CARPENTER TECHNOLOGY CORPORATION 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.
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.
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) 2021 2020 2019
Net sales $ 1,475.6 $
2,181.1
Net sales excluding surcharge revenue (1)$ 1,252.8 $ 1,828.7 $ 1,942.1 Operating (loss) income$ (248.6) $ 25.3 $ 241.4 Net (loss) income$ (229.6) $ 1.5 $ 167.0 Diluted (loss) earnings per share$ (4.76) $
0.02
Purchases of property, plant, equipment and software
171.4$ 180.3 Free cash flow (1)$ 132.0 $ 21.8 $ (53.7) Pounds sold (in thousands) (2) 169,706
231,736 267,536
(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
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,
2021 2020 2019
% of % of % of
($ in millions) Dollars Total Dollars Total Dollars TotalAerospace and Defense$ 710.9 48 %$ 1,313.7 60 %$ 1,327.9 56 % Medical 143.5 10 % 197.0 9 % 205.0 8 % Transportation 144.5 10 % 132.1 6 % 157.7 6 % Energy 87.8 6 % 135.4 6 % 181.7 8 % Industrial and Consumer 292.1 20 % 296.0 14 % 371.5 16 % Distribution 96.8 6 % 106.9 5 % 136.4 6 % Total net sales$ 1,475.6 100 %$ 2,181.1 100 %$ 2,380.2 100 % 21
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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.
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 and/or losses on the commodity
forward contracts are reclassified from other comprehensive income (loss)
together with the actual purchase price of the underlying commodities when the
underlying commodities are purchased and recorded in inventory. To the extent
that the total purchase price of the commodities, inclusive of the gains or
losses on the commodity forward contracts, are higher or lower relative to the
beginning of year costs, our cost of goods sold reflects such amounts.
Accordingly, the gains and/or losses associated with commodity forward contracts
may not impact the same period that the firm price sales arrangements revenue is
recognized, and comparisons of gross profit from period to period may be
impacted. These firm price sales arrangements are expected to continue as we
look to strengthen our long-term customer relationships by expanding, renewing
and, in certain cases, extending to a longer term, our customer long-term
arrangements.
We produce hundreds of grades of materials, with a wide range of pricing and
profit levels depending on the grade. In addition, our product mix within a
period is subject to the fluctuating order patterns of our customers as well as
decisions we may make on participation in certain products based on available
capacity including the impacts of capacity commitments we may have under
existing customer agreements. While we expect to see positive contribution from
a more favorable product mix in our margin performance over time, the impact by
period may fluctuate, and period to period comparisons may vary.
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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.
During the fiscal year endedJune 30, 2021 , we evaluated the need for settlement accounting under Accounting Standards Codification ("ASC') 715-30-35-82 based on the higher than normal lump-sum payments made during the current fiscal year in our largest defined benefit plan. We determined that the lump-sum payments exceeded the threshold of service cost and interest cost components and settlement accounting was required. We recorded a settlement charge of$11.4 million in the year endedJune 30, 2021 within other expense (income), net.
The following is a summary of the net periodic benefit costs for the years ended
Years Ended June 30,
($ in millions) 2021 2020 2019
Pension plans $ 21.3 $ 12.2 $ 9.8
Other postretirement plans 3.3 3.1 1.8
Net periodic benefit costs $ 24.6 $ 15.3 $ 11.6
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 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 and
benefits.
During the year ended June 30, 2020 , in connection with a restructuring plan, we
reduced our global salaried positions by twenty percent. In certain cases,
employees were eligible for severance benefits under one of our pension plans.
As a result, $3.5 million was funded from our qualified pension plan to cover
severance payments and medical coverage for impacted participants.
Net periodic benefit costs are recorded in accounts that are included in both
the cost of sales and selling, general and administrative expenses based on the
function of the associated employees and in other expense (income), net. The
following is a summary of the classification of net pension expense for the
years ended June 30, 2021 , 2020 and 2019:
Years Ended June 30,
($ in millions) 2021 2020 2019
Service cost included in Cost of sales $ 10.8 Service cost included in Selling, general and administrative expenses 1.5 1.5 1.5
Pension earnings, interest and deferrals included in Other expense (income), net
0.9 2.8 0.1
Settlement charge included in Other expense (income), net
11.4 - -
Net periodic benefit costs $ 24.6
As of
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Operating Performance Overview
For fiscal year 2021, we reported net loss of $229.6 million , or $4.76 loss per
diluted share, compared with net income of $1.5 million , or $0.02 earnings per
diluted share for fiscal year 2020. Our fiscal year 2021 ended strong with
overall end-use market conditions showing signs of recovery. We finished the
fiscal year with $582.0 million in total liquidity, including $287.4 million of
cash on hand. Fiscal year 2021 has been a challenging yet successful year for
Carpenter Technology . Over the past year we executed various portfolio
initiatives and targeted cost reductions, further implemented the Carpenter
Operating Model to secure notable productivity gains and generated $132 million
of free cash flow, which we define under "Non-GAAP Financial Measurers" below.
We also expanded and further strengthened key customer relationships and added
additional qualifications for our Athens, Alabama facility. We believe that our
efforts will prove critical to our financial position as demand conditions
across our end-use markets are strengthening, and we believe the beginning of a
broad-based recovery is taking shape. We remain a critical solutions provider
for our customers and have successfully deepened our relationships during the
downturn. The long-term outlook for our end-use markets remains attractive and
we are well positioned given our mission-critical solutions coupled with leading
capabilities and established supply chain position.
