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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-Q)

10/22/2020 | 04:20pm EST

Background and General


We are a producer and distributor of premium specialty alloys, including
titanium alloys, powder metals, stainless steels, alloy steels, and tool steels
as well as drilling tools. We are a recognized leader in high-performance
specialty alloy-based materials and process solutions for critical applications
in the aerospace, defense, medical, transportation, energy, industrial and
consumer markets. We have evolved to become a pioneer in premium specialty
alloys, including titanium, nickel, and cobalt, as well as alloys specifically
engineered for additive manufacturing ("AM") processes and soft magnetics
applications. We have expanded our AM capabilities to provide a complete
"end-to-end" solution to accelerate materials innovation and streamline parts
production. We primarily process basic raw materials such as nickel, cobalt,
titanium, manganese, chromium, molybdenum, iron scrap and other metal alloying
elements through various melting, hot forming and cold working facilities to
produce finished products in the form of billet, bar, rod, wire and narrow strip
in many sizes and finishes. We also produce certain metal powders and parts. Our
sales are distributed directly from our production plants and distribution
network as well as through independent distributors. Unlike many other specialty
steel producers, we operate our own worldwide network of service and
distribution centers. These service centers, located in the United States,
Canada, Mexico, Europe and Asia allow us to work more closely with customers and
to offer various just-in-time stocking programs.

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

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Our discussions below in this Item 2 are based upon the more detailed
discussions about our business, operations and financial condition included in
Item 7 of our 2020 Form 10-K. Our discussions here focus on our results during
or as of the three-month period ended September 30, 2020 and the comparable
period of fiscal year 2020, and to the extent applicable, on material changes
from information discussed in the 2020 Form 10-K and other important intervening
developments or information that we have reported on Form 8-K. These discussions
should be read in conjunction with the 2020 Form 10-K for detailed background
information and with any such intervening Form 8-K.

Impact of Raw Material Prices and Product Mix


We value most of our inventory utilizing the last-in, first-out ("LIFO")
inventory costing method. Under the LIFO inventory costing method, changes in
the cost of raw materials and production activities are recognized in cost of
sales in the current period even though these materials may potentially have
been acquired at significantly different values due to the length of time from
the acquisition of the raw materials to the sale of the processed finished goods
to the customers. In a period of rising raw material costs, the LIFO inventory
valuation normally results in higher cost of sales. Conversely, in a period of
decreasing raw material costs, the LIFO inventory valuation normally results in
lower cost of sales.

The volatility of the costs of raw materials has impacted our operations over
the past several years. We, and others in our industry, generally have been able
to pass cost increases on major raw materials through to our customers using
surcharges that are structured to recover increases in raw material costs.
Generally, the formula used to calculate a surcharge is based on published
prices of the respective raw materials for the previous month which correlates
to the prices we pay for our raw material purchases. However, a portion of our
surcharges to customers may be calculated using a different surcharge formula or
may be based on the raw material prices at the time of order, which creates a
lag between surcharge revenue and corresponding raw material costs recognized in
cost of sales. The surcharge mechanism protects our net income on such sales
except for the lag effect discussed above. However, surcharges have had a
dilutive effect on our gross margin and operating margin percentages as
described later in this report.

Approximately 20 percent of our net sales are sales to customers under firm
price sales arrangements. Firm price sales arrangements involve a risk of profit
margin fluctuations, particularly when raw material prices are volatile. In
order to reduce the risk of fluctuating profit margins on these sales, we enter
into commodity forward contracts to purchase certain critical raw materials
necessary to produce the related products sold. Firm price sales arrangements
generally include certain annual purchasing commitments and consumption
schedules agreed to by the customers at selling prices based on raw material
prices at the time the arrangements are established. If a customer fails to meet
the volume commitments (or the consumption schedule deviates from the
agreed-upon terms of the firm price sales arrangements), the Company may need to
absorb the gains or losses associated with the commodity forward contracts on a
temporary basis. Gains or losses associated with commodity forward contracts are
reclassified to earnings/loss when earnings are impacted by the hedged
transaction. Because we value most of our inventory under the LIFO costing
methodology, changes in the cost of raw materials and production activities are
recognized in cost of sales in the current period attempting to match the most
recently incurred costs with revenues. Gains or losses on the commodity forward
contracts are reclassified from other comprehensive (loss) income together with
the actual purchase price of the underlying commodities when the underlying
commodities are purchased and recorded in inventory. To the extent that the
total purchase price of the commodities, inclusive of the gains or losses on the
commodity forward contracts, are higher or lower relative to the beginning of
year costs, our cost of goods sold reflects such amounts. Accordingly, the gains
and/or losses associated with commodity forward contracts may not impact the
same period that the firm price sales arrangements revenue is recognized, and
comparisons of gross profit from period to period may be impacted. These firm
price sales arrangements are expected to continue as we look to strengthen our
long-term customer relationships by expanding, renewing and in certain cases
extending to a longer-term, our customer long-term arrangements.

