating the expected annual LIFO cost based on cost changes to date. These
projections of annual LIFO inventory valuation reserve changes are updated
quarterly and are evaluated based upon material, labor and overhead costs.

Pension and Other Postretirement Benefits


The amount of the pension expense, which is determined annually, is based upon
the value of the assets in the pension trusts at the beginning of the fiscal
year as well as actuarial assumptions, such as the discount rate and the
expected long-term rate of return on plan assets. The assumed long-term rate of
return on pension plan assets is reviewed at each year-end based on the plan's
investment policies, an analysis of the historical returns of the capital
markets and current interest rates. Based on the current funding level, the
allocation policy for pension plan assets is to have approximately 60 percent in
return seeking assets and 40 percent in liability matching assets. Return
seeking assets include domestic and international equities and diversified loan
funds. Liability matching assets include long duration bond funds. As the
funding level of the plan improves in increments of 5 percent, assets will be
shifted from return seeking to liability matching in increments of 4 percent as
a de-risking strategy. The plan discount rate is determined by reference to the
Bond:Link interest rate model based upon a portfolio of highly rated U.S.
corporate bonds with individual bonds that are theoretically purchased to settle
the plan's anticipated cash outflows. The fluctuations in stock and bond markets
could cause actual investment results to be significantly different from those
assumed, and therefore, significantly impact the valuation of the assets in our
pension trusts. Changes in actuarial assumptions could significantly impact the
accounting for the pension assets and liabilities. If the assumed long-term rate
of return on plan assets was changed by 0.25 percent, the net pension expense
would change by $2.6 million. If the discount rate was changed by 0.25 percent,
the net pension expense would change by $0.6 million.

Long-Lived Assets


Long-lived assets are reviewed for impairment and written down to fair value
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable through estimated future undiscounted cash flows. The amount
of the impairment loss is the excess of the carrying amount of the impaired
assets over the fair value of the assets based upon estimated future discounted
cash flows. We evaluate long-lived assets for impairment by individual business
unit. Changes in estimated cash flows could have a significant impact on whether
or not an asset is impaired and the amount of the impairment.


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Goodwill


Goodwill is not amortized but instead is at least annually tested for impairment
as of June 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. 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 of June 30, 2019, we had six remaining 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 five reporting
units with goodwill recorded.

As of June 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 of June 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 of capital of 10 percent and a terminal growth rate
assumption of 3 percent.

As of June 30, 2019, the fair value of Carpenter Powder Products ("Powders")
exceeded the carrying value by 8 percent. The goodwill recorded related to
Powders as of June 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.

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, 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.

Environmental Expenditures


Environmental expenditures that pertain to current operations or to future
revenues are expensed or capitalized consistent with Carpenter's capitalization
policy for property, plant and equipment. Expenditures that result from the
remediation of an existing condition caused by past operations and that do not
contribute to current or future revenues are expensed. Liabilities are
recognized for remedial activities when the remediation is probable and the cost
can be reasonably estimated. Most estimated liabilities are not discounted to
present value due to the uncertainty as to the timing and duration of expected
costs. For one former operating facility site, due to the routine nature of the
expected costs, the liability for future costs is discounted to present value
over 20 years assuming a discount rate of approximately 3 percent as of June 30,
2019 and 2018.


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Income Taxes


Deferred income taxes result from temporary differences in the recognition of
income and expense for financial and income tax reporting purposes, or
differences between the fair value of assets acquired in business combinations
accounted for as purchases for financial reporting purposes and their
corresponding tax bases. Deferred income taxes represent future tax benefits
(assets) or costs (liabilities) to be recognized when those temporary
differences reverse. We evaluate on a quarterly basis whether, based on all
available evidence, we believe that our deferred income tax assets will be
realizable. Valuation allowances are established when it is estimated that it is
more likely than not that the tax benefit of the deferred tax assets will not be
realized. The evaluation includes the consideration of all available evidence,
both positive and negative, regarding historical operating results including
recent years with reported losses, the estimated timing of future reversals of
existing taxable temporary differences, estimated future taxable income
exclusive of reversing temporary differences and carryforwards, and potential
tax planning strategies which may be employed to prevent an operating loss or
tax credit carryforward from expiring unused. Future realization of deferred
income tax assets ultimately depends upon the existence of sufficient taxable
income within the carryback or carryforward period available under tax law.

Management determines whether a tax position should be recognized in the
financial statements by evaluating whether it is more likely than not that the
tax position will be sustained upon examination by the tax authorities based
upon the technical merits of the position. For those tax positions which should
be recognized, the measurement of a tax position is determined as being the
largest amount of benefit that is greater than 50 percent likely of being
realized upon ultimate settlement. Interest and penalties on estimated
liabilities for uncertain tax positions are recorded as components of the
provision for income taxes.
Derivative Financial Instruments

Our current risk management strategies include the use of derivative instruments
to reduce certain risks. The critical strategies include: (1) the use of
commodity forward contracts to fix the price of a portion of anticipated future
purchases of certain raw materials and energy to offset the effects of changes
in the costs of those commodities; and (2) the use of 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 commodity forwards and foreign currency
forwards have been designated as cash flow hedges and unrealized net gains and
losses are recorded in the accumulated other comprehensive loss component of
stockholders' equity. The unrealized gains or losses are reclassified to the
income statement when the hedged transaction affects earnings or if the
anticipated transactions are no longer expected to occur. We use interest rate
swaps to maintain a certain level of floating rate debt relative to fixed rate
debt. Interest rate swaps have been designated as fair value hedges.
Accordingly, the mark-to-market values of both the interest rate swap and the
underlying debt obligations are recorded as equal and offsetting gains and
losses in the interest expense component of the consolidated statement of
income. We have also used forward interest rate swaps to manage the risk of cash
flow variability associated with fixed interest debt expected to be issued. We
also use foreign currency forward contracts to protect certain short-term asset
or liability positions denominated in foreign currencies against the effect of
changes in exchange rates. These positions do not qualify for hedge accounting
and accordingly are marked-to-market at each reporting date through charges to
other income and expense.