Results of Operations - Fiscal Year 2021 Compared to Fiscal Year 2020
For fiscal year 2021, we reported net loss of$229.6 million , or$4.76 loss per diluted share. Excluding special items, loss per diluted share would have been$2.01 for fiscal year 2021. This compares with net income of$1.5 million , or$0.02 per diluted share, a year earlier. Excluding special items, earnings per share would have been$2.36 per diluted share for fiscal year 2020. The results for 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 to strengthen liquidity and non-cash restructuring and asset impairment charges. These headwinds were partially offset by the various cost savings actions taken by us in fiscal year 2021 and the fourth quarter of fiscal year 2020. Our fiscal year 2021 results were impacted by a goodwill impairment charge totaling$52.8 million , LIFO decrement charges of$52.2 million , COVID-19 charges of$17.3 million , restructuring and asset impairment charges of$16.6 million , pension settlement charges of$11.4 million , debt extinguishment losses, net of$8.2 million and inventory write-downs from restructuring of$4.2 million . The LIFO decrement charges are non-cash charges associated with reducing inventory and liquidating LIFO layers that have historical costs in excess of the current year inventory costs. Our fiscal year 2020 results reflect goodwill impairment charges totaling$34.6 million , inventory write-downs and restructuring and asset impairment charges of$97.8 million , LIFO decrement charges of$1.8 million and COVID-19 charges of$7.4 million .Net Sales Net sales for fiscal year 2021 were$1,475.6 million , which was a 32 percent decrease from fiscal year 2020. Excluding surcharge revenue, sales were 31 percent lower than fiscal year 2020 on 27 percent lower volume. The results reflect the on-going financial disruptions caused by COVID-19, resulting in lower sales across all end-use markets except transportation versus the prior year period. Geographically, sales outsidethe United States decreased 30 percent from fiscal year 2020 to$549.0 million . The decrease was primarily due to lower product demand in the Aerospace and Defense and Medical end-use markets in all regions. A portion of our sales outsidethe United States are denominated in foreign currencies. The impact of fluctuations in foreign currency exchange rates resulted in a$3.8 million increase in sales during fiscal year 2021 compared to fiscal year 2020. International sales as a percentage of our total net sales represented 37 percent and 36 percent for fiscal year 2021 and fiscal year 2020, respectively. 24 -------------------------------------------------------------------------------- Table of Contents 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 $ (Decrease) % ($ in millions) 2021 2020 Increase (Decrease) Increase
Aerospace and Defense$ 710.9 $ 1,313.7 $ (602.8) (46) % Medical 143.5 197.0 (53.5) (27) % Transportation 144.5 132.1 12.4 9 % Energy 87.8 135.4 (47.6) (35) % Industrial and Consumer 292.1 296.0 (3.9) (1) % Distribution 96.8 106.9 (10.1) (9) % Total net sales$ 1,475.6 $ 2,181.1 $ (705.5) (32) %
The following table includes comparative information for our net sales by the same principal end-use markets, but excluding surcharge revenue:
Fiscal Year $
(Decrease) %
($ in millions) 2021 2020 Increase (Decrease) IncreaseAerospace and Defense$ 598.8 $ 1,072.1 $ (473.3) (44) % Medical 128.2 177.2 (49.0) (28) % Transportation 115.9 108.7 7.2 7 % Energy 70.5 116.4 (45.9) (39) % Industrial and Consumer 243.1 248.1 (5.0) (2) % Distribution 96.3 106.2 (9.9) (9) % Total net sales excluding surcharge revenue$ 1,252.8 $ 1,828.7 $ (575.9) (31) % Sales to the Aerospace and Defense market decreased 46 percent from fiscal year 2020 to$710.9 million . Excluding surcharge revenue, sales decreased 44 percent on 47 percent lower shipment volume. The results reflect weaker year-over-year demand in all sub-markets due to the continued impact of lower aircraft OEM build rates due to COVID-19 travel restrictions. Sales to the Medical market decreased 27 percent to$143.5 million from fiscal year 2020. Excluding surcharge revenue, sales decreased 28 percent on 24 percent lower shipment volume. The results reflect lower demand as a result of the medical supply chain managing inventory levels closely related to ongoing concerns and delays of elective medical procedures due to the COVID-19 pandemic. Transportation market sales of$144.5 million reflected a 9 percent increase from fiscal year 2020. Excluding surcharge revenue, sales increased 7 percent on 12 percent higher shipment volume. The results reflect improved demand for materials used in light-duty and heavy-duty vehicles in fiscal year 2021. Sales to the Energy market of$87.8 million reflected a 35 percent decrease from fiscal year 2020. Excluding surcharge revenue, sales decreased 39 percent. The results reflect depressed North American drilling activity and decreased demand globally as a result of the impact of COVID-19. This is slightly offset by higher demand in power generation materials. The prior year results include a full year of sales for the Amega West business, which we divested onSeptember 30, 2020 . Industrial and Consumer market sales decreased 1 percent to$292.1 million for fiscal year 2021. Excluding surcharge revenue, sales decreased 2 percent on 4 percent higher shipment volume. The flat results reflect the ongoing demand for materials used in select industrial applications and steady demand for consumer electronics and sporting goods. 25 -------------------------------------------------------------------------------- Table of Contents Gross Profit Gross profit in fiscal year 2021 decreased to$1.0 million , or 0.1 percent of net sales, from$329.4 million , or 15.1 percent of net sales for fiscal year 2020. The current year results were impacted by significantly lower volume resulting from the COVID-19 pandemic, continued targeted inventory reductions which resulted in a$52.2 million LIFO decrement charge and$4.2 million of inventory write-downs from restructuring. Excluding the impact of the surcharge revenue, LIFO decrement and the inventory write-downs, our adjusted gross margin in fiscal year 2021 was 4.6 percent compared to adjusted gross margin of 19.7 percent in fiscal year 2020. Our surcharge mechanism is structured to recover increases in raw material costs, although in certain cases with a lag effect as discussed above. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharge on gross margin excluding the impact of the LIFO decrement and inventory write-downs from restructuring. We present and discuss these financial measures because management believes removing the impact of these items provides a more consistent and meaningful basis for comparing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures. Fiscal Year ($ in millions) 2021 2020 Net sales$ 1,475.6 $ 2,181.1 Less: surcharge revenue 222.8 352.4 Net sales excluding surcharge revenue$ 1,252.8 $ 1,828.7 Gross profit$ 1.0 $ 329.4 LIFO decrement 52.2 1.8 Inventory write-downs from restructuring 4.2
29.3
Gross profit excluding special items$ 57.4 $ 360.5 Gross margin 0.1 % 15.1 % Gross margin excluding surcharge revenue and special items 4.6
% 19.7 %
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal year 2021 were$180.2 million , or 12.2 percent of net sales (14.4 percent of net sales excluding surcharge revenue), compared to$201.0 million , or 9.2 percent of net sales (11.0 percent of net sales excluding surcharge revenue), in fiscal year 2020. The lower selling, general and administrative expenses in fiscal year 2021 reflect the impacts of the cost saving actions initiated in the fourth quarter of fiscal year 2020 including lower salaries and benefits compared to the same period a year ago.
Restructuring and Asset Impairment Charges
During fiscal year 2021, restructuring and asset impairment charges were$16.6 million compared to$68.5 million in fiscal year 2020. Additional restructuring activities were executed in our Additive business in the PEP segment during fiscal year 2021. This included$14.2 million of non-cash pre-tax impairment charges consisting of$8.2 million of property, plant and equipment,$4.3 million associated with certain definite lived intangible assets,$1.3 million related to a lease right of use asset and$0.4 million of other non-cash charges. We also recognized$0.4 million for facility shut-down costs and various personnel costs for severance payments, medical coverage and related items. We recorded$2.0 million of non-cash impairment pre-tax charges as a result of the Amega West business exit primarily related to accounts receivable determined to be uncollectible.
Activities undertaken in connection with the fiscal year 2021 Additive restructuring plan are expected to be substantially complete in the first quarter of fiscal year 2022.
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Goodwill Impairment Charge
Our long-term projections for the Additive reporting unit within the PEP segment
have been impacted by slower than expected growth in additive manufacturing
applications which was further compounded by the effects from COVID-19. As a
result, during fiscal year 2021 we recorded an impairment charge of $52.8
million , which represented the entire remaining balance of goodwill for this
reporting unit. During the fiscal year ended June 30, 2020 we recorded an
impairment charge of $34.6 million for the Additive reporting unit, which
represented a portion of the balance of the goodwill recorded for this reporting
unit.