We produce hundreds of grades of materials with a wide range of pricing and
profit levels depending on the grade. In addition, our product mix within a
period is subject to the fluctuating order patterns of our customers as well as
decisions we may make on participation in certain products based on available
capacity, including the impacts of capacity commitments we may have under
existing customer agreements. While we expect to see positive contribution from
a more favorable product mix in our margin performance over time, the impact by
period may fluctuate and period-to-period comparisons may vary.

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Net Pension Expense

Net pension expense, as we define it below, includes the net periodic benefit
costs related to both our pension and other postretirement plans. The net
periodic benefit costs are determined annually based on beginning of year
balances and are recorded ratably throughout the fiscal year, unless a
significant re-measurement event occurs. We currently expect that the total net
periodic benefit costs for fiscal year 2021 will be $16.3 million as compared
with $15.3 million in fiscal year 2020.  The following is the net pension
expense for the three months ended September 30, 2020 and 2019:

                                       Three Months Ended
                                          September 30,
($ in millions)                          2020             2019
Pension plans                    $      3.2$ 3.0
Other postretirement plans              0.9                0.8
Net periodic benefit costs       $      4.1$ 3.8



Net pension expense is recorded in accounts that are included in cost of sales
and selling, general and administrative expenses based on the function of the
associated employees and in other expense, net. The following is a summary of
the classification of net pension expense for the three months ended
September 30, 2020 and 2019:

                                                                              Three Months Ended
                                                                                September 30,
($ in millions)                                                            2020                2019

Service cost included in Cost of sales                                 $    

2.7 $ 2.7

Service cost included in Selling, general and administrative expenses

                                                                      0.4                0.4

Pension earnings, interest and deferrals included in Other expense, net

                                                                  1.0                0.7
Net periodic benefit costs                                             $    

4.1 $ 3.8

As of September 30, 2020 and June 30, 2020, amounts related to the net pension expense capitalized in gross inventory were $1.4 million and $1.6 million, respectively.

Operating Performance Overview


The first quarter fiscal year 2021 results reflect a continued strengthening of
our liquidity position through solid operating and free cash flow generation. We
ended the first quarter with over $600 million in total liquidity. While the
inventory reduction generated cash flow it did negatively impact our
profitability. Operating results in the quarter were also impacted by lower
volume due to challenging conditions in Aerospace and Defense and Medical
end-use markets as a result of COVID-19 and significant costs to help safeguard
employees and their families from COVID-19.

Looking ahead, the headwinds from COVID-19 will continue to impact demand levels
across our end-use markets and we will remain in constant contact with our
customers to address their evolving material requirements. Despite the near-term
challenges related to COVID-19, the long-term outlook for our markets is solid,
and we will continue working closely with our customers to strengthen our
established supply chain position and extend key strategic supply agreements. We
remain a critical solutions provider to customers and are developing stronger
relationships as we work together to navigate the current environment.

We believe our liquidity position is strong as a result of the actions we have
taken since the onset of the pandemic and we will continue to maintain a
disciplined approach to reducing costs and increasing cash generation. While we
will continue actively managing our business given the current challenges, we
are also maintaining a focus on the future and further advancing our position in
critical emerging technologies. We see a number of attractive growth
opportunities for our proprietary soft magnetics solutions across all of our key
end-use markets. We believe our soft magnetics and additive manufacturing
solutions are pivotal to addressing the future of our industry and best
positioning Carpenter Technology for sustainable growth over the long-term.

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Results of Operations - Three Months Ended September 30, 2020 vs. Three Months
Ended September 30, 2019

For the three months ended September 30, 2020, we reported a net loss of $47.1
million, or $0.98 loss per diluted share. Excluding special items, adjusted loss
per diluted share was $0.58 in the current quarter. This compares with net
income for the same period a year earlier of $41.2 million, or $0.85 earnings
per diluted share. The current period results reflect the continued impact of
both the COVID-19 pandemic and the 737 MAX production halt. The results in the
current period also include cost savings realized from restructuring actions
initiated in the fourth quarter of fiscal year 2020. During the current quarter,
we also completed the divestiture of our Amega West business and initiated
additional restructuring actions to reduce costs and streamline operations
primarily in our Additive business unit.