New Accounting Pronouncements

For information with respect to new accounting pronouncements and the impact of
these pronouncements on our consolidated financial statements, see Note 2 to
Notes to Consolidated Financial Statements included in Item 8. "Financial
Statements and Supplementary Data".
Off Balance Sheet Arrangements

We had no off balance sheet arrangements during the periods presented.

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Contractual Obligations

At June 30, 2019, we had the following contractual obligations and other commercial commitments and contingencies:


                                                                Fiscal Year
($ in millions)               Total        2020        2021        2022        2023        2024        Thereafter
Long-term debt (1)         $   550.0     $     -     $     -     $ 250.0     $ 300.0     $     -     $          -
Estimated interest
payments (2)                    75.6        26.4        26.4        13.9         8.9           -                -
Operating leases                66.5        12.7        10.4         8.3         6.6         5.0             23.5
Qualified pension plan
contributions (3)              242.8         6.2        23.0        45.5        48.9        47.4             71.8
Accrued post-retirement
benefits (4)                   148.2        14.7        15.1        15.1        15.1        15.1             73.1
Purchase obligations (5)       300.5       212.7        42.6        30.1        15.1           -                -
Non-qualified pension
benefits (6)                    33.1         3.4         3.5         3.5         3.4         3.3             16.0
Total                      $ 1,416.7     $ 276.1     $ 121.0     $ 366.4     $ 398.0     $  70.8     $      184.4



(1) Refer to Note 10 of our Notes to Consolidated Financial Statements included in Item 8. "Financial Statements and Supplementary Data".


(2)    Estimated interest payments for long-term debt were calculated based on
the applicable rates and payment dates. No interest payments are included for
any potential borrowings under our revolving credit facility.

(3) Qualified pension plan contributions represent required minimum contributions for plan years beginning January 1, 2018 and thereafter. The amounts were calculated based on actuarial valuations as prescribed by pension funding regulations in the United States effective June 30, 2019. Estimated fiscal year contributions have been included through fiscal year 2029. The actual required pension contributions in future periods may be different.

(4) Postretirement benefits for certain plans may be paid from corporate assets or certain designated plan assets maintained in a Voluntary Employee Benefit Association ("VEBA") Trust. During fiscal years 2019 and 2018, benefit payments were funded using assets in the VEBA Trust. Estimated fiscal year postretirement benefit payments have been included through fiscal year 2029.


(5)    We have entered into purchase commitments primarily for various key raw
materials at market related prices, all made in the normal course of business.
The commitments include both fixed and variable price provisions. We used
June 30, 2019 raw material prices for commitments with variable pricing.

(6)    Pension benefits for certain non-qualified plans are paid from corporate
assets. There is no guarantee that future payments will be paid from corporate
assets rather than plan assets.

Market Sensitive Instruments and Risk Management

See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for discussion of market sensitive instruments and associated market risk for Carpenter.

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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 potentially responsible party ("PRP") with respect
to certain third party Superfund waste-disposal sites and other third
party-owned sites. 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. We accrue
amounts for environmental remediation costs that represent our best estimate of
the probable and reasonably estimable future costs related to environmental
remediation. 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 June 30, 2019 and 2018 were $16.1
million and $16.1 million, respectively.

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. 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.


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Forward-Looking Statements


This Annual Report on Form 10-K 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 in this Form 10-K. They include
but are not limited to: (1) the cyclical nature of the specialty materials
business and certain end-use markets, including aerospace, defense, industrial,
transportation, consumer, medical, and energy, or other influences on Carpenter
Technology's business such as new competitors, the consolidation of competitors,
customers, and suppliers or the transfer of manufacturing capacity from the
United States to foreign countries; (2) the ability of Carpenter 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 in Carpenter 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,
including LPW Technology Ltd ; (11) the availability of credit facilities to
Carpenter 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 in Reading and Latrobe,
Pennsylvania and Athens, 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; and (15)
fluctuations in oil and gas prices and production. Any of these factors could
have an adverse and/or fluctuating effect on Carpenter 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.

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Sales 2020 2 562 M
EBIT 2020 290 M
Net income 2020 205 M
Debt 2020 454 M
Yield 2020 1,49%
P/E ratio 2020 12,8x
P/E ratio 2021 9,02x
EV / Sales2020 1,18x
EV / Sales2021 0,91x
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NameTitle
Tony R. Thene President, Chief Executive Officer & Director
Gregory A. Pratt Chairman
Timothy Lain Chief Financial Officer & Vice President
James A. Johnson Chief Information Officer & Vice President
Stephen Maurice Ward Independent Director
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