Operating (Loss) Income
Our operating loss in fiscal year 2021 was $248.6 million , or 16.8 percent of
net sales, as compared with $25.3 million of operating income, or 1.2 percent of
net sales, in fiscal year 2020. Excluding surcharge revenue and special items,
adjusted operating margin was 8.4 percent for fiscal year 2021 and 9.1 percent
for fiscal year 2020. The results for 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 to strengthen liquidity
and non-cash restructuring and asset impairment charges. These headwinds were
partially offset by the various cost savings actions taken in fiscal year 2021
and the fourth quarter of fiscal year 2020. Our fiscal year 2021 results were
also impacted by goodwill impairment charges totaling $52.8 million , LIFO
decrement charges of $52.2 million , COVID-19 charges of $17.3 million ,
restructuring and asset impairment charges of $16.6 million , and inventory
write-downs from restructuring of $4.2 million .
The following presents our operating (loss) income and operating margin, in each
case excluding the impact of surcharge on net sales and excluding special items.
We present and discuss these financial measures because management believes
removing the impact of these items provides a more consistent and meaningful
basis for comparing results of operations from period to period. See the section
"Non-GAAP Financial Measures" below for further discussion of these financial
measures.
Fiscal Year
($ in millions) 2021 2020
Net sales $ 1,475.6 $ 2,181.1
Less: surcharge revenue 222.8 352.4
Net sales excluding surcharge revenue Operating (loss) income$ (248.6) $ 25.3 Special items: LIFO decrement 52.2 1.8 COVID-19 costs 17.3 7.4 Inventory write-downs from restructuring 4.2 29.3 Restructuring and asset impairment charges 16.6 68.5 Goodwill impairment 52.8 34.6 Adjusted operating (loss) income excluding special items$ (105.5) $ 166.9 Operating margin (16.8) % 1.2 % Adjusted operating margin excluding surcharge revenue and special items (8.4) % 9.1 % 27
-------------------------------------------------------------------------------- Table of Contents Interest Expense, Net and Debt Extinguishment Losses, Net Fiscal year 2021 interest expense, net was$32.7 million compared to$19.8 million in fiscal year 2020. We have historically used interest rate swaps to achieve a level of floating rate debt to fixed rate debt where appropriate; all interest rate swaps were terminated as ofSeptember 30, 2020 in connection with the prepayment of the related$250.0 million notes. Interest expense, net for fiscal year 2021 includes net gains from interest rate swaps of$0.4 million compared with$1.4 million of net gains from interest rate swaps for fiscal year 2020. Capitalized interest reduced interest expense by$8.1 million for fiscal year 2021 and by$9.0 million in fiscal year 2020. Debt extinguishment losses, net in fiscal year 2021 include$10.5 million of debt prepayment costs on the notes dueJuly 2021 partially offset by gains of$2.3 million on the related interest rate swaps that were terminated in connection with the prepayment.
Other Expense (Income), Net
Other expense for fiscal year 2021 was$8.4 million compared with other income of$0.6 million a year ago. The fiscal year 2021 expense is primarily due to pension settlement charges of$11.4 million . There were no pension settlement charges in fiscal year 2020.
Income Taxes
Our effective tax rate (income tax (benefit) expense as a percent of (loss) income before taxes) for fiscal year 2021 was 22.9 percent as compared to 75.4 percent for fiscal year 2020. The fiscal year 2021 tax benefit includes the unfavorable impacts of the$52.8 million non-deductible goodwill impairment charge and losses in certain foreign jurisdictions for which no tax benefit can be recognized, as well as, tax benefits of$2.8 million associated with pension settlement charges,$2.0 million associated with debt extinguishment losses, net,$5.0 million for the impact of restructuring and asset impairment charges and$0.7 million as a result of changes in our prior year tax positions. Additionally, the anticipated benefit for the carryback of the current year net operating loss to fiscal years with higher tax rates is included in the period. Also included is a tax charge of$1.4 million attributable to employee share-based compensation. Excluding the tax impact of the non-deductible goodwill impairment charge, pension settlement charges, debt extinguishment losses, net restructuring and asset impairment charges and changes in our prior year tax positions, the tax rate for fiscal year 2021 would have been 28.2 percent. The fiscal year 2020 tax expense includes the unfavorable impact of the$10.7 million non-deductible goodwill impairment charge and losses in certain foreign jurisdictions for which no tax benefit can be recognized, as well as, tax benefits of$27.0 million for the impact of restructuring and asset impairment charges and$1.0 million as a result of changes in our prior year tax positions. Excluding the impact of the non-deductible goodwill impairment charge, restructuring and asset impairment charges and changes in the our prior year tax positions, the tax rate for fiscal year 2020 would have been 23.6 percent. The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted onMarch 27, 2020 . The CARES Act established new provisions, including but not limited to, expanded deduction of certain qualified capital expenditures, delayed payment of certain employment taxes, expanded use of net operating losses, reduced limitations on deductions of interest expense and extension of funding for defined benefit plans. The 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. Undistributed earnings of our foreign subsidiaries, totaling$56.4 million were considered permanently reinvested. If these earnings were to be repatriated, approximately$0.8 million of tax expense would be incurred.
See Note 18 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.
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Business Segment Results
Summary information about our operating results on a segment basis is set forth
below. For more detailed segment information, see Note 20 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 $ %
(Pounds sold, in thousands) 2021 2020 (Decrease) (Decrease)
Specialty Alloys Operations 166,942 221,784 (54,842) (25) %
Performance Engineered Products * 7,936 12,260 (4,324) (35) %
Intersegment (5,172) (2,308) (2,864) (124) %
Consolidated pounds sold 169,706 231,736 (62,030) (27) %
* Pounds sold data for PEP segment includes
The following table includes comparative information for net sales by business
segment:
Fiscal Year $ %
(Decrease) (Decrease)
($ in millions) 2021 2020 Increase Increase
Specialty Alloys Operations $ 1,262.2 $ 1,831.6 $ (569.4) (31) %
Performance Engineered Products 259.8 401.1 (141.3) (35) %
Intersegment (46.4) (51.6) 5.2 10 %
Total net sales $ 1,475.6 $ 2,181.1 $ (705.5) (32) %
The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:
Fiscal Year $ %
(Decrease) (Decrease)
($ in millions) 2021 2020 Increase Increase
Specialty Alloys Operations $ 1,042.8 $ 1,483.0 $ (440.2) (30) %
Performance Engineered Products 255.9 395.2 (139.3) (35) %
Intersegment (45.9) (49.5) 3.6 7 %
Total net sales excluding surcharge revenue $ 1,252.8 $ 1,828.7 $ (575.9) (31) %
Specialty Alloys Operations Segment
Net sales in fiscal year 2021 for the SAO segment decreased 31 percent to$1,262.2 million , as compared with$1,831.6 million in fiscal year 2020. Excluding surcharge revenue, net sales decreased 30 percent from a year ago. The fiscal year 2021 net sales reflected 25 percent lower shipment volume as compared to fiscal year 2020. The SAO segment results reflect lower sales in the Aerospace and Defense and Medical end-use markets compared to the prior year caused by the market impact from the COVID-19 pandemic. Sales in the Transportation end-use market increased in fiscal year 2021 compared to fiscal year 2020. Operating loss for the SAO segment in fiscal year 2021 was$87.4 million , or negative 6.9 percent of net sales (negative 8.4 percent of net sales excluding surcharge revenue), compared to operating income of$239.0 million , or 13.0 percent of net sales (16.1 percent of net sales excluding surcharge revenue), for fiscal year 2020. Fiscal year 2021 included LIFO decrement charges of$47.9 million compared to$1.8 million in fiscal year 2020. The LIFO decrement charges are non-cash charges associated with reducing inventory and liquidating LIFO layers that have historical costs in excess of the current year inventory costs. The fiscal year 2021 results also include$14.6 million of COVID-19 related costs compared to$6.5 million in fiscal year 2020. 29 -------------------------------------------------------------------------------- Table of Contents Performance Engineered Products Segment Net sales for fiscal year 2021 for the PEP segment were$259.8 million as compared with$401.1 million for fiscal year 2020. Excluding surcharge revenue, net sales decreased 35 percent from 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. The current year net sales results reflect the divestiture of the Amega West business onSeptember 30, 2020 . Operating loss for the PEP segment for fiscal year 2021 was$16.5 million , or negative 6.4 percent of net sales, as compared with operating loss of$10.4 million , or negative 2.6 percent of net sales for fiscal year 2020. Fiscal year 2021 included LIFO decrement charges of$4.3 million . The LIFO decrement charges are non-cash charges associated with reducing inventory and liquidating LIFO layers that have historical costs in excess of the current year inventory costs. The fiscal year 2021 results also include$2.7 million of COVID-19 related costs compared to$0.9 million in fiscal year 2020.