COVID-19 related costs negatively impacted operating results by approximately
$7.9 million in the first quarter of fiscal 2021 compared to $0.0 million in the
prior year quarter. These costs principally include direct incremental operating
costs including outside services to execute enhanced cleaning protocols,
additional personal protective equipment, isolation pay for production employees
potentially exposed to COVID-19 and various operating supplies necessary to
maintain the operations while keeping employees safe against possible exposure
to COVID-19 in the Company's facilities. The COVID-19 costs in the current
quarter also include $3.1 million related to costs associated with an aerospace
customer bankruptcy as a result of COVID-19.

Net Sales


Net sales for the three months ended September 30, 2020 were $353.3 million,
which was a 40 percent decrease over the same period a year ago. Excluding
surcharge revenue, sales decreased 37 percent on a 29 percent decrease in
shipment volume from the same period a year ago. The results reflect ongoing
demand impacts driven by COVID-19 headwinds in our Aerospace and Defense and
Medical end-use markets during the three months ended September 30, 2020
compared to the three months ended September 30, 2019.

Geographically, sales outside the United States decreased 36 percent from the
same period a year ago to $128.6 million for the three months ended
September 30, 2020. The decrease is primarily due to weaker demand in key
end-use markets across all regions. A portion of our sales outside the United
States are denominated in foreign currencies. The fluctuations in foreign
currency exchange rates resulted in a $0.2 million increase in sales during the
three months ended September 30, 2020 compared to the three months ended
September 30, 2019. Net sales outside the United States represented 36 percent
and 34 percent of total net sales for the three months ended September 30, 2020
and 2019, respectively.

Sales by End-Use Markets

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


                                  Three Months Ended                             $                %
                                     September 30,                           (Decrease)       (Decrease)
($ in millions)                    2020            2019                       Increase         Increase
Aerospace and Defense        $    172.0$ 353.3$ (181.3)           (51) %
Medical                            32.8             48.9         (16.1)           (33) %
Transportation                     29.1             40.0         (10.9)           (27) %
Energy                             25.1             39.3         (14.2)           (36) %
Industrial and Consumer            73.4             73.3           0.1              -  %
Distribution                       20.9             30.6          (9.7)           (32) %
Total net sales              $    353.3$ 585.4$ (232.1)           (40) %



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


                                                      Three Months Ended                                          $                   %
                                                        September 30,                                        (Decrease)           (Decrease)
($ in millions)                                     2020                2019                                  Increase             Increase
Aerospace and Defense                         $    147.5$  286.1$ (138.6)                      (48) %
Medical                                             30.0                 44.0             (14.0)                      (32) %
Transportation                                      24.5                 33.0              (8.5)                      (26) %
Energy                                              21.3                 33.0             (11.7)                      (35) %
Industrial and Consumer                             63.1                 60.2               2.9                         5  %
Distribution                                        20.8                 30.3              (9.5)                      (31) %
Total net sales excluding surcharge
revenue                                       $    307.2$  486.6$ (179.4)                      (37) %



Sales to the Aerospace and Defense end-use market decreased 51 percent from the
first quarter a year ago to $172.0 million. Excluding surcharge revenue, sales
decreased 48 percent from the first quarter a year ago on a 45 percent decrease
in shipment volume. The results reflect weaker year-over-year demand in all
sub-markets due to the continued impact from COVID-19 travel restrictions and
the 737 MAX production halt.

Medical end-use market sales decreased 33 percent from the first quarter a year
ago to $32.8 million. Excluding surcharge revenue, sales decreased 32 percent on
34 percent lower shipment volume from the first quarter a year ago. The results
reflect supply chain disruptions from both continued destocking by the medical
device companies and the ongoing delays of elective medical procedures from the
COVID-19 pandemic.

Transportation end-use market sales decreased 27 percent from the first quarter
a year ago to $29.1 million. Excluding surcharge revenue, sales decreased 26
percent on 27 percent lower shipment volume from the first quarter a year ago.
The results are impacted by production disruptions caused by COVID-19 compared
to the prior year period.

Sales to the Energy end-use market of $25.1 million in the current quarter reflect a 36 percent decrease from the first quarter a year ago. Excluding surcharge revenue, sales decreased 35 percent from a year ago. The results reflect severely depressed North American drilling activity and decreased demand globally as a result of the impact of COVID-19.


Industrial and Consumer end-use market sales of $73.4 million are flat compared
to the first quarter a year ago. Excluding surcharge revenue, sales increased 5
percent on 11 percent higher shipment volume. The results reflect stronger
demand in the semi-conductor sub-market.

Gross Profit


Our gross profit in the first quarter decreased 97 percent to $3.5 million, or
1.0 percent of net sales as compared with $112.6 million, or 19.2 percent of net
sales in the same quarter a year ago. Excluding the impact of surcharge revenue,
our adjusted gross margin in the first quarter was 1.1 percent as compared to
23.1 percent in the same period a year ago. The current period results were
impacted by significantly lower volume resulting from the COVID-19 pandemic,
continued inventory reduction and the 737 MAX production halt.