Results of Operations - Fiscal Year 2020 Compared to Fiscal Year 2019
For fiscal year 2020, we reported net income of$1.5 million , or$0.02 per diluted share. Excluding special items, earnings per share would have been$2.36 per diluted share for fiscal year 2020. This compared to net income of$167.0 million , or$3.43 per diluted share, for fiscal year 2019. Excluding special items, earnings per share would have been$3.46 per diluted share for fiscal year 2019. Our fiscal year 2020 results reflect goodwill impairment charges totaling$34.6 million and inventory write-downs and restructuring and asset impairment charges of$97.8 million .Net Sales Net sales for fiscal year 2020 were$2,181.1 million , which was an 8 percent decrease from fiscal year 2019. Excluding surcharge revenue, sales were 6 percent lower than fiscal year 2019 on 13 percent lower volume. The results reflect higher demand and better mix during the first half of fiscal year 2020. This improvement was negated in the second half of fiscal year 2020 by the financial disruptions caused by COVID-19, resulting in lower demand across all end-use markets versus the prior year period. Geographically, sales outsidethe United States increased 2 percent from fiscal year 2019 to$787.7 million . The increase is primarily due to stronger product demand in the Aerospace and Defense end-use market inAsia Pacific ,Europe andCanada which was partially offset by lower demand in the Consumer and Industrial end-use market inEurope . A portion of our sales outsidethe United States are denominated in foreign currencies. The impact of fluctuations in foreign currency exchange rates resulted in a$3.5 million decrease in sales during fiscal year 2020 compared to fiscal year 2019. International sales as a percentage of our total net sales represented 36 percent and 32 percent for fiscal year 2020 and fiscal year 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 performance of the business from period to period.
Fiscal Year $ %
($ in millions) 2020 2019 Decrease Decrease
Aerospace and Defense $ 1,313.7 $ 1,327.9 $ (14.2) (1) %
Medical 197.0 205.0 (8.0) (4) %
Transportation 132.1 157.7 (25.6) (16) %
Energy 135.4 181.7 (46.3) (25) %
Industrial and Consumer 296.0 371.5 (75.5) (20) %
Distribution 106.9 136.4 (29.5) (22) %
Total net sales $ 2,181.1 $ 2,380.2 $ (199.1) (8) %
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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:
Fiscal Year $ %
Increase Increase
($ in millions) 2020 2019 (Decrease) (Decrease)Aerospace and Defense$ 1,072.1 $ 1,051.5 $ 20.6 2 % Medical 177.2 176.3 0.9 1 % Transportation 108.7 126.6 (17.9) (14) % Energy 116.4 154.3 (37.9) (25) % Industrial and Consumer 248.1 298.5 (50.4) (17) % Distribution 106.2 134.9 (28.7) (21) % Total net sales excluding surcharge revenue$ 1,828.7 $ 1,942.1 $ (113.4) (6) % Sales to the Aerospace and Defense market decreased 1 percent from fiscal year 2019 to$1,313.7 million . Excluding surcharge revenue, sales increased 2 percent on 4 percent lower shipment volume. The results reflect stronger demand for materials used across all aerospace sub-markets and defense during the first half of the current fiscal year offset by lower build rates caused by the global travel halt in the second half of fiscal year 2020 due to the COVID-19 pandemic.
Sales to the Medical market decreased 4 percent to
Transportation market sales of$132.1 reflected a 16 percent decrease from fiscal year 2019. Excluding surcharge revenue, sales decreased 14 percent on 20 percent lower shipment volume. The results reflect decreased demand caused by COVID-19 related plant closures and production disruptions inNorth America ,Asia andEurope in the second half of fiscal year 2020.
Sales to the Energy market of
Industrial and Consumer market sales decreased 20 percent to$296.0 million for fiscal year 2020. Excluding surcharge revenue, sales decreased 17 percent on 26 percent lower shipment volume. The results reflect the impact of reduced demand for materials used in select industrial applications and declines in demand for consumer electronics and sporting goods.
Gross Profit
Gross profit in fiscal year 2020 decreased to$329.4 million , or 15.1 percent of net sales from$444.8 million , or 18.7 percent of net sales for fiscal year 2019. During the fiscal year endedJune 30, 2020 we recorded$1.8 million of LIFO decrement charges and$29.3 million of inventory write-downs related to targeted cost reduction actions including exiting the oil and gas business in our PEP segment and the closure of two powder facilities. Fiscal year 2020 results were impacted by the COVID-19 pandemic and the 737 MAX production halt. Fiscal year 2020 results were also negatively impacted by an accelerated inventory reduction program. Excluding the impact of the surcharge revenue, LIFO decrement and the inventory write-downs, our gross margin in fiscal year 2020 was 19.7 percent compared to 22.9 percent in fiscal year 2019. The results reflect the impact of improved product mix and capacity gains during the first half of fiscal year 2020 offset by incremental costs and productivity losses due to COVID-19. Fiscal year 2019 also reflects an$11.4 million benefit related to an insurance recovery in our third fiscal quarter of fiscal year 2019. Our surcharge mechanism is structured to recover increases in raw material costs, although in certain cases with a lag effect as discussed above. While the surcharge generally protects the absolute gross profit dollars, it does have a dilutive effect on gross margin as a percent of sales. The following represents a summary of the dilutive impact of the surcharge on gross margin. We present and discuss these financial measures because management believes removing the impact of surcharge provides a more consistent and meaningful basis for comparing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures. 31
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Fiscal Year
($ in millions) 2020 2019
Net sales $ 2,181.1 $ 2,380.2
Less: surcharge revenue 352.4 438.1
Net sales excluding surcharge revenue $ 1,828.7 $ 1,942.1
Gross profit $ 329.4 $ 444.8
LIFO decrement 1.8 -
Inventory write-downs from restructuring 29.3 -
Gross profit excluding special items $ 360.5 $ 444.8
Gross margin 15.1 % 18.7 %
Gross margin excluding surcharge revenue and special items 19.7 % 22.9 %
Selling, General and Administrative Expenses
Selling, general and administrative expenses in fiscal year 2020 were$201.0 million , or 9.2 percent of net sales (11.0 percent of net sales excluding surcharge revenue), compared to$203.4 .million, or 8.5 percent of net sales (10.5 percent of net sales excluding surcharge revenue), in fiscal year 2019. Selling, general and administrative expenses were relatively flat in fiscal year 2020 compared to fiscal year 2019. Fiscal year 2020 results reflect lower salary costs and variable compensation expense offset by higher spending in key growth areas including additive manufacturing compared to the same period a year ago.
Restructuring and Asset Impairment Charges
During fiscal year 2020, we incurred$68.5 million of restructuring and asset impairment charges. This included$56.4 million of non-cash impairment charges to write down property, plant and equipment and other intangible assets primarily related to the exit from the oil and gas business and the closure of two domestic powder facilities. The remaining$12.1 million , consisting primarily of various personnel-related costs for severance payments, medical coverage and related items, resulted from a restructuring plan to reduce the global salaried workforce by twenty percent. No restructuring or asset impairment charges were incurred during the fiscal year endedJune 30, 2019 .
Activities undertaken in connection with the fiscal year 2020 restructuring plan were substantially complete in the first quarter of fiscal year 2021.
Goodwill Impairment Charge
Our long-term projections for the Additive reporting unit within the PEP Segment have been impacted by slower than expected growth in additive manufacturing applications which was further compounded by the effects from COVID-19. As a result, during fiscal year 2020 we recorded an impairment charge of$34.6 million , which represented a portion of the balance of the goodwill recorded for this reporting unit. No goodwill impairment charges were incurred during the fiscal year endedJune 30, 2019 . 32 -------------------------------------------------------------------------------- Table of Contents Operating Income Our operating income in fiscal year 2020 decreased to$25.3 million , or 1.2 percent of net sales as compared with$241.4 million , or 10.1 percent of net sales in fiscal year 2019. Excluding surcharge revenue and special items, adjusted operating margin was 9.1 percent for fiscal year 2020 and 12.5 percent for fiscal year 2019. The second half of fiscal year 2020 was negatively impacted by the financial disruptions of COVID-19 and the Boeing 737 MAX production halt compared to fiscal year 2019. During this time, we executed targeted cost reduction actions and portfolio restructurings including exiting the oil and gas business in our PEP segment, closure of two domestic powder facilities, global salaried workforce reductions and other asset impairments. These actions resulted in LIFO decrement charges of$1.8 million , COVID-19 costs of$7.4 million , inventory write-downs of$29.3 million and restructuring and asset impairment charges of$68.5 million in fiscal year 2020. Operating income in fiscal year 2020 was also impacted by a goodwill impairment charge of$34.6 million . The following presents our operating income and operating margin, in each case excluding the impact of surcharge on net sales and excluding special items. We present and discuss these financial measures because management believes removing the impact of these items provides a more consistent and meaningful basis for comparing results of operations from period to period. See the section "Non-GAAP Financial Measures" below for further discussion of these financial measures. Fiscal Year ($ in millions) 2020 2019 Net sales$ 2,181.1 $ 2,380.2 Less: surcharge revenue 352.4 438.1 Net sales excluding surcharge revenue$ 1,828.7 $ 1,942.1 Operating income$ 25.3 $ 241.4 Special items: LIFO decrement 1.8 - COVID-19 costs 7.4 - Inventory write-downs from restructuring 29.3 - Acquisition-related costs - 1.2 Restructuring and asset impairment charges 68.5 - Goodwill impairment 34.6 - Adjusted operating income excluding special items$ 166.9 $ 242.6 Operating margin 1.2 % 10.1 %
Adjusted operating margin excluding surcharge revenue and special items
9.1 % 12.5 %
Interest Expense
Fiscal year 2020 interest expense was $19.8 million compared to $26.0 million in
fiscal year 2019. We have used interest rate swaps to achieve a level of
floating rate debt to fixed rate debt. Interest expense for fiscal year 2020
includes net gains from interest rate swaps of $1.4 million compared with $0.2
million of net losses from interest rate swaps for fiscal year 2019. Capitalized
interest reduced interest expense by $9.0 million for fiscal year 2020 compared
to $5.1 million in fiscal year 2019.
Other Income, Net
Other income for fiscal year 2020 of
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Income Taxes
Our effective tax rate (income tax expense as a percent of income before taxes) for fiscal year 2020 was 75.4 percent as compared to 22.7 percent for fiscal year 2019. The fiscal year 2020 tax expense includes tax benefits of$1.0 million as a result of changes in our prior tax positions as well as a$2.0 million charge for non-deductible goodwill impairment. The effective tax rate for fiscal year 2020 as compared to 2019 reflects the magnified impact of permanent adjustments on a significantly lower pre-tax income.