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While the surcharge generally protects the absolute gross profit dollars, it
does have a dilutive effect on gross margin as a percent of sales. The following
represents a summary of the dilutive impact of the surcharge on gross margin for
the comparative three-month periods. See the section "Non-GAAP Financial
Measures" below for further discussion of these financial measures.

                                                                                    Three Months Ended
                                                                                      September 30,
($ in millions)                                                                2020                     2019
Net sales                                                              $              353.3       $           585.4
Less: surcharge revenue                                                                46.1                    98.8
Net sales excluding surcharge revenue                                  $              307.2       $           486.6

Gross profit                                                           $                3.5       $           112.6

Gross margin                                                                           1.0%                   19.2%

Adjusted gross margin excluding surcharge revenue                                      1.1%                   23.1%



Selling, General and Administrative Expenses


Selling, general and administrative expenses of $42.3 million were 12.0 percent
of net sales (13.8 percent of net sales excluding surcharge) as compared with
$52.8 million and 9.0 percent of net sales (10.9 percent of net sales excluding
surcharge) in the same quarter a year ago. The lower selling, general and
administrative expenses in the current quarter reflect the impacts of the cost
saving actions initiated in the fourth quarter of fiscal year 2020 including a
reduction of $6.7 million in salaries and benefits in the three months ended
September 30, 2020 compared to the same period a year ago.

Restructuring and Asset Impairment Charges

Restructuring and asset impairment charges for the three months ended September 30, 2020 were $10.0 million as compared with no restructuring or asset impairment charges for the three months ended September 30, 2019.


During the first quarter ended September 30, 2020, we initiated a restructuring
plan to consolidate certain operations within the Additive business in the PEP
segment. This included $8.7 million of non-cash impairment charges primarily
related to certain long-lived assets and certain definite lived intangible
assets. We also recognized $1.3 million of charges primarily related to various
personnel-related costs for severance payments, medical coverage and related
items. Activities undertaken in connection with this fiscal year 2021
restructuring plan are expected to be substantially complete in the second
quarter of fiscal year 2021.

Operating (Loss) Income


Our operating loss in the recent first quarter was $48.8 million or 13.8 percent
of net sales as compared with income of $59.8 million or 10.2 percent of net
sales in the same quarter a year ago. Excluding surcharge revenue and special
items, adjusted operating margin was 10.1 percent for the most recent quarter as
compared with 12.3 percent a year ago. The results for the first quarter of
fiscal year 2021 compared to the same period a year ago were negatively impacted
by the significantly lower volume due to the COVID-19 pandemic, targeted
inventory reductions, and the impacts of the Boeing 737 MAX production halt,
partially offset by the various cost savings actions taken by the Company.

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The following presents our operating (loss) income and operating margin, in each
case excluding the impact of surcharge revenue on net sales and special items.
We present and discuss these financial measures because management believes
removing these items provides a more consistent and meaningful basis for
comparing ongoing results of operations from period to period. See the section
"Non-GAAP Financial Measures" below for further discussion of these financial
measures.
                                                                                Three Months Ended
                                                                                  September 30,
($ in millions)                                                              2020                 2019
Net sales                                                              $          353.3       $       585.4
Less: surcharge revenue                                                            46.1                98.8
Net sales excluding surcharge revenue                                  $    

307.2 $ 486.6


Operating (loss) income                                                $         (48.8)       $        59.8
Special items:

 Restructuring and asset impairment charges                                        10.0                   -
 COVID-19 costs                                                                     7.9                   -
Operating (loss) income                                                $         (30.9)       $        59.8

Operating margin                                                               (13.8) %             10.2  %

Adjusted operating margin excluding surcharge revenue and
special items                                                                  (10.1) %             12.3  %



Interest Expense, Net

Interest expense, net for the three months ended September 30, 2020 was $14.9
million compared with $5.4 million in the same period a year ago. We have used
interest rate swaps to achieve a level of floating rate debt to fixed rate debt
where appropriate. Interest expense, net includes net gains from interest rate
swaps of $2.7 million compared with net losses of $0.0 million for the three
months ended September 30, 2020 and 2019, respectively. The interest rate swaps
were terminated in the current quarter in connection with the prepayment of
related Notes. Interest expense, net for the three months ended September 30,
2020 also includes $10.5 million of debt prepayment costs on the Notes due July
2021 offset by gains of $2.3 million on related interest rate swaps that were
terminated in connection with prepayment. Capitalized interest reduced interest
expense, net by $2.8 million for the three months ended September 30, 2020 and
$2.0 million for the three months ended September 30, 2019.