Fiscal year 2019 income tax expense includes tax benefits of
The Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was enacted onMarch 27, 2020 . The CARES Act established new provisions, including but not limited to, expanded deduction of certain qualified capital expenditures, delayed payment of certain employment taxes, expanded use of net operating losses, reduced limitations on deductions of interest expense and extension of funding for defined benefit plans. We are continuing to evaluate these provisions but do not anticipate the CARES Act will have a significant impact on our financial position, results of operations or cash flows. The Tax Cuts and Jobs Act was enacted onDecember 22, 2017 . The Tax Cuts and Jobs Act included provisions that reduced the federal corporate income tax rate, created a territorial tax system with a one-time mandatory tax on previously deferred foreign earnings (i.e. transition tax), and changed certain business deductions including allowing for immediate expensing of certain qualified capital expenditures and limitation on deductions of interest expense. During fiscal year 2019, we recorded a discrete tax benefit of$0.2 million for the transition tax offset by a discrete tax charge of$0.2 million for the re-measurement of deferred tax assets and liabilities. The accounting for the income tax effects of the Tax Cuts and Jobs Act was completed byDecember 31, 2018 . Under the Tax Cuts and Jobs Act the transition tax is being paid over an eight year period beginning in fiscal year 2019. Undistributed earnings of our foreign subsidiaries, totaling$61.7 million were considered permanently reinvested. Following enactment of the Act, the repatriation of cash to theU.S. is generally no longer taxable for federal income tax purposes. If these earnings were to be repatriated, approximately$0.1 million of tax expense would be incurred. See Note 18 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 20 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 $ % (Pounds sold, in thousands) 2020 2019 (Decrease) Increase (Decrease) Increase Specialty Alloys Operations 221,784 256,360 (34,576) (13) % Performance Engineered Products * 12,260 13,752 (1,492) (11) % Intersegment (2,308) (2,576) 268 10 % Consolidated pounds sold 231,736 267,536 (35,800) (13) %
* Pounds sold data for PEP segment includes
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The following table includes comparative information for net sales by business
segment:
Fiscal Year $
(Decrease) %
($ in millions) 2020 2019 Increase (Decrease) Increase
Specialty Alloys Operations $ 1,831.6 $ 1,967.3 $ (135.7) (7) %
Performance Engineered Products 401.1 479.8 (78.7) (16) %
Intersegment (51.6) (66.9) 15.3 23 %
Total net sales $ 2,181.1 $ 2,380.2 $ (199.1) (8) %
The following table includes comparative information for our net sales by business segment, but excluding surcharge revenue:
Fiscal Year $
(Decrease) %
($ in millions) 2020 2019 Increase (Decrease) Increase
Specialty Alloys Operations $ 1,483.0 $ 1,536.6 $ (53.6) (3) %
Performance Engineered Products 395.2 467.0 (71.8) (15) %
Intersegment (49.5) (61.5) 12.0 20 %
Total net sales excluding surcharge revenue $ 1,828.7 $ 1,942.1 $ (113.4) (6) %
Specialty Alloys Operations Segment
Net sales in fiscal year 2020 for the SAO segment decreased 7 percent to$1,831.6 million , as compared with$1,967.3 million in fiscal year 2019. Excluding surcharge revenue, net sales decreased 3 percent from fiscal year 2019. The fiscal year 2020 net sales reflected 13 percent lower shipment volume as compared to fiscal year 2019. The SAO segment results reflect higher sales and stronger product mix in key end-use markets during the first half of fiscal year 2020 offset by the impacts of the 737 MAX production halt and the COVID-19 pandemic during the second half of fiscal year 2020. Operating income for the SAO segment in fiscal year 2020 was$239.0 million , or 13.0 percent of net sales (16.1 percent of net sales excluding surcharge revenue), compared to$282.2 million , or 14.3 percent of net sales (18.4 percent of net sales excluding surcharge revenue), for fiscal year 2019. The decrease in operating income reflects productivity losses and impacts from an accelerated inventory reduction program in the second half of the current fiscal year due to the COVID-19 pandemic. This was partially offset by the impact of the higher valued product mix and demand in our premium products during the first half of fiscal year 2020.
Performance Engineered Products Segment
Net sales for fiscal year 2020 for the PEP segment were$401.1 million as compared with$479.8 million for fiscal year 2019. Excluding surcharge revenue, net sales decreased 15 percent from fiscal year 2019. The results reflect decreases in sales in all end-use markets except the Medical end-use market. Prolonged weakness in the oil and gas sub-market and impacts of tariffs were the primary drivers for the Energy and Distribution end-use market declines, respectively. Operating loss for the PEP segment for fiscal year 2020 was$10.4 million , or 2.6 percent of net sales, as compared with operating income of$30.0 million , or 6.3 percent of net sales for fiscal year 2019. Fiscal year 2020 results were impacted by weak demand in the oil and gas sub-market, the ongoing trade actions and tariffs on our distribution business and the impacts of COVID-19. The prior year results were impacted by an$11.4 million benefit related to an insurance recovery. During fiscal year 2020 we approved a plan to exit the oil and gas business in our PEP segment and close two domestic powder facilities. 35
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Liquidity and Financial Resources
During fiscal year 2021, we generated cash from operating activities of$250.0 million as compared with$231.8 million in fiscal year 2020. Our free cash flow, which we define under "Non-GAAP Financial Measures" below, was positive$132.0 million as compared to positive$21.8 million for the same period a year ago. The change in operating cash flow primarily reflects the impact of lower earnings after non-cash adjustments to net income in fiscal year 2021 offset by improvements in working capital compared to a year ago. The current year reflects impacts from targeted inventory reductions to strengthen liquidity. Cash generated from reductions in inventory was$238.5 million and$29.5 million in fiscal years 2021 and 2020, respectively. During the year endedJune 30, 2021 , we generated cash from accounts payable of$22.4 million compared to the use of cash of$109.9 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. Fiscal year 2021 results also include$20.0 million of proceeds related to the sale of ourAmega West business. Capital expenditures for property, plant, equipment and software were$100.5 million for fiscal year 2021 as compared to$171.4 million for fiscal year 2020. In fiscal year 2022, we expect capital expenditures to be approximately$125 million . We evaluate liquidity needs for alternative uses including funding external growth opportunities, share repurchases as well as funding consistent dividend payments to stockholders. Dividends for fiscal year 2021 were$39.1 million , as compared to$38.8 million in the prior year period. In fiscal years 2021, 2020 and 2019 we declared and paid quarterly cash dividends of$0.20 per share. For the fiscal years endedJune 30, 2021 , 2020 and 2019, interest costs totaled$40.8 million ,$28.8 million and$31.1 million , respectively, of which$8.1 million ,$9.0 million and$5.1 million , respectively, were capitalized as part of the cost of property, plant, equipment and software. Debt extinguishment losses, net for the year endedJune 30, 2021 includes$10.5 million of debt prepayment costs on notes dueJuly 2021 , offset by gains of$2.3 million on related interest rate swaps that were terminated in connection with the prepayment. For the years endedJune 30, 2020 and 2019, there were no debt extinguishment losses, net. During fiscal year 2021, we made required minimum pension contributions of$19.9 million in total to three of our qualified pension plans. We are not required to make cash contributions to our qualified pension plans during fiscal year 2022 as a result of the American Rescue Plan Act of 2021. Over the next five years, current estimates indicate that we will be required to make approximately$5.7 million of cash contributions to our pension plans, based on the laws in effect for pension funding as ofJune 30, 2021 , and subject to market returns and interest rate assumptions. 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 target minimum liquidity of$150 million , consisting of cash and cash equivalents added to available borrowing capacity under our Credit Facility. OnMarch 26, 2021 , we entered into our$300.0 million secured revolving Credit Facility. The Credit Facility amended and restated the previous revolving credit facility, datedMarch 31, 2017 , which had been set to expire inMarch 2022 . The Credit Facility made several changes from the prior Credit Agreement. The Credit Facility extends the maturity toMarch 31, 2024 , subject to a springing maturity ofNovember 30, 2022 . If, byNovember 30, 2022 , our outstanding$300.0 million 4.45 percent Senior Notes due inMarch 2023 are not redeemed, repurchased or refinanced with indebtedness having a maturity date ofOctober 1, 2024 or later, all indebtedness under the Credit Facility will be due. The Credit Facility contains a revolving credit commitment amount of$300.0 million , subject to our right, from time to time, to request an increase of the commitment to$500.0 million in the aggregate; and provides for the issuance of letters of credit subject to a$40.0 million sub-limit. We have the right to voluntarily prepay and re-borrow loans, to terminate or reduce the commitments under the Credit Facility, and, subject to certain lender approvals, to join subsidiaries as subsidiary borrowers. As ofJune 30, 2021 , we had$5.4 million of issued letters of credit and no short-term borrowings under the Credit Facility. The balance of the Credit Agreement,$294.6 million , remains available to us. From time to time during the year endedJune 30, 2021 , we have borrowed under our Credit Facility. The weighted average daily borrowing under the Credit Facility during the fiscal year endedJune 30, 2021 was approximately$13.0 million with daily outstanding borrowings ranging from$0.0 million to$170.0 million . As ofJune 30, 2021 , the borrowing rate for the Credit Facility was 2.10 percent. 36
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We believe that our total liquidity of
As ofJune 30, 2021 , we had cash and cash equivalents of approximately$44.0 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. During the fiscal year endedJune 30, 2021 , we repatriated cash of$11.4 million from foreign jurisdictions. We are subject to certain financial and restrictive covenants under the Credit Facility, which, among other things, require the maintenance of a minimum interest coverage ratio. The interest coverage ratio is defined in the Credit Facility as, for any period, the ratio of consolidated earnings before interest, taxes, depreciation and amortization and non-cash net pension expense ("EBITDA") to consolidated interest expense for such period. The interest coverage covenant is waived until the quarter endedMarch 31, 2022 at which time it will be 3.00 to 1.00 and then 3.50 to 1.00 thereafter. The Credit Facility also requires us to maintain a debt to capital ratio of less than 55 percent. The debt to capital ratio is defined in the Credit Facility as the ratio of consolidated indebtedness, as defined therein, to consolidated capitalization, as defined therein. During the period in which the interest coverage covenant is waived, the Credit Facility requires that we maintain a minimum available liquidity of$150.0 million which is defined in the Credit Facility as the aggregate amount of loans available to be drawn under the facility plus non-restricted cash and cash equivalents as defined therein. In addition, we are subject to an asset coverage ratio minimum of 1.10 to 1.00. The asset coverage ratio is defined in the Credit Facility as eligible receivables and inventory, as defined therein, to outstanding loans and obligations, as defined therein. As ofJune 30, 2021 , we were in compliance with all of the covenants of the Credit Facility.
The following table shows our actual ratio performance with respect to the
financial covenants, as of
Actual
Covenant Covenant Requirement Ratio
Consolidated debt to capital 55% (maximum) 33%
Available liquidity (excludes certain foreign cash) $150.0 (minimum) $543.0 million
Asset coverage ratio 1.10 to 1.00 60.67 to 1.00
To the extent that we do not comply with the current or modified covenants under the Credit Facility, this could reduce our liquidity and flexibility due to potential restrictions on borrowings available to us unless we are able to obtain waivers or modifications of the covenants.
Non-GAAP Financial Measures
The following provides additional information regarding certain non-GAAP financial measures that we use in this report. Our definitions and calculations of these items may not necessarily be the same as those used by other companies.
This report includes discussions of net sales as adjusted to exclude the impact of raw material surcharge and special items and the resulting impact on gross margins, which represent financial measures that have not been determined in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"). We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net sales provides a more consistent basis for comparing results of operations from period to period for the reasons discussed earlier in this report. In addition, management believes that excluding the inventory write-downs from gross profit and gross margin is helpful in analyzing our operating performance as the inventory write-downs from restructuring 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 "Gross Profit" for a reconciliation of net sales and gross margin, excluding surcharge revenue and special items, to net sales as determined in accordance withU.S. GAAP. Net sales and gross margin excluding surcharge revenue and special items is not aU.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, net sales and gross margin calculated in accordance withU.S. GAAP. 37
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Table of Contents Adjusted Operating (Loss) Income and Adjusted Operating Margin Excluding Surcharge Revenue and Special Items
This report includes discussions of operating (loss) 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 withU.S. GAAP. We present and discuss these financial measures because management believes removing the impact of raw material surcharge from net 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 (loss) income for a reconciliation of adjusted operating (loss) income and adjusted operating margin excluding special items to operating (loss) income and operating margin determined in accordance withU.S. GAAP. Adjusted operating (loss) income and adjusted operating margin excluding surcharge revenue and special items is not aU.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, operating (loss) income and operating margin calculated in accordance withU.S. GAAP.
Adjusted (Loss) Earnings Per Share
The following provides a reconciliation of adjusted (loss) earnings per share,
to its most directly comparable
Loss Before Income Tax Loss Per
($ in millions, except per share data) Income Taxes Benefit Net Loss Diluted Share*
Year ended June 30, 2021, as reported $ (297.9) $ 68.3 $ (229.6) $ (4.76)
Special items:
LIFO decrement 52.2 (14.9) 37.3 0.77
COVID-19 costs 17.3 (5.0) 12.3 0.25
Inventory write-downs from restructuring 4.2 (1.0) 3.2 0.07
Restructuring and asset impairment
charges 16.6 (4.0) 12.6 0.26
Goodwill impairment 52.8 (0.1) 52.7 1.09
Debt extinguishment losses, net 8.2 (2.0) 6.2 0.13
Pension settlement charges 11.4 (2.8) 8.6 0.18
Total impact of special items 162.7 (29.8) 132.9 2.75
Year ended June 30, 2021, as adjusted $ (135.2) $
38.5
* Impact per diluted share calculated using weighted average common shares
outstanding of 48.3 million for the fiscal year ended
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Income Before Income Tax Earnings Per
($ in millions, except per share data) Income Taxes Expense Net Income Diluted Share*
Year ended June 30, 2020, as reported $ 6.1 $ (4.6) $ 1.5 $ 0.02
Special items:
LIFO decrement 1.8 (0.4) 1.4 0.03
COVID-19 costs 7.4 (1.5) 5.9 0.12
Inventory write-downs from restructuring 29.3 (6.0) 23.3 0.49
Restructuring and asset impairment
charges 68.5 (14.0) 54.5 1.13
Goodwill impairment 34.6 (7.1) 27.5 0.57
Total impact of special items 141.6 (29.0) 112.6 2.34
Year ended June 30, 2020, as adjusted $ 147.7 $
(33.6)
* Impact per diluted share calculated using weighted average common shares
outstanding of 48.2 million for the fiscal year ended
Management believes that the presentation of (loss) 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 (loss) earnings per share is not aU.S. GAAP financial measure and should not be considered in isolation of, or as a substitute for, (loss) earnings per share calculated in accordance withU.S. GAAP.
Free Cash Flow
The following provides a reconciliation of free cash flow, as used in this annual report, to its most directly comparableU.S. GAAP financial measures: Fiscal Year ($ in millions) 2021 2020 2019 Net cash provided from operating activities$ 250.0 $ 231.8 $ 232.4 Purchases of property, plant, equipment and software (100.5) (171.4) (180.3) Acquisition of business, net of cash acquired - - (79.0)
Proceeds from disposals of property, plant and equipment and assets held for sale
1.6 0.2 0.4
Proceeds from divestiture of business 20.0 - -
Proceeds from insurance recovery - - 11.4
Dividends paid (39.1) (38.8) (38.6)
Free cash flow $ 132.0 $ 21.8 $ (53.7)
Management believes that the presentation of free cash flow provides useful
information to investors regarding our financial condition because it is a
measure of cash generated which management evaluates for alternative uses. It is
management's current intention to use excess cash to fund investments in capital
equipment, acquisition opportunities and consistent dividend payments. Free cash
flow is not 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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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, pensions and other postretirement benefits, intangible
assets, goodwill, leases, environmental liabilities, income taxes, derivative
instruments and hedging activities and contingencies and litigation.