Other Expense, Net


Other expense, net for the three months ended September 30, 2020 was $2.3
million as compared with $0.3 million of other expense, net in the same period a
year ago. The current year results include foreign exchanges losses partially
offset by favorable market returns on investments used to fund Company-owned
life insurance contracts and investments held in rabbi trusts. The other
expense, net for the three months ended September 30, 2019 reflected expense
from pension earnings, interest and deferrals.

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Income Taxes

Income tax benefit in the recent first quarter was $18.9 million, or 28.6
percent of pre-tax loss compared with expense of $12.9 million, or 23.8 percent
of pre-tax income in the same quarter a year ago. Income tax benefit in the
three months ended September 30, 2020 includes discrete tax benefits of $2.0
million associated with the debt prepayment costs and $2.4 million for the
impact of restructuring and asset impairment charges. Additionally, the
anticipated benefit for the carryback of the current year net operating loss to
fiscal years with higher tax rates is included in this period. Also included are
the unfavorable impact of losses in certain foreign jurisdictions for which no
tax benefit can be recognized as well as a tax charge of $1.2 million
attributable to employee share-based compensation. Income tax expense in the
three months ended September 30, 2019 included the impact of losses in certain
foreign jurisdictions for which no tax benefit can be recognized as well as tax
benefits of $0.4 million attributable to employee share-based compensation.

The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was
enacted on March 27, 2020. The CARES Act established new provisions, including
but not limited to, expanded deduction of certain qualified capital
expenditures, delayed payment of certain employment taxes, expanded use of net
operating losses, reduced limitations on deductions of interest expense and
extension of funding for defined benefit plans. The net operating loss provision
is expected to provide incremental tax benefits of approximately $7.0 million
due to the higher tax rates in the expanded carryback period. The other
provisions in the CARES Act are not expected to have a significant impact on our
financial position, results of operations or cash flows.

Business Segment Results

We have two reportable business segments: SAO and PEP.


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


                                                                      Three Months Ended                                                                     %
                                                                        September 30,                                               (Decrease)           (Decrease)
(Pounds sold, in thousands)                                     2020                      2019                                       Increase             Increase
Specialty Alloys Operations                                     43,368                    60,044               (16,676)                      (28) %
Performance Engineered Products *                                1,466                     3,250                (1,784)                      (55) %
Intersegment                                                      (486)                     (996)                  510                        51  %
Consolidated pounds sold                                        44,348                    62,298               (17,950)                      (29) %


* Pounds sold data for PEP segment includes Dynamet and Additive businesses only.


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


                                                          Three Months Ended                                          $                   %
                                                            September 30,                                        (Decrease)           (Decrease)
($ in millions)                                         2020                2019                                  Increase             Increase
Specialty Alloys Operations                       $    300.7$  491.1$ (190.4)                      (39) %
Performance Engineered Products                         61.8                109.4             (47.6)                      (44) %
Intersegment                                            (9.2)               (15.1)              5.9                        39  %
Total net sales                                   $    353.3$  585.4$ (232.1)                      (40) %



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


                                                      Three Months Ended                                          $                   %
                                                        September 30,                                        (Decrease)           (Decrease)
($ in millions)                                     2020                2019                                  Increase             Increase
Specialty Alloys Operations                   $    254.8$  393.2$ (138.4)                      (35) %
Performance Engineered Products                     61.2                107.9             (46.7)                      (43) %
Intersegment                                        (8.8)               (14.5)              5.7                        39  %
Total net sales excluding surcharge
revenue                                       $    307.2$  486.6$ (179.4)                      (37) %


Specialty Alloys Operations Segment


Net sales for the quarter ended September 30, 2020 for the SAO segment decreased
39 percent to $300.7 million, as compared with $491.1 million in the same
quarter a year ago. Excluding surcharge revenue, net sales decreased 35 percent
on 28 percent lower shipment volume from a year ago. The SAO Segment results
reflect lower sales in most end-use markets compared to the prior year same
quarter caused by the COVID-19 pandemic as well as the 737 MAX production halt.

Operating loss for the SAO segment was $18.6 million or negative 6.2 percent of
net sales (7.3 percent of net sales excluding surcharge revenue) in the recent
first quarter, as compared with operating income of $81.0 million or 16.5
percent of net sales (20.6 percent of net sales excluding surcharge revenue) in
the same quarter a year ago. The decrease in operating income reflects lower
demand across all key end-use markets and the impacts from targeted inventory
reduction in the current fiscal year as compared to the prior year period. The
results for the quarter ended September 30, 2020 also include $7.3 million of
expenses due to COVID-19 which were not required during the prior year period.

Performance Engineered Products Segment


Net sales for the quarter ended September 30, 2020 for the PEP segment decreased
44 percent to $61.8 million, as compared with $109.4 million in the same quarter
a year ago. Excluding surcharge revenue, net sales of $61.2 million decreased
from $107.9 million a year ago. The results reflect decreases in sales in all
end-use markets. This included lower demand in the Medical end-use market from
delays in elective procedures caused by COVID-19 as well as prolonged weakness
in the oil and gas sub-market and depressed drilling levels in the Energy
end-use market.

Operating loss for the PEP segment was $3.6 million or negative 5.8 percent of
net sales in the recent first quarter, compared with operating loss of $2.0
million or negative 1.8 percent of net sales in the same quarter a year ago. The
results were impacted by weaker demand in the Medical end-use market and
decreased activity in the North American oil and gas sub-market. The results for
the quarter ended September 30, 2020 also include expenses due to COVID-19 which
were not required during the prior year period.

Liquidity and Financial Resources


During the three months ended September 30, 2020, we generated cash from
operations of $88.0 million compared to $0.7 million in the same period a year
ago. Our free cash flow, which we define under "Non-GAAP Financial Measures"
below, was positive $62.6 million as compared to negative $56.4 million for the
same period a year ago. The increase in cash provided from operating activities
for the three months ended September 30, 2020 compared to the same period a year
ago was driven by working capital improvements. Cash generated from reductions
in inventory was $84.9 million in the current quarter compared to cash used for
inventory of $51.1 million in the prior year. The current year reflects impacts
from targeted inventory reductions to strengthen liquidity. During the three
months ended September 30, 2020, we generated cash from accounts receivable of
$42.0 million compared to a use of cash of $2.1 million in the same period a
year ago. The free cash flow results reflect lower capital spending levels in
the current period as compared to the prior year period. Current quarter results
also include $17.6 million of proceeds related to the sale of our Amega West
business.

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Capital expenditures for property, plant, equipment and software were $33.3
million for the three months ended September 30, 2020 as compared to $47.5
million for the same period a year ago. In fiscal year 2021, we expect capital
expenditures to be approximately $120 million.

Dividends during the three months ended September 30, 2020 and 2019 were $9.7
million and $9.7 million, respectively, and were paid at the same quarterly rate
of $0.20 per share of common stock in both periods.

We have demonstrated the ability to generate cash to meet our needs through cash
flows from operations, management of working capital and the ability to access
capital markets to supplement internally generated funds. We generally target
minimum liquidity of $150 million, consisting of cash and cash equivalents added
to available borrowing capacity under our Credit Agreement. Our Credit Agreement
contains a revolving credit commitment of $400 million, which expires in March
2022. As of September 30, 2020, we had $6.0 million of issued letters of credit
and no short-term borrowings under the Credit Agreement. The balance of the
Credit Agreement, $394.0 million, remains available to us. As of September 30,
2020, we had total liquidity of $612.9 million, including $218.9 million of cash
and cash equivalents. From time to time during the three months ended
September 30, 2020, we have borrowed under our Credit Agreement. The weighted
average daily borrowing under the Credit Agreement during the three months ended
September 30, 2020 was approximately $51.2 million with daily outstanding
borrowings ranging from $0.0 million to $170.0 million during the period. As
of September 30, 2020, the borrowing rate for the Credit Agreement was 1.65%.

We believe that our cash and cash equivalents of $218.9 million as of
September 30, 2020 and available borrowing capacity of $394.0 million under our
credit facility will be sufficient to fund our cash needs over the foreseeable
future.

During the three months ended September 30, 2020, we made pension contributions
of $2.9 million to our qualified defined benefit pension plans. We currently
expect to make $16.4 million of additional contributions to our qualified
defined benefit pension plans during the remainder of fiscal year 2021.

As of September 30, 2020, we had cash and cash equivalents of approximately
$26.1 million held at various foreign subsidiaries. Our global deployment
considers, among other things, geographic location of our subsidiaries' cash
balances, the locations of our anticipated liquidity needs, and the cost to
access international cash balances, as necessary. During the three months ended
September 30, 2020, we repatriated cash of approximately $4.9 million from a
foreign jurisdiction that resulted in minimal tax cost. 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 September 30, 2020). The interest
coverage ratio is defined in the Credit Agreement as, for any period, the ratio
of consolidated earnings before interest, taxes, depreciation and amortization
and non-cash net pension expense ("EBITDA") to consolidated interest expense for
such period. The Credit Agreement also requires the Company to maintain a debt
to capital ratio of less than 55%. The debt to capital ratio is defined in the
Credit Agreement as the ratio of consolidated indebtedness, as defined therein,
to consolidated capitalization, as defined therein. As of September 30, 2020,
the Company was in compliance with all of the covenants of the Credit Agreement.