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 valued at the lower of cost or market for those inventories determined by the LIFO method. We value other inventory at the lower of cost or net realizable value, determined by the FIFO and average cost methods. As ofJune 30, 2021 and 2020,$107.5 million and$136.3 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 evaluate 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 and recognize effects that are not expected to be replaced by year-end in the interim period in which the liquidation occurs. 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 net pension expense, which is determined annually, or upon remeasurement, 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 ratedU.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$2.7 million . If the discount rate was changed by 0.25 percent, the net pension expense would change by$0.9 million . 40
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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 is not amortized but instead is tested at least annually for impairment as ofJune 30 , or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. Potential impairment is identified by comparing the fair value of a reporting unit to its carrying value. If the carrying value of the reporting unit exceeds its fair value, any impairment loss is measured by the difference between the carrying value of the reporting unit and its fair value, not to exceed the carrying amount of goodwill. 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 related to revenue growth rates, which include perpetual growth rates, gross margin and weighted average cost of capital. 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. In preparing the financial statements for the quarter endedDecember 31, 2020 , we identified an impairment triggering event related to the Additive reporting unit within the PEP segment. This reporting unit has experienced slower than expected growth due to customers shifting their near-term focus away from this emerging area as a result of the continuing impacts of the COVID-19 pandemic. During the quarter endedDecember 31, 2020 we also made strategic decisions to reduce resources allocated to the Additive reporting unit to concentrate on the essential manufacturing business. In light of these decisions and current market conditions, the pace of growth in the future projections for the Additive reporting unit were lowered. We determined the goodwill associated with this reporting unit was impaired and recorded an impairment charge of$52.8 million during the quarter endedDecember 31, 2020 , which represents the entire balance of goodwill for this reporting unit. No other asset impairment was identified at the impairment testing date. The carrying value of the Additive reporting unit was greater than the fair value by approximately 37.7 percent. For purposes of the discounted cash flow technique for Additive's fair value, we used a weighted average cost of capital of 15.5 percent and a terminal growth rate assumption of 3.0 percent. If a terminal growth rate of 4.0 percent was used the Additive reporting unit would have a carrying value in excess of fair value of approximately 34.2 percent, still resulting in a full impairment. As ofJune 30, 2021 we have three reporting units with goodwill recorded.Goodwill associated with the SAO reporting unit as ofJune 30, 2021 was$195.5 million and represents approximately 81 percent of total goodwill as ofJune 30, 2021 . The remaining goodwill is associated with the PEP segment, which includes two reporting units,Dynamet and Latrobe Distribution, with goodwill recorded as ofJune 30, 2021 of$31.9 million and$14.0 million , respectively.Goodwill associated with the SAO reporting unit is tested at the SAO segment level. The fair value is estimated using a weighting of discounted cash flows and the use of market multiples valuation techniques. As ofJune 30, 2021 , the fair value of the SAO reporting unit exceeded the carrying value by approximately 26.3 percent. 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, a weighted average cost capital of 9.0 percent and a terminal growth rate assumption of 3.0 percent were used. If the long-term growth rate for this reporting unit had been hypothetically reduced by 0.5 percent atJune 30, 2021 , the SAO reporting unit would have a fair value that exceeded the carrying value by approximately 22.0 percent. 41 -------------------------------------------------------------------------------- Table of Contents All other goodwill is associated with the PEP segment, which includes two reporting units with goodwill recorded. The fair value is estimated using a weighting of discounted cash flows and the use of market multiples valuation techniques for the PEP segment reporting units. The fair values of the two remaining PEP segment reporting units exceeded their carrying values, in each case, by 45 percent or more. 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 ongoing 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.
Leases
Determination of whether a contract is or contains a lease at contract inception
is based on the presence of identified assets and the right to obtain
substantially all of the economic benefit from or to direct the use of such
assets. When it is determined a lease exists, a right-of-use ("ROU") asset and
corresponding lease liability are recorded on the consolidated balance sheets.
ROU assets represent the right to use an underlying asset for the lease term.
Lease liabilities represent the obligation to make lease payments arising from
the lease. ROU assets are recognized at commencement date at the value of the
lease liability and are adjusted for any prepayments, lease incentives received,
and initial direct costs incurred. Lease liabilities are recognized at lease
commencement date based on the present value of remaining lease payments over
the lease term. As the discount rate implicit in the lease is not readily
determinable in most leases, an incremental borrowing rate is used. Lease terms
include options to extend or terminate the lease when it is reasonably certain
that the option will be exercised. Lease contracts with a term of 12 months or
less are not recorded in the consolidated balance sheets. Fixed lease expense is
recognized for operating leases on a straight-line basis over the lease term.
Lease agreements with lease and non-lease components, are accounted for as a
single lease component for all underlying asset classes. Accordingly, all costs
associated with a lease contract are accounted for as lease costs. Some leasing
arrangements require variable payments that are dependent on usage, output, or
may vary for other reasons, such as insurance and tax payments. The variable
lease payments are not presented as part of the ROU asset or lease liability.
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 ofJune 30, 2021 and 2020. 42 -------------------------------------------------------------------------------- Table of Contents 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 statement of operations when the hedged transaction affects earnings or if the anticipated transactions are no longer expected to occur. We may 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 operations. 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 3 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
Fiscal Year
($ in millions) Total 2022 2023 2024 2025 2026 Thereafter
Long-term debt (1) $ 700.0 $ -
184.2 37.6 37.6 24.2 24.2 24.2 36.4
Operating leases 53.2 10.2 8.6 6.4 4.1 3.4 20.5
Qualified pension plan contributions
(3) 24.0 - - - 0.7 5.0 18.3
Accrued post-retirement benefits (4) 140.0 14.4 14.8 14.6 14.4 14.3 67.5 Purchase obligations (5) 250.3 173.4 54.5 21.2 0.8 0.4 - Non-qualified pension benefits (6) 32.8 3.5 3.4 3.4 3.4 3.3 15.8 Total$ 1,384.5 $ 239.1 $ 418.9 $ 69.8 $ 47.6 $ 50.6 $ 558.5
(1) Refer to Note 11 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 for long-term debt outstanding as ofJune 30, 2021 . 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
(4) Postretirement benefits for certain plans may be paid from corporate assets or certain designated plan assets maintained in aVoluntary Employee Benefit Association ("VEBA") Trust. During fiscal years 2021, 2020 and 2019, benefit payments were funded using assets in theVEBA Trust . Estimated fiscal year postretirement benefit payments have been included through fiscal year 2031. (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 usedJune 30, 2021 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, 2021 and 2020 were $16.0
million and $16.0 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, 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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