The following table shows our actual ratio performance with respect to the financial covenants as of September 30, 2020:


Covenant                              Covenant Requirement       Actual 

Ratio

Consolidated interest coverage 3.50 to 1.00 (minimum) 6.68 to 1.00 Consolidated debt to capital

             55% (maximum)              33.0%



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.

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Non-GAAP Financial Measures

The following provides additional information regarding certain non-GAAP financial measures that we use in this report. Our definitions and calculations of these items may not necessarily be the same as those used by other companies.

Net Sales and Gross Margin Excluding Surcharge Revenue


This report includes discussions of net sales as adjusted to exclude the impact
of raw material surcharge and the resulting impact on gross margins, which
represent financial measures that have not been determined in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP"). We present and discuss these financial measures because management
believes removing the impact of raw material surcharge from net sales and cost
of sales provides a more consistent basis for comparing results of operations
from period to period for the reasons discussed earlier in this report.
Management uses its results excluding these amounts to evaluate its operating
performance and to discuss its business with investment institutions, our board
of directors and others. See our earlier discussion of "Gross Profit" for a
reconciliation of net sales and gross margin, excluding surcharge revenue, to
net sales as determined in accordance with U.S. GAAP. Net sales and gross margin
excluding surcharge revenue is not a U.S. GAAP financial measure and should not
be considered in isolation of, or as a substitute for, net sales and gross
margin calculated in accordance with U.S. GAAP.

Adjusted Operating Margin Excluding Surcharge Revenue and Special Items


This report includes discussions of operating margin as adjusted to exclude the
impact of raw material surcharge revenue and special items which represent
financial measures that have not been determined in accordance with U.S. GAAP.
We present and discuss this financial measure because management believes
removing the impact of raw material surcharge from net sales and cost of sales
provides a more consistent and meaningful basis for comparing results of
operations from period to period for the reasons discussed earlier in this
report. In addition, management believes that excluding special items from
operating margin is helpful in analyzing our operating performance, as these
items are not indicative of ongoing operating performance. Management uses its
results excluding these amounts to evaluate its operating performance and to
discuss its business with investment institutions, our board of directors and
others. See our earlier discussion of operating income for a reconciliation of
operating income and operating margin excluding surcharge revenue and special
items to operating income and operating margin determined in accordance with
U.S. GAAP. Operating margin excluding surcharge revenue and special items is not
a U.S. GAAP financial measure and should not be considered in isolation of, or
as a substitute for, operating margin calculated in accordance with U.S. GAAP.

Adjusted (Loss) Earnings Per Share

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

Income Tax

                                                   Loss Before             Benefit              Net (Loss)           (Loss) Per
($ in millions, except per share amounts)         Income Taxes            (Expense)               Income           Diluted Share*
Three months ended September 30, 2020, as
reported                                         $      (66.0)         $    

18.9 $ (47.1)$ (0.98) Special items: Debt prepayment costs, net

                                8.2                   (2.0)                 6.2                  0.13
Restructuring and asset impairment charges               10.0                   (2.4)                 7.6                  0.16
COVID-19 costs                                            7.9                   (2.6)                 5.3                  0.11

Three months ended September 30, 2020, as
adjusted                                         $      (39.9)$        11.9$     (28.0)$      (0.58)

* Impact per diluted share calculated using weighted average common shares outstanding of 48.3 million for the three months ended September 30, 2020.

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($ in millions, except per share               Income Before           Income Tax                                Earnings Per
amounts)                                        Income Taxes            Expense             Net Income          Diluted Share*
Three months ended September 30, 2019,
as reported                                   $        54.1$     (12.9)$      41.2$        0.85
Special item:
None reported                                             -                    -                    -                      -

Three months ended September 30, 2019,
as adjusted                                   $        54.1$     (12.9)$      41.2$        0.85

* Impact per diluted share calculated using weighted average common shares outstanding of 48.3 million for the three months ended September 30, 2019.


Management believes that the presentation of (loss) earnings per share adjusted
to exclude special items is helpful in analyzing the operating performance of
the Company, as these items are not indicative of ongoing operating
performance. Our definitions and calculations of these items may not necessarily
be the same as those used by other companies. Management uses its results
excluding these amounts to evaluate its operating performance and to discuss its
business with investment institutions, our Board of Directors and others.
Adjusted (loss) earnings per share is not a U.S. GAAP financial measure and
should not be considered in isolation of, or as a substitute for, (loss)
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 report, to its most directly comparable U.S. GAAP financial measures:

                                                                   Three Months Ended
                                                                      September 30,
($ in millions)                                                     2020            2019
Net cash provided from operating activities                   $    88.0$   0.7
Purchases of property, plant, equipment and software              (33.3)    

(47.5)

Proceeds from disposals of property, plant and equipment              -     

0.1

Proceeds from divestiture of business                              17.6                 -
Dividends paid                                                     (9.7)             (9.7)

Free cash flow                                                $    62.6$ (56.4)



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

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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 PRP with respect to certain third party Superfund
waste-disposal sites and other third party-owned sites. We accrue amounts for
environmental remediation costs that represent our best estimate of the probable
and reasonably estimable future costs related to environmental remediation.
During the three months ended September 30, 2020, the Company increased the
liability for a Company-owned former operating site by $0.1 million. The
liabilities recorded for environmental remediation costs at Superfund sites,
other third party-owned sites and Carpenter-owned current or former operating
facilities remaining at September 30, 2020 and June 30, 2020 were $16.1 million
and $16.0 million, respectively. Additionally, we have been notified that we may
be a PRP with respect to other Superfund sites as to which no proceedings have
been instituted against us. Neither the exact amount of remediation costs nor
the final method of their allocation among all designated PRPs at these
Superfund sites have been determined. Accordingly, at this time, we cannot
reasonably estimate expected costs for such matters. The liability for future
environmental remediation costs that can be reasonably estimated is evaluated on
a quarterly basis.

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

Other


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

Critical Accounting Policies and Estimates


A summary of other significant accounting policies is discussed in our 2020
Form 10-K Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations", and in Note 1, Summary of Significant Accounting
Policies, of the Notes to our consolidated financial statements included in
Part II, Item 8 thereto.

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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.

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 September 30, 2020, we had four reporting units with goodwill recorded.
Goodwill associated with our SAO reporting unit is tested at the SAO segment
level and represents approximately 67 percent of our total goodwill. All other
goodwill is associated with our PEP segment, which includes three reporting
units with goodwill recorded.

As of June 30, 2020, the carrying value of the Additive reporting unit was
greater than the fair value by approximately 24.1 percent. The goodwill recorded
as of June 30, 2020, after the impairment charge, related to the Additive
reporting unit was $45.6 million. For purposes of the discounted cash flow
technique for Additive's fair value, we used a weighted average cost of capital
of 17.0 percent and a terminal growth rate assumption of 3 percent. If the fair
value of this reporting unit had been hypothetically reduced by 5 percent at
June 30, 2020, the Additive reporting unit would have a carrying value in excess
of fair value of approximately $5.4 million.

As of June 30, 2020, the fair value of the SAO reporting unit exceeded the
carrying value by approximately 4.5 percent.  The goodwill recorded related to
the SAO reporting unit as of June 30, 2020 was $195.5 million. The discounted
cash flows analysis for the SAO reporting unit includes assumptions related to
our ability to increase volume, improve mix, expand product offerings and
continue to implement opportunities to reduce costs over the next several years.
For purposes of the discounted cash flow analysis for SAO's fair value, we used
a weighted average cost capital of 10.5 percent and a terminal growth rate
assumption of 3 percent. If the fair value of this reporting unit had been
hypothetically reduced by 5 percent at June 30, 2020, the SAO reporting unit
would have a fair value that would approximate net book value.

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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. We continuously monitor for events and
circumstances that could negatively impact the key assumptions in determining
fair value of the reporting units. Given the evolving nature of and uncertainty
driven by the COVID-19 pandemic, we will continue to evaluate the impact on the
reporting units as adverse changes to these assumptions could result in future
impairments.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Act of 1995. These
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ from those projected, anticipated or implied. The
most significant of these uncertainties are described in Carpenter Technology's
filings with the Securities and Exchange Commission, including its report on
Form 10-K for the year ended June 30, 2020, and the exhibits attached to that
filing. They include but are not limited to: (1) the cyclical nature of the
specialty materials business and certain end-use markets, including aerospace,
defense, medical, transportation, energy, industrial and consumer, or other
influences 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; (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; (15) fluctuations in oil and gas prices and production; (16)
uncertainty regarding the return to service of the Boeing 737 MAX aircraft and
the related supply chain disruption; (17) potential impacts of the COVID-19
pandemic on our operations, financial results and financial position; (18) our
efforts and efforts by governmental authorities to mitigate the COVID-19
pandemic, such as travel bans, shelter in place orders and business closures,
and the related impact on resource allocations and manufacturing and supply
chains; (19) our status as a "critical", "essential" or "life-sustaining"
business in light of COVID-19 business closure laws, orders and guidance being
challenged by a governmental body or other applicable authority; (20) our
ability to execute our business continuity, operational, budget and fiscal plans
in light of the COVID-19 pandemic; and (21) our ability to successfully carry
out restructuring and business exit activities on the expected terms and
timelines. 